Normally payment of commission to foreign agent ( for Export Sales) does not attracts TDS u/s 195 , since it is exempted & clarified vide Board's circular no. 23 of 1969 dt.23.7.1969. The same was confirmed by Eminent Tax consultant Mr. S.Rajaratnam,Chennai, thro the Newspaper “The Hindu” dt 7.7.1999 . Tax Queries Column-"No TDS on foreign commission".
Now the resolved query to Mr.Shrikant(posted on 14th June ,09) & Expert Mr. CA. B. Srinivasulu-9945842240) Reply is contrary to the Tax Consultant – Advised as it is attracting TDS u/s 195 or go with the DTAA terms.
Please Clarify –Text Matter appeared in “Direct taxes Ready Reckoner “ –Dr.Vinod K. Singhania - Para No.168.4 (Payments to foreign agents of Indian exporters) --shows exempt from TDS u/s 195
I am pleased to request to clarify again this matter Mr.CA.B.Srinivasulu or Anyone, since two different views on this matter.
18 June 2009
Another clarification has been issued on 7/02/2000 as under confirming that no TDS u/s 195 is deductible on export commission payable to non resident agent.
1176. Clarification regarding taxability of export commission payable to non-resident agents rendering services abroad
1. In their Audit Report for 1997-98 [D.P. No. 79(I.T.)] the Comptroller & Auditor General (C & A G) Raised an objection that the Assessing Officer in computing the profits and gains of business or profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C & A.G. the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the I.T. Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.
2. 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. In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn where the taxability of ‘Foreign Agents of Indian Exporters’ was considered alongwith certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller and Auditor General have agreed to drop the objection referred to above.
18 June 2009
Dear Mr.Aditya Maheswari, Thanks A lot. Hope this will help us to stand in our case -No TDS on Foreign Commission (paid in foreign currency for his services rendered outside india).
26 October 2009
Dear Sirs, What will be the implications on the withdrawal of IT Circulars no 23,163 & 786?
Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Withdrawal of Circulars No. 23 dated 23rd July, 1969, No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000
The Central Board of Direct Taxes had issued Circular No. 23 (hereinafter called "the Circular") on 23rd July 1969 regarding taxability of income accruing or arising through, or from, business connection in India to a non-resident, under section 9 of the Income-tax Act, 1961.
2. It is noticed that interpretation of the Circular 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.
3. Accordingly, the Central Board of Direct Taxes withdraws Circular No 23 dated 23rd July, 1969 with immediate effect.
4. Even when the Circular was in force, the Income-tax Department has argued in appeals, references and petitions that-
(i) the Circular does not actually apply to a particular case, or
(ii) that the Circular can not be interpreted to allow relief to the taxpayer which is not in accordance with the provisions of section 9 of the Income-tax Act or with the intention behind the issue of the Circular.
It is clarified that {he withdrawal of the Circular will in no way prejudice the aforesaid arguments which the Income-tax Department has taken, or may take, in any appeal, reference or petition.
5. The Central Board of Direct Taxes also withdraws Circulars No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000 which provided clarification in respect of certain provisions of Circular No 23 dated 23rd July, 1969.
08 November 2009
You will have to refer to section 9 and the relevant articles of the DTAA with the foreign country.
Refer only to Section 9 for the moment as commentary on DTAA is too long:- (1) The following incomes shall be deemed to accrue or arise in India :
(i) all income 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.
[Explanation 1].For the purposes of this clause
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.
Both (a) and (b) above are are applicable for the non resident independent agent who is earning commission during his regular course of business abroad. He does not have any operations in India and therefore no income can be attributable to accrue in India. Even if he has operations in India, no income would be deemed to accrue if operations are restricted for the purchase of goods for export from India. However, the money should be paid to him abroad and not in India. You would have to remit to him in the foreign country.
This has been inserted and renumbered as Explanation 1 by the Finance Act, 2003, w.e.f. 1-4-2004. That is well after the Circular No. 786. Therefore withdrawal of the circular does not mean that this explanation is withdrawn.
It is safer to do the following:- 1) Deal through the Bank only. Mention commission amount in shipping bill and send documents on L/C or CAD basis. 2) While seeking reimbursement ask Bank to get our portion of the remittance to India and the agent's portion to be sent to the agents bank.
If you bring money to India and then remit to agent, you will have to file these 2 Forms 15CA & 15CB and your CA will have to quote relevant clause of Section 9 or DTAA regarding non taxability or tax rate for remittance if the agreement is for technical service. Usually before doing step 2 above, bank verifies the agreement. From 1/7/2009, they may ask you to provide the Form 15CA & CB. This is good only if amount is large enough to absorb additional foreign bank charges for 2nd remittance. However you can put the cost to Beneficiary
However, there is a rider to this. If the services given by the foreign agent is technical in nature as per definition of the fees for technical services defined in the same section, you will have to deduct tax at 20%. If DTAA provides a lower rate, or gives a different definition for technical services that does not include what is in your agreement with the agent, you can apply what is most beneficial to the assessee. However, if you have to apply a rate lower than 20%, Foreigner will have to quote PAN Number w.e.f. 1/10/2009.
Do note that foreign taxation is full of litigation and especial due to inconsistencies in interpretation by AOs. Therefore you will find yourself going right through till the supreme court in appeals. It is better to ask foreigner to go for advanced ruling. The agreement between him and exporter should clearly mention that the foreigner is having no PE in India and that he is acting during regular course of his business as a GCA or broker in his country and as an independent agent. When going for an advanced ruling, also refer to DTAAs as they usually clarify the same way for Business Income. In no way should the services outlined in the agreement include any technical service as defined. Then only you can say that no income is deemed to accrue in India. For technical services, income is deemed to accrue in India whether foreigner has a PE or not. Most of the DTAAs also confirm this but they also specify a different rate and define technical services in a different way.
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