TDS on Payment of commission to Non-Residents

CA Puja Borar – [email protected], +91 9831304298

1st July 2015

Residents in India acquire the services of non- within the meaning of the said section by
resident agents for canvassing of overseas contacts, reason of the fact that it is taken into account
for export of their products and/or for the provision in the balance sheet prepared in India.
of ancillary support services etc. Commission is paid
to the non-resident agents in lieu of the services 1.3 Deeming fiction u/s 9(1)
rendered by them. The chargeability and deduction Section 9(1)(i) of the Act, stipulates that
of tax on such payments has been a controversial income which accrues or arises directly or
subject. This article intends to discuss the issue in the indirectly through or from any business
light of the applicable provisions, circulars issued and connection in India in India, or through or from
recent judicial pronouncements pertaining to the any property in India, or through or from any
same. asset or source of income in India, or through
the transfer of a capital asset situate in India, is
1. Applicable provisions deemed to accrue or arise in India. Explanation
2 to the Section defines the term Business
1.1 Basis of charge connection to include specified activities
The basis of charge is determined in carried out through a person acting on behalf
accordance with Section 4 of the Act. As per of the non-resident.
the provision of Section 4(1) of the Act, “where
any Central Act enacts that income-tax shall be Section 9(1)(vi) of the Act states that royalty
charged for any assessment year at any rate or payable by a resident shall deem to accrue or
rates, income-tax at that rate or those rates arise in India except where the royalty is
shall be charged for that year in accordance payable in respect of any right, property or
with, and subject to the provisions (including information used or service utilised for the
provisions for the levy of additional income- purposes of business or profession carried on
tax) of, this Act in respect of the total income of by such person outside India or for the
the previous year of every person. purposes of making any income from any
source outside India.
1.2 Income chargeable to tax
Further, as per the provisions contained in Section 9(1)(vii) of the Act states that income
Section 5(2), the total income of previous year by way of fees for technical services payable
of a person, who is a non-resident, is by a resident shall be deemed to accrue or
chargeable to tax in India if it is arise in India except where the fees is payable
 Received or is deemed to be received in in respect of service utilized in a business or
India or profession carried on by such person outside
 Accrues or arises or is deemed to accrue India or for the purposes of making any income
or arise to him in India. from any source outside India
Explanation 1 to the Section further clarifies
that income accruing or arising outside India 2. Applicability of Section 195 of the Act
shall not be deemed to be received in India

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 Section 195 imposes a statutory obligation on payable to Mr B, the same cannot be
any person responsible for paying to a non- considered as receipt of commission by Mr B in
resident any interest (not being interest u/s India.
194 LB, 194 LC, 194 LD) or any other sum
chargeable under the provisions of the Act 2.1.2 Do the payments accrue or arise in India?
(not being salaries), to deduct income-tax at Also such payments do not accrue or arise in
the rates in force. Whether or not the payment India, as they are pursuant to services rendered
of commission to the non-residents agent falls abroad. A similar view has been held by the
within the ambit of any sum chargeable needs Bangalore Tribunal in the case of Exotic Fruits
to be determined after a combined analysis of (P.) Ltd. v. Income-tax Officer (International
the relevant provisions of the Act discussed Taxation) Ward -1(1), Bangalore wherein it was
hereunder. held that “The income of the non-resident(s) by
way of commission in the present case cannot be
2.1 Interoperability of Section 4, Section 5(2) and considered as accrued or arisen or deemed
Section 9(1) of the Act to accrue or arise in India as the services of such
Let us understand the issue with the help of an agents, as asserted by the assessee, were
example. Mr A has paid commission to a non- rendered/utilised outside India and
resident agent Mr B in UK for securing orders the commission was also paid outside India”.
abroad and for the provision of other ancillary
support services. Mr B does not have any 2.1.3 Are such payments deemed to accrue or arise
Permanent Establishment in India, and the in India u/s 9(1)(i)?
remittance is made directly to him. It is Classification of such payments as deemed to
important to answer the following question in accrue or arise in India requires establishing
order to determine the chargeability thereof: - among other things, of the fact that the same
is rendered
 Are such payments received in India?  Through or from any business
 Does the payments accrue or arise in connection in India as defined in
India? Explanation 2 to Section 9(1)(i) or
 Are such payments deemed to accrue or  Through or from any asset or source of
arise in India? income in India.
a. Does there exist any Business
connection/asset/source of income a. Does there exist any Business
in India? connection in India?
b. Can such payments be classified as The term “business connection” has been
royalty/fees for technical services? interpreted by the Supreme Court to mean
something more than mere business. The
2.1.1 Are such payments received in India? same is not equivalent to carrying on
The payments in lieu of commission are business, but a relationship between, the
remitted directly to the non-resident agent Mr business carried on by a non-resident which
B and the same is not received by him or on his yields profits and some activities in India,
behalf in India. Even in a situation where the which contributes directly or indirectly to the
sales to the end customers abroad is effected earning of those profits or gains. It predicates
through Mr B, and the sale proceed thereof are an element of continuity between the
remitted to Mr A, who thereafter remits the business of the non-resident and their
appropriate amount of commission as is activities in India. Mr B does not carry on any

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 business activity in India which shall enable from sources outside India. Accordingly, the
him in delivering the services for which commission received by Mr B cannot be said to
commission is being paid to him. Accordingly be derived through or from any source of
there does not exist any business connection income in India. A similar view in case of royalty
of Mr B in India. income has been taken by the Madras High
Court in the case of CIT vs. Aktiengesellschaft
Refer: - CIT vs. R.D. Aggarwal and Company Kuhnle Kopp and Kausch W. Germany by BHEL
(1965) 56 ITR 20 (SC), [2002] 125 taxmann 928 wherein it was held
Carborandum & Co. vs. CIT (1977) 2 SCC 862 that “As far as royalty on export sales was
Ishikawajma-Harima Heavy Industries ltd. vs. concerned, that amount was also exempt
DIT, Mumbai (2007) 3 SCC 481 under section 9(1)(vi). Though the royalty was
paid by a resident in India, it could not be said
b. Does there exist any source of income in that it was deemed to have accrued or arisen
India? in India as the royalty was paid out of the
The term “source” has not been defined in the export sales and, hence, the source for the
Act. However, the term has been referred to royalty was the sales outside India. Since the
in certain judicial pronouncements. The source for the royalty was from the source
Judicial Committee in the case of Rhodesia situated outside India, the royalty paid on
Metals Ltd. v. CIT [1941] 9 ITR (Suppl.) 45 export sale was not taxable.”
(PC) observed that a "source" means not a
legal concept but one which a practical man The other view which may be taken is that the
would regard as a real source of income. term “source of income” is distinct from the
term “source of receipts”. The source of the
A source of income was described by R.S. commission income as is being paid to the non-
Pathak, J. in the following words in Seth Shiv resident agent Mr B can be interpreted as the
Prasad v. CIT[1972] 84 ITR 15 (All.) at page activity of exports which is actually generating
18: "A source of income, therefore, may be the income. Since the goods are manufactured
described as the spring or fount from which a by Mr A in India and thereafter sent to Mr B
clearly defined channel of income flows. It is pursuant to the contracts secured by them it
that which by its nature and incidents may be inferred that the actual source of the
constitutes a distinct and separate origin of commission income received by Mr B vests in
income, capable of consideration as such in India. The export proceeds which are
isolation from other sources of income, and ultimately derived from persons located
which by the manner of dealing adopted by outside India, can be interpreted as the source
the assessee can be treated so." of the receipts which differs from the source of
the income. Thus, the commission income may
The non-resident agent Mr B has been be deemed to accrue or arise in India since the
appointed by Mr A for the purposes of securing source of such income lies in India. A similar
orders abroad and for the provision of other view has been held by the Delhi High Court in
ancillary support services. One possible view the case of CIT v. Havells India Limited [2012]
which may be taken is that the source of the 21 taxmann.com 476 wherein it was held that
commission income vests in the sale of goods “In view of the decision in CIT v. Anglo French
to the non-resident end users/customers Textiles [1993] 199 ITR 785 (Mad.), the export
pursuant to orders secured by Mr B. Thus, the activity having taken place or having been
services of Mr B are utilized for earning income fulfilled in India, the source of income was

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 located in India and not outside. Mere fact that is attributable to any operations carried out by
the export proceeds emanated from persons the non-resident in India.
situated outside India did not constitute them
as the source of income.” However, where the commission agreement
between the resident and the non-resident
However, even if it is presumed that such agent is so drafted that in substance it relates
commission income is derived from any to rendering of services which are of
business connection in India or asset or source managerial, consultancy or technical nature,
of income in India, only such proportion of the then the agreement may be disregarded as
income as is reasonably attributable to the such and the commission payments may be
operations carried out by the non-resident construed by the Department as fees for
agent in India shall be deemed to accrue or technical services. By virtue of the provisions
arise in India. Where the non-resident agent contained in Section 9(1)(vii)(b), such
Mr B does not carry out any operations in India payments shall then be deemed to accrue or
which would facilitate him in providing the arise in India if the services are utilised for
services outside India in lieu of which the carrying on any business or profession in India
commission is being paid to him, no portion of or for the purposes of earning any income from
the income shall be deemed to accrue or arise any source in India. Further, pursuant to the
in India. provisions of Section 9(2) of the Act, such fees
for technical services shall be deemed to
2.1.4 Can such payments be deemed to accrue or accrue or arise in India irrespective of whether
arise in India as royalty/FTS? the non-resident has a place of residence or
Fees for technical services is defined in business connection in India, and whether or
Explanation 2 to Section 9(1)(vii) as not such services are rendered in India.
consideration for the rendering of managerial,
technical or consultancy services including the 3. Analysis
provision of services of technical or other A combined reading of Section 4, Section 5 and
personnel. Section 9 of the Act suggests that, if the
payments to the non-resident agent are purely
It is imperative to determine whether the towards commission and the provisions of
services rendered by the commission agent are section 9(1)(i) are not fulfilled then there is no
of managerial, technical or consultancy nature. deemed accrual of such income in India. This
Payment of commission to the non-residents means that there is no income which can be
for services rendered by them otherwise said to be includible in the total income of Mr
cannot be classified as fees for technical B u/s 5(2) and accordingly, there is no
services. Such services are of regular/routine requirement for charging income-tax in
nature and do not involve any technical skills or respect of the commission payments made to
knowhow so as to be roped in within the ambit Mr B, u/s 4(1) of the Act.
of managerial, technical or consultancy
services. Accordingly, where Mr B is habitually Thus, if such payments are not chargeable to
rendering such routine services abroad in the tax, then there does not arise any liability to
ordinary course of his business, the same shall deduct taxes in respect thereof u/s 195 of the
not be classified as fees for technical services. Act. Accordingly, the explanation (2) to sub-
Accordingly, no income shall be deemed to section (1) of Section 195 which clarifies that
accrue or arise in India, except where the same the obligation to comply and make deduction

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 thereunder applies/extends and shall be of commission are not chargeable to tax in
deemed to have always applied/extended to India and therefore, the assessee was not
all persons, resident or non-resident, whether under obligation to deduct tax at source as
or not the non-resident person has a per provisions of section 195”.
residence/place of business/business
connection/any other presence in any manner  The Delhi Tribunal in the case of Welspring
whatsoever in India also remains inapplicable Universal vs. JCIT [2015] 56 taxmann.com
to such payments. 174 held that “It is apparent that
the commission income in the hands of
However, it is pertinent to note that the terms the non-resident can neither be
of the agreement should be read carefully. As considered as received or deemed to be
discussed in the prior paragraphs where the received in India or accruing or arising or
terms of the agreement suggest otherwise, deemed to accrue or arise to him in India
and it appears that the actual services in terms of section 5(2). Once it is held that
rendered are not in the nature of a pure the commission income of a non-resident
commission agent then such services should be for rendering services outside India does
appropriately classified and the liability to tax not fall within the scope of his total
should be determined accordingly. income, it automatically implies that the
same is not chargeable to tax in his hands”.
4. Withdrawal of erstwhile Circulars
 The ITAT Chennai Bench 'B' in the case of
The Central Board of Direct Taxes has vide ACIT vs. T. Abdul Wahid & Co. [2014] 46
Circular No 7 dated 22nd October, 2009 taxmann.com 75 has held that
withdrawn its earlier circulars namely:- “Agency/sales commission paid by
assessee to non-resident agents for
 Circular No 23 dated 23rd July, 1969 services rendered by them outside India in
 Circular No163 dated 29th May, 1975 and procuring export orders for assessee, is not
 Circular No 786 dated 7th February, 2000. chargeable to tax in India and
consequently the assessee is not under any
The earlier circulars clearly furnished obligation to deduct TDS under section 195
illustrations to explain that such commissions on said commission payment. Therefore,
can be paid without deduction of tax. However, provisions of section 40(a)(i) have no
the withdrawal of such Circulars shall not have application”.
any significant impact on the issue since the
law and the provisions of the various section of  The ITAT Chennai Bench 'A' in the case of
the Act pertaining to the same continue to DCIT, Company Circle-II(1), Chennai v.
remain unchanged. Farida Prime Tannery Pvt. Ltd. [2014] 45
taxmann.com 174 wherein following prior
5. Recent Judicial pronouncements judgements in the cases of ITO v. Faizon
Shoes (P.) Ltd. [2013] 58 SOT 245/34
 The ITAT Panaji Bench in the case of ACIT taxmann.com 79 (Chennai) (para 6), it
vs. Karishma Global Mineral (P.) Ltd. [2015] was concluded that the transactions of
56 taxmann.com 265 held that “Once DLM commission payments to the non-
does not have permanent establishment, residents for procuring export orders, are
the business profit earned by DLM by way not assessable to tax in India and

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 consequently the assessee company is not ETUK. The payment was remitted outside
under any obligation to deduct the TDS on India. [Para 17]. Therefore, the provisions
the above commission payments u/s.195 of section 9(1)(i ) were not fulfilled and
of the Act. Therefore, the provisions of there was no deemed accrual of income in
section 40(a)(i) have no application in the India”.
case.

 The ITAT Chennai Bench 'B' in the case of

DCIT, Chennai vs. Rane (Madras) Ltd.
[2014] wherein the assessee had entered
into agreement with agents outside India
for procurement of export orders and
marketing purposes, held that “From the
above scope of services of the agreement,
we do not find any managerial/technical
services are to be provided to the assessee
by the overseas agent M/s. James Druchas,
USA so as to attract the provisions of
section 195 of the Act. However, this
agreement which was entered into on
5.6.2008 is relevant to the assessment year
2009-10 and the assessment year under
appeal now before us is 2007-08. Neither
the assessee nor the Revenue placed an
agreement relevant for the assessment
year under consideration. Therefore, we
restore this issue to the file of the Assessing
Officer to examine afresh with reference to
the agreement and the case laws relied on
this issue”.

 The ITAT Delhi Bench 'B' in the case of

Deputy Commissioner of Income-tax,
Circle 11(1), New Delhi v. Eon Technology
(P.) Ltd. [2011] 11 taxmann.com 53
wherein it was held that “The operations
carried out by ETUK were not carried out in
India. ETUK did not have any permanent
establishment in India. ETUK was acting as
the assessee's marketing agent and was
providing marketing and sales support to
all purchases executed by the assessee-
company for its overseas clients. It was for
the rendering of such service that the
commission was paid by the assessee to

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