Education

TDS relevance for foreign commissions

G. KARTHIKEYAN | Updated on December 25, 2011

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The question is if the commission payment to a non-resident is chargeable to income tax in India.

Gangesh Exports Ltd is engaged in the manufacture of precision sorting machinery for agricultural products. It sells machinery to various countries, especially developing countries, through agents in the respective countries.

These overseas agents are paid commission for effecting sales abroad. No TDS was deducted by Gangesh Exports on these commission payments, in view of the fact that the payments were made outside India, and the overseas agents are non-residents.

However, during the assessment proceedings, the Assessing officer held that the payment is not only commission for effecting sales, but also qualifies as related services rendered for sales, and hence it should have been subjected to TDS.

The Assessing officer's contention is that the said commission amount be disallowed as expenditure, and be added as income under Section 40 (a) (i) in view of non-deduction of tax on such commission payment.

Circular 23 is explicit that if an overseas agent operates in his own country, the entire commission received by him from an Indian exporter isn't liable to tax in India. However, recent withdrawal of Circular 23 provided a perception for some tax officials that such a situation would warrant withholding of tax on commission payments to overseas agents.

Though few Tribunal rulings are clear that no withholding tax is required on mere sales commission, the Revenue seems to prefer the verdict of the court in such an instance.

SECTION 195

For many of the exporters, especially of capital goods, payment of commission to overseas agents is inevitable, and the RBI has permitted payment of that without any prior approval.

The withholding provisions for foreign payments are governed by Section 195 of the Income Tax Act, which says that any person who makes payment to a non-resident has tax deduction obligations at specified rates, if the said payment is chargeable to income tax in India.

The next question that needs an answer is if the commission payment to a non-resident is chargeable to income tax in India. Taxable income of a non-resident includes all income, from whatever source derived, that is deemed to accrue or arise in India.

The income deemed to arise/accrue includes any income of any person who has business connections in India, as well as any fees received towards technical services. Also, if the overseas agent has any permanent establishment in India, it shall be included as income.

In the given situation, Gangesh exports has paid mere sales commission for effecting the sales, and there is no other activity involved in this transaction; hence, it doesn't necessitate deduction of TDS on sales commission.

PERMANENT ESTABLISHMENT

However, the situation would have been different had that overseas agent carried out additional functions, such as demonstration of the machinery, imparting initial training to the buyers team etc, in which case, it would be fees for technical services.

Such situations not only warrant the Indian exporter to withhold tax, but also to examine if the Indian exporter would be deemed to have a Permanent Establishment (PE) in the respective country. A reverse situation would depict the picture clearly, wherein a German exporter of machinery, having an agent in India, who not only sells machinery but also imparts training, would be construed as a PE in India.

The major test is if the source of income stems outside India or in India, which is determined by the nature of activities taken up by the agent, though actual payment is made outside India. Therefore, care needs to be exercised while deciding on TDS applicability and evaluating the nature of activities rendered by the overseas sales agent, though the nomenclature may be “agent”.

The current scale of industrialisation and globalisation across the globe makes it impossible for countries to remain independent of each other as far as complex international financial transactions are concerned. Tax law changes in any country influence its trade and policy decisions. Tax structures also determine inflow and outflow of investment and capital, and can inhibit or promote growth.

It is a recommended practice to get the views of your professional tax consultant whenever or wherever a question of such demarcation arises.

(The author is Coimbatore-based chartered accountant.)

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Published on December 25, 2011
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