Commission on export sales to a non resident

Tax queries 2928 views 2 replies

TAX ISSUES

CA Business

25 Points Posted on 26 September 2013

Facts : -

One of our client is a 100% EOU located in Seepz SEZ.

The client has to make payment to a Marketing Agent who is a citizen of USA for generating sales in USA and other global markets.

He is not an employee of the client.

He doesn’t have a PAN card issued by Indian Income Tax Authorities.

He will be paid commission as a percentage of Export sales after due realisation from the debtors.

The agent neither has any PE in India nor any Business connection.

Agent provides all the services outside India.

As the client is situated inside SEEPZ Sez, they are not registered with the service tax department.

However, client also has a unit outside seepz, to which service tax is charged by the service providers.

The client would like to know that if there are any other compliances to be adhered to for claiming the below mentioned exemption. e.g. Whether any forms are to be furnished with the Service tax department or elsewhere for claiming the said exemption OR whether the exemption can be claimed suo motto without any compliance.

Queries iro Income Tax Act, 1961: -

Whether TDS is exempt on Commission
What will be rate of TDS?
Whether the provision of section 5 / 9 of the Income Tax Act, 1961 will govern the payment of commission?
Whether the commission paid to the Marketing Agent will be covered under DTAA with USA?

Queries iro Service Tax: -

Whether service tax / reverse service tax is applicable?
If YES, any compliance to be done in order to claim the commission payment as exempt from service tax
If NO, any compliance to be done in order to claim the commission payment as exempt from service tax

Replies (2)

Kiran

44 Points Posted on 28 September 2013

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])

Member

Management

325 Points Posted on 30 September 2013

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.