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2019 (1) TMI 876
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....utset that the Revenue's two appeals ITA No.1615 and 1616/Kol/2017 raise identical substantive grounds. The Revenue's first substantive ground in its both appeals plead that CIT(A) has erred in law as well as on facts in admitting additional evidence in violation of Rule 46A of the Income Tax Rules, 1962. We do not see any additional evidence admitted in lower appellate proceedings of all much less in violation of said statutory provision. Its first substantive grievance raised in instant two appeals stands decline therefore. 4. Next comes Revenue's second identical substantive grievance in both assessment years seeking to revive the Assessing Officer's action disallowing assessee's export commission payments of Rs.63,56,458/- and Rs.19,88,798/- on account of non-deduction of TDS thereby invoking sec. 40A(a)(i) of the Act. We treat the former assessment year 2011-12 as the "lead" assessment year containing the CIT(A)'s following detailed discussion on the issue. "5. I have considered the order u/s 143(3) of the Act, the submission of the AR on this point along with the case laws relied upon by him and the extant law in this regard. It is observed from the grounds of ....
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....out in India, the appellant did not deduct tax at source (TOS) on the commission payments whereas TOS has been made on payments of testing and global service agreement. In fact, it is mentioned in the impugned order that the appellant is making payment to foreign agents and thereby receiving their services enabling the sales of products and articles of the appellant thereby it earns its income in India and therefore the provisions of Section 9(1) are applicable in this case. 5.2 It is also gathered from the impugned order that reliance has been made on the following court judgements - * Transmission Corporation of AP Ltd Vs CIT 239ITR 587 (SC) * Van Oord ACZ India (P) Ltd Vs CIT 189 TAXMANN 232 (Delhi) * CIT Vs Havells India Ltd 352 ITR 370 (Del) In these judicial precedents, it has been held that the payer is duty-bound to deduct TDS as per the provisions of Section 195 of the Act unless the permission of deducting at a lower rate or non-deduction of tax is granted by the Assessing Officer. The payer is not expected to step into the shoes of the Assessing Officer for examining whether the receipts in the hands of the recipient is income....
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....owing criteria are present- * Non-resident Agent operates its business activity outside India * Commission paid in relation to services provided outside India * Commission remitted to it directly outside India * Non-resident Agent does not have any PE or permanent business place in India * No part of its income arises in India * Non-resident's Income is not chargeable to tax in India From the submissions of the appellant it is gathered as below - • Commission agents have rendered services and have no establishment In India • Appellant is 100% export oriented unit and claimed exemptions u/s 10B • Payments to foreign commission agents made in foreign currency • As foreign agents render services outside India and have no establishment In India, TDS provisions Inapplicable Thus, it can be safely inferred that as the foreign commission agents reside outside India and do not render any technical services*, the non-resident's income will not come under the provisions of Section 9(1)(vii)(b) of the Act and the appellant's payment of commission, without TDS....
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....ing and selling electrical conductors, insulated electrical wire and cables, high tension insulators and electrical energy. It had paid Mohd Abdul Sadek, Mady Italy, Braseco Ghana Ltd. sums of Rs.3,10,616/-, Rs.21,15,899/- and Rs.38,73,946/- as well as to other small parties to the tune of Rs.55,997/-respectively totalling to Rs.63,56,458/ in the relevant year in the nature of commission for securing export orders. There is no dispute that the said payees have neither any permanent establishments in India nor had they rendered their commission services in India which could be held to the managerial, professional or technical in nature. The question as to whether the said commission payments attract TDS deduction provision or not stands adequately answered by this tribunal co-ordinate bench's decision in ITA No.249/Ahd/2015 and 48/Rjt/2015 in Welspun Corporation Ltd. vs. DCIT decided on 03.01.2017as follows:- 31. The scheme of taxability in India, so far as the non residents, are concerned, is like this. Section 5(2), which deals with the taxability of income in the hands of a non-resident, provides that "the total income of any previous year of a person who is a non-resident inc....
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....ur purposes 32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore Explanation 1 to Section 9(1)(i) comes into play. 33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(1)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case of SKF Boilers & Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)], we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra [(2006) 284 ITR 564] which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) p....
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....f the matter, views expressed by the Hon'ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon'ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these rulings 34. Coming to Section 9(1)(vii)(b), this deeming fiction- which is foundational basis for the action of the Assessing Officer, inter alia, provides that the income by way of technical services payable by a person resident in India, except in certain situationswhich are not attracted in the present case anyway, are deemed to be income accruing or arising in India. Explanation 2 to Section 9(1)(vii)defines 'fees for technical service....
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....nnot 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 are held to be in the nature of technical services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor the quantification of these amounts have any relation with the quantum of these technical services. The key to taxability of an amount under section 9(1)(vii) is that it should constitute "consideration" for rendition of technical services. The case of the revenue fails on this short test, as in the present case the amounts paid by the assessee are "consideration" for orders secured by the assessee irrespective of how and whether or not the agents have performed the so called technical services. 36. Let us sum up our discussions on this part of the scheme of Section 9, so far as tax implications on commission agency business carried out by non-residents for Indian principals is concerned. It does not need much of a cerebral exercise to find out whether the income from the business carried on by a non-r....
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....be treated as 'consideration' for technical services, may be rendered academic in effect. Learned CIT(A) has very well summarized the judicial precedents in support of this line of reasoning, and, in an erudite and extended discussion, dealt with each limb of the definition of technical services. These findings are reproduced by us earlier in this order. While, for the sake of brevity, we need to repeat each of these reasons analysed by the learned CIT(A), suffice to say that we approve his well-reasoned findings and line of reasoning, and we will also briefly touch upon this aspect of the matter. Before we do so, we may take note of some of the clauses in a typical commission agreement entered into by the assessee with its commission agents. The key provisions in this agreement, a copy of which is placed before us at pages 103 to 109 of the paperbook, are as follows: Article 5 - AGENT'S OBLIGATION The AGENT shall carry out ail the duties normally rendered by an AGENT including but not limited to the following: 5.1 To act exclusively on behalf of the PRINCIPAL and not source, procure or market products of similar type manufactured by competitive compan....
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....give the AGENT full support for promoting and creating market for the products of the PRINCIPAL in the TERRITORY. 7.2 To inform the AGENT on receipt of an inquiry from the TERRITORY requiring direct supply. 7.3 The AGENT shall be entitled to commission as agreed upon in the contract. 7.4 To take into consideration the recommendations made by the AGENT while making the offer. 7.5 To provide all informative data, catalogues and technical material (all in the English Language) regarding the PRINCIPAL'S products and activities and keep the AGENT informed about all relevant charges. 7.6 To offer competitive prices as far as possible to enable the sale of the products as the agent is only entitled for commissions and not fixed salary on his work. 7.7 The PRINCIPAL nominates Mr. Ranjit Lala as the contact person with the AGENT for all correspondences and communications. Article 9 - TERMINATION. 9.1 This Agreement shall remain valid for a period of One year from the date of signing. The said Agreement can also be terminated by either party anytime giving notice to the other party of at least 90 days in advance by fax and fo....
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....e sales commission shall be payable by WELSPUN to GLOBAL SYNERGY INTERNATIONAL LTD., as interim payments on prorate basis after realization of the payments received by the PRINCIPAL within a reasonable time but not exceeding 30 days from receipt of payment by WELSPUN. 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 business generated for the principal, the agent gets nothing. Quite clearly, what is done by the agent is not a rendition of service but pure entrepreneurial activity. The work actually undertaken by the agent is the work of acting as agent and so procuring business for the assessee but as the contemporary business models require the work of agent cannot simply and only be to obtain the orders for....
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....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 distinction between a business activity, requiring understanding of related technology, and rendition of technical services simplictor. In any case, what has been described as a technical service is the service being rendered to the buyer but the payment received by the commission agents is not for this service per se but for generating business orders for the assessee. Generati....
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....on 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 non-residents, 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] 367 ITR 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 certificate is essential. 6. Whether this contention is correct, is the issue to be decided. 7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:-- (i) Section 40(a)(i) of the Act :-- "Section 40 - Amounts not deductible: Notwi....
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.... 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 non- resident 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 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no ....
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....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, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, na....
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....ation, 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 Explanation 2 to Section 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962. 1....
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....gerial, 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 7, 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 Menlo outside India. These services comprise of transport, procurement, customs clearance, sorting, warehousing and pic....
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....esponsibility 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 assessee is covered within section 9(1)(vii). The word "consultancy" means giving some sort of consultation de hors ....
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....ly 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 "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-O in respect of its foreign exchange earnings for rendering technical / professional services to a US Multi International company. During the course of assessment proceedings, the A.O. required the assessee to furnish the nature of services rendered and also the calculation of deduction. The assessee did it. On....
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.... 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-O. 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 ld. 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-Oas 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 ld. CIT(A) in reaching the conclusion that the assessee rendered 'technical services' also observed that its 'business structure is time bound service coupled with continuous real time transmission of information by using and also making available advanced technology in the form of sophisticated equipment and software....
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....cts 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, cannot 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 with materially similar question dealing with taxability of income in the hands of non resident commission agents, representing Indian prin....
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....ng 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, at least once every quarter, with reports on economic devel....
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....ed in another 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-- (a) 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 perso....
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....d sales promotion services were considered 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 45....
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.... observed from the impugned order that it was made by the assessee company towards noncompliance of its business obligations with the parties and as such, the sum is thus a penal amount and levied by the parties after negotiation on account of negligence or non-compliance of business promises. It is further gathered therefrom that the appellant is engaged in the business of manufacturing of electric conductors, insulator, electric wires and cables and in the course of aforesaid transactions, the assessee has incurred damages on account of non-compliance of business promises or non-fulfllment of business obligations. Accordingly, the reason for the disallowance is payments which are penal in nature i.e. incurred for penalty are not allowable u/s.37*(1) of the Act. Thus it can be inferred that the payments (for liquidated damages) for breach of contract have been concluded as payments which are penal in nature. 5.7a. From the submissions of the appellant filed at the appellate stage, it is observed that these payments are compensatory in nature and accordingly allowable. This is also observed from the court decision is relied upon by the appellant and mentioned in its submis....
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....support of Revenue's grievance that assessee's liquidated damages are in the nature of penal liability not allowable as expenditure incurred wholly and exclusively for the purpose of its business. She fails to dispute the clinching fact the impugned liquidated damages are in the nature of contractual liability only than arising from violation of any penal provision. We hold in these peculiar facts and circumstances that the assessee had made the impugned provision as per its contractual liability on account of non compliance / non-fulfilment of its business obligations to only its customer parties. We therefore find no merit in Revenue's instant last substantive ground as well both of its appeals ITA No.1615-1616/Kol/2017 fail therefore. 10. We are now left with assessee's cross objection No.87/Kol/2017. Its former substantive ground is that both the lower authorities have erred in making Long Term Capital Gains addition of Rs.19,81,550/- in respect of sale of its land. The CIT(A)'s discussion on the issue reads as under:- "5.8. With regard to the ground at (e)(i) and (e)(ii) relating to the addition with regard to the capital gain on sale of land in the impugned order ....