The
role of an agent differs from case to case. The duties of the agent are usually
compiled in the agency agreement between Indian Exporter (Principle) and Agent
abroad. The relationship of the parties to the agreement is that of
Principle-Agent. The Principle pays export commission to the agent as per
agreed terms based on the sales abroad. The Principle obviously claims the
export commission as business expenditure.
The
Hon’ble Supreme Court in the case of GE India Technology Centre (P) Ltd. (2010)
TS 140 SC held that Tax is to be deducted at source while making payment to the
non-resident, only when the related income of the non-resident is taxable in
India.
Applicability of Sections 5 and 9 of
Income-tax Act, 1961
Section
5(2) of the Act defines the scope of total income of a person who is a
non-resident. It includes all income from whatever source derived which:
(a)
is received or is deemed to be received in India in such year by or on behalf
of such
person or
(b)
accrues or arises or is deemed to accrue or arise to him in India during such
year.
In
the case of export commission, the commission is usually remitted to the agent
out of India for the services rendered outside India, neither any income is
received in India nor deemed to be received in India. Hence, export commission
can be included in total income only if it can be covered under any of the
possibilities of clause (b) of Section 5(2) of the Act.
Concept of Business Connection
The concept of “business
connection” was dealt with in the landmark case of CIT v. R. D.
Aggarwal & Co. & ANR. (1965) 56 ITR 20 (SC) where the Apex
Court held that a business connection “involves a relation between a
business carried on by a non-resident which yields profits or gains and some
activity in the taxable territories which contributes directly or indirectly to
the earning of those profits or gains. It predicates an element of
continuity between the business of the non-resident and the activity in
the taxable territories.”.
According to Double Taxation Avoidance
Agreements, if the non-resident does not have Permanent Establishment in India
then Business Income of such non-resident shall not be taxed in India
Double
Taxation Avoidance Agreement is important in light of provisions of Section 90
of the Act. According to the sub-section (2) of section 90 of the Act:
“When
the Central Government has entered in to an agreement with the Government of
any country outside India or specified territory outside India, as the case may
be, under sub section (1) for granting relief of tax, or as the case may be,
avoidance of double taxation, then, in relation to the assessee to whom such
agreement applies, the provisions of this Act shall apply to the extent they
are more beneficial to the assessee.”
According
to Article 7 on Business Income in the Double Taxation Avoidance Agreements,
the Business Connection of non-resident is taxable in India only if said
non-resident has Permanent Establishment in India. If the non-resident has
Permanent Establishment in India then the profits attributable to such
Permanent Establishment shall be taxed in India. The relevant extract of the
Article 7 on Business Income from UN Model Tax Conventions is:
“The
profits of an enterprise of a Contracting State shall be taxable only in that
state unless the enterprise carries on business in the other contacting state
through a Permanent Establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be taxed in the other
state but only so much of them as is attributable to (a) that permanent
establishment; (b) sales in that other state of goods or merchandise of the
same or similar kind as those sold through that Permanent Establishment; or (c)
other business activity carried on in that other state of the same or similar
kind as those effected through that Permanent Establishment.”
CBDT’s Circular No.
7/2009, dated 22.10.2009 [F. No. 500/135/2007-FTD-I]
The Central Board of Direct Taxes had issued Circular No. 23
on 23.07.1969 regarding taxability of income accruing or arising through,
or from, business connection in India to a non-resident, under section 9 of the
Income-tax Act, 1961.
2. It is noticed that interpretation of the Circular by some
of the taxpayers to claim relief is not in accordance with the provisions of
section 9 of the Income-tax Act, 1961 or the intention behind the issuance of
the Circular.
3. Accordingly, the Central Board of Direct Taxes withdraws
Circular No 23 dated 23.07. 1969 with immediate effect.
4. Even when the Circular was in force, the Income-tax
Department has argued in appeals, references and petitions that-
(i) the Circular does
not actually apply to a particular case, or
(ii) that the Circular
can not be interpreted to allow relief to the taxpayer which is not in
accordance with the provisions of section 9 of the Income-tax Act or with the
intention behind the issue of the Circular.
It is clarified
that {the withdrawal of the Circular will in no way prejudice the aforesaid
arguments which the Income-tax Department has taken, or may take, in any
appeal, reference or petition.
5. The Central Board of Direct Taxes also withdraws Circulars
No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000 which
provided clarification in respect of certain provisions of Circular No 23 dated
23rd July, 1969.
CBDT’s Circular No. 786 dated 07.02.2000
CBDT
through this circular clarified the deduction of tax under Section 195 and the
taxability of export commission payable to non-resident agents rendering
services abroad. The relevant extract of the said circular is:
“It
had been clarified then that where the nonresident agent operates outside the
country no part of his income arises in India. Further, since the payment is
usually remitted directly abroad it cannot be held to have been received by or
on behalf of the agent in India. Such payments were therefore, held to be not
taxable in India. The relevant Sections, namely Section 5(2) and Section 9 of
the Income-tax Act, 1961 not having undergone any change in this regard, the
clarification in Circular No. 23 still prevails. No tax is therefore deductible
under Section 195 and consequently the expenditure on export commission and
other related charges payable to a non-resident for services rendered outside
India becomes allowable expenditure.”
CBDT’s Circular No. 23 dated
23.07.1969: Foreign agents of Indian exporters
CBDT
through this circular explained the taxability of export commission. The
relevant extract from the said circular is:
“A
foreign agent of Indian exporter operates in his own country and no part of his
income arises in India. His commission is usually remitted directly to him and
is, therefore, not received by him or on his behalf in India. Such an agent is
not liable to income-tax in India on the commission.”
No tax
to be withheld on commission paid to non-resident agent even in cases where
orders ultimately secured from Indian company
The assessee was engaged in the business of
manufacture of precision measuring, checking instruments and gauges used to
control quality of engineering production. He had paid commission to an agent
based in Italy for securing purchase orders from an Indian subsidiary of an
Italian company. He had appointed the agent to follow-up with the Italian
company due to distance and language barriers. He had not withheld tax on such
payment of commission. The Assessing Officer
disallowed the commission expense during regular assessment proceedings under
section 40(a)(i) of the Act as no tax had been withheld. The assessee filed an
appeal before the CIT(A), who upheld the Assessing Officer’s order. The assessee
then filed an appeal before the Tribunal.
The Revenue contended that since the orders
were procured from an Indian entity, services were provided in India, and the
situs of the foreign agent was in India. It placed reliance on the ruling
pronounced by Delhi High Court in the case of Havells India Limited 352 ITR 376
(Del). It also contended that the CBDT Circular No. 23 of 1969 having been
withdrawn, was not applicable.
The Tribunal observed that it was an
undisputed fact that services rendered were neither technical nor managerial in
nature. It also observed that the Revenue was unable to show that the foreign
agent had a PE in India. It held that as the foreign agent was involved in
liaison/ following up with the Italian company, the services were rendered
outside India. The Tribunal further distinguished the Delhi High Court decision
in CIT v. Havells India Limited (2013) 352 ITR 376 (Del) on facts, as in that
case, the assessee had paid fees for testing and certification services. The
Tribunal discussed the CBDT Circular No. 786 dated 07.02.2000 which clarified
the taxability of export commission payable to non-resident agent for rendering
services abroad, and held that no tax needed to be withheld under section 195
on such export commission. Referring to a judicial precedent relied upon by the
assessee, viz. CIT v. Faizan Shoes (P) Ltd. (2014) 367 ITR 155 (Mad); Welspring
Universal v. JCIT (2015) 56 taxmann.com
174 (ITAT Delhi)] , the Tribunal held that payment of commission to a foreign
agent was not liable to tax in India. In this case, the Madras HC had also held
that services rendered by an agent were not covered under the category of Fees
for Technical Services (FTS). It further placed reliance on the Apex Court’s
ruling in the case of GE India Technology Centre v. CIT (2010) 327 ITR 456 (SC),
to hold that tax was required to be withheld only if such sum was chargeable to
tax under the Act. Accordingly, the Tribunal concluded that the taxpayer was
not required to withhold tax on commission paid to foreign agent, as the
services were rendered outside India and hence disallowance under section
40(a)(i) of the Act would not sustain. - [TS-230-ITAT-2016
(ITAT Pune)]
No
withholding taxes on commission paid to NR agents for services rendered abroad
in absence of their Permanent establishment (PE) in India
Assessee firm made payments of
commission to its foreign agents without deducting tax at source - Assessing
Officer thus disallowed said payments under section 40(a)(i) - It was apparent
from records that foreign agents had rendered services in their respective
countries and had received commission - It was also undisputed that foreign
agents did not have any PE in India and there was nothing brought on record to
show that agreements between assessee and commission agents were entered in
India - On facts, commission payments were not taxable in India and, thus,
impugned disallowance deserved to be deleted. - (Related Assessment year :
2010-11) – [ITO v. Trident Exports (2014) 149 ITD
361 : 44 taxmann.com 297 (ITAT Chennai)]
AAR
held that the words ‘accrue’ or ‘arise’ occurring in Section 5 have more or
less a synonymous sense and income is said to accrue or arise when the right to
receive it comes into existence. Though the agents rendered services abroad and
have solicited orders, but the right to receive the commission arises in India
when the order is executed in India. - [SKF
Boilers and Driers (P) Ltd. (2012) TS 203 AAR]
Indian taxpayer is not
liable to deduct tax under Section 195 of the Act from commission and other
related charges payable to non-resident who has rendered services outside India
The
Delhi High Court in the case of CIT v. Eon Technology (P) Ltd. (2011) TS 661
ruled in favour of the assessee. In the said case, the non-resident was acting
as a marketing agent and was providing marketing and sales support to Indian
Exporter. It was held that the services are rendered outside India and
non-resident agent does not have a Business Connection in India and hence, commission
income is not taxable in India. (Related Assessment
year : 2007-08) - [CIT v. Eon
Technology (P) Ltd. (2011) TS 661- Date of Judgement : 08.11.2011 (Del)]
It
was held that non-resident agency companies have not made available any
technical or managerial service and hence commission paid to such companies is
a business profit and not fees for technical services. – [ACIT v. Modern Insulator Ltd (2011) 10 ITR (Tri) 147 (ITAT Jaipur)]
It was held that with respect to payment of selling
commission, brokerage and other related charges to non-resident agents in
respect of sale of tea outside India, no income had accrued or arisen in India
either under Section 5(2) or under Section 9 and therefore no tax was
deductible under Section 195. – [JCIT v. George
Williamson (Assam) Ltd. (2009) 116 ITD 328 (ITAT Guwahati)]
In Spahi
Projects (P) Ltd., IN RE, where the AAR held
that commission for services rendered in connection with arranging sales abroad
(in South Africa) cannot be brought within the net of income-tax in India as
there was no fixed place of business in India for the South African entity nor
does the SA entity enter into any contracts in India. - [Spahi Projects (P) Ltd., IN RE (2009) 315 ITR 374 : 225 CTR 133 : 183
TAXMAN 92 : 26 DTR 303 (AAR)]
It
was held that the foreign agent’s right to receive the commission is acquired
as and when services are rendered. Since services are rendered abroad, the
right to receive the commission is consequentially acquired outside India.
Accrual of Income is also outside India. Hence, the commission income of
foreign agent paid by Indian exporter is not chargeable to tax in India.
- [DCIT v. Ardeshi and Cursetjee &
Sons Ltd. (2008) 115 TTJ 916 : 7 DTR 51 (ITAT Mumbai)]
Commission and retainer fees received
by non resident agent from Indian exporters is not taxable in India
In
the case of Ind Telesoft (P) Ltd. (2004) 267 ITR 725, the Authority for Advance
Rulings held that commission and retainer fees received by non resident agent
from Indian exporters is not taxable in India. In the said case, assessee was
engaged in the business of providing software solutions for telecom industry.
It entered into agreement with three nonresidents from three different
countries viz. France, Canada and USA, for securing business from outside
India. The assessee agreed to pay retainer fees and commission to non-resident
agents. Those non resident agents did not have any business connections in
India. AAR held that, income of non-residents is not taxable in India in the
absence of Business Connection in India.
The
Madras ITAT in the case of Indopel Garments (P) Ltd. referred the case of CIT
v. Toshoku Ltd. (1980) 125 ITR 525 (ITAT Madras) and held that no disallowance under section 40(a)(i) could be made
for commission payment, without deducting tax, to foreign concern without
acting as a selling agent of the assessee for canvassing orders outside India
as income will be deemed to accrue or arise in India only if any part of the
income is reasonably attributable to the operations carried out in India and if
no operations are carried out in India, there would be no income deemed to
accrue or arise in India and no tax was to be deducted under section 195 out of
remittances made to foreign concern. The foreign agent does not have any
Business Connection in India and hence his income is not deemed to accrue or
arise in India. - [Indopel Garments (P) Ltd. v. DCIT (2003) 86 ITD 102 (ITAT
Madras)]
It was held that no disallowance under section 40(a)(i) could
be made for commission payment, without deducting tax, to foreign concern
without acting as a selling agent of the assessee for canvassing orders outside
India as income will be deemed to accrue or arise in India only if any part of
the income is reasonably attributable to the operations carried out in India
and if no operations are carried out in India, there would be no income deemed
to accrue or arise in India and no tax was to be deducted under section 195 out
of remittances made to foreign concern. – [CIT v. Indopel
Garments (P) Ltd. v. DCIT (2001) 72 TTJ 702 (ITAT Chennai)
It
was held that commission service by foreign agent does not impart any
information concerning technical, industrial, commercial or scientific
knowledge, experience or skill nor does he render any managerial, technical or
consultancy service. Commission attributable to services rendered by assessee
cannot be regarded as royalty or fees for technical services and hence the same
was not taxable under Section 9(1)(vi) or (vii). – [CEAT International S. A. (1999) 237 ITR 859 (Bom)]
When a non-resident,
with no operation of business in India, rendered services outside India to
an Indian concern, then provisions of Section 9 are not attracted
It
was held that the commission amounts which were earned by the non-resident
assessees for services rendered outside India cannot be deemed income accrued
or arisen in India. The term ‘Business Connection’ in the context of its
applicability to commission income of foreign agents is discussed in this case.
- [CIT v Toshoku
Ltd (1980) 125 ITR 525 SC)
