2020 (10) TMI 941 - HC - Income Tax

Income accrued in India - commission paid to the non-resident - whether services of the non-resident do not fall under the scope of 'technical services' as spoken of in Section 9(1)(vii)? - TDS u/s 195 - HELD THAT - There is an element of managerial function coupled with all encompassing consultancy services and also purely technical services too. The appellant cannot raise a contention that the services of the non-resident do not fall under the scope of 'technical services' as spoken of in Section 9(1)(vii) and defined in Explanation-2. Activities carried out by the commission agent, who is a non-resident, to be covered under the exception to clause (b) of Section 9(1)(vii) - The commission, as is seen from Annexure-B, is 15% of the contracts/projects executed by the appellant on the basis of the marketing services rendered by the commission agent. The income derived by the appellant from the marketing services rendered by the commission agent is sourced from the three territories which are outside India. The activities of the non-resident agent are confined to those territories outside India - commission paid is 'fees payable in respect of services for the purposes of making or earning any income from any source outside India' is the compelling argument, which we find favour with. The income derived by the appellant is un-disputedly from the three territories mentioned in the agreement, which are admittedly outside India. There is no utilization of the services rendered by the non-resident agent within India. The projects executed by the resident company even within India was for sale to the foreign buyer and it cannot be said that merely for reason of the execution in India the service was utilized in India. The software developed in India was also for export; the appellant being a 100% EOU. The services rendered by the non-resident agent was for facilitating sale in the three outside territories. The services rendered for effecting exports by the appellant company to foreign buyers, makes the foreign countries the source of income. The execution of the project within India would not attract income tax since the income is derived from the sale of the product outside the territories of India and the execution is only to obtain such income from territories outside India. As has been declared in Sedco Forex International Drill Inc. 2005 (11) TMI 25 - SUPREME COURT an explanation to a statutory provision may fulfill the purpose of clearing up an ambiguity in the main provision or an explanation can add to and widen the scope of the main section . The Explanation cannot be found to have taken away or curtailed the effect of the clear exceptions provided by sub-clause (b) of Section 9(1)(vii). Commission paid to the non-resident in the present case is not taxable under the IT Act by virtue of Section 5(2) read with Section 9(1)(vii)(b), there is no scope for finding any liability on the resident company to deduct tax from source, from payments made by them to the non-resident. We rely on GE India Technology Centre 2010 (9) TMI 7 - SUPREME COURT wherein it was categorically held that the plain words of Section 195(1) which is in clear terms lays down that tax at source is deductible only from 'sums chargeable' under the provisions under the IT Act, i.e., chargeable under Sections 4, 5 and 9 of the IT Act (sic. para 24). In favour of the assessee and against the Revenue.

Issues Involved:

1. Taxability of commission paid to a non-resident under the Income Tax Act, 1961.
2. Applicability of Section 40(a)(i) for disallowance of commission paid.
3. Requirement of tax deduction at source under Section 195.
4. Application of the India-Switzerland Double Taxation Avoidance Agreement (DTAA).
5. Interpretation of Section 9(1)(vii) and its exceptions.
6. Impact of the Explanation added by Finance Act, 2010.

Issue-wise Detailed Analysis:

1. Taxability of Commission Paid to a Non-Resident:
The primary question was whether the commission paid to a non-resident director of the appellant company, who was also a commission agent, was taxable under the IT Act. The commission was paid for services rendered outside India in territories such as the European Union, North America, and the Middle East. The court analyzed whether these services fell under the definition of 'fees for technical services' as per Explanation 2 of Section 9(1)(vii) and whether they were exempt under sub-clause (b) of Section 9(1)(vii). It was concluded that the services provided did not fall within the taxable category under the IT Act due to the territorial nexus being outside India.

2. Applicability of Section 40(a)(i) for Disallowance:
The appellant's return was processed under Section 143(1), and the commission paid was disallowed under Section 40(a)(i) on the grounds that it constituted fees for technical services on which tax was deductible at source. The court found that the commission paid did not fall under 'fees for technical services' as defined, and hence, Section 40(a)(i) was not applicable.

3. Requirement of Tax Deduction at Source under Section 195:
Section 195 mandates tax deduction at source for payments to non-residents if the sum is chargeable under the IT Act. The court held that since the commission paid was not taxable under the IT Act due to the services being rendered outside India, there was no obligation for the appellant to deduct tax at source.

4. Application of the India-Switzerland DTAA:
The appellant argued that the DTAA between India and Switzerland absolved the liability to income tax in India. The court found that the services rendered by the non-resident were entirely outside India, and the income had no territorial nexus with India. Therefore, the DTAA further supported the non-taxability of the commission in India.

5. Interpretation of Section 9(1)(vii) and Its Exceptions:
The court analyzed Section 9(1)(vii), which deems income by way of fees for technical services payable by a resident to accrue or arise in India unless it falls under certain exceptions. The court found that the commission paid was for services utilized in earning income from sources outside India, thus falling under the exception provided in sub-clause (b) of Section 9(1)(vii).

6. Impact of the Explanation Added by Finance Act, 2010:
The Explanation added by the Finance Act, 2010, with retrospective effect from 01.06.1976, was considered. It clarified that income of a non-resident shall be deemed to accrue or arise in India regardless of whether the non-resident has rendered services in India. However, the court held that this Explanation did not affect the exceptions provided in sub-clause (b) of Section 9(1)(vii), and thus, the commission paid was not taxable.

Conclusion:
The court concluded that the commission paid to the non-resident was not taxable under the IT Act, and the appellant was not liable to deduct tax at source under Section 195. The appeal was allowed, and the assessment order was set aside to the extent it attempted to hold the payment as income deemed to arise or accrue in India. The court granted substantial relief to the appellant, and parties were left to bear their respective costs.

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