Commission on export sales to a non resident

Section 40(a)(i) of the Act, provides for disallowance of expenditure in the nature of interest, royalty, FTS or other sum chargeable under the Act which is payable outside India or to a non resident, on which tax is deductible at source under Chapter XVII-B of the Act and such tax has not been deducted.

The disallowance is attracted only in a scenario where tax is required to be deducted, but has not been deducted.

The liability to withhold taxes on payments to non-resident is governed by the provisions of Section 195 (Chapter XVII-B) of the Act.  Under section 195 of the Act, any person responsible for paying any sum chargeable to tax in India to a non-resident, is required to withhold tax at the rates in force, at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier.

In the instant case, the commission paid to the non-resident should fall within the definition of FTS.  However, clause (b) of section 9(i)(vii) of the Act states that any income by way of FTS payable by a resident to a non resident in respect of services utilized in a business or profession carried on by the resident outside India or for the purpose of making or earning any income from any source outside India is excluded from taxability under section 9 of the Act.  

The above principle was upheld by the Madras High Court in the case of Aktiengesellschaft Kuhnle Kopp Kausch 262 ITR 513 wherein it was held that royalty cannot be deemed to accrue or arise in India as the royalty was paid out of export sales and hence, the source for royalty was sales outside India and accordingly, royalty paid on export sales was not taxable under section 9(1)(vi) of the Act since the royalty payment was from a source outside India.

Based on the above a view can be taken that payments are exempt from tax.  However, note the negative ruling in the case of Havells India Ltd.] [ITA No. 55/2012 & ITA No. 57/2012])

Under Section 9, certain categories of income of non residents is deemed to accrue or arise in India. However, Explanation to 9(2) which provides for such accrual whether or not services were rendered in India is applicable only for clauses (v), (vi) & (vii) of 9(1).  Commission is covered u/s 9(1)(i), unless it is proved otherwise to fall within (v), (vi) & (vii) of 9(1) in which case, it is liable for TDS.  If it does not, then GE India decision of SC would apply and TDS would not be deductible.  There may be other views.