The applicability of TDS U/s 195 of the IT act is on all the payments to Non residents but which are taxable in India. The applicable rate is as per DTAA or in case there is no DTAA then as per the rates prescribed in this respect.
The income of non residents as per section 5(2) includes all income from whatever source :- 1. Which are received or deemed to be received in India. 2. Income which accrues or arise or deemed to accrue or arise in India.
Now comes section 9 into the picture for deciding accrues/arising/deemed to accrue or deemed to arise in India which means income arising directly or indirectly from or through business connections in India, through or from property in India, through or from sorce of income in India or through transfer of capital assets in India etc.
From your case I understand that the agent is non resident, there is no PE in India, the services are not rendered in India and the payments are being generally made directly to him in foreign country through the banking channel.
From this it is obvious that it does not satisfy the requirements as mentioned in section 5(2) hence there should not be any TDS on such payments.
This was supported by the Honurable Supreme Court in the case CIT Vs Toshoku Ltd (1980) 125 ITR 525. The income tax department circular no 786 dated 7th February,2000 also supported the view. However the said circular has been withdrawn by another circular no 7 of 2009 dated 22-10-2009. The plain meaning of withdrawing any circular means that the department opinion has been reversed and the TDS should be deducted. Again internal circulars are not law and they may not be final and binding and generally are in the nature of clarification/advisory in nature.
You may try making an application u/s 195 (2) to the Assessing Officer about the TDS applicability but chances of supporting our view is less because of withdrawn of circular on 786 dated 7-02-2010. I suggest try this as well as take an expert opinion to decide the next course of action.
The direct deduct of commission is not permissible as per RBI master circular no 69/2009-10 dated 01-07-2009.
I hope some use to you.