• +91 98 10 272652

Agency Setup in India

1. WHAT IS AN AGENCY...??

A consensual relationship created by contract or by law where one party, the principal, grants authority for another party,theagent to act on behalf of and under the control of the principal to deal with a third party. An agency relationship is fiduciaryin nature, and the actions and words of an agent exchanged with a third party bind the principal.

2. HOW CAN AN AGENCY BE CREATED...??

An agency is created by express appointment when the principal appoints the agent by express agreement with the agent. This express agreement may be an oral or written agreement between the principal and the agent. Contract law principles apply to an agency agreement.

"No consideration is necessary to create an agency".
MODES OF CREATION
(a) Express Appointment- An agency is created by express appointment when the principal appoints the agent by express agreement with the agent. This express agreement may be an oral or written agreement between the principal and the agent.

The general rule is that agency may be created orally and there is no formality for the creation of agency by express agreement. The one exception is where an agent is appointed to execute a deed on behalf of the principal. In this case, the agent will have to be appointed by deed, which is called a power of attorney.

(b) Agency by estoppel (Implied appointment)- Agency by estoppel arises when A makes a representation to a third party, whether by words or conduct, that B is his agent, and subsequently that third party deals with B as A's agent in reliance on such representation. A will not be permitted (is estopped) to deny the existence of the agency if to do so would cause damage (usually financial loss) to that third party.

(c) Agency by Ratification- Agency by ratification arises when a person (the principal) ratifies (that is, approves and adopts) an act which has already been done in his name and on his behalf by another person (the agent) who in fact, had no actual authority (whether express or implied) to act on his (the principal's) behalf when the act was done.

The person who ratifies an act of another person must have been in existence and have the legal capacity to carry out that act himself both at the time when the act was done and at the time of ratification. A person may lack legal capacity on grounds of bankruptcy, infancy or mental incapacity.

(d) Agency of necessity- Agency of necessity arises when a person ("A") is faced with an emergency in which the property of another person ("B") is in imminent jeopardy and it becomes necessary, in order to preserve the property for A to act for and on behalf of B. In this case, A acts as an agent of necessity of B.

3. WHO CAN SETUP AN AGENCY...??

An agreement creating an agency relationship may be express or implied, and both the agent and principal maybe either an individual or an entity, such as a corporation or partnership.

Principal - : Any Person who is of the age of majority according to the law to which he is subject and who is of sound mind may employ an agent.

Agent - : As between the principal and third persons, any person may become an agent; but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal.
Can Minor be an Agent-- Any person can become agent, including Minors and Unsound mind persons. However, they are not responsible for their act. The principal must be responsible and take the risks of their acts.

4. WHAT ARE THE BENEFITS AND LIMITATONS RELATED TO AGENCY...??

Advantages
  • Lower overheads - you don't have to pay for the salary, the car or the office of sales agents.
  • Agents are easier to recruit than experienced sales executives with specialist knowledge.
  • Using a network of agents can be a cost-effective way of reaching a wide variety of markets.
  • Some markets, including overseas markets, are difficult to break into without existing contacts, local knowledge and experience.
Disadvantages
  • It can be difficult to control the agent's activities and to make sure they continually work hard on your behalf.
  • An agent might not sell your product or service in the way that you would like.
  • They might sell to unsuitable customers who might undermine the integrity of your product.
  • An agent might not fully understand your product or service and you may be better off with hands-on control.
  • They can be entitled to compensation on termination of the contract even if they breached the agreement.

5. WHAT ARE THE TAX IMPLICATIONS ON AGENCY...??

An agent is subjected to taxation under the provisions of the Income Tax act,1961.
An agent may be taxed depending upon the category of "persons" in which it falls under the Income Tax Act. The term "person" under the Act includes:-
  • Individuals
  • Corporate
  • Firms
  • Association of Persons or Body of Individuals
  • Hindu Undivided Families
Commission agent has been redefined by the Finance Act, 2005. Accordingly, "commission agent" means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person: i) deals with goods, services or documents of title to such goods or services; ii) collects payment of sale price of such goods/services; iii) guarantees collection or payment for such goods/services; or iv) undertakes any activities relating to such sale of purchase of such goods/services.

According to the new definition, commission agent should cause sale or purchase of goods or provision of services for a consideration and should act on behalf of another person.

6. HOW IS AN AGENCY TERINATED...??

An agency may be terminated either by – 1) act of the parties, or 2) operation of law. 
By act of the parties: 

1. By agreement: An agency, like any other contract, can be terminated at any time by a mutual agreement between the Principal and the Agent. 

2. Revocation by the Principal: The Principal is empowered to revoke the authority of the Agent at any time. The agency stands terminated from the time such revocation is affected. Revocation can be express or implied.

a.  In the case of a continuous agency, it can be terminated by revocation only for the future. It cannot be revoked in relation to the acts already done by the Agent. In other words, revocation cannot be with retrospective effect. Reasonable notice should be given to the Agent and also the third parties before revocation.

b. An agency, which is created for a fixed period, can be terminated by revocation even before the expiry of that period. However, the Principal is bound to pay compensation to the Agent, even if the authority is revoked after giving notice. 

3. Renunciation by the Agent: It is the termination of the agency at the instance of the Agent, when he no longer wishes to continue working as Agent. The Agent has to give a reasonable notice to the Principal of his intention to renounce the agency; otherwise he is liable to compensate the Principal for any loss due to renunciation without notice. Further, if the agency is for a fixed period and the Agent renounces it without sufficient cause before the expiry of the period, he shall have to compensate the Principal for the resulting loss, if any. 

By operation of law:

An agency comes to end automatically by operation of law in the following conditions:

1. Completion of business of agency : - If the purpose for which the agency is created is served and achieved, the agency stands terminated, e.g.  where an advocate is appointed to appear in a suit, his authority comes to end when the adjudication is complete and the judgment is delivered. 

2. Expiry of time : - When the agency is created for a specified period of time, the agency comes to end with that period, even though the business or reason for which the agency was created continues. 

3. Death of the Principal or the Agent : - An agency is terminated automatically on the death of the Principal or the Agent. In the event of the death of the Principal, the Agent must take all reasonable care to protect the interests of the deceased Principal, which were entrusted to him. 

4. Insanity of the Principal or the Agent : -  If the Principal or the Agent becomes of unsound mind, the agency is terminated automatically. Here also, in the case of insanity of the Principal, the duty of the Agent is the same as in the event of death of the Principal. 

5. Insolvency of the Principal : - When the Principal becomes insolvent, the agency is terminated. However, the termination of agency on the insolvency of the Agent is at the discretion of the Principal. 

6. Destruction of the subject matter : - Where the agency is created with reference to a particular property or subject matter, it stands terminated automatically with the destruction of that property. When the Agent is appointed for the sale of a house, the agency is terminated when the house is destroyed by fire. 

7. Dissolution of a Company :-  It is like the death of the Principal or the agent. When Principal or the Agent is an artificial person created only in the eyes of law (such as incorporated companies), the agency is terminated with the dissolution of that company.

8.  Becoming an alien enemy: - If the Principal or the Agent is a citizen of another country and the war breaks between India and that country, the contract of agency is automatically terminated, as the continuance of the same is unlawful.

Get a Quote