Volume 6, Issue 5

6th May, 2013

Tax Alert

Non-taxability in India of export commission earned by non-resident agents affirmed by Tribunal


It is a common practice for Indian exporters to appoint foreign agents for procuring / soliciting orders from customers situated in foreign jurisdictions.  Based on the Circulars 23 of 1969 and 786 of 2000 issued by the Central Board of Direct Taxes (‘CBDT’) in the past, it was a settled position that the commission earned by such foreign agents for procuring export orders (‘export commission’) was not liable to tax in India.  This tax position however stood unsettled on account of the withdrawal of the aforementioned Circulars and thereafter the Indian revenue authorities have been adopting a position that the export commission paid to foreign agents is taxable in India and consequently subject to tax withholding in India.

In a recent ruling (Gujarat Reclaim & Rubber Products Ltd. (ITA No. 8868/Mum/2010; ITA No.8789/Mum/2011 and ITA No. 169/Mum/2012), the Mumbai bench of the Income Tax Appellate Tribunal (‘ITAT’) has provided relief to taxpayers by ruling that export commission paid to foreign agents does not accrue or arise in India and can not be held to be taxable in India in the absence of a business connection of the foreign agent in India. While there were various aspects which were subject matter of appeal in this case, the most interesting aspect relates to taxability of export commission in India, which has been discussed in this alert. 

Facts of the case:

  • Gujarat Reclaim & Rubber Products Ltd. (‘taxpayer’) is an Indian manufacturer and exporter of reclaimed rubber.
  • During Assessment Year (‘AY’) 2007-08 and AY 2008-09, the taxpayer paid export commission to its non-resident agents for rendering services in respect of procuring export orders for the taxpayer from various countries.
  • The taxpayer did not withhold taxes on the payment of export commission since: 
    • The non-resident agents were operating in their own countries outside India;
    • The non-resident agents procured orders from parties outside India;
    • The export commission was paid to the non-resident agents directly outside India in foreign currency;
    • The non-resident agents did not have any business connection in India;
  • The taxpayer reserved the right of execution of order and/or cancel the order procured by the non-resident agents.

Action of the Assessing Officer:

  • During assessment proceedings of the taxpayer, the Assessing Officer (‘AO’) disallowed the export commission payments under section 40(a)(i) of the Income Tax Act, 1961 (‘the Act’) on the ground that appropriate taxes were not withheld from such export commission. 
  • In making the disallowance, the AO made the following observations: 
    • No documentary evidence was furnished by the taxpayer to substantiate non-taxability of export commission in India except a statement that services were not rendered in India;
    • The taxability of the payments in India would apply even if services are performed outside India as long as the services are utilized in India;
    • The taxpayer should have approached the tax authorities for a nil withholding tax certificate;
    • The CBDT Circulars on non taxability of export commission were not applicable in the present case since the same were withdrawn by the CBDT in 2009.

Decision of the first appellate authority (‘CIT (A)’):

  • Aggrieved by the said orders, the taxpayer filed an appeal before the CIT(A).
  • Interestingly, the CIT(A) has adopted a  different stance for each of the year under consideration.  For AY 2007-08, the CIT(A) upheld the order of the AO.  However, for AY 2008-09, the CIT(A) deleted the disallowance of the AO and upheld the contentions of the taxpayer vide a separate order. 
  • Accordingly, the taxpayer filed appeal before the ITAT for AY 2007-08 and the AO filed an appeal before the ITAT for AY 2008-09.

Issues before the Tribunal:

  1. Whether export commission paid to non-resident agents for providing services outside India is taxable in India and accordingly, should the taxpayer have withheld taxes on the same?
  2. Whether the benefit of CBDT circulars which were in force during the relevant assessment year but withdrawn subsequently could be availed by the taxpayer?

Tribunal’s Ruling:

  • The ITAT passed a ruling in favour of the taxpayer holding that the export commission earned by non-resident agents is not liable to tax in India. 
  • In passing its ruling, the ITAT relied upon judicial precedents (CIT vs. EON Technologies 203 Taxman 266 (Del HC) and Armayesh Global v. ACIT, 50 SOT 564 (Mum.)) wherein it was held that income of a non-resident agent cannot be considered as (i) accruing or (ii) arising or (iii) deemed to be accruing or arising in India as the services of the non resident agents were rendered/utilized outside India and the commission was also payable/paid outside India.
  • The ITAT also held that in the absence of a permanent establishment of the agents in India, the income of the said agents could not be subjected to tax in India. 
  • The ITAT extensively relied upon the order of the CIT(A) for AY 2008-09 (which was in favour of the taxpayer).  Some of the key aspects of the CIT(A) order, which have also been produced in the ITAT ruling are: 
    • The services were neither rendered in India nor utilized in India.
    • The payment of export commission was made outside India and in foreign currency.
    • The said payments fell outside the scope of Section 5 and Section 9 of the Act. 
    • Explanation to section 9(2) of the Act (which pertains to place of utilisation of services) was not applicable in the said case.
    • When the taxpayer claimed that the payment was not liable to tax withholding in India, there was no requirement to approach the tax authorities for obtaining a nil withholding tax certificate.
    • Reliance was placed on the Mumbai ITAT ruling in the case of DCIT vs. Ardeshi B. Cursetjee & Sons Ltd. (115 TTJ 916) where export commission paid to a non-resident agent was considered as not being taxable in India.
  • Having regard to the fact that the AO placed reliance on the withdrawal of the beneficial CBDT Circulars in determining the taxability of the export commission, the ITAT also passed the following key observations / upheld the following key observations of CIT(A):
    • The clarification provided by the CBDT Circulars was inter alia based on the provisions of sections 5 and section 9 of the Act. Since no relevant change has been made in the said sections, the withdrawal of the CBDT Circulars should not result in automatic taxability of export commission in India. 
    • Independent of the CBDT Circulars, the taxability of the export commission must be decided as per Section 9(1) of the Act, which is not applicable in the present case in the absence of any business connection of the non resident agents in India.
    • Even otherwise, based on judicial precedents, the withdrawal of CBDT Circulars cannot have a retrospective effect. Consequently, the CBDT Circulars will continue to apply during the year under consideration. 
  • Based on the above, the ITAT ruled in the favour of the taxpayer for AY 2007-08 and AY 2008-09.

SKP’s Comments:

This ruling should come as a welcome relief to exporters since the ITAT has reaffirmed that export commission paid to non-resident agents is not taxable in India in the absence of the agents having a business connection in India.

This settled tax position had become unsettled on account of the withdrawal of CBDT Circulars and has been subject matter of disallowances during assessment proceedings of various exporters in recent years.  In light of the same, the observations of the ITAT that the withdrawal of the CBDT Circulars do not automatically grant taxing rights to the AO and the examination of the provisions of the Act on an independent footing is still a pre-requisite for taxability of income are noteworthy.