OVERSEAS COMMISSION & TDS u/s 195
CBDT earlier clarified that the foreign agents of Indian exporters are operating outside India, so they are not liable to income tax in India on commission paid by Indian Exporters, CBDT also clarified that the exporter are not required to Deduct TDS u/s 195 on such overseas commission. But CBDT withdrew these clarifications in the month of October 2009 by a circular. Now there is confusion in mind of exporters whether they should deduct TDS or not on overseas commission. In this matter conflicting decisions have been given by different high courts. Now, in the case of “GE India Technology Cen. (P.) Ltd. Vs Commissioner of Income-tax” the Supreme Court in recent judgment has clarified the lot of confusions which were created by the decision in Transmission Corporation and withdrawal of various circulars by CBDT. In the opinion of the author, If payment to Non-Resident is not taxable at all then no need to file an application before Assessing officer u/s 195(2) for grant of a certificate of non deduction of tax while making payments to foreign agents.
Income deemed to accrue or arise in India u/s 9 (1)
Following Income deemed to accrue or arise in India:
- 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.
[Explanation 1].—For the purposes of this clause—
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 ;
As per Explanation 2 to section 9(1)(i) “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident,—
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:
However following activities are not included in business connection
- Any business activity carried out through a broker, general commission agent or any other agent having an independent status.
Provided that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident or on behalf of such non-resident and other non-residents which are controlled by the same management, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.
- in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India .
- 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 ;
- No income shall be deemed to accrue or arise in India to following individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India:-
- An individual who is not a citizen of India ; or
- A firm which does not have any partner who is a citizen of India or who is resident in India ;
- A company which does not have any shareholder who is a citizen of India or who is resident in India
Some clarification on business connection was given by the CBDT vide circular No 23, dated 23rd July, 1969, No. 163, dated 29th May, 1975, but after withdrawal of these circular those clarifications are not relevant at the moment.
Whether Commission paid by the exporter to the non-resident agent for service provided outside India is taxable in India?
Income to a non-resident is taxable in India if satisfy the following conditions:
- If Income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
- If Income is received (or deemed to be received) in India during the previous year but does not accrue (or arise) during the previous year.
- If income is received outside India during the previous Year but it accrues (or arise or is deemed to accrue or arise) in India during the previous year.
Whether Commission Income of non-resident agents who are operating outside India is satisfying any condition given above?
- As Exporter paid commission in foreign currency to agents directly outside India so income is neither received in India nor deemed to received in India.
- Secondly if non-resident agent doesn’t have any permanent establishment or permanent place in India then commission income neither arise in India nor deemed to accrue or arise in India.
With above discussion if the following conditions are satisfied the commission paid to non-resident is not taxable in India:-
- Agent should be non-resident.
- Agent should operate its business activities outside India.
- Commission paid should be related to services provided outside India.
- Agent should not have any permanent establishment or permanent business place in India.
- Commission remitted to agent directly outside India.
CBDT’s stand on Taxability of Overseas Commission in India
Department clarify the definition of Business Connection in India vide circular No 23 dated 23.07.1969 as “FOREIGN AGENTS 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.”
Again the same clarification given by the department vide circular no 163 dated 29.05.1975
Deduction of Tax on Overseas Commission is not required u/s 195
Department again vide circular no 786 dated 07.02.2000 clarify “The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn where the taxability of ‘Foreign Agents of Indian Exporters’ was considered alongwith certain other specific situations. It had been clarified then that 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”
Situation after withdrawal of above Circulars No. 23, dated 23rd July, 1969, No. 163, dated 29th May, 1975 and No. 786, dated 7th February, 2000, by CBDT circular 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009
CBDT vide circular 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009 withdraw their earlier stand and roll back the 30 years old situation. Now department creates a controversy regarding the taxability of commission paid to non-resident agents who operates out side the country and deduction of TDS u/s 195
Whether payer is liable to deduct TDS on overseas commission u/s 195
Before going to conclusion that a resident payer is liable or not to deduct TDS u/s 195 on overseas commission (which is not chargeable to tax if above conditions satisfied) we should go through some landmark Judgments.
Transmission Corpn. of A.P. Ltd. vs. Commissioner of Income-tax  105 taxman 742 (SC)
The purpose of sub-section (1) of section 195 is to see that the sum which is chargeable under section 4 for levy and collection of income-tax, the payee should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, rights of the parties are not, in any manner, adversely affected. Further, the rights of payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. Only thing which is required to be done by them is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of recipient, or for determination of appropriate proportion of such sum so chargeable, or for grant of certificate authorising recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at appropriate rate could be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation of tax deduction at source.
Hence, there was no substance in the contention of the appellant that the expression ‘any other sum chargeable under the provisions of the Act’ would not include cases where any sum payable to the non-resident is a trading receipt which may or may not include ‘pure income’. The language of section 195(1) for deduction of income-tax by the payee is clear and unambiguous and casts an obligation to deduct appropriate tax at the rates in force.
Commissioner of Income-tax*, (International Taxation) v. Samsung Electronics Co. Ltd.  185 taxman 313 (kar.)
While under section 195(1), an obligation on the part of the person responsible for paying to a non-resident does arise if and only if the payment partakes the character of income payment, in the sense that, if an amount is not in the nature of income payment at all, then section 195(1) does not operate, one cannot lose sight of the fact that section 195(1) is neither a provision for assessing the tax liability of a non-resident nor as to whether under section 9, any income is deemed to have resulted in the accrual or arising of income to the non-resident in India, but by simply accepting the operation of the mandate under section 195(1) on every resident payer making a payment to a non-resident recipient in respect of any goods/services supplied by the non-resident, which the resident payer is making use of in the running of its business or any other activity indulged in as a part of the business/professional activity of the resident assessee, as in such a situation, the payment to the non-resident recipient prima facie bears the character of an income of recipient and, therefore, the obligation under sub-section (1) of section 195 springs up. [Para 53]
Van Oord ACZ India vs. CIT (Delhi High Court)
(i) The observations of the Supreme Court in Transmission Corporation of AP 239 ITR 387 have to be read in the context of the question before the Court i.e. whether tax was deductible on the gross trading receipts or only on the “pure income profits”. The Court was not concerned with a case where the receipt was not chargeable to tax in the hands of the recipient at all. On the other hand the observations of the Court make it clear that the liability to deduct tax at source arises only when the sum payable to the non-resident is chargeable to tax;
(ii) Even the plain language of s. 195 shows that the tax at source is to be deducted on the “sum chargeable under the provisions of the Act”. One can, therefore, reasonably say that the obligation to deduct tax at source is attracted only when the payment is chargeable to tax in India;
(iii) The determination by the AO under s.195(2) of the Act is tentative in nature. In case it is ultimately found in the assessment proceedings relating to the recipient that he was not liable to pay any tax on the sums received, the assessee cannot be treated in “default” inasmuch as s. 195(1) of the Act casts an obligation to deduct the tax at source on the sum ‘chargeable under the provisions of this Act’;
In the above given cases contradictory decision given by the different court,
GE India Technology Cen. (P.) Ltd vs.Commissioner of Income-tax  193 taxman 234 (SC)
In our view, section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. It is in this context hat the Supreme Court stated, “If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words “such sum” clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corpn. of A.P. Ltd.’s case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all “chargeable to tax in India”, then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from “sums chargeable” under the provisions of the Income-tax Act, i.e., chargeable under sections 4, 5 and 9 of the Income-tax Act.
Options for the Payer or Payee
As in the case of GE India Technology Cen. (P.) Ltd vs.Commissioner of Income-tax  193 taxman 234 (SC) HELD THAT” In our view, section 195(2) is based on the “principle of proportionality”. The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India”
After withdrawal of circular No. 23, dated 23rd July, 1969, No. 163, dated 29th May, 1975 and No. 786, dated 7th February, 2000, vide CBDT circular 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009 there is a lot of confusion in mind of exporters relating to deduction TAS on commission paid to non-resident agents who operates outside India. As the Supreme Court nicely interpreted that if income is not chargeable to tax in India at all then no need to file an application 195(2) to AO and obtain his permission for deduction TAS at lesser amount. Now it is clear after this judgement that if non-resident agents do not have any PE or business connection in India no needs to deduct TAS.
The material contained on this site and on the associated web pages is general information and is not intended to be advice on any particular matter. Subscribers and readers should seek appropriate professional advice before acting on the basis of any information contained herein. The website expressly disclaims any and all liability to any person, whether a subscriber or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance upon the contents of this site and associated web pages.
Add A Reply
You must be logged in to post a comment.