No TDS on non-resident's fee

CHAT ROOM

We export garments to the US. We have an agent there, who collects orders from customers and forwards them to us in India. Supplies are made directly to purchasers. For the year ended March 31, 2004, a sum of Rs 5 lakh would be payable to the agent, a non-resident, as commission, which we would be remitting to him in April, 2004. Are we obliged to deduct tax at source from the commission before remitting it?

In the circular No. 23, dated July 23, 1975, the Central Board of Direct Taxes (CBDT) has said where a foreign agent of an Indian exporter operates in his own country and his commission is remitted directly to him, such income is not liable to tax in India. Since the remittance does not constitute income, the question of deducting any tax on such amount before remittance does not arise.

In the above situation, if the payment is made without tax deduction at source, can the income tax department say the commission paid will not be allowed as deduction in computing the taxable income of the company?

No. Section 40(a)(i) of the Income Tax Act, 1961, deals with payments outside India or payment within India to a non-resident other than a company or a foreign company. Thus, any payment of interest, royalty, fees for technical services or other sum chargeable under the Act, which is payable outside India or in India to a non-resident, not being a firm or to a foreign firm, is not allowable as deduction unless the tax has been deducted at source.

In this case, the commission is to be paid to an agent working in a foreign country and the same is not chargeable to tax in India. Hence, the assessee is not obliged to deduct any tax at source. Thus, the amount paid cannot be disallowed on the ground that tax has not been deducted at source before remitting the commission. The payer of the commission also need not apply to the assessing officer for obtaining a certificate as envisaged in Section 195(2).

While setting aside the assessment order by invoking Section 263 of the Income Tax Act, 1961, on the ground that the order is erroneous and prejudicial to the interest of revenue, the income tax commissioner has asked the assessing officer to redo the assessment keeping in view the observations made in the order as also initiate penalty proceedings under Section 271 (1)(c) of the Act on the ground that the assessee has, prima facie, concealed the particulars of his income. Can the income tax commissioner issue such order for initiating penalty proceedings under Section 271 (1)(c) (which the assessing officer has not done while passing the order) while passing order under Section 263?

No. Power to initiate or not to initiate penalty proceedings lies with the assessing officer and not with the income tax commissioner. The commissioner cannot indirectly exercise power to ask the assessing officer to initiate penalty proceedings while passing order under Section 263, which power he has not been given under the Income Tax Act. In view of this, the commissioner cannot direct the assessing officer to initiate penalty proceedings nor he himself can assume jurisdiction to do. Hence, the income tax commissioner's direction for initiating penalty proceedings in the order passed under Section 263 is not valid.

I was in need of funds for my proprietary business. My wife and sister advanced me Rs 30,000 each in cash from their savings. Both amounts were credited in their names in the books of the business. The assessing officer, while making the assessment, treated these amounts as unexplained investments by the givers and considered these as my income. He has initiated penalty proceedings under Section 269SS also. Is he right in initiating penalty proceedings?

No. There is a contradiction in the assessing officer's approach. If the amount represents your income, which has been taxed in your hands, it cannot be treated simultaneously as a loan or deposit. Hence, there is no ground for penalty proceedings under Section 269SS.

We made an application for waiver of interest under Section 273A to the income tax commissioner. This was rejected on the ground that tax had not been paid. After paying the tax, we requested the commissioner to reconsider the application for waiver, which has now been rejected on the ground that it is not maintainable. Is he right?

Prima facie, the commissioner's decision is not correct. Earlier, no tax had been paid and for the same, waiver or reduction was not granted. But since subsequently tax was paid, there couldn't be any embargo against considering the matter on merits as regards waiver of interest under Section 273A.

Prosecution under Section 276C/277 of the Income Tax Act, 1961, was launched against the assessee for the assessment year 1999-2000 for concealment of income. Earlier, penalty proceedings were also initiated and penalty for concealment was levied. This was deleted by the Tribunal saying there was no concealment. Are prosecution proceedings still valid? Should the income tax department not withdraw the same also?

There are umpteen decisions to the effect that when penalty proceedings for concealment are dropped, there can be no case for prosecution. For example, in the Income Tax Office vs Dr (Smt) Usha Gupta case, (2003) 262 ITR 679 (Punjab and Haryana), such a view has been taken. Hence, prosecution proceedings sho-uld be withdrawn.