The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the appeal filed by Kloeckner Desma Machinery Pvt. Ltd. and deleted the disallowance of commission expenses paid to non-resident foreign agents, holding that no tax was deductible at source where the services were rendered entirely outside India and the agents had no permanent establishment in India. The Tribunal held that the disallowance made by the Assessing Officer was unsustainable in law and liable to be deleted.
The Bench comprising Suchitra Kamble, Judicial Member, and Annapurna Gupta, Accountant Member, observed that when commission income does not accrue or arise in India under Section 9(1)(i) of the Income Tax Act, 1961, there is no obligation to deduct tax at source under Section 195, and consequently no disallowance can be made under Section 40(a).
The appeal related to Assessment Year 2017–18 and arose from an order passed by the Commissioner of Income Tax (Appeals), which had upheld the disallowance of commission expenses on the ground that tax had not been deducted at source. During the assessment proceedings, the Assessing Officer noticed that the assessee had paid export commission aggregating to ₹83.74 lakh to four foreign agents based in Germany, Thailand, Iran, and the United States, without deducting tax at source.
Invoking Section 195 of the Act, the Assessing Officer disallowed 30 per cent of the commission expenditure by applying Section 40(a)(ia), alleging failure to deduct tax at source on payments made to non-residents. The disallowance was subsequently confirmed by the Commissioner (Appeals), prompting the assessee to approach the Tribunal.
Before the ITAT, the assessee contended that the foreign agents were operating entirely outside India and were engaged only in procuring export orders abroad. It was submitted that no part of the commission income accrued or arose in India, as the agents had no business operations or permanent establishment in India. The assessee pointed out that the Assessing Officer himself had recorded a finding that the services were rendered abroad and that the agents had solicited orders outside India.
It was further submitted that the issue was squarely covered in the assessee’s own favour by a series of decisions in earlier assessment years ranging from AYs 2001–02 to 2014–15, involving identical facts and the same foreign agents. In those years, identical disallowances had been deleted either by the ITAT, by directions of the Dispute Resolution Panel, or by orders of the Commissioner (Appeals), and the said decisions had attained finality.
The Tribunal noted that the facts in the present year were identical to those in the earlier years and that the Revenue had failed to point out any distinguishing feature. It also observed that the Assessing Officer had incorrectly invoked Section 40(a)(ia), which applies to payments made to residents, whereas payments to non-residents are governed by Section 40(a)(i). Even otherwise, the Tribunal held, no disallowance could survive since no tax was deductible under Section 195 in the first place.
Relying on the settled legal position laid down by the Supreme Court in CIT v. Toshoku Ltd., the Tribunal reiterated that commission paid to non-resident agents for services rendered outside India, without any permanent establishment in India, is not chargeable to tax in India. Consequently, there is no obligation to deduct tax at source on such payments.
The Tribunal also emphasised the importance of judicial discipline, observing that when identical issues have been consistently decided in favour of the assessee in earlier years, the appellate authorities are bound to follow those precedents in the absence of any change in facts or law. The Commissioner (Appeals) was found to have erred in ignoring binding decisions in the assessee’s own case.
Holding that the commission income earned by the foreign agents did not accrue or arise in India and was not chargeable to tax, the Tribunal concluded that the disallowance of commission expenses was wholly unjustified. Accordingly, it directed the complete deletion of the disallowance. In the result, the appeal filed by the assessee was allowed, reaffirming the settled principle that no TDS is required on commission payments to non-resident agents for services rendered entirely outside India where they have no permanent establishment in India.
Cause Title: Kloeckner Desma Machinery Pvt. Ltd. Versus DCIT
Case No: I.T.A. No. 578/Ahd/2025
Coram: Suchitra Kamble (Judicial Member) and Annapurna Gupta (Accountant Member)
