Commission earned by Non-resident overseas agent from an Indian Company- Whether Taxable in India?
Firstly, Taxability of any income in the hands of non-resident is be determined as per the provision of Section-4, Section-5 and Section-9 of the Indian Income Tax Act. Secondly, if non-resident is taxable under these provisions, then the person paying the income which is subject to tax in India is required to deduct withholding tax as per provision of Section-195 of the ITA or in certain cases, non-resident is directly required to discharge his tax liability as per provision of the ITA. Non-Compliance on the part of payer of Income may lead to several hard consequences like dis allowance of expenditure as business expenses, discharging of tax, interest and penalties of the non-resident as representative assesse of non-resident etc. Let us now discuss the case study in hand i.e. Commission earned by Non-resident overseas agent from an Indian Company- Whether Taxable in India?
Here are some of the key point to be considered:
- Comptroller and Auditor General (C&AG) in its Audit report of tax department audit raised the objection on allowance of expenditure of Commission paid to foreign agent without withholding tax under section 195 for the year 1997-98.
- CBDT by Circular No. 786/2000 dated 7.2.200 clarified that where the Non-resident agent operates outside India, no part of his income arises in India. Moreover, as payment is directly received by the agent in his bank account outside India, therefore, it is not covered under the ambit of section-5(2) of Income tax Act and hence no tax to withhold. This clarification is provided by CBDT based on its earlier Circular No. 23 dated 23.7.1969.
- The above referred Circular of 1969 was not relevant as the new provisions of Section 9(1) Clause (vi) and (vii) of Income deemed to accrue arise in India for Royalty and fee for technical services (FTS) from the year 1976. Moreover, the Circular no 786/2000, circular no-23 dated 23.07.1969 and circular no 163 dated 29/01975 were itself withdrawn by CBDT through Circular No. 7/2009 dated 22/10/2009 stating that interpretation of the circular by some taxpayers to claim relief is not in accordance with the provisions of Section-9 of ITA or intention behind the issuance of circular.
- But the fact was that there was a retrospective amendment in Section-9 of the Act effective from 1.6.1976 whereby explanation was added in Section-9(1) stating that interest, royalty and fee for technical services shall be deemed to income of the Non-resident irrespective of its performance and availability of place of business in India by the Non-resident.
- Now, no circular is relevant for providing relief on the issue of taxability of commission in the hands of non-resident agent in India.
- Therefore, , presently one needs to test the Taxability of Commission in the hands of Non-resident agent in India on touch stone of Section-9 of ITA i.e. income deemed to accrue arise in India and the relevant clause (vii) of Sub section 1 of Section-9 of ITA i.e. fee for technical services.
- The key test for this, whether the services provided by Non-resident agent is covered under ‘Managerial, Technical and Consultancy’ services. It will depend upon the scope of work as defined in the agreement between the Indian party and Non-resident agent. Decision may differ from case to case basis, but one thing is very clear that a simple Transactions of referral Commission, or ‘Commission which was order specific and computable at a fixed percentage of order value [Gopalkumaran Nair Case of (2021) 130 taxman.com 235 Madras] or incidental activities like market survey only to ascertain demand of the product to function as Commission agent [Evolv Clothing Co. Private limited of (2018) 94 taxman.com 449 (Madras) is not covered under the definition of fee for technical services as defined above. Or, we can say if services of Commission agent is something more than the traditional services being offered by the commission agent may be covered under the definition.
- Taxability as per this clause of Section-9 of ITA is irrespective whether or not the Non-resident is providing services in India and he is having Resident, fixed place of business in India. However, there are two EXEMPTIONS, one, services provided by the agent is utilised by the recipient for his business/profession outside India and second, services used for earning income source outside India. Accordingly, situs of the rendering of services was not relevant, but the situs of the payer and the situs of the utilization of services which determine taxability of such services in India.
- Moreover, where a non-resident has no permanent establishment in India, there can be no liability either under the domestic law or under Double Taxation Avoidance Agreement as business income of the non-resident. In any case, even if a non-resident Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the income for services rendered abroad could not have been liable for tax deduction at source.
- Obviously, if the Non-resident agent is a tax Resident of a Country with which India have DTAAs, all the relief provided under the treaty shall be available with the agent.
Concluding Remark
If commission is not taxable as per the above test, then there is no requirement of any clearance under Section-195(2) or Section-195(3) of the ITA as where no part of the income is chargeable to tax in India. [Supreme Court in GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234]. No consequences of non-deduction. But one needs to be very careful in understanding the terms of service agreement between the parties to judge the applicability of the relevant provision of Section-9 of the ITA based on the relevant case laws which provides very strong support in case of any litigation at all stages if any.
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