FEES
PAID BY PARENT FIRMS ABROAD NOT TAXABLE HERE
A recent ruling by the Authority for Advance Ruling (AAR) will
go a long way in cheering foreign entities that secure orders
outside India for Indian business entities, against a commission
payment. The AAR has held that commission and retainer fees
payable to such foreign entities, for securing business from
abroad, will not be taxable in India.
The reason is that
such income will not accrue or arise in India. Consequently,
when the Indian business concerns directly remit the commissions
and retainer fees, no tax should be withheld in India. The
only criteria is that such foreign entity should not have
an office or any business operations here.
In this case, Ind
Telesoft, a Bangalore-based company engaged in the business
of providing software solutions for the telecom sector, entered
into agreements with three different foreign entities based
in France, Canada and the US, respectively. The main purpose
of such agreements was to secure business from outside India.
After receipt of
foreign exchange in India, against the export orders, Ind
Telesoft was to pay the foreign entities their share of fees
and commission. Ind Telesoft sought an advance ruling on whether
it will have to deduct tax at source in India against such
payments made by it.
The jurisdictional
tax commission, in a letter to the AAR, stated that the Central
Board of Direct Taxes had issued circulars clarifying that
where foreign entities were operating out of India and the
payment was remitted to them directly abroad, no part of the
income will accrue or arise in India. Thus, no tax will be
required to be withheld here. The AAR upheld this contention.
Rulings given by the AAR have a persuasive effect when similar
cases are under assessment.
