TaxTMI 
TaxTMI 
2013 (11) TMI 966
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....ted material facts. The assessee before us is a manufacturer and exporter of leather goods. On 14th August 2008, the assessee filed his return of income, declaring taxable income of Rs. 5,81,56,220 which was later taken up for the scrutiny assessment proceedings. During the course of this scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has made remittances aggregating to Rs. 52,07,883 to a Germany based company, by the name of TUV Product Und Umwelt GmbH (TUV GmbH, in short), in respect of leather testing charges, but did not withhold the applicable taxes from these remittances. The Assessing Officer was of the view that since the assessee has made the remittances without withholding requisite tax deductions, the payments so made are not allowable as deductions in the hands of the assessee. It was in this backdrop that a show cause notice was issued requiring the assessee to show cause as to why these payments not be disallowed under section 40(a)(i) of the Act. 4. It was contended by the assessee that unless TUV GmbH is liable to be taxed in India, in respect of the income embedded in the remittances made to them, the assessee did not have any o....
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....that for accrual of FTS, there is no requirement of residence, place of business or business connection in India. It was observed that if any payment is made by any person resident in India to a non resident person by way of fees for technical services, income is deemed to accrue or arise in India. It was because of this deeming fiction, according to the Assessing Officer, that the income is taxable in India. It was also observed that the double taxation avoidance agreement between India and Germany (Indo German tax treaty, in short) does not come to the rescue of the assessee since this treaty itself provides that the income on account of fees for technical services may be taxed in the source state as well. The Assessing Officer thus concluded that, "on the facts and in the circumstances of the case as discussed above, it is crystal clear that testing charge is payment on account of technical cum consultancy services only and is deemed to accrue or arise in India..and, therefore, leather testing charges paid ....of Rs. 52,07,833, without deduction of tax at source as required under section 195, is disallowed under section 40(a)(i) of the Act and added to the income of the assessee....
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....ed that, " ..in leather testing, for determination of quality, contents in leather, and doing the necessary testing and doing the necessary checking whether the material has any toxic chemicals or not, before issuing the requisite certificate if its suitability to be used in manufacturing of shoes, an expertise in leather technology is required in which knowledge and skill of a technical expert is used, and, therefore, the leather testing is apparently in the nature of 'technical services'". He then referred to the provisions of Article 12 of Indo German tax treaty, analyzed the same and came to the conclusion that the testing charges , being consideration for technical services of testing leather, were clearly in the nature of technical services within the scope of Article 12(4) of the said tax treaty. Learned CIT(A) also rejected the assessee's plea to the effect that he cannot be expected to discharge the onus of tax deduction when law is amended with retrospective effect , by stating that the amendment was only clarificatory in nature and that, in any event, it was open to the assessee to move application under section 195(2) in case he had any doubts on the issue o....
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....to be taxed in the source state as well, is free from doubt. 7. In our considered view, it is necessary to appreciate the fundamental position with regard to the treaties in the sense that treaties do not, and cannot, provide for taxation of any income; they limit the taxing authority of the contracting states. The tax treaties are primarily instrument allocating between such contracting states, with or without conditions, rights to tax income which have allegiance in more than one tax jurisdiction. A tax treaty does, therefore, only enable a contracting state to levy tax. Once it does so, the domestic law of the tax jurisdiction which has been granted the right to tax comes into play and it comes into play subject to such restrictions as may have been placed thereon, A tax treaty cannot force a contracting state to levy a tax. The expression 'shall only be taxed' in the context of the treaties is used only in the sense of restricting the other state from levying taxes on such income, as in Article 8 for example. The use of expression 'shall' in such situations is not to levy any taxes, since, as we have noted earlier, treaties cannot impose any taxes, but it doe....
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.... as the case may be, shall apply. (6) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a Land or a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. (7) Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other Person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such ca....
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....erved as follows: 9. The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment w.e.f. 1st June 1976 in section 9 brought out by the Finance Act, 2010. Under the amended Explanation to Section 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9(1), and shall be included in his total income, whether or not (a) the non-resident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India. 10. The concept of territorial nexus, for the purpose of determining the ....
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....territoriality of the tax laws. As regards the subsequent special bench decision in the case of ADIT v. Clifford Chance (154 TTJ 537), learned counsel fairly accepts that the special bench decision covers only with the scope of Section 9(1)(i) and the other segments of Section 9(1) have not been dealt with the said decision. The Special Bench has specifically observed that they are concerned with the scope of Section 9(1)(i) which has remained unaffected by the retrospective amendment made by Finance Act 2010. The question that we are, therefore, required to deal with is whether or not the Ashapura Minichem decision holds good law in the light of Hon'ble Supreme Court's decision in the case of GVK Industries (supra). 14. As far as Hon'ble Supreme Court's judgment in the case of GVK Industries is concerned, it does not, by any stretch of logic, hold against the constitutional validity of Section 9(1)(vii). The relevant observations made against the constitutional validity of laws having extra territorial implications are as follows: (2) Does the Parliament have the powers to legislate 'for' any territory other than the territory of India or any pa....
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.... tax jurisdiction". This source rule taxability has not been struck down by the GVK decision. All it says that there has to be reasonable nexus and impact. It is not, and cannot be, anybody's case that there is no nexus between income in the hands of a person providing technical services to India and India the tax jurisdiction. We, therefore, reject learned counsel's reliance on GVK decision. 17. Learned counsel then contends that, in any event, the provisions of Section 9 (1)(vii) will not come into play in this case because the entire testing process is automated. It is submitted that the provisions of Section 9(1)(vii) can come into play only in respect of such a technical service which involves human skills and interplay. Our attention is invited to a decision of the coordinate bench in the case of Siemens Ltd. v. CIT ( ITA No 4356/Mum/2010; order dated 12th February 2013) in which it is held that " if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services", and it is contended that the leather testing services are rendered with the help of machines and, therefore, the same are not covered as b....
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....s meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general". Just as a man is known by the company he keeps ,a word is also to be interpreted with reference to be accompanying words. Words derive colour from the surrounding words. Broom's Legal Maxims (10th Edn.) observes that "It is a rule laid down by Lord Bacon, that copulation verborum indicate cceptationem in eodem sensu i.e. the coupling of words together shows that they are to be understood in the same sense. It is, therefore, clear on principle that as long as words are used together in a statutory provision, they take colour from each other and restrict its meaning to the genus of these words. In this way, the meaning of words is restricted because of other words in the same group of words, and the meaning is so restricted to the species or genus of those other words. Genus of these words should be clearly discernible from the lowest common factor in those words. The lowest common factor in 'managerial, technical and consultancy services' seems to be....
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....lained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:- Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general. This would mean that the word technical would take colour from the words managerial and consultancy, between which it is sandwiched. The word managerial has been defined in the Shorter Oxford English Dictionary, Fifth Edition as:- of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc. The word manager has been defined, inter alia, as:- a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization etc; a person controlling the activities of a person or team in sports, entertainment, etc. It is, therefore, clear that ....
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....ervice without human interface is essentially a question of fact and each case will have to be examined on its own facts. However, as long as there is no human intervention in a technical service, in the light of law so laid down, it cannot be treated as a technical service under Section 9(1)(vii). 20. The principle of law, as clearly discernable from the observations made by Hon'ble Delhi High Court in Bharati Cellular's case (supra), is that "the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element." In other words, when services have no human element involved, such services cannot be treated as 'technical services' for the purposes of Section 9(1)(vii). Let us also not forget that these observations were made in the context of inter connect and port access facility which is facility to use the gateway and the network of other cellular operator. This is a completely automated process with no human involvement at all, and yet , when the matter reached Hon'ble Supreme Court, Their Lordships, in the judgment reported as CIT v. Bharati Cellular Ltd. (330 ITR 239), did remit the matter b....
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....CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian Companies and Multinational Corporations, we are of the view that the cases herein are required to be remitted to the Assessing Officer (TDS). Accordingly, we are directing the Assessing Officer (TDS) in each of these cases to examine a technical expert from the side of the Department and to decide the matter within a period of four months. Such expert(s) will be examined (including cross-examined) within a period of four weeks from the date of receipt of the order of this Court. Liberty is also given to Respondent No.1 to examine its expert and to adduce any other evidence 21. In Siemens case (supra), however, the coordinate bench went much beyond what was held by the Hon'ble Courts above. The coordinate bench has concluded that, "Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that t....
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.... not be taxable in India. 24. In order to deal with this plea, let us take a fresh look at Section 9 (1)(vii) first: Section 9 (1) (vii) The following income shall be deemed to accrue or arise in India (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 utilised 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: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1st day of Apr....
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....ing income from any source outside India. A business outside India and a source outside India are used together in contrast, and can be viewed as reflecting relatively active and passive activities. For example, if technical service is used in a business activity outside India, it could be covered by the first category, while technical service used in an asset which gave on lease could be in the second category. The question, however, is whether the customers being outside India could be viewed as source of income. In our considered view, the source of income, whether customers are inside India or outside India, continues to be business in India. A customer is an important part of the business but no matter how important a segment of business is, such a part of the business cannot be the business itself. The assessee has all along claimed that the leather testing services were required under instructions from importers and so as to enable its products to enter the German markets. All it indicates is that the services were required because of the foreign importers, but, as the mandate of the law, is that aspect itself is not decisive and sufficient for the purpose of exclusion from ....
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....itself and since no part of the same remaining outstanding at the year end, the disallowance under section 40(a)(i) cannot be made in the light of Special Bench decision in the case of Merlyin Shipping & Transport v. ACIT (136 ITD SB 23) which is said to have been approved by Hon'ble jurisdictional High Court in the case of CIT v. Vector Shipping Services (ITA No 122 of 2013; judgment dated 9th July 2013). 30. We are unable to accept this plea. There is no dispute that the Special Bench decision is in the context of Section 40(a)(ia) which is of recent origin and the majority view therein heavily relied upon the wordings originally proposed in the enactment of Section 40(a)(ia) which were in sharp contrast with the wordings actually used in the enactment of Section 40(a)(ia), as also certain other issues which donot touch upon the scope Section 40(a)(i). Section 40(a)(i) debars the deduction of "any interest , royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII- B" In contrast with these words, Section 40(a)(ia) used the expression "payable to a resident". O....
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....A No. 2234 and 2244/Ahd/2008; order dated 2008), it is held that law cannot cast the burden of performing the impossible task of performing tax withholding obligations with retrospective effect, and, accordingly, the disallowance under section 40(a)(i) cannot be made in a situation in which taxability is confirmed only as a result of retrospective amendment of law. Learned counsel has also cited several other decisions in support of the proposition that in the case of retrospective amendment, the assessee cannot be punished for not complying with the law as it did not exist at the material point of time. 32. Even as we donot think that the provisions of Section 40(a)(i) are penal provisions in nature, particularly as the related deduction is allowed even in a subsequent period when tax withholding obligation is discharged, and even as we are alive to the fact that we are not dealing with consequences of non tax deduction of tax at source under section 201, as was the position in the case of Sterling Abrasives Ltd (supra), once there is a coordinate bench decision on this issue in favour of the assessee as in the case of Channel Guide (supra), and such a decision is not a manifes....