payment of Sales Commission to NRI

This query is : Resolved 

Querist : Anonymous (Querist) 18 June 2010

i am exporter and paying a sales commission @ 12.5% of FOB value to a NRI and I am not deducting the TDS on sales commission. I know that he is also having some other source of Incomes in India. The NRI has no office or residence in India. Whether I am right or wrong in this case.
In addition to above I want to know that what will be the liability of Service Tax on me. Whether this amount of service tax is cenvatable or not.

CA Amit Agrawal (Expert)
18 June 2010

Dear Author,

Deduction of TDS totally depends on the DTAA with country and following siatuations may arise...
1. If India Has DTAA with that country and Such NRI do not have Permanent Establishment as per DTAA in India then Income of NRI will be govern by Business Clause and accordingly provision of Withholding Tax will be Applied read with Sec 195 & Sec 206A.

2.If No DTAA with That Country then Sec 195 will be applicable subject to Sec 206A.

Deduction Of TDS is pure matter of subject & Fact so one single opinion can not be given for a general question please provide specific facts regarding.. Country of Tax Residency of NRI,Information of agreement, weather, Status of Permanent Establishment of NRI in India..

With Respect to Service Tax it is clearly mentioned in Finance Act that in case of Receipt of service from NRI who has No Establishment in India, the Receiver of service will be deened to be the provider of service and liable to pay Service tax on the value of such service received.

Querist : Anonymous (Querist) 18 June 2010

The commission agent is resides at Dubai.

CA Amit Agrawal (Expert)
18 June 2010

Agreement for avoidance of double taxation and the prevention of fiscal evasion with United Arab Emirates

ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State.
4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph (2) shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary ; the methods of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by the permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
(7) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.

AS per DTAA of India with Dubai if You pay Commission Under Business Income to NRI Then Article 7 Applies and If such Commission provides the following documents then you need not to deduct TDS...

1) Tax Residency Certificate of Agent of Dubai.
2) Certificate of Incorporation of constitution of Agent at Dubai.
3) undertaking That he do not have any PE In India during the year.

Further you have to file form 15CA to RBI and take Certificate from Chartered Accountant in form 15CB in this regards.

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