TMI Blog2018 (11) TMI 782X X X X Extracts X X X X X X X X Extracts X X X X ..... gent's income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions. Addition on account of prior period expenses - Held that:- We find that in the case of Saurashtra Cement & Chemical Industries Ltd Vs CIT [1994 (10) TMI 30 - GUJARAT HIGH COURT] has, inter alia, observed that “Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis” but that is precisely what has been upheld in the impugned order. It is not the case of the revenue that the expenses have been claimed twice but the short ground of disallowance is that since the expenses pertain to an earlier year, these expenses cannot be allowed. That approach is impermissible in law. - direct the Assessing Officer to delete the impugned disallowance - decided in favour of assessee. - ITA No.: 1400/Ahd/17 - - - Dated:- 15-10-2018 - Pramod Kumar AM And Mahavir Prasad JM For the Appellant : S N Soparkar For the Respondent : Keyur Patel ORDE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating aircraft, and its benefit, therefore, is restricted to this category of enterprise. Given this fact, nothing really turns on Indo Iranian tax treaty not having a specific provision for taxation of income by way of fees for technical services. All other incomes, except for the income of enterprise operating aircraft, continue to be covered by the domestic taxation laws in entirety. In this view of the matter, so far as payment of ₹ 12,05,96,574 to NJ-Iran is concerned, we will take it up alongwith the cases in respect of which are covered only by the domestic law. That leaves us with the cases of payment of ₹ 1,06,251 to a Thailand based entity GMS- Thailand and of ₹ 35,73,878 to Afras-UAE in this category. 23. There is no dispute that there is no specific provision for taxation of fees for technical services in India Thailand tax treaty and India UAE tax treaty. There is also no dispute that GMS-Thailand and Afras-UAE did not have any permanent establishments in India. Clearly, therefore, income in the hands of the recipients of this income could neither be taxed in as business income or under the head fees for technical services. 24. The stand of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply 25. To understand the scope of these treaty provisions, which are broadly in pari materia with the provisions of article 21 of UN Model Convention, we find guidance from the OECD Model Convention Commentary which states that The Article covers income of a class not expressly dealt with in the preceding articles (e.g. an alimony or a lottery income) as well as income from sources not expressly referred to therein (e.g. a rent paid by a resident of a Contracting State for the use of immovable property situated in a third State). The Article covers income arising in third States as well as income from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, also explains the scope of this article. In our humble understanding, therefore, article 21 does not apply to items of income which can be taxed in any situations under articles 6-20 whether or not such an income is actually taxable under these articles. 27. The question then arises whether income earned by the recipients in question, i.e. Afras UAE and GMS Thailand, can be said to in the nature of an income which is not expressly dealt with by other operative articles (i.e. article 6 to 20) of the treaty. The income earned by these entities was in the regular course of their business, and there is no dispute about this fundamental aspect. There cannot also be dispute about the fact that in the event of these entities satisfying the conditions regarding existence of permanent establishment in India, the amounts so received by these entities would have been taxable as business income. The income in question is thus clearly dealt with by article 7 read with article 5 and the reason why it has not been taxed is that the entities concerned did not have permanent establishments in India. 28. As we hold so, we are alive to the fact that there is no specific taxability provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the receipts in question are in the nature of fees for technical services in the hands of Afras UAE and GMS Thailand, these receipts are not taxable in the hands of these entities, in terms of the respective tax treaties, in India. It is only elementary that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, the provisions of this (Income Tax) Act shall apply to the extent they are more beneficial to that assessee . Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either. 30. As regards the remaining cases, in category (b) and in category (c) as also in the case of JT-Iran, the provisions of the tax treaties donot come to the rescue of the recipients, and, therefore, the taxability in these cases is to be decided on the basis of the provisions in the domestic law. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore, Explanation 1 to Section 9(1)(i) comes into play. 33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(1)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case of SKF Boilers Driers (P.) Ltd. In re [2012] 343 ITR 385/206 Taxman 19/18 taxmann.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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In this view of the matter, views expressed by the Hon'ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon'ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these rulings. 34. Coming to Section 9(1)(vii)(b), this deeming fiction- which is foundational basis for the action of the Assessing Officer, inter alia, provides that the income by way of technical services payable by a person resident in India, except in certain situationswhich 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 techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be said to be consideration for rendering of any managerial, technical or consultancy services (Emphasis by underlining supplied by us) . The services rendered by the agents, even if these services are held to be in the nature of technical services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor the quantification of these amounts have any relation with the quantum of these technical services. The key to taxability of an amount under section 9(1)(vii) is that it should constitute consideration for rendition of technical services. The case of the revenue fails on this short test, as in the present case the amounts paid by the assessee are consideration for orders secured by the assessee irrespective of how and whether or not the agents have performed the so called technical services. 36. Let us sum up our discussions on this 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration' for technical services, may be rendered academic in effect. Learned CIT(A) has very well summarized the judicial precedents in support of this line of reasoning, and, in an erudite and extended discussion, dealt with each limb of the definition of technical services. These findings are reproduced by us earlier in this order. While, for the sake of brevity, we need to repeat each of these reasons analysed by the learned CIT(A), suffice to say that we approve his well-reasoned findings and line of reasoning, and we will also briefly touch upon this aspect of the matter. Before we do so, we may take note of some of the clauses in a typical commission agreement entered into by the assessee with its commission agents. The key provisions in this agreement, a copy of which is placed before us at pages 103 to 109 of the paper-book, are as follows: Article 5 - AGENT'S OBLIGATION The 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the TERRITORY. 7.2 To inform the AGENT on receipt of an inquiry from the TERRITORY requiring direct supply . 7.3 The AGENT shall be entitled to commission as agreed upon in the contract. 7.4 To take into consideration the recommendations made by the AGENT while making the offer. 7.5 To provide all informative data, catalogues and technical material (all in the English Language) regarding the PRINCIPAL'S products and activities and keep the AGENT informed about all relevant charges. 7.6 To offer competitive prices as far as possible to enable the sale of the products as the agent is only entitled for commissions and not fixed salary on his work. 7.7 The PRINCIPAL nominates Mr. Ranjit Lala as the contact person with the AGENT for all correspondences and communications. Article 9 - TERMINATION. 9.1 This Agreement 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 bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PAL within a reasonable time but not exceeding 30 days from receipt of payment by WELSPUN. 38. As is clear from the above provisions of the agreement, the work that the agent has to done under this agreement, as is stated unambiguously in the agreement itself, is to carry out all the duties normally rendered by an agent including but not limited to the activities specified therein. The consideration for which the payment made to the commission agent is obtaining of the orders and not any services per se. The consideration is computed on the basis of business procured. Obviously, if there are no business generated for the principal, the agent gets nothing. Quite clearly, what is done by the agent is not a rendition of service but pure entrepreneurial activity. The work actually undertaken by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and present of complex technical presentation, on behalf of the assessee, which can only be done by a specialist in this field so as to convince the clients about Welspun's suitability to the contract . This at best signifies complexity in the businesses and the need of technical inputs in the process of businesses, particularly when the products being dealt with are technical products, but then merely because technical inputs are needed in carrying out business activity, it does not become a technical service rather than a business activity. At the cost of repetition, we must emphasize the important distinction between a business activity, requiring understanding of related technology, and rendition of technical services simplictor. In any case, what has been described as a technical service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission. 5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential. 6. Whether this contention is correct, is the issue to be decided. 7. In order to appreciate this contention, it is 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 (no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee. 8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent. 9. This question has been answered by the Hon 'ble Supreme Court, in the case of G.E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient. 9.1 Therefore, merely because a person 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 ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore, explanation (2) to Section 9(1)(vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee's case. 13. In this case, the commission payments to the non-resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. 14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E.India Technology's case, cited supra, in view of insertion of Explanation 4 to Section 9(1)(i) of the Act with corresponding introduction of Explanation 2 to Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een given in clause 1.1. In the recital clause it has been provided that the assessee company may require Menlo India to perform logistics services such as transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services (Local services) within India (Local operating area). It has further been provided that Menlo India may also seek similar services from the assessee company such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services (International services) outside India. In the present appeal we are concerned with the International services provided 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. Ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... role of the assessee in the entire transaction was to perform only the destination services outside India by unloading and loading of consignment, custom clearance and transportation to the ultimate customer. In our considered opinion, it is too much to categorize such restricted services as managerial services. We, therefore, jettison this contention raised on behalf of the Revenue. 9. Now we take up the next component of the definition of fees for technical services , being 'consultancy services', which has been pressed into service by the learned CIT(A) to fortify his view that the amount received by the assessee 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 consultat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has also harped on transportation of time sensitive packages with a view to bring the services provided by the assessee within the fold of technical services . In reaching this conclusion the learned CIT(A) also relied on the order passed by the Mumbai bench of the Tribunal in Blue Dart Express Limited v. JCIT. Let us examine the facts of that case. The assessee there claimed deduction u/s 80 O in respect of its foreign exchange earnings for rendering technical / professional services to a US Multi International company. During the course of assessment proceedings, the A.O. required the assessee to furnish 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) 51 DTR 148] (to which one of us, namely, the ld. JM is party) in which it has been held that the ratio laid down in that case cannot be universally applied. Due to material difference in the language of sections 9(1)(vii) and 80 O as discussed above, we hold that the decision in Blue Dart Express Limited (supra), can not be held to be supporting the case of the Revenue. 13. The ld. CIT(A) in reaching the conclusion that the assessee rendered 'technical services' also observed that its 'business structure is time bound service coupled with continuous real time transmission of information by using and 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not necessary for rendering such services, the payment for freight and logistics will not partake of the character of fees of 'technical services'. We, therefore, repel this contention raised on behalf of the Revenue. 17. Thus it can be noticed that the payment made to the assessee in question is not a consideration for managerial or technical or consultancy services. That being the position, it cannot fall within the ambit of section 9(1)(vii).' 40. We may also take note of another decision of a coordinate bench dealing with materially similar question dealing with taxability of income in the hands of nonresident 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refuse the conclusion of a contract negotiated by the Agent. 2.2 While negotiating contracts of sale the Agent shall act in conformity with all the conditions and particularly of delivery and payment as fixed by the principal. 2.3 The Agent shall be responsible for negotiating with all parties in their territory (area). The Agent shall travel in their territory (area) regularly to visit customers, and is bound to keep concluded contracts secret. The Agent shall always keep the principal informed about their activities and shall supply the principal, at least once 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services as per the Income Tax Act is as under: 9.(1) The following incomes shall be deemed to accrue or arise in India: (i) (vi )** ** ** (vii) Income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilized 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 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the income embedded in these payments did not have any tax implications in India, no fault can be found in not deducting tax at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 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. 4. We see no reasons to take any other view of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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