Taxability of export commission paid to Foreign Agents

Taxability of export commission paid to Foreign Agents u/s 195 of IT Act In the era of global village, the boundaries have been removed and cross border transactions have been increased. The Indian businessman makes various payments in terms of commission to non-resident agents, for availing various services from these foreign agents. The commission is always paid to the agents residing outside India for furtherance of business activities. The role of agent is to procure business, finalize deal, responsibility for collection, sourcing of raw-material, Plant and Machinery etc. The issue for the consideration is how to deal with taxability of export commission paid to Foreign Agents or whether the payment made to foreign agent is liable to TDS u/s 195 of the I.T. Act or Whether failure to deduct tax will lead to disallowance of expenses under section 40(a)(i) of the I.T. Act. The issue is to be considered from the perspective of both the domestic law as well as under the Double Taxation Avoidance Agreements (DTAA). First, let us look at the applicable provisions under domestic law.

Taxability of export commission paid to Foreign Agents

The section 195 of the I. T. Act states as (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC)] [or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Therefore, as per section 195 of the I.T. Act, the liability to deduct TDS arises only where the payment to non-resident is made in respect of any sum chargeable to tax in India. Section 195 has to be read along with the charging sections 4, 5 and 9 of the I.T. Act. Thus, section 195 should not be read to mean that the moment there is a remittance; the obligation to deduct TDS will arise automatically. The Honble Supreme in the case of GE India Technology Centre (P) ltd. vs. CIT 327 ITR 456 (SC) has held that if the income is not chargeable to tax in India , there is no liability of TDS u/s 195 of the I.T. Act Therefore, in order to determine the applicability of the provisions of Section 195, it is first essential to find out whether the sum paid to non- residents is chargeable to tax as per the provisions of Section 9. The provisions of Section 9(1) (i) states that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of capital asset situate in India shall be deemed to accrue or arise in India. Therefore, when the payment in question has been made to an export agent operating outside India, the income is not chargeable to tax in India as the no income which is accruing or arising in India. Moreover, the agent does not have any business connection or Permanent Establishment in India. The commission has been paid for procuring export orders or relevant services, hence the services rendered by the agent cannot be regarded as income that accruing or arising in India and therefore such income cannot be taxed in India u/s 4, 5 or section 9(1)(i) of the I.T. Act. Therefore, the commission is not liable to tax under the domestic law. The view is further supported by following decisions :

• GE India Technology Centre (P) ltd. vs. CIT 327 ITR 456 (SC)
• CIT TOSHOKU LTD 125 ITR 0525 (SC)
• CIT vs. EON Technology (P) (ltd) 343 ITR 366 (Delhi HC)
• DCIT Vs. Divis Laboratories ltd. (2011)131 ITD 271 (Hyderabad)
• ACIT vs. MODERN INSULATOR LTD. 30 CCH 0193 (Jaipur)

Now let us look at the chargeability under DTAA. Under DTAA , the income is chargeable under different Articles, with each having a separate set of distributive rules and definition, stated under treaty between two countries. Therefore, under DTAA it is important to decide the characterization of the income. As the DTAA, the business income is taxable only in residence country, if there is no Permanent Establishment in source country. Therefore, the foreign commission is also not taxable in India as per DTAA. This view is also supported by SPAHI Projects 183 Taxman 92 (AAR), Modern Insulators Ltd. 55 Taxman.com 260 (Rajasthan) Therefore, under DTAA also the export commission paid to foreign agent is not liable to tax in India. Therefore, the provision of section 195 of the I.T. Act is not applicable and there is no liability both under domestic law and under treaty also. This article has been shared by CA Kalpesh Doshi. For any query the author can be on contacted on[email protected] Taxability of export commission paid to Foreign Agents u/s 195 of IT Act