2004 (5) TMI 57 - AAR - Income Tax

No TDS on non-resident commission and retainer fees for export earnings under Income-tax Act

The Authority for Advance Rulings ruled that no tax is required to be deducted at source under section 195 of the Income-tax Act for both commission ... Applicant who had business of providing software solutions for the telecom industry entered into a agreements with non-resident entities for securing business from outside India - a letter of the CIT, on record, proves that no income arises to the said foreign agents in India – therefore, there may not be any need to deduct tax at source u/s 195 in respect of payments made to them by way of Commission on export earnings and Retainer fees Issues:1. Whether tax at source is to be deducted for commission payable to non-residents on export earningsRs.2. Whether tax at source is to be deducted for retainer fees payable to non-residents apart from commission on export earningsRs.Issue 1: Commission payable to non-residents on export earningsThe applicant, a software solutions provider for the telecom industry, entered into agreements with three non-resident entities for securing business from outside India. The agreements involved paying commission and retainer fees to these non-resident companies. The non-resident companies did not have any business operations in India and the applicant earned foreign exchange through software exports. The Commissioner of Income-tax, in response to the application, stated that no tax at source is deductible under section 195 of the Income-tax Act if the income of non-resident agencies does not arise in India. Referring to CBDT circulars, the Commissioner confirmed that no tax deduction is required on payments to non-residents in this scenario. The Authority for Advance Rulings, considering the Revenue's plea and the Commissioner's opinion, ruled that no tax is deductible at source under section 195 of the Act for commission payable to non-residents on export earnings.Issue 2: Retainer fees payable to non-residents apart from commission on export earningsThe applicant also sought a ruling on whether tax at source should be deducted for retainer fees payable to non-residents, in addition to commission on export earnings. The Commissioner of Income-tax reiterated that no income arises to the non-resident agents in India, and therefore, there may not be a requirement to deduct tax at source for payments made to them. The Authority for Advance Rulings, based on the Commissioner's opinion and the absence of income arising in India for non-resident agents, ruled that no tax is deductible at source under section 195 of the Act for retainer fees payable to non-residents, apart from commission on export earnings.In conclusion, the Authority for Advance Rulings, after considering the application, Commissioner's comments, and relevant CBDT circulars, ruled that no tax is required to be deducted at source under section 195 of the Income-tax Act for both commission payable to non-residents on export earnings and retainer fees payable to non-residents, apart from commission on export earnings. The ruling clarified the tax treatment for the specified transactions involving non-resident entities and export earnings, providing certainty to the applicant regarding tax deductions in such scenarios.