ITAT Mumbai: No TDS on Payments to Foreign Agents for Services Rendered Outside India

The ITAT Mumbai Bench has ruled that payments made to foreign agents for services provided entirely outside of India do not need to be taxed in India. As a result, businesses are not required to deduct TDS from these payments.

The taxpayer, Manisha Kiran Temkar, was in the international merchant trade under the name M/s. Kathmandu Apparel Group declared an income of Rs. 5.74 crore during the return filing. Her case was scrutinised, during which the assessing officer noted foreign remittances made to several parties, as reported in Form 15CA and 15CB.

Remittances information was asked to be given by the taxpayer along with the type of services, copies of agreements, and TDS compliance.

The taxpayer, remittances were made for her business operated entirely outside India, and pertinent with the invoices or debit notes for international transactions. The taxpayer provided an agreement with Imperial Impact Bangladesh Ltd., which acted as her agent for sales execution and allied activities.

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Payments flowed to Bureau Veritas Hongkong Limited for meticulous garment sample testing, to Imperial Impact Bangladesh Ltd. for expert agency commission and smooth shipment facilitation, and to Ec Vision Limited for essential software subscriptions powering her representative offices in Bangladesh and Vietnam.

She emphasised that all these services were delivered beyond India’s borders and maintained that she had fulfilled the requirements of Chapter XVII-B of the Income Tax Act.

The submissions of the taxpayer were not accepted by the Assessing Officer (AO), marking that as an Indian resident, her income and corresponding foreign expenditures were considered to accrue in India. He said that the headquarters was in Mumbai, samples were developed there, and all the orders were processed from India before sending the goods to foreign suppliers.

He concluded that the remittances fell under the ambit of TDS as per section 195/40(a)(i), leading to a 30% disallowance of payments made to Imperial Impact Bangladesh Ltd., Ec Vision Limited, and Bureau Veritas Hongkong Ltd., amounting to a substantial Rs. 1.857 crore. The Commissioner of Income Tax (Appeals) [CIT(A)] stood by this decision, prompting the assessee to take the matter before the tribunal.

The two-member bench, including Pawan Singh (Judicial Member) and Padmavathy S (Accountant Member), acknowledged the submissions of both parties and analysed the records. No dispute was there in the business model of the appellant.

Payment has been made by the taxpayer to the parties in Bangladesh, who provided services entirely outside India, and their income did not accrue in India. The foreign agents performed activities such as checking and packing goods outside India, and the payments to them were not for royalty or technical services.

From the expression of the taxpayer, the appellate tribunal agreed that, as the services rendered outside India, the commissioner paid was not imposed to tax in India, and no Tax Deducted at Source (TDS) was needed; therefore, as held by the Apex court in PCIT vs Vedanta Ltd. For technical services or royalty, payments to non-resident Indians, and software-based inspection charges were not considered as fees.

The appeal of the taxpayer has been permitted by the tribunal.