TMI Blog2013 (11) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... SUPREME COURT] and in view of the fact that services were rendered outside India even if utilized in India, the impugned leather testing fees was not taxable in India - The disallowance under Section 40(a)(i) cannot be invoked on the facts of this case – Decided in favour of assessee. - I.T.A. No.: 393/Agra/2012 - - - Dated:- 1-11-2013 - Bhavnesh Saini And Pramod Kumar, JJ. For the Appellant : Naveen Gargh For the Respondent : Waseen Arshad ORDER:- PER : Pramod Kumar By way of this appeal, the assessee appellant has challenged the correctness of learned Commissioner (Appeals)'s order dated 29th February 2012, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ( hereinafter referred to as 'the Act') for the assessment year 2008-09. 2. The main issue that we are required to adjudicate in this appeal is whether or not the learned CIT(A) was justified in confirming the disallowance of ₹ 52,07,883, in respect of leather testing charges paid to TUV Product Und Umwelt GmbH - a tax resident of Germany, under section 40(a)(i) of the Act, on the ground that the assessee failed to discharge his tax withholdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decision in the case of Jindal Thermal Power Co Ltd v. DCIT (321 ITR 31 ) in support of the proposition that the said amendment has not really nullified the impact of Hon'ble Supreme Court's judgment in the case of Ishikwajima (supra). It was submitted that no testing operations were carried out by the TUV GmbH in India, and that, accordingly, income cannot be said to accrue or arise in India. It was also contended that unless TUV GmbH can be said to have a PE in India, which cannot be said in the present case, and unless the services are rendered in India, which is not the case here, the income of the TUV GmbH cannot be brought to tax in India. It was also submitted that the assessee that the testing services for which impugned payments are made do not benefit the assessee in any other way except for compliance with statutory requirements in Germany with regard to the safety of products. With this factual contention, reliance was placed on the decisions of the Authority for Advance Ruling in the cases of Cushman Wakefields Pvt Ltd In Re (305 ITR 208) and Joint Accreditation Committee of Australia and New Zealand ( 2010-TII-28-ARA-INTL). None of these submissions, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, the business is clearly carried on in India and as such it cannot be said that the source of income was outside India. It was in this backdrop that he distinguished decision of a coordinate bench of this Tribunal, in the case of Havel India Pvt Ltd. v. ACIT ( 140 TTJ 283) and noted that it was case in which assessee had the customers as also the manufacturing facilities outside India and, therefore, the Tribunal's decision that the business was carried out outside India was on different set of facts. Learned CIT(A) also rejected assessee's reliance on Hon'ble Supreme Court's judgment in the case of GVK Industries Ltd. v. ITO (332 ITR 130), on the ground of that this decision does not hold Section 9(1)(vii) to be unconstitutional and that the observations made by Their Lordships are being read out of context. He also referred to and relied upon the decision of another coordinate bench of this Tribunal, in the case of Indian Summer v. ACIT [4 ITR (Tribu) 181] in support of the proposition that the only requirement of Section 9(1)(vii) is that the fees paid the fees for technical services paid by a person, who is a resident of India, to a non resident and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axability of leather testing fees in the hands of the TUV GmbH, in terms of the provisions of Indo German tax treaty is concerned, while learned counsel fairly accepts that the issue of testing fees in terms of the treaty provisions is covered against him by a decision of the coordinate bench in the case of Ashapura Mibnichem Ltd. (supra), he submits one aspect of the matter has been overlooked in this decision. The point is this. While Article 12(1) of the India German Double Taxation Avoidance Agreement does provide for taxation of the 'fees for technical services', it merely states that such fees may be taxed in the other contracting states, and that the expression may has a connotation much narrower than shall which alone can justify levy of taxes in the other contracting state. Learned counsel makes elaborate submissions on the connotations may , shall in the context of the levy of taxes. Learned Departmental Representative, on the other hand, submits that even though the expression used is may , it does entitle the other contracting state, i.e. the source state, to levy taxes in accordance with its domestic law. It is pointed out that the terminology used in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (4) The term fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. (5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively conne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal, in the case of Pooja Bhatt v. DCIT (2008 TIOL 558 ITAT MUM), had indeed drawn a line of demarcation between 'shall ', 'may' and 'may also' and, based on that analysis, held that an income cannot be taxed in the residence country unless it falls in the category where both the contracting states have the right to tax, which, in their esteemed view, will be represented by expression may also . However, the question that we are called upon to adjudicate in this case did not fall for consideration in the said case, and as is the settled position of law, a judicial precedent is an authority for what it actually decides and not what may even reasonable follow from the same. We leave it at that. 11. In view of the above discussions, in our considered view, the TUV GmbH does not get any benefit from the provisions of the Indo German tax treaty, so far as taxability of its income from leather testing fees is concerned. 12. Coming to the merits of taxability of testing fees in the hands of TUV GmbH under section 9(1)(vii), we find that, in principle, the issue is covered against the assessee by decision of a coordinate bench, in the case of Ashapura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has been the fundamental justification of mechanism to relieve a taxpayer, whether under a bilateral treaty or under domestic legislations, of the double taxation - either by way of exclusion of income from the scope of taxability in one of the competing jurisdictions or by way of tax credits. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system and any double jeopardy, due to inherent clash of source and residence rule, to a taxpayer is relieved only through the specified relief mechanism under the treaties and the domestic law. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. This school of thought is now specifically supported by the retrospective amendment to section 9. 13. Learned counsel, however, submits that the conclusion so arrived at in Ashapura Minichem's case (supra) is vitiated in law for the fundamental reason that it overlooks the decision of Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Parliament with respect to extra territorial aspects or causes that have no nexus with India that such laws would be ultra vires . As to what is acceptable nexus, we find guidance from Prof Michael Lang's rather recent book 'Introduction to the Law of Double Taxation Conventions' (published by Linde, Austria; ISBN 978-90-8722-082-2): In international law practice, there are no significant limits on the tax sovereignty of states. In designing the domestic personal tax law, the national legislator can even tax situations when, for example, only a genuine link exists. It is only when neither the person nor the transaction has any connection with the taxing state that tax cannot be levied. 16. There is a clear nexus between the taxability of services rendered to residents of a tax jurisdiction with that jurisdiction itself. As the assessee himself has observed in the written submissions reproduced in the assessment order at page 6 thereof, the intention of introducing the source rule was to bring to tax interest, royalty or fees for technical services by way of creating a fiction in Section 9, the source rule would mean that irrespective of the situs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is seeking to justify. It is, if we may say so, classical case of right propositions being used to justify the wrong conclusions. 19. We agree that when no human intervention is involved in any services, such services cannot be treated to be of the nature which can be covered by the scope of Section 9 (1)(vii). The detailed reasoning for this approach, as was noted by another coordinate bench in the case of ITO v. Right Florists Pvt Ltd. (154 TTJ 142), is as follows: 24. While there is no specific definition assigned to the technical services, and Explanation 2 to Section 9(1)(vii), as also Article 12(2)(b) merely states that 'fees for technical services' will include considering of rendering of any managerial, technical or consultancy services . It is significant that the expression 'technical' appears alongwith expression 'managerial' and 'consultancy' and all the three words refer to various types of services, consideration for which is included in the scope of 'fees for technical services'. The significance of this company of words lies in the fact that, as observed by a coordinate bench of this Tribunal in the case of Kotak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct its meaning to the genus of these words which is evident by the lowest common factor in those words. The lowest common factor in 'managerial, technical and consultancy services' being the human intervention, as long as there is no human intervention in a technical service, it cannot be treated as a technical service under Section 9(1)(vii).There is one more approach to this issue, even though the results will be the same. The other way of looking at these three words on the basis of the principle of noscitur a sociis is, as was done by Hon'ble Delhi High Court in the case of CIT v. Bharti Cellular Ltd. (319 ITR 139), is that the common characteristic of the majority of the words be read as limitation on the scope of the other words. While doing so, Their Lordships had observed as follows: 13. .In the said Explanation [ i.e. Explanation 2 to Section 9(1)(vii)] the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services. The word technical is preceded by the word managerial and succeeded by the word consultancy. Since the expression technical services is in doubt and is unclear, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a consultant. 15. From the above discussion, it is apparent that both the words managerial and consultancy involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element. 25. We may also point out that while this judgment did not meet approval of Hon'ble Supreme Court, in the judgment reported as CIT v. Bharti Cellular Ltd. (330 ITR 239), on the short factual aspect regarding fact of human intervention. It was for recording the factual findings on this aspect that the matter was remitted to the file of the Assessing Officer. However, so far as the principle laid down by Hon'ble Delhi High Court on the application of principle of noscitur a sociis in restricting the scope of 'technical services' to 'technical services with a human interface' was concerned, Their Lordships of Hon'ble Supreme Court took note of the said principle and left it intact. The stand taken by Hon'ble Delhi Court, in our humble understandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage, any human intervention is involved is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasise that these types of matters cannot be decided without any technical assistance available on record. There is one more aspect that requires to be gone into. It is the contention of Respondent No.1 herein that Interconnect Agreement between, let us say, M/s. Bharti Cellular Limited and BSNL in these cases is based on obligations and counter obligations, which is called a revenue sharing contract . According to Respondent No.1, Section 194J of the Act is not attracted in the case of revenue sharing contract . According to Respondent No.1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute fees under Section 194J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal. In short, the above aspects need reconsideration by the Assessing Officer. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the larger bench. That would be, as we will see a little later, an academic exercise on the facts of the present case. Suffice to say, we are not inclined to accept this plea of the assessee. In any event, there is nothing on records to even demonstrate the precise process of leather testing, the actual steps involved in the process and parameters involved, nor these aspects of the matter have been examined by any of the authorities below. 22. The next plea of the assessee is whether the fees paid by the assessee, on account of leather testing charges, is in the nature of technical services within meanings of Section 9(1)(vii) or not is absolutely academic on the facts of this case because the assessee being a one hundred percent exporter, and the source of income thus being outside India, the exception visualized in Section 9(1)(vii)(b) will come into play. 23. Learned counsel's next argument is that since assessee is one hundred percent exporter, we have to proceed on the basis that the source of assessee's income, for which testing services are used, is outside India, and, accordingly, by the virtue of exception visualized in Section 9(1)(vii)(b), the fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n resident outside India, and - second, in respect of services utilized in respect of earning any income from a source outside India. No doubt whether an India based business is one hundred percent export oriented unit or not, it is still a business carried on in India, and it cannot, therefore, be covered by the first limb of exception envisaged in Section 9(1)(vii)(b). Even if entire products are sold outside India, the fact of such export sales by itself does not make business having been carried outside India. What matters really, in this perspective, is whether or not business is carried on in India or not, and once it is an undisputed position that business is set up and carried on India, irrespective of where the end consumers are, the business is carried on outside India. However, the scope of second limb of this exception is rather narrow. As against use of expression 'profession or business carried on .outside India', this exception refers to use of service in 'making or earning any income from any source outside India'. In order to be covered by this exception, what is material is that, irrespective of where the business is situated, the services need t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n our considered view, it cannot be said that the technical services are used for the purpose of making or earning any income from any source outside India , and, accordingly, outside the ambit of income taxable as fees for technical services under section 9(1)(vii). 28. In the light of the foregoing discussions, in our considered view, the payments made to TUV GmbH were taxable in India, and, accordingly, it cannot be said, based on the material on record and arguments before us, that the assessee did not have obligation to withhold taxes from the remittances made to TUV GmbH for leather testing charges. However, as hold so, we are alive to the fact that right now we are not dealing with the penal, recovery or other consequences of non deduction of tax at source, which are of different dimensions and import, and therefore, our findings above do not foreclose any plea or arguments that the assessee may like to take in the course of such proceedings, if any. 29. Learned counsel, however, submits that even if it is assumed, though he does not admit so, that the income embedded in leather testing charges paid to the TUV GmbH was taxable in India, since entire amount was pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and to understand the words with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. It is also an elementary legal principle, as was also held by Hon'ble Bombay High Court in the case of CIT v. Sudhir Jayantilal Mulji (214 ITR 154) that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein. 31. Learned counsel also submits in any event, it is because of a retrospective amendment in law . It is submitted that the retrospective amendment was brought about by the Finance Act 2010 which was nowhere in sight at the material point of time, i.e. previous year relevant to the assessment year 2008-09. Learned counsel submits that the assessee cannot be penalized for performing the impossible task of deducting tax at source in accordance with the law which was brought on the statute book much after the point of time when tax deduction obligations were to be discharged. Our attention is invited to the decisions of a coordinate bench in the case of Channel Guide India Ltd. v. ACIT (139 ITD 49), wherein, following the views expressed by Ahmedabad bench in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature, in view of Hon'ble Supreme Court's judgment in the case of Ishikwajima (supra) and in view of the fact that services were rendered outside India - even if utilized in India, the impugned leather testing fees was not taxable in India. Such being the position, and respectfully following the decision of coordinate bench in the case of Channel Guide (supra), we hold that the disallowance under Section 40(a)(i) cannot be invoked on the facts of this case. 33. In the light of the above discussions, and for the reasons set out above, we delete the disallowance of ₹ 52,07,883. The assessee gets the relief accordingly. 34. In the result, ground no. 1 is allowed in the limited terms indicated above. The other grounds of appeal, i.e. ground nos. 2 and 3, because of the smallness of the amounts were not really pressed before us. That fact however cannot be put against the assessee in the subsequent years or in penalty proceedings. With these observations, the ground no. 2 and 3 are dismissed. 35. In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open court today on 1 st day of November, 2013. - - Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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