Emergency query on tds

(Guest)

Yes, the same commission attracts TDS u/s. 194H, and if commission expense exceed threshold limit it attracts liability to deduct TDS.

Regards

shankar (CA, CS Final) (243 Points)
Replied 12 June 2012

If it is Export of service, then TDS on commision will be not applicable Subject to Permanent establishment ( Ref - Artical 7 of DTAA).

Thanks

Shankar

jean (article assistant) (113 Points)
Replied 12 June 2012

in my view,

deduction u/s 194H is for payment to the resident. the above case is covered by sec 195 of income tax act 1961.

tds shall be deducted.

2 Like

shankar (CA, CS Final) (243 Points)
Replied 12 June 2012

Before comment anything please read ............ Article 7 of DTAA.

shankar (CA, CS Final) (243 Points)
Replied 12 June 2012

ARTICLE 7 -

Business profits -

Article 7(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

(a) that permanent establishment ;

(b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or

(c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.

Article 7(3)

In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent
establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than toward
reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or
any of its other offices.

Thanks

Shankar

CA. Amit Prajapati (Chartered Accountant) (118 Points)
Replied 12 June 2012

Mr Shankar, Article 7 speaks about the business profit; however the original question is about the commission expenses and TDS deduction. Jean is correct what she has stated one will have to identify the residential status of the recipient and then apply the section 194H or 195. Section 195 is applicable for TDS deduction on payment made to “Non Resident not being a company” or “foreign company”. Section 195 of Income Tax Act casts an obligation on a person, who makes a payment to a non-resident, to deduct tax at source at the time of making the payment or at the time of credit of such income to the account of the payee, whichever is earlier.

Further the deduction you have pointed out is relevant to the expenses deduction in case of Head office expenses pertaining to the profit earned through permanent establishment. I think that your intention to refer DTAA is relevant but not the article 7 as you have referred.

While assessing the section 195 one has to take care that:

Whether payment made is taxable under IT Act if not you may make the payment directly without deduction.
Second if it is taxable then you will have to refer DTAA if any existing between the contracting states, if there isn’t you will have to Deduct TDS.
If there is DTAA you have to refer the provision under that DTAA, whether the income is exempt, if income is not exempted as per DTAA you will have to deduct the TDS else you should not deduct the TDS.

3 Like

Prateek Agarwal (Sr. Executive - Finance & Accounts) (1732 Points)
Replied 12 June 2012

At first. you should see which DTAA you are talking about. The DTAA with the other country shall be taken into consideration.

As such, what I believe is that sec 195 shall be attracted in the abovementioned case.

BHARAT BAMBHAROLIYA (CA FINAL) (57 Points)
Replied 12 June 2012

i agree with Mr Amit prajapati, Section 195 of income tax act 1961 will be applicable in this case.

shankar (CA, CS Final) (243 Points)
Replied 12 June 2012

Sorry Friends ,

I was wrong.

CA Chirag (Chirag Sheth & Associates) (1183 Points)
Replied 12 June 2012

sec 195 is applicable only in case Payment to Non resident. so accordingly TDS will be deducted u/s195.

this is a particular section for payment made to non-resident.

CA.Kanhaiyalal Gupta (Taxation Incharge) (290 Points)
Replied 12 June 2012

Dear Pornima,

Please elaborate your query with simple example then we can povide proper solution, Your question is not showing correct picture so that other answer is also different from each other

Please elaborate

Ramanuj (Accountant.) (834 Points)
Replied 12 June 2012

yes tds will be aplicable

CA ADITYA SHARMA (CA IN PRACTICE ) (16719 Points)
Replied 12 June 2012

tds will be applicable in this case

CA Sumiit B Nagpal (Business) (1077 Points)
Replied 12 June 2012

Originally posted by : Amit Prajapati

Mr Shankar, Article 7 speaks about the business profit; however the original question is about the commission expenses and TDS deduction. Jean is correct what she has stated one will have to identify the residential status of the recipient and then apply the section 194H or 195. Section 195 is applicable for TDS deduction on payment made to “Non Resident not being a company” or “foreign company”. Section 195 of Income Tax Act casts an obligation on a person, who makes a payment to a non-resident, to deduct tax at source at the time of making the payment or at the time of credit of such income to the account of the payee, whichever is earlier.

Further the deduction you have pointed out is relevant to the expenses deduction in case of Head office expenses pertaining to the profit earned through permanent establishment. I think that your intention to refer DTAA is relevant but not the article 7 as you have referred.

While assessing the section 195 one has to take care that:

Whether payment made is taxable under IT Act if not you may make the payment directly without deduction.

Second if it is taxable then you will have to refer DTAA if any existing between the contracting states, if there isn’t you will have to Deduct TDS.

If there is DTAA you have to refer the provision under that DTAA, whether the income is exempt, if income is not exempted as per DTAA you will have to deduct the TDS else you should not deduct the TDS.