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TMI Blog2012 (5) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... income arises in India and no tax is therefore deductible under section 195 - in favour of assessee. - IT Appeal NO. 8822 (MUM.) of 2010 - - - Dated:- 4-5-2012 - B. RAMAKOTAIAH, V. DURGA RAO, JJ. ORDER B. Ramakotaiah, Accountant Member This appeal was preferred by assessee and the ITAT 'A' Bench decided the issue in favour of the assessee. Consequent to the appeal preferred by the Revenue, the Hon'ble Bombay High Court restored the matter to the file of the ITAT for considering the issue and passing a detailed order. Therefore, the case was taken up again. 2. The facts of the case are that assessee is a firm engaged in the business of manufacturing and exporting of hand embroidery and handicraft items. The return of income declaring total income of Rs. 13,87,010/- was filed on 19.10.2007. While completing the assessment u/s. 143(3), the Assessing Officer held that the assessee had made payment to Indijack Ltd. Overseas Commission agent, to the tune of Rs. 86,51,484/- and not deducted TDS on the same. The Assessing Officer opined that M/s. Indijack Ltd is offering services to assessee which are managerial/technical in nature and therefore, assessee is liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces are defined in the explanation which specifies managerial services as fees for technical services. In the instant case, the assessee has paid consideration to non resident for managerial services and thus payment to a non-resident is income deemed to arise in India. The AO held that the exclusion clause, also does not help as it clearly lays down that services should be utilized in India rather than rendered. Reliance was placed on SRK Consulting Engineers (1998) 230 ITR (AAR) to hold that the sum payable to non-resident is chargeable u/s. 9(1)(vii), hence TDS should be deducted u/s. 195. Since tax was not deducted payment made to non-resident was disallowed u/s. 40(a)(i). Reliance was also placed on Karnataka High Court decision in the case of CIT v. Samsung Electronics Ltd which held that effect of the judgment in Transmission Corpn. Of India was that the moment there was a payment to a non-resident there was an obligation on the payer to deduct tax at source u/s. 195(1). The Assessing Officer also cited judgment of ITAT, vide order dt. 10.12.2000 in the case of ACIT v. Anchor Health Beauty Care Pvt. Ltd in ITA No. 7164/M/08 A.Y. 2004-05 in which it has been held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident was to help the appellant to procure orders abroad. All the services and activities incidental to the services were carried out abroad and no part of it was carried out hence no income could be attributed to Indian territory. No managerial services were rendered. No technical services were involved since the non-resident was merely a commission agent appointed to procure purchase orders for the appellants' products. Technical services are involved only when there are highly sophisticated systems involving special knowledge and experience and a person rendering the service must be a technical services person. Nothing of that sort was involved in the present case. If the services of a commission agent were to be treated as technical services or managerial services covered by Sec. 194J of the I.T. Act, there was no need for Sec. 194H which specifically deals with income by way of commission or brokerage. Subsequently it was stated that the case of Samsung Electronics and others was taken up by the Supreme Court and vide order dt. 9.9.2010, the Supreme Court, in Civil Appeal No. 7541-7542 of 2010 in the matter of GE India Technology Centre Pvt. Ltd. v. CIT , has set aside th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195. It was held that consultancy fee payable to the non-resident for developing business with foreign customers falls within the meaning of "fees for technical services" as defined in explanation 2 to clause (vii) of subsection (1) of section 9. In the present case, Indijack Ltd. is providing composite services comprising commission agency as also services for promoting sales of the appellant in the foreign countries, although the nomenclature used by the appellant is commission. The payment thus falls within the meaning of "fees for technical services" which is subject to application of section 195. Section 195(2) is applicable to a composite payment. The appellant has drawn support from the Supreme Court judgment in the case of GE India Technology Centre Pvt. Ltd. ( supra ). However the issue in that case is whether, the moment there is remittance, whether the obligation to deduct tax at source arises? While the Hon'ble Supreme Court has not answered this question in the affirmative, the Apex Court has held that in a given case when the sums remitted outside India come within the definition of royalty or fees for technical services or other sums chargeable under the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axability in India, services must also be rendered in India; utilization of the services in India is enough to attract its taxability in India. In the said case the jurisdictional ITAT held that the income of the Chinese company by way of receipt of fees for technical services from an Indian company is to be deemed to accrue or arise in India under section 9(1)(vii); it is accordingly liable to be taxed in India under the domestic tax law as also under the provision of the applicable India China tax treaty. As regards the question of applicability of Boards' circulars relied upon by the appellant, these were rendered in the context of the unamended provisions of section 9(1)(vii), before the introduction of Explanation to this clause, which has been made effective retrospectively. Thus, the Board's Circulars are not applicable in view of the Act as it stands after amendment. In view of the above position is clear that the appellant has paid to Indijack Ltd, a composite amount including fees for technical services which is taxable in India, and for which payment the applicant was obliged to deduct tax at source under section 195 of the Income Tax Act. On the appellant's failure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial services. Therefore in the absence of any service having been rendered in India, no part of the commission paid to the overseas agency could be said to be chargeable in India under the I.T. Act, 1961 and in the absence of any income chargeable to tax in India, question of applying S.195 of I.T. Act, 1961 does not arise. Hence we allow assessee's appeal on this issue". 13. The Hon'ble High Court set aside the above order and restored the matter to the file of the ITAT for deciding afresh with the following directions: "5. In our opinion, when the CIT (A) on perusal of the clauses in the agreement held that part of the amount paid was towards commission and part of the payment was towards rendering technical/managerial services, the ITAT ought to have specifically dealt with those findings recorded by the CIT (A)". "6. Since the ITAT has not specifically dealt with the findings recorded by the CIT (A) by consent, the impugned order dated 23.2.2011 passed in ITA No.882/Mum/2011 relating to assessment year 2007-08 is quashed and set aside and the matter is restored to the file by the ITAT for fresh decision in accordance with law". Hence, present hearing and consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the course of buying or selling of goods and specifically excludes professional services covered under section 194J. It was further submitted that Article 13 of DTAA between India and UK defines technical services which does not include managerial services, which are considered by AO and CIT(A) in their orders. Hence no tax is required to be deducted since payment was towards business profit and not fee for technical services. It was further submitted that no income can be considered as accrued or deemed to have accrued or arisen in India as the revenue from sales had come from sales outside India i.e. the source is outside India and services of the above person was rendered/utilized outside India, not in India. He relied on the decision of CEAT International S.A. v. CIT 237 ITR 859 for the proposition that the export commission cannot be considered as income taxable under section 9(1)(vi) or 9(1)(vii). He also relied on the decision of the Delhi High Court in the case of Director of Income Tax v. Sheraton International Inc. 313 ITR 267. Apart from the above High Court judgments, he also relied on the decision of the ITAT in the case of TITAN Industries Ltd v. Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been deducted. The Assessing Officer made out a case that the commission paid is 'fees for technical services' without specifying what are the technical/Managerial services rendered by the said company to the assessee. Assessee indeed entered into an agreement for propagation of its handicraft products with the non resident company. The copies of the agreement have been placed before the authorities. The agreement clearly shows that the non resident company was to get commission for promoting the products of the assessee company and rendering incidental services on sales such as recovery etc. for doing export sales. It is also responsibility of the non resident company to disseminate the information and inquire about various importers in various countries so that assessee exports can be increased. The agreement clearly shows that non resident company was to get the commission for promoting the product of assessee company after sales proceeds are received. The detailed terms of the agreement are as under: "Agency Agreement In this Agreement between M/s Armayesh Global, Kamanwala Chambers, 2nd Floor, Sir P.M. Road, Fort, Mumbai 400 001, India hereinafter referred to as "Prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of whether or not the contract is still in force. 2.5 The Agent shall observe the rules of fair competition and be responsible for any violation of the same. 2.6 The Agent is not authorized to accept payments directly in their own name but shall assist the principal in collecting outstanding payments. The Agent is also authorized to accept notification of defects by a customer, as well as the statement of a customer that he will the goods at the disposable of the principal or any similar statement by which the customer exercises his rights resulting from defective delivery. The Agent shall immediately ii principal and shall see to it that the necessary evidence in favour of the principal is obtained. 2.7 The Agent shall establish business relations only with such customers whose solvency is satisfactory to the best of the knowledge and belief of the Agent. 17. Thus as can be seen from the above, all the terms do indicate that the said company was only acting as an Agent on commission basis and has not been providing any Managerial/Technical services. Further there is no evidence on record that they are providing any technical/managerial services. The said company was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) 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". 19. As can be seen from the above section 9(1)(vii)(b), fee payable for the purposes of making or earning income from any source outside India is not included in the definition. The amount has to be considered as business income. Since the services are rendered outside India, that amount is not taxable as it does not accrue or arise in India. The same view was considered by the Hon'ble Bombay High Court in the case of CEAT International S.A. v. CIT 237 ITR 859, where certain export commission was paid to a Non Resident Company and it was held that the assessee did not impart any information concerning technical, industrial, commercial or scientific knowledge exports or skill, nor rendered any managerial technical or consultancy services. The commission attributable to the services rendered cannot be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to nonresident when the payment is in nature of export commission and charges payable for services rendered outside India. The Board stated that the liability to TDS under s. 195 will arise if the payment of commission to non-resident agent is chargeable to tax in India. When non-resident agent operates outside the country, no part of his income arises in India. The payment is remitted directly abroad and therefore, it cannot be stated that the payment by non-resident is received in India. Such payments are therefore, not taxable in India. When C AG was apprised of such factual information then C AG has agreed to drop the objection. Thus the CBDT was of the view that the commission and the amounts paid for services outside India are not liable for tax in India and therefore, no TDS is required to be deducted. It is not disputed after the finding of the learned CIT(A) that non-residents have provided services for earning commission. The services have been rendered outside India. The commission so earned by non-resident is business profit. As per DTAA between India and UK and DTAA between India and UAE, it is mentioned in art. 7 of both the DTAAs that business profit can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso discussed in various cases relied upon by the learned Counsel, we do not consider it necessary to extract the same, but the principles laid down in all the cases is that if the fee payable is on source of income outside India, the same is not taxable in India. Therefore, we are of the opinion that both the Assessing Officer and the CIT (A) ignored the facts that services were rendered outside India and wrongly considered that the services are managerial services partly. Since there is no evidence that the non-resident has rendered any managerial services to assessee and the agreement indicates only services simplicitor for agency on commission basis, the findings of AO and CIT(A) are to be rejected. Assessee placed reliance on the CBDT circular 786 dated 7 February 2000 wherein the CBDT has considered and clarified that where the non-resident agent operates outside the country, no part of his income arises in India. Also, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments are therefore held to be not taxable in India. Accordingly as per the said circular, no tax is therefore deductib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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