Export commission earned by foreign commission agent is not taxable India. Further it is not in the nature of Fees for Technical Services
Agreement between the assessee and the Non Resident is only for rendering services which cannot be considered as technical services and as there is no PE to the said non resident in India, the amount does not accrue or arise in India and further as there is no need for deducting the amount under section 195, there is no violation of provisions of section 195 and accordingly the same cannot be disallowed under section 40(a)(ia).
Since similar issues are also discussed in various cases relied upon by the learned Counsel, we do not consider it necessary to extract the same, but the principles laid down in all the cases is that if the fee payable is on source of income outside India, the same is not taxable in India. Therefore, we are of the opinion that both the Assessing Officer and the CIT (A) ignored the facts that services were rendered outside India and wrongly considered that the services are managerial services partly. Since there is no evidence that the non-resident has rendered any managerial services to assessee and the agreement indicates only services simplicitor for agency on commission basis, the findings of AO and CIT(A) are to be rejected. Assessee placed reliance on the CBDT circular 786 dated 7 February 2000 wherein the CBDT has considered and clarified that where the non-resident agent operates outside the country, no part of his income arises in India. Also, 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 are therefore held to be not taxable in India. Accordingly as per the said circular, no tax is therefore deductible under section 195 of the Act on export commission and other related charges payable to non-resident for services rendered outside India. Even though the said Circular 786 has been withdrawn by Circular 7 of 2009 dated 22nd October, 2009 w.e.f. 22nd October, 2009, the Circular 786 would continue to be applicable during AY 2007-08, i.e. the period under appeal as held by the jurisdictional Bombay High Court in the case of UTI v Income Tax Officer (249 ITR 612) that the withdrawal of a circular can only operate prospectively. Accordingly, assessee’s contentions are allowed. The ground is allowed.
Income Tax Appellate Tribunal, Mumbai
ITA No. 8822/Mum/2010 – (Assessment Year: 2007-08)
M/s. Armayesh Global V/s A.C.I.T.-12 (3)
Date of Pronouncement: 04/05/2012
Per B. Ramakotaiah, A.M
This appeal was preferred by assessee and the ITAT ‘A’ Bench decided the issue in favour of the assessee. Consequent to the appeal preferred by the Revenue, the Hon’ble Bombay High Court restored the matter to the file of the ITAT for considering the issue and passing a detailed order. Therefore, the case was taken up again.
2. The facts of the case are that assessee is a firm engaged in the business of manufacturing and exporting of hand embroidery and handicraft items. The return of income declaring total income of 13,87,010/- was filed on 19.10.2007. While completing the assessment u/s. 143(3), the Assessing Officer held that the assessee had made payment to Indijack Ltd. Overseas Commission agent, to the tune of .86,51,484/- and not deducted TDS on the same. The Assessing Officer opined that M/s. Indijack Ltd is offering services to assessee which are managerial/technical in nature and therefore, assessee is liable to deduct withholding tax.
3. Before the AO, assessee stated that it had executed export sales in Australia, UK, USA, Italy and France. For procuring the export orders, assessee is using the services of overseas commission agent namely M/s Indijack Ltd. The latter either provides confirmed export orders or provides information regarding prospective customers. However, the agent is entitled to commission only on actual export sales executed for customers routed through Indijack Ltd. Reliance was placed on CBDT Circular No. 23 dt. 23.7.1969, which clarifies that no tax is deductible u/s. 195 for expenditure towards export commission payable to a non-resident for services rendered outside of India.
4. However, the AO observed that M/s. Indijack Ltd is doing the following activities on behalf of assessee.
i. Procuring export orders
ii. Providing confirm export orders
iii. Providing information regarding respective customers
iv. Getting the export sales executed
5. The Assessing Officer opined that there are two issues under consideration:
(i) Nature of services for which payment is being made to Indijack Ltd. whether it is simply commission, or it is in the nature of managerial services,
(ii) Whether there is a liability on the assessee to deduct withholding tax.
The Assessing Officer discussed various definitions with regard to “management and managerial services” and decision of the Supreme Court in R.Dalmia Vs CIT 106 ITR 895 in which it was pointed out that management includes the act of managing by direction, or regulation or superintendence. The AO noted that the overseas agent is not engaged in a one-time agency for merely soliciting clients but also involves himself in the broad gamut of services pertinent to the client identification, soliciting, constant feedback and ensuring timely payments. The Assessing Officer observed that the key factor in managerial services is coordination and marketing and convincing the prospective buyer to make the deal. The AO thus concluded that payments made to the Indijack Ltd. are covered under managerial services and is not commission simplicitor.
6. On the question of whether the assessee was required to deduct tax at source AO discussed the provisions of Sec. 195, Sec. 40(a)(i) and Sec. 9(1)(vii) read with Explanation 2. The AO stated that fees for technical services are defined in the explanation which specifies managerial services as fees for technical services. In the instant case, the assessee has paid consideration to non resident for managerial services and thus payment to a non-resident is income deemed to arise in India. The AO held that the exclusion clause, also does not help as it clearly lays down that services should be utilized in India rather than rendered. Reliance was placed on SRK Consulting Engineers (1998) 230 ITR (AAR) to hold that the sum payable to non-resident is chargeable u/s. 9(1)(vii), hence TDS should be deducted u/s. 195. Since tax was not deducted payment made to non-resident was disallowed u/s. 40(a)(i). Reliance was also placed on Karnataka High Court decision in the case of CIT Vs Samsung Electronics Ltd which held that effect of the judgment in Transmission Corpn. Of India was that the moment there was a payment to a non-resident there was an obligation on the payer to deduct tax at source u/s. 195(1). The Assessing Officer also cited judgment of ITAT, vide order dt. 10.12.2000 in the case of ACIT Vs Anchor Health & Beauty Care Pvt. Ltd in ITA No. 7164/M/08 A.Y. 2004-05 in which it has been held that in the light of Hon’ble Karnataka decision and in the absence of any contrary decision on this issue, the assessee cannot escape from taxation by virtue of provisions of section 40(a)(i) of the Act, in the event of nonpayment of tax at source u/s. 195 of the Act without obtaining clearance u/s. 195(2) of the Act.
7. The AO also stated that Circular No. 23 relied upon by the assessee has been withdrawn by the CBDT vide circular No. 7 of 2009 dt. 22.10.2009. Since the assessee had not deducted tax at source on the commission paid, the AO made disallowance u/s. 40(a)(i) of the I.T. Act.
8. Aggrieved by the order of the AO, assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A) the assessee submitted as follows:
“It was submitted that decision of the Karnataka High Court and Supreme Court cited by the AO are totally distinguishable and not applicable in the present case. On the contrary, the case is covered by the decision of Supreme Court in CIT Vs Toshoku Ltd. 125 ITR 525, wherein it has been held that in the case of a nonresident who does not carry on any business connection in India and who acts as a selling agent outside India, the commission amount earned by such a non-resident for services rendered outside India cannot be deemed to be income accrued or arising in India. While arriving at the decision, Supreme Court, in this case has considered the provisions of Sec. 5(2), 9(1)(i), 160 & 163 of the I. T. Act and said sections have not undergone any change to date. The provisions of Sec. 195(2) applies only when part of a sum paid to a non¬resident will be income chargeable in India. Reliance was placed in Special Bench ITAT decision in ITO International Taxation Chennai Vs Prasad Production Ltd. 2010 TIOL 182 ITAT (Mad)(SB) wherein the Bench held that no TDS is deductible if the income of a non-resident is not chargeable to tax in India. Further, none of the decisions have considered the provisions of Double Taxation voidance Agreements with various countries. The commission earned by the non-resident will be nothing but business profit would be chargeable in the foreign country and not in India. The provisions of DTAA will prevail over the provisions of the I. T. Act.
On the aspect of managerial services propounded by the AO, it can be seen from the agreement that it was purely a commission agreement whereby a non-resident was to help the appellant to procure orders abroad. All the services and activities incidental to the services were carried out abroad and no part of it was carried out hence no income could be attributed to Indian territory. No managerial services were rendered. No technical services were involved since the non-resident was merely a commission agent appointed to procure purchase orders for the appellants’ products. Technical services are involved only when there are highly sophisticated systems involving special knowledge and experience and a person rendering the service must be a technical services person. Nothing of that sort was involved in the present case. If the services of a commission agent were to be treated as technical services or managerial services covered by Sec. 1 94J of the I. T. Act, there was no need for Sec. 1 94H which specifically deals with income by way of commission or brokerage.
Subsequently it was stated that the case of Samsung Electronics and others was taken up by the Supreme Court and vide order dt. 9.9.2010, the Supreme Court, in Civil Appeal No. 7541-7542 of 2010 in the matter of GE India Technology Centre Pvt. Ltd. Vs CIT, has set aside the order of the Karnataka High Court by holding that tax is required to deduct at source only when the sum payable to a non-resident is chargeable to tax under the I.T. Act and not otherwise. In view of the above, contention of the appellant in the present case that no tax was required to be deducted at source on the commission paid by them and therefore since the commission was not chargeable to tax in India under the I.T. Act, stands fortified.
The appellant also submitted the statement of commission paid along with bank documents showing remittance of the said commission. It was also stated in the commission in the years ending 31.3.2005 and 31.3.2006 were paid to Indijack Ltd., UK. For A.Y. 2005-06 assessment was completed u/s. 143(1)”.
9. The Ld. CIT(A) held as follows:
“The submissions made for the appellant, the assessment order and the facts on record have been considered. The 1st issue for consideration as pointed out by the AO is whether the payment is commission simplicitor, or whether this payment for fees for technical services. Section 9(1)(vii) deals with income by way offees for technical services. Explanation 2 to Sec. 9(1)(vii) provides that for the purpose of clause (vii), “fees for technical services” means any consideration for the rendering of managerial, technical or consultancy services, but does not include consideration which would be income of the recipient chargeable under the head “Salaries”. The Agency Agreement entered into by the appellant with the agent Indijack Ltd. states in the articles that the agent agrees to represent the principal. That the agent shall be responsible for negotiating with all parties in their territory, the agent shall travel in the territory regularly to visit customers, the agent shall assist the principal in collecting outstanding payments. The gamut of services which are being provided by Indijack Ltd. have been spelt out by the Assessing Officer in his order. It has been held in Wallace Pharmaceuticals Pvt. Ltd, in re (2005) 198 CTR (AAR) 63, that consultancy services provided whether by way of promoting sales or otherwise having been utilized by the applicant, an Indian company in India, the monthly consultancy fee as also the commission payable on the orders procured by the non-resident are deemed to be income arising to the said non-resident in India and are subject to TDS under section 195. It was held that consultancy fee payable to the non-resident for developing business with foreign customers falls within the meaning of “fees for technical services” as defined in explanation 2 to clause (vii) of subsection (1) of section 9. In the present case, Indijack Ltd. is providing composite services comprising commission agency as also services for promoting sales of the appellant in the foreign countries, although the nomenclature used by the appellant is commission. The payment thus falls within the meaning of “fees for technical services” which is subject to application of section 195. Section 195(2) is applicable to a composite payment.
The appellant has drawn support from the Supreme Court judgment in the case of GE India Technology Centre Pvt. Ltd. (supra). However the issue in that case is whether, the moment there is remittance, whether the obligation to deduct tax at source arises? While the Hon’ble Supreme Court has not answered this question in the affirmative, the Apex Court has held that in a given case when the sums remitted outside India come within the definition of royalty or fees for technical services or other sums chargeable under the Income Tax Act, then it will be open to the Assessing Officer to disallow such claim for deduction. It has further been stated that section 195(2) is based on the “principle of proportionality”, the said subsection gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of “income” chargeable to tax in India. In the said case the ITAT had held that such sum paid by the appellant to the foreign software supplier was not a “royalty” and that the same did not give rise to any “income” taxable in India and therefore the appellant/s was not liable to deduct tax at source. However the High Court did not go into the merits of the case and went straight to conclude that the moment there is remittance, an obligation to deduct tax at source arises, which view stands overruled. The Supreme Court remitted the matter back to the High Court to determine whether the ITAT was justified in holding that the amount is paid by the appellants to the foreign software suppliers was not “royalty”.
In the present case therefore, since the payment made by the applicant to Indijack Ltd. has been held to be a composite payment which is held to be fees for technical services, the payment has an element of “income” chargeable to tax in India, and therefore, the appellant is obligated to deduct tax at source.
In the case of Elkem Technology vs. DCIT (2001) 250 ITR 164 (AP), it was held that under section 9(1)(vii)(b), the expression used is fees for services utilized in India” and not the expression “fees for services rendered in India”. If the fees are paid for services utilized by the Indian company in its business carried on by it in India, irrespective of the place where the services were rendered, the amounts of the fees should be deemed to accrue or arise in India. Similar view has also been held in Steffen Robertson & Kirsten Consulting Engineers & the Scientists (1998) 230 ITR 206 (AAR). The effect of the decision of Supreme Court in Ishikawajima-Harima Heavy Industries has been nullified by insertion of Explanation in section 9 by the Finance Act, 2007 with retrospective effect from 1st of June, 1975. in the decision of ITAT Mumbai L Bench, in Ashapura Minichem Ltd. versus ADIT (Int’l Taxation), ITA No.2508/MUM/08 dated 21/05/2010, the ITAT has held that it is no longer necessary that, in order to attract taxability in India, services must also be rendered in India; utilization of the services in India is enough to attract its taxability in India. In the said case the jurisdictional ITAT held that the income of the Chinese company by way of receipt offees for technical services from an Indian company is to be deemed to accrue or arise in India under section 9(1)(vii); it is accordingly liable to be taxed in India under the domestic tax law as also under the provision of the applicable India China tax treaty.
As regards the question of applicability of Boards’ circulars relied upon by the appellant, these were rendered in the context of the unamended provisions of section 9(1)(vii), before the introduction of Explanation to this clause, which has been made effective retrospectively. Thus, the Board’s Circulars are not applicable in view of the Act as it stands after amendment.
In view of the above position is clear that the appellant has paid to Indijack Ltd, a composite amount including fees for technical services which is taxable in India, and for which payment the applicant was obliged to deduct tax at source under section 195 of the Income Tax Act. On the appellant’s failure to do so, the payment is liable to be disallowed under section 40 (a) (i) of the Income Tax Act. The addition made by the Assessing Officer is therefore confirmed”.
10. In the course of the submissions before the ITAT “A” bench, the Ld. Counsel for assessee pointed out page 84 of the Paper Book consisting of the Agency Agreement between Indijack and assessee. The Ld. Counsel for the assessee distinguished the case of LM Technology VS DCIT 250 ITR 164 (AP) which dealt with the issue of supply of equipment and Engineering Services which were purely technical service and hence pleaded that the same was inapplicable to assessee’s case. He also pointed out that the case of Wallace Pharmaceuticals Ltd. 198 ITR 63 AAR cannot be applied to the assessee’s case as in that case full fledged marketing consultancy and business development was involved which was akin to management services.
11. The Ld. Counsel for assessee submitted that the services rendered by the overseas commission agent were not managerial/technical services. Assessee relied upon the following decisions in favour of assessee.
i) Line A.G. Vs ITO -1997 62 ITD 330 (Mum-Tri) wherein it has been held that procurement fee for supply of machinery was involved. The said fee was for time spent and effort taken by the agent abroad and it was also held that it was not royalty or technical service fee but it was a commercial profit.
ii) DECTA Vs CIT -1999- 237 ITR 190 (AAR) wherein DECTA is an agent abroad was helping Indian Govt. to develop Indian products abroad as also in export potential and export countries. Contribution by companies to DECTA was held to be not for technical services.
12. After considering the submissions, the ITAT “A” Bench decided the matter as under:
“14. We heard both the parties. In the present case, the overseas agent did not render any services in India. It had no place or permanent establishment in India. It worked abroad and procured orders. The orders were sent directly by the foreign purchasers remitted to the assessee in India and even the payment for export was received by the assessee in foreign currency directly fromforeign purchasers and the commission was paid to foreign agent thereafter as a percentage of sales in terms of the agency agreement. The payment made to overseas commission agent by the assessee was not for technical/managerial services. Therefore in the absence of any service having been rendered in India, no part of the commission paid to the overseas agency could be said to be chargeable in India under the I. T. Act, 1961 and in the absence of any income chargeable to tax in India, question of applying S. 195 of I. T. Act, 1961 does not arise. Hence we allow assessee’s appeal on this issue”.
13. The Hon’ble High Court set aside the above order and restored the matter to the file of the ITAT for deciding afresh with the following directions:
“5. In our opinion, when the CIT (A) on perusal of the clauses in the agreement held that part of the amount paid was towards commission and part of the payment was towards rendering technical/managerial services, the ITAT ought to have specifically dealt with those findings recorded by the CIT (A)”.
“6. Since the ITAT has not specifically dealt with the findings recorded by the CIT (A) by consent, the impugned order dated 23.2.2011 passed in ITA No.882/Mum/201 1 relating to assessment year 2007-08 is quashed and set aside and the matter is restored to the file by the ITAT for fresh decision in accordance with law”.
Hence, present hearing and consideration.
14. The learned Counsel for assessee Shri Rajeev Waglay submitted the facts of the case and referred to the agreement and submitted that what the assessee had entered into was only for marketing of exports in handicraft for which the services of the said company were engaged and these services were utilized outside India, so the provisions of section 9(1) (vii) with reference to the technical fee does not apply, as the services are neither rendered in India nor utilized in India. It was his submission that since the services were utilized outside India on a source of income earned out of India, the definition of Income-Tax Act with reference to technical services did not apply. It was further submitted that the ITAT has already accepted that the non-resident company do not have any PE in India and so the income that is to be assessed as business income is not taxable in India. He further submitted that the agreement with the said company stationed in U.K was purely a commercial agreement whereby Non-Resident was to (a) negotiate contracts with the overseas parties (b) travel in its territory to visit customers and (c) give information on economic development and market conditions and observations on the activities of the competitors. It was further submitted that for the above services, they were to be paid commission on actual realization of sales by the assessee. There was no retainer fee or monthly fee. It was the submission that the agreement cannot be treated as a managerial agreement since by no stretch of imagination the services rendered by a Non Resident can be said to be managerial in nature. These are the services incidental to as a commission agent and nothing more. He further submitted that the technical services can only be considered when there are highly sophisticated systems involving specialized knowledge and experience and further the persons rendering services must be a technical person. Since assessee exports handicrafts which does not require any technical knowledge, the services of a commission agent was utilized for furthering the export activity. The learned Counsel also submitted that there is separate provision for commission under section 1 94H which indicates that payment of commission is different from payment for technical services. The definition as given in Exp- 1 to section 194H defines payment received for services rendered in the course of buying or selling of goods and specifically excludes professional services covered under section 194J. It was further submitted that Article 13 of DTAA between India and UK defines technical services which does not include managerial services, which are considered by AO and CIT(A) in their orders. Hence no tax is required to be deducted since payment was towards business profit and not fee for technical services. It was further submitted that no income can be considered as accrued or deemed to have accrued or arisen in India as the revenue from sales had come from sales outside India i.e. the source is outside India and services of the above person was rendered/utilized outside India, not in India. He relied on the decision of CEAT International S.A. vs.CIT 237 ITR 859 for the proposition that the export commission cannot be considered as income taxable under section 9(1)(vi) or 9(1)(vii). He also relied on the decision of the Delhi High Court in the case of Director of Income Tax vs. Sheraton International Inc. 313 ITR 267. Apart from the above High Court judgments, he also relied on the decision of the ITAT in the case of TITAN Industries Ltd vs. Income Tax Officer, 11 SOT 206 for the proposition that earning income from source outside India was not taxable in India being covered by the exception covered in Section 9(1) (vii) (b) as there was no requirement of tax deducted at source, therefore, there is no need for disallowance under section 40(a)(ia). He also relied on the decision of Raymonds Ltd vs. DCIT 86 ITD 791 wherein the underwriting commission and management commission was paid in respect of GDRs issued outside India, where it was held that the amount paid could not be considered as fees for technical services under section 9(1) (vii) r.w. explanation thereto. Further reliance was also placed on the decision of DCIT vs. MRO (India) (P) Ltd 139 TTJ 10, wherein a liaisoning and coordinating fees paid to non resident from New Zealand was considered not taxable. He also relied on the decision of Lufthansa Cargo India vs. DCIT 91 ITD 133 Delhi Trib. where vetting and leasing charges of aircraft was paid outside India, therefore, that amount was not taxable. Similar is the case in Havells India Ltd v Addl CIT ( 2011)140 TTJ 283 (Del.) wherein fees paid to Non Resident for testing and certification in respect of export sales was considered non taxable as the source of income was outside India. The learned Counsel submitted that all these issues were considered by the ITAT in earlier order and they gave a finding that overseas agent did not render any services in India. Therefore, the amount was not chargeable to India and accordingly disallowance under section 40(a)(ia) does not arise.
15. In reply the learned Departmental Representative, however, relied on the orders of the Assessing Officer and the CIT (A) and the case laws relied by the authorities to support that the amount is taxable. Therefore, having not deducted the tax, the same was liable for disallowance under section 40(a)(ia).
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 of section 40(a)(ia), as it has only applicable to any interest royalty, fees for technical services or other sum chargeable under this act which payable outside India on which tax is deductible at source but has not been deducted. The Assessing Officer made out a case that the commission paid is ‘fees for technical services’ without specifying what are the technical/Managerial services rendered by the said company to the assessee. Assessee indeed entered into an agreement for propagation of its handicraft products with the non resident company. The copies of the agreement have been placed before the authorities. The agreement clearly shows that the non resident company was to get commission for promoting the products of the assessee company and rendering incidental services on sales such as recovery etc. for doing export sales. It is also responsibility of the non resident company to disseminate the information and inquire about various importers in various countries so that assessee exports can be increased. The agreement clearly shows that non resident company was to get the commission for promoting the product of assessee company after sales proceeds are received. The detailed terms of the agreement are as under:
In this Agreement between MIs Armayesh Global, Kamanwala Chambers, 2nd Floor, Sir P.M. Road, Fort, Mumbai 400 001, India hereinafter referred to as “Principal” and Indijack Limited, 99 BreckNock Road, London N19 5 AB, U.K. — hereinafter referred to as “Agent”— the following is agreed upon: –
Article 1- Object of Agreement
1.1. The principal entrusts the Agent with the non exclusive agency for the following contractual territory (area): Worldwide
1.2. The principal also has the right to operate actively’ in he aforementioned territory (area).
1.3. The agency covers the following products: Hand embroidered products of any and all kinds.
1.4. The Agent covenants and agrees to represent the principal on a commission basis.
Article 2— Duties of the Agent
2.1 It shall be the Agent’s duty to negotiate contracts with the overseas party. Furthermore, the Agent shall act on the principal’s behalf in conformity with provisions hereinafter enumerated. The Agent shall not be authorized to enter into a contract or otherwise to bind the principal. The principal shall be free to conclude, or to 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 or indirectly with competitive firms. The Agent shall not, for all time exploit or disclose to other persons any business and production secrets of the principal that have been communicated to them or which they have otherwise come to know, irrespective of whether or not the contract is still in force.
2.5 The Agent shall observe the rules of fair competition and be responsible for any violation of the same.
2.6 The Agent is not authorized to accept payments directly in their own name but shall assist the principal in collecting outstanding payments. The Agent is also authorized to accept notification of defects by a customer, as well as the statement of a customer that he will the goods at the disposable of the principal or any similar statement by which the customer exercises his rights resulting from defective delivery. The Agent shall immediately ii principal and shall see to it that the necessary evidence in favour of the principal is obtained.
2.7 The Agent shall establish business relations only with such customers whose solvency is satisfactory to the best of the knowledge and belief of the Agent.
17. Thus as can be seen from the above, all the terms do indicate that the said company was only acting as an Agent on commission basis and has not been providing any Managerial/Technical services. Further there is no evidence on record that they are providing any technical/managerial services. The said company was responsible for arranging timely payment from the customers and commission was paid only after the sales amount was received. Since the services were rendered outside India, the provisions of section 5 cannot be applied to the commission paid so as to make it taxable in India.
18. This aspect can also be examined in another way as already given a finding by the Bench earlier and which is also not in dispute, that the foreign company does not have any PE in India. Therefore, the commission paid to the foreign company which has to be considered as business income and cannot be taxed in India as per the DTAA between India and UK. The definition of ‘fee for technical services’ between UK and India does not include managerial services. However, neither the Assessing Officer nor the CIT (A) considered the issue of DTAA, even though assessee mentioned the same in its submissions before the authorities. The definition of technical 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)… (ii)….. (iii)…… (iv)….. (v)…… (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 proposals approved by the Central Government before that date.]
Explanation .—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”.
19. As can be seen from the above section 9(1)(vii)(b), fee payable for the purposes of making or earning income from any source outside India is not included in the definition. The amount has to be considered as business income. Since the services are rendered outside India, that amount is not taxable as it does not accrue or arise in India. The same view was considered by the Hon’ble Bombay High Court in the case of CEAT International S.A. vs.CIT 237 ITR 859, where certain export commission was paid to a Non Resident Company and it was held that the assessee did not impart any information concerning technical, industrial, commercial or scientific knowledge exports or skill, nor rendered any managerial technical or consultancy services. The commission attributable to the services rendered cannot be regarded as royalty or fees for technical services and it was held that the same was not taxable under section 9(1) (vii). Similar issue was also considered by the Hon’ble Delhi High Court in the case of Director of Income Tax vs. Sheraton International Inc. 313 ITR 267 where certain payments for advertising, publicity and sales promotion services were considered and held that those payments cannot be considered as either royalty or for technical services. Since the Non Resident does not have any PE in India, such income which is to be considered as business income was not taxable in India.
20. In the case of ACIT vs. Modern Insulators Ltd, 56 DTR (Jp.) (Trib.) 362, the following issue was considered and held as under:
“Business expenditure—Disallowance under s. 40(a)(ia)—Commission payments to foreign companies—
As per Circular No. 786, dt. 7th Feb., 2000 commission and other amounts paid for services outside India are not liable to tax in India and, therefore, no tax deduction is required to be made—In the instant case, services were rendered outside India and the commission so earned by the non-residents is business profit—As per DTAA between India and UK and between India and UAE, business profit can be taxed in the case of an enterprise of a Contracting State in other Contracting State if it is having PE in the other Contracting State—It is not the case of Revenue that the recipient companies are having PE in India—Hence, even if the commission has been received by the non-residents on account of business connection mentioned in s. 9(L)(i) it is not chargeable to tax in India—Circular No. 7, dt. 22nd Oct., 2009 cannot be applied retrospectively to make it applicable to payments made before that date—Since tax was not required to be deducted, s. 40(a)(i) is not applicable—That apart, s. 40(a)(ia) refers to commission paid to a resident—Sec. 40(a)(i) is applicable in respect of payments to non-resident in the nature of interest, royalty, fee for technical services or other sums chargeable under the Act—Word ‘commission’ is not specifically mentioned in s.40(a) (i)—Hence, s. 40(a)(i) is not applicable—Disallowance rightly deleted by CIT(A)”.
“The CBDT Circular No. 786, dt. 7th Feb., 2000 had an occasion to consider the objections raised by C &AG report in which it was stated that the tax is required to be deducted at source in respect of payment to non¬resident when the payment is in nature of export commission and charges payable for services rendered outside India. The Board stated that the liability to TDS under s. 195 will arise if the payment of commission to non-resident agent is chargeable to tax in India. When non-resident agent operates outside the country, no part of his income arises in India. The payment is remitted directly abroad and therefore, it cannot be stated that the payment by non-resident is received in India. Such payments are therefore, not taxable in India. When C & AG was apprised of such factual information then C & AG has agreed to drop the objection. Thus the CBDT was of the view that the commission and the amounts paid for services outside India are not liable for tax in India and therefore, no TDS is required to be deducted.
It is not disputed after the finding of the learned CIT(A) that non-residents have provided services for earning commission. The services have been rendered outside India. The commission so earned by non-resident is business profit. As per DTAA between India and UK and DTAA between India and UAE, it is mentioned in art. 7 of both the DTAAs that business profit can be taxed in other Contracting State in case the enterprise of a Contracting State is having PE in other Contracting State. It is not the case of the Revenue that non-resident companies are having their PE. Hence, even if commission has been received by the non-residents on account of the business connections mentioned in s. 9(1)(i) then the same is not chargeable in India because such non-resident companies are not having any PE. The CBDT Circular No. 333, dt. 2nd April, 1982 [(1982) 81 CTR (TLT) 18] has stated that the specific provision in DTAA is to be followed irrespective of the provisions of IT Act. Tax was not required to be deducted at source on account of Circular No. 786 dt. 7th Feb.2000. The Circular No.7 of 22nd Oct. 2009 cannot be considered retrospectively to make it applicable for payments before that date- Dy. CIT vs. Sanjay Gupta (2011) 50 DTR (Lucknow) (Trib) 225 relied on.
Since the tax at source is not required to be deducted then s. 40(a) will not be applicable. It is further noticed that s. 40(a)(ia) refers to commission payable to a resident. Hence, this provision is not at all applicable. Sec.40(a)(i) is applicable in respect of payments to non-resident and the payment should be in the nature of interest, royalty, fee for technical services or other sum chargeable under this Act. It is undisputed fact that the sum is commission and the word commission is not specifically mentioned in s. 4 0(a) (i). The sum paid is not chargeable in India under IT Act, 1961. Hence, s. 40(a) (i) is not applicable. The CIT(A) was therefore, justified in deleting the disallowance of Rs. 6,04,58,699-GE India Technology Centre (P) Ltd vs. CIT (2010) 234 CTR (Supreme Court) 153: (2010) 44 DTR (SC) 201:2010)327 ITR 456(SC) followed”.
21. Since the facts are similar to the facts in the present case, respectfully following the principles laid down by the Coordinate Bench, we are of the opinion that the agreement between the assessee and the Non Resident is only for rendering services which cannot be considered as technical services and as there is no PE to the said non resident in India, the amount does not accrue or arise in India and further as there is no need for deducting the amount under section 195, there is no violation of provisions of section 195 and accordingly the same cannot be disallowed under section 40(a)(ia). Since similar issues are also discussed in various cases relied upon by the learned Counsel, we do not consider it necessary to extract the same, but the principles laid down in all the cases is that if the fee payable is on source of income outside India, the same is not taxable in India. Therefore, we are of the opinion that both the Assessing Officer and the CIT (A) ignored the facts that services were rendered outside India and wrongly considered that the services are managerial services partly. Since there is no evidence that the non-resident has rendered any managerial services to assessee and the agreement indicates only services simplicitor for agency on commission basis, the findings of AO and CIT(A) are to be rejected. Assessee placed reliance on the CBDT circular 786 dated 7 February 2000 wherein the CBDT has considered and clarified that where the non-resident agent operates outside the country, no part of his income arises in India. Also, 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 are therefore held to be not taxable in India. Accordingly as per the said circular, no tax is therefore deductible under section 195 of the Act on export commission and other related charges payable to non-resident for services rendered outside India. Even though the said Circular 786 has been withdrawn by Circular 7 of 2009 dated 22nd October, 2009 w.e.f. 22nd October, 2009, the Circular 786 would continue to be applicable during AY 2007-08, i.e. the period under appeal as held by the jurisdictional Bombay High Court in the case of UTI v Income Tax Officer (249 ITR 612) that the withdrawal of a circular can only operate prospectively. Accordingly, assessee’s contentions are allowed. The ground is allowed.
22. In the result, assessee’s appeal is allowed.
Order pronounced in the open court on 4th May, 2012.