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Query Id is 286
Our Company is a Government recognized Export Trading House and to avail the service of foreign agents for export of our goods we have to pay them regular commission based on fixed percentage on our export made through them. Till about five years back we were making payment of this commission through Demand Draft, which means we were purchasing Demand Draft from our bank in Bombay and handing over the draft to a courier like DHL Courier for dispatch to our agent in foreign country. Some time in between we were advised by our Auditors that if we purchase the draft in favour of foreign agent and hand it over to the courier in Bombay, the courier will be deemed to be an agent of foreign agent and the income paid to the foreign agent may be deemed to be earned or received in India and in such case we would be liable to deduct income tax at source, for which no foreign agent agrees. To obviate this problem our Auditors suggested that we should pay the agency commission by Bank T.T, which will be directly credited to the account of foreign agent in foreign country, and in that case there will be no question of income deemed to be earned or received in India. Later on many of our foreign agents have complained that they have to incur bank charges @ US $ 50 to US $ 100 per T.T to get the credit of the same in their account and which they do not want to pay at all. In case of Demand Draft this type of charges are not payable by them. They also inform us that none of the exporter with whom they have been dealing in India are adopting this type of mode of payment i.e mode of payment by T.T. We request you to kindly give your expert opinion whether payment of commission by Demand Draft can make us liable to deduction of income tax at source. (23-Mar-01)

Query Id is 283
A company proposes to enter into a agreement with another company for sub-leasing its godown. The Sub-lessee proposes to put up a processing plant in the Godown after making certain structural modifications in the Godown. These modifications will be carried out by the sub-lessor. In order to get the modifications done the sub-lessee must make some upfront payment to the sub-lessor. Sub-lessee proposes to pay this as advance rent to be adjusted against future monthly rentals. The problem with this arrangement is that this payment of advance would attract TDS @ 20.4%, the same being treated as rent under IT Act, and this is unacceptable to the sub-lessor. Alternative solution is to give a refundable deposit to the sub-lessor. As refundable deposit does not attract the TDS this would solve the TDS problem; however this arrangement is not acceptable to the Sub-lessee as this would mean a substantial escalation of the fund outlay for the lease. And even for sub-lessor the problem of 20.4% TDS would remain with the monthly rentals attracting TDS @ 20.4%. Third alternative that presented itself was to divide the composite rent into lease rental and service charges for Maintenance, security, Gardening and landscaping etc. Substantial part of the payment will be paid as service charges, which attracts a TDS of just 2.04%. This is acceptable to both the parties but it has the following problems: a. Is it possible to defend a large part of the payment given out as service charges while keeping the rent very low (60:40)? Is it not likely to raise audit objections and problems at the time of IT assessment for the sub-lessee? b. Is it really practical to pay huge amount as advance payment of service charges only to avoid the TDS on rent? c. The Sub-lessor is only assuring to give the receipt separately for the lease rent and service charge components, instead of raising the invoice against the services rendered. Now my query is which one is the best alternative among the three. Is there a fourth alternative? Kindly advise us as to how a mutually satisfactory arrangement can be arrived at without overstepping the boundaries of law. (29.11.2005)

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