No tax is required to be deducted from commission paid to agent outside India if no services performed in India or no fixed place of business in India.

AAR No. 802 of 2009

S. 9(1), Income-tax Act; Article 7,

India-South Africa DTAA

Dated : 29-7-2009

No tax is required to be deducted from commission
paid to agent outside India if no services performed in India or no fixed
place of business in India.

Facts :

The applicant was an Indian company engaged in
the business of manufacture and sale of industrial pesticides. The applicant
appointed a South African company (‘SA Co’) to promote and market its products
in South Africa. In consideration of its services, SA Co was to receive
commission from the applicant in respect of completed transactions. SA Co was
to : (i) procure orders from different buyers; (ii) negotiate price and other
terms and intimate the same to the applicant; (ii) re-negotiate the
terms/price if necessary, based on the instructions of the applicant; (iv)
follow up in getting purchase orders from customers and forward the same to
the applicant; (v) follow up regarding LC opening, shipment and payment; (vi)
attend to queries in regard to shipment. The orders were to be directly
executed by the applicant. Sale consideration would also be directly received
by the applicant in India. After receipt of the sale consideration, the
applicant would remit commission to SA Co.

The applicant had raised the following issues for
ruling by AAR :

(i) Whether amount paid to SA Co was liable to
tax deduction u/s.195 of the Act read with India-South Africa DTAA.

(ii) As SA Co did not have permanent
establishment in India, whether amount paid to it was liable to tax
deduction.

(iii) Whether amount paid to SA Co could be
treated as ‘fees for technical services’ under the Act.

The applicant contended that : SA Co rendered all
its services outside India; it did not maintain any establishment in India;
the income received by SA Co was its business income; and hence, the income
cannot be taxed under the Act as SA Co did not have any business connection or
permanent establishment in India. The applicant also clarified that SA Co has
no authority to conclude contracts on its behalf or to take any decision
without referring to the applicant.

In support of its contention, the applicant
relied on CBDT’s Circular No. 23, dated 23rd July 1969, Circular No. 786 of
7th February 2000 and also on the decisions in CIT v. R. D. Aggarwal & Co.,
(1965) 56 ITR 20 and CIT v. T.I. and M. Sales Ltd., (1987) 166 ITR 93.

The AAR referred to Article 7 of India-South
Africa DTAA. The AAR also cited with approval certain observations of the
Supreme Court in CIT v. Toshoku Ltd., (1980) 125 ITR 525 (SC).

Held :

(i) As no business operations are carried out
in India by SA Co, no income can be attributed under Explanation (a) and
therefore no income can be deemed to accrue or arise in India.

(ii) SA Co has no fixed place of business in
India and hence, none of the sub-clauses of Article 5(2) are applicable.
Accordingly, the business profits of SA Co for services rendered as
commission agent in SA Co could not be brought to tax in India.

(iii) As SA Co will not be rendering services
of a managerial, technical or consultancy nature, provisions dealing with
fee for technical services cannot be invoked.

(iv) As commission paid by the applicant to SA
Co is not chargeable to tax in India by virtue of Art.7 of DTAA and S.
9(1)(i) read with the Explanation thereto, the applicant is not obliged to
deduct tax u/s.195 of the Act..