Case on TDS on Commission Fee debate, 15% or 1.5% or based on Remuneration ?

February 26, 2025

Issue: Income Tax

Appellant: Inland Revenue Office, Kathmandu, Region No. 3

Against

Respondent: Ceragem Health Care Nepal Pvt. Ltd., located in Bishalnagar, Kathmandu District, Kathmandu Metropolitan City, Ward No. 4

The decision-maker should keep in mind that the true intention of the law is not revealed when the wording used in the example of a departmental directive is recognized as law and the wording that carries the same meaning is excluded from the example. Since the words "consultation service" are used only in the example and not in the main provision of the directive, only the commission received for consulting services can be considered a service fee, but the commission received for services other than consulting (including services provided by selling goods) cannot be considered a service fee. Therefore, it cannot be considered a correct interpretation of the law to automatically assume and interpret certain words cited as examples as words that have a substantial impact on someone's rights and obligations without clarifying them in the law.

“The commission paid to the agent appointed by the sales manager is a service fee, while the commission received by the designated employee for achieving the sales target falls under remuneration,” clearly stating that the provision mentioned in the Income Tax Directive of the Inland Revenue Department considers the commission of the sales agent as a service fee. Therefore, it does not seem possible to interpret these three terms service fee, commission and sales bonus used in it from a technical point of view without specifically looking at the sales agent for the purpose of commission. When interpreting the terms used in the law, the meaning of those terms should be interpreted in relation to the context by looking at the provisions of the law as a whole. Since the terms service fee, commission and sales bonus used in the sub-section are used separately, although those terms have independent meanings, the separate provision regarding the commission of the sales agent and the fact that the commission is not classified should be understood as a service fee.

Fact Section

While paying commission to an agent appointed for trade promotion services, the respondent taxpayer submitted a reply to the appellant Internal Revenue Office dated 27.3.2072, requesting that the tax deduction on the commission (under service fee) issued by the commissioner (under VAT) be kept at only 1.5 percent, as it is an established practice for Nepali telecommunications companies, automobile dealerships and other entities to deduct commission tax when the agent appointed for trade promotion services is a resident registered for VAT.

It was found that the taxpayer's claim that the 13 % of the VAT and the 15 % to be deducted at source together will be a burden of 28 % is not the amount included in the calculation of expenses and that the amount to be included in the calculation of expenses is not known. In addition, as per Sub-section 10 of Section 88 of the Income Tax Act, 2058, only 15 % of the commission paid by the taxpayer is considered to be the amount to be deducted at source. The total taxable income of the tenant is Rs. 69,72,161 (Decision issued by the Appellate Internal Revenue Office dated 29.3.2072, determining the revised tax pursuant to Section 102 of the Income Tax Act, 2058 and giving written notice to the taxpayer).

Overall summary:

The case deals with the difference between the Inland Revenue Office (appellant) and respondent as to tax treatment of payments for commission on the sales agent, i.e., whether to treat the commission payment given to sales agents, who are VAT registered, 1.5% as a service fee or 15% as a deduct advance tax of commission.

The respondent argued that, as per the Income Tax Act, 2058 BS, and its interpretation, the commission received by VAT-registered sales agents falls under the definition of "service fee" and therefore must be taxed at 1.5%. The respondent further referred to the practices followed by other Nepali companies, including telecommunications and automobile dealers, which deduct 1.5% tax on such commissions. But the Internal Revenue Office contended that the sale of goods commission would be taxed at 15% under Section 88 of the Income Tax Act, contending that selling good commissions are not included as a service fee under the law.

The Income Tax Act, under Section 2, Clause 9A, has defined a service fee as any sum charged for services rendered at market price, including commissions. This provision was significant in determining that commissions paid to sales agents are indeed service fees. The case also referred to an internal ruling by the Inland Revenue Department, which indicated that the commission paid to sales agents is a service fee. This perception led the Revenue Tribunal to rule that the tax deduction will be 1.5%, favoring the respondent's argument.

The judgment of the Revenue Tribunal was unsatisfactory for the Inland Revenue Office and they appealed for a review of the decision. The Supreme Court examined legal concepts and context within the Income Tax Act and in its mandate. The Court stipulated that sales agents' receipt of commission belongs to the genre "service fee" and that the 1.5% deduction was permissible. The Court also emphasized that the interpretation of law must respect the entire context, making sure that the tax is levied consistently with what the law intends to do. Lastly, the Supreme Court upheld the decision of the Revenue Tribunal, according to which the payment of commission to VAT-registered sales agents is a taxable service charge of 1.5%, and dismissed the Inland Revenue Office's appeal. The case is a testament to how tax law and its interpretation have to be properly applied to make distinctions between different types of payments and taxation levels under the Income Tax Act.

Supreme Court, Joint Bench

Decision date 2076.5.16

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