AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 81
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....mpany was engaged in the business of manufacturing and export of furniture and leather goods etc. The assessee filed its return of income on 01/10/2010 declaring total income of Rs. 1,07,47,960/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. The assessment under section 143(3) of the Act was completed on 15/03/2013 assessing total income at Rs. 2,56,15,450/- after making disallowance on sales commission amounting to Rs. 1,39,60,134/- and disallowance under section 14A of the Act amounting to Rs. 9,07,361/-. On further appeal, the Ld. CIT-(A) partly allowed the appeal of the assessee. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground No. 2 of the appeal being general in nature is dismissed as infructuous. 4. The ground No. 1 of the appeal relates to disallowance of sale commission to foreign agents amounting to Rs. 1,39,60,134/-. The facts qua the disallowance are that the assessee paid sales commission to two foreign agents who were based in the Canada and the UK respectively. The assessee did not deduct tax at sourc....
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....do not fall in any of the categories mentioned in Sec 9(1) (vii) of the Act. The section reads as under: Sec 9 (1) : (i) to (vi) xxxxxx (vii) - income by way of fees for technical services payable by- (a) xxxxxxxx (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) xxxxxxxxxxx : [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 l.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2].-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of a....
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....gy. * The meaning associated with "technical" is "involving or concerning applied and industrial science". * Services are of a "technical" nature when special skills or knowledge relate to a technical field. * These include services related to a particular art, science or applied science or vocational training dealing with applied science; dictionary meaning includes professional. * Delivery of a service via technological means does not make the service technical. * The expression "technical" has very wide amplitude and does not restrict its applicability only to engineering or scientific areas of knowledge. Consultancy Services * Services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. * Overlap with technical and managerial services possible so long as provided by a consultant. * The expression "consultancy" service involves giving of an advice or advisory service by a professional." 4.3 The assessee further contended before the Ld. CIT-(A) that the foreign agents being nonresidents, who had no operations/permanent establishment India and therefore not subjected to be a....
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....under section 40(a)(i) of the Act. 4.6 On the other hand, Ld. counsel relied on the order of the Ld. CIT-(A). The Ld. counsel also relied on the decision of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. versus DIT (288 ITR 408) and submitted that for accrual of income from Fee for Technical Services (FTS) both the conditions - the services (which is source of income), which is sought to be taxed, has been rendered in India, as well as utilized in India and both the condition have to be satisfied simultaneously. The Ld. counsel also submitted that retrospective amendment in section 9 had changed the position of taxability of income of non-residents from rendering of technical services in India. According to the Ld. counsel, amendment has been introduced by way of Finance Act, 2010, which received assent of the President of India on 8th May, 2010, whereas the present case of the assessee pertains to financial year 2009-10 and, thus, the assessee had no occasion to know/believe that tax was to be deducted irrespective of the place of rendering of services. The Ld. counsel in support, relied on the decisions of the Tribunal, Mumbai Bench in the c....
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....f the said circular reads as under: "2. The expression 'business connection' admits of no precise definition. The import and connotation of this expression has been explained by the Supreme Court in their judgment in CIT vs. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) : TC 39R.1098. The question whether a non-resident has a 'business connection' in India from or through which income, profits or gains can be said to accrue or arise to him within the meaning of s. 9 of the IT Act, 1961, has to be determined on the facts of each case. However, some illustrative instances of a non-resident having business connection in India, are given below: (a) Maintaining a branch office in India for the purchase or sale of goods or transacting other business. (b) Appointing an agent in India, for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident's goods or for other business purposes. (c) Erecting a factory in India where the raw produce purchased locally is worked into a firm suitable for export abroad. (d) Forming a local subsidiary company to sell the products of the non-resident parent company. (e) Havi....
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....s' was considered along with certain other specific situations. It had been clarified then that where the non-resident agent operates outside the country no part of his income arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore, deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position the Comptroller & Auditor General have agreed to drop the objection referred to above. 4.7.9 Further, vide circular No. 7/2009 dated 22/10/2009, the CBDT withdrawn the circular No. 23 dated 23/07/1969 and circular No. 786/2000 dated 07/02/2000. 4.8 In our opinion, it is settled position that circulars are binding on the authorities under the CBDT....
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....dment made in section 9 as well as section 163 by the Finance Act, 2003 has been explained by the CBDT in Circular No. 7 of 2003. 4.8.3 Further, Hon'ble Andhra Pradesh High Court in the case of GVK Industries Ltd. versus Income Tax Officer, (1997) 228 ITR 564 analysed various decisions of the courts and laid certain principles to decide existence of 'business connection', as under: "12. Clause (i) of sub-s. (1) of s. 9, extracted above, brings within the fold of the said expression 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. Here the contention of Mr. Dhanuka that the NRC had no business connection requires examination. 13. "The expression business connection" is also used in s. 163(1)(b) which regards every person in India, who has any business connection with the non-resident, as an agent of that non-resident. 14. The import of that expression has been explained in various judicial pronouncements. 15. In CIT vs. R. D. Aggarwal and Co. ....
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.... of s. 42(1) of the 1922 Act it must be shown by the Department that some of the operations were carried out in India in respect of which the income is sought to be assessed. In CIT vs. Hindustan Shipyard Ltd. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP), the respondent-company entered into an agreement with a Polish company for the purchase of diesel engines with accessories. The agreement provided that the Polish company would render services for the effective fulfilment of the contract of sale, which included organising of a training course in Poland for technical employees of Hindustan Shipyard at the expense of the Polish company. In the context of the question referred to this Court under s. 256(1) of the Act, the Division Bench which dealt with the case, considered the scope of the expression business connection within the meaning of ss. 9(1)(i) and 163(1)(b) of the Act and held that to conform to the requirements of that expression it is necessary that the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territory which has been described as a real and intimate connection and that there must be....
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....on within the meaning of s. 9(1) of the Act so the income accruing to the non-resident foreign company could not be assessed through its agent. That order was affirmed by the Tribunal. On a reference to the High Court of Patna, it was held that the sum of GBP 7,000 was not the income which the foreign-company had received in India or an income which had accrued to the foreign company within the meaning of s. 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the operation carried on in India. It was further held that there was no continuity between the business of the non-resident and the activity in the taxable territories in respect of the income and, therefore, there was no business connection between the foreign company and the assessee- company and the income could not be deemed to accrue or arise to the foreign company in India within the meaning of s. 9(1) as such, the said sum paid to the foreign company at London was not assessable in the hands of the assessee-company even as agent of the foreign company. 20. From the above discussion the following principles emerged: (i) whether th....
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....s 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 : Explanation 1.-............................................................................... Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) 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 charg....
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....n India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." 4.9 Thus, according to the above Explanation irrespective of the fact whether the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India, income of non-resident for the purpose of clause (vii) i.e. fee for technical services shall be deemed to accrue or arise in India. The contention of Ld. counsel that this amendment has been introduced by Finance Act, 2010, which received assent of the President on the 8^th may 2010, whereas the financial year pertained in the case of the assessee is 2009-10 which ended on 31/03/2010, therefore, the assessee had no occasion to know/believe that tax was to be deducted irrespective to the place of rendering service. The Ld. counsel in support of contention relied on the decision of the Tribunal Mumbai Bench in the case of KPMG versus ACIT (supra), where the Tribuna....
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....n India. Both the above conditions have to be satisfied simultaneously. Thus for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India. In the above judgment, the apex Court observed that (p. 444) : 'Sec. 9(1)(vii) of the Act must be read with s. 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income'. According to the apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTAA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of s. 5(2) of the Act subject to the compliance with 90 days rule.' As per the above judgment of the apex Court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally a....
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.... India on 8th May 2010. Explaining the scope of this amendment, a coordinate bench of this Tribunal, in the case of Ashapura Minichem Ltd Vs ADIT (131 TTJ 291), has explained thus: ......(this legal position) does no longer hold good in view of retrospective amendment w.e.f. 1st June, 1976 in s. 9 brought out by the Finance Act, 2010. Under the amended Explanation to s. 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 cl. (v) or cl. (vi) or cl. (vii) of s. 9(1), and shall be included in his total income, whether or not (a) the nonresident 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 taxa....
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....sessee fails to comply with such an obligation. In view of these discussions, so far as payments made before 8th May 2010 are concerned, the assessee did not have any tax withholding liabilities from foreign remittances for fees for technical services unless such services were rendered in India, and a fortiori no disallowance can be made under section 40(a)(i) for assessee's failure to deduct tax at source from such payments. 9. In the case before us, there is no material whatsoever to demonstrate and establish that the design and development services, for which impugned payments were made, were rendered in India. Therefore, the assessee did not have any liability under section 195 r.w.s. 9(1)(vii) to deduct tax at source from these payments. Once we come to the conclusion that the assessee did not have any obligation to deduct tax at source from these payments, in the light of the above discussions and as corollary thereto, no disallowance can be made in respect of these payments. As we have come to these conclusions in the light of the provisions of the domestic law, i.e. Income Tax Act, itself, there is no need to deal with the taxability of incomes embedded in these pa....
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....ates specified in the treaty. The services of selling agents for booking of orders is out of the scope of royalty and does not fall in the nature of 'royalty', hence we are not discussing here on the taxability of 'royalty' in India. Now we have to see whether the questioned services of Foreign Agents are covered in the definition of FTS. The Article 12 (4) of the India- Canada treaty defines the term Fees for Included Service as under: 12(4): For the purposes of this Article, fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. The clause (a) is not applicable in the instant case because the para 3 of the article s....
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.... benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payme....