Commission paid to NR for effecting exports to foriegn buyer is not taxable in India

IN THE HIGH COURT OF KERALA AT ERNAKULAM

The Relevant Text of the order as follows :

29. In this case, there is no utilization of the services rendered by the non-resident agent within India. The projects executed by the resident company even within India was for sale to the foreign buyer and it cannot be said that merely for reason of the execution in India the service was utilized in India. The software developed in India was also for export; the appellant being a 100% EOU. The services rendered by the non-resident agent was for facilitating sale in the three outside territories. The services rendered for effecting exports by the appellant company to foreign buyers, makes the foreign countries the source of income. The execution of the project within India would not attract income tax since the income is derived from the sale of the product outside the territories of India and the execution is only to obtain such income from territories outside India. As has been declared by the Hon’ble Supreme Court in Sedco Forex International Drill Inc., “an explanation to a statutory provision may fulfill the purpose of clearing up an ambiguity in the main provision or an explanation can add to and widen the scope of the main section”. The Explanation cannot be found to have taken away or curtailed the effect of the clear exceptions provided by sub-clause (b) of Section 9(1)(vii).

30. Since we have concluded that the commission paid to the non-resident in the present case is not taxable under the IT Act by virtue of Section 5(2) read with Section 9(1)(vii)(b), there is no scope for finding any liability on the resident company to deduct tax from source, from payments made by them to the non-resident. We rely on GE India Technology Centre, wherein it was categorically held that “the plain words of Section 195(1) which is in clear terms lays down that tax at source is deductible only from ‘sums chargeable’ under the provisions under the IT Act, i.e., chargeable under Sections 4, 5 and 9 of the IT Act” (sic. para 24). We hold question No’s.1 and 2 in favour of the assessee and against the Revenue. We decline to answer question Nos.3 and 4 in view of our answer to the first two questions granting substantial relief to the assessee.

The appeal stands allowed and the assessment order to the extent it attempts to hold the payment made by the resident-company/assessee/appellant, to the non-resident agent as income deemed to arise or accrue in India would stand set aside. Parties are left to suffer their respective costs.