TDS on commission to non-resident

The Central Board of Direct Taxes has recently by its circular 7 of 2009 dt: 22nd October,2009 withdrawn its earlier circular No:23 dt: 23.7.2009, No:163 dated: 29th May,1975 and No:786 of 7.2.2000. The impact of such withdrawal is that in respect of entities who engage Non-resident agents for canvassing of overseas contacts, for export of their products and such agents who render service overseas are paid commission would become taxable.

The earlier circulars have clearly furnished illustrations to explain that such commissions can be paid wirhout deduction of tax. The main thrust in such situations is whether the commission payments made to overseas agents (who are non resident entities) and who render services only at such particular place. Is assessable to tax. In this connection it is pertinent to point out that section 195 very clearly speaks that unless the income is liable to tax in India, there is no obligation to deduct tax.

Now in order to determine, whether an income could be deemed to accrue or arise in India, section 9 is the basis. However, his section does not provide scope for taxing such payments, as the basic criteria provided about genesis or accruing or arising in India, by virtue of connection with a property in India, conrol and management vesed in India are not satisfied in such cases. In such circumstances, it would be most unfair on the part of the Central Board of Diect Taxes to with draw the circular. This will certainly arm the assessisng Officers, who invariably refuse to listen to arguments or examine facts, to disallow commission payment made to non resident agents under section 40(1a). This will again open new avenue for spate of appeals before the Appellate Authorities and substantial hardship to honest tax payers. The reasoning advanced for withdrawal of such circulars is ridiculous and does not make proper understanding of realities obtaining in the field.

The three circulars withdrawn are appended to this report, which will bear ample proof to establish the incoherent approach of he Central Board of Direct Taxes, more so, in its functions invoking the provisions of section 119 of the Act, which instead of remaining ameliorative is more baneful, as is evidenced by the present action of withdrawing the circulars under discussion.

RELEVANT CBDT CIRCULARS & COMMENTS PASTED BELOW

SECTION 9: INCOME DEEMED TO ACCRUE OR ARISE IN INDIA [CORRESPONDING TO SECTION 42 OF THE 1922 ACT]
Circular : No. 23 [F. No. 7A/38/69-IT(A-II)], dated 23-7-1969.

39. Income accruing or arising through or from business connection in India - Non-residents - Liability to tax under clause (i) of sub-section (1)
CLARIFICATION 1
1. Section 9 provides, inter alia, that income accruing or arising, directly or indirectly, through or from any business connection in India, shall be deemed to be income accruing or arising in India and, hence, where the person entitled to such income is a non-resident, it will be includible in his total income.

Clarifications (These clarifications are contained in Circular No. 17(XXXVII- 1) [F. No. 26(26)-IT/53], dated 17-7-1953 and Circular No. 4(XLIII-8), dated 24-2-1958, which have been retained in the compendium and appear at Sl. Nos. 40 and 41, pp. 1.95, respectively, for the sake of academic interest.) issued in the past by the Board on the scope of the provisions of section 42 of the 1922 Act and their applicability in certain types of cases are hereby consolidated and restated for the information and convenience of the public.

2. What constitutes business connection - The expression business connection admits of no precise definition. The import and connotation of this expression has been explained by the Supreme Court in their judgment in CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20. The question whether a non-resident has a business connection in India from or through which income, profits or gains can be said to accrue or arise to him within the meaning of section 9 has to be determined on the facts of each case. However, some illustrative instances of a non-resident having business connection in India, are given below :

Maintaining a branch office in India for the purchase or sale of goods or transacting other business.
Appointing an agent in India for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-residents goods, or for other business purposes.
Erecting a factory in India, where the raw produce purchased locally is worked into a form suitable for export abroad.
Forming a local subsidiary company to sell the products of the non-resident parent company.
Having financial association between a resident and a non-resident company.

3. The following clarifications would be found useful in deciding questions regarding the applicability of the provisions of section 9 in certain specific situations :

(1) NON-RESIDENT EXPORTER SELLING GOODS FROM ABROAD TO INDIAN IMPORTER (Old clarification on this issue, see Circular No. 17, dated 17-7-1953, at Sl. No. 40, p. 1.95.) No liability will arise on accrual basis to the non-resident on the profits made by him where the transactions of sale between the two parties are on a principal-to-principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of agreement existing between them, but where
(a) the purchases made by the resident are outright on his own account,
(b) the transactions between the resident and the non-resident are made at arms length and at prices which would be normally chargeable to other customers,
(c) the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or
(d) the payment to the non-resident is made on delivery of documents and is not dependent in any way on the sales to be effected by the resident,
it can be inferred that the transactions are on the basis of principal-to-principal.

(2) A question may arise in the above type of cases whether there is any liability of the non-resident under section 5(1)(a) on the basis of receipt of sale proceeds including the profit in India. If the non-resident makes over the shipping documents to a bank in his own country which discounts the documents and sends them for collection to the bankers in India, who present the sight or usance draft to the resident importer and deliver the documents to him against payment or acceptance by the latter, the non-resident will not be liable to tax on the profit arising out of the sales on receipt basis. Even if the shipping documents are not discounted in the foreign country, but are handed over in India against payment or acceptance, no portion of the profits will be chargeable to tax under the Income-tax Act, if this is the only operation carried on in India on behalf of the non-resident.

(3) NON-RESIDENT COMPANY SELLING GOODS FROM ABROAD TO ITS INDIAN SUBSIDIARY -

(i) A question may arise whether the dealings between a non-resident parent company and its Indian subsidiary can at all be regarded as on a principal-to-principal basis since the former would be in a position to exercise control over the affairs of the latter. In such a case, if the transactions are actually on a principal-to-principal basis and are at arms length and the subsidiary company functions and carries on business on its own, instead of functioning as an agent of the parent company, the mere fact that the Indian company is a subsidiary of the non-resident company will not be considered a valid ground for invoking section 9 for assessing the non-resident.
(ii) (Applied in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.)) Where a non-resident parent company sells goods to its Indian subsidiary, the income from the transaction will not be deemed to accrue or arise in India under section 9, provided that (a) the contracts to sell are made outside India, (b) the sales are made on a principal-to-principal basis and at arms length, and (c) the subsidiary does not act as an agent of the parent company. The mere existence of a business connection arising out of the parent-subsidiary relationship will not give rise to an assessment, nor will the fact that the parent company might exercise control over the affairs of the subsidiary.

(4) SALE OF PLANT AND MACHINERY TO AN INDIAN IMPORTER ON INSTALMENT BASIS - Where the transaction of sale and purchase is on a principal-to-principal basis and the exporter and the importer have no other business connection, the fact that the exporter allows the importer to pay for the plant and machinery instalments will not, by itself, render the exporter liable to tax on the ground that the income is deemed to arise to him in India. The Indian importer will not, in such a case, be treated as an agent of the exporter for the purposes of assessment.

(5) FOREIGN AGENTS OF INDIAN EXPORTERS - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission
(The Supreme Court has held to the same effect in CIT v. Toshoku Ltd. [1980] 125 ITR 525)

(6) (For the old clarification on these issues, see Circular No. 4 (XLIII-8), dated 24-2-1958, printed at Sl. No. 41 on p. 1.95.) NON-RESIDENT PERSON PURCHASING GOODS IN INDIA - A non-resident will not be liable to tax in India on any income attributable to operations confined to purchase of goods in India for export, even though the non-resident has an office or an agency in India for this purpose. Where a resident person acts in the ordinary course of his business in making purchases for a non-resident party, he would not normally be regarded as an agent of the non-resident under section 163. But, where the resident person is closely connected with the non-resident purchaser and the course of business between them is so arranged that the resident person gets no profits or less than the ordinary profits which might be expected to arise in that business, the Income-tax Officer is empowered to determine the amount of profits which may reasonably be deemed to have been derived by the resident person from that business and include such amount in the total income of the resident person.

(7) SALES BY A NON-RESIDENT TO INDIAN CUSTOMERS EITHER DIRECTLY OR THROUGH AGENTS -

(a) Where a non-resident allows an Indian customer facilities of extended credit for payment, there would be no assessment merely for this reason provided that(i) the contracts to sell were made outside India; and (ii) the sales were made on a principal-to-principal basis.
(b) Where a non-resident has an agent in India and makes sales directly to Indian customers, section 9 of the Act will not be invoked, even if the resident pays his agent an overriding commission on all sales to India, provided that (i) the agent neither performs nor undertakes to perform any service directly or indirectly in respect of these direct sales and the making of these sales can, in no way, be attributed to the existence of the agency or to any trading advantage or benefit accruing to the principal from the agency; (ii) the contracts to sell are made outside India; and (iii) the sales are made on a principal-to-principal basis.
(c) Where a non-residents sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited to the amount of profit which is attributable to the agents services, provided that (i) the non-resident principals business activities in India are wholly channeled through his agent, (ii) the contracts to sell are made outside India, and (iii) the sales are made on a principal-to-principal basis. In the assessment of the amount of profits, allowance will be made for the expenses incurred, including the agents commission, in making the sales. If the agents commission fully represents the value of the profit attributable to his service; it should prima facie extinguish the assessment.
(d) Where a non-resident principal’s business activities in India are not wholly channeled through his agent in India, the assessment in India will be on the sum total of the amount of profit attributable to his agents activities in India and the amount of profit attributable to his own activities in India, less the expenses incurred in making the sales.

(8) EXTENT OF THE PROFIT ASSESSABLE UNDER SECTION 9 - Section 9 does not seek to bring into the tax net the profits of a non-resident which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India, which is liable to income-tax.
To constitute a business connection, some continuity of relationship, between the person in India who helps to make the profits and the person outside India who receives or realises the profits, is necessary. Where all what has happened is that a few transactions of purchases of raw materials have taken place in India and the manufacture and sale of goods have taken place outside India, the profits arising from such sales cannot be considered to have arisen out of a business connection in India. Where, however, there is a regular agency established in India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in the line of trade, it can be said that there is a business connection in India so that a portion of the profits attributable to the purchase of raw materials in India can be apportioned under Explanation (a) to section 9(1)(i). (Added by Circular No. 163, dated 29-5-1975, printed as Clarification 2. ) [The taxability of such portion of the profits will, however, be subject to the exemption provided in clause (b) of the Explanation to section 9(1)(j).]

JUDICIAL ANALYSIS
Circular: No. 163 [F. No. 488/23/73-FTD], dated 29-5-1975.

Distinguished in - The above circular was distinguished on facts in Performing Rights Society Ltd. v. CIT [1977] 106 ITR 11 (SC), with the following observations :
Mr. Dutt relied upon a circular of the Central Board of Direct Taxes being Circular No. 23/F, 1969, dated 23rd July, 1969, regarding liability to tax on income accruing or arising to a non-resident under section 9 of the Act. Mr. Dutt contended that this circular has statutory force under section 119 of the Act. For our present purpose, however, we are not required to consider whether the circular has any statutory force or not because the circular relates to income accruing or arising through or from business connection in India. Paragraph 7 of the said circular is as follows :

This circular, therefore, contemplates a situation quite different from that in the present case. (pp. 17-18)

Applied in - The above circular was referred to and applied in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.), with the following observations :
. . . . However, Mr. Joshi was fair enough to invite our attention to a circular bearing No. 23 of 1969, dated July 23, 1969, issued by the Central Board of Direct Taxes, where certain clarifications have been issued by the Board on the scope of provisions of section 42 (section 9 of the Income-tax Act, 1961), and their applicability in certain types of cases and he fairly conceded that the question raised in the instant reference may have to be considered having regard to the guidelines or clarifications that have been issued by the Board in the said circular. Paragraph 2 of the circular runs thus:
Having regard to this illustrative instance, which has been given in paragraph 2 of the aforesaid circular, it is quite clear that in the instant case the business connection could be said to have been established, inasmuch as the Indian subsidiary company which is a hundred per cent subsidiary owned by the non-resident company has been formed to effect sales of the products of non-resident company . . . .
In this view of the matter, it seems to us clear that in view of the illustrative instances and guidelines furnished by the Board under its aforesaid circular, there is no scope for applying the provisions of section 42(3) of the Act . . . . CLARIFICATION 2

1. Attention is invited to para 3(7) of Boards Public Circular No. 23, dated 23-7-1969 [Clarification 1] , wherein it has been stated as follows :
. . . where, however, there is a regular agency established in India for the purchase of the entire raw materials required for the purpose of manufacture and sale abroad and the agent is chosen by reason of his skill, reputation and experience in the line of trade, it can be said that there is a business connection in India so that a portion of the profits attributable to the purchase of raw materials in India can be apportioned under Explanation (a) to section 9(1)(i).
2. The above sentence may convey the impression that a non-resident is liable to be taxed on a portion of the profits attributable to the purchase of raw materials required for the purposes of manufacture and sale abroad, if the purchases are made in India through a regular agency established in India for this purpose. By virtue of clause (b) of the Explanation to section 9(1)(i), the correct legal position is that in the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to purchase of goods in India for the purpose of export. Accordingly, the mere existence of an agency established by a non-resident in India will not be sufficient to make the non-resident liable to tax, if the sole function of the agency is to purchase goods for export. This legal position has also been explained in para 3(5) of the Boards Public Circular cited above.
3. To remove any possible misunderstanding of the legal position, the following sentence may be added at the end of para 3(7) of the said circular:
The taxability of such portion of the profits will, however, be subject to the exemption provided in clause (b) of the Explanation to section 9(1)(i).

1168. Clarification regarding taxability of export commission payable to non-resident agents rendering services abroad
Circular : No. 786, dated 7-2-2000.
1. In their Audit Report for 1997-98 [D.P. No. 79(I.T.)] the Comptroller & Auditor General (C & A G) Raised an objection that the Assessing Officer in computing the profits and gains of business or profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C & A.G. the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the I.T. Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.
2. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23 dated 23rd July, 1969 is drawn where the taxability of Foreign Agents of Indian Exporters was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under section 195 and consequently, the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position, the Comptroller and Auditor General have agreed to drop the objection referred to above.

Section 9 of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Withdrawal of Circulars No. 23 dated 23rd July, 1969, No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000

Circular No. 7/2009 [F. No. 500/135/2007-FTD-I], dated 22-10-2009

The Central Board of Direct Taxes had issued Circular No. 23 (hereinafter called "the Circular") on 23rd July 1969 regarding taxability of income accruing or arising through, or from, business connection in India to a non-resident, under section 9 of the Income-tax Act, 1961.
2. It is noticed that interpretation of the Circular by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular.
3. Accordingly, the Central Board of Direct Taxes withdraws Circular No 23 dated 23rd July, 1969 with immediate effect.
4. Even when the Circular was in force, the Income-tax Department has argued in appeals, references and petitions that-
(i) the Circular does not actually apply to a particular case, or
(ii) that the Circular can not be interpreted to allow relief to the taxpayer which is not in accordance with the provisions of section 9 of the Income-tax Act or with the intention behind the issue of the Circular.
It is clarified that {he withdrawal of the Circular will in no way prejudice the aforesaid arguments which the Income-tax Department has taken, or may take, in any appeal, reference or petition.
5. The Central Board of Direct Taxes also withdraws Circulars No. 163 dated 29th May, 1975 and No. 786 dated 7th February, 2000 which provided clarification in respect of certain provisions of Circular No 23 dated 23rd July, 1969.

These clarifications are contained in Circular No. 17(XXXVII- 1) [F. No. 26(26)-IT/53], dated 17-7-1953 and Circular No. 4(XLIII-8), dated 24-2-1958, which have been retained in the compendium and appear at Sl. Nos. 40 and 41, pp. 1.95, respectively, for the sake of academic interest.
Old clarification on this issue, see Circular No. 17, dated 17-7-1953, at Sl. No. 40, p. 1.95.
Applied in CIT v. Gulf Oil (Great Britain) Ltd. [1977] 108 ITR 874 (Bom.).
The Supreme Court has held to the same effect in CIT v. Toshoku Ltd. [1980] 125 ITR 525.
Added by Circular No. 163, dated 29-5-1975, printed as Clarification 2.