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Export commission paid to a non-resident director is taxable under the Income-tax Act as well as under the India-Switzerland tax treaty
Export commission paid to a non-resident director is taxable under the Income-tax Act as well as under the India-Switzerland tax treaty
Export commission paid to a non-resident director is taxable under the Income-tax Act as well as under the India-Switzerland tax treaty
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Export commission paid to a non-resident director is taxable under the Income-tax Act as well as under the India-Switzerland tax treaty

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The Cochin Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Device Driven (India) Pvt. Ltd. (the taxpayer) held that export commission paid to a non-resident director, a …

The Cochin Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Device Driven (India) Pvt. Ltd. (the taxpayer) held that export commission paid to a non-resident director, a commission agent, for securing export orders, ensuring supply of software, etc. constitutes ‘technical services’ under the Income-tax Act, 1961 because such services require the commission agent’s vast technical knowledge and experience.

The Tribunal observed that as a non-resident director, the commission agent has every right to look into and was required to take care of the affairs of the taxpayer and hence, the office of the taxpayer in India can be treated as fixed base for the commission agent. Accordingly, the payments made to him are also taxable as Independent Personal Services of the India-Switzerland tax treaty.

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  • 1. KPMG FLASH NEWS KPMG IN INDIA Export commission paid to a non-resident director is taxable under the income-tax Act as well as under the India-Switzerland tax treaty 17 December 2013 Executive Summary Facts of the case Recently, the Cochin Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of Device Driven 1 (India) Pvt. Ltd. (the taxpayer) held that export commission paid to a non-resident director, a commission agent, for securing export orders, ensuring supply of software, etc. constitutes ‘technical services’ under the Income-tax Act, 1961 (the Act) because such services require the commission agent’s vast technical knowledge and experience. The taxpayer was engaged in development and sale of software. During the year under consideration, the taxpayer paid export commission to its non-resident director, acting as a commission agent, without deduction of tax. The taxpayer claimed export commission as a deduction while computing its taxable income. The Tribunal observed that as a non-resident director, the commission agent has every right to look into and was required to take care of the affairs of the taxpayer and hence, the office of the taxpayer in India can be treated as fixed base for the commission agent. Accordingly, the payments made to him are also taxable as Independent 2 Personal Services of the India-Switzerland tax treaty (tax treaty). ____________________ 1 2 ITO v. Device Driven (India) Pvt. Ltd. (ITA No. 282/Coch/2013) – Taxsutra.com Article 14 of the tax treaty He was not having any Permanent Establishment (PE) in India. The non-resident director was a qualified architect and has got vast experience in the technical field, especially in mobile communication. The terms of the commission agency agreement entered into between the taxpayer and commission agent are as follows:  The commission agent will facilitate marketing of the taxpayer’s services in the territory and will provide support as well as sales expertise for projects to be executed at the customer site or at the taxpayer’s centre in India.  The commission agent shall be responsible for generating leads and initiating interaction with end customers in the relevant competency areas of the taxpayer. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 2.  The commission agent shall if required, provide support to taxpayer in evaluation from a business perspective, in the light of his relationships with the proposed clients and local expertise. He will also provide support to the taxpayer for presentations and other collateral proposals and contracts. The Assessing Officer (AO) held that the terms of the agreement are beyond the scope of normal commission agency agreement, and the technical skills of the director have been utilised by the taxpayer. Accordingly, the payment made to a commission agent was accruing and arising in India and liable for deduction of tax. However, since the taxpayer did not deduct tax, the AO disallowed the payment under Section 40(a)(i) of the Act. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the order of the AO. Tribunal’s ruling Reference to the terms of the agreement, indicates that the responsibilities and obligation placed upon the commission agent is more than what is normally placed upon agents working in normal business transactions. The work of the taxpayer does not end upon developing and installing the software at the client’s site. It requires onsite monitoring, especially when the customised software is developed. Hence, it cannot be equated with the commodities, where the role of a commission agent normally ends after supply of goods and receipt of money. In the present case, the commission agent has vast technical knowledge and experience. Further, he is also one of the directors of the taxpayer. He is able to secure orders only because of his vast technical knowledge and experience. As per the clauses of the agreement, the commission agent is responsible in securing orders and for that purpose he has to assist the taxpayer in all respects including identifying markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients. The commission agent’s duty does not end on securing the orders, but he has to monitor the status and progress of the project, meaning thereby, the commission agent is responsible for ensuring supply of the software and also for receiving the payments. All these activities could be carried on only by a person who has vast technical knowledge and experience. Accordingly, the payment made to a commission agent constitutes towards technical services. As a director, he has every right to look into and is required to take care of the affairs of the taxpayer. Hence, the office of the taxpayer can be treated as fixed base for the commission agent. The certificate/affidavit given by the taxpayer was not of any help due to the closeness of the non-resident director with the taxpayer. The taxpayer would be liable to deduct tax on the payments made to a commission agent. Since tax has not been deducted under Section 195 of the Act, the payment was disallowed under Section 40(a)(i) of the Act. Our comments The issue with respect to taxation of ‘export commission’ paid to a non-resident agent has been a subject matter of litigation before the Courts for a long 3 time. In the case of EON Technology (P.) Ltd. , the taxpayer paid commission to its British parent company on sales and amounts realised on software export contracts procured by the parent company for the taxpayer. The Delhi High Court held that the parent company was not rendering any service or performing any activity in India itself and hence, the commission income could not be said to have accrued, arisen in India. Subsequently, the Mumbai Tribunal in the case of 4 Armayesh Global held that the export commission earned by a foreign commission agent is not taxable in India and it is not in the nature of Fees for Technical Services. Recently, the Mumbai Tribunal in the case of 5 Gujarat Reclaim & Rubber Products Ltd. relying on the decision of EON Technology P. Limited and Armayesh Global has held that the export commission paid to a foreign agent is not taxable in India. However, in the present case, the Tribunal has held that payments to a commission agent to secure orders, ensures supply of the software, etc. are in consideration of the technical services as per the Act. Further, the commission agent had the responsibility to take care of business interests of the taxpayer and therefore, the office of the taxpayer can be treated as a fixed base of the commission agent under the tax treaty. The commission agent was the director of the company and also the sole foreign marketing agent. Hence, he has got responsibility to take care of business interests of the taxpayer. Hence, the office of the taxpayer can be treated as the fixed base of the commission agent, as per Article 14 - Independent Personal Services of the tax treaty. ___________________ 3 CIT v. EON Technology (P.) Ltd. [2011] 15 taxmann.com 391 (Delhi) Armayesh Global v. ACIT [2013] 51 SOT 564 (Mum) Gujarat Reclaim & Rubber Products Ltd. v. ACIT [2013] 35 taxmann.com 587 (Mum) 4 5 © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 3. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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