India Entry Strategy through Independent Contractors
An Independent Contractor/Agent is a person or business who performs services for another person under an express or implied agreement and who is not subject to the other's control, or right to control, the manner and means of performing the services; not as an employee.
As per the provisions of Article 5 of Double Taxation Avoidance Agreements (DTAA’s) entered into by India with other countries which defines Permanent Establishment and as per Section 9(1) of Income Tax Act, 1961 the following conditions generally make an agent an Independent Agent.
• Being legally & economically independent
• Acting in the ordinary course of his business
• Having activities, which are not devoted wholly or almost wholly to principal.
• Should not have the ability to conclude contracts on behalf of the principal
• Should not be maintaining any stock on behalf of the principal.
• Should not be manufacturing or processing on behalf of the principal
• Transacting on an Arms- Length basis with the principal.
Commercial Benefits of using an Independent Contractor
Taxation Benefits of Independent Agent
If a foreign company does business in India through a Dependent Agent Permanent Establishment / Business Connection then, so much of income of the Foreign Company as is attributable to the operations carried out in India shall be deemed to accrue or arise in India & thus, be taxable in India (As per DTAA & Act). Thus to ensure no Taxation of the Foreign Company on the sales made in the source country through an Agent it should be ensured that the agent is an Independent Agent.
Precautions should be taken while entering into an agreement with Independent Contractor
• Independent-contractor agreements, like other documents, must undergo a formal stamping process in order to be admissible as evidence in court in India.
• Independent Contractor should be financially independent of the Principal
• The company should also ensure that the contractor is not under the control and supervision of the company and has not been authorized to negotiate or conclude contracts on the company’s behalf.
•Independent Contractor should not be only working for one Principal
Contractors can be a relatively low-cost alternative to full-time employees/ working through a Permanent establishment, but these monetary benefits come with some restrictions/precautions that one must adhere to.
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