Foreign Agent Commission & Export Undertaking Receipts Allowed: Karnataka HC

PCIT Vs Technotree Convergence Ltd. (Karnataka High Court)

Foreign Agent Commission and Incidental Export Income: Karnataka High Court Rejects Revenue’s Appeal

Can commission paid to a foreign agent be disallowed for failure to deduct tax under Section 195? Can receipts connected with an export undertaking be separated from its business profits and taxed as income from other sources? These were the two issues before the Karnataka High Court in the Revenue’s appeal concerning assessment year 2011–12. On both issues, the Court ruled in favour of the assessee by following its earlier decisions.

Commission paid to foreign agents

The Assessing Officer had disallowed commission payments under Section 40(a)(ia) on the ground that tax had not been deducted at source. The Revenue argued that the assessee had not furnished complete details of the services rendered by the foreign payees. Without those details, according to the Revenue, it could not simply be assumed that the payments fell outside the scope of fees for technical services.

That argument raises a practical point. Describing a payment as “commission” does not, by itself, settle its tax treatment. The services actually rendered, the terms of the agreement and the chargeability of the payment in India remain relevant when examining a withholding obligation under Section 195.