(i) Since the services were rendered outside India, section 5 could not be applied to commission and further, section 9(1)(vii)(b) excluded fee payable for making or earning income from any source outside India and therefore, commission did not accrue or arise in India.
(ii) Since definition of ‘fees for technical services’ in Article 13 of India-UK DTAA did not include managerial services, the commission should be considered as business income and as the nonresident did not have a PE in India, in terms of Article 7 of DTAA, the commission could not be taxed in India.
(iii) As commission did not accrue or arise in India, tax was not required to be withheld and consequently, commission could not be disallowed u/s 40(a)(i) of I T Act.
Facts
The taxpayer was engaged in the business of manufacture and export of hand embroidery and handicraft items. The taxpayer had exported certain items to several countries. The orders in respect of these exports were secured through, or pursuant to information received from, a non-resident commission agent. The agent was entitled to the commission upon execution of the export order.
CBDT Circular No. 23 dated 23rd July 1969, clarified that no tax was deductible on export commission payable to a non-resident for services rendered outside India. Relying on the said Circular, the taxpayer did not withhold tax on the commission paid to the non-resident agent.
The AO noted that as per the decision of the Supreme Court in R.Dalmia v. CIT [1977] 106 ITR 895, management includes the act of managing by direction, or regulation or superintendence. Since the non-resident agent involved himself in the broad gamut of services pertaining to client identification, soliciting, constant feedback and ensuring timely payments, the payments made to him were towards managerial services and not commission simpliciter. The AO also noted that Circular No. 23 relied upon by the taxpayer had been withdrawn by CBDT vide Circular No. 7 of 2009 dated 22nd October 2009. The AO thus concluded that such payments were ‘fees for technical services’ covered u/s 9(1)(vii) read with Explanation 2 thereto and since the assessee had not deducted tax at source on the payments, they were disallowable u/s 40(a)(i) of IT Act.
Held
The Tribunal observed and held as follows:
- As regards taxability under I T Act
As per the agreement, the non-resident was only acting as an agent on commission basis and had not provided any managerial/technical services nor was there any evidence of its having provided any technical/managerial services. The agent was responsible for the timely payment from the customers and the commission was payable only after receipt of the payment from the customers. Since the services were rendered outside India, provisions of section 5 cannot be applied to the commission paid.
In terms of section 9(1)(vii)(b) of I T Act, fee payable for making or earning income from any source outside India is excluded and hence, it should be considered as business income. Since the services were rendered outside India, the amount paid is not taxable, as it did not accrue or arise in India.
- As regards taxability under India-UK DTAA
The definition of ‘fees for technical services’ in Article 13 of India-UK DTAA did not include managerial services. Hence, the commission paid should be considered as business income. Since the non-resident did not have a PE in India, in terms of Article 7 of DTAA, the commission could not be taxed in India.
- As regards disallowance u/s 40(a)(i) of I T Act
As the commission did not accrue or arise in India, tax was not required to be withheld and consequently, commission could not be disallowed u/s 40(a)(i) of I T Act.
