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India: Export commission paid to foreign agent for arranging export sales not taxable

Monday, 08 December 2014   (0 Comments)
Posted by: Authors: Atul Dua and Gautam Chopra
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Authors: Atul Dua and Gautam Chopra (Seth Dua & Associates)

Export commission paid to foreign agent for arranging export sales not taxable as 'fee for technical services'

The Delhi High Court in case of DIT v Panalfa Autoelektrik Ltd: 49 412, held that export commission for arranging export sales could not be considered as consideration for providing managerial, consultancy or technical services, and therefore would not be taxable in India.

In this case, the taxpayer made an application for remittance of export commission to a foreign company, incorporated in Liechenstein, which was engaged in procuring export orders for the taxpayer outside India. The contention of the taxpayer was that the payment was not in the nature of fees for technical services under the domestic tax law and therefore no tax was required to be deducted at source in India.

"Fees for technical services" are defined in the domestic law to mean consideration for technical, managerial or consultancy services. In this case, the Court elaborately discussed the meaning of terms 'managerial', 'technical' and 'consultancy' services.

Delineating the meaning of the term 'consultancy', the Court observed that "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. "Consult" has also been defined as "ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action".

The Court went on to observe that the term "managerial" relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people's activity [New Shorter Oxford Dictionary]. The Court further cited with approval, the observations of the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895 wherein the apex court held that "management" includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involved controlling, directing or administering the business.

The Court further went on to observe that "technical services" consist of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, and managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so.

In the present case, the Court observed that the aforesaid requisites and required necessities were not satisfied due to the following reasons:

  • The foreign company was appointed as a commission agent for sale of products within the territories specified and subject to and in accordance with the terms set out, which the foreign company accepted. The foreign company, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services.
  • Further, the taxpayer was legally bound with the foreign company's representations and acts, only when there was a written and signed authorization Thus, the taxpayer dictated and directed the foreign company and it could not be said that the foreign company was providing advise to the taxpayer.
  • The foreign company was certainly not providing any technical services in the realm of technology to the taxpayer;

The Court thus held that the taxpayer was not required to deduct tax at source while making payment of export commission to a foreign company.


The above decision lays down important ratio of law since it has not only distinguished some earlier rulings on the issue (Shell ruling, Wallace Pharma case etc.), but has clearly delineated the meaning of the terms 'technical', 'managerial' and 'consultancy' services, which would be relevant in determining taxability of payment for various kinds of services under different contracts. Multinational companies enter into various arrangements with Indian companies, sometimes group companies, where Indian companies are required to remit payments for various kinds of back office, general management and support services. This decision would be useful in determining taxability of such payments in India.

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