Circulars u/s 9 withdrawn

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As far as payment of commission to non-resident on export of goods is concerned, withdrawal of this circular should not affect the status as plain reading of Section 9 as well as Aricle 7 most of the DTAAs does not deem the commission to a non resident acting as a broker or general commission agent of independent status as  income accruing in India. For both these to be valid, the income should be received by the non-resident in his country only and not in India. The income that is billed should be purely for commission on exports and there should be an agreement to back these invoices. If you pay for managerial services to the agent (normally this is the situation of dependent agents), then you have to deduct TDS on Professional (technical & managerial Services).

Section 9:-

[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 63 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

In most of the DTAAs, article 7 reads as follows:-

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.

As India income tax recognises commission and brokerage to be a BUSINESS, plain reading of Article 7 also suggests that the income would not be taxable in India. However, it has to satisfy the condition that it is received by the non resident in his state and he is acting during the course of his business as independent agent.

If he is a dependent agent  who is also deemed to give managerial service (simply by the fact of excercising authority on behalf of his principal and contracting on his behalf), then it would no longer be a business income and would come under professional services.

Withdrawal of Circular 786 does not amount to withdrawal of these clauses. However,now your CA while issuing you the form 15CB, will have to refer to the Act and DTAA and no longer the clarification. Clarification was highly misused for many things.

It should be noted that the section 9 as it stands today has been ammended after the issue of Circular 786. Therefore, I do not think the circular 786 is necessary for the commission paid on exports to non resident. However, I would be happy if anyone will negate what I am saying by any other point in law other than high handedness, arbitrariness and inconsistencies in assessments by different Assessing Officers.

So does that mean that even though circular 786 is withdrawn but still its implication rule? i.e., payment of commission to a non resident independent agent is not liable for TDS deduction...

Ruchika, this depends on the circumstances of the case. If you are paying an independent broker or GCA doing his own business and charging you commission for passing on his orders to you or bringing buyer / seller together and buyer / seller themselves contract on principal to principal basis, provided the agent has no PE in India and he performs his function abroad and receives from you money abroad, it is his business income abroad and not accruing tax in India. Most of the DTAAs reiterate this position in Article 7 and therefore no tax.

However, if agent is offering you Technical, managerial or consulatancy service or provides you personnel for the same, then TDS is applicable on FTS irrespective of whether the agent has a PE or not. Therefore it depends on what service the agent is giving you.

The misinterpretation that caused government to withdraw these circulars was reverse situations of Indian Agents Acting for foreigners in India. They were Dependent Agents and therefore there existed a DAPE or Dependent Agent Permanent establishment. The case was of Sony Entertainment where they contended that they were not liable to Tax in india as they paid their Agent (SET) in India Arms length commission. The Tribunals ruled that even though arm lengths remuneration was paid, tax was still payable on income accrued in India as Agent and DAPE are two independent entities. If arms length commission is note paid then DAPE has to pay Tax on the shortfall between Arms length Commission and Commission paid as that is deemed to be income of the DAPE as well as on the business profit on account of the transaction.  The agent is a separate tax entitiy / person and therefore he has to pay the tax on his commission income separately irrespective of it being arms length or not. This misinterpretation of contending that no income accrues in India on account of paying arms length remuneration forced govt. to withdraw all these circulars. For your information, the liability of filing returns of the DAPE and discharging tax liability is responsibility of agent as per section 163. This is in addition to his own tax return for the remuneration he receives.

Thanku so much Sunil

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sunil

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