2015 (2) TMI 1420 - AT - Income Tax

Decision: Export commissions not fees for technical services under s.9(1)(vii) so no TDS under s.195; SIPCOT development charge expensed annually

ITAT CHENNAI - AT dismissed the Revenue's appeal. The tribunal upheld the CIT(A)'s finding that export commission payments to overseas agents did not ... TDS u/s 195 - assessee has not deducted TDS in making the impugned export commission payments to its overseas agents - AO treats the same as fee for technical services u/s 9(1)(vii) - HELD THAT:- There is no evidence forthcoming in support of this plea so far as element of technical services rendered by the export agents is concerned. We find that the hon'ble jurisdictional high court in CIT vs Faizan Shoes Pvt. Ltd. [2014 (8) TMI 170 - MADRAS HIGH COURT] has held that such export commission payments are not in the nature of fee for technical services. Revenue fails to point out any distinction on facts. Therefore, we uphold the CIT(A)’s findings. The Revenue’s ground is rejected. Disallowance of development expenses on SIPCOT’s leased land - assessee had occupied SIPCOT’s land on lease for 99 years. It had paid development charges thereupon alongwith other expenses - HELD THAT:- Factual backdrop of the issue already stands narrated. SIPCOT lessor has received a lumpsum development charges of Rs. 1,96,23,800/-. Its 5% comes to the impugned sum. The lease period in question is 99 years. Clause 14(ii) of the lease agreement reproduced hereinabove provides for retention of development charges @ 5% every year. The assessee has booked this sum annually as an expenditure pertaining to the impugned assessment year. AO treats it as a case of amortization. We agree with the CIT(A) that this yearly retention money reduces development charges paid hereinabove. The Revenue fails to point out any illegality or irregularity in the lower appellate order. In these circumstances, we agree with the CIT(A)’s findings. Revenue’s appeal is dismissed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether payments made to overseas export agents as commission, without deduction of tax at source, are taxable in India as 'fee for technical services' (or otherwise taxable) so as to attract section 40(a)(i) disallowance for failure to deduct TDS. 2. Whether lump-sum development charges paid under a 99-year lease, where the lease provides for annual retention/forfeiture of 5% of the development charges (with specified refund mechanics), are revenue in nature and allowable as yearly/deferred expenditure, or are capital in nature and wholly disallowable (or to be amortised differently) for the assessment year in question. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of overseas export commission payments and TDS liability (section 40(a)(i) / income taxable in India) Legal framework: Deduction of tax at source under section 40(a)(i) follows where payments to non-residents are chargeable to tax in India; characterization of payments as 'fee for technical services' (FTS) under the domestic nexus provisions (section 9(1)(vii) and statutory explanations) determines whether such payments are taxable in India irrespective of place of service. Precedent treatment: The Tribunal relied on the jurisdictional High Court decision holding that export commission payments to overseas agents are not in the nature of FTS. The Assessing Officer, by contrast, treated the payments as FTS, invoking retrospective amendment/explanation to the charging provision and noting withdrawal of an earlier Board circular that had suggested otherwise. Interpretation and reasoning: The Court observed absence of evidence that the overseas agents rendered technical services in India or that the payments had the requisite element of technical services. The Assessing Officer's contrary view - that export commission represents fee for technical services and is taxable by virtue of the retrospective explanation - was not supported on facts. The Tribunal found no factual distinction from the High Court authority that held export commissions are not FTS. The withdrawal of the Board circular and retrospective statutory language did not, on the facts, convert the nature of the payments into taxable FTS when no technical service element was shown. Ratio vs. Obiter: Ratio - Where payments to overseas export agents are commission for commercial agency services and there is no evidence of technical services rendered in India (or of the payee having business connection/place of business in India providing technical services), such payments are not chargeable as FTS and do not attract TDS under section 40(a)(i). The Tribunal applied existing High Court precedent to similar facts. No obiter treatment affecting other legal questions was relied upon. Conclusions: The disallowance under section 40(a)(i) for failure to deduct TDS on export commission payments is rejected; such payments are not taxable in India as fee for technical services on the facts before the Court, and the CIT(A)'s deletion of the disallowance is upheld. Issue 2: Characterisation and allowability of lump-sum development charges paid under lease (capital v. revenue; amortisation/annual depletion) Legal framework: Expenditure is deductible if revenue in nature and pertains to the year; capital expenditure or expenditure conferring enduring benefit/capital asset treatment is not allowable as revenue. Lease agreements and their terms (including refund/forfeiture clauses) are dispositive in determining whether a lump-sum payment constitutes capital outlay or a payment that depletes/gets consumed over the lease term and hence may be expensed or amortised over relevant periods. Precedent treatment: The Assessing Officer classified the lump-sum development charges as capital expenditure (enduring benefit/transfer in nature) and disallowed the annual claim as improper amortisation. The lower appellate authority accepted the assessee's contention based on the contractual refund/forfeiture mechanism, treating the yearly 5% retention as depletion of the development charge. The Tribunal agreed with the CIT(A).'s treatment. Interpretation and reasoning: The critical contractual clause provides that the development charges, although paid in lump sum at lease commencement, shall be refunded subject to forfeiture/deduction of 5% per year (with minimum deduction) upon expiry or surrender. The Tribunal interpreted the clause to mean that the development charge effectively reduces by 5% each year - i.e., the lessor retains (forfeits) 5% per year and the balance is refundable under prescribed conditions. This contractual structure indicates that the payment does not vest as an irrevocable capital outlay creating an indefeasible capital asset; rather, it is a payment subject to yearly depletion/forfeiture, permitting recognition of the annual 5% as expenditure for the year. The Assessing Officer's general classification as capital, without demonstrating that the payment conferred an enduring benefit not consumed or depleted under the contract, was not sustained. Ratio vs. Obiter: Ratio - Where a lease-based lump-sum development charge is contractually subject to annual forfeiture/retention (e.g., 5% per year) and refund mechanics demonstrate depletion of the amount over time, the annual retention/forfeiture may be treated as the yearly expenditure/charge for revenue account purposes rather than as an inexorably capitalized sum. Obiter - The decision does not lay down a universal rule for all lump-sum development charges; treatment depends on specific contractual terms and factual matrix. Conclusions: The disallowance of the claimed amount relating to development charges is rejected. The Tribunal upholds the CIT(A)'s finding that the yearly 5% retention reduces the lump-sum development charges and that the assessee's claim for the impugned assessment year is acceptable in light of the lease clause; the Revenue failed to demonstrate illegality or irregularity in the lower appellate conclusion. Cross-references Issue 1 and Issue 2 are independent: the first concerns characterization of payments for income-tax/TDS purposes (taxability nexus and nature of services), while the second concerns characterization of lease payments under contract terms for deduction purposes (capital v. revenue). The Tribunal applied factual analysis guided by contractual terms and binding precedent in each.