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TMI Blog2018 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and export of furniture and leather goods etc. The assessee filed its return of income on 01/10/2010 declaring total income of Rs. 1,07,47,960/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. The assessment under section 143(3) of the Act was completed on 15/03/2013 assessing total income at Rs. 2,56,15,450/- after making disallowance on sales commission amounting to Rs. 1,39,60,134/- and disallowance under section 14A of the Act amounting to Rs. 9,07,361/-. On further appeal, the Ld. CIT-(A) partly allowed the appeal of the assessee. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. The ground No. 2 of the appeal being general in nature is dismissed as infructuous. 4. The ground No. 1 of the appeal relates to disallowance of sale commission to foreign agents amounting to Rs. 1,39,60,134/-. The facts qua the disallowance are that the assessee paid sales commission to two foreign agents who were based in the Canada and the UK respectively. The assessee did not deduct tax at source (TDS) on the payment to these foreign agents. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vii) of the Act. The section reads as under: Sec 9 (1) : (i) to (vi) xxxxxx (vii) - income by way of fees for technical services payable by- (a) xxxxxxxx (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) xxxxxxxxxxx : [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 l.-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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * Services are of a "technical" nature when special skills or knowledge relate to a technical field. * These include services related to a particular art, science or applied science or vocational training dealing with applied science; dictionary meaning includes professional. * Delivery of a service via technological means does not make the service technical. * The expression "technical" has very wide amplitude and does not restrict its applicability only to engineering or scientific areas of knowledge. Consultancy Services * Services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. * Overlap with technical and managerial services possible so long as provided by a consultant. * The expression "consultancy" service involves giving of an advice or advisory service by a professional." 4.3 The assessee further contended before the Ld. CIT-(A) that the foreign agents being nonresidents, who had no operations/permanent establishment India and therefore not subjected to be assessed in India. Accordingly, the assessee was not liable to deduct tax at source on such expenses. In support of the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the decision of the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. versus DIT (288 ITR 408) and submitted that for accrual of income from Fee for Technical Services (FTS) both the conditions - the services (which is source of income), which is sought to be taxed, has been rendered in India, as well as utilized in India and both the condition have to be satisfied simultaneously. The Ld. counsel also submitted that retrospective amendment in section 9 had changed the position of taxability of income of non-residents from rendering of technical services in India. According to the Ld. counsel, amendment has been introduced by way of Finance Act, 2010, which received assent of the President of India on 8th May, 2010, whereas the present case of the assessee pertains to financial year 2009-10 and, thus, the assessee had no occasion to know/believe that tax was to be deducted irrespective of the place of rendering of services. The Ld. counsel in support, relied on the decisions of the Tribunal, Mumbai Bench in the case of KPMG Vs. ACIT in ITA No.6286, 6694/Mum./2012 reported in (2016) ITR (Trib.) 070. 4.7 We have heard the rival submission and perused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression has been explained by the Supreme Court in their judgment in CIT vs. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) : TC 39R.1098. The question whether a non-resident has a 'business connection' in India from or through which income, profits or gains can be said to accrue or arise to him within the meaning of s. 9 of the IT Act, 1961, has to be determined on the facts of each case. However, some illustrative instances of a non-resident having business connection in India, are given below: (a) Maintaining a branch office in India for the purchase or sale of goods or transacting other business. (b) Appointing an agent in India, for the systematic and regular purchase of raw materials or other commodities, or for sale of the non-resident's goods or for other business purposes. (c) Erecting a factory in India where the raw produce purchased locally is worked into a firm suitable for export abroad. (d) Forming a local subsidiary company to sell the products of the non-resident parent company. (e) Having financial association between a resident and non- resident company. 4.7.6 Further, para-7 of the said circular has laid down that to constitute a business connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me arises in India. Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore, held to be not taxable in India. The relevant sections, namely section 5(2) and section 9 of the Income-tax Act, 1961 not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore, deductible under section 195 and consequently the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position the Comptroller & Auditor General have agreed to drop the objection referred to above. 4.7.9 Further, vide circular No. 7/2009 dated 22/10/2009, the CBDT withdrawn the circular No. 23 dated 23/07/1969 and circular No. 786/2000 dated 07/02/2000. 4.8 In our opinion, it is settled position that circulars are binding on the authorities under the CBDT but these are not binding on the Income-tax Appellate Tribunal. We note that as per section 119 of the Act, the CBDT is empowered to issue orders, instructions, or directions to al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f GVK Industries Ltd. versus Income Tax Officer, (1997) 228 ITR 564 analysed various decisions of the courts and laid certain principles to decide existence of 'business connection', as under: "12. Clause (i) of sub-s. (1) of s. 9, extracted above, brings within the fold of the said expression 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 transfer of a capital asset situate in India. Here the contention of Mr. Dhanuka that the NRC had no business connection requires examination. 13. "The expression business connection" is also used in s. 163(1)(b) which regards every person in India, who has any business connection with the non-resident, as an agent of that non-resident. 14. The import of that expression has been explained in various judicial pronouncements. 15. In CIT vs. R. D. Aggarwal and Co. (1965) 56 ITR 20 (SC), the expression "business connection," as used in s. 42 of the Indian IT Act, 1922, fell for consideration of the Supreme Court. It is observed that the question whether there is "b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP), the respondent-company entered into an agreement with a Polish company for the purchase of diesel engines with accessories. The agreement provided that the Polish company would render services for the effective fulfilment of the contract of sale, which included organising of a training course in Poland for technical employees of Hindustan Shipyard at the expense of the Polish company. In the context of the question referred to this Court under s. 256(1) of the Act, the Division Bench which dealt with the case, considered the scope of the expression business connection within the meaning of ss. 9(1)(i) and 163(1)(b) of the Act and held that to conform to the requirements of that expression it is necessary that the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territory which has been described as a real and intimate connection and that there must be something more than a mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of the expression. 18. In Barendra Prasad Ray vs. ITO (1981) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court of Patna, it was held that the sum of GBP 7,000 was not the income which the foreign-company had received in India or an income which had accrued to the foreign company within the meaning of s. 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the operation carried on in India. It was further held that there was no continuity between the business of the non-resident and the activity in the taxable territories in respect of the income and, therefore, there was no business connection between the foreign company and the assessee- company and the income could not be deemed to accrue or arise to the foreign company in India within the meaning of s. 9(1) as such, the said sum paid to the foreign company at London was not assessable in the hands of the assessee-company even as agent of the foreign company. 20. From the above discussion the following principles emerged: (i) whether there is a business connection between an Indian company and a non-resident (company) is a mixed question of fact and law which has to be determined on the facts and circumstances of each case ; (ii) the expression b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised 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 : Explanation 1.-............................................................................... 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 recipient chargeable under the head "Salaries". 4.8.6 Thus, in the instant case, the first issue arises, whether the services of procuring export order by the non-resident outside India falls under the definition of fee for technical services. Evidently, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) the non-resident has rendered services in India." 4.9 Thus, according to the above Explanation irrespective of the fact whether the non-resident has a residence or place of business or business connection in India or the non-resident has rendered services in India, income of non-resident for the purpose of clause (vii) i.e. fee for technical services shall be deemed to accrue or arise in India. The contention of Ld. counsel that this amendment has been introduced by Finance Act, 2010, which received assent of the President on the 8th may 2010, whereas the financial year pertained in the case of the assessee is 2009-10 which ended on 31/03/2010, therefore, the assessee had no occasion to know/believe that tax was to be deducted irrespective to the place of rendering service. The Ld. counsel in support of contention relied on the decision of the Tribunal Mumbai Bench in the case of KPMG versus ACIT (supra), where the Tribunal has given finding as under: "4.10. It is further noted by us that the law as it stood in the year before us i.e. A.Y. 2007-08, provided a mandatory condition that services should be rendered in India before it could be made taxable u/s 9(1)(vii). This req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment, the apex Court observed that (p. 444) : 'Sec. 9(1)(vii) of the Act must be read with s. 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income'. According to the apex Court, the global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTAA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of s. 5(2) of the Act subject to the compliance with 90 days rule.' As per the above judgment of the apex Court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavor should, thus, be made to construe the taxability of a nonresident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words 'income deemed to accrue or arise in India' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought out by the Finance Act, 2010. Under the amended Explanation to s. 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under cl. (v) or cl. (vi) or cl. (vii) of s. 9(1), and shall be included in his total income, whether or not (a) the nonresident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India. It is thus no longer necessary that, in order to attract taxability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its taxability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its taxability in India. 8. It is thus clear that till 8th May 2010, the prevailing legal position was that unless the technical services were rendered in India, the fees for such services could not be brought to tax under Section 9(1)(vii). The law amended was undoubtedly retrospective in nature but so far as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance can be made under section 40(a)(i) for assessee's failure to deduct tax at source from such payments. 9. In the case before us, there is no material whatsoever to demonstrate and establish that the design and development services, for which impugned payments were made, were rendered in India. Therefore, the assessee did not have any liability under section 195 r.w.s. 9(1)(vii) to deduct tax at source from these payments. Once we come to the conclusion that the assessee did not have any obligation to deduct tax at source from these payments, in the light of the above discussions and as corollary thereto, no disallowance can be made in respect of these payments. As we have come to these conclusions in the light of the provisions of the domestic law, i.e. Income Tax Act, itself, there is no need to deal with the taxability of incomes embedded in these payments under the provisions of the applicable tax treaties. That would be relevant with respect to taxability of these payments in the hands of the recipients, but, for the reasons set out above and in the light of the legal position discussed above, will be academic in the present context. As regards learned Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered in the definition of FTS. The Article 12 (4) of the India- Canada treaty defines the term Fees for Included Service as under: 12(4): For the purposes of this Article, fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. The clause (a) is not applicable in the instant case because the para 3 of the article speaks about 'royalty' and the selling agent's services are out of the purview of royalty. In clause (b) above, there is a 'make available' clause which means the service must be made available to resident so that he can use the same service for performing the same kind of tasks without the help of service provider, in future. Fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied. Your kind attention ids invited to the Income Tax commentary of Sampath lyenger, page 1536 volume 1 Ed. 11th, on the issue of interpretation of the term 'make available& ..... X X X X Extracts X X X X X X X X Extracts X X X X
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