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TMI Blog2019 (10) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... were rendered outside India. No hesitation in holding that the services rendered by Mr. Firpo which were in Italy and not in India are not taxable in India under Income Tax Act, 1961 as the same has not accrued or arisen in India and hence, no tax need be deducted u/s 195 - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... s order passed by the Assessing Officer is erroneous and hence this appeal is being preferred." 2. On appeal the ld. First appellate authority held as follows: "4. In the oral & written submissions, the ld. AR has vehemently argued that the services were rendered outside India and in relation to source outside India and therefore even if the payments qualified as "fees for technical services" u/s 9(1)(vii), it was still not taxable in India. The Ld. AR of the appellant placed reliance on the judgments of ITO(IT)TDS-3 Vs M/s Bajaj Hindusthan Ltd [ ITA No. 63/Mum/09] & ITO(IT)TDS-3 Vs M/s Bajaj Hindusthan Ltd [ ITA No. 63/Mum/09]. I however find the submissions of the ld. AR to be untenable in the context of the amendments brought in Section 9(1)(vii) by the Legislature in the Finance Act, 2010. 5. The Explanation to Section 9(2) was inserted by the Legislature which clarified that irrespective whether services are rendered in India or not, since the payment has a business connection in India; the same is taxable under the provisions of the Income-tax Act, 1961. In the facts of the present case, it is an undisputable position that the payments made to non-resident by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xports of the company to newer countries. He relied on the decision of the Hon'ble Delhi High Court in the case of Commissioner of Income-tax vs. Havells India Ltd. [2013] 352 ITR 376 (Delhi) wherein the term "new source of income" has been explained and that increase in exports does not fall within the exceptions to Section 9(1)(vii)(b) of the Act. 6. Thus, he submitted that the amount paid to Mr. Firpo consequently falls within the definition of fees for technical services. He further submitted that the payment in question is not covered by Article 15 of the DTAA between India and Italy, which is on the issue of independent personal services. He referred to the services of Mr. Firpo and the nature of services mentioned as professional services in Article 15 and submitted that the nature of services of Mr. Firpo is neither scientific, literary, artistic, educational etc., nor that of a physician, surgeon, lawyer etc. He distinguished the case laws relied upon, by the ld. Counsel for the assessee. 7. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, perusal of the papers on record, all the orders of the authorities below as well as ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the office is operational or six months from the date of this contract whichever is later. b)Second Installment - Euro 40000 (forty thousand) will be paid once all the above activities completed in full or 12 months from this contract whichever is later. c)Third installment - Euro 30000 (thirty thousand) will be paid only if the office is made profitable in the financial year 2012-13 i.e. ending 31st March 2013 or within a reasonable period thereafter if Electrosteel feels that there were genuine reasons for the delay in achieving the profitability. The above consultancy fees includes all travelling and the other out of pocket expenses in Italy which may be incurred by Mr Firpo. Confidentiality Mr Firpo formally agrees not to reveal to anybody, any information related to Electrosteel, under complete professional secret conditions. Mr Firpo also forbids himself to publish without the consent of Electrosteel any study based on works done for the company. Arbitration or Governing Law Any dispute arising out of the contract shall be settled in accordance with the Rules of Arbitration of the International Chamber of Commerce. The laws of U.K. will apply. 7th Februar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia for the reason that. The entire services were rendered outside India. Section 9(1)(vii)(b) of the Act reads as follows: "For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the agents and not the services alleged rendered by the agents. The event triggering crystallization of liability of the assessee, under the commission agency agreement, is the event of securing orders and not the rendition of alleged technical services. In a situation in which the agent does not render any of the services but secures the business anyway, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order. In a reverse situation, in which an agent renders all the alleged technical services but does not secure any order for the principal i.e. the assessee, the agent 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 assesse 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot get triggered. Therefore, irrespective of whether any technical services are rendered during the course of carrying on such agency commission business on behalf of Indian principal, the consideration for securing business cannot be taxed under section 9(1 )(vii) at all. This profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out. 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 ail 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in, even simplest of day to day gadgets that we use are fairly technical and complex. Undoubtedly when a technical 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 distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, would not attract or partake the character of "fees for technical services" 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 nonresidents, 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] 367ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the nonresident 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sub-clause, 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) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1 Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 case, cited supra, in view of insertion of Explanation 4 to Section 9(1 )(i) of the Act with corresponding introduction of Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s below. We will examine as to whether the services so provided by the assessee fall within 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 1, 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, sorting, delivery, warehousing and pick up services (International services) outside India. In the present appeal we are concerned with the "International services" provided by the assessee to Men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services", being 'consultancy services', which has been pressed into service by the learned CIT(A) to fortify his view that the amount received by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Vs. JCIT. Let us examine the facts of that case. The assessee there claimed deduction u/s 80-0 in respect of its foreign exchange earnings for rendering technical / professional services to a US Multi International company. During the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical 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 80-0. 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 80-0. 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 Vs. Addl.DIT (International Taxation) [(2011) 51 DTR 148] (to which one of us, namely, the Id. 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 80-0 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 Id. CIT(A) in reaching the conclusion that the assessee rendered 'technical services' also observed that its 'business structure is time bound service couple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actured with the 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight 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 shall supply the principal, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other 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)...(ii)...(iii)....(iv)...(v)...(vi) (vii) Income by way of fees for technical services payable by- fa) 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) a person who is a non-resident, where the fees are pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 Pvt Ltd Vs CIT [(2010) 327 ITR 456 (SC)], payer is bound to withhold tax from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 I95(i)- 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 moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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