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TMI Blog2018 (6) TMI 1324X X X X Extracts X X X X X X X X Extracts X X X X ..... erial, 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 - Tax Case (Appeal) No. 572 of 2013 - - - Dated:- 14-6-2018 - MS. INDIRA BANERJEE, CHIEF JUSTICE And MR.JUSTICE M.SUNDAR For the Appellant : Mrs.Nalini Chidambaram Senior Counsel for Ms.C.Uma For the Respondent : Mr.Karthik Ranganathan JUDGMENT Ms. Indira Banerjee, Chief Justice This appeal is against an order dated 11.3.2013 passed by the Income Tax Appellate Tribunal, 'A' Bench, Chennai, allowing the appeal of the Revenue, being I.T.A.No.2100/Mds/2012, reversing an order of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 9(1)(vi)(b) / 9(1)(vii)(b) applied to utilisation of services in business outside India and did not cover the case of the appellant assessee. Section 9(1)(vi)(b) relating to royalty is not attracted in this case. The Assessing Officer was of the view that the appellant assessee was liable to comply with the provisions of Chapter XVII of the IT Act relating to deduction of tax at source (TDS). 7. The Assessing Officer proceeded on the basis that the situs of the rendering of services was not relevant. It was the situs of the payer and the situs of the utilization of services which determine taxability of such services in India, as long as services are utilized in India. The Assessing Officer found that the business of the assessee was situated in India and payments also made from India. From the agreement copies filed by the assessee, it is clear that commission was paid to the foreign agents for: (i)marketing the products of the assessee company; (ii) to procure orders for the assessee company; (iii) systematic market research with regard to the needs of the products. 8. The Assessing Officer found that it could not be said that the payments made by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources which were taxable in India. The non-residents did not file any return in India or pay Indian taxes in respect of the services rendered by them, nor obtained exemption under Section 195(2) of the IT Act. The amounts paid to the non-residents were, therefore, to be deemed to be income that had arisen in India under Section 9(1)(vii) of the IT Act, for which the appellant ought to have deducted TDS under Section 195 of the IT Act. The amount of ₹ 3,74,09,773/- paid to the non-residents was disallowed under Section 40(a)(i) of the IT Act and added to the income of the appellant. 12. The appellant filed an appeal against the aforesaid order of assessment, which, as stated above, was allowed by the Commissioner of Income Tax (Appeals)-I, Coimbatore, by an order dated 23.8.2012. The Commissioner of Income Tax (Appeals)-I, Coimbatore, inter alia, observed, and in our view, rightly that from the Service Agreement of the appellant with the agents abroad, it was clear that the service rendered by the agents was of brokerage, to procure orders and to do market research abroad. These were ordinarily the tasks which any agent or broker undertook incidental to brokerage service. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. 16. Relevant parts of the order of the Commissioner of Income-tax (Appeals) is extracted hereinbelow: From the service agreement with the agents abroad, it is clear that the service rendered is essentially brokerage service even as stated in the very first clause to procure orders and in reference to market research abroad or co=ordination with the supplier or to ensure timely payment or making available its office space for visit by the suppliers. These are ordinarily the tasks, which any agent or a broker undertakes incident to brokerage service. Also, none of the commission agents have any place of business in India. Even if there be any, Explanation 1 to section 9(1)(i) of the Act would attract liability to Indian tax for a non-resident with business connections in India, only on income attributable to his operations in India. There can, therefore, be no liability under the domestic law. If there is also a Double Tax Avoidance Agreement, this inference is further buttressed, if they do not have permanent establishment in India or if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the Income-tax Department has followed this view, is by insertion of Explanation to section 9(2) to provide that the incomes under clauses (v), (vi) and (vii) {of section 9(1)] relating to interest (v), royalty (vi) and technical fees (vii) would be liable to tax irrespective of the place of residence or place of business or business connection. The amendment, therefore, relates only to income from technical service, royalty and interest and not to business income of non-residents from activities abroad. In fact, even in the case of business connection under the domestic law and permanent establishment in India under the Double Tax Avoidance Agreement, where there is one, the Income liable to tax in India is what is attributable to activities in India. This amendment, therefore, does not make any difference to any income other than interest, royalty and technical fees. In other words, there is no change in law for any other income as for business, which includes commission on sales. There has also been no modification to any Double Tax Avoidance Agreement as well to require a different view. Section 195 attracts tax only on chargeable income, if any paid to the non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices' is defined. In other words, section 9(1)(i) is a general provision whereas, clause (vii) is in the nature of specific provision. Thereafter comes the Explanation substituted by the Finance Act, 2010 with retrospective effect from 01.06.1976. This explanation makes it categoric that in cases covered by clause (vii) or for that section 9, sub-section (1)(vi) (vii), it would not be necessary for the non-resident to have residence or place of business or business connection in India. To simplify, in case of 'fee for technical services', the mandate of the legislative is that clause (vii) would have overriding effect by virtue of aforesaid explanation to section 9(1)(i). 11.Proceeding on this analogy, now we deal with assessee's agreement. There is no issue between the parties that the assessee has paid for 'systematic research' made by the overseas entity. Its only contention is that the 'systematic research' does not fall under the definition of 'technical services'. In Explanation 2 of clause (vii) (supra) of section 9(1) with effect from 01.04.1977, fee for 'technical services' means any consideration paid for 'technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and ensure timely payment by the buyers for all exports performed by the FIRST PARTY which have been negotiated by the SECOND PARTY. 5.To render all other assistance to the FIRST PARTY and its representatives while on visits to the territory and to make available the agency office for all secretarial and other assistance. 21. On consideration of the terms and conditions of the said agreement, the learned Tribunal formulated the question of whether systematic research giving rise to payment in question made by the assessee could be termed as fee for technical services or not. The question was answered in the affirmative. The learned Tribunal held that the word technical services would imply an operation involving skilled precision, which systematic research also involves. The learned Tribunal, thus, concluded that the assessee's agreements in question leading to payment to the overseas entity amounted to fees for technical services, for which the appellant was liable to deduct TDS, failure of which would entail disallowance under Section 40(a)(ia) of the IT Act. 22. The appeal was admitted by a Division Bench comprising Chitra Venkataraman and K.B.K.Vasuki, JJ. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. Having found that the payments were for marketing the products of the assessee company, for procuring of orders for the assessee company and for systematic research with regard to the demand for the products of the assessee. The Assessing Officer erred in arriving at the conclusion that payments made by the appellant assessee could not be said to have been made for the purpose of overseas commission. The Assessing Officer as also the learned Tribunal misinterpreted the Explanation 2 of Section 9(1)(vii) of the IT Act, whereunder fee for technical services means any managerial, technical or consultancy services. It is nobody's case that the service rendered by the overseas agent was either managerial or technical. As held by the Appellate Commissioner, payment for research with regard to need for products was incidental to the job of procuring orders on commission basis. Consultancy services contemplate comprehensive expert technical advisory services based on technical expertise and research, of business and marketing strategies as a whole, including adoption of cost effective measures, organizational and infrastructural requirements, business management, personnel managem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant. It was only the situs of the payer and the situs of the utilization of services which determine taxability of such services in India. 31. Section 195 of the IT Act attracts tax only on chargeable income, if any, paid to a non-resident. Where there is no liability, the question of tax deduction does not arise. Where no part of the income is chargeable in India, even clearance under Section 195(2) or 195(3) of the IT Act is not necessary. The decision of the Karnataka High Court in Commissioner of Income Tax (International Taxation) v. Samsung Electronics Co. Ltd., reported in (2010) 320 ITR 209 (Kar), has been overruled by the Supreme Court in GE India Technology Centre P. Ltd. v. CIT, reported in (2010) 327 ITR 456 (SC). The Supreme Court held as under: This reasoning flows from the words 'sum chargeable under the provisions of the Act' in Section 195(1). The fact that the Revenue had not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the mome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed in India. 35. In Commissioner of Income Tax, Delhi-IV, New Delhi v. EON Technology (P) Ltd., (2011) 15 Taxmann.com 391 (Delhi), the High Court of Delhi held that payment of sales commission to non-resident who operates outside the country would not attract tax, if payment was remitted abroad directly. Merely because an entry had been made in the books of accounts of the appellant/assessee, that would not mean that the non-resident agent had received payment in India and, therefore, disallowance under Section 40(a)(i) of the IT Act was found uncalled for. 36. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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