Sec 195

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swasti (Querist)
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16 August 2012 If any Indian Company is going to pay commission on exports to a Non Resident( Resident of UAE) in the FY 2012-13, is it required to withhold tax when the non resident is not having PE in India. Also no PAN is there in the name of Non Resident agent. Kindly clarify in detail. Thanks

Arun Biyani

Arun Biyani (Expert)
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16 August 2012 please check DTAA between india and UAE here in this site http://law.incometaxindia.gov.in/DIT/intDtaa.aspx.

swasti

swasti (Querist)
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16 August 2012 Mr. Arun, thanks for the help. I have gone through it. But still there is some confusion :

According to DTAA :

ARTICLE 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

and

Article 22 - Other income - 1. Subject to the provisions of paragraph (2), items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement, shall be taxable only in that Contracting State.

2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of Article 6, if the recipient of such income, being a resident of a Contacting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.

whereas

Sec 195 says :

"Any person responsible for paying to a Non Resident, any interest or any other sum chargeable under the provisions of this Act, shall at the time of credit of such income to the account ogf payee or at the time of payment , whichever is earlier should deduct tax thereon at the rates in force"

Secondly, Explanation 2 to Sec 195 says that the liability of withholding tax arises irrespective of the fact whether the non resident has -

(i) a residence or place of business or business connection in India or
(ii) any other presence in any manner whatsoever.

Now in such condition, could you help me in understanding that :
(a) Whether commission will fall under Article 22 of the DTAA? and

(b) Which would be applicable - DTAA or the Act

(c) Finally, whether withholding tax has to be deducted or not on commission payment to NR?

Regards

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Arun Biyani

Arun Biyani (Expert)
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16 August 2012 Hi, without further reading the DTAA and based on the two articles that you have produced here, commission will fall under Article 22 and no TDS has to be withheld.

Over a period of time, it is well established that DTAA over-ride the domestic IT Act to the extent that they are more beneficial to the taxpayer. plain reading of Section 90 A on double taxation avoidance, also suggests that the provision of income tax act applies to the assessee to the extent they are more beneficial. The same has been established in many SC rulings also which you can try to find out for your reference.

let me know in case you get to to any other opinion on the same.

swasti

swasti (Querist)
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16 August 2012 Thanks a lot Sir. In case of any other opinion, I would let you know. Regards