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Assistant Commissioner of Income Tax, Circle-II, Trichy. Versus M/s. Amarvathy Textiles

2015 (8) TMI 1029 - ITAT CHENNAI

Non-deduction of TDS for payment of product designing charges outside India for services rendered outside India - Held that:- The services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of “fees for technical services”, we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above find .....

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UF at the specified rate. In this case, the assessee is a firm assessable under the provisions of the Act and therefore bound to deduct tax at source on payment of rent to its partners who are individuals and distinct assessable entities as held by the Ld. Assessing Officer. It is pertinent to mention that the provisions of “TDS” represent an alternative and more efficient tax collection mechanism for the Government. Neither provisions of TDS is a separate charge nor levy in addition to income t .....

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issue. - Decided in favour of revenue. - I.T.A.No.1031/Mds. /2012 - Dated:- 5-8-2015 - SHRI N.R.S.GANESAN AND SHRI A.MOHAN ALANKAMONY, JJ. For The Appellant : Mr.P.Radhakrishnan JCIT,D.R For The Respondent : Mr.V.D.Gopal,Advocate ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: This appeal is filed by the Revenue, aggrieved by the order of the Learned Commissioner of Income Tax (A), Tiruchirappalli dated 28.02.2012 in ITA No.391/2010-11 passed under Sec.143(3) read with section Sec. 250 of the .....

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195 of the Act. ADDITIONAL GROUND (ii) The Ld. CIT(A) had erroneously held that, in the case where rent is paid to the partners by the firm, the provisions of Section 195-I of the Act will not be attracted. 3. The assessee has filed a letter dated 04.06.2014 requesting the Tribunal not to admit the additional grounds filed by the Revenue since there was no justification for the same. After perusing the letter, we do not find any merit in the contention of the assessee and therefore, we hereby r .....

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and towards payment of rent to partners of the firm respectively. 5.1 Ground No.1 - Non-deduction of TDS for payment of product designing charges outside India for services rendered outside India. During the course of assessment proceedings it was observed by the Ld. Assessing Officer that the assessee had not deducted tax at source while making payment of 15,37,994/- to Ms Joanne Collins in USA towards product design charges. The assessee had explained before the Revenue that payment made to no .....

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rdingly as per the law TDS has to be deducted. The relevant portion of the order of the Ld. Assessing Officer is extracted herein below for reference:- 2.1.Regarding the taxability of income earned by non-residents, it is pertinent to note that as per Section-5(2), the total income of the nonresident includes all income from whatever source derived which is received or is deemed to be received in India by or on behalf of such person and which accrues or arises or is deemed to accrue or arise to .....

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ing to which the above payments were claimed to have been made. Examination of the agreement produced reveals that the assessee firm has paid to Ms.Joanne Collins, C/o.Joanne Collins Product Design, 4656 Nine Mile Greek Pareway, Minneapolis, MN 55437 USA in terms of 3% of the value of the proceeds realized on account of exports of products designed by Ms.Joanne Collins, USA. 2.2. The payment of this type is covered under the term royalty within the provisions of section 9(1)(vi) of the IT Act. I .....

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n secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill (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 .....

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ed in the Contracting State in which they arise and according to the laws of that State. 5.2 On appeal, the Ld. CIT (A) deleted the addition by placing reliance in the decision of the Hon ble Apex Court in the case Toshoku Ltd., reported in 125 ITR 525(SC) and held that the assessee is not required to deduct tax at source for the payments made in foreign currency to Ms Joanne Collins towards services rendered outside India being product design charges. The relevant portion of the Order of the Ld .....

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textiles to USA and European countries need the services of Ms.Joanne Collins and paid a total sum of 15,37,994/- as remuneration. The Assessing Officer was under the impression that above payment was made without deduction of tax. She being a non resident and here services were rendered outside India paid the remuneration also outside India in foreign currency, the Authorized Representative of the pat argued that no taxable event had happened in India to attract tax liability.She is not liable .....

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r the services rendered also outside India when the payee is not liable to pay any tax in India, being NRI, no TDS is required to be deducted. The same view was held in apex court judgment in the case of Toshuku Ltd 125/525(SC) wherein it was held that if services rendered outside India TDS need not be deducted. Therefore, provisions of section 40(a)(ia) are not applicable and addition made at ₹ 1537994 as remuneration is deleted. 5.3 Ld. D.R argued in support of the order of the Ld. Asses .....

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he facts of the case of the assessee. The assessee had also explained that Ms Joanne Collins was only acting as selling agent and also advising the assessee on the product trend in USA based on which the assessee was manufacturing garments for marketing in USA. The assessee had paid in foreign currency as remuneration to Ms Joanne Collins @3% on the value of the export sales proceeds. In such circumstances, the Hon ble Apex court has categorically held that the commission amount which was earned .....

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id amount paid would fall under the headings: (i) income by way of interest as set out in Section 9(1)(v) of the Act; or (ii) income by way of royalty as set out in Section 9(1)(vi) of the Act; or (iii) income by way of fees for technical services as set out in Section 9(1)(vii) of the Act. 10. While dealing with Section 9(1) of the Act, the Supreme Court in Commissioner of Income Tax v. Toshoku Limited, (1980) 125 ITR 525, on considering a transaction where tobacco was exported to Japan and Fra .....

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ey, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such p .....

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carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC) and Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian I.T. Act, 1922, which corresponds to s. 9(1)(i) of the Act). 9. In the insta .....

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outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. 11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribun .....

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ll within the definition of fees for technical services , we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above finding, the decision of the Supreme Court in Transmission Corporation of A.P. Ltd. case, referred supra, relied upon by the learned Standing Counsel for the Revenue is not applicable to the facts of the present case. We find no infirmity in the order of the Tribunal in .....

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f rent to the partners of the firm. During the course of assessment proceedings, the Ld. A.O. further observed that the assessee firm had paid rent to its partners Shri M.Sivaknnu, 4,80,000/- & Shri Prem Anand 3,60,000/- without deducting tax at source in accordance with Section 195(I) of the Act. The assessee s representatative had stated before the Ld. Assessing Officer that the payment of rent by the firm to its partners is not liable for deduction of tax at source since the firm is only .....

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(A) deleted the addition of 8,40,000/- because he was of the view that the expenditure in the form of rent is not a deduction falling under any of the Sections 32 to 38 of the Act and only a legitimate debit in the trading account. 6.2 Ld. D.R argued in support of the order of the Ld. Assessing Officer while as Ld. A.R. relied on the order of the Ld. CIT (A) and also relied in the decision of the case CIT Vs. Chidambaram Pillai reported 106 ITR 292, the decision of CIT Vs. NSM Sankarapandian re .....

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re not identical. In that case, the issue was with respect to penalty proceedings U/s.271D of the Act against the loan taken by the assessee from the firm wherein the Hon ble jurisdictional High Court held that the assessee s action was bonafide and there was a reasonable cause within the meaning of Section-273B of the Act and therefore penalty could not be imposed. Further in the case CIT Vs. NSM Sankarapandian supra also, the facts are not identical because in that case the issue was with resp .....

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