We are a software company in INDIA .We need to appoint a consultant on commission basis in US .He is a NRI settled for last 20 years.He is facilitating orders from a US company .These orders are serviced by us at our office in NEW DELHI.Since he is doing his activities in US , NOT IN INDIA .We need to know if we have to deduct any withholding tax or any other tax while sending him commission .KULDIP KUMAR MEHTA
Section 9 of the I T Act defines income which are deemed to accrue and arise in India. Subsection (vii) of section 9 is for technical services. The said subsection is as under :
(vii) income by way of fees for technical services payable by
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
The word “technical services’ has been defined in the Explanation 2 given under the subsection ( vii) as under
Explanation 2.For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries.
Prima facie , it appears from your question where the nature of service given by the NRI is not given ,that the payment to NRI will fall within the definition of ‘technical fees” mentioned under the definition of deemed accrued or arising income. The only question of confusion which has also been raised by you , is that when NRI who will be receiving income from you for consultancy given from US , whether his income is taxable in India and accordingly should there be withholding tax on the payment made by you to him.
This confusion has been set to rest now that the Finance Act 2007 has introduced an Explanation under section 9 of the I T Act which is with retrospective date from 1/6/1976 .The said explanation is :
Explanation.For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.
However, if you find that the payment is for any kind of work which does not fall under the definition of technical service, I feel you should take the benefit of the circular issued by CBDT with respect to sales commission paid to to a non resident .Circular 786 of 7/2/2000 is reproduced below
“In the Audit Report for 1997-98 (D P No 79(I.T.) The Comptroller & Auditor General (C&AG) raised an objection that the Assessing Officer in computing the Profits and Gains of Business or Profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C&AG the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the Income-tax Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges.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 23.7.1969 is drawn, where the tax ability of ‘Foreign Agents of Indian Exporters” was considered alongwith certain other specific situations. It had been clarified then 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 shall 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. On being apprised of this position, the Comptroller & Auditor General have agreed to drop the objection referred to above.
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About taxworry
Good one. Quiet informative