TMI Blog2019 (6) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the same are not relevant in the backdrop of the facts involved in the case before us. Managerial services - As the foreign concern was only rendering its services abroad for referring or introducing customers to the assessee, and was not rendering managerial advice or management services, therefore, the referral income received by the said foreign agency from the assessee cannot be held to have been received by it for rendering any managerial services. Technical services - As the foreign agency viz. Newmark Company Real Estate Inc., New York, USA, was only rendering referral services to the assessee, and was not undertaking or performing any technical services where special skills or knowledge relating to a technical field were required, therefore, it can safely be concluded that the referral fees received by the foreign agency from the assessee was not towards technical fees. Consultancy fees - As the foreign agency by using its skill, business acumen and knowledge which was acquired by it for its own benefit, was only referring customers to the assessee, therefore, it cannot be said that it was providing any consultancy services to the assessee. No obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The learned Commissioner of Income Tax (Appeals) erred in holding that the appellant had failed to demonstrate how the commission was not taxable under the Double Taxation Avoidance Agreement between India and USA. The said finding is perverse. 3. Having regard to the facts and circumstances, the appellant submits the disallowance of ₹ 24,62,367/- is unjustified and is required to be deleted. The Appellant craves leave to add to, amend, alter, modify or withdraw any or all the Grounds of Appeal before or at the time of hearing of the Appeal, as they may be advised from time to time. 2. Briefly stated, the assessee company which is engaged in the business of rendering international real estate advisory and property management services had filed its return of income for A.Y. 2012-13 on 29.11.2012, declaring total income of ₹ 7,23,59,570/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the I-T Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2). 3. During the course of the assessment proceedings it was observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia; or (ii) the non-resident has rendered services in India. It was noticed by the A.O that his predecessor on the basis of the aforesaid retrospective amendment had concluded, that irrespective of the fact that the foreign concern to which referral fees was paid by the assessee had a residence or place of business or business connection in India, or had rendered services in India, or not, the amount of referral fees would be taxable in the hands of the said foreign concern in India. Apart there from, it was also observed by the A.O that the assessee had failed to demonstrate as to how the aforesaid amount was not taxable in India as per the India-USA DTAA. On the basis of his aforesaid deliberations, the A.O being of the view that the assessee who was obligated to deduct tax at source on the referral fees of ₹ 24,62,367/-, however, had failed to comply with the said statutory obligation, thus, disallowed the said amount under Sec. 40(a)(i) of the I-T Act. 4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). However, the CIT(A) following the view taken by his predecessor who had upheld the said disallowance while disposing off the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O holding a conviction that the assessee had defaulted in deducting tax at source u/s 195 on the referral fees of ₹ 24,62,367/- that was paid to a foreign concern viz. Newmark Company Real Estate Inc., New York, USA, had thus disallowed the claim of the said amount as an expenditure under Sec. 40(a)(i). As is discernible from the assessment order, the A.O had subscribed to the view that was taken by his predecessor in the case of the assessee for A.Y. 2009-10, and had observed, that as the referral commission paid by the assessee to the aforementioned foreign concern was covered by the Explanation to Sec. 9(2) that was made available on the statute by the Finance Act, 2010 w.r.e.f from 01.06.1976, therefore, the same was taxable in India. Accordingly, the A.O holding the assessee as being in default for not deducting tax at source u/s 195, thus disallowed the aforesaid payment of referral fees of ₹ 24,62,367/- u/s 40(a)(i) of the I-T Act. We find that the A.O while concluding that the referral fees paid by the assessee to the foreign concern fell within the realm of Explanation to Sec. 9(2), and was thus taxable in the hands of the said foreign concern in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to be deducted from the commission and other related charges payable to a non-resident for services rendered outside. However, as the aforesaid circulars had thereafter been withdrawn by the CBDT, vide its Circular No. 7/2009, dated 22.10.2009, therefore, the same cannot be pressed into service for arriving at a similar conclusion while disposing off the present appeal of the assessee. At this stage, we may herein observe that the ld. A.R had fairly brought to our notice the distinction in the facts involved in the case of the assessee for A.Y 2009-10, as against that for the year under consideration. Be that as it may, we find that both the aforesaid CBDT circulars viz. (i). Circular No. 786, dated 07.02.2009; and (ii). Circular No. 23, dated 23.07.1969, were clarificatory in nature and, therein clearly provided that as per Sec. 5(2) and Sec. 9 of the I-T Act, no tax was deductible on export commission and other related charges payable to a non-resident for services rendered outside India. Admittedly, though the aforesaid circulars do not hold the ground any more, however, as per the mandate of law, as was therein clarified in both of the said respective circulars, the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f clause (i) of Sec. 9(1) provides, that 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 from any asset or source of income in India, or through the transfer of a capital asset situate in India, shall be deemed to accrue or arise in India. On a scrutiny of clause (i), the only relevant aspect of the said clause which could have any bearing on determining the deemed accrual or arising of the referral fees in the hands of the foreign concern in the case before us, is the .....direct or indirect business connection in India . A perusal of Explanation 1(a) of clause (1) to Sec. 9(1) reveals, 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 this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Now, in the case before us, as the referral fees was earned by the foreign concern, viz. Newmark Company Real Estate Inc., New York, USA, for their services or operations which were fully carried out outside In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded on the basis of s. 42 of the Indian IT Act, 1922, which corresponds to s. 9(1)(i) of the Act]. 9. In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned by the nonresident assessees for services rendered 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. As the facts involved in the case before us i.e pertaining to taxability of referral fees paid by the assessee to the foreign concern, for the services rendered by it abroad, are more or less similar to the facts as were there in the case before the Hon ble Apex Court, therefore, we respectfully follow the same and conclude that the referral fees r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, therefore, in the backdrop of the same, the nature of services rendered by the foreign concern to the assessee would require some deliberation, for deciding, as to whether the referral fees received by the foreign concern from the assessee would fall within the realm of either of the aforementioned three services, or not : (A). Managerial services : (i). We are of the considered view that referral services rendered by the foreign concern viz. Newmark Company Real Estate Inc., New York, USA, abroad for referring/introducing a customer to the assessee, cannot be bracketed as management services provided by the said foreign concern to the assessee. Admittedly, as the foreign concern was neither acting as a manager or dealing with the administration, nor controlling the policies or scrutinising the effectiveness of the policies, therefore, it did not perform any supervising function whatsoever. Accordingly, as the foreign concern was only rendering its services abroad for referring or introducing customers to the assessee, and was not rendering managerial advice or management services, therefore, the referral income received by the said foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.r.e.f 01.06.1976, would not come into play. Accordingly, we are of the considered view that as the referral fees received by the foreign concern from the assessee does not fall within the realm of the scope of total income of the said foreign concern viz. Newmark Company Real Estate Inc., New York, USA, as envisaged in Sec. 5(2) of the Act, therefore, no obligation u/s 195 was cast upon the assessee to have deducted tax at source on the referral fees of ₹ 24,62,367/- that was paid to the said foreign concern. 13. Alternatively, we find that no obligation was cast upon the assessee to deduct tax at source on the amount of ₹ 24,62,357/- that was paid to the foreign concern viz. Newmark Company Real Estate Inc., New York, USA, towards referral fees, for the reason viz. (i) that, as the services rendered by the foreign concern for introducing a client did not did not make available any technical knowledge, experience, skill, know-how or processes to the assessee, therefore, the same did not fall within the realm of Fees for included services as envisaged in Article 12 of the India-USA, DTAA; and (ii). that, as the aforesaid payment made to the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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