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TMI Blog2020 (10) TMI 941X X X X Extracts X X X X X X X X Extracts X X X X ..... ent agent are confined to those territories outside India - commission paid is 'fees payable in respect of services for the purposes of making or earning any income from any source outside India' is the compelling argument, which we find favour with. The income derived by the appellant is un-disputedly from the three territories mentioned in the agreement, which are admittedly outside India. There is no utilization of the services rendered by the non-resident agent within India. The projects executed by the resident company even within India was for sale to the foreign buyer and it cannot be said that merely for reason of the execution in India the service was utilized in India. The software developed in India was also for export; the appellant being a 100% EOU. The services rendered by the non-resident agent was for facilitating sale in the three outside territories. The services rendered for effecting exports by the appellant company to foreign buyers, makes the foreign countries the source of income. The execution of the project within India would not attract income tax since the income is derived from the sale of the product outside the territories of India and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of the Act. The dis-allowance under Section 40(a)(i) was on the ground that the commission paid was fees for technical services on which tax is deductible at source, which the assessee failed to deduct. The amount shown as commission paid to the non-resident was added to the total income of the Company. 3. On appeal, the first appellate authority concurred with the Assessing Officer with respect to the dis-allowance; but, however, allowed deduction under Section 10A. The Department approached the Tribunal and the assessee filed a cross objection. The Department's appeal was allowed and the Assessing Officer was directed to consider the deduction under Section 10A. The cross objection of the assessee was rejected. The assessee is now not concerned with the remand made, since the Assessing Officer has allowed the deduction. The assessee is aggrieved with the order of the Tribunal affirming the dis- allowance under Section 40(a)(i). 4. Sri.Raja Kannan, learned Counsel for the appellant, refers to Section 9(1)(vii) and Section 195 of the Act. It is the specific case of the appellant-assessee that the recipient of the commission is a non-resident, not taxable under the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire liability to income tax in India. To further the contention of the payment not being a part of the technical services as per the DTAA, a Division Bench judgment of this Court in US Technology Resources (Pvt.) Ltd. v. CIT [(2018) 407 ITR 327 (Ker)] is relied on. To advance the case of no liability under the DTAA, the decision in C.I.T. v. P.V.A.L. Kulandagan Chettiar [(2004) 267 ITR 654 (SC)] has also been relied on. 6. Sri.P.K.Ravindranatha Menon, learned Senior Counsel appearing for the respondent, would specifically refer to the Explanation added in the year 2010, which has retrospective effect from 1976 onwards. The Explanation was specifically introduced to get over the decision in Ishikawajima. The Explanation furthers the deeming provision under Section 9 to make it applicable, whether or not the non-resident has rendered services in India. There is no ground available to the appellant to escape from its liability to deduct tax at source on the ground that the activity of the non-resident was outside India. The enduring benefit of the services rendered by the non-resident was enjoyed by the assessee's business and, hence, the commission earned by the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with Section 9(1)(vii)(b). 10. The admitted facts are as herein after stated. The non-resident, who was paid commission by the appellant herein, was a Director of the appellant company, but the payment made was not in that status. A Commission Agency Contract [Annexure-B] was entered into by the appellant and the non-resident, by which the latter was appointed as Commission Agent in the territories of European Union, North America and Middle East; all outside India. The appellant had procured orders from these outside territories by reason of the activities carried on by the non-resident commission agent. The assessee had received income in such business generated by the non-resident Commission Agent in those territories, outside India, and in terms of Annexure-B agreement, payments were made to the Commission Agent amounting to ₹ 55,51,605/-. The non- resident was a resident of Switzerland. The appellant did not deduct any tax under Section 195 from the commission paid to the non-resident on the ground that it is not taxable. 11. We have already detailed the various contentions of the appellant and the Revenue herein before. The first contention of the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hold periodic meetings with DEVICEDRIVEN (INDIA) to track project progress and status. 2.7. COMMISSION AGENT shall assist in all payment collection from the Client . The duties enumerated herein above would clearly indicate that there is an element of managerial function coupled with all encompassing consultancy services and also purely technical services too. The appellant cannot raise a contention that the services of the non-resident do not fall under the scope of 'technical services' as spoken of in Section 9(1)(vii) and defined in Explanation-2. 13. The further contention taken is as to the activities carried out by the commission agent, who is a non-resident, to be covered under the exception to clause (b) of Section 9(1)(vii). The ground, in a nutshell, is that the non-resident was appointed as an agent for marketing the goods (software) of the appellant, in three territories falling outside India. The commission payable to the non-resident, as per the contract was only with respect to such business canvassed by the non-resident from those three outside territories. When such business is carried out by the appellant on the basis of the services of the non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch year. Explanation 1 to Section 5(2) of the Act declares that an income arising abroad can not be deemed to be received in India for the purpose of that section by reason only of the fact that it is included in a balance sheet prepared in India. Section 9(1)(i) of the Act provides that all income accruing or arising whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. The Explanation to this clause provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India and in the case of a non-resident no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export . [Underlining by us for emphasis] 15. It was found that un-disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kawajima, which however was countered by the Department based on the Explanation substituted by Finance Act, 2010 with retrospective effect from 01.06.1976. The learned Senior Counsel had also specifically referred to GVK Industries Ltd. to buttress their argument, which is countered by the learned Counsel for the appellant with Jindal. By placing reliance on GVK Industries Ltd., it is urged by the Revenue that the 'source rule' as discussed therein makes it mandatory that the income of the recipient is to be charged or becomes chargeable in the country where the source of payment is located. On the other hand, the appellant relies on the decision in Jindal to argue that the Explanation as substituted by Finance Act 2010 does not take away the effect of Ishikawajima. Before we deal with the Explanation, we would just look at the facts and law declared in the decisions. 18. Ishikawajima considered a turnkey project, wherein there were a number of parties who were obliged to carry out different parts of the contract. With respect to the non-resident Ishikawajima, the contract involved offshore supply services, onshore supply services as also construction and erection. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof . 20. Jindal again was a case in which the resident entered into a contract with three companies, two of which were companies registered outside the territory of India. The question was also as to the services rendered by the foreign company (non-resident) to the Indian company. The Division Bench of the Karanataka High Court held that Ishikawajima still held the field. The contract between the foreign company and the resident Indian company was found to have three aspects, one, technical services involving overall conceptualization of the plant, the technical logistics and designs, etc., in which the foreign Company did not have any role to play. The job of the foreign company was to execute the contract as conceptualized, which was to be done only offshore and outside India. But, with respect to start up services and overall responsibility, which was envisaged as the responsibility of the foreign companies, that component was found to be taxable. 21. Ishikawajima, Jindal and also US Technology Resources, considered the question as to whether the payment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is in respect of services utilized in a business or profession carried on by such person (resident) outside India or (ii) when it is payable for the purposes of making or earning any income from any source outside India. Clause (c) deems fees for technical services by a resident, to be income arising or accruing in India only when either (i) the fees are payable in respect of services utilized in a business or profession carried on by such person in India or (ii) when the fees are payable for the purposes of making or earning any income from any source in India. 23. We extract Section 9(1)(vii): 9. Income deemed to accrue or arise in India- (1) The following income shall be deemed to accrue or arise in India-- xxx xxx xxx (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 utilised 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 payable in respect of services uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, both from the IDBI for its Rupee loan requirement and part of its foreign currency loan requirement from one international financier in the USA. On facts it was found that the non-resident company did not have a place of business in India. The Revenue did not have a case that the income had actually arisen or received by the non-resident in India. The conclusion of the High Court that the 'success fee' received by the non-resident, on financial facilities being obtained by the resident company, was not taxable under Section 9(1)(i) as the transaction or activity did not have any business connection was approved. The remaining question was as to whether the payment made by the resident to the non-resident would be taxable under Section 9(1)(vii)(b). The Explanation as it was inserted by the Finance Act, 2007 and the Finance Act, 2010 was specifically referred to. It was stated so in paragraph 22: 22. The principal provision is clause (b) of section 9(1)(vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or profes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financial facilities were utilized by the resident company in India. This makes the 'success fee' taxable under Section 5(2) read with Section 9(1)(vii)(b). 27. We find, in the present case, a clear distinction from GVK Industries Ltd. As we observed, the non-resident agent was appointed for the purpose of generating business from three territories, which are European Union, North America and Middle East. The activities of the non-resident were only in those territories from which territories he was generating business for the appellant-resident. The responsibility of the non-resident agent as per the contract was also to facilitate the marketing of the products of the resident company, a fully Export Oriented Unit. The services of the non-resident agent was in those outside territories to provide free sales support as well as expertise for projects to be executed at the customer site or at the resident's company centre in Thiruvananthapuram. Essentially there is no activity carried on by the non-resident within India. There could be a question raised insofar as the sales expertise provided by the agent, for the execution of contracts at the Thiruvananthapuram ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. If the services are utilized in India, then necessarily the mere fact that the non-resident has always been acting from abroad does not absolve him from the charging section under the IT Act is the purport of Clause (ii) of the Explanation. Again we notice GVK Industries Ltd., wherein the consultancy services offered by the non-resident was from Zurich alone. However, the finances obtained by the resident company was utilized in India for setting up a gas based power project at Andhra Pradesh. In such circumstances, without reference to whether the non-resident has rendered services in India, the fees payable by the resident to the non-resident for consultancy services would be taxable under the IT Act. 29. In this case, there is no utilization of the services rendered by the non-resident agent within India. The projects executed by the resident company even within India was for sale to the foreign buyer and it cannot be said that merely for reason of the execution in India the service was utilized in India. The software developed in India was also for export; the appellant being a 100% EOU. The services rendered by the non-resident agent was for facilitating sale in the t ..... 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