Whether commission paid by an export-oriented assessee to non-resident agents, for services rendered outside India, can be disallowed under section 37(1) of the Income-tax Act, 1961 on the ground of alleged lack of genuineness and non-deduction of tax at source, despite the commission being an essential and integral part of the export business and the issue having been consistently decided in favour of the assessee in earlier years.

 

Case Citation:-Income Tax Appellate Tribunal, Ahmedabad Bench

Deputy Commissioner of Income Tax, Circle-2(1)(1), Ahmedabad

vs.

Kewalram Textiles Pvt. Ltd.

ITA No. 1076/Ahd/2025

Assessment Year: 2017-18

Order dated: 18 December 2025

 

Appeal against the order of the National Faceless Appeal Centre (NFAC), Delhi dated 20.03.2025.

 

 

Facts of the Case:-The assessee, Kewalram Textiles Pvt. Ltd., is engaged in the business of export trading of yarn. For the assessment year 2017-18, it filed its return of income declaring a loss of ₹15,11,271. The case was selected for scrutiny and statutory notices under sections 143(2) and 142(1) were issued.

 

During the assessment proceedings, the Assessing Officer noticed that the assessee had paid commission aggregating to ₹3,42,79,595 to non-resident agents for procuring export orders. No tax was deducted at source on such payments. The Assessing Officer issued a show-cause notice proposing disallowance of the commission expenditure.

 

Although the assessee explained that the commission payments were identical to earlier years and that similar additions had already been deleted by the appellate authorities, the Assessing Officer held that:

the agreements were on plain paper,

they were allegedly not signed by authorised signatories, and

the commission structure varied across agents.

 

On this basis, the Assessing Officer concluded that the genuineness of commission expenditure was not proved and disallowed the entire amount under section 37(1).

 

Aggrieved, the assessee preferred an appeal before the CIT(A), who deleted the disallowance. The Revenue carried the matter in appeal before the Tribunal.

 

 

Statutory Provisions Involved

Section 37(1) – Allows deduction of any expenditure (other than capital or personal expenditure) laid out wholly and exclusively for the purposes of business or profession.

 

Section 9(1)(i) – Deals with income deemed to accrue or arise in India, along with Explanation thereto relating to business connection.

 

Section 195 – Obligation to deduct tax at source on payments to non-residents, applicable only if the sum is chargeable to tax in India.

 

Arguments by the Revenue:

The Departmental Representative contended that the CIT(A) erred in deleting the disallowance, arguing that:

the assessee failed to establish the genuineness of commission payments;

agreements with non-resident agents were not properly executed or registered;

no documentary evidence such as emails, correspondence, Form 15CA/15CB or bank statements was furnished to conclusively prove the services rendered; and

therefore, the expenditure could not be said to be incurred wholly and exclusively for business purposes.

 

The Revenue relied on the assessment order and submitted that the disallowance under section 37(1) was justified.

 

Arguments by the Assessee:-that the entire show-cause notice revolved around TDS issues, not disallowance under section 37(1). It was emphasized that:

identical commission payments had been consistently allowed in the assessee’s own case in earlier years;

from assessment years 2010-11 to 2014-15, the CIT(A) as well as the Tribunal had deleted similar disallowances;

the commission agents operated entirely outside India and rendered services abroad, making the income not chargeable to tax in India; and

once the income itself was not taxable in India, no obligation to deduct tax at source arose.

 

Reliance was placed on earlier Tribunal orders in the assessee’s own case and settled judicial precedents.

 

ITAT Findings:-The Tribunal carefully examined the record and noted that the assessee was engaged in export business, where payment of overseas commission is a commercial necessity and an integral part of business operations.

 

It was specifically observed that:

the issue of disallowance of overseas commission on grounds of genuineness and non-deduction of TDS had already been decided in favour of the assessee in earlier years;

the Tribunal, vide order dated 06.05.2021, had deleted identical disallowances in the assessee’s own case for assessment years 2010-11 and 2011-12; and

the Assessing Officer had not brought any new material on record to take a different view in the year under appeal.

 

The Tribunal also relied on the judgment of the Hon’ble Supreme Court in CIT v. Toshoku Ltd., wherein it was held that commission paid to non-resident agents for services rendered outside India does not accrue or arise in India and is not chargeable to tax in India.

 

Accordingly, the Tribunal held that the CIT(A) had rightly deleted the disallowance.

 

Decision:-The Tribunal upheld the order of the CIT(A) and dismissed the appeal of the Revenue, holding that:

commission paid to non-resident agents for export activities is a legitimate business expenditure;

such commission, when services are rendered outside India, is not taxable in India; and

consistent appellate findings in the assessee’s own case cannot be disregarded in the absence of fresh material.

 

Result: Appeal of the Revenue dismissed.