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TMI Blog2012 (5) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and therefore, assessee is liable to deduct withholding tax. 3. Before the AO, assessee stated that it had executed export sales in Australia, UK, USA, Italy and France. For procuring the export orders, assessee is using the services of overseas commission agent namely M/s Indijack Ltd. The latter either provides confirmed export orders or provides information regarding prospective customers. However, the agent is entitled to commission only on actual export sales executed for customers routed through Indijack Ltd. Reliance was placed on CBDT Circular No. 23 dt. 23.7.1969, which clarifies that no tax is deductible u/s. 195 for expenditure towards export commission payable to a non-resident for services rendered outside of India. 4. However, the AO observed that M/s. Indijack Ltd is doing the following activities on behalf of assessee. i. Procuring export orders ii. Providing confirm export orders iii. Providing information regarding respective customers iv. Getting the export sales executed 5. The Assessing Officer opined that there are two issues under consideration: (i) Nature of services for which payment is being mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 A.Y. 2004-05 in which it has been held that in the light of Hon'ble Karnataka decision and in the absence of any contrary decision on this issue, the assessee cannot escape from taxation by virtue of provisions of section 40(a)(i) of the Act, in the event of nonpayment of tax at source u/s. 195 of the Act without obtaining clearance u/s. 195(2) of the Act. 7. The AO also stated that Circular No. 23 relied upon by the assessee has been withdrawn by the CBDT vide circular No. 7 of 2009 dt. 22.10.2009. Since the assessee had not deducted tax at source on the commission paid, the AO made disallowance u/s. 40(a)(i) of the I.T. Act. 8. Aggrieved by the order of the AO, assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A) the assessee submitted as follows: "It was submitted that decision of the Karnataka High Court and Supreme Court cited by the AO are totally distinguishable and not applicable in the present case. On the contrary, the case is covered by the decision of Supreme Court in CIT v. Toshoku Ltd. 125 ITR 525, wherein it has been held that in the case of a nonresident who does not carry on any business connection in India and who acts as a selling agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT, has set aside the order of the Karnataka High Court by holding that tax is required to deduct at source only when the sum payable to a non-resident is chargeable to tax under the I.T. Act and not otherwise. In view of the above, contention of the appellant in the present case that no tax was required to be deducted at source on the commission paid by them and therefore since the commission was not chargeable to tax in India under the I.T. Act, stands fortified. The appellant also submitted the statement of commission paid along with bank documents showing remittance of the said commission. It was also stated in the commission in the years ending 31.3.2005 and 31.3.2006 were paid to Indijack Ltd., UK. For A.Y. 2005-06 assessment was completed u/s. 143(1)". 9. The Ld. CIT(A) held as follows: "The submissions made for the appellant, the assessment order and the facts on record have been considered. The 1st issue for consideration as pointed out by the AO is whether the payment is commission simplicitor, or whether this payment for fees for technical services. Section 9(1)(vii) deals with income by way of fees for technical services. Explanation 2 to Sec. 9(1)(vii) provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income Tax Act, then it will be open to the Assessing Officer to disallow such claim for deduction. It has further been stated that section 195(2) is based on the "principle of proportionality", the said subsection gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. In the said case the ITAT had held that such sum paid by the appellant to the foreign software supplier was not a "royalty" and that the same did not give rise to any "income" taxable in India and therefore the appellant/s was not liable to deduct tax at source. However the High Court did not go into the merits of the case and went straight to conclude that the moment there is remittance, an obligation to deduct tax at source arises, which view stands overruled. The Supreme Court remitted the matter back to the High Court to determine whether the ITAT was justified in holding that the amount is paid by the appellants to the foreign software suppliers was not "royalty". In the present case therefore, since the payment made by the applicant to Indijack Ltd. has been held to be a composite payment whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure to do so, the payment is liable to be disallowed under section 40 (a) (i) of the Income Tax Act. The addition made by the Assessing Officer is therefore confirmed". 10. In the course of the submissions before the ITAT "A" bench, the Ld. Counsel for assessee pointed out page 84 of the Paper Book consisting of the Agency Agreement between Indijack and assessee. The Ld. Counsel for the assessee distinguished the case of LM Technology v DCIT 250 ITR 164 (AP) which dealt with the issue of supply of equipment and Engineering Services which were purely technical service and hence pleaded that the same was inapplicable to assessee's case. He also pointed out that the case of Wallace Pharmaceuticals Ltd. 198 ITR 63 AAR cannot be applied to the assessee's case as in that case full fledged marketing consultancy and business development was involved which was akin to management services. 11. The Ld. Counsel for assessee submitted that the services rendered by the overseas commission agent were not managerial/technical services. Assessee relied upon the following decisions in favour of assessee. (i) Line A.G. v. ITO -1997 62 ITD 330 (Mum-Tri) wherein it has been held that procureme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel for assessee Shri Rajeev Waglay submitted the facts of the case and referred to the agreement and submitted that what the assessee had entered into was only for marketing of exports in handicraft for which the services of the said company were engaged and these services were utilized outside India, so the provisions of section 9(1)(vii) with reference to the technical fee does not apply, as the services are neither rendered in India nor utilized in India. It was his submission that since the services were utilized outside India on a source of income earned out of India, the definition of Income-Tax Act with reference to technical services did not apply. It was further submitted that the ITAT has already accepted that the non-resident company do not have any PE in India and so the income that is to be assessed as business income is not taxable in India. He further submitted that the agreement with the said company stationed in U.K was purely a commercial agreement whereby Non-Resident was to (a) negotiate contracts with the overseas parties (b) travel in its territory to visit customers and (c) give information on economic development and market conditions and observations on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proposition that earning income from source outside India was not taxable in India being covered by the exception covered in Section 9(1)(vii)(b) as there was no requirement of tax deducted at source, therefore, there is no need for disallowance under section 40(a)(ia). He also relied on the decision of Raymonds Ltd v. DCIT 86 ITD 791 wherein the underwriting commission and management commission was paid in respect of GDRs issued outside India, where it was held that the amount paid could not be considered as fees for technical services under section 9(1)(vii) r.w. explanation thereto. Further reliance was also placed on the decision of DCIT v. MRO (India) (P) Ltd 139 TTJ 10, wherein a liaisoning and coordinating fees paid to non resident from New Zealand was considered not taxable. He also relied on the decision of Lufthansa Cargo India v. DCIT 91 ITD 133 Delhi Trib. where vetting and leasing charges of aircraft was paid outside India, therefore, that amount was not taxable. Similar is the case in Havells India Ltd. v Addl CIT [2011] 140 TTJ 283 (Del.) wherein fees paid to Non Resident for testing and certification in respect of export sales was considered non taxable as the sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 AB, U.K. -hereinafter referred to as "Agent"-the following is agreed upon: - Article 1- Object of Agreement 1.1 The principal entrusts the Agent with the non exclusive agency for the following contractual territory (area): Worldwide 1.2 The principal also has the right to operate actively' in he aforementioned territory (area). 1.3 .The agency covers the following 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 territ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid only after the sales amount was received. Since the services were rendered outside India, the provisions of section 5 cannot be applied to the commission paid so as to make it taxable in India. 18. This aspect can also be examined 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) to (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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue was also considered by the Hon'ble Delhi High Court in the case of Director of Income Tax v. Sheraton International Inc. 313 ITR 267 where certain payments for advertising, publicity and 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. 20. In the case of ACIT v. Modern Insulators Ltd, 56 DTR (Jp.) (Trib.) 362, the following issue was considered and held as under: "Business expenditure-Disallowance under s. 40(a)(ia)- Commission payments to foreign companies- As per Circular No. 786, dt. 7th Feb., 2000 commission and other amounts paid for services outside India are not liable to tax in India and, therefore, no tax deduction is required to be made - In the instant case, services were rendered outside India and the commission so earned by the non-residents is business profit - As per DTAA between India and UK and between India and UAE, business profit can be taxed in the case of an enterprise of a Contracting State in other Contracting State if it is having P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the Revenue that non-resident companies are having their PE. Hence, even if commission has been received by the non-residents on account of the business connections mentioned in s. 9(1)(i) then the same is not chargeable in India because such non-resident companies are not having any PE. The CBDT Circular No. 333, dt. 2nd April, 1982 [(1982) 81 CTR (TLT) 18] has stated that the specific provision in DTAA is to be followed irrespective of the provisions of IT Act. Tax was not required to be deducted at source on account of Circular No.786 dt. 7th Feb.2000. The Circular No.7 of 22nd Oct. 2009 cannot be considered retrospectively to make it applicable for payments before that date- Dy. CIT v. Sanjay Gupta [2011] 50 DTR (Lucknow) (Trib) 225 relied on. Since the tax at source is not required to be deducted then s. 40(a) will not be applicable. It is further noticed that s. 40(a)(ia) refers to commission payable to a resident. Hence, this provision is not at all applicable. Sec.40(a)(i) is applicable in respect of payments to nonresident and the payment should be in the nature of interest, royalty, fee for technical services or other sum chargeable under this Act. It is undisputed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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