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TMI Blog2013 (10) TMI 748X X X X Extracts X X X X X X X X Extracts X X X X ..... ny source outside India, in all other circumstances, the assessee is liable to deduct tax on the amount of technical fee paid to non-residents – Section 9(1)(vii)(b) itself provides the exception. If the Resident-assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India - Assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria - Services were provided by the assessee outside India and for this business the services of non-residents were utilized to whom technical fee in question was paid – Following the decision of the Hon’ble Tribunal in the Assessee’s own case for the year 2007-08, it is held that the services of non-residents to whom the technical fee of Rs. 74,63,768/- was paid by the assessee were utilized for the business which was carried out outside India for earning income from a source outside India – Appeal allowed – Decided in favor of Assessee. - IT Appeal No. 1648 (Mds.) 2012 - - - Dated:- 15-1-2013 - N.S. SAINI AND VIKAS AWASTHY, JJ. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly." 3. The sole issue raised in this appeal by the assessee is that the CIT(A) erred in coming to the conclusion that the provisions of section 9(1)(vii)(b) of the Act are not applicable; and in confirming the disallowance of fee for technical services of Rs. 74,63,768/- paid to non-resident divers for non-deduction of TDS by invoking the provisions of section 40(a)(i) of the Act. 4. The brief facts are that the Assessing Officer disallowed deduction on account of professional charges paid to divers of Rs. 74,63,768/- out of the total amount of Rs. 3,07,06,730/- claimed by the assessee by observing that the services rendered by the divers are technical services and fall u/s 9(1)(vii) of the Act and the assessee has failed to deduct TDS and therefore, the provisions of section 40(a)(i) are attracted. 5. Being aggrieved by the said order of the Assessing Officer, the assessee filed appeal before the CIT(A). 6. Before the CIT(A), the A.R of the assessee submitted that a sum of Rs. 74,63,768/- was paid for professional charges to divers engaged for work for its clients, M/s Mashhor Covus SDB BHD, Brunei and M/s Khalifa A Algosaibi Diving and Marine Services Co., Saudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) has held that technical fees paid by a resident to a non-resident for services of technicians engaged for services outside India, the amounts cannot be treated as income. This basic principle that non-resident is taxable on the income in the form of technical fees arising in India has been nullified by the insertion of Explanation to section 9 by the Finance Act, 2007 with effect from 1.6.1976. The Assessing Officer also stated that since the transactions are not covered under the exception provided u/s 9(1)(vii)(b) and by virtue of the explanation inserted to section 9 by the Finance Act, 2007, there cannot be leeway available to the assessee in non-compliance to deduction and payment of withholding tax, before making the payments to the non-residents. 7. The A.R argued that Explanation was introduced to explain the provisions of section 9(1)(vii)(c) and not to take away the exception that was given in section 9(1)(vii)(b). It was submitted that Memorandum explaining the provisions in the Finance Bill, 2010 very clearly states the intention of the legislature which was to tax all non-residents whether they have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule out the inference that the technical services should be rendered in India in order to attract tax liability. The amendment makes it clear that in case of FTS, the place where such benefit is made available is immaterial as long as they are utilized for the business in India. Therefore, the reliance placed by the AR on the decision of Ishikawajima Harima Heavy Industries Ltd. (supra) and Jindal Power Company Ltd. (supra) does not come to the rescue of the appellant in the amended scenario. 6.5 The AR has further contended that the Explanation below sec 9(2) would be applicable to the provisions of sec 9(1)(vii)(c) and not 9(1)(vii)(b). This assertion is not tenable since the plain reading of the Explanation makes it abundantly clear that the Explanation is applicable in respect of income which is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-sec (1) to sec 9 and is not specific to sec 9(1)(vii)(c). The exclusions provided under sub-clause (b) would be applicable if the assessee has a branch or a permanent establishment (PE) at the place outside India and payments are made by those entities abroad. In absence of branch or PE outside India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the payments were made for services to be utilised in India or abroad. 6.8 In Cochin Refineries Ltd. v. CIT, 222 ITR 354 (Ker.), the refineries requested a foreign company to evaluate whether the coke produced from a blend of vacuum bottoms and clarified oil from Bombay High crude was suitable for making anodes for aluminium industry. The tests were carried out in the USA. Part of the payments were in the nature of reimbursement of the payments made to the personnel of the said consultant. It was held that the services rendered by the foreign company would be in the nature of technical services and would, therefore, consequently, be covered fully by the Explanation to section 9(1)(vii). 6.9 Relying on the decisions in Orissa Synthetics Ltd., Steffen, Robertson and Kirsten Consulting Engineers and Scientists and Cochin Refineries Ltd. cited supra, the Hon'ble Andhra Pradesh High Court in the case of Elkem Technology v. DCIT (250 ITR 164) held under similar circumstances that payment made by the Indian company to the Norwagian company towards charges for engineering and other personnel services would be part and parcel in the process of utilizing those technical ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a A Algosaibi Diving and Marine Services Co., Saudi Arabia, and in terms of the contract, the assessee hired the services of the divers who were paid the fees. The services were rendered outside India by the assessee and therefore, the income earned by the assessee was from business carried on outside India and hence, the payment made to the divers as fees was exempt from tax in view of the provisions of section 9(1)(vii)(b) of the Act. 12. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the present appeal, the issue to be adjudicated upon by us is whether the fee for technical services paid to divers by the assessee of Rs. 74,63,768/- was covered by the exception provided in section 9(1)(vii)(b) of the Act and therefore, there was no requirement for the assessee to deduct tax at source at the time of payment made to the divers and hence, no disallowance can be made by invoking the provisions of section 4(a)(i) of the Act. The assessee is in the business of providing underwater diving services in Saudi Arabia under a contract with M/s Mashhor Covus SDB BHD, Brunei and M/s Khalifa A Algosaibi Diving and Mari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , order dated 21.5.2012, has observed that in order to fall within the exception provided in section 9(1)(vii)(b) source of income should be situated outside India. In the present case before us the assessee provides services of underwater diving. For rendering such services under a contract, the assessee took its personnel to Saudi Arabia where the services of underwater diving was rendered. The source of receipt was from business carried on abroad with its trained manpower. Section 9(1)(vii)(b) of the Act provides that the income by way of fee for technical services payable by a person who is a resident shall be deemed to accrue or arise in India except where it is payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning income from any source outside India. 15. The relevant portion of section 9(1)(vii)(b) of the Act is extracted as under: "Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :- .. (vii) income by way of fees for technical services payable by- (a) the Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]" 16. We find that it is not in dispute that the assessee has paid fee for technical services to non-residents of Rs. 74,63,768/- during the year under consideration. Further, it is also not in dispute that the assessee is a resident in India. Thus, except in two circumstances, firstly, where the fee is paid in respect of services utilized in a business carried on by the assessee outside India or secondly, fee is paid for the purposes of earning any income from any source outside India, in all other circumstances, the assessee is liable to deduct tax on the amount of technical fee paid to non-residents. For carrying out the above business or to earn income from the above source, the services in respect of which technical fee in question was paid by the assessee to non-residents. We find that the Assessing Officer held that the assessee is liable to deduct tax in respect of payments made to non-residents only because the payment relates to technical fee without examining the existence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd v. CIT, 327 ITR 356 and observed that section 195(2) springs into action only when the payment to the recipient contains an element of income chargeable to tax in India. Since the sum is not chargeable to tax in India, the provisions of section 195(2) are not attracted and disallowance u/s 40(a)(i) would not arise. The Assessing Officer observed that objecting to the order of the CIT(A)-III, Chennai dated 28.9.2010 for assessment year 2007-08, the Department approached the Tribunal by way of an appeal and the issue has not attained finality. Therefore, he disallowed the payment of consultancy fees of Rs. 4,76,58,976/- by invoking the provisions of section 40(a)(i) of the Act. 20. On appeal, the CIT(A) allowed the appeal of the assessee following the order of the Tribunal in assessee's own case for assessment year 2007-08 in I.T.A. No. 2169/Mds/2010, dated 22.6.2011. 21. The DR has fairly conceded that this issue is covered against the Revenue and in favour of the assessee by the said order of the Tribunal. We find that the Tribunal, while deciding the issue in assessment year 2007-08, has held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Having held so, he could not have pressed into service the mischief of section 40(a)(i) because the appellant did not make application u/s 195(2). For this he has relied on the decision of the Karnataka High Court in the case of Samsung Electronics (supra). However, the Hon'ble Supreme Court in its recent ruling in GE India Technology Centre Pvt. Ltd. v. CIT Others in Civil Appeal Nos. 7541-4542 of 2010 dated 09.09.2010 held as under: "Section 195 uses the word 'payer' and not the word 'assessee'. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income, the payer cannot be made liable. He cannot be declared to be an assessee-in default." Further it held "In our view, Section 195(2) is based on the 'principle of proportionality'. The said sub-section gets attracted in cases where the payment made is composite payment in which certain portion of the payment has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or arise in India. Here, the assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria. Therefore, though assessee company has shown that the payments are directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria leaves some ambiguity in determining whether the exception provided to the non-resident on utilization of services outside India would directly apply to the said non-resident consultants and whether the income accrue to them in India or abroad, as section 9(1)(vii)(b) is a deeming provision." (emphasis supplied)". 17. It is clear from the above that the payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee. Assessee being engaged in consultancy business, the fees paid to such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. Therefore, clearly Section 9(1)(vii)(b) of the Act applied and the income earned by such non-residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason ..... X X X X Extracts X X X X X X X X Extracts X X X X
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