Judgment:
Honble Chairman
1. The applicant which is an Indian Company and is engaged in the business of manufacture and supply of industrial pesticides has filed this application for advance ruling seeking determination of the non-residents tax liability under the Income-tax Act in connection with the proposed transactions with the non-resident Company by name Zaikog Trading Co. Zaikog Trading Co. (hereafter referred to as âZaikog) is a company incorporated in the Republic of South Africa and it is in the business of promotion and distribution of various products. Zaikog has offered its services to promote and market the product known as âImida Chloprid formulation for termite control. For the services rendered by it, Zaikog will receive from the applicant a commission of 3% or a mutually agreed percentage on every completed transaction. In the application, it is broadly stated that the role of Zaikog is to communicate the details of the interested parties to the applicant who will pursue the proposal for confirmed orders. Such confirmed orders will be executed directly by the applicant. The sale consideration will be received in India by the applicant. The amount of commission payable to Zaikog is paid from India by the applicant. The applicant submits that Zaikog renders all services outside India i.e., in South Africa and no services of whatsoever nature are performed in India and Zaikog does not maintain any establishment in India. As the income received by Zaikog is business income, it is contended that the same cannot be taxed under the Income-tax Act 1961 in the absence of business connection and permanent establishment in India.
2. At the time of arguments, the learned counsel for the applicant has clarified that the business transactions between the applicant and the Zaikog have not yet started. It is further stated that Zaikog offers to tax the income received on account of the transactions with the applicant as its business income in South Africa. In a note furnished by the applicants counsel at the time of hearing, the role and responsibilities of Zaikog have been described to be: (i) to procure orders from different buyers (ii) to negotiate price and other terms and intimate the same to the applicant (ii) to re-negotiate the terms/price if necessary, based on the instructions of the applicant (iv) follow up in getting purchase orders from customers and forward the same to the applicant (v) follow up regarding LC opening, shipment and payment (vi) attending to queries in regard to shipment.
3. It is stated that Zaikog raises a debit note for commission at the agreed rate and the amount is credited to Zaikogs bank account in South Africa. The counsel for the applicant has clarified more than once that Zaikog has no authority to conclude the contracts so as to bind the applicant and it cannot take any independent decision without reference to the applicant. Its main duty is to canvas for orders, liaisoning with the customers and the applicant and to keep track of the shipments and payments to be made by the African customers to the applicant. It is further clarified that the purchase orders collected by the agent do not become effective unless and until confirmed by the applicant.
4. The following questions are raised in the application :
1. On the facts and in the circumstances of the case whether the amounts proposed to be paid by the applicant to M/s Zaikog Trading Co., South Africa are liable for deduction of tax in accordance with the provisions of Section 195 of Indian Income Tax Act, 1961 read with the provisions of the Agreement for the Avoidance of Double Taxation between India and Republic of South Africa?
2. On the facts and circumstances of the case whether the amounts paid by the applicant to Zaikog, Republic of South Africa are taxable in the hands of Zaikog which does not have a permanent establishment in India?
3. On the facts and circumstances of the case whether the amounts paid by the applicant to Zaikog would be taxable as fees for technical services under the Income Tax Act?
4. On the facts and circumstances of the case whether there is any liability for Zaikog to file a return of income in India?
5. The concerned Commissioner, without furnishing the comments on merits has taken the following stand in his communication dated 22nd April, 2009.
âThe Assessing Officer has conducted enquiries and found that the company was incorporated on 29.03.2008 and that the return of income for the first year of operation upto 31.3.2009 relevant to the Asst. Year 2009-10 is due on 30.09.2009 which is yet to be filed by the assessee. In the absence of return of income, we are not in a position to send the comments/records called for in the above case.â
6. The learned counsel for the applicant contends that the payments made to Zaikog towards commission for services rendered by it abroad are not liable to be taxed in India either going by the provisions of the Income-tax Act or the Double Taxation Avoidance Agreement (DTAA) between India and South Africa. Consequently, the applicant is not liable to deduct any tax at source under Section 195 of the Income-tax Act. Viewed from the angle of Section 9(1) of the Income-tax Act, it is submitted that Zaikog does not earn any income on account of business connection in India. As per the provisions of DTAA, Zaikog cannot be subjected to tax in India in the absence of permanent establishment here. Reliance has been placed on the circulars issued by CBDT, apart from the case law.
7. The applicants contention is, in my view, well-founded. At the outset, it seems that the applicants stand is fully supported by the circular no.23 dated 23.7.69 issued by the Central Board of Direct Taxes and circular no.786 of 7.2.2000 which reiterated the earlier circular. Suffice it to refer to the later circular :
â2. 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 âForeign Agents of Indian Exportersâ was considered along with certain other specific situations. It had been clarified therein 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.â
These circulars were apparently issued in exercise of the powers conferred on the Board under Section 119(7) of the Income-tax Act.
8. The relevant provisions in DTAA may now be referred to. Art.7 deals with business profits. Paras 1 and 2 thereof are relevant :
â1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.â
8.1 Thus, the profits received by Zaikog in South Africa on account of commission received can be taxed only in South Africa based on the principle of tax residency. The exception is carved out in a case where the enterprise carries on business through a permanent establishment situated in the other country. If such PE exists, only such part of the profits as are attributable to the PE can be taxed by the contracting state in which the PE is located. The expression âpermanent establishment has been defined in Art.5 of DTAA. The relevant portion thereof is extracted hereunder :
â1. For the purposes of this Agreement, the term âpermanent establishmentâ means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term âpermanent establishmentâ includes especially :
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; and
(g) a warehouse, in relation to a person providing storage facilities for others.
4. - - - - - - - -
5. Notwithstanding the provisions of paragraphs 1 and 2, where a person â other than an agent of an independent status to whom paragraph 6 applies â is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
8.2 Zaikog has no fixed place of business in India and none of the sub-clauses of para 2 of Art.5 become applicable. Paragraph 6 has no application at all because Zaikog does not enter into any contracts in India. The conclusion is, therefore, inevitable that the business profits made up of the commission paid by the applicant to Zaikog for the services rendered as a commission agent in South Africa cannot be brought within the net of income-tax in India by invoking the exception contemplated by the second part of Art.7.1.
9. Even viewed from the stand-point of Section 9 of the Income-tax Act, the commission paid to Zaikog cannot be subjected to income-tax in India.
The relevant part of clause (i) of Section 9(1) reads thus :
â9(1). The following incomes shall be deemed to accrue or arise in India :
(i) All income accruing or arising, whether directly or indirectly through or from any business connection in Indiaâ¦â¦â¦..
Explanation : For the purposes of this clause â
(a) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;â
9.1 Explanation 2 contains an inclusive definition of business connection but it applies only to a business activity carried out through a person acting on behalf of a non-resident. That situation does not exist here.
9.2 Relying on the decision of the Supreme Court in CIT Punjab vs. RD Aggarwal and Co ((1965) 56 ITR p.20)* and CIT, Kolkata vs. T.I. and M. Sales Ltd. ((1987) 166 ITR p.93), it is contended that Zaikog has no business connection in India. In the latter case (TI and M Sales Ltd.). It was observed thus : âThe position, therefore, is that in a case like this, there can be no business connection unless the Indian assessee has the authority to accept offers or enter into contracts on behalf of the non-residentsâ. It is pointed out by the learned counsel with considerable force that the above enunciation of law applies a fortiori to the instant case. Irrespective of the existence or otherwise of the business connection, the Explanation fully supports the stand of the applicant. Where no business operations are carried out in India by Zaikog, the attribution in terms of clause (a) of the Explanation is not possible and therefore no income can be deemed to accrue or arise in India merely because Zaikog promotes the business of the applicant in South Africa. If any authority is needed for this proposition, the decision of the Supreme Court in Commissioner of IT, Andhra Pradesh vs. Toshoku Ltd. ((1980) 125 ITR p.525)may be referred to. In that case a dealer in India purchased tobacco and exported it to Japan through a non-resident sales agent. A Japanese company was appointed as exclusive sales agent in Japan for the tobacco exported by Indian dealer for which the agent got a commission of 3% of the invoice amount. The sale price received in Japan was remitted to the Indian dealer who in his turn credited the commission payable to the Japanese agent in his account books and then remitted the amount to the Japanese agent. The question was whether the commission earned by the non-resident sales agent could be taxed in India, treating the Indian dealer as a representative assessee under Section 161 of the IT Act. The Supreme Court held that the commission earned by the non-resident (appellant before the Supreme Court) cannot be deemed to be income that accrued or arose in India. The Supreme Court repelled the contention of the Revenue in the following words:
âThe second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to s.9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl.(a) of the Explanation to cl.(i) of sub-s.(1) of s.9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT vs. R.D.Aggarwal and Co. [1965] 56 ITR 20 (SC).â
It was then observed:
âIn the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl.(a) of the Explanation to s.9(1)(i) of the Act.â
The legal position thus clarified by the Supreme Court while interpreting the Explanation to cl.(i) of sub-section (1) of Section 9 dispels any doubt on the point of non-chargeability of income tax on the commission earned by Zaikog.
10. In the light of the above discussion, questions 1 and 2 are answered in the negative. As the income of Zaikog on account of the commission paid to it by the applicant is not chargeable to tax in India by virtue of Art.7 of DTAA and Section 9(1)(i) read with the Explanation thereto, the applicant is not obliged to deduct the tax at source under Section 195 of the Income-tax Act 1961.
10.1 As regards the third question, there could possibly be no controversy that Zaikog will not be rendering services of a managerial, technical or consultancy nature and therefore the liability to tax cannot be fastened on it by invoking the provisions dealing with fee for technical services.
10.2 The learned counsel for the applicant has stated that the fourth question need not be answered as it is merely consequential to the answer to questions 1 and 2.
11. Accordingly the ruling is given and pronounced on the 29th day of July, 2009.