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06 October, 2014

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Payment of commission to a non resident agent under an Agency Agreement not to be taken under the ambit of Section 40(a)(i) and Section 9(1) of the Income Tax Act.

In case a manufacturer-exporter enters into an agency agreement with a non resident to secure orders from customers outside India, for which the non-resident is paid commission, the payment made to him shall be outside the ambit of section 40(a)(i) and hence tax shall not be deducted on it as per the Madras High Court, Judgement Dated 22-7-2014, in case of CIT v. Faizan Shoes Pvt Ltd ITA no. 789 of 2013.

Section 40(a)(i) of the income tax act specifies the payments made to a non resident ( not being a company or foreign company) either in India or outside India which shall be disallowed if tax is not deducted on them under chapter XVII-B which are payment of any sum by way of :

· Interest

· Royalty

· Fees for technical services

· Or other sum chargeable under this act

However commission paid under the above mentioned agency agreement does not fall under any of the category mentioned above. As per the high court judgement it simply comes under the ambit of commission and not falls within the definition for technical services

Further the same is not a payment under section 9(1) of the Income Tax Act. In light of the case above mentioned the The Commissioner of Income Tax (Appeals) is of the view that the payment of commission does not fall under section 9(1) based on the following criteria:

● Agent is a non-resident.

● Agent is operating his business activities outside India.

● The commission paid related to services provided outside India.

● The agent does not have any permanent establishment or permanent business place in India.

● The commission was remitted to the agent directly outside India.

As per the high court Judgement Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play.

Hence the assessee can claim the payment of commission as expenditure u/s 37 of the Income Tax Act.

Click on the link below to view the judgement:


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