2012 (7) TMI 795 - AT - Income Tax

Non deduction of tax at source - remittances to a non-resident company incorporated in Hongkong - services rendered by M/s SEL, NRI company to the assessee company are technical, managerial or consultancy as per sec. 9(i)(vii) - Held that - The agreement between the assessee and NRI company stipulates that it shall be responsible for the shipment of raw material to the assessee from its importers within the stipulated time and as per the specific quality and quantity - it is the assessee, in the consultation with its exporters, which identifies the manufacturer and the quality and the price of the material to be imported. Therefore, SEL nowhere is involved in the above identification of the exporter or in selecting the material and negotiating the price, thus it cannot be said that SEL is rendering any of the consultancy services. As the quality of material is already determined by the assessee and the SEL is only to make a physical inspection of the material to see if it resembles the quality specified by the assessee it is thus not much of technical knowledge is required in it.SEL is not required to employ any skilled technical personnel to discharge its obligation under the agreement and, therefore, we hold that the assessee is not discharging any technical services - it is seen that SEL is acting on behalf of the assessee as its agent and there is no independent application of thought process in any of the activities to be carried out by SEL no managerial services being rendered by SEL to the assessee - above payments do not fall within the ambit of fee for technical services and, therefore, the provision of sec. 195(1) is also not attracted - in favour of assessee.

Issues Involved:
1. Whether the services rendered by M/s Sharp Eagle International Ltd. (SEL) fall within the ambit of technical, managerial, and consultancy services as defined under Explanation 2 to clause (vii) of sub-section (1) to section 9 of the Income-tax Act, 1961.
2. Whether the assessee was required to deduct tax at source under section 195(1) of the Income-tax Act, 1961.
3. Whether the assessee can be considered a defaulter under sections 201(1) and 201(1A) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Nature of Services Rendered by SEL:
The Assessing Officer (AO) observed that the services rendered by SEL involved inspecting fabrics, advising on defects, and managing the dispatch of materials, which he categorized as technical, consultancy, and managerial services. The AO held that the inspection of fabrics required technical knowledge and skills, thus qualifying as technical services. Additionally, advising on defects was seen as consultancy, and managing dispatches was considered managerial services. Consequently, the AO classified the payments to SEL as fees for technical services (FTS) under Explanation 2 to section 9(1)(vii) of the Income-tax Act.

However, the assessee argued that SEL's role was limited to overseeing the quality and quantity of shipments, which did not require technical expertise or managerial skills. The assessee contended that SEL acted as an agent performing physical verification of materials based on pre-determined specifications, which did not constitute technical or consultancy services.

The Tribunal agreed with the assessee, noting that SEL's activities involved basic inspection and verification tasks that did not require significant technical knowledge or managerial skills. The Tribunal concluded that SEL's services did not fall within the definitions of technical, managerial, or consultancy services under section 9(1)(vii).

2. Requirement to Deduct Tax at Source under Section 195(1):
The AO held that the assessee should have deducted tax at source at the rate of 10% on payments to SEL under section 195(1) read with section 115A(1)(b)(BB) of the Income-tax Act. The AO treated the assessee as a defaulter under sections 201(1) and 201(1A) for failing to deduct tax at source and charged interest accordingly.

The assessee contended that SEL operated entirely outside India, and no part of its income arose or accrued in India. Citing CBDT Circulars No. 23 (1969) and No. 786 (2000), the assessee argued that payments to foreign agents for services rendered outside India were not taxable in India and, therefore, not subject to tax deduction at source under section 195(1).

The Tribunal agreed with the assessee's position, emphasizing that SEL's operations were entirely outside India, and its income did not arise or accrue in India. Consequently, the Tribunal held that the provisions of section 195(1) were not applicable to the payments made to SEL.

3. Assessee as a Defaulter under Sections 201(1) and 201(1A):
The AO and the Commissioner of Income-tax (Appeals) [CIT(A)] had treated the assessee as a defaulter under sections 201(1) and 201(1A) for failing to deduct tax at source on payments to SEL. The CIT(A) had also raised doubts about the nature of services rendered by SEL and confirmed the AO's order.

The Tribunal, having concluded that SEL's services did not qualify as technical, managerial, or consultancy services and that the provisions of section 195(1) were not applicable, held that the assessee was not liable to be considered a defaulter under sections 201(1) and 201(1A). The Tribunal allowed the appeals filed by the assessee, setting aside the orders of the AO and CIT(A).

Conclusion:
The Tribunal ruled in favor of the assessee, determining that SEL's services did not fall within the ambit of technical, managerial, or consultancy services as defined under section 9(1)(vii) of the Income-tax Act. Consequently, the assessee was not required to deduct tax at source under section 195(1), and the assessee could not be considered a defaulter under sections 201(1) and 201(1A). The appeals filed by the assessee were allowed.

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