ITAT Deletes Disallowance on Foreign Commission Paid for Services Rendered Outside India:

Thrius Pharma Expertize LLP, engaged in project consultancy and the export of pharmaceutical equipment, filed its return of income declaring total income of Rs 7,73,380 for AY 2020-21. During scrutiny assessment under Section 143(3) read with Section 144B of the Income Tax Act, the AO noticed that the assessee had claimed commission expenditure of ₹55,09,938, comprising Rs 50,63,084 paid to Incentive Building Information Technology Inc. (IBIT), a US-based entity, and Rs 4,46,855 paid to Kheddache Consulting and Engineering, Algeria.

The AO observed that tax had not been deducted at source under Section 195. Although the assessee furnished invoices, agreements, bank statements, Forms 15CA or 15CB, shipping bills and other supporting documents, the AO held that the assessee had failed to establish the US recipient’s tax residency for FY 2019-20. He also relied on the description “Consulting Services” appearing in Form 15CB.

Consequently, the AO disallowed the entire commission expenditure of Rs 55,09,938 under Section 40(a)(i) and assessed the total income at Rs 62,83,318. The CIT(A) upheld the disallowance. 

The Tribunal examined that in the present case, the assessee consistently maintained that IBIT provided services outside India in connection with overseas transactions and had no permanent establishment, office or other business presence in India. The Revenue failed to establish that the services were rendered in India or that IBIT carried out business operations in the country giving rise to the commission income.

The Tribunal also held that the description “Consulting Services” in Form 15CB could not, by itself, determine the true nature of the payment. The lower authorities had not established that IBIT rendered any specific technical, managerial or consultancy services in India that would independently make the payment taxable.

Accordingly, the Tribunal held that the commission paid to IBIT was not shown to be chargeable to tax in India. Consequently, the assessee was not required to deduct tax under Section 195, and the corresponding expenditure could not be disallowed under Section 40(a)(i) merely because TDS had not been deducted.