Section 195 – Assistance in securing orders and in identifying markets, arranging meeting with prospective clients, etc., are not ‘pure’ commissionbased services but are technical services under the Act; Since the service provider (SP) is also the director of the Taxpayer, his office can be treated as a ‘Fixed base’ regularly available to the SP and taxable as per Independent Personnel Service (IPS) Article of the India–Switzerland DTAA.
Facts:
The Taxpayer, an Indian company, was engaged in the development and sale of software. The Taxpayer paid export commission to the SP who was tax resident of Switzerland, and claimed the same as deduction against its taxable profits.
The scope of work for the export commission, as decided between the Taxpayer and the SP covered the following:
• Facilitate marketing of the services and provide support as well as sales expertise for projects to be executed at customer site.
• Generate leads and initiate interaction with end customers in the relevant competency areas of the Taxpayer.
• Support in evaluating the Taxpayer’s presentations and other collateral proposals and contracts.
• Review proposals of the Taxpayer for target prospects and provide advice and assistance, to help securing projects.
• Hold periodic meetings with the Taxpayer to track project progress and status.
The Taxpayer contended that (i) the services rendered by the SP were for marketing assistance/ support and guidance for securing orders from overseas clients and not for rendering any technical expertise/services. (ii) Pure export commission earned by a person for rendering services outside India would not be taxable in India.
The Tax Authority contended that the SP is technically qualified and highly experienced in the software business. Considering the vast experience and technical knowledge, the services rendered by the SP were technical in nature and beyond what a normal commission agent would have rendered. Accordingly, the same was taxable under the Act as Fees for Technical Services (FTS).
Also, as the SP was required to hold regular meetings for monitoring the progress and status of the projects undertaken by the Taxpayer in India, the Taxpayer would have provided a fixed base in the form of office to the director, which triggered tax under IPS Article of the DTAA.
Aggrieved, the Taxpayer appealed before the Tribunal.
Held:
The nature of responsibilities and obligations placed on the director is significantly higher than what would have been placed upon a pure commission agent working in normal business transactions.
Customised software is a highly technical product, which is developed in accordance with the requirements of the customers. Even after the development, it requires constant on-site monitoring so that necessary modifications are carried out in order to make it suitable to the requirements.
Unlike sale of commodities, the role of the commission agent is not limited, but vast technical knowledge and experience is required to understand the needs of the clients, to procure orders, to identify markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients, monitor the status and progress of the project etc. Accordingly, the services rendered are technical in nature.
As the SP is a director of Taxpayer and also the sole foreign marketing agent, he has the responsibility to take care of business interests of the Taxpayer. Director, the SP has every right to look into and is also required to take care of the affairs of the Taxpayer. Further, the certificate/affidavit given by the Taxpayer confirming that it has not provided any fixed base to the SP cannot be of any help due to the closeness of the SP with the Taxpayer. Therefore, there is no infirmity in the Tax Authority’s view that the Taxpayer must have provided a ‘fixed base’ to the SP.
Hence, the office of the Taxpayer can conveniently be treated as a fixed base for the SP. Accordingly payment to the director is taxable in India and warrants withholding.
