Commission to foreign cos not taxable in India

Commission to foreign cos not taxable in India

THE Authority for Advanced Ruling (AAR) has ruled that if an Indian company pays a commission to an overseas company to promote its business in that country, such payment will not be taxable in India. 

  The AAR, a quasi judicial body on matters of taxation, in a ruling on July 29, also held that the expenditure incurred by an Indian company towards the payment of commission to a foreign agent is an ‘allowable expenditure’. 

  The AAR gave its verdict on an application filed by the Chennaibased Spahi Projects, in connection with commission that it paid to South Africa’s Zaikog Trading Company. 
  The commission will not attract tax in India, it said. If Zaikog is liable to be taxed in India, then, Spahi will be required to deduct that amount as tax before making a payment to Zaikog. 
  Under the arrangement between the two companies, Zaikog would secure orders from the South African market, negotiate terms and prices and follow up on tasks relating to the opening of the letter of credit, shipments etc. Spahi clarified that Zaikog had no independent authority to conclude contracts and its role was restricted to the jobs mentioned. 

  All decisions of the South African company would necessarily be approved by the Indian company. Hence, purchase offers secured by Zaikog would not become effective until Spahi confirmed them which meant Zaikog’s activity is completely confined to South Africa. 

  The commission paid by Spahi to Zaikog is credited to the latter’s bank account in South Africa. Spahi’s counsel maintained that Zaikog was not liable to pay tax in India because it did not earn any income here nor was there a direct business connection with India.