AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 133
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....d to many countries in the world. For the financial year 2013-14 the case of appellant was selected for 15CA verification by the DIT Systems. Vide notice dated 7.8.2015 under section 133(6) details of various transactions were asked by the Assessing officer. The said details were provided by the appellant's letter dated 10.09.2015. Out of the said details submitted vide letter dated 18.2.2016, the Assessing Officer asked the details of the amount remitted to Mr. Alfio Firpo ("Mr. Alfio") for a remittance of 15,000 Euros (Rs. 10,65,000/-) as no TDS was deducted on the same. The appellant vide letter dated 23.02.2016 made a detailed submission for non-deduction of tax at source on remittance made to Mr. Alfio by citing relevant provisions of the DTAA and judicial precedents. Subsequently, vide letter dated 29.02.2016, the appellant submitted the professional qualification certificate of Mr. Alfio. Mr. Alfio is an independent professional who was appointed by the appellant vide agreement dated 7.2.2012 for various responsibilities including setting up an office, managing stock inventory and other allied services for the Appellants product in Italy and submitted t....
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....he appellant-company for his services indeed had business connection in India. The Id. AR's proposition that the services may have been rendered outside India is no longer of any relevance. The judgments relied upon by the ld. AR of the appellant was rendered in the context of Section 9(1)(vii) which stood prior to the amendment brought in by the Finance Act, 2010 and therefore these judgments are distinguishable." 3. Aggrieved, the assessee is in appeal before us. 4. The ld. Counsel for the assessee submitted that, the assessee was setting up a new business abroad and it was a case, where the assessee was sought to create a new source of income outside India. Hence he submitted that the payment in question fell within the "exception" to Section 9(1)(vii)(b) of the Act and hence not taxable under the domestic law and hence no deduction of tax was made u/s 195 of the Act. Thus, he submits that the order passed u/s 201(1)/(1A) is bad in law. He filed a paper book, wherein Consultancy Contract between the assessee and Mr. Firpo and pointed out that the entire activities of Mr. Firpo were outside the country and under those circumstances no income is deemed to accrue or arise....
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....ll as case law cited, we hold as follows. 8. The duties and responsibilities of Mr. Firpo for which the payment is made are brought out the consultancy contract which is extracted for ready reference: CONSULTANCY CONTRACT Mr Alfio Firpo (herein referred to as 'Mr Firpo') With residence at Capotera, Via del Ginepro No. 3B (Province, Sardinia, Italy) Identity Card No AK 0191378 AND M/s Electrosteel Castings Limited, India (herein referred to as 'Electrosteel') 19, Camac Street Kolkata- 700017, India The following has been agreed between the two parties: Responsibilities of Mr Firpo Mr Firpo has been appointed as 'Executive consultant1 to set up a new office and stocking area in Italy of Electrosteel or its wholly owned subsidiaries. Additional responsibilities in this respect may be assigned to him by Electrosteel from time to time. The immediate works of Mr Firpo in this connection are the following: a) To assist in all the legal formalities required for opening of the new office. b) To search for Office Space in Italy preferably in the city of Milan. ....
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....ks done for the company. Arbitration or Governing Law Any dispute arising out of the contract shall be settled in accordance with the Rules of Arbitration of the International Chamber of Commerce. The laws of U.K. will apply. 7th February, 2012 9. The issue before us is whether the functions of Mr. Firpo as per the above contract fall, within the explanation mentioned in Section 9(1)(vii)(b) of the Act. 10. The contention of the assessee is that, it is setting up a new business in Italy and that this is a new source of income. The perusal of the facts does not demonstrate that the assessee has set up a new business, which can be said to give it a new source of income. The assessee is setting up a new office and godown for the purpose of boosting its exports. The Hon'ble Delhi High Court in the case of Havells India Ltd. (supra) in para 9 observed as follows: "If that is so, the only questions which are required to examine is (a) whether the fees are payable in respect of services utilized in business or profession carried on by the assessee outside India or (b) they were paid for the purpose of making or earning any income from any source o....
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....concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)." 13. 'I' Bench of Tribunal in ITA No. 48/Rjt/2015 in the case of DCIT vs. Welspun Corporation Limited order dated03.01.2017 had held as follows: 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 situations- which are not attracted i....
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....w, the amounts paid by the assesse to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot 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 fo....
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....sly 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 the product, as this obtaining of orders is invariably preceded by and followed by several preparatory and follow up activities. The description of agent's obligation sets out such common ancillary activities as well but that does not override, or relegate, the core agency work. The consideration paid to the agent is also based on the business procured and the agency agreements donot provide for any independent, standalone ....
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.... 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 perse but for generating business orders for the assessee. Generating business or securing orders is an entrepreneurial activity and cannot, by any stretch of logic, be treated as a technical service per se. The same is the position with regard to assistance with respect of logistics, such as shipping and handling services, with respect to sale forecasting, with respect to gathering information on markets, business environment and on specific buyers and with respect to development of sales network. All these services....
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....of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367ITR 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: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", - (a) in the case of any assessee - (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or ....
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....r 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 such deduction shall be made in respect of any dividends referred to in section 115-0. [Explanation 1]: [Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a reside....
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....stion 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, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. 9.2 The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the receipient and therefore, when the recipient / foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the ....
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....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. 15. The issue raised in this case has been the subject matter of the decision, in the recent case, CIT v. Kikani Exports (P.) Ltd. [2014] 369 ITR 96/[2015] 232 Taxman 255/49 taxmann.com 601 (Mad.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the de....
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....sessee- 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 pick up services on the cargo exported by Menlo on behalf of its customers. Having noted the nature of services provided by the assessee outside India, for which Menlo India made the payment, let us consider if these can be described as managerial or technical or consultancy services. 7. First we will consider the ambit of 'managerial services' to test whether the instant services can qualify to be so called. Ordinarily the managerial services mean managing the affairs by layin....
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....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 the performance or the execution of any work. It is only when some consideration is given for rendering some advice or opinion etc., that the same falls within the scope of "consultancy services". The word 'consultancy' excludes actual 'execution'. The nature of services, being freight and logistics services provided by the assessee to Menlo India has not been disputed by the authorities below. There is nothing like giving any consultation worth the name. Rather such payment is wholly....
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....sportation of time sensitive packages" with a view to bring the services provided by the assessee within the fold of "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 80-0 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. 0. required the assessee to furnish the nature of services rendered and also the calculation of deduction. The assessee did it. On being satisfied the A.O. granted deduction u/s 80-0. By exercising the power u/s 263, the leamedCIT held the assessment order to be erroneous and prejudicial to the interest of the Revenue to the extent of granting deduction u/s 80-0. When the matter came up before the Tribunal, it was observed that the issue is debatable and hence outside the ambit of section 263. Apart from that, it was also observed that the assessee was engaged in integrated air and ground transportation of time sensitive pac....
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....one of us, namely, the Id. 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 80-0 as 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 Id. 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.' He was swayed by the contention of the assessee that the Manlo India or the ultimate customer could track the movement of cargo with the help of computers. We have noted supra that the consideration received by the assessee did not include any consideration for the supply of any equipment to Manlo India. Now we will examine as to whether the use of computer in any manner for knowing the location of the cargo at a particular time, can be held as technical service. 14. Explanation to....
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....essary 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 principal, in which similar activities were said to have been performed. In the case of Armyesh Global Vs ACIT [(2012) 51 SOT 564 (Mum)], the coordinate bench has, inter alia, observed as follows: 16. We have considered the issue and examined the facts on record. The learned Assessing Officer tried to invoke the definitions of technical services on the commission paid to the foreign company. The reason being that commission payment to non resident is not covered by the provisions of section 40(a)(ia), as it has....
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.... 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 developments and market conditions in the territory (area) and at the same time, convey to the principal, the Agent's observations with resped to adivities of competitors. The Agent shall report immediately on particular profitable business possibilities and extraordinary events. 2.4. The Agent shall abstain from any competition whatsoever against the prindpal and shall not promote competition by third persons. In particular, the Agent shall not act for competitive firms as a commercial Agent, Commiss....
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....ssee 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- fa) 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 person who is a non-resident, where the fees are payable in respect of services utilized 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 provi....
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....t 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 456 (SC)], payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent's income i....
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.... India Technology Centre P. Ltd. v. CIT, reported in (2010) 327 ITR 456 (SC). The Supreme Court held as under: This reasoning flows from the words 'sum chargeable under the provisions of the Act' in Section I95(i)- The fact that the Revenue had not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression sum chargeable under the provisions of the Act from Section 195(1). 34. In GE India Technology Centre P. Ltd., supra, the Supreme Court clearly held that no tax is deductible under Section 195 of the IT Act on commission payments and consequently the expenditure on export commission payable to non-residents for services rendered outside Ind....