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2015 (11) TMI 1447 - ITAT MUMBAI

2015 (11) TMI 1447 - ITAT MUMBAI - TMI - TDS u/s u/s. 195(2) - maintainability or otherwise in law of section 40(a)(i) payment on Freight - Held that:- With regard to freight allowed to shipping companies, the matter, in our view, is squarely covered against the assessee by the decision in the case of Orient (Goa) (P.) Ltd. (2009 (10) TMI 575 - Bombay High Court ) wherein held that payment of demurrage charges, which assume the same nature as of freight charges, to a non-resident without deducti .....

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see and the Revenue to be responsible for a complete factual indetermination of the matter. Merely stating that no services are rendered in India is under the circumstances of little consequence. It is, again, upon examining and ascertaining the nature of the services that the AAR in Wallace Pharmaceutical (P.) Ltd. (2005 (9) TMI 26 - AUTHORITY FOR ADVANCE RULINGS ) held that the services provided by Penser Group, a tax resident of USA, were not limited to USA and, further, utilized in India and .....

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, the product was ‘tobacco’, essentially a commodity (or a generic product), and which could be sold as such, adhering to the specifications as may be stipulated by law.

Under the circumstances, in view of the foregoing, we only consider it fit and proper, even as observed during hearing – and to the agreements by the parties, that the matter, setting aside the impugned order, is restored for proper factual as well as legal determination back to the file of the Assessing Officer (A.O. .....

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essment years (A.Ys.) 2008-09 and 2009-10, by the Assessee and the Revenue respectively, arising out of the separate Orders by the Commissioner of Income Tax (Appeals)-23, Mumbai ( CIT(A) for short), u/s.250(6) of the Income Tax Act, 1961 ( the Act hereinafter), disposing the assessee s appeals contesting its assessment u/s.143(3) of the Act for the said years. The issues arising being common, the appeals were taken up for hearing together, and are being disposed of per the combined order. 2. Th .....

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(A) approved the Revenue s case in principle, i.e., qua the applicability of section 40(a)(i) of the Act to the said payments in the facts and circumstances of the case, he accepted the assessee s alternate contention of the said provision being applicable only on that part of the expenditure incurred for the year that remained unpaid as at the year-end. This argument, then, constitutes the assessee s alternate plea (vide Ground 5) for A.Y. 2008-09, and also explains the Revenue s appeal for A.Y .....

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ues in India. Commission, again, is allowed to non-residents, who undertake promotion of the assessee s - a manufacturer of engineering goods, products abroad, whereat the agents are located/ resident. No service is rendered in India for any part of the income to accrue or arise in India, which is paid directly to the non-resident agent/s outside India. This, in fact, is a pre-requisite for the application of section 195, as clarified by the Hon ble Apex Court in G. E. India Technology Centre (P .....

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ITR 138 (Raj). As such, these Circulars were in force when the payments were made, and the clarification per Circular 23 that no income shall be chargeable to tax in India in such a case shall prevail. The Revenue s case is, again, two fold. Admittedly, the payments have been allowed without either deducting tax at source or obtaining a certificate from the A.O. as to non-deduction (or deduction of tax at a lower rate), as required u/s. 195(2) of the Act. As regards freight charges, the same is .....

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scheme of the Act. The same being, though, in the context of demurrage charges would be inconsequential in-as-much as per section 172(8) such charges assume the nature of receipt toward freight, i.e., are to be accordingly considered as part of the freight charges (income) of the shipping company. The Hon ble Court considered the Circular No. 723 dated 19.9.1995 issued by CBDT. As regards the commission income, the Revenue places reliance on the decision in the case of Elkem Technology vs. Dy. C .....

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irrespective of the description as commission , consultancy fees payable to non-resident for developing business with foreign customers falls within the meaning of fee for technical services as defined under Explanation 2 to s. 9(1)(vii). The Board Circulars would not apply in view of the amendment by way of insertion of Explanation below section 9 by Finance Act, 2009 w.r.e.f. 01.04.1976. This sums up the cases of both the parties, who have also relied on case law in support of their respective .....

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1 We shall take up both the sums (payments) separately. With regard to freight allowed to shipping companies, the matter, in our view, is squarely covered against the assessee by the decision in the case of Orient (Goa) (P.) Ltd. (supra). This was in fact conceded to by the ld. Authorized Representative (AR), the assessee s counsel, before us. Per the said decision, the Hon'ble jurisdictional High Court has unequivocally held that payment of demurrage charges, which assume the same nature as .....

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r with the Tribunal in Orient (Goa) (P.) Ltd.(supra), admits of the same being chargeable to tax under the provisions of the Act. Section 172, falling under Chapter XV-H, titled Liability in special cases , has been found by the Hon'ble jurisdictional High Court in Orient (Goa) (P.) Ltd.(supra) to operate in a field different from Chapter XVII, i.e., Collection and recovery of tax , under which Chapter section 195 falls. The assessee, accordingly, fails on its Grounds 1 & 2 for both the .....

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e taxable in India merely because the assessee did not apply for or seek a sanction of the Revenue to remit the payment to a non-resident without deduction of tax at source, as envisaged u/s. 195. True, s. 195(2) operates as a safeguard, but would not by itself lead to the satisfaction of the condition of chargeable under the provisions of the Act specified in s. 195(1). It is only on this condition being met that the provision of s. 195, falling under Chapter XVII, shall come into play. This, t .....

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r commission earned cannot be deemed to have either accrued or arisen in India. Where the services are rendered in India (taxable territory), the income therefrom, to that extent, would surely accrue or arise in India, so that one may not be required to even travel to the deeming provision of section 9, which in a way seeks to extend and to definition the scope of accrual by and through the concept of business connection . As explained in CIT vs. R. D. Aggarwal & Co. [1965] 56 ITR 20 (SC), w .....

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de the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity - the Agents in the present case. The matter is, thus, principally and primarily factual. This is also what the Board Circular 23 (supra) explains, i.e., whether the non-resident has a business connection in India, from which income, profits or gains can be said to arise within the meaning of section 9 has to be .....

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etermination of whether there is any business connection which would only be upon examining the scope and activities in the taxable territory (India) and the relation with that carried in the territory outside India from which income is earned. A Circular cannot, and it would be presumptuous to think otherwise, decide whether there is in the facts and circumstances of the case, a business connection, i.e., a relation between the trading activity in the taxable and the non-taxable territories, an .....

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dustries (in Civil Appeal No. 4022 of 1999 dated 14.10.2008). The subsequent withdrawal of the said Circular is thus, under the circumstances, of little assistance to the assessee. In the facts of the present case, the assessee claims likewise, i.e., of no services having been rendered in India (taxable territory). There has been, however, no examination of the activities carried out by the non-resident agents, even as the Revenue claims the same to involve managerial and consultancy services, s .....

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be responsible for this. The law could not be applied without examining and determining the facts. The law provides the guidelines, the frame work, applying which to the facts as found, the issues as arising are to be decided/adjudicated. That is, the law could only be applied on the terra firma of the facts, which form the building block of any case. Not so doing would only amount to matching the colour of one case with that of another, something which could not be countenanced, and disapproved .....

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on of tax at source. Coming to the facts and circumstances of the case, the assessee, as given to understand, is a manufacturer of automobile parts in India. The vehicles plying on the roads abroad are, as is the common knowledge, very different in design and engineering from that in India. The profile of the auto parts would have to match and fit into the engineering and designing of the vehicles. How is the assessee s product, then, sold and marketed, which would require penetration and establ .....

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he technical details, including on product quality, leading to the production of the product prototype and approval thereof, to the trial production, before the regular production commences and supplies made. In other words, the assessee s product is not a standardized, but a customized one, with, rather, customization itself being a long drawn process. All this, as indicated before, would require interaction of high calibre between the concerned parties, with the agents presumably co-coordinati .....

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with its own set of requirements and issues. The assessee s view point on each aspect of the matter, and at each stage, has to be put across to the buyers, and vice-versa, constituting an effective dialogue between the two, which is the prime function of the agent as an intermediary. Why, it may also necessitate visits by either side, to another, besides by the Agent/s to India, apart from the regular exchange and flow of information through other modes of communication. How else, we wonder, th .....

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is under the circumstances of little consequence. It is, again, upon examining and ascertaining the nature of the services that the AAR in Wallace Pharmaceutical (P.) Ltd. (supra) held that the services provided by Penser Group, a tax resident of USA, were not limited to USA and, further, utilized in India and, accordingly, payments thereto warranted deduction of tax at source. The AAR has, in our view, sought to correctly apply the law in the matter - the issue being principally factual. It is .....

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, even as observed during hearing - and to the agreements by the parties, that the matter, setting aside the impugned order, is restored for proper factual as well as legal determination back to the file of the Assessing Officer (A.O.), who shall decide the same after allowing the assessee reasonable opportunity to present its case before him. This decides Grounds 3 & 4 of the Assessee s appeals for both the years. 5. We, next, consider the Revenue s appeal, toward which the assessee places .....

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