By CA. Pankaj G. Shah
To understand the subject, let’s first analyze the modus operandi of the transaction. Generally the agents render their services abroad for which they are entitled to receive commission abroad for the services rendered by way of searching prospective foreign buyers / clients. Also, the payment is also received by the foreign agents directly outside India in their country.
Section 195 of the Income tax Act requiring to deduct tax on foreign payments i.e. sum paid by Resident to Non Resident, comes in to force only when the payment made to the Nonresident is his income chargeable under Indian Income tax Law. Therefore TDS liability on such commission is an offshoot from its chargeability to Income tax under Section 5(2) of the Act. See GE India Technology (327 ITR 456)(SC)
Section 5(2), the charging section for taxing nonresident income provides for two conditions. First condition of receipt of income in India is ruled out since payment of commission is made directly outside India. However the second condition viz., income accrues or arises or deemed to accrue or arise requires considered elaboration.
AAR in the ruling in case of SKF Boiliers has stated that the words ‘accrue’ or ‘arise’ occurring in Section 5 of the Act have more or less a synonymous sense and income is said to accrue or arise when the right to receive it comes into existence. It also stated that it is undisputed that agents have rendered services abroad and have solicited orders, but observed that the right to receive commission arises in India when the order is executed by the applicant in India. The AAR concluded that the fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is remitted to them abroad are wholly irrelevant for the purpose of determining the situs of their income and accordingly held such commission income of non resident agents as taxable under Section 5(2)(b) read with Section 9(1)(i) of the Act.
On a careful perusal it appears that AAR has applied Section 9(1)(i) without examining the existence concept of ‘business connection’ before arriving at its decision. It may be noted that for invoking Section 9(1)(i), existence of business connection (Permanent Establishment) is a sine qua non and inevitable. Hon’ble Delhi High Court has recently in case of Eon Technology (203 Taxman 266) has rightly held that overseas commission income of foreign agent is not taxable in India in absence of ‘business connection’.
In the above context, the term ‘business connection’ as defined in Explanation 2 to S.9(1) would mean:
“any business activity carried out through a person who, acting on behalf of the non-resident,—
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:
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”
Section 9(1)(i) provides that income arising out of ‘business connection’ is chargeable to tax in India only to the extent of income reasonably attributable to the operations carried out in India. As noted earlier, a commission agent working outside India for obtaining export orders does not carry out any business operation in India and therefore no income is stated to accrue or rise in India. in respect of your commission agent. No doubt, the CBDT circulars clarifying this position have been withdrawn. However, it does not change the fundamental principles.
Incidentally, the decision of Supreme Court in the case of CIT vs. Toshoku Limited (125 ITR 525) is worth noting where it was held that the commission agent who does not carry out any business operation in India and acts as a selling agent outside India is not chargeable to tax in India and that the receipt in India of the sale proceeds remitted by the purchasers from abroad did not amount to an operation carried out by the non-resident commission agent in India as contemplated by clause (a) of the Explanation to Section 9(1)(i) of the Act. The Supreme Court has categorically held that the commission amounts which were earned by the non-resident for services rendered outside India could not be deemed to be income which had either accrued or arisen in India.
In light of above discussion, it is clear that in absence of any fixed establishment of the foreign agent, his income may not be taxable in India and accordingly the question to deduct doe not arise. It is possible that department may litigate based on withdrawal of CBDT Circular and the AAR ruling, however it may be confronted by arguing that such ruling is per incuriam (not a binding precedent) as it has not considerd the crucial aspect of ‘business connection’. Needless to add findings of ITAT decision in case of Green Emirates (99 TTJ 988)(Mum.) where it is stated that since AAR is not part of the judiciary hierarchy, it cannot lay down a binding precedent for anyone be it the Revenue, the assessee or the appellate authorities and by no stretch of logic, a ruling given by AAR has any precedent value in general.
I hope this article may prove useful to all members in practice and industry at large.
(The author can be reached at firstname.lastname@example.org or on +91 96918 93040 for any queries)