Case Law Details

Case Name : Gama Industries Coimbatore Ltd. Vs Commissioner of Income-tax-III (ITAT Chennai)
Appeal Number : IT Appeal No. 755 (MdS.) of 2011
Date of Judgement/Order : 11/07/2012
Related Assessment Year : 2006-07
Courts : All ITAT (4534) ITAT Chennai (222)

IN THE ITAT CHENNAI BENCH ‘B’

Gama Industries Coimbatore Ltd.

versus

Commissioner of Income-tax-III

IT Appeal No. 755 (MdS.) of 2011

[Assessment year 2006-07]

JULY 11, 2012

ORDER

Abraham P. George, Accountant Member

In this appeal filed by the assessee, it assails an order dated 23.3.2011 of Commissioner of Income Tax-III, Coimbatore, passed under Section 263 of Income-tax Act, 1961 (in short ‘the Act’).

2. Short facts apropos are that assessee, a company engaged in manufacture and export of cotton yarn fabrics and garments, had filed its return for impugned assessment year showing a loss of Rs. 1,14,27,692/-. During the course of original assessment proceedings, assessee was required to file various details by the Assessing Officer. Such details were filed and assessment was completed accepting the loss. Thereafter, on 28.1.2011, the CIT issued a notice under Section 263 of the Act proposing revision of the order of A.O. According to him, assessee had paid a sum of Rs. 25,11,946/- to one M/s Thin Red Line, United Kingdom, as fees for market development overseas in UK. As per the CIT, provisions of Section 9 of the Act applied and income had to be considered as accruing in India in the hands of the Non Resident. Since no tax was deducted at source as mandated under Section 195 of the Act, as per the CIT, rigours of Section 40(a)(ia) of the Act was attracted. Assessing Officer having not made any disallowance invoking such section, CIT was of the opinion that the assessment was erroneous insofar as it was prejudicial to the interests of Revenue. Reply of the assessee was that Section 9(1)(vii) of the Act, which dealt with fees for technical services, was not applicable for the impugned payment for a reason that the services rendered by the party abroad was only for market development and was not in the nature of any managerial, technical or consultancy services falling under Explanation 2 to Section 9(1)(vii). As per the assessee, services of M/s Thin Red Line were utilized only for marketing done in United Kingdom. In any case, according to assessee, vide Article 6 of Double Taxation Avoidance Agreement (DTAA) between India and United Kingdom, profits of an enterprise arising in United Kingdom will be taxable in India only if such enterprise was having a permanent establishment in India. Since M/s Thin Red Line was not having any permanent establishment in India, its profits could not be considered as taxable in India. Further, according to it, such receipts in the hands of M/s Thin Red Line could not be considered as technical services, under DTAA, as well.

3. However, the CIT was not impressed. According to him, what was paid by the assessee in the guise of market development fees was nothing but consultancy charges and it fell within the definition of “technical services” given under Explanation 2 to Section 9(1)(vii) of the Act. As for the contention of the assessee that market development fees, was not taxable in India, in view of Article 6 of DTAA, CIT was of the opinion that such payments were nothing but fees for technical services, and Section 9(1)(vii) squarely applied. He thus directed the A.O. to revise the assessment considering the original assessment erroneous and prejudicial to the interests of Revenue.

4. Now before us, learned A.R. strongly assailing the orders of authorities below, submitted that in the first place what was paid by the assessee to M/s Thin Red Line UK was market development fee and not fees for technical services. According to him, admittedly, the payee was a non-resident. If the amounts received by the payee were business income in its hand, then it would not be taxable in India for the simple reason that it was not having any permanent establishment in India. Further, according to him, if such market development fee was treated as fee for technical services, then vide Article 13.4 of DTAA such technical services unless it was made available to the assessee, could not be taxed in India. There was nothing that was made available to the assessee. On the other hand, M/s Thin Red Line UK was doing market survey for the assessee outside India. Learned A.R. also pointed out that payments made by assessee squarely fell within the exclusion mentioned in clause (b) of Section 9(1)(vii). Said clause clearly excluded from purview of fee for technical services, fees paid in respect of services as well as business promotion carried on by a non-resident outside India. Reliance was placed on the decision of Hon’ble Bombay High Court in the case of Grasim Industries Ltd. v. S.M. Mishra, CIT [2011] 332 ITR 276 and also that of Authority for Advance Ruling in the case of Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418.

5. Per contra, learned D.R. supporting the order of CIT, submitted that what was paid by the assessee was nothing but fee for technical services. Once it was considered as fee for technical services, there was no necessity for the concerned non-resident to have a place of business or business connection in India for taxing such amount under Section 9(1)(vii) of the Act. According to him, this position was clear in view of the explanation added to Section 9 by Finance Act, 2010 with retrospective effect from 1.6.1976.

6. We have perused the orders and heard the rival submissions. Relevant question to be decided, in our opinion, is not whether the payment made by the assessee to M/s Thin Red Line UK was fee for market development overseas or fee for technical services. No doubt, this issue has not been discussed by the Assessing Officer in the assessment order at all. The question is, even if we consider it as fee for technical services, would it be taxable in India in the hands of M/s Thin Red Line UK. Section 9(1)(vii) of the Act, which specifies that income by way of fees for technical services shall be deemed to accrue or arise in India, is reproduced hereunder:-

“(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 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)  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;

[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 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”.]”

7. Here, if we consider the amount paid by the assessee as fee for technical services, it would fall under clause (b) above. Such clause clearly mentions exclusion of fees that are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making an earning any income from any source outside India. Hon’ble Bombay High Court in the case of Grasim Industries Ltd. (supra) relied on by the learned A.R., had clearly mentioned that the expression “by such person” appearing in Section 9(1)(vii) (b), referred to the recipient of the income and not to the person making the payment. Here, the recipient of the income was M/s Thin Red Line UK and there is no dispute that so far as M/s Thin Red Line UK was concerned, they were rendering such services to the assessee in the course of their business. Therefore, such payment clearly went out of the ambit of Section 9(1)(vii) through the exclusion specified in clause (b) thereunder. Irrespective of the fact whether the non-resident had a place of business or business connection in India, the amount received by it would not fall within the purview of Section 9(1)(vii) of the Act. Further, the CIT has not mentioned how the amount could be considered as fee for technical services under DTAA between India and UK. Clause (4) of Article 13 thereof clearly gives what is construed as term “fee for technical services” under the said DTAA. The said clause is reproduced hereunder:-

“4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which:

(a)  are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or

(b)  are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or

(c)  make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”

Giving marketing services outside India, even if we consider it as technical services, nothing was made available to the assessee in the nature of any technical knowledge, experience, skill know-how or processes. There was no development or transfer of any technical plan or technical design. CIT in his order under Section 263 has not pointed out any sort of similar transfer or any sort of technical knowledge being made available to the assessee. He simply relied on Section 9(1)(vii) of the Act for coming to the conclusion that amounts received by M/s Thin Red Line UK taxable in India. We are of the opinion that this finding of the CIT is incorrect in view of Section 9(1)(vii) (b) of the Act and also in view of DTAA between India and UK. Assessee could always fall back on the DTAA if it was beneficial to it. Thus, in our opinion, the twin conditions required for invoking Section 263, that there should be an error in the order of Assessing Officer and such error should be prejudicial to the interests of Revenue, have not been satisfied. We, therefore, quash the order under Section 263 of the Act passed by the CIT.

8. In the result, appeal filed by the assessee is allowed.

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