[2013] 34 taxmann.com 60 (Article)
TDS on Commission paid to foreign agents - Divergent views!
RAGHAV KUMAR BAJAJ
CA
Over the past few decades India's contribution to the international trade has increased noticeably. Consequently, more and more Indian exporters are appointing foreign agents who work on commission basis for the Indian exporters. The foreign agents explore the overseas markets, find more and more customers and then forward the list of such probable customers to the Indian enterprises. Then the Indian enterprises deal with such probable customers on their own, carry forward the export to such customers and finally realize the sale considerations from the customers on their own account directly. For the services rendered by the overseas agents, they are paid export commission by the Indian enterprises. The issue that arises in such type of transactions is whether the Indian enterprise is required to deduct tax at source under the Income-tax Act, 1961 ("the Act") from the payment made to the foreign agent ? There have been divergent views available on this issue. Through this article the author has attempted to briefly state the current legal position in this regard.
Introduction
1. Over the past few decades, India's contribution to the international trade has increased noticeably. Just to put the things into proper perspective: India's total merchandise trade increased over three-fold from US$ 252 bn. in FY 2006 to US$ 792 bn. in FY 2012. Furthermore, the Exports-GDP ratio increased from 12.3% in FY 2006 to 16.3% in FY 2012 [Source: http://www.eximbankindia.com/fore-trade.pdf].
This steep rise in India's share in the international trade could not be possible if the Indian enterprises wished to carry out their operations entirely from India. For better exploitation of the business opportunities available in the overseas markets, the Indian enterprises have increased the appointments of foreign agents who work on commission basis for the Indian businesses.
The modus operandi in which this transaction moves forward is that the Indian enterprise appoints a foreign party as its agent for the purpose of soliciting customers for the overseas business of the Indian enterprise. The foreign agent explores the overseas market, finds more and more customers and then forwards the list of such probable customers to the Indian enterprise. Then the Indian enterprise deals with such probable customers on its own, carries forward the export to such customers and finally, realizes the sale consideration from the customers on its own account directly. For the services rendered by the overseas agent, he is paid an export commission by the Indian enterprise.
The Issue that generally arises in such transactions
2. The issue that generally arises in such type of transactions is whether the Indian enterprise is required to deduct, tax at source under the Income-tax Act, 1961 ("the Act") from the payment made to the foreign agent.
Analysis
3. Section 195 of the Act deals with the deduction of tax at source from the payments made to non-residents. The relevant extracts of section 195 of the Act are reproduced herein for the sake of ready reference:—
"Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 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 :"
In section 195(1), the crucial expression is 'any other sum chargeable under the provisions of this Act'. It would, thus, mean that the person making payment to the non-resident would be liable to deduct tax, if the payment so made is chargeable to tax under the Act. Impliedly, if the payment is not chargeable to tax under the Act, the payer would not be liable to deduct tax at source. The chargeability to tax mentioned in the above provision is directly linked with section 4, which is the main charging section. In other words, if the charge under section 4 fails, automatically section 195 would be inapplicable. Section 195 of the Act will be applicable only if the payment made to the non-resident is chargeable to tax. At this juncture, it would be pertinent to refer to the section 4, the relevant provisions of which are as under:—
"Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person".
Thus, section 4 makes it evident that the income-tax shall be charged for a particular year in accordance with the provisions of this Act. In this regard section 5 of the Act which deals with the scope of total income, in the case of a non-resident assessee, inter alia, provides as under:—
"Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident 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. | |
| Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. |
The plain language of section 5 provides that in the case of a non-resident assessee, the total income takes within its ambit two types of incomes: one, the income which is received or is deemed to be received in India, and second, the income which accrues or arises or is deemed to accrue or arise to him in India. In the present case, we are concerned with the latter limb of this scope. Section 9 of the Act provides for the income deemed to accrue or arise in India. This is a fiction created by the enactment which is essential in fixation of the charge under the Act. The relevant extracts of section 9 are reproduced herein for the sake of ready reference:—
"(1) The following incomes shall be deemed to accrue or arise in India:—
| (i) | all incomes 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 a capital asset situate in India : | |
| "Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : | ||
| Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. |
Section 9, as aforesaid, creates a legal fiction and provides that certain income shall be deemed to accrue or arise in India. In the present case, we are concerned with clause (i) and clause (vii) of the section 9(1). Let us analyze each of these clauses one-by-one:
Section 9(1)(i): Business connection
| ♦ | The plain language of section 9(1)(i) of the Act provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise India. Applying the above legal provisions of the Act to the factual matrix of the case, it becomes apparent that the question which needs to be addressed is whether the income earned by foreign commission agents, whose work is limited to soliciting customers in relation to the overseas business of the Indian enterprise and forwarding the list of such probable customers to the Indian enterprise, accrues or arises from any business connection in India. In other words, does this foreign agents commission have any business connection with India ? | |
| ♦ | This issue has been the subject matter of various circulars issued by the Central Board of Direct Taxes (CBDT). The relevant extracts of one such circular is as under: | |
| Circular No.23, dated 23 July, 1969: | ||
| "Foreign Agents of Indian Exporters: - 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." | ||
| ♦ | The above mentioned Circular No.23 mentions that the foreign agents of Indian exporters are not liable to income-tax in India on the commission. This circular was relied upon by the Hon'ble Supreme Court of India in the case of CIT v. Toshoku Ltd.[1980] 125 ITR 525 wherein the Apex Court held as under:— | |
| "...if no operations of business are carried out in the taxable authorities, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. . . The commission amounts which were earned by the non-resident assessee for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India..." |
Section 9(1)(vii): Fees for technical services
| ♦ | If the amount paid by the Indian enterprise to the foreign agent is in the nature of 'fees for technical services' as defined in theExplanation 2 to section 9(1)(vii) of the Act, then such income in the hands of the foreign agent shall be deemed to accrue or arise in India, and, consequently, such foreign agent's commission shall be chargeable to tax in India, and, consequently, the Indian business enterprise shall be liable to deduct tax at source from such foreign agent's commission under section 195 of the Act at the rates in force. | |
| ♦ | In this regard, the relevant extracts of the ruling pronounced by the Authority for Advance Rulings (AAR), in the case of Spahi Projects (P) Ltd., In re [2009] 315 ITR 374/183 Taxman 92 (AAR-New Delhi) are as under: | |
| "...Explanation 2 to section 9 contains an inclusive definition of business connection but it applies only to a business activity carried out through a person acting on behalf of a non-resident. That situation does not exist here. Where no business operations are carried out in India by Zaikog, the attribution in terms of cl. (a) of the Explanation is not possible and, therefore, no income can be deemed to accrue or arise in India merely because Zaikog promotes the business of the applicant in South Africa. As the income of Zaikog on account of the commission paid to it by the applicant is not chargeable to tax in India by virtue of the article 7 of the DTAA and section 9(1)(i) r/w the Explanation thereto, the applicant is not obliged to deduct the tax at source under section 195. . . | ||
| There could possibly be no controversy that Zaikog will not be rendering services of a managerial, technical or consultancy nature and, therefore, the liability to tax cannot be fastened on it by invoking the provisions dealing with fee for technical services. .". | ||
| ♦ | Thus, the AAR, in the above case, has categorically stated that the amount paid by an Indian business enterprise to its foreign agent as commission will not covered in the definition of 'fees for technical services' as defined in the Explanation 2 to section 9(1)(vii) of the Act. |
TDS liability under section 195 of the Act
Once it is established that the amount of commission paid by the Indian enterprise to its foreign agent is not chargeable to tax under the provisions of the Act, it becomes evident that the payer of such commission shall not be required to deduct tax at source under section 195 of the Act from such commission.
This position has been further strengthened by the clarification given by the CBDT in its Circular No.786, dated 7 February, 2000. The relevant extracts of the said circular are reproduced herein for the sake of ready reference:
"The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India."
A bare perusal of the above mentioned circular makes it apparent that no tax is required to be deducted by the Indian exporters from commission to their foreign agents, since such payments are not taxable in India.
Conflicting position
4. The crux of the aforesaid circulars [Circular No. 23, dated 23 July 1969 and Circular No. 786, dated 7 February 2000] is that as regards extent of profits attributable to India, only that portion of the profit, which can reasonably be attributed to the operations of the business carried out in India, is liable to tax. Further, the TDS provisions under section 195 of the Act are not applicable to the commission paid by the Indian exporters to their foreign agents. However, subsequently, the CBDT issued Circular No. 7/2009, dated 22 October, 2009 withdrawing the aforesaid circulars. The reason mentioned for such withdrawal was that interpretation of the Circular (No. 23, dated 23 July, 1969) 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 (No. 23, dated 23 July, 1969). As a result, the matter became a subject of opposing views.
Furthermore, the AAR, in the case of SKF Boilers and Driers Pvt. Ltd., In re [2012] 206 Taxman 19/18 taxmann.com 325 (AAR-New Delhi), has pronounced the following ruling:
"We are concerned with the source of income of the two non-resident agents who had earned commission from the business activity of the applicant. Sections 5 and 9 of the Act, thus, proceed on the assumption that income has a situs and the situs has to be determined according to the general principles of law. 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. No doubt, the agents rendered services abroad and have solicited orders, but the right to receive the commission arises in India when the order is executed by the applicant in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is to be remitted to them abroad are wholly irrelevant for the purpose of determining the situs of their income. We follow the ruling of this Authority [Rajive Malhotra AAR 671 of 2005, 284 ITR 564]. We, therefore, hold that the income arising on account of commission payable to the two agents is deemed to accrue and arise in India, and is taxable under the Act in view of the specific provision of section 5(2)(b), read with section 9(1)(i) of the Act. The provision of section 195 would apply, and the rate of tax will be as provided under the Finance Act for the relevant year."
Conclusion
5. After the above discussions, one thing is certain that post the issuance of Circular No.7/2009 and the ruling of the AAR in the case of SKF Boilers and Driers (P.) Ltd. (supra), the Pandora's Box has been opened and the matter has again become an issue for litigation. Having said that, one thing that still remains in favour of the non-applicability of the TDS provisions under section 195 of the Act is that as on date, the judgment of the Hon'ble Supreme Court in the case of Toshoku Ltd. (supra)is still the law of the land as regards the applicability of TDS provisions to foreign agents' commission paid by Indian exporters.
Regards
Prarthana Jalan
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