ITAT Ahmedabad Rules Out Section 40(a)(i) Disallowance on Commission to Foreign Agents

1. Background of the Dispute

The Income Tax Appellate Tribunal, Ahmedabad Bench, in the case of Jupiter Comtex Pvt. Ltd. Vs ACIT (ITAT Ahmedabad), dealt with a recurring issue concerning commission payments to non-resident agents for facilitating export orders. The controversy centred on whether such payments attracted withholding tax under section 195 and, consequently, whether a disallowance under section 40(a)(i) of the Income Tax Act 1961 was justified.

The appeal related to Assessment Year 2012-13 and arose from the order of the CIT(A), NFAC, Delhi dated 07.04.2026. The Assessing Officer had disallowed commission expenses aggregating to Rs. 9,66,471/- under section 40(a)(i) on the ground that no tax had been deducted at source from payments made to non-resident commission agents.

The Tribunal ultimately decided in favour of the assessee and deleted the disallowance, holding that the foreign agents’ income was not taxable in India and therefore no obligation to deduct tax under section 195 arose.

The central issue before the Tribunal was:

Whether the export commission of Rs. 9,66,471/- paid to non-resident agents, who operated entirely outside India and had no permanent establishment or business presence in India, constituted income chargeable to tax in India so as to trigger the obligation to deduct tax under section 195, and consequently justify disallowance under section 40(a)(i) for non-deduction of TDS.

The resolution of this issue required an interpretation of section 5(2), section 9(1)(i), section 195, and section 40(a)(i) of the Income Tax Act 1961, in the light of binding precedents.

3. Factual Matrix

3.1 Nature of Payments

  • The assessee was engaged in export activities.
  • It had engaged non-resident agents to procure export orders from overseas customers.
  • These agents were based outside India and performed their services abroad.
  • Commission was paid to these non-resident agents for facilitating export sales.

3.2 Key Factual Assertions by the Assessee

The assessee consistently maintained that:

  • All services by the non-resident agents were rendered outside India.
  • The non-resident agents did not have any permanent establishment (PE) or fixed place of business in India.
  • The agents did not carry out any operations or business activities within Indian territory.
  • During the original and subsequent proceedings, the assessee submitted:
    • Copies of agreements with the foreign agents;
    • Invoices and other supporting documentation demonstrating the nature and place of services.

On this basis, the assessee argued that:

  • The commission income was not taxable in India in the hands of the non-resident agents.
  • Since the payments were not chargeable to tax in India, no TDS obligation under section 195 arose.
  • Therefore, disallowance under section 40(a)(i) for non-deduction of TDS was unsustainable.

3.3 Assessment and First Appellate Proceedings

  1. Original Assessment under section 143(3)

    • The Assessing Officer held that the assessee ought to have deducted tax at source under section 195 on commission remitted to non-residents.
    • As the assessee had not done so, the AO invoked section 40(a)(i) and disallowed commission expenses of Rs. 9,66,471/-, adding the same to the total income.

  2. First Order of CIT(A) (10.03.2016)

    • The CIT(A) upheld the disallowance made by the AO in respect of the foreign commission of Rs. 9,66,471/-.

  3. First ITAT Round (Order dated 25.05.2022 in ITA No. 938/Ahd/2016)

    • The Tribunal remanded the specific issue of disallowance of foreign commission back to the file of the AO for fresh adjudication in accordance with law.

  4. Set-Aside Assessment Proceedings

    • In the remand proceedings, the AO revisited the assessee’s submissions and documentary evidence.
    • Despite this, the AO reiterated the original view and again disallowed the foreign commission of Rs. 9,66,471/- under section 40(a)(i) by treating the assessee as an assessee in default for non-deduction of TDS.

  5. NFAC / CIT(A) Order dated 07.04.2026

    • The assessee carried the matter in appeal before the CIT(A), NFAC, Delhi.
    • The NFAC dismissed the appeal and confirmed the disallowance, leading to the present second-round appeal before the ITAT Ahmedabad.

4.