Applicability of provisions of TDS in respect of Commission Paid by Indian Exporters to Non-Resident Agents

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)