2018 (6) TMI 1324 - HC - Income Tax

TDS u/s 195 - tds laibility on commission charges to overseas agents - fees for technical services - additions u/s 40(a)(i) - Held that - The expression fees for technical services has been defined in Explanation (2) of Section 9(1)(vii) of the Income Tax Act to mean any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personal) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration, which would be income of the recipient chargeable under the head salaries. Explanation (B) to Section 40(a)(i) provides that the expression fees for technical services in Section 40(a)(i) shall have the same meaning as in Explanation 2 to Clause (vii) of sub-section (1) of Section 9. On a reading of Explanation (2) to Section 9(1)(vii), fees for technical services means consideration, including lumpsum consideration for rendering any managerial, technical or consultancy services. In the instant case, the Assessing Officer has, in the assessment order, accepted that the appellant assessee has paid commission charges to overseas agents. It is not the case of the Assessing Officer that any lumpsum consideration has been made for any specific managerial, technical or consultancy services. On a overall reading of the Explanation, it is apparent that fees for technical services does not contemplate commission which is order specific and computable at a small percentage of the order value. Section 40(a)(i) does not contemplate order wise commission based on the order value. - Decided in favour of the assessee

Issues Involved:
1. Taxability of commission paid by an exporter to a non-resident agent for services provided outside India.
2. Whether market survey services rendered abroad constitute technical services attracting taxes in India.
3. Liability of an assessee to deduct TDS on commission paid to overseas agents.
4. Applicability of the retrospective amendment of the Income Tax Act by the Finance Act, 2010.

Detailed Analysis of the Judgment:

1. Taxability of Commission Paid by an Exporter to a Non-Resident Agent:
The appellant, engaged in the export of garments, paid a commission to a non-resident Italian agent for procuring export orders. The Assessing Officer disallowed the commission under Section 40(a)(i) of the Income Tax Act, 1961, asserting that the commission was for marketing, order procurement, and systematic market research, which could be deemed as income accruing in India. The Commissioner of Income Tax (Appeals)-I, Coimbatore, reversed this order, stating that the services were essentially brokerage services and not liable to tax in India as per the Supreme Court's ruling in CIT v. Toshoku Ltd. The Tribunal, however, reversed the appellate order, concluding that the payments constituted fees for technical services.

2. Market Survey Services as Technical Services:
The Tribunal held that systematic market research involved skilled precision, thus qualifying as technical services under Explanation 2 of Section 9(1)(vii) of the IT Act. The appellant contended that the services were incidental to brokerage and did not constitute technical services. The High Court concluded that market survey services incidental to procuring orders do not meet the criteria for technical services, which involve comprehensive expert advisory services, not merely market survey.

3. Liability to Deduct TDS on Commission Paid to Overseas Agents:
The Assessing Officer and the Tribunal held that the appellant should have deducted TDS on the commission paid to the foreign agent, as the income was deemed to accrue in India. The High Court, however, found that the services were rendered outside India, and there was no business connection or permanent establishment of the agents in India, thus negating the liability to deduct TDS. The Supreme Court's ruling in GE India Technology Centre P. Ltd. v. CIT supported this view, stating that no tax is deductible under Section 195 on payments not chargeable to tax in India.

4. Retrospective Amendment by the Finance Act, 2010:
The Tribunal relied on the retrospective amendment of Section 9 by the Finance Act, 2010, which clarified that income by way of fees for technical services is taxable in India irrespective of the non-resident's place of business or residence. The High Court clarified that this amendment applies only to income from interest, royalty, and fees for technical services, not to brokerage or commission for order procurement. The court emphasized that the amendment does not alter the taxability of business income earned from activities conducted outside India.

Conclusion:
The High Court allowed the appeal, answering the questions in favor of the assessee and against the Revenue. The court held that:
1. The commission paid to the non-resident agent for procuring export orders is not taxable in India.
2. Market survey services incidental to procuring orders do not constitute technical services.
3. The assessee is not liable to deduct TDS on the commission paid to overseas agents.
4. The retrospective amendment by the Finance Act, 2010, does not apply to the commission paid for services rendered outside India.

The court reiterated that where no part of the income is chargeable in India, the question of tax deduction does not arise, and disallowance under Section 40(a)(i) or Section 40(a)(ia) is not warranted. The appeal was allowed, and the Tribunal's order was set aside.

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