TMI Blog2017 (10) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... stainable basis. The impugned order is thus quashed and the assessee gets the relief accordingly. - Decided in favour of assessee. - ITA No. 1534/Ahd/2015 - - - Dated:- 26-9-2017 - Pramod Kumar AM And S S Godara JM For The Appellant : Shradha Khemka For The Respondent : VK Singh ORDER Per Pramod Kumar, AM: 1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 30.03.2015 passed by the Principal Commissioner of Income-tax, Vadodara-2, Vadodara under Section 263 of the Income-tax Act, 1961 for the Assessment Year 2009-10. 2. The grievances raised by the assessee are as follows:- 1. The learned Principal Commissioner of the Income Tax-2, Vadodara ( the CIT ) erred in fact and in law in revising the assessment by invoking powers u/s. 263 of the Income Tax Act, 1961 ( the Act ) which was completed by way of assessment u/s 143(3) of the Act despite the fact that the conditions stipulated for invoking such extra-ordinary jurisdiction were not satisfied. 2. The learned CIT erred in fact and in law in setting aside the assessment u/s. 143(3) and directing the AO to frame fresh assessment on the issues a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31. The scheme of taxability in India, so far as the non-residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a non-resident, provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year . There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is deemed to accrue or arise in India . Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context: 'Section 9- Incomes deemed to accrue or arise in India ( 1) The following incomes will be deemed to accrue or arise in India: ( i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com 325 (AAR - New Delhi), we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra, In re [2006] 284 ITR 564/155 Taxman 101 (AAR - New Delhi) which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the non-resident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food Wine Show (to be held in India), and makes full and final payment to the applicant in India and that the commission income would, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income by way of technical services payable by a person resident in India, except in certain situations- which are not attracted in the present case anyway, are deemed to be income accruing or arising in India. Explanation 2 to Section 9(1)(vii) defines 'fees for technical services' as any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions 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' [Relevant portion highlighted by underlining] . 35. In the light of the above legal position, what we need to decide at the outset is whether the amounts paid by the assessee to the non-resident agents could be termed as consideration for the rendering of any managerial, technical and consultancy services . As we do so, it is useful to bear in mind the fact that even going by the stand of the Assessing Officer, at best services rendered by the non-resident to the agent include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the scheme of Section 9, so far as tax implications on commission agency business carried out by non-residents for Indian principals is concerned. It does not need much of a cerebral exercise to find out whether the income from the business carried on by a non-resident assessee, as a commission agent and to the extent it can be said to directly or indirectly accruing through or from any business connection in India, is required to be taxed under section 9(1)(i) or under section 9(1)(vii), of the Income Tax Act, 1961. The answer is obvious. Deeming fiction under section 9(1)(i) read with proviso thereto, as we have seen in the earlier discussions, holds the key, and lays down that only to the extent that which the operations of such a business is carried out in India, the income from such a business is taxable in India. When no operations of the business are carried on India, there is no taxability of the profits of such a business in India either. The question then arises whether in a situation in which, in the course of carrying on such business, the assessee has to necessarily render certain services, which are of such a nature as covered by Explanation 2 to Section 9(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AGENT shall carry out all the duties normally rendered by an AGENT including but not limited to the following: 5.1 To act exclusively on behalf of the PRINCIPAL and not source, procure or market products of similar type manufactured by competitive companies without prior written consent of the PRINCIPAL. 5.2 To use its best endeavors and facilities to develop, expand and promote diligently, the sale and the market for the Products. The agent will be responsible of making the necessary market plans and establish the marketing network of representatives to help promote Welspun products . 5.3 To provide the PRINCIPAL with information such as marker developments, activities of competitors, intentions and plans of clients to the maximum of his knowledge. 5.4 Endeavor to provide the PRINCIPAL prompt advance information regarding tenders. To forward to the PRINCIPAL tender documents, inquiries etc, with full technical specifications well ahead - as much as he can - of tender closing. 5.5 The AGENT on behalf of the PRINCIPAL, will purchase tender documents and forward the same to the PRINCIPAL well ahead - as much as he can - of tender closing. The cost of pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent shall remain valid for a period of One year from the date of signing. The said Agreement can also be terminated by either party anytime giving notice to the other party of at least 90 days in advance by fax and followed by registered letter stating reasons for the termination. The agreement can be reinstated for a further period of two years based on mutual agreement and then after its termination another period of five years. 9.2 In the event of the termination, the AGENT will furnish all the relevant information to the PRINCIPAL and will be responsible for realization of payments outstanding till date within the TERRITORY. Also the AGENT shall return all the customers records and other data relating to the Company's business or Services which may be in his possession. 9.3 In the event of termination, if any contract is concluded after the termination date, but the exercise has commenced prior to the termination date, the agent is entitled for the applicable commissions. SALES COMMISSION FOR THE SONATRACH GK3 PROJECT WELSPUN will pay GLOBAL SYNERGY INTERNATIONAL LTD. in its capacity as agent for WELSPUN a sales commission, based on the FOB mill sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the agent is the work of acting as agent and so procuring business for the assessee but as the contemporary business models require the work of agent cannot simply and only be to obtain the orders for the product, as this obtaining of orders is invariably preceded by and followed by several preparatory and follow up activities. The description of agent's obligation sets out such common ancillary activities as well but that does not override, or relegate, the core agency work. The consideration paid to the agent is also based on the business procured and the agency agreements donot provide for any independent, standalone or specific consideration for these services. The services rendered under the agreement cannot, therefore, be considered to be technical services in nature or character. The services rendered in the course of rendering agency services are essentially business services and to obtain the business. We have also noted that, so far as rendition of technical services is concerned, one of the main points in the case of the revenue, as evident from a plain reading of the impugned order under section 201, is that manufacturing of specialized pipe was a highly technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice is the service being rendered to the buyer but the payment received by the commission agents is not for this service per se but for generating business orders for the assessee. Generating business or securing orders is an entrepreneurial activity and cannot, by any stretch of logic, be treated as a technical service per se. The same is the position with regard to assistance with respect of logistics, such as shipping and handling services, with respect to sale forecasting, with respect to gathering information on markets, business environment and on specific buyers and with respect to development of sales network. All these services are essentially integral part of, and are thus aimed at, developing business for the assessee and securing orders for the assessee from the right persons. Neither these services can be viewed on a standalone basis divorced from the economic activity of securing orders, nor any payment can be said to be for rendition of these services inasmuch as it is not the rendition of these services but securing business of the assessee which triggers the income accruing to the non-resident agents of the assessee and it is securing of business for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary to consider the relevant provisions of the Act:- ( i) Section 40(a)(i) of the Act :- Section 40 - Amounts not deductible: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession , - (a) in the case of any assessee - ( i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- ( A) outside India; or ( B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode : Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. [ Explanation 1] :...................... [ Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or nonresident, whether or not the non-resident person has- ( i) a residence or place of business or business connection in India; or ( ii) any other presence in any manner whatsoever in India. Explanation 4 to Section 9 (1) (i) of the Act:- Section 9 - Income deemed to accrue or arise in India - ( 1) The following incomes shall be deemed to accrue or arise in India : (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India. 9.2 The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipient / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist. 10. Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipent is not liable to be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962. 15. The issue raised in this case has been the subject matter of the decision, in the recent case, CIT v. Kikani Exports (P.) Ltd. [2014] 369 ITR 96/[2015] 232 Taxman 255/49 taxmann.com 601 (Mad.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- '... the services rendered by the non-resident agent could 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 and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted.' 16. When the transaction does not atract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed. 6. Clearly, therefore, the payment of commission in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to Menlo outside India. These services comprise of transport, procurement, customs clearance, sorting, warehousing and pick up services on the cargo exported by Menlo on behalf of its customers. Having noted the nature of services provided by the assessee outside India, for which Menlo India made the payment, let us consider if these can be described as managerial or technical or consultancy services. 7. First we will consider the ambit of 'managerial services' to test whether the instant services can qualify to be so called. Ordinarily the managerial services mean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect is missing and one has to follow a direction from the other for executing particular job in a particular manner, it cannot be said that the former is managing that affair. It would mean that the directions of the latter are executed simplicity without there being any planning part involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is covered within section 9(1)(vii). The word consultancy means giving some sort of consultation de hors the performance or the execution of any work. It is only when some consideration is given for rendering some advice or opinion etc., that the same falls within the scope of consultancy services . The word 'consultancy' excludes actual 'execution'. The nature of services, being freight and logistics services provided by the assessee to Menlo India has not been disputed by the authorities below. There is nothing like giving any consultation worth the name. Rather such payment is wholly and exclusively for the execution in the shape of transport, procurement, customs clearance, delivery, warehousing and picking up services. That being the position, we opine that the payment in lieu of freight and logistics services cannot be ranked as consultancy services. 10. The only left over component of the definition of fees for technical services taken note of by the ld. CIT(A) is technical services . He observed that the assessee's business structure is time bound service coupled with continuous real time transmission of information by using and also mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the nature of services rendered and also the calculation of deduction. The assessee did it. On being satisfied the A.O. granted deduction u/s 80 O. By exercising the power u/s 263, the learned CIT held the assessment order to be erroneous and prejudicial to the interest of the Revenue to the extent of granting deduction u/s 80 0. When the matter came up before the Tribunal, it was observed that the issue is debatable and hence outside the ambit of section 263. Apart from that, it was also observed that the assessee was engaged in integrated air and ground transportation of time sensitive packages to various destinations rendering commercial services. It was in this context that the assessee was held to be eligible for deduction u/s 80 O. At this juncture it will be useful to note that at the material time section 80 O provided for deduction on any 'income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also making available advanced technology in the form of sophisticated equipment and software.' He was swayed by the contention of the assessee that the Manlo India or the ultimate customer could track the movement of cargo with the help of computers. We have noted supra that the consideration received by the assessee did not include any consideration for the supply of any equipment to Manlo India. Now we will examine as to whether the use of computer in any manner for knowing the location of the cargo at a particular time, can be held as technical service. 14. Explanation to section 9(1)(vii) defines the expression fees for technical services as consideration for rendering 'managerial, technical or consultancy services'. It is seen that there is no definition of the term technical services in the Act. 15. The principle of noscitur a sociis mandates that the meaning of a word is to be judged by the company of other words which it keeps. This rule is wider in scope than the rule of ejusdem generis. In order to discover the meaning of a word which has not been defined in the Act, the Hon'ble Supreme Court has applied the principle of noscitur a soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in the hands of non-resident commission agents, representing Indian principal, in which similar activities were said to have been performed. In the case of Armyesh Global v. Asstt. CIT [2012] 51 SOT 564/21 taxmann.com 130 (Mum.), the coordinate bench has, inter alia, observed as follows: '16. We have considered the issue and examined the facts on record. The learned Assessing Officer tried to invoke the definitions of technical services on the commission paid to the foreign company. The reason being that commission payment to non-resident is not covered by the provisions of section 40(a)(ia), as it has only applicable to any interest royalty, fees for technical services or other sum chargeable under this act which payable outside India on which tax is deductible at source but has not been deducted. The Assessing Officer made out a case that the commission paid is Tees for technical services' without specifying what are the technical/Managerial services rendered by the said company to the assessee. Assessee indeed entered into an agreement for propagation of its handicraft products with the non-resident company. The copies of the agreement have been placed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... every quarter, with reports on economic developments and market conditions in the territory (area) and at the same time, convey to the principal, the Agent's observations with respect to activities of competitors. The Agent shall report immediately on particular profitable business possibilities and extraordinary events. 2.4. The Agent shall abstain from any competition whatsoever against the principal and shall not promote competition by third persons. In particular, the Agent shall not act for competitive firms as a commercial Agent, Commission Merchant or Distributor, nor shall the Agent associate directly or indirectly with competitive firms. The Agent shall not, for all time exploit or disclose to other persons any business and production secrets of the principal that have been communicated to them or which they have otherwise come to know, irrespective of whether or not the contract is still in force. 2.5 The Agent shall observe the rules of fair competition and be responsible for any violation of the same. 2.6 The Agent is not authorized to accept payments directly in their own name but shall assist the principal in collecting outstanding payments. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : [ Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [ Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2].-For the purposes of this clause, fees for technical services means any consideration (including any 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 recip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 234/7 taxmann.com 18, payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non-resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent's income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions. 42. In view of these discussions, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. 5. In the light of view so expressed by the Co-ordinate Bench, the stand of the Commissioner in the impugned appeal is incorrect and does not meet our approval. We, therefore, hold that the Commissioner was not justified in invoking his powers under Section 263 of the Act on the basis of his understanding that commission paid to non-resident even for services rendered outside India is taxable in India. The very foundation of the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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