Mr. A.S Narang:— In this case an application under section 245Q(1) of the Income-tax Act, 1961, (hereinafter referred to as ‘the Act’) seeking advance ruling from the Authority has been filed on 21.10.2005 Shri Rajiv Malhotra, the applicant is the proprietor of Lotus Exhibition Marketing Services (for short ‘LEMS’), which is based at A-28, Lajpat Nagar-II, New Delhi. The applicant is engaged in the organization of India International Food & Wine Shows (IFOWS) for which purpose he is intending to organize “4 India Food & Wine Show” and for this participation of foreign concerns, undertakings and Govt. Departments is desired. The applicant wants to appoint agents abroad to furnish information about terms & conditions to foreign participants in respect of their participation in the Food & Wine Show in India and for booking space in the exhibition. It has been stated by the applicant that the agents would be rendering services abroad in the territory allotted to them and would be entitled to receive commission abroad for the services so rendered to foreign participants. Since the services are rendered by non-resident agents outside India and according to the terms of the agency agreement, the payment is also receivable by the agent abroad, the agent is not liable to tax, in view of the provisions of Section 5(2) read with section 9(1) of the Act. The terms & conditions with the agent are set out in the agreement form annexed to the application along with General Regulations for foreign exhibitors. It has been stated by the applicant that the Agence Delalande & Fleuri at 11 Rue Alessandno Volta 33700 Merignac, France (hereinafter referred to as ‘the Agent’) will be responsible for planning, directing and executing sales campaign and the services to be provided by the Agent are as follows:
(i) The Agent will be responsible for liaison with government departments and trade associations to endeavor, where and when appropriate, to obtain National Pavilions/joint participations.
(ii) The Agent will be responsible for distributing to exhibitors the contract forms, invoices for space and shell scheme sales and for the distribution of all relevant materials and application forms for stand fitting, furniture and other on-site services.
(iii) The Agent will attend where appropriate, exhibitor meetings and will ensure that adequate briefings are given to them prior to their departure for India to participate in IFOWS.
(iv) The Agent will provide support to LEMS with regard to all promotional activities related to IFOWS that it may decide to undertake in the Agent's territory. Particularly, the AGENT will assist LEMS during its meetings with potential exhibitors, government bodies and export promotion bodies taking place in the AGENT's territory.
(v) The Agent acknowledges that the exhibitors are required to make all the payments directly to LEMS. The AGENT will assist LEMS and make its best efforts to induce exhibitors to fulfill their contractual obligations with regard to the payments owned to LEMS.
(vi) The Agent will never accept in his favour any payments that exhibitors owe to LEMS unless authorized by LEMS in writing. Even if the AGENT accepts any payments after having received written authorization from LEMS, such action should not result in any extra cost for LEMS.
(vii) The Agent will assist LEMS and ensure that the exhibitors adhere to the general regulations governing their participation in IFOWS.
(viii) The Agent will ensure that the exhibitors submit the contract form, catalogue entry form and forms for onsite services to LEMS as per the stipulated deadlines.
On the facts stated above, the applicant has referred the following question for ruling by the Authority:
Whether any tax liability especially liability for deducting any tax at source arises on payment which are remittable to non-resident by the applicant as per agreement.
2. During the course of hearing on being pointed out that the question framed by the applicant did not clearly state as to whose “tax liability” was being referred to, the learned counsel for the applicant vide his application dated 6.2.2006 has reframed the following questions of law and requested for their substitution in place of the original 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 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.
The request for reframing the questions has been accepted.
3. The jurisdictional commissioner, in his comments has stated that in the case law relied on by the applicant the issues involved were different. Further it is not clear from the application whether the applicant himself is an ‘Agent’ of the person with whom he is entering into agreement i.e “Agence Delalande & Fleuri”.
4. In the rejoinder to the written submissions, it has been stated by the applicant that there is absolutely no difference regarding facts in his case as compared to the case of Ind. Telesoft Pvt. Ltd. (267 ITR 725). In that case the agents were securing business from outside India and in the case of the applicant also the non-resident agent is to secure business from persons abroad who are to be persuaded to book the space and participate in exhibition and to pay charges there for, and the commission is to be received by the agent outside India. That there is no question of applicant's being Agent of the “Agence Delalande & Fleuri”. Rather the non-resident company would be working and collecting business from outside for the applicant.
5. During the course of oral hearing, it was stated by the learned counsel that as per the provisions of Section 5(2)(b) read with section 9(1), neither any income is received by the non-resident agent nor does any income accrue or arise to him in India in as much as he is not having any business connection nor does the income arise from any property, assets located in India and under the Act there should be no liability since the services are rendered abroad. That in re Ind. Telesoft Pvt. Ltd. the applicant was a private company, which entered into an agreement with 3 non-resident companies for securing business from outside India. The commission was paid to these companies on export earnings and no TDS was deducted u/s. 195 on the commission and retainer fee paid to the three companies. Regarding liability to deduct tax at source, it has been stated that in the present case, 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 [(91 ITD 133 (Delhi) and 140 TAXMAN 147 (AAR)].
6. In order to properly examine the liability to tax in India, we have to first decide whether a particular receipt is liable to tax under the Act, (88 ITD 213 Delhi). For the purpose, it is necessary to consider the scope of total income of a non-resident, as enumerated in section 5(2) read with section 9(1) of the Act, and the situs of the source from which the Agent derives commission income. Section 5(2)(b) which is apposite is extracted below:—
Scope of total income
5(1) xxxxxx
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) xxxxxx
(b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Sub clause (b) of clause (2) of section 5, which deals with the scope of total income of a non-resident under the Act, states that subject to the other provisions of the Act, total income of any previous year of a non-resident, includes all income from whatever source derived, which accrues or arises, or is deemed to accrue or arise to him in India during such previous year. The scope of the deeming provision is given in section 9(1) which is extracted below:
9(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 India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
[Explanation 1] — For the purposes of this clause—
(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.
In other words section 9(1)(i) states that all income accruing or arising whether directly or indirectly, through or from any business connection in India or property in India or any asset or source of income in India, or through the transfer of capital asset situated in India, shall be deemed to accrue or arise in India. Since we are mainly concerned with the “source of income” of the Agent (non-resident), 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. The applicant is engaged in organizing exhibitions in India for the purpose of business promotion of goods and articles etc. The applicant is organizing India International Food & Wine Show in India and all the business operations for holding the show will be carried on in India.
Sections 5 & 9 of the Act proceed on the assumption that income, profits and gains have a situs, though there is no indication as to how the situs has to be determined, and hence the situs has to be determined according to the general principles of law and in the light of the particular facts of each case. The words “accrue or arise” in section 5 have more or less a synonymous sense and income or profits are said to accrue or arise where the right to receive them comes into existence. From the terms & conditions of article 5 of the agreement relating to remuneration, it is seen that commission becomes payable to the Agent only after the exhibitor participates in the show/exhibition in India and makes full and final payment due to the applicant in India. Clause ‘A’, ‘B’ and ‘E’ which are apposite are extracted below:—
Article 5. Remuneration
a. For the services provided LEMS will pay the AGENT an all inclusive commission equal to 10% of the net amount received on account of space sales only made by the AGENT. The said commission will be paid within 30 days of the exhibition getting over or within 30 days of the exhibitors making full payment due to LEMS (whichever is later) and after the AGENT has sent an invoice for the same amount to LEMS. The commission will be paid through normal banking channels to a designated bank account of the Agent maintained in a bank outside India.
b. In case participation is finalized with an exhibitor at a discounted tariff, the commission payable to the Agent in such cases will be 7%. The terms of payments will remain the same as in Clause 5.(a) above.
c. The AGENT will not be entitled to receive any commission in case the exhibition is cancelled due to unforeseen circumstances.
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 India International Food & Wine Show (to be held in India), and makes full and final payment to the applicant in India. The commission income would, therefore, 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. The facts that the Agent renders services abroad in the form of pursuing and soliciting the participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining the situs of his income.
7. In the application and the reply of the Commissioner no reference is made to the Double Taxation Avoidance Agreement with French Republic (hereinafter referred to as the Treaty) notified vide Notification No. GSR 681(E) 9602, dated 7.9.1994 In view of the provisions of section 90(2), where in relation to a person to whom such Treaty applies, the provisions of the Act shall apply to the extent they are more beneficial to such person. Assuming that an Agent is having its place of business at 11 Rue Alessandno Volta 33700 Merignac, France and he is represented by Agence Delalande & Fleuri is a Treaty resident (as per facts stated in the application) entitled to the benefits of the Treaty, it is imperative and necessary to refer to the relevant Article of the Treaty dealing with the commission income. Article 23 which deals with other income is apposite and is extracted below:—
Article 23: Other income
1. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State.
2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of article 6, if the recipient of such income being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply.
3. Notwithstanding the provisions of paragraph 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention, and arising in the other Contracting State may be taxed in that other Contracting State.
Sub-para 3, which is relevant, states that income of a resident of a Contracting State arising in the other contracting state may be taxed in the other Contracting State. Thus, it is seen that para (3) of Article 23 is at par with the provisions of Section 5(2) read with section 9(1) of the Act and does not grant any further benefit to a Treaty resident of a contracting state (France) who is having commission income arising in the other contracting state (India) which may be taxed in the other Contracting state (India).
8. In question No. 2 the applicant has stated whether tax has to be deducted at source from payments, which will be remitted by the applicant to the non-resident Agent. In this regard the basic provision for deduction of income tax at source is contained in sub-section (2) of section 4 of the Act and the charging provisions are contained in sub-section (1). The relevant provisions relating to deduction of tax at source are extracted below:—
Charge of income tax.
4. (1) xxxx
(2) In respect of income chargeable under sub-section (1), income tax shall be deducted at the source or paid in advance, where it is deductible or payable under any provision of this Act.
It is seen that sub-section (2) clearly states that in respect of income chargeable under sub-section (1), income tax shall be deducted at source, where it is so deductible under any provision of the Act. The provision which relates to deduction of tax at source in respect of payments being made to a non-resident person are contained in section 195(1) which is given below:—
Other sums
195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
From the above it is seen that any person responsible for paying to a non-resident, any sum chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by any other mode, whichever is earlier deduct income-tax thereon at the rates prescribed under the Act.
9. We now advert to the case law and circulars relied on by the learned counsel during the course of oral hearing. Primarily, the reliance has been placed on 267 ITR 725 (AAR) in re Ind. Telesoft Pvt. Ltd. In that case, a private company, resident in India, entered into agreements with three non-resident companies for securing business from outside India, agreeing to pay two of them retainer fees and commission and only commission to the third company. None of the three foreign companies had any office or any business operations in India. The Indian company earned foreign exchange by export of developed software to European countries (other than Germany), Canada and USA. After receipt of foreign exchange in India, the non-resident companies were paid their commission or fees. On the Indian company applying for an advance ruling, the Authority ruled on the facts stated, that no tax was deductible at source under section 195 of the Income-tax Act, 1961, from the commission on export earnings and retainer fees payable to the three non-resident companies. The facts of the applicant's case are clearly distinguishable since exhibitions/food shows are held in India and right to receive commission arises in India from earnings, on account of participation by foreign exhibitors in India. Whereas in the case of Ind. Telesoft Pvt. Ltd. the right to receive commission arose in foreign countries i.e Europe, Canada and USA where developed software was supplied and payment received in foreign exchange, which was subsequently repatriated to India. Therefore, reliance placed in the above case is of no help to the applicant. Reliance has also been placed on para 4 of Circular No. 23 dated 23.7.1969 and Circular No. 786 dated 7.2.2000 and the case of 72 TTJ 702 (Mad). Both the Circulars and the case of ITAT Madras ‘A’ Bench pertain to the exemption of tax granted to foreign Agents of Indian exporters who operate in their own country and no part of the commission income arises in India. These circulars are, therefore, not relevant and of no help in the case of the applicant since the commission payable to the non-resident Agent in the present case arises in India as discussed supra. The applicant has also placed reliance on the case of Siapem SPA, 88 ITD 213 (Delhi) wherein it was held that whether it be the case of a resident or that of a non-resident, it is necessary to decide whether a particular receipt or item of income is liable to be included in total income vis-à-vis section 5. This issue has already been dealt with in detail supra and commission income receivable by the Agent forms part of the total income of the non-resident under Section 5(2)(b).
Regarding deduction of tax at source the learned counsel has placed reliance on the case of Airport Authority of India (140 Taxman 147). In the above case the role of the applicant i.e Airports Authority of India was limited to granting approval to the contractor's proposals and thereafter money was directly payable by TDA, which was an agency of Govt. of USA. It was therefore, held that no income could be deemed to accrue or arise in India under section 9(1)(vi) or (vii) and, therefore, payments in question made to the contractor were not taxable in India under the Act or under DTAA. The reliance placed on the above case by the learned counsel is of no avail since the facts are entirely different from the case of the applicant where source of income is situated in India and income to the non-resident arises here in India. Similarly, reliance placed by the learned counsel on 91 ITD 133 (Delhi) in the case of Lufthansa Cargo India Pvt. Ltd. is of no avail since source of income was situated outside India in that case.
10. In the light of above discussion we rule on:
question (1): the fact that non-resident would be rendering services outside India and also getting payment outside India, are wholly irrelevant considerations. The source of income being situated in India, the Agent will be liable to income tax in India under the Act; question
question (2): since answer to question No. 1 is negative, tax is required to be deducted at source from payments, which will be remitted by the resident applicant to the non-resident Agent.