PCIT Vs Technotree Convergence Ltd. (Karnataka High Court)
Foreign Agent Commission and Incidental Export Income: Karnataka High Court Rejects Revenue’s Appeal
Can commission paid to a foreign agent be disallowed for failure to deduct tax under Section 195? Can receipts connected with an export undertaking be separated from its business profits and taxed as income from other sources? These were the two issues before the Karnataka High Court in the Revenue’s appeal concerning assessment year 2011–12. On both issues, the Court ruled in favour of the assessee by following its earlier decisions.
Commission paid to foreign agents
The Assessing Officer had disallowed commission payments under Section 40(a)(ia) on the ground that tax had not been deducted at source. The Revenue argued that the assessee had not furnished complete details of the services rendered by the foreign payees. Without those details, according to the Revenue, it could not simply be assumed that the payments fell outside the scope of fees for technical services.
That argument raises a practical point. Describing a payment as “commission” does not, by itself, settle its tax treatment. The services actually rendered, the terms of the agreement and the chargeability of the payment in India remain relevant when examining a withholding obligation under Section 195.
However, the High Court did not undertake a fresh examination of each commission payment in this appeal. It noted that the questions raised by the Revenue had already been answered by a coordinate Bench in PCIT v. Puma Sports India Pvt. Ltd., ITA No. 223 of 2018. The Court also recorded that the Revenue’s special leave petition against that judgment was dismissed by the Supreme Court on 29 October 2021 in SLP(C) No. 15834 of 2021, and that the Puma Sports decision had been followed in an earlier appeal concerning Technotree itself, ITA No. 834 of 2018.
Following that line of decisions, the High Court answered the two commission-related questions against the Revenue and in favour of the assessee. The result is favourable to the assessee, but the present judgment is chiefly an application of precedent. It does not reproduce the foreign agency agreements or lay down a fresh, detailed test for distinguishing ordinary commission from fees for technical services.
Recoveries from employees and liabilities written back
The second dispute concerned amounts recovered from employees and liabilities written back. The Tribunal had treated these receipts as business income connected with the export undertaking. The Revenue contended that they lacked the necessary nexus with export turnover and should instead be assessed as income from other sources.
For this issue, the High Court relied on the Full Bench decision in CIT v. Hewlett Packard Global Soft Ltd., [2017] 87 taxmann.com 182 (Karnataka). That decision explains the treatment of income incidental to undertakings eligible under Sections 10A and 10B. The Full Bench had held that interest from temporarily parking business funds in bank deposits, and interest on staff loans, could form part of the profits and gains of such an undertaking. Those receipts were not to be detached from its export business merely because they did not arise directly from a sale to an overseas customer.
The Full Bench also distinguished the special scheme under Sections 10A and 10B from deductions under provisions such as Sections 80HH and 80-IB. The distinction matters because a narrow “derived from” test applied in another statutory setting cannot automatically decide whether an incidental receipt belongs to the business profits of a Section 10A or 10B undertaking.
Applying Hewlett Packard Global Soft, the Court answered the remaining questions in Technotree’s favour. Thus, the Tribunal’s treatment of the employee recoveries and liabilities written back was left undisturbed, and the Revenue’s appeal was disposed of.
Author’s comments
The judgment is useful on two separate propositions, but its reach should be stated carefully. On foreign commission, the Court followed Puma Sports and the earlier Technotree appeal; it did not hold that every payment to an overseas agent is automatically free from TDS. An assessee relying on the decision should still be able to establish what the agent did and why the payment was not chargeable to tax in India.
On export undertaking receipts, the decision reinforces that the real connection with the undertaking must be examined. A receipt does not necessarily become “income from other sources” merely because it is not part of export invoices. At the same time, the Court’s reasoning rests on the Full Bench’s interpretation of Sections 10A and 10B. It should be applied with care to receipts under other deduction provisions, whose wording and statutory scheme may differ.
The practical takeaway: Technotree succeeds on both issues, but the strongest use of this ruling is alongside the precedents it follows- Puma Sports for foreign commission and Hewlett Packard Global Soft for incidental income of a Section 10A or 10B undertaking.
Cases Discussed
- PCIT v. Puma Sports India Pvt. Ltd., ITA No. 223 of 2018 (Karnataka High Court)
- PCIT-7 v. Technotree Convergence Pvt. Ltd., ITA No. 834 of 2018 (Karnataka High Court)
- CIT v. Hewlett Packard Global Soft Ltd., [2017] 87 taxmann.com 182 (Karnataka) (FB)
FULL TEXT OF THE KARNATAKA HIGH COURT JUDGMENT/ORDER
This Appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 is directed against the order dated 03.07.2019 passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Bangalore, in ITA Nos.1447 and 1448/Bang/2017 for assessment years 2010-11 and 2011-12.
2. Heard learned counsel Sri.E.I.Sanmathi for the appellants and learned Senior Counsel Sri.K.R.Vasudevan for learned counsel Sri.P.D.Ankur for the respondent-assessee. Perused the entire appeal papers.
3. The above appeal was admitted on 28.06.2021 to examine the following Substantial Questions of Law:
“1. “Whether on the facts and circumstances of the case, the Tribunal was right in law in setting aside disallowance made under section 40 (a) (ia) of the Act in respect of commission payment by holding that the provisions of section 195 are not applicable in the facts of present case ignoring that assessee had failed to establish nature of payments and even during the appellate proceedings, the assessee had not submitted complete details about the nature of services rendered by the payees for which commission has been paid and whether this would fall beyond the scope for fee for technical services?”
2. “Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the nature of commission payments are not in dispute when the assessing authority has clearly disputed the same and made disallowance under section 40(a)(ia) of the Act since all the conditions set out in said provision was fulfilled”?
3. “Whether on the facts and circumstances of the case, the Tribunal was right in law in setting aside the addition made by assessing authority by treating amounts recovered from employees and liabilities written back as when the assessing authority has clearly disputed the same and made disallowance under section 40(a)(ia) of the Act since all the conditions set out in said provision was fulfilled”?
4. “Whether on the facts and circumstances of the case, the Tribunal was right in law in setting aside the addition made by assessing authority by treating amounts recovered from employees and liabilities written back as business income instead of ‘other income’ as claimed by assessee by following the decision of this Hon’ble Court in case of Hewlett Packard Global Soft Ltd even though the nature of receipt of income do not have any nexus with export turnover and same is not incidental to export business”?”
4. At the outset, learned counsel for the respondent submits that the Substantial Questions of Law No.1 and 2 raised by the appellants-revenue is answered by the Co-ordinate Bench of this Court in ITA No.223/2018 in Principal Commissioner of Income Tax-5 and Another vs. M/s.Puma Sports India P., Ltd.
5. It is further submitted that the SLP filed against the said judgment was dismissed by the Hon’ble Apex Court by order dated 29.10.2021 in SLP(C) No.15834/2021. It is also pointed out that by following the judgment in M/s.Puma Sports India P., Ltd., ITA No.834/2018 [M/s.Principal Commissioner of Income Tax-7 vs. M/s.Technotree Convergence Pvt. Ltd.,] was also disposed of. By following the decision of Co-ordinate Bench in Ms.Puma Sports India Pvt Ltd., the substantial question Nos.1 & 2 are answered against Revenue and in favour of the assessee.
6. In so far as substantial question Nos.3 & 4 are concerned, it is submitted that the said question is answered by Full Bench of this Court in Commissioner of Income Tax v/s Hewlett Packard Global Soft Ltd., reported in [2017] 87 Taxmann.com 182 (Karnataka) (FB), wherein, relevant paragraphs 34 and 37 read as follows:
“34. We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10-A and 10-B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon’ble Supreme Court has held that the interest income would not be the income “derived from” such Undertakings doing such special business activity.
37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as ‘Income from other Sources’ under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act.”
7. Respectfully following the above Full Bench decision of this Court, we answer substantial question Nos.3 and 4 in favour of the respondent-Assessee and against the appellant-Revenue.
Accordingly, the appeal stands disposed of.
