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TMI Blog2018 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, no disallowance could have been made under section 40(a)(i) of the Act. The finding of the Ld. CIT(A) on the issue in dispute is upheld and accordingly, the ground of the appeal of the Revenue is dismissed. - ITA No.177/Del/2015 - - - Dated:- 7-2-2018 - Sh. H.S. Sidhu, Judicial Member and Sh. O.P. Kant, Accountant Member Appellant by Ms. Ashima Neb, Sr.DR Respondent by Sh. Rakesh Agarwal, CA ORDER PER O.P. KANT, A.M.: This appeal by the Revenue is directed against order dated 08/10/2014 passed by the Ld. Commissioner of Income-tax (Appeals)- XIII, New Delhi [in short the Ld. CIT-(A) ] for assessment year 2010-11, raising following grounds of appeal: 1. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition made by the Assessing Officer of ₹ 1,39,60,134/- on account of disallowance of sales commission to foreign agents. The appeal is in respect of balance amount of ₹ 1,04,14,649/- which was payment to non-residents on which no TDS was made. 2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing. 2. Briefly state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed the payment under the provisions of section 40(a)(i) of the Act. 4.2 Before the Ld. CIT-(A), the assessee made written submission as why the services of foreign sales agents were not in the nature of managerial services liable to be taxed as Fee for Technical Services (FTS). The assessee also submitted that as per the Double Taxation Avoidance Agreement (DTAA) between Canada and in India there is a make available clause, according to which the service must be made available to the resident so that he can use the same service for performing the same kind of task without the help of service provider, in future. According to the assessee, no such technical knowledge was provided by the foreign agents, hence the services provided by the agents were not liable as FTS in India. The relevant submission of the assessee made before the Ld. CIT-(A) is reproduced as under: h. As is stated above at para 4 on page 14 of this submission that the AO clothed the sales commission with managerial service and consequently included it as Fees for Technical Service. In this regard, we submit that the overseas agents are not being paid for rendering any kind of technical, managerial or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (vil) of sub-section (1) and shall be included in the total income of 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.] The sales agency work doesn't fall in any of three categories of services mentioned in explanation 2 - any managerial, technical or consultancy services. Any of these three terms is not defined in the Act, so a meaning / interpretation which is generally understood is to be adopted. In the general parlance and to the commercial world the three terms are understood as under: Managerial Service: There is no exact definition of this term. It covers services rendered in performing management functions. The management functions should necessarily relate to running a business The expression management should be interpreted as per its normal business meaning or ordinary meaning. It means handling manpower and their affairs. A Managerial service is towards the adoption and carrying out the policies of an organization. Managerial services must necessarily be non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was paid to them for booking the sales orders against which the assessee exported the goods and realized the export proceeds in convertible foreign currency. The foreign agents are independent parties and worked on the principal to principal basis with the assessee. They did not have any power to finalize the sales contracts on behalf of the company. Both the foreign agents were non residents and no part of the services were rendered in India and did not have permanent establishment in India. In view of the precedents discussed in the earlier part, the disallowance u/s 40(a) of the Act made by the Assessing Officer is deleted. 4.5 Before us, the Ld. Sr. DR submitted that by way of Circular No. 7/2009 dated 22/10/2009, the earlier circulars issued by the Central Board of Direct Taxes (CBDT) i.e. the Circular No. 163 dated 29/05/1975 and Circular No. 786 dated 7/02/2000 have been withdrawn, which provided clarification in respect of certain provisions of circular No. 23 dated 23rd July, 1969. According to her, in view of the withdrawal of the circulars, the payment made by the assessee to the non-resident are income accrued or arisen from business connection in India and, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices rendered by the foreign agents are chargeable to tax in India during relevant period. 4.7.2 As far as services rendered by the foreign agents are concerned, the assessee explained that services of booking of export orders from foreign buyers were performed outside India and no part of services were rendered in India. The assessee further submitted that commission was paid to them after realization of the export sale proceeds from customers. The Revenue has not disputed the nature of services rendered by the foreign agents. 4.7.3 According to the Assessing Officer, the income from services are deemed to accrue or arise in the hands of non-resident either under section 9(1)(i) or 9(vii)(b) of the Act. 4.7.4 First we examine the taxability of the payments under section 9 (1)(i) of the Act. In view of the Assessing Officer as per the section 9(1)(i) of the Act, income has accrued or arisen in the hand of non-resident through or from any business connection in India. 4.7.5 We have noted that the CBDT following the decision of the Hon ble Supreme Court in the case of CIT versus RD Aggarwal Co (1965) 56 ITR 20 (SC), issued a Circular No. 23 dated 23/07/1969, giving s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular No. 786 dated 07/02/2000 the CBDT issued clarification regarding deduction of tax under section 195 and the taxability of export commission payable to non-resident agents rendering services abroad. The relevant part of the circular is reproduced as under: In their Audit Report for 1997-98 [D.P. No. 79(IT)] the Comptroller Auditor General (C AG) raised an objection that the Assessing Officer in computing the profits and gains of Business or Profession, in a case in Mumbai charge, had wrongly allowed a deduction in respect of a payment to a non-resident where tax had not been deducted at source. The nature of the payment in this case was export commission and charges payable for services rendered outside India. In the view of C AG the expenditure should have been disallowed in accordance with the provisions of section 40(a)(i) of the IT Act, 1961. It has come to the notice of the Board that a similar view, on the same set of facts has been taken by some Assessing Officers in other charges. 2. The deduction of tax at source under s. 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the issue of the taxability of payment to non-resident agents has to be decided in accordance with law. 4.8.1 We have further, noted that the term business connection has been defined in Explanation-2 below the section 9(1)(i) of the Act, which was inserted by Finance Act, 2003 w.e.f. 01/04/2004. The business connection defined is identical to dependant agent Permanent Establishment (PE) in DTAA. The said Exploanation reads as under: Explanation 2.-For the removal of doubts, it is hereby declared that business connection shall include any business activity carried out through a person who, acting on behalf of the non-resident,- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident and the activity in the taxable territories and a stray or isolated transaction is not to be regarded as business connection. In Carborandum Co. vs. CIT 1977 CTR (SC) 209 :(1977) 108 ITR 335 (SC), a foreign company entered into an agreement with an Indian company for rendering technical and know-how services to the Indian company. In lieu of those services, the foreign company was to receive from the Indian company an annual fee equal to three per cent. of the net sale proceeds of the products manufactured by the Indian company every year. The question was how much of the money received by the foreign company would be taxable under the provisions of the Act. The Indian company employed personnel made available by the foreign company, who worked under the direct control of the Indian company. The Supreme Court held that the services of the foreign company in making the employees available were rendered wholly outside India and that the activities of the foreign personnel lent or deputed by the foreign company did not amount to a business activity carried on by the foreign company in India. It was further held that the fee did not accrue or arise in India nor could i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n further appeal to the Supreme Court it was held that there was connection between the Indian solicitor and the barrister which was real and intimate and not a casual one and that the barrister earned the fee arguing the case in India only due to that connection. E. S. Venkataramiah J. (as he then was) speaking for the Supreme Court, observed that, in that case the test laid down by the Supreme Court in Aggarwals case (supra), was satisfied and in the professional connection there was a business connection. 19. In Addl. CIT vs. New Consolidt. Gold Fields Ltd. (1983) 143 ITR 599 (Patna), the assessee-company and the foreign company entered into an agreement under which the foreign company was to be technical adviser of the assessee-company in the matter of exploration, mining and mineral dressing operations. The foreign company was to be paid a retainers fee at the rate of 7,000 per annum in London. The ITO treated the assessee-company as the agent of the foreign-company within the meaning of s. 163 of the IT Act and treated 7,000 payable by the assessee-company to the foreign company as its income accruing in the hands of the assessee-company. On appeal, the AAC held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. In our opinion in absence of establishing any business connection , the action of the Assessing Officer in holding that income accrued or arisen in the hand of non-resident through or from any business connection in India is not justified. The Assessing Officer has also not established that the non-resident was having any permanent establishment in India, and thus in terms of Double Tax Avoidance Agreement (DTAA) with relevant countries i.e Canada and UK also income of the non-residents was not taxable as business income in India. 4.8.5 Another section, relied upon by the Assessing Officer for holding that the income has accrued or arisen in the hands of non-resident, is 9(1)(vii)(b) of the Act. According to the said section income by way of fees for technical services payable by a person who is a resident is deemed to accrue or arise in India, except where the fees are payable in respect of the services utilized in the business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. Further, the Explanation - 2 below the said sub-section 9(1)(vii) has defined the term fee for technical serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd order of the lower authorities, we find that the non-resident has rendered services of booking export order from foreign buyers. In the process of procuring export orders, the non-resident displays or demonstrates the goods of the assessee to the foreign buyers. If the foreign buyer place any order for purchase of those goods, the non-resident agent forward those purchase orders to the assessee. For rendering the services of procuring orders, the assessee pays certain commission at the rate of percentage agreed by the non-resident agent. In our opinion, this entire process of procuring orders by the non-resident cannot be termed as managerial service, which could fall under fee for technical services as defined in Explanation -2 below the section 9(1)(vii) of the Act. 4.8.9 Further, we find that the assessee has claimed that no part of services was rendered in India. The contention of the Ld. DR is that in view of the Explanation inserted below the section 9(2), now even if services are rendered outside India, same may fall under fee for technical services. The relevant explanation is reproduced as under: Explanation.-For the removal of doubts, it is hereby declared that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench are reproduced hereunder: 6. Hon ble Supreme Court, in the case of Ishikawajima Harima Heavy Industries Ltd Vs DIT (288 ITR 408), had held that in order to bring a fees for technical services to taxability in India, not only that such services should be utilized in India but these services should also be rendered in India. Analyzing this legal position, Hon ble Bombay High Court has, in the case of Clifford Chance Vs DCIT (318 ITR 237), observed as follows: The apex Court had occasion to consider the above question in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of IT (2007) 288 ITR 408 (SC), wherein, while interpreting the provisions of s. 9(1)(vii)(c) of the Act, the Supreme Court held as under (p. 444): Sec. 9(1)(vii)(c) of the Act states that a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source of India . Reading the provision in its plain sense, as per the apex Court it requires two conditions to be met-the services which are the source of the income that is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex Court, if one turns to the facts of the case in hand and examines them on the touchstone, s. 9(1)(vii)(c) which clearly states ....... where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India . It is thus, evident that s. 9(1)(vii)(c), read in its plain, envisages the fulfillment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously. 7. The law laid down by Hon ble Supreme Court, in the case of Ishikawajma-Harima Heavy Industries Ltd. vs. Director of Income Tax (supra), binds everyone under Article 141 of the Constitution of India. The legal position thus was that unless the services are rendered in India, the same cannot be brought to tax as fees for technical services under Section 9. However, this legal positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rates in force . When these obligations are to be discharged at the point of time when payment is made or credited, whichever is earlier, such Assessment year : 2008 -0 9 Page 6 of 7 obligations can only be discharged in the light of the law as it stands that point of time. Section 40(a)(i) provides that, inter alia, notwithstanding anything to the contrary in sections 30 to 38, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head profits and gains of business or profession on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted . The disallowance under section 40(a)(i) is not for the payments made to non-residents, which are taxable in India, but for the payments on which tax was deductible at source but tax has not been deducted, and such deductibility of tax at source, as we have discussed above, has to be in the light of the legal position as it stood at the point of time when payment was made or credited-whichever is earlier . Clearly, therefore, the disallowance under section 40(a)(i) can come into play only when the assessee had an obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also findings of the learned CIT(A), which, given our adjudication on this legal issue, are now rendered academic in the present context. 4.11. It is noted by us that in the case before us, the assessment order involved is in A.Y. 2007-08 and therefore, amendment made by the Finance Act, 2010 cannot be pressed into service to create an obligation upon the assessee for deduction of tax at source, which otherwise, was not upon the assessee, as per law existing at the time of making of impugned remittances. 4.9.1 Respectfully, following the above finding, we hold that the assessee cannot be made liable for deduction of the tax at source in view of a retrospective amendment to section 9 of the Act. 4.10 Before the Ld. CIT-(A), the assessee also contended that in terms of DTAA both in case of the Canada and the UK, for taxability of fee for technical services, the services should make available technical knowledge to the assessee and the said condition has not been fulfilled. The relevant part of the submission of the assessee is reproduced as under: I. As per India - Canada treaty Article 12 , income of non-resident from 'royalty' or 'fees for included s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design We give below meaning of the word ' Make Available' as has been explained in various judgments pronounced by various courts and explained in the commentaries written by learned authors on the subject:- The technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, whichever is more beneficial to him. In view of the articles of the DTAA, for holding the fee for technical services as liable to tax in source country, the services should make available the technical knowledge etc to the assessee of the source country. We find that in instant case, the Assessing Officer has not been able to establish that the services of procuring orders has made available any technical knowledge, experience, skill know-how etc. to the assessee, and, therefore, in our considered opinion, the services rendered by the non-resident agents cannot be taxed as fee for technical services under the DTAA. 4.12 In view of the above discussion, we hold that income from services of the non-residents of procuring orders are not chargeable to tax in India and, therefore, assessee was not liable to deduct tax at source on the payments of commission made to those agents, accordingly, no disallowance could have been made under section 40(a)(i) of the Act. The finding of the Ld. CIT(A) on the issue in dispute is upheld and accordingly, the ground of the appeal of the Revenue is dismissed. 5. In the result, appeal of the Revenue is dismissed. (The decision ..... X X X X Extracts X X X X X X X X Extracts X X X X
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