Commission Paid to Overseas Sourcing Agents Not Taxable as FTS; No Witholding Obligation

 Delhi ITAT held that commission paid by an exporter to an overseas sourcing agent for procurement of export orders and follow-up on realisation of proceeds is not Fee for Technical/Consultancy Services, and accordingly no tax was required to be withheld and therefore, the resultant disallowance for non-deduction was deleted.

Background

·       The taxpayer is engaged in the manufacture and export of readymade garments, with substantially all exports made to a Swedish garment brand.

·       A Sweden-based individual acted as sourcing agent/intermediary, procuring orders from the overseas buyer, conveying order specifications (sizes, materials, designs) to the taxpayer, and following up on clearance of invoices and payments, in consideration for which commission was paid.

·       No tax was withheld on the commission, on the basis that the agent rendered no technical or consultancy services and operated wholly outside India.

·       The Assessing Officer (AO) held the payments to be in the nature of Fees for Technical/Consultancy Services (FTS) based on email exchanges between the taxpayer and the agent, and disallowed the expenditure for non-deduction of tax at source. The CIT(A) upheld the AO's order. The taxpayer appealed to the Tribunal.

Taxpayer's Contentions

·       The payments were purely commission for procurement of orders and follow-up on payments, rendered entirely outside India, and therefore not chargeable to tax in India.

·       No written agreement between the taxpayer and the agent ever existed; the consistent stand throughout the proceedings was that no such agreement existed, and reference to an alleged agreement was introduced for the first time by the Department before the Tribunal in the first round of litigation.

·       The email correspondence relied upon by the AO related only to measurement charts, sizes, colours, materials and other execution details of garment orders, and did not evidence sharing of any technical information or consultancy service.

·       On identical facts for AY 2015-16, the CIT(A) had already held in the taxpayer's favour that the agent rendered no technical services and that the payments could not be disallowed, and this finding had been accepted by the Department without further appeal.

Revenue's Contentions

·       The taxpayer had raised the plea of non-existence of a written agreement for the first time before the Tribunal, and its submissions on this point had otherwise been ambiguous.

·       Since the India–Sweden tax treaty contains no "make available" clause, the narrower FTS test could not be invoked in the taxpayer's favour – meaning the consultancy fee paid to the foreign agent was taxable in India, triggering an obligation to withhold tax at source; failure to do so justified disallowance of the expenditure.

ITAT Decision & Key Observations

·       Once the existence of a written agreement was specifically denied by the taxpayer, the taxpayer could not be compelled to produce a document that likely never existed; no concrete evidence of any such agreement was placed on record by the Department.

·       The email correspondence, on a close reading, showed the agent merely answering the taxpayer's queries on measurement, print, texture, dye and similar order-execution details – information exchange of this nature do not establish rendering of technical or consultancy services.

·       The payments were held to be commission for procuring orders and following up on payments, rendered outside India, and therefore not taxable in India; consequently, there was no obligation to withhold tax under the Act, and the disallowance for non-deduction was deleted.

·       The Tribunal also relied on the CIT(A)'s own order for AY 2015-16 on identical facts, which the Department had accepted without further challenge.

Key Takeaway
For exporters engaging overseas sourcing or buying agents, commission paid for order procurement and payment follow-up remains outside the scope of Fees for Technical/Consultancy Services and therefore outside India's taxing rights and withholding obligations, so long as the substance of the agent's role is confined to order execution and collection support. Routine commercial correspondence on order specifications does not, by itself, convert such arrangements into technical service contracts.