Exporters often engage foreign agents to source overseas buyers and pay commissions for services executed entirely outside India. While this seems straightforward, compliance under Section 195 of the Income Tax Act, 1961 frequently raises the question:
Should TDS be deducted on commission paid to non-resident agents abroad?
Incorrect TDS application can lead to disallowances under Section 40(a)(i), penalties, and litigation. Conversely, a robust, legally grounded framework allows exporters to remit commissions confidently, mitigating risk while remaining fully compliant.
Core Principle: No TDS under Section 195 applies if services are performed entirely abroad, and the non-resident agent has no Permanent Establishment (PE) or business connection in India. Offshore profits remain offshore.
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Practical Implication: Exporters can remit commissions abroad without TDS, provided robust documentation and compliance practices exist, avoiding Section 40(a)(i) disallowances.
Why This Issue Matters
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Section 5: Determines the scope of income taxation for non-residents.
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Section 9: Establishes accrual and source rules, including business connection and PE.
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Section 195: TDS obligation arises only if the payment is chargeable to tax in India.
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DTAA provisions: Allocate taxing rights over business profits based on the PE framework.
Errors in TDS compliance can trigger litigation, penalties, and reputational risk, making a structured analytical framework essential for exporters.
Statutory and Legal Framework
Section 195 – TDS Trigger Mechanism
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Principle: TDS applies only on sums chargeable to tax in India.
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Supreme Court Insight: GE India Technology Centre (SC, 2010) – TDS cannot be demanded on non-taxable payments.
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Key Takeaway: Merely remitting funds abroad does not trigger TDS; legal chargeability is required.
Section 9(1)(i) – Deemed Accrual / Business Connection
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Income is deemed to accrue in India if business operations generating it are performed in India.
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Practical Interpretation: Commission for overseas sales solicitation by an agent with no Indian operations is not taxable.
Section 9(1)(vii) – Fees for Technical Services (FTS)
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Covers managerial, technical, or consultancy services.
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Critical Distinction: Pure sales commission is not FTS.
Judicial Precedents:
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Farida Leather Co. (Madras HC, 2016)
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Welspun Corporation (Ahd-Trib, 2017)
Section 5(2)(a) – Receipt in India
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Income is taxable if received or deemed received in India.
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Commission paid directly overseas and retained abroad is not taxable.
DTAA & Permanent Establishment (PE)
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Article 7 (Business Profits): Profits are taxable in the state of residence unless attributable to a PE in India.
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Documentation: Obtain Tax Residency Certificate (TRC) and Form 10F.
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If no PE exists, India cannot tax offshore commission.
Pure Agent / Reimbursement Considerations
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Pure agent principle: Payments made on behalf of a foreign agent (e.g., travel, shipping) without markup are not income.
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Implication: TDS is not required; only the actual commission may trigger TDS.
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Caution: Mixing reimbursements and commission without clear documentation may invite disputes.
Decision Tree for TDS Applicability
| Condition | Taxable in India? | TDS u/s 195? |
|---|---|---|
| Services performed entirely abroad, no PE | No | No |
| Agent has office/staff in India or concludes contracts in India | Yes | Yes |
| Payment for managerial/technical/consultancy services (FTS) | Yes | Yes |
| Pure commission for order procurement, outcome-based | No | No |
| Payment received in India by agent | Yes | Yes |
| DTAA applies and agent has PE in India | Yes, on profits attributable to PE | Yes |
| DTAA applies, no PE exists | No | No |
| Pure agent reimbursement | No (if no markup) | No |
Judicial Precedents – Analytical Insights
| Case | Principle | Application |
|---|---|---|
| GE India Technology Centre (SC, 2010) | TDS triggers only if sum is chargeable | Offshore commission: No TDS if no Indian PE |
| Transmission Corporation (SC, 1999) | TDS applies on taxable portion of composite payments | Use Section 195(2) for complex arrangements |
| Nova Technocast (Guj HC, 2018) | Foreign commission not taxable if services performed abroad | Supports exporters; robust documentation avoids disallowance |
| Roomag Motors (Ahd ITAT, 2025) | Services wholly offshore, no PE, no office in India | Reaffirmed GE India; Section 40(a)(i) disallowance deleted |
| Bhartiya International (Delhi ITAT, 2024) | Commission ≠ FTS; payments outside India | Only managerial/technical services are taxable |
| Mc Fills Enterprise (Ahd ITAT, 2019) | Offshore solicitation, no PE → not taxable | Confirms offshore profits outside Indian tax net |
| Excel Chemicals (Ahd ITAT) | Section 9(1)(i) attribution only for Indian operations | Strengthens documentation approach |
| Pure Agent Cases | Payments reimbursed without markup are not income | Clear agreement clauses avoid misclassification |
Practical Compliance & Risk Mitigation
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Agreement Architecture
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Strictly offshore canvassing and buyer introduction
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Exclude contract conclusion authority in India
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Define service delivery locations abroad
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PE-Negative Documentation
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Written declaration confirming no Indian operations
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Evidence of foreign office, staff, and operations
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SWIFT remittance trail for direct payment
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DTAA Compliance Protocol
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Obtain TRC and Form 10F
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Document treaty protection claims with legal reasoning
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Service Evidence
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Emails, reports, correspondence demonstrating foreign execution
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Marketing materials, meeting records, order procurement logs
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Advance Ruling / Section 197 Certificate
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Consider Section 195(2) for complex arrangements
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Seek Section 197 certificate for lower or nil deduction
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Caution Points / Grey Areas
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Mixed Contracts: Commission + technical advisory → segregate taxable portion
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Indirect Payments: Pure agent reimbursements mixed with commission may attract scrutiny
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Routing via India: Payment through Indian bank → Section 5(2)(a) may apply
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PE Risk: Regular presence or decision-making authority in India may create PE
Strategic Decision-Making Framework
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Service Location: Entirely offshore? → No TDS
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PE Presence: None? → No TDS
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Service Categorization: Pure commission vs FTS → Only FTS triggers TDS
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Payment Segregation: Pure agent reimbursements separately
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Document Everything: Agreements, correspondence, payment trails
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DTAA Protection: Obtain TRC & Form 10F
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Advance Rulings / Certificates: For complex/high-value arrangements
Conclusion
Fundamental Principle: Pure offshore commission arrangements for foreign agents without Indian PE or business connection fall outside India’s tax jurisdiction, eliminating Section 195 TDS obligations.
