| QUERY: | XYZ is engaged in the business of manufacturing and export of various chemicals. It pays commission to various overseas agents, who procures orders for it from outside India. The Commission is payable only on actual export sales routed through the agents. The question is whether it is necessary to deduct tax at source under section 195 on export commission in view of withdrawals of circulars bearing no. 23 dated July 23,1969 and bearing no. 786 dated February 7, 2000. |
| ANSWER: | Even though, the circulars stated above have been withdrawn vide circular no. 7 of 2009 dated October 22,2009, no TDS is required to be deducted as no income is chargeable to tax under section 195 of the Income-tax Act, 1961, as non-resident selling agents have rendered the services outside India for procuring the orders and commission is payable to them outside India. In this connection, the observations of the Supreme Court in CIT vs. Toshoku Ltd. [125 ITR 525] are noteworthy, which are as under: “That it could not be said that the making of the entries in the books of debtor amounted to receipt, actual or constructive, by the non-residents sales agents as the amounts so credited in their favour were not at their disposal or control; they could not, therefore, be charged to tax on the basis of receipt of income, actual or constructive, in taxable territories. That the non-residence did not carry on any business operation in the taxable territories; they acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad did not amount to an operation carried out by the non-residence in India as contemplated by clause (a) of the Explanation to s. 9(1)(i) of the I.T. Act, 1961. The commission amounts which were earned by the non residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India”. The aforesaid decision, recently has been followed by the Delhi High Court in CIT vs. EON Technology (P) Ltd. [15 Taxmann.com 391] and by the Mumbai Tribunals in undernoted decisions: (a) Addl. DIT (International Taxation) vs. Star Cruise India Travels Services (P) Ltd., [46 SOT 173 (Mum)] (b) Dy. DIT vs Samsung Engg. Co. Ltd. [43 SOT 38 (Mum) ] (c) ITO vs. Kirtilal Kalidas Diamond Exports [47 SOT 144 (Mum)] (d) Valentine Maritime (Gulf) LLC vs. Asst. DIT International Taxation [45 SOT 359 (Mum)] and (e) Armayesh Global vs. ACIT [45 SOT 69 (Mum)]. However recently the Authority of Advance Ruling in SKF Boilers and Driers (P) Ltd., In re [343 ITR 385], following its earlier ruling in Rajiv Malhotra, In re [284 ITR 564] has held as under: “That although the agents rendered services abroad and solicited orders, the right to receive the commission arose in India when the order was executed by the applicant in India. The facts that the agents had rendered services abroad in the form of soliciting orders and the commission was to be remitted to them abroad were wholly irrelevant for the purpose of determining the situs of their income. The income arising on account of commission payable to the agents was deemed to accrue and arise in India, and was taxable under the Act in view of the specific provisions of section 5(2)(b) read with section 9(1)(i) of the Act. The provisions of section 195 would apply, and the rate of tax would be as provided under the Finance Act for the relevant year”. With due respect to the aforesaid ruling has not considered the Supreme Court decision in CIT vs. Toshoku Ltd. (supra) and as per section 245S of the Act, the ruling is applicable only to the applicant in respect of the transaction and to the commissioner and therefore, not applicable to other assessees. Even though, the income is deemed to accrue in India the Explanations to Section. 9(1)(i) are applicable. Explanation 1 to clause (i) of section 9(1) provides that in case a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Explanation 2 declares that the business connection shall include any business activity carried out through a person who, acts on behalf of the non resident in certain specified circumstances. Explanation 3 further provides that where a business is carried on in India through a person refer to in Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. When all the three Explanations to Section 9(1)(i) are considered in unison it comes to light that only such part of income is deemed to accrue or arise in India which is attributable to the operations carried out in India. If the non resident receives income which is wholly attributable to the operations carried out in India then the entire sum is deemed to accrue or arise in India as per clause (i) of section 9(1)(i). If however a part of such income is relatable to the operations carried out in India then only that part of income which is so attributable to the operations carried out in India shall be deemed to accrue or arise in India. Still in another situation if no part of income is attributable to the operations carried out in India, then the entire amount would go out of the ambit of section 9(1). So, what is material for fixing liability under section 9(1) is that the non resident should have carried out operations in India in order to categorize that part of the income as having been deemed to accrue or arise in India. [See. ITO vs. Jay Container Services Co. (P) Ltd. – 27 SOT 383 (Mum)]. |
| EXPERT: | CA. H. N. Motiwalla |
| SECTION(S): | 195, 5(2)(b), 9(1)(i) |
| GENRE: | Taxation (Domestic) |
| CATCH WORDS: | commission, Non-resident, tax deducted at source |
Opinion Of Eminent Legal Luminaries On Controversial Issues
Whether TDS Is Required When Making Payment To Non-Resident On Export Commission?
Posted in Income-tax
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