The Hindu Business Line : Tax on commission to foreign agents who corner business for an Indian event

In Coriolanus, Menenius tells Brutus that with wine and feeding, "we have suppler souls than in our priest-like fasts." Which perhaps explains why eats and spirits go together in occasions such as `food and wine events' listed on www.contracostatimes.com, and the fifth `India International Food and Wine Show,' or IFOWS slated for January 2007 that www.ifows.com speaks of.

Before the fourth edition of IFOWS, the organiser Lotus Exhibition Marketing Services (LEMS) approached the Authority for Advance Rulings (AAR) with a poser on tax. Lotus informed the AAR that the event was expecting to attract the participation of foreign concerns, undertakings and government departments.

For this, Lotus wanted to appoint agents abroad to furnish information about terms and conditions to foreign participants in respect of their participation in the `food and wine show' in India and for booking space in the exhibition. These agents would be rendering services abroad in the territory allotted to them and would be entitled to receive commission abroad for the services so rendered to foreign participants, explained Lotus. Exhibitors, however, were to make payments directly to LEMS.

"Considering the fact that the non-resident would be rendering services outside India and also getting payment outside India, whether he will be liable to income-tax in India on account of his being agent of resident in India," asked LEMS of the AAR. "In case the answer to the above is negative, whether tax deducted at source is to be deducted from payments which will be remitted by resident to the non-resident agent," reads the second part of the question. The application mentioned the address of one such agent, based in France.

During the course of the oral hearing at the AAR, K. R. Manjani argued that the non-resident's income was not accruing or arising to him in India; and that it was not arising from any property or assets located in India. He cited the Ind Telesoft P Ltd case, where the applicant, a private company, had entered into an agreement with three non-resident companies for securing business from outside India.

Commission was paid on export earnings, without deducting any tax at source on the commission and retainer fee paid to the three companies. "Since the source from which income is to be derived by the agent is situated outside India, there shall be no liability to deduct TDS," said Manjani, citing Lufthansa Cargo India P Ltd vs Deputy CIT.

Scope and situs

Justice Syed Shah Mohammed Quadri, Chairman, and A. S. Narang, Member, of the AAR, heard the submissions and said that to examine the tax liability, one had to study the scope of total income of the non-resident, as enumerated in Section 5(2) read with the deeming provision, viz. Section 9(1) of the Income-Tax Act, and the situs of the source from which the agent derives commission income.

"Total income of any previous year of a non-resident, includes all income from whatever source derived, which accrues or arises, or is deemed to accrue or arise to him in India during such previous year," noted the Authority. "Section 9(1)(i) states that all income accruing or arising whether directly or indirectly, through or from any business connection in India or property in India or any asset or source of income in India or through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India."

So, the key question is the `source of income' for the non-resident agents of Lotus. "The applicant (LEMS) is organising India International Food and Wine Show in India and all the business operations for holding the show will be carried on in India," said the AAR. "Sections 5 and 9 of the Act proceed on the assumption that income, profits and gains have a situs, though there is no indication as to how the situs has to be determined, and hence the situs has to be determined according to the general principles of law and in the light of the particular facts of each case," it reasoned.

Income or profits are said to accrue or arise where the right to receive them comes into existence, said the Authority. It studied the agreement between Lotus and its agents and found that commission became payable to the agent only after the exhibitor participated in the show/exhibition in India and made full and final payment to Lotus. Therefore, the source of income for the agent is participation by the exhibitors in the exhibition/Food and Wine Show in India, stated the Authority.

"No doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when the exhibitor participates in the India International Food and Wine Show (to be held in India), and makes full and final payment to the applicant in India," reads a snatch from the text of the AAR's decision dated July 3. "The commission income would, therefore, be taxable under the Act."

Treaty with France

Strangely, neither Lotus nor the Commissioner of Income-Tax had made any reference to the double taxation avoidance agreement with France. Yet, the Authority analysed if there were any provisions in the treaty that could be more beneficial to Lotus. In Article 23, on `other income', the treaty said, in paragraph 3, that income of a resident of a contracting State arising in the other contracting State may be taxed in the other contracting State.

"Thus, it is seen that para 3 of Article 23 is at par with the provisions of Section 5(2) read with Section 9(1) of the Act and does not grant any further benefit to a Treaty resident of a contracting State (France) who is having commission income arising in the other contracting State (India) which may be taxed in the other contracting state (India)," interpreted the Authority. It added, "Tax is required to be deducted at source from payments which will be remitted by the resident applicant to the non-resident agent."

In Othello, Iago tells Cassio, "Come, come, good wine is a good familiar creature, if it be well used." One may possibly say that of the taxman too. "Bring in the banquet quickly; wine enough," says Domitius Enobarbus in Antony and Cleopatra. "Also, deduct tax enough from commissions," a line that we can add, for the benefit of the event organisers.

Tailpiece

"Is it true that the Railways will apply its freight strategy to passenger fares too?"

"You mean, by stacking up berths?"

"And by charging for excess weight!"

http://Detaxification.blogspot.com

D. Murali

More Stories on : Taxation | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A new triangle of trust

Crude effect in the air

The residence factor and tax incidence

Invest time in framing the new tax code

Tax on commission to foreign agents who corner business for an Indian event

Chambers of service

Damocles sword of reassessment proceedings

India moving forward `on a remarkably stable trajectory'