Many small business owners in India are eager to expand their reach internationally, tapping into global markets to secure a share of foreign revenue. To facilitate this, they often appoint independent local agents in overseas jurisdictions who play a pivotal role in marketing services and connecting Indian sellers with buyers in specific foreign regions.
Typically, these overseas independent agents operate from their own base in their country of residence, charging a referral fee or sales commission for export orders routed through them.
However, this raises an important question: Is the Indian entrepreneur required to withhold taxes while remitting such fees to the independent agent? Addressing this is crucial to avoid disallowances of sales commission expenditure when finalizing tax liabilities or during scrutiny assessments by tax authorities.
For the TDS provisions to apply, it is essential that the payments being made to non-residents are sums that are “chargeable to tax in India”
When the services are rendered abroad and the payments to a non-resident independent agent is also received abroad it can be concluded that the services were rendered for business outside India. Furthermore, since the independent agents operates solely from their country of residence, the services are rendered abroad, and as a result, the commission income of the independent foreign agent accrues outside India.
Further, sales and marketing services rendered by the independent foreign agent should not fall within ambit of fees for technical services as defined under the Income-tax Act or as defined under the relevant Tax treaties. As long as the commission paid by the Indian entrepreneur is not classified as such, there should be no obligation to deduct tax on the sales commission.
By demonstrating the above with the help of adequate documentation, the Indian entrepreneur can take a stand that such sums paid to the non-resident agent are not chargeable tax in India and hence not subject to withholding taxes.