Tax Treaty Case Law around the Globe 2019

S. 1061. Introduction

For those engaged in exporting goods or services, payment of commission is an easy way to erode the tax base. Most of the time, these comissions are paid for services like conducting a market survey for the products of the taxpayer. Without proper investigation, it is difficult to find out whether any service is actually rendered by the recipient of the commission. If the recipient is a related party, the arm’s length principle can perhaps limit the amount that can be charged. In a cross-border situation, it is not always possible to launch an investigation into every such case and ask for information in a routine manner, even under the Exchange of Information (EOI) article of a tax treaty. Under the Indian tax law, if payment is made to a non-resident in respect of certain chargeable incomes without deduction of tax at source, then the payment itself can be disallowed (subject to the conditions mentioned in that section). Tax officers in India often seek recourse to this provision to deny the claim in respect of such payments. But, as this case shows, this is not always successful.

2. Facts of the case

The taxpayer, carrying on the business of export of garments claim...