IN THE ITAT BANGALORE BENCH ‘A’
Sri Subbaraman Subramanian
Assistant Commissioner of Income-tax
IT APPEAL NO. 26 (BANG.) OF 2012
S.P. NO. 136 (B) OF 2012
[ASSESSMENT YEAR 2008-09]
DECEMBER 21, 2012
P. Madhavi Devi, Judicial Member
This appeal is filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income-tax (Appeals) – III at Bangalore dated 29-11-2011. The appeal arises out of the assessment completed u/s 143(3) of the Income-tax Act, 1961.
2. Stay petition is filed by the assessee seeking stay of the outstanding demand of Rs. 13,52,063/-. As the appeal is heard and disposed of by the order even dated, the stay application is dismissed.
3. In this appeal, the assessee is aggrieved by the order of the CIT(A) –
(1) sustaining the disallowance made by the AO of –
(i) The commission paid to M/s Misc. Maldives Pvt. Ltd., for the services rendered by it in respect of receiving the materials, weighing them and getting them cleared from customs and delivering them to customers of the assessee at Maldives, holding that it has the character of technical services under Explanation to sec. 9[vii] of the Act, warranting deduction of tax at source.
(ii) Commission paid to one Mr. Hussain Shiham, who directly receives the persons sent by the assessee in his tourists business at Maldives and puts them into the Resorts/hotels directly at Maldives on the ground that it amounts to technical services under explanation to sec. 9[viii] of the Act, warranting deduction of tax.
(2) The assessee is also aggrieved by the levy of interest u/s 234B and 234C of the Income-tax Act.
4. The brief facts of the case are that the assessee, an individual filed his return of income for the assessment year 2008-09 returning a total income of Rs.56,29,610/-. During the assessment proceedings u/s 143(3) of the Income-tax Act, the AO noticed that the assessee has the following two proprietary concerns.
(1) Gemini International
(2) Gemini Tours and Travels
5. He found that during the year Gemini International made payment of Rs. 14,93,215/- to a non resident, Misc. Maldives Pvt. Ltd. towards commission fees and Gemini Tours and Travels also has made the payment of Rs. 14,26,174/- to a non resident Mr. Hussain Shiham, Maldives towards tourist handling charges. He has observed that tax has not been deducted at source in respect of the above payments as required u/s 195 of the Act. He, therefore, intended to invoke the provision of sec. 40a(i) of the Income-tax Act and, therefore, proceeded to examine if any income had accrued to the payee. He examined the application of provision of sec. 9[vii] and Explanation to sub-sec. (2) of sec. 9 of the Income-tax Act and held that the income has accrued to the payee from the payments made by the assessee. Since according to the AO, the income has accrued to the payee from the payments of the assessee and no TDS was made, he applied the provisions of sec.40(a)(i) of the Act and disallowed the said expenditure of commission/fees for technical services and added back a sum of Rs. 29,19,389/- to the returned income of the assessee and completed the assessment accordingly.
6. Aggrieved, the assessee preferred an appeal before the CIT(A) contending that both M/s Misc. Maldives Pvt. Ltd., and Mr. Hussain Shiham are non-residents and are rendering services out side India and also that the bills are raised outside India and, therefore, the payments made to them are not subject to tax in India. He placed reliance upon the provisions of sub.-Sec. 2 of sec. 5 to the effect that a non-resident is liable to be charged with income-tax in India only if such non-resident renders services in India or through his agents in India. He submitted that the provisions of sec. 194 and 195 are not applicable to any such payments as the services are rendered outside India by the non residents. In support of this contention, he placed reliance upon the decision of Authority for Advance Ruling in Jt. Accreditation Sysem of Australia & New Zealand, In re  326 ITR 487. As regards handling charges, the assessee also submitted that M/s Gemini Tours and Travels is doing business as touring operator and the assessee has undertaken to provide to its customers stay at various resorts and hotels at Maldives and these tourists are received by Mr. Hussain Shiham, who puts them into their hotels and resorts and ensures liasoning with the hotels etc. For the services rendered by him at Maldives, a sum of $15 per person was being paid which is retained by the person entitled to such commission and only the balance is paid to the assessee.
7. He submitted that the commission and handling charges are paid outside India to the non-residents and, therefore, the provisions of sec. 194H are not applicable to the assessee. It was also submitted that TDS is payable only if the income accrues to non-residents in India and, as there is no income accruing or arising to the non-resident in India, the provisions of sec. 194 are not applicable.
8. The CIT(A) after considering the assessee’s submissions examined whether the services rendered by assessees’s associates and agents at Maldives can be categorized as technical services. He held that the payments by the purchaser of the items are made to the agents at Maldives and they remit the balance amount to the assessee after deducting their dues and in the case of tour operators, the local associates receives the assessee’s clients at the airport and facilitate their stay at the resorts/hotels and a fee of $15 per client is collected directly from the clients at Maldives as handling charges. He also has taken into consideration that the services are rendered outside India and the incomes are earned and received/paid outside India. However observing that these activities fall squarely under the definition of ‘technical services’ being in the nature of ‘consultancy and managerial services’ requiring domain knowledge and technical exposure, held that deduction of tax u/s 195 is required on these payments as per the provisions of sec. 9(1)(vii) and explanation thereto. He, therefore, confirmed the disallowance made by the AO and the assessee is in second appeal before us.
9. The learned counsel for the assessee Shri Raghavendra Chakravarthi, while reiterating the assessee’s submissions before the authorities below, submitted that the income earned by the non-resident is their ‘business income’ and is not ‘fees for technical services’ as held by the AO and the CIT(A). He submitted that business income earned by the non-residents can be deemed to accrue or arise in India only if it works through a PE or business connection in India and these non-residents do not have any PE/business connection in India, their income is not taxable in India and, therefore, the disallowance u/s 40a(ia) is not warranted. In support of his contentions, he placed reliance upon the following decisions :
1. CIT v. EON Technology (P.) Ltd.,  343 ITR 366, Delhi, wherein the Hon’ble Delhi High Court has considered the CBTD Circular No. 23, dated 23 July, 1969 and Circular No.786, dated 7th Feb, 2000 to hold that business income of non residents can be deemed to accrue or arise in India only if there is business connection in India and if there is failure to establish business connection in India then tax need not be deducted at source and disallowance u/s 40a(i) is not called for.
2. Dy. CIT v. Sanjiv Gupta  19 taxmann.com 341 (Luck) Tribunal orders, wherein the Circular No. 7 of 2009, dated 22/10/2009 withdrawing the Circular No.23 July 1969 and Circular No.786 of 2000 has been considered and it has been held that Circulars which are in force during the relevant assessment years are the Circulars that have to be applied and subsequent circulars either withdrawing or modifying the earlier circulars can only have prospective effect and can have no application. He has also placed reliance upon the Circular No.786, dated 7th Feb, 2000 and Circular No.23, dated 23 Jul, 2009, wherein it has been set out that where the non-resident agents operates outside the country and no part of his income arise in India and the payment is also remitted directly abroad and that even if received by or on behalf of the agents in India and such payments are not taxable in India.
3. AIA Engineering Ltd. v. Addl. CIT  50 SOT 134, wherein the commission paid to non-residents for the services rendered outside India were held to be not deemed to arise or accrue in India and no disallowance u/s 40(a)(ia) was called for.
10. Further, on the question as to the services rendered by the non-residents are technical services, the learned counsel for the assessee submitted that these parties do not render any technical, managerial or consultancy services but render simple handling/receiving services. He submitted that the agent in Maldives only receives the goods which are exported by the assessee and facilitates their clearance and ensures their delivery to the assessee’s clients. He submitted that the non-resident who receives the tourists is only intermediary between the assessee and the resorts/hotels and he is not rendering any services of technical nature as defined u/s 9(1)(vii) of the Income-tax and, therefore, these services cannot be considered as technical services and there is no liability on the assessee to deduct tax at source while making the payment.
11. The learned DR on the other hand supported the orders of the authorities below and also placed reliance upon the decision of the (1) Authority for Advance Ruling in the case of Wallace Pharmaceutical (P.) Ltd., In re  278 ITR 97, wherein it has been held that the consultancy fee payable under the agreement by the assessee falls within the meaning of fees for technical services as per explanation to clause (vii) of sub sec. 1 of sec. 9; and (2) Hon’ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT  239 ITR 587, wherein it was held that the assessee who makes payment to non-residents under contract entered into is under an obligation to deduct tax at source u/s 195 and that the obligation is limited only to appropriate proportion of income chargeable under the Act.
12. Having heard both the parties and having considered their rival contentions, we find that the basic question to be considered by us is whether the payment made by the assessee to the agents outside India are in the nature of their business income or fees for technical services. Both the AO as well as the CIT(A) have held the services to be technical services as per provision of 9(1)(vii) of the Income-tax Act. For application of the said provision, the nature of the services rendered by the non-residents in Maldives are to be examined. As far as Gemini International is concerned, we find that it supplies building materials to various tourist resorts at Maldives and to facilitate the delivery of goods to its customers, the assessee has engaged the services of M/s Misc. Maldives Pvt. Ltd, for weighing the goods, clearance from the customs at Maldives and their delivery to the purchasers. In this whole exercise, we have to examine whether there is any technical, consultancy or managerial services rendered by the non-resident. For every activity of supervision, certain skill and knowledge of the equipment to be dealt with is required but can it be called as technical services. The agent only receives the material, gets the material cleared from the customs and delivers it to the purchasers. In this whole exercise, there is no application of mind by the agent and no independent decision taken with regard to the goods to be delivered. In such circumstances, it cannot be said that technical services have been rendered by the agent at Maldives. Therefore, the income earned by the said agent outside India is to be considered as his business income and as held by the Hon’ble Delhi High Court in the case of EON Technology (P.) Ltd., (cited Supra) the business profits of a non-residents cannot be brought to tax until and unless there is a PE in India. Therefore, this ground of appeal is allowed.
13. As regards the payment made by Gemini International Tours and Travels is concerned, we find that the agent receives the clients and leave them in the resorts or hotels for which he is paid commission. The nature of the activity of the agent at Maldives is only to facilitate the movements of the tourists of the assessee within the country of Maldives and to see that no inconvenience is caused to them. He is not entitled to take any decision as regards the destination of the tourists or with regard to their stay and accommodation. Therefore, services rendered by him also cannot be said to be technical services u/s 9(1)(vii) of the Income-tax Act. If the said services cannot be termed as technical services, then the payment made to the agent can only be considered as his business income which can be taxed in India only if he has a PE in India. As there is no PE in India for Mr. Hussain Shiham, respectfully following the decision of the Hon’ble Delhi High Court in the EON Technology (P.) Ltd. (cited Supra), this ground of appeal is also allowed.
14. The decisions relied upon by the learned DR are not applicable to the facts of the case before us. In view of the same, the assessee’s appeal is allowed.
15. The levy of interest u/s 234B and 234C is consequential in nature and hence AO is directed to give consequential relief.
16. In the result, the appeal filed by the assessee is allowed.