Background:
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.
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