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"Whether Tax Deductible at Source u/s 195 on payment of Commission to Foreign Agents"
-CA Sashi Kumar Jain

As per Sec 195 of the Income Tax Act, 1961 any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

Also Sec 9 says that 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 situated in India incomes shall be deemed to accrue or arise in India

Explanation to Sec 9 says that 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. Now if an Indian assessee appoints any agent in a foreign country for the purpose of rendering services in that foreign country and pays him commission/brokerage for such services and that agent has no business operations /permanent establishment in India, then no tax at source is required to be deducted on such payment of commission. That agent is not rendering or performing any activity in India. Even if the appointed agent is an exclusive agent, then also tax is not required to be deducted at source if the
agent has no business operations in India.

Circular No. 23 dated 23.07.1969 & Circular no.786 dated 07.02.2000 issued by the Central Board of Direct Taxes can be relied upon to support the above view. The relevant portions of the said circulars are quoted below:

Circular No. 23 dated 23.07.1969
“Foreign agent of Indian exporters - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission.”

Circular no.786 dated 07.02.2000
“As clarified in Circular No.23 dated 23.07.1969 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.”

Further reliance can be placed on the Judgment of the Hon’ble Supreme Court in the case of CIT vs Toshoku Ltd. as reported in [1980] 125 ITR 525. Here the question of law that arose before the Apex Court was whether the assessee was required to deduct tax on the commission paid to foreign agents appointed abroad for assistance in procuring orders from their countries.

The Supreme Court ruling in favour of the assessee held that the non-residents did not carry on any business operation in the taxable territories: they acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad did not amount to an operation carried out by the non-residents in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the I.T. Act, 1961. The commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India.

As per this judgment if no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India.

Reference can also be made to the Judgment of the Hon’ble ITAT, Hyderabad in the case of DCIT v. Divi’s Laboratories Ltd, [2011] 10 ITR (Trib) 05. Here the moot question that arose in the appeal was whether the payment of commission made to the overseas agents without deduction of tax attracts disallowance under section 40(a)(ia) of the Act or not. The Hon’ble ITAT rejecting the appeal of the Department held that an overseas agent of Indian exporter operates in his own country and no part of his income arises in India and his commission is usually remitted directly to him by way of telegraphic transfer or cheque/demand draft posted in India and therefore such an overseas agent was not liable to income-tax in India on these commission payments. Section 195 of the Act had to be read along with the charging sections 4, 5 and 9 of the Act. One should not read section 195 to mean that the moment there was a remittance the obligation to deduct tax at source automatically arises. Therefore no tax was deductible under section 195 of the Act on commission payments and consequently the expenditure on export commission payable to non-resident for services rendered outside India was allowable expenditure and was outside the ambit of section 40(a)(ia) of the Act.

In order to support the above view we can also refer the following case laws:-
1. 343 ITR 366, Del - CIT v. Eon Technology Pvt Ltd
2. 10 ITR (Trib) 147, ITAT Jaipur - ACIT v. Modern Insulator Ltd.
3. 8 ITR (Trib) 334, ITAT Mumbai - ADIT (IT) v. Wizcraft International Entertainment P. Ltd
4. 305 ITR (AT) 422, ITAT Gauhati - JCIT v. George Williamson (Assam) Ltd.

Therefore based on the above facts, circulars and judicial pronouncements we can conclude that if a person pays commission/brokerage to a foreign agent appointed abroad for rendering services, then no income accrues or arises to the agent in India and therefore no tax is required to be deducted u/s 195 of the Act.

-CA Sashi Kumar Jain

(As appeared in e-magazine "Professional" dated: 16-June-2012)
(Download .pdf version / Article on page-4)

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