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TMI Blog2017 (11) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 (9) TMI 7 - SUPREME COURT OF INDIA] payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent’s income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions. - ITA No. 1391/Ahd/2015 - - - Dated:- 25-9-2017 - Pramod Kumar AM And S S Godara JM For The Appellant : Shradha Khemka For The Respondent : VK Singh ORDER Per Pramod Kumar, AM: 1. This appeal of assessee for Assessment Year 2010-11 is directed against the order of the Principal Commissioner of Income-tax, Vadodara-1, Vadodara dated 12.03.2014, arising out of order under Section 263 of the Income-tax Act, 1961. 2. The grievances raised by the assessee, are as follows:- 1. The learned Principal Commissioner of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be made on commission payments to non-residents for rendering sale service out of India. Since the assessee has not deducted TDS on such payments, Pri. CIT was of the opinion that the expenditure of ₹ 99,20,174/- was required to be disallowed. Accordingly, he passed an order under Section 263 of the Act, thereby set aside the order framed by the by the Assessing Officer u/s 143 (3) of the Act and directed him to examine the claim as per the provisions of the Act and make the disallowance as per the provisions of the law. 4. The assessee is aggrieved by the order so framed by the Pri. CIT and is in appeal before us. 5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. 6. We find that, as learned representatives fairly agree, the issue in question is covered, in favour of the assessee, by the decision of the co-ordinate bench in the case of DCIT vs. Welspun Corp Ltd [(2017) 55 ITR (Trib) 405 (Ahd)] wherein the Tribunal has observed as follows:- 31. The scheme of taxability in India, so far as the non-residents, are concerned, is like this. Section 5 (2), which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices 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 . * Not relevant for our purposes 32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient s business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent s business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore, Explanation 1 to Section 9(1)(i) comes into play. 33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(1)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these rulings. 34. Coming to Section 9(1)(vii)(b), this deeming fiction- which is fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not entitled to any commission. Clearly, therefore, the event triggering the earnings by the agent is securing the business and not rendition of any services. In this view of the matter, in our considered view, the amounts paid by the assessee to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot be said to be consideration for rendering of any managerial, technical or consultancy services (Emphasis by underlining supplied by us) . The services rendered by the agents, even if these services are held to be in the nature of technical services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor the quantification of these amounts have any relation with the quantum of these technical services. The key to taxability of an amount under section 9(1)(vii) is that it should constitute consideration for rendition of technical services. The case of the revenue fails on this short test, as in the present case the amounts paid by the assessee are consideration for orders secured by the assessee irrespective of how and whether or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a in respect of the commission agency business so carried out. 37. On a more fundamental note, however, it is also a settled legal position by now that the services of the nature rendered by these commission agents cannot anyway be treated as fees for technical services anyway. Viewed thus, even the discussion on whether the amounts in question could be treated as consideration for technical services, may be rendered academic in effect. Learned CIT(A) has very well summarized the judicial precedents in support of this line of reasoning, and, in an erudite and extended discussion, dealt with each limb of the definition of technical services. These findings are reproduced by us earlier in this order. While, for the sake of brevity, we need to repeat each of these reasons analysed by the learned CIT(A), suffice to say that we approve his well-reasoned findings and line of reasoning, and we will also briefly touch upon this aspect of the matter. Before we do so, we may take note of some of the clauses in a typical commission agreement entered into by the assessee with its commission agents. The key provisions in this agreement, a copy of which is placed before us at pages 103 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olitical/ Economic changes which would affect tie business, 5.9c To undertake not to divulge sales documents, catalogues, prices etc. to competitors and their agents and associates. Article 7 PRINCIPAL S OBLIGATIONS During the continuance of this Agreement the PRINCIPAL agrees : 7.1 To give the AGENT full support for promoting and creating market for the products of the PRINCIPAL in the TERRITORY. 7.2 To inform the AGENT on receipt of an inquiry from the TERRITORY requiring direct supply . 7.3 The AGENT shall be entitled to commission as agreed upon in the contract. 7.4 To take into consideration the recommendations made by the AGENT while making the offer. 7.5 To provide all informative data, catalogues and technical material (all in the English Language) regarding the PRINCIPAL S products and activities and keep the AGENT informed about all relevant charges. 7.6 To offer competitive prices as far as possible to enable the sale of the products as the agent is only entitled for commissions and not fixed salary on his work. 7.7 The PRINCIPAL nominates Mr. Ranjit Lala as the contact person with the AGENT for all correspondences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spun to Global Synergy as specified in Annexure-1 of Agency agreement dated 29th day of June, 2008. All sales commission shall be paid in U.S. Dollars to the bank account to be advised by GLOBAL SYNERGY, details of which are available with WELSPUN. Unless otherwise agreed, the sales commission shall be payable by WELSPUN to GLOBAL SYNERGY INTERNATIONAL LTD., as interim payments on prorate basis after realization of the payments received by the PRINCIPAL within a reasonable time but not exceeding 30 days from receipt of payment by WELSPUN. 38. As is clear from the above provisions of the agreement, the work that the agent has to done under this agreement, as is stated unambiguously in the agreement itself, is to carry out all the duties normally rendered by an agent including but not limited to the activities specified therein. The consideration for which the payment made to the commission agent is obtaining of the orders and not any services per se. The consideration is computed on the basis of business procured. Obviously, if there are no business generated for the principal, the agent gets nothing. Quite clearly, what is done by the agent is not a rendition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal product is being sold, the person selling the product should be familiar with technical specifications of the product but then this aspect of the matter does not anyway change the economic activity. Nothing, therefore, turns on the details of the products being technical. It was also noted that by the Assessing Officer that it is a very technical exercise to obtain the contracts since it involves complex process requiring elaborate discussion, technical expertise and present of complex technical presentation, on behalf of the assessee, which can only be done by a specialist in this field so as to convince the clients about Welspun s suitability to the contract . This at best signifies complexity in the businesses and the need of technical inputs in the process of businesses, particularly when the products being dealt with are technical products, but then merely because technical inputs are needed in carrying out business activity, it does not become a technical service rather than a business activity. At the cost of repetition, we must emphasize the important distinction between a business activity, requiring understanding of related technology, and rendition of tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as explained in the context of 9(1)(vii) of the Act and therefore, there is no scope for the application of the provisions of Section 195 of the Act (Tax Deducted at Source). It is also contended that as the non-resident agents have neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India. 5.1 Yet another contention of the learned counsel for the assessee is that: (a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission. 5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential. 6. Whether this contention is correct, is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this subclause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. ( ii) Explanation 2 to Section 195(1) of the Act :- Section 195 - Other sums: (1) Any person responsible for paying to a nonresident not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom payment to non-residents and foreign companies. Section 195(1) of the Act comes into play at a stage where the payer, who is enjoined to deduct the tax, either credit such income to the account of the payee or make payment thereof, whether in cash / cheque / draft or any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195(1) of the Act. 7.4 Section 195(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent. 9. This question has been answered by the Hon ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of fees for technical services as explained in the context of Section 9(1)(vii) of the Act. 12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee s case. 13. In this case, the commission payments to the non-resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E.India Technology s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention of the assessee has remained before the authorities below as well as us that the such services do not fall within the ambit of any of the categories taken note of by the authorities below. We will examine as to whether the services so provided by the assessee fall within Page 16 of 24 the scope of managerial, technical or consultancy services as per Explanation 2 to section 9(1)(vii). 6. In order to appreciate the nature of services more elaborately, it is relevant to consider the terms of the Agreement entered into between the assessee and Menlo India executed on November 7, 2006 with effect from 1st June, 2005, a copy of which is available on page 1 onwards of the paper book. The scope of services has been given in clause 1.1. In the recital clause it has been provided that the assessee company may require Menlo India to perform logistics services such as transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services (Local services) within India (Local operating area). It has further been provided that Menlo India may also seek similar services from the assessee company such as transport, procurement, customs clearance, sortin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be described as managing the goods because he simply followed the direction given to him. On the other hand, managing encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word managing is wider in scope than the word executing . Rather the later is embedded in the former and not vice versa. 8. Adverting to the facts of the instant case it is observed that the assessee performed freight and logistics services outside India in respect of consignments originating from India undertaken to be delivered by Menlo India. The role of the assessee in the entire transaction was to perform only the destination services outside India by unloading and loading of consignment, custom clearance and transportation to the ultimate customer. In our considered opinion, it is too much to categorize such restricted services as managerial services. We, therefore, jettison this contention raised on behalf of the Revenue. 9. Now we take up the next component of the definition of fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Agreement, it is obvious that Menlo India shall separately execute a technology and software license agreement for the provision of computer equipment and software supplied by the assessee. It is nobody s case that the consideration in question relates to the supply of any computer equipment and software by the assessee to Menlo India. We fail to appreciate as to how this clause 2 makes the services provided by the assessee as technical . Rather clause 2 mandates to execute a separate Technology and Software license agreement for the provision of computer equipment and software. How is it that the consideration for the services can be attributed to a proposed agreement, which has yet to see the light of the day. 12. The learned CIT(A) has also harped on transportation of time sensitive packages with a view to bring the services provided by the assessee within the fold of technical services . In reaching this conclusion the learned CIT(A) also relied on the order passed by the Mumbai bench of the Tribunal in Blue Dart Express Limited v. JCIT. Let us examine the facts of that case. The assessee there claimed deduction u/s 80 O in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was considering all the species of the services set out in section 80 O and not only technical or professional services . It was in the light of such language of the provision that the Tribunal held the assessee to be eligible for relief u/s 80 O. We are currently dealing with section 9(1)(vii), being the fees for technical services and the definition of such expression is restricted only to managerial, technical or consultancy services and does not have any such elements as are there in section 80 O. The decision in the case of Blue Dart Express Limited (supra) came up for consideration before the Mumbai bench of the tribunal in Dampskibsselskabet AF 1912 v. Addl. DIT (International Taxation) [(2011) 51 DTR 148] (to which one of us, namely, the ld. JM is party) in which it has been held that the ratio laid down in that case cannot be universally applied. Due to material difference in the language of sections 9(1)(vii) and 80 O as discussed above, we hold that the decision in Blue Dart Express Limited (supra), can not be held to be supporting the case of the Revenue. 13. The ld. CIT(A) in reaching the conclusion that the assessee rendered technical services also observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of technology is used, such a user cannot be characterized as using technical services . 16. Coming back to the facts of the present case, even if we accept the learned first appellate authority s point of view that the computer could be used in tracing the movement of the goods, such use of computer, though indirect, remote and not necessary, can not bring the payment for freight and logistics services within the purview of technical services . The essence of the consideration for the payment is rendering of services and not the use of computer. If incidentally computer is used at any stage, which is otherwise not necessary for rendering such services, the payment for freight and logistics will not partake of the character of fees of technical services . We, therefore, repel this contention raised on behalf of the Revenue. 17. Thus it can be noticed that the payment made to the assessee in question is not a consideration for managerial or technical or consultancy services. That being the position, it cannot fall within the ambit of section 9(1)(vii). 40. We may also take note of another decision of a coordinate bench dealing with materially simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal also has the right to operate actively in he aforementioned territory (area). 1.3. The agency covers the following products: Hand embroidered products of any and all kinds. 1.4. The Agent covenants and agrees to represent the principal on a commission basis. Article 2- Duties of the Agent 2.1 It shall be the Agent s duty to negotiate contracts with the overseas party. Furthermore, the Agent shall act on the principal s behalf in conformity with provisions hereinafter enumerated. The Agent shall not be authorized to enter into a contract or otherwise to bind the principal. The principal shall be free to conclude, or to refuse the conclusion of a contract negotiated by the Agent. 2.2 While negotiating contracts of sale the Agent shall act in conformity with all the conditions and particularly of delivery and payment as fixed by the principal. 2.3 The Agent shall be responsible for negotiating with all parties in their territory (area). The Agent shall travel in their territory (area) regularly to visit customers, and is bound to keep concluded contracts secret. The Agent shall always keep the principal informed about their activities and shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. 18. This aspect can also be examined in another way as already given a finding by the Bench earlier and which is also not in dispute, that the foreign company does not have any PE in India. Therefore, the commission paid to the foreign company which has to be considered as business income and cannot be taxed in India as per the DTAA between India and UK. The definition of fee for technical services between UK and India does not include managerial services. However, neither the Assessing Officer nor the CIT (A) considered the issue of DTAA, even though assessee mentioned the same in its submissions before the authorities. The definition of technical services as per the Income Tax Act is as under: 9.(1) The following incomes shall be deemed to accrue or arise in India: ( i) (vi )** ** ** ( vii) Income by way of fees for technical services payable by- ( a) the Government; or ( b) a person who is a resident, except where the fees are 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 any income from any source outside India ; or ( c) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtising, publicity and sales promotion services were considered and held that those payments cannot be considered as either royalty or for technical services. Since the Non-Resident does not have any PE in India, such income which is to be considered as business income was not taxable in India. 41. We are in considered agreement with the views so expressed by the coordinate bench. In view of these discussions, as also bearing in mind entirety of the case, we uphold well reasoning findings of the learned CIT(A) that the commission payments made to the non-resident agents did not have any taxability in India, even under the provisions of the domestic law i.e. Section 9. Once we come to the conclusion that the income embedded in these payments did not have any tax implications in India, no fault can be found in not deducting tax at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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