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Withholding tax not required on payment to non-resident agents of artists in absence of a permanent establishment

In a recent ruling, the Mumbai Income-tax Appellate Tribunal (the “Tribunal”), in the case of Wizcraft International Entertainment Pvt. Ltd. (the “assessee”)’ held that commission paid by an entertainment event management firm in India to a UK based agent for organizing performances of various international artists in India is not taxable in India, in absence of Permanent Establishment (“PE”) and that no withholding tax deduction would be required on such commission. The Tribunal also held that no withholding tax deduction is required on reimbursement of expenses.

Facts

• The assessee was engaged in the business of entertainment event management and marketing.

•  The assessee entered into an agreement with the UK company Colin Davie Artiste Services (the “UK agent”), under which the latter agreed to procure renowned foreign entertainers like Diana King and Shaggy for performances in India.

• The assessee agreed to pay a fee to the artists as well as to the UK agent, and also reimburse expenses incurred by them.

• The assessee withheld tax on the fees paid to the artists under section 195 of the Income-tax Act, 1961 (the “Act”) as the same was taxable under Articlel8 of the India-UK double taxation avoidance agreement (the “tax treaty”).

• However, on the fees paid to the UK agent, and amounts paid for the reimbursement of expenses, the assessee did not withheld tax on the grounds that the UK agent did not have a PE in India and that no activities or operations were performed in India.

• The assessing officer (the “AO”) took the view that as the payment to the UK agent was very large, it was actually intended as additional payment to the artists.

• The AO also held that the nature of the services rendered by the UK agent were such that they could not be performed without a presence in India. Accordingly, the assessee should have withheld tax on payment made to the UK agent and also on reimbursement of expenses.

Assessee’s contentions

The assessee contended that:-

• The payment of commission to the UK agent is not covered by Article 18 of the tax treaty, as the UK agent himself has neither taken part in any events during the dates of engagement nor exercised any personal activities in India.

• Furthermore, the income of the UK agent by way of commission did not relate to the services of an artist.

• The services (of procuring artists) were rendered outside India by the UK agent. Precedent for this interpretation was derived from placed on the Supreme Court decision in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 (SC), where it was held that “the carrying on of activities or operations in India is essential to make the non-resident have a business connection in India in order that he may be liable to tax on the income attributable to that business connection”.

•  Reliance was also placed on the Central Board of Direct Taxes (“CBDT”)  Circular no. 786 dated 7 February, 2000 regarding the taxability of export commission payable to non-resident agents rendering services abroad. The circular clarified that “no tax is therefore deductible under section 195 of the Act, and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure.”

Revenue’s contentions

The revenue contended that on a closer analysis of the various clauses of the agreement between the assessee and the UK agent, the performance of the terms of the agreement would not be possible without the UK agent coming to India. Therefore, the services rendered by the UK agent were considered to have been rendered in India, and hence, liable to withholding tax.

Tribunal Ruling

The Tribunal held that:-

• The payment of commission to the UK agent is not covered by Article 18 of the tax treaty as the UK agent had neither taken any part in the events during the dates of engagement, nor exercised any personal activities in India.

• The income of the UK agent by way of commission did not relate to the services of entertainer/ artist.

• The UK agent did not have any PE in India. Relying on the Supreme Court decision in the case of Carborandum Co. (above) and the CBDT Circular Nos. 17()000/11) of 1953 and 786 (above), the commission paid to the UK agent was not taxable in India, and consequently, there was no obligation on the part of the assessee to withhold tax at the time of making the payment.

• In the case of reimbursement of expenses, reliance was placed on the Bombay High Court decisions in the cases of DIT (IT) v. Krupp Uhde Gmbh [2010] 1 ITR(Trib) 614 (Born) and CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Born)where it was held that reimbursement of expenses is not chargeable to tax, and therefore, there was no obligation on the part of the assessee to withhold tax on reimbursement of expenses.

Conclusion :-The Tribunal held that the commission received by the non-resident agent for services rendered abroad would not be taxable in India if the agent did not have a PE in India. This decision placed reliance on Circular no. 786 (above) which has since been withdrawn by Circular no. 7/2009 dated 22 October, 2009. Hence, the relevance of this judgement may be applied considering withdrawal of Circular no. 786(above). The reimbursement of expenses in this case was held to be not chargeable to tax, and therefore it was held that there was no obligation on the assessee to withhold tax on reimbursement of expenses.

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