Decision of Authority for Advance Rulings in Shri Rajiv Malhotra, Lotus Exhibition Marketing Services, AAR No. 671 of 2005 dated 3rd July 2006 reported at 284 ITR 564

Subject matter of Ruling: Payment to Non-resident for services rendered outside India and payment made outside India whether liable for TDS in India

1. Facts

1. Shri Rajiv Malhotra, the applicant, the proprietor of Lotus Exhibition Marketing Services (hereinafter referred to as “LEMS”) is engaged in the organization of India International Food & Wine Shows (IFOWS)

2. The applicant want to appoint agents abroad who shall furnish information as to foreign participants from the territory allotted to them, in respect of their participation in the 4th India Food & Wine Show and for booking space in the exhibition

3. The agents will be paid commission directly in his bank account outside India

4. The agent will not be entitled to receive any commission in case the exhibition is cancelled due to unforeseen circumstances

2. Cases referred

1. Ind. Telesoft Pvt. Ltd.

2. Cir. No. 23 dt. 23-7-1969 & Cir. No. 786 dt. 7-2-2000 and case of 72 TTJ 702

3. Siapem SPA 88 ITD 213

4. Lufthansa Cargo India Pvt. Ltd. 91 ITD 133

3. Question

1. Considering the fact that non resident would be rendering services outside India and also getting payment outside India, whether he will be liable to income tax in India on account of his being agent of LEMS resident in India?

2. In case answer to the above is negative, whether T.D.S. is to be deducted from payment which will be remitted by resident to the non resident agent.

4. Contention of the assessee

Assessee relying on judgements in several cases, contends that since the source from which income is to be derived by the agent is situated outside India, there shall be no liability to deduct TDS

5. Ruling of the Authority

1. According to section (5)(2)(b) read with section (9)(1)(i) of the Income-tax Act (Act) states that all income accruing or arising whether directly or indirectly, through or from any source of income in India shall be taxable in India

2. In order to determine “source of income” of the agent, who earns commission from the business activity of the applicant, it is important to examine the nature of business of the applicant and its situs

3. The income or profits are said to accrue or arise where the right to receive them comes into existence

4. In present case, it is, therefore, clear that source of income for the agent is participation by the exhibitors in exhibition/Food & Wine Show in India and the agent will not be entitled to receive any commission for services rendered in case the exhibition is not held due to unforeseen circumstances. No doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when the exhibitor participates in IFOWS and makes full and final payment to the applicant in India.

5. According to paragraph 3 of Article 23 of Double Taxation Avoidance Agreement between India & French Republic (DTAA), items of income of a resident of a Contracting State not dealt with in any other articles of the Convention and arising in the other Contracting State, may be taxed in that other Contracting State

6. The DTAA also does not offer better position, therefore, the commission income would be taxable under the Act in view of the specific provisions of section 5(2)(b) read with section 9(1)(i) of the Act

7. As regards 2nd question, u/s (4)(1) read with section (195)(1), tax is required to be deducted at source from payments which will be remitted by the resident applicant to the non resident agent

8. The facts of several cases and other supporting materials as relied by the applicant differ from the applicant’s case and therefore are irrelevant because those cases pertains to goods or services exported outside India, whereas in present case it is the activity of each exhibitor being carried out in India for which commission is paid to non resident.

[Source : www.aar.gov.in]