TMI Blog2014 (9) TMI 193X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, the AO invoking the provisions of section 40(a)(ia) of the Act disallowed the claim of the assessee for deduction of the sum while computing income - as on the last date of the previous year relevant to AY 2005-06, the amounts due and payable to the sub-contractors had been paid and nothing remained payable and that provisions of Sec.40(a)(ia) of the Act cannot be invoked to make disallowance where the amounts do not remain payable but had been actually paid - There was no clear finding of the AO/CIT(A) nor material to show that the Assessee had in fact made payments on or before the last date of the previous year to the non-residents – thus, the matter is remitted back to the AO for consideration – Decided in favour of Assessee. Fee paid to specialists who maintain records of online consumers – Held that:- Following the decision in The Commissioner of Income Tax Versus M/s. Gem Plus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] - the consequence of disallowance u/s 36(1)(va) r.w.s. 2 (24)(x) of the Act, would be the business profit of the assessee would increase and exemption u/s 10A has to be allowed with reference to enhanced profits – Decided against Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction, while computing income, a sum of ₹ 3,06,08,522/- which were payments made by the assessee to non-residents on the ground that tax was not deducted at source as required u/s.195(1) of the Act. The Revenue authorities disallowed the claim of the assessee for deduction by invoking the provisions of Section 40(a)(i) of the Act. 3. The assessee is engaged in market research activity in India and abroad. Market research is an analysis of market response to products and services launched by various companies. It involves processes like preparing questionnaire, collecting data from a sample representative of the population which uses or has some experience with the desired product/service, analyzing the results and then preparing reports based on the results of the analysis. The same are given to the clients who engage the services of the assessee, who are in countries like USA, Japan, Germany, France, Korea etc. The assessee is registered as a STPI unit. One of the method by which the assessee collects data is through online survey which is conducted via e-mail through internet. The assessee sends questionnaire and conducts survey through e-mail from consumers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Revenue aggrieved by the relief allowed by the Commissioner of Income-tax (Appeals) has raised ground no.2 to 6 in assessee's appeal. 5. The grounds raised by the assessee in its appeal and ground no.2 to 5 taken by the Revenue in its appeal are therefore, taken upon together for consideration. 6. Contentions on behalf of the assessee : As far as appeal by assessee is concerned, the learned counsel for the assessee submitted that the clients of the assessee send survey questionnaire and entrust the assessee with managing the entire operations cycle from completing survey scripting, sample purchase (through online panels providers), survey deployment and data/report delivery. The clients neither ask for individual's personal information nor sell their goods or services post survey. They are interested only in summarized information on the attitudes, opinions, market practices etc., of the sampled groups. The extent of personal and demographic information which is shared by online panel company with the assessee is already in public domain as the panel company collects this information as a part of panel registration process and for the same the sample has volun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bestsite Korea 15,65,621 9. JMI Japan 14,86,689 10. Bloomerce Netherlands 14,68,621 11. Research Dynamics Canada 10,50,045 12. AMR Interactive Australia 6,76,244 13. COAPAG Germany 5,63,472 14. Asia Insight Hong Kong 4,05,968 15. Brazil WMS Brazil 3,19,417 TOTAL 3,06,08,522 8. The learned counsel for the assessee drew our attention to pages 53.1 to 53.31 of the paper book which contains the invoices which the non-residents have raised on the assessee. The invoices give the description of the services for which payment is made by the assessee. According to the learned counsel for the assessee the payments wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness connection' includes among others, certain business activities carried out by a dependent agent for and on behalf of a non-resident in India. It was his submission that in the present case, the payees were not carrying on business in India either by itself or through any other person acting on their behalf. None of the activities enumerated in any of the three limbs of the definition of the term 'business connection' were carried out in India either by payees themselves or through any other person acting on their behalf. Thus, the definition of the term 'business connection' is not attracted. Since no activity is carried out in India, there is no 'business connection' in terms of section 9(1)(i)of the Act. 13. The second limb of Sec.9(1)(i) of the Act, deals with Income from property or asset in India is covered u/s.9(1)(i) of the Act. It was submitted by the learned counsel for the Assessee that in the present case, the underlying payment was towards access to database maintained outside India. The payment was not made in relation to any property or asset in India. Thus, the underlying income cannot be said to have accrued through or from any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it was pointed out by the learned counsel for the Assessee that there was no transfer of capital asset and therefore the applicability of the above limb does not arise for consideration at all. 16. As far as applicability of section 9(1)(vi) of the Act is concerned, it was submitted that clause (vi)(b) of section 9(1) deems income by way of royalty to accrue or arise in India, if it is paid by a person who is a resident of India. The term royalty is defined in Explanation II to section 9(1)(vi). As per the main body of section 9(1)(vi), royalty should be payable for any right, property or information used or services utilized for the purpose of a business. The significant terms indicating a royalty payment are right , property , information or services . The only aspect relevant to the present case would be 'information used' or 'services utilised'. On the question of the payment being related to right to use information, it was submitted that the term information is also not defined in the Act. Used independently it may convey a very broad meaning. Thus information as per the dictionary means the act or the process of informing, communication, or rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerning technical, industrial, commercial or scientific knowledge experience or skill . As noted above, the term information is also used in the main body of section 9(1)(vi). The term information as used in clause (iv) would draw its meaning and ambit in the light of the meaning of the term as used in the main body of the section. The fees paid to non-resident panel companies in the present case are not for any particular services but for obtaining email addresses of consumers as per the specifications. There is no discrimination between several subscribers in respect of such access. In other words, it is a general facility provided to all the subscribers without any difference or discrimination. Due to evolving business models and need for faster and easier access to data, the information is provided through internet. Accessing data through internet from online database providers (payees) in the instant case) is like subscribing to a newspaper through the web. It is possible today to buy a physical copy of the newspaper or subscribe to the newspaper on the web. Subscription to a newspaper on the web would not result in either royalties or fees for technical services. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 chargeable under the head Salaries . 19. As per the definition, where any managerial, technical or consultancy services are utilized and a payment in consideration for the same is made then such payments constitute fees for technical services . The term managerial service postulates presence of a manager. A manager is a person who manages things or affairs of business on behalf of another. In other words, a principal to principal relationship cannot constitute a 'managerial service'. The popular meaning as evident from above associated with the term technical is involving or concerning applied and industrial science . Technical could also broadly mean - based on technology - something to do with natural or applied science. Consultancy : A consultant is thus a person who gives professional advice or services in a specialist field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered services in India. The memorandum explaining the provisions of Finance Bill 2010 [321 ITR (St.) 33], in the context of the amendment to Explanation below section 9(2), provides that the source rule under section 9 would be attracted only if the services are utilized in India. It is a trite law that provisions incorporating deeming fiction should be construed strictly and the deeming fiction should not be extended beyond its legitimate field of operation. In other words, the deeming fiction should be restricted to the purpose for which it is created. The deeming fiction under amended Explanation below section 9(2) would therefore operate only to the extent of deeming the income as accruing or arising u/s.9(1)(vi) or 9(1)(vii) irrespective of whether the services of nonresident are rendered in India or outside India. The deeming fiction does not extend further so as to hold the deductor as an 'assessee in default' retrospectively for not deducting tax at source. In other words, the deeming fiction applies retrospectively only for not deducting tax at source. In other words, the deeming fiction applies retrospectively only for the purpose of charge of income tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical, plan or technical design and in the case of the Assessee no such knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical, plan or technical design is made available to the Assessee? (d) If the receipt by the non-resident is held to be chargeable to tax. in India consequent to a retrospective amendment to the law and if at the time when the Assessee made payments to the non-residents such receipts are not chargeable to tax in India but for the retrospective Amendment, then can an obligation to deduct tax at source under Chapter XVII-B of the Act be imposed and consequently disallowance made u/s.40(a)(i) of the Act? (e) Since the Assessee had already made payments to the non-resident on or before the last date of the previous year and nothing remained Payable the provisions of Sec.40(a)(i) of the Act are not applicable? 25. We shall first see the relevant provisions of the Act that are applicable in the present case. Sec.40(a)(i) of the Act reads as follows: Amounts not deductible. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government: Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1. For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). Explanation 3. For the purposes of this clause, computer software means any computer programme recorded on any disc, tape., perforated media or other information storage device and includes any such programme or any customized electronic data.] Explanation 4. For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5. For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the non-resident. The payment by the Assessee to the non-resident is admittedly not in the nature of interest. It has therefore to be examined as to whether the said payment can be said to be Royalty or Fees for technical services or Business Income chargeable to tax in India. 28. The nature of services rendered by the non-residents to the Assessee for which the Assessee made payments to them has to be examined. The particulars of the non-residents, payments made to them by the Assessee and the countries in which they are resident is given in page 53-1 of the Assessee's paper book. The same is given below : The invoices raised by them and the nature of services rendered by them as described in the invoice, which could throw some light on the nature of services rendered by the non-residents is placed at pages 53-2 to 53-31 of the Assessee's paper book. An analysis of the same shows the following: Name of the non-resident nature of services 1. Greenfield on-line Internet user Satisfaction 2. Global Market Insite Inc. Project Management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by the non-residents from the Assessee is in the nature of Income from Business , the Assessee cannot presume that the same are not chargeable to tax in India. The AO has thereafter referred to case laws cited by the Assessee for the proposition that obtaining data cannot be regarded as Fees for technical Services rendered . He has concluded that the case laws cited by the Assessee were easily distinguishable as in the case of the Assessee the data was tailor-made data whereas in the cases cited the data in question were standard-data. Thereafter the AO has concluded that the payments by the Assessee are liable to be disallowed u/s.40(a)(i) of the Act. There is no discussion on the question whether the payments would be Royalty or Fees for Technical Services or Income from Business . 31. In his remand report before the CIT(A), the AO has opined that the payment in question would be in the nature of Fees for Technical Services . The CIT(A) after reproducing the contentions of the Assessee, which are on the same lines as that of the submissions made before us, given his conclusions in paras 3.7 3.8 of his order. The CIT(A) has concluded that the payments by the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion of point (a) and (b) above. 34. Having held that the payment in question is in the nature of Royalty , we now have to examine Point (d) formulated for consideration viz., Since the Assessee had already made payments to the non-resident on or before the last date of the previous year and nothing remained Payable the provisions of Sec.40(a)(i) of the Act are not applicable? On the above point, the learned counsel for the Assessee has placed reliance on the decision of the ITAT Bangalore Bench in the case of DCIT v. Ananda Markala ITA No.l584/Bang/2012 order dated 13.9.2013 had taken the view that in case the payments are made on or before the last date of the previous year and nothing remains payable, then the provisions of Sec.40(a)(i) of the Act cannot be invoked to make disallowance of expenses. Similar view has been expressed by the ITAT Bangalore Bench in the case of Varun Transport v. CIT ITA No.277/Bang/2013 order dated 10.10.2013 and the Chennai Bench of the ITAT in the case of DCIT v. MRF Ltd. ITA No.l985/Mds/2011 order dated 4.3.2014. No contrary view was brought to our notice. 35 We have considered the submissions of the learned counsel for the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that provisions of Section 40(a)(ia) of the Act are applicable to even sums paid during the year. In the case of Teja Construction v. ACIT reported in 39 SOT 13 the Hon'ble Hyderabad ITAT has decided the issue against the Revenue and has held that provisions of Section 40(a)(ia) of the Act are not applicable in respect of sums/amount paid during the year and which are not payable at end of the year on date of balance sheet, as it is applicable only in respect of Payable amount shown in balance sheet as outstanding expenses on which TDS has not been made. Similar laws were laid in various other cases. To resolve the above issue Special Bench was constituted and the Hon'ble Visakhapatnam Special Bench of ITAT in the case of Merilyn Shipping Transport v. Addl CIT reported in has decided the issue against the Revenue and after comparing the proposed and enacted provision which is intended from the replacement of the words in the proposed and enacted provision from the words 'amount credited or paid' to 'payable' has held that it has to be concluded that provisions of Section 40(a)(ia) are applicable only to the amounts of expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rilyn Shipping following its judgment on 3rd April, 2013 in IT AT No. 20 of 2013, G.A. No. 190 of 2013 (CIT, Kolkata-XI v. Crescent Export Syndicates) holding that the views expressed in the case of Merilyn Shipping Transports (ITA.477/Viz./2008 dated 20.3.2012) were not acceptable. 29. However, we find that the Hon'ble Allahabad High Court has however upheld the view taken by the Special Bench ITAT in the case of Merilyn Shipping (supra) in the case of M/s. Vector Shipping Services Pvt. Ltd. (supra). The relevant observations of the Hon'ble Court were as follows:- We do not find that the revenue can take any benefit from the observations made by the Special Bench of the Tribunal in the case of Merilyn Shipping and Transport Ltd. (136 ITD 23) (SB) quoted as above to the effect Section 40(a)(ia) was introduced in the Act by the Finance Act, 2004 with effect from 1.4.2005 with a view to augment the revenue through the mechanism of tax deduction at source. This provision was brought on statute to disallow the claim of even genuine and admissible expenses of the assessee under the head 'Income from Business and Profession' in case the assessee does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the very same fee paid to specialists (Non-residents) who maintain records of online consumers. As a consequence of the action of the Revenue authorities in disallowing the fee so paid by invoking provisions of section 40(a)(i) of the Act for non-deduction of tax at source, the profits/income of the assessee stood enhanced/increased. The income of the assessee was eligible for exemption u/s. 10A of the Act. The assessee pleaded before the Assessing Officer that in the event of the Assessing Officer coming to the conclusion that the fee in question has to be disallowed as deduction while computing income by reason of invoking the provisions of section 40(a)(i) of the Act, the deduction u/s. 10A of the Act should be allowed on the income as increased by the disallowance of expenditure by invoking provisions of section 40(a)(i) of the Act. The CIT(A) agreed with the submissions of the Assessee in this regard. 38. The learned counsel for the Assessee has placed reliance on the decision of the ITAT Bangalore in the case of Bearing Point Business Consulting Private Limited v. DCIT ITA M.P.No.47/Bang/2013 in ITA No. 1124/Bang/2011 order dated 5.7.2013 wherein the Tribunal took th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the consolidated order dt 30.8.2011 in IT A No. 70/2009 others (2012) 247 CTR 334, which has not been accepted by the department and SLP has been filed before the Hon'ble Supreme Court against such order. 41. As we have already seen the assessee is engaged in the business of providing market research within and outside India. The Assessee was entitled to deduction u/s. 10A of the Act in respect of business of export of computer software. While computing the export turnover for the purpose of allowing deduction u/s. 10A of the Act, the AO did not exclude Leaseline charges and internet subscription charges amounting to ₹ 3,14,404/- from the total turnover but excluded the same from the Export turnover. The assessee submitted that Explanation 2 to section 10A defines 'export turnover' to mean consideration in respect of export of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent fund not paid before the due date relying on the decision of the Karnataka High Court in the case of Sabari Enterprises against which an SLP has been filed and the same is pending before the Supreme Court. 46. The AO disallowed claim of the Assessee for deduction of a sum of ₹ 18,086/- which was employees contribution to Provident Fund which had been paid after the due date prescribed under the relevant Act but had been paid before the due date for filing of the return of income. The CIT(A) however allowed the claim of the Assessee for deduction by following the decision of the Hon'ble Karnataka High Court in the case of Sabari Enterprises 298 ITR 141 (Karn.) wherein the Hon'ble Court held that payment of employees contribution though belated under the relevant enactment relating to Provident fund but if the same had been paid before due date for filing return of income then the same should be allowed. The revenue aggrieved by the order of the CIT(A) has raised Gr.No.10 before the Tribunal. 47. We have heard the submissions of the learned DR who relied on the order of the AO. The decision of the CIT(A) is based on the decision of the Hon'ble Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (24)(x) on receipt by the assessee and allowed as a deduction u/s 36(1)(va) on making deposit with the concerned authorities. S. 43B(b) stipulates that such deduction would be permissible only on actual payment; (ii) The question as to when actual payment should be made is answered by Vinay Cements 213 CTR 268 where the deletion of the second Proviso to s. 43B w.e.f 1.4.2004 was held applicable to earlier years as well. As the deletion of the 2nd Proviso is retrospective, the case has to be governed by the first Proviso. Dharmendra Sharma 297 ITR 320 (Del) P.M. Electronics 313 ITR 161 (Delhi) followed; (iii) If the employees' contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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