Payment for international freight logistic support services & Global Account Management expenses cannot be treated as technical services fee

ACIT Vs Expeditors International of Washington (ITAT Delhi)

No payment for international freight logistic support services and Global Account Management (GAM) expenses could be treated as technical services fee

Conclusion: Amount paid for international freight logistic support services and Global Account Management (GAM) expenses by assessee-foreign company to Indian company could not be treated as Technical Services or Fee for Included Services (FIS) and also could not be taxed under section 9(1)(i) as no income had accrued or arised from the business connection abroad in India.

Held: Assessee-foreign company was engaged in the business of providing global logistics services worldwide. It had agreed with an Indian Company for providing the freight and logistics services to each other. Each party agreed to render services to the other in respect of import and export of consignments. Assessee undertook the logistics operations with respect to the consignment in the USA and no part of the operations or business was carried out by the assessee in India. The entire dispute centered around the taxability of the amount received by assessee from an Indian comapny  in respect of services performed outside India on the export consignments of Indian company originating from India. The primary question which arose for consideration was as to whether the payment in respect of these services could be held as ‘fees for technical services’ within the meaning of section 9(1)(vii). It was held that the services rendered by assessee did not fall within the purview of managerial, consultancy or technical services. The payment for freight and logistics could not be treated as technical services. Similarly, the provisions of Section 9(1)(i) were not attracted in this case as no income had accrued or arised from the business connection abroad in India. The explanation stated that only that part of income from business operations could be said to be accruing or arising in India only if it was relatable to the carrying of operations in India. Thus, the payment received by assessee neither fell under Section 9(1)(i) or Section 9(1)(vii).

FULL TEXT OF THE ITAT JUDGEMENT

The present appeal has been filed by the revenue against the order dated 28.01.2015 passed by the AO u/s 144C(13)/143(3) of the Income Tax Act, 1961.

2. Following grounds have been raised by the revenue:

“1. Whether on the facts and in the circumstances of the case and in law, the Hon’ble DRP is correct in holding that the receipts are not in the nature of fees for technical services.

2. Whether on the facts and in the circumstances of the case and in law, the Hon’ble DRP is correct in holding that the receipts of the assessee do not fall within the scope of section 9(1)(i) of the Income Tax Act.”

3. The facts and the arguments have been taken from the order of the ld. DRP.

4. The assessee is headquartered in Seattle, Washington, and is engaged in the business of providing global logistics services worldwide. The Company carries out operations in various segments such as airfreight, ocean freight & ocean services, customs brokerage and import services. The nature of services primarily includes consolidation or forwarding of air and ocean freight. Additionally these services include distribution management, vendor consolidation, cargo insurance, purchase order management, and customized logistics information. These operations are rendered by the assessee from outside India.

Logistics Operations:

5. During AY 2010-11, the assessee entered into logistics transactions with Expediters International (India) Private Limited (‘EI India’) which is its Associated Enterprise. The Indian leg of the logistics contrary with me customers is handled by EI India from the customers premises to the Indian port of airport, while the assessee typically handles similar services at the other end of the consignment for the USA region and vice-versa. The contract is entered into between El and the customer i.e. at the consignor’s end in the case of export of consignment from India to overseas countries viz. USA and between the assesse and the customer i.e. at the consignor’s end in the case of import of consignment from other countries viz. USA to India.

6. The logistics operations covers a range of activities from packing, loading/unloading, trucking, /containerization, custom clearance and other cargo handling activities besides moving the goods via air/sea. The nature of these operations is purely logistics support provided by the assessee for shipment of transport of goods, performed outside of India.

Reimbursement of Global Account Management (‘GAM’)  expenses:

7. During the course of assessment proceedings, the assessee submitted the nature of GAM expenses which are incurred in relation to routine’ business support services rendered by a team of employees (“team”) of the assessee, which has the responsibility to manage a set of global customers of the Expeditors group, having operations in many countries.

8. Global Account Managers (“GAMs”) are appointed in order to manage the clients globally. GAMs manage global customer sales and act as a marketing interface. They instruct, coach the local account teams belonging under them and support the account teams throughout the whole project. The cost of these GAMs is allocated to all the respective countries benefiting from these services. Accordingly, El India paid the assessee on account of GAM expenses incurred outside India.

9. The GAM staff is employed with the assessee and there is no employer – employee relationship between the employees and EI India. The assesse incurs expenses on the employees working as part of the GAM team, viz. their salary, operational expenses (including salary, telephone expenses of GAM team, conveyance, tour and travelling expenses, entertainment expenses etc). These actual expenses incurred by the assessee are allocated in proportion to the revenue earned by the relevant Expediter group entity in that country from that particular customer account, which is managed by the GAM team.

10. These allocated expenses without any income element embedded in them are then reimbursed to the assessee on actual basis by El India.

11. The AO in the draft assessment order on 26March 2014has proposed the following additions to the income and disallowance of expenses:

S.No.	Particulars	Amount              (in INR)
1.	Returned income (Royalty income as per return of income)	246,183,805
2.	Fee   for Included       Services Share in logistics  operations 1,653,922,311 Reimbursement of GAM expenses 20,875,810	1,684,798,121
	Total taxable income	1,930,981,930

12. Issue-1: Whether in the facts of the case, the AO is- right in assessing the cost allocation of international freight logistic support services and reimbursement of Global Account Management (‘GAM’) expenses as Technical Services / Fee for Included Services (‘FIS’) as per the provisions of section 9(1)(vii) of the Act.

Briefly stated the facts of the case are that the assessee, a foreign company incorporated under the laws of USA, is engaged in the business of the provision of freight and forwarding and logistics services. The assessee company agreed with Expeditors International an Indian Company for providing the freight and logistics services to each other. Each party agreed to render services to the other in respect of import and export of consignments. It is observed that Import consignments are those which originate outside India and are to be delivered in India. The services in origin of foreign country broadly comprise of overseas local pick, overseas ground transportation, overseas customer clearance, overseas documentation, loading and unloading and stuffing consignment in- cargo, agreed to be performed outside India. Expeditors International, undertook to perform destination services on the arrival of consignment in India. The destination services to be carried out in India by Expeditors International comprises of local unloading and loading of consignment, local custom clearance, local ground transportation, local documentation etc. On the other hand, export consignments originate from India for the delivery of consignments outside India. The taxpayer, undertook to perform the destination, services outside India, similar to those performed by Expeditors International in India as discussed above in the context of Import consignments. During the year in question, the taxpayer received INR-1,663,922,311 as international transportation fee from Expeditors International towards services rendered by it abroad on the above described export consignments. In addition, the taxpayer received the reimbursement of Global Account Management (‘GAM’) expanses of INR 20,875,810. Such amount was claimed by the taxpayer to be not chargeable to tax in India as per the provisions of section 5 read with section 9 of the Income-tax Act, 1961. It was so claimed on the premise that the income arose from services rendered by it outside India and no operations in this regard were carried out in India. The taxpayer also claimed that its relationship with Expeditors International was that of independent contractor and the business between them was done on principal to principal basis and at arm’s length. The Assessing Officer observed that the services rendered by the taxpayer were in the nature of freight and logistics services such as transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services. In his opinion such services were covered under the provisions of section 9(1)(vii), being “fees for technical services”.

13. The entire dispute centers around the taxability of the amount received by the assessee from Expeditors International in respect of services performed outside India on the export consignments of Expeditors International originating from India. There is no quarrel over the nature of services for which the above referred amount has been paid to the assessee being, freight and logistics services such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services. The primary question which arises for consideration of is as to whether the payment in respect of these services can be held as ‘fees for technical services’ within the meaning of section 9(1)(vii). The expression fees for technical services” has been defined in Explanation 2 to section 9(1)(vii) as under:-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 changeable under the head ‘Salaries”.

14. A bare perusal of the above quoted provision indicates that the “fees for technical services” means any consideration for rendering of any “managerial, technical or consultancy services” but does not include the consideration for any construction, assembly etc. The Assessing Officer has held the services rendered by the assessee as Tees for technical services’ coming within the sweep of “managerial, technical or consultancy services”. On the contrary, the contention of the assessee has remained that the such services do not fall within the ambit of any of the categories taken note of by the authorities below. It is to be examined as to whether the services so provided by the assessee fall within the scope of ‘managerial, technical or consultancy services’ as per Explanation 2 to section 9(1)(vii).

15. The ld. AR made the following submission in this regard:

“The nature of such freight and logistics services range from packing, loading/unloading, trucking, containerization, customer clearance and other cargo handling activities besides moving the goods via air/sea.

16. In the case of a typical logistic consignment requiring import of goods to India / export of goods from USA, the assessee executes the respective portion of the consignment in the USA region only whereas El India independently carries out its part of the consignment in the India region. For the purpose of execution of such consignment, involving the export of the goods from the USA, the following activities are undertaken by the assessee until the consignment leaves the US airport/port:

i. Pick-up services which involve procuring goods/ packages from the customers in USA;

ii. Sorting of goods/ packages if required;

iii. Warehousing of goods due to the time lag between the procurement and shipment of goods, if any;

iv. Nominating Customs Housing Agent (CHA) for export of goods at the customs station;

v. Obtaining custom clearance at the airport/port;

vi. Loading of goods onto cargo airplane or ship for transportation.

17. After the goods have been loaded to the airplane / ship, the US portion of the logistic contract involving transportation of the consignment is completed.

18. Similarly, in respect of logistic consignment requiring export of goods from India/ import of goods to USA, the assessee executes the respective portion of the consignment in the USA region only whereas EI India independently carries out its part of the consignment in the India region. For the purpose of execution of such consignment, involving the import of goods to USA, the following activities are undertaken by the assessee once the consignment reaches to the US airport/port:

i. Unloading of goods from cargo airplane or ship for transportation purposes in USA;

ii. Obtaining customs clearance at the airport/port;

iii. Nominating Customs Housing Agent (CHA) for import of goods at the custom station;

iv. Warehousing of goods (if required) till the time the necessary customs -clearances are obtained;

v. Transportation of goods to the ultimate consumer in USA;

19. In line with worldwide acceptable standards in the logistics industry and the group’s policy, the income from freight logistics operations represents gross income less costs for the actual transportation expense paid to third parties and other direct costs such as third party fees, commission, allowance, discount, delivery costs, cost of carrier’s liability insurance, gateway costs, terminal fee etc. for the services provided at the origin. Thereafter, the residual profits is then shared equally (i.e. 50/50 between assessee and El India) in respect of the import and export of international cargo.

20. The assessee undertakes the logistics operations with respect to the consignment in the USA and no part of the operations or business was carried out by the assessee in India.

21. Further, the assessee places reliance on the decision of UPS SCS Asia Limited (Mumbai ITAT) wherein it was held that international freight forwarding logistics services performed by the upon resident tax payer outside India is neither managerial nor technical nor consultancy in nature and hence would not be taxable as FTS as per provisions of the Act. It was further held that as such services were held outside India the same will not fall within the scope of section 9(1)(i) of the Act.

22. The assessee submits that the Transfer Pricing officer (TPO) has already accepted the logistics operations at arm’s length price and no adverse observation has been given by him.

23. Also, no disallowance has been made with respect to freight logistics transactions in the scrutiny assessment proceedings of El India in any of the previous years.”

24. The adjudication of the ld. DRP on the issue of ‘managerial service’ is as under:

“First, the Panel will consider the ambit of ‘managerial services’ to test whether the instant services can qualify to be so called. Ordinarily the managerial services mean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect is missing and one has to follow a direction from the other for executing particular job in a particular manner, it cannot be said that the former is managing that affair. It would mean that the directions of the latter are executed simplicity without there being any planning part involved in the execution and also the evaluation of the performance. In the absence of any specific definition of the phrase “managerial services” as used in section 9(1)(vii) defining the “fees for technical services”, it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. For instance, if goods are to be loaded and some worker is instructed to place the goods on a carrier in a particular manner, the act of the worker in placing the goods in the prescribed manner, cannot be described as managing the goods. It is a simple direction given to the worker who has to execute it in the way prescribed. It is quite natural that some sort of application of mind is required in each and every aspect of the work done. As in the above example when the worker will lift the goods, he is expected to be vigilant in picking up the goods moving towards the carrier and then placing them. This act of the worker cannot be described as managing the goods because he simply followed the direction given to him. On the other hand, ‘managing’ encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word ‘managing’ is wider in scope than the word ‘executing’. Rather the later is embedded in the former and not vice versa.

Adverting to the facts of the instant case, it is observed that the taxpayer performed the freight and logistics services outside India in respect of consignments originating, from India undertaken to be delivered by Expeditors International. The role of the taxpayer in the entire transaction was to perform only the destination services outside India by unloading and- loading of consignment, custom clearance and transportation to the ultimate customer. In the considered opinion of this Panel, it is too much to categorize such restricted services as managerial services, this Panel, therefore, jettison this contention raised by the Assessing Officer.”

25. On the issue of ‘fee for technical services’ and with regard to the provisions of Section 9(1)(vii), the order of the ld. DRP is as under:

“Now the Panel takes up the next component of the definition of “fees for technical services”, being ‘consultancy services’, which has been pressed into service by the Assessing Officer to fortify his view that the amount received by the assessee is covered within section 9(1)(vii). The word “consultancy” means giving some sort of consultation de hors the performance or the execution of any work. It is only when some consideration is. given for rendering some advice or opinion etc., that the same falls within the scope of “consultancy services”. The word ‘consultancy’ excludes actual ‘execution’. The nature of services, being freight and logistics services provided by the taxpayer to El has not been disputed by the Assessing Officer. There is nothing like giving any consultation worth the name. Rather such payment is wholly and exclusively for the execution in the shape of transport, procurement, customs clearance, delivery, warehousing and picking up services. That being the position, this Panel opine that the payment in lieu of freight and logistics services cannot be ranked as consultancy services. The only left over component of the definition of “fees for technical services” taken note of by the Assessing Officer is “technical services”. He observed that the taxpayer’s business structure is time bound service coupled with continuous real time transmission of information by using and also making available its technology in the form of sophisticated equipments and software etc. The Assessing Officer has held that in order to ensure efficient and timely delivery and to provide continuous real time information, the taxpayer is required to use sophisticated technology for which the Indian entity is also equally involved and to whom the taxpayer is committed to provide the requisite software and equipment.

The Assessing Officer in reaching the conclusion that the taxpayer rendered ‘technical services’ also observed that its ‘business structure is time bound service coupled with continuous real time transmission of information by using and also making available advanced technology in the form of sophisticated equipment and software. He was swayed by the contention of the taxpayer that the Expeditors International or the ultimate customer could track the movement of cargo with the help of computers. The Panel noted that the consideration received by the taxpayer did not include any consideration for the supply of any equipment to Expeditors International. Now the Panel will examine as to whether the use of computer in any manner for knowing the location of the cargo at a particular time, can be held as technical service.

Explanation to section 9(1)(vii) defines the expression “fees for technical services” as consideration for rendering ‘managerial, technical or consultancy services’. It is seen that there is no definition of the term “technical services” in the Act.

The principle of noscitur a sociis mandates that the meaning of a word is to be judged by the company of other words which it keeps. This rule is wider in scope than the rule of ejusdem generis. In order to discover the meaning of a word which has not been defined in the Act, the Hon’ble Supreme Court has applied the principle of noscitur a sociis in several cases including Aravinda Paramila Works Vs. CIT reported .in 237 ITR 284 (SC). As noted above the Word ‘technical’ has been sandwiched between the words ‘managerial’ and ‘consultancy’ in Explanation 2 to sec. 9(1)(vii) and no definition has been assigned to the ‘technical’ services in the relevant provision, we need to ascertain the meaning of the ‘technical services’ from the overall meaning of the words ‘managerial’ and ‘consultancy’ services by applying the principle or nosticur a sociis. It has been held above that the ‘managerial services’ and ‘consultancy services’ pre-suppose some sort of direct human involvement. These services cannot be conceived without the direct involvement of man. These services can be rendered with or without any equipment, but the human involvement is inevitable. Moving in the light of this rule, there remains no doubt whatsoever that the technical services cannot be contemplated without the direct involvement of human endeavor.

Where simply an equipment or a standard facility albeit developed or manufactured with the use of technology is used, such a user cannot be characterized as using ‘technical services’.

Coming back to the facts of the present case,, even if the Panel accept the Assessing Officer’s point of view that the computer could be used, in tracing the movement of the goods, such use of computer, though indirect, remote and not necessary, cannot bring the payment for freight and logistics services within the. purview of “technical services”. The essence of the consideration for the payment is rendering of services and not the use of computer. If incidentally computer is used at any stage, which is otherwise not necessary for rendering such services, the payment for freight and logistics will not partake of the character of fees of ‘technical services’. The Panel, therefore, repel this contention raised by the Assessing Officer.

Thus, it can be noticed that the payment made to the taxpayer in question is not a consideration for managerial or technical or consultancy services. That being the position, it cannot fall within the ambit of section 9(1)(vii).

Section 4 provides that the income tax shall be charged on the total income of any taxpayer of the previous year for any assessment year at the rates in accordance with and subject to the provisions of this Act. Scope of total income of any person has been enshrined in section 5. The taxpayer in question is a non-resident company. Section 5(2) mandates that the total income of a non-resident includes the income from whatever source derived which is received or is deemed to be received in India; or accrues or arises or is deemed to accrue or arise in India. The only possibility of the receipt by the assessee in the present facts and circumstances qualifying for inclusion in the total income, can be under section 9. The Panel has observed that section 9(1)(vii) is not applicable. Now let us examine the prescription of section 9(1)(i) which deals with the income accruing or arising from any business connection in India. It provides that where an income accrues or arises whether directly or indirectly through or from any business connection in India etc., it shall be deemed to accrue or arise in India. Explanation 1(a) states that in the case of a business of which all 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. This Explanation makes it prominent that only that part of the income from business operations can be said to be accruing or arising in India, as is relatable to the carrying on of operations in India. In other words, if a non-resident earns any income from India by means’ of operations carried on outside India, that will not fall within the scope of section 9(1)(i). It shows that unless’ a non-resident earns income from business operations carried out in India, such income cannot be deemed accruing or arising in India. Reverting to the facts of the instant case, it is crystal clear that, the taxpayer rendered “International services” outside India which required the payment in question. If this-is the position, which has not even been disputed by the Assessing Officer, then there can be no question of roping such income within the ken of section 9(1)(i) of the Act.

It is, therefore, patent that the payment received by the taxpayer neither falls u/s 9(1)(i) nor u/s 9(1)(vii). Since the income cannot be described as deemed to accrue or arise in India and there is no doubt about such income having not been received or deemed to be received or accruing or arising in India, the taxability of such income fails. This Panel, therefore, direct the Assessing Officer to delete the addition made to the income of the taxpayer.”

26. Before us, the ld. DR relied on the order of the TPO while the ld. AR reiterated the submissions made before the ld. DRP and on the order of the ld. DRP.

27. The provisions of Section 9(1)(vii) are as under:

“9. (1) The following incomes shall be deemed45 to accrue or arise in India :—

(i) 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 through or from any asset or source of income in India, [***J or through the transfer of a capital asset situate in India.

[Explanation 1J.—For the purposes of this clause—

(a) in the case of 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 operations50 carried out in India ;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export ;

[* * *]

(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India ;]

[(d) in the case of a non-resident, being—

(1) an individual who is not a citizen of India ; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India ; or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;]

[(e) in the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India to it through or from the activities which are confined to the display of uncut and unassorted diamond in any special zone notified by the Central Government in the Official Gazette in this behalf.]

[Explanation 2.—For the removal of doubts, it is hereby declared that “business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident,—

[(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts by that non-resident and the contracts are—

(i) in the name of the non-resident; or

(ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that non-resident or that non-resident has the right to use; or

(iii) for the provision of services by the non-resident; or]

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or

(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:

Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business :

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non­resident or have a controlling interest in the principal non­resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.

[Explanation 2A.—For the removal of doubts, it is hereby clarified that the significant economic presence of a non­resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means:

(i) Provided that the transactions or activities shall constitute significant economic presence in India, whether or not,—

(ii) the agreement for such transactions or activities is entered in India; or

(iii) the non-resident has a residence or place of business in India; or the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.]

Following Explanation 2A shall be inserted in clause (i) of sub­-section (1) of section 9 by the Finance Act, 2020, w.e.f. 1-4-­2022 :

Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose, shall mean—

(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:

Provided that the transactions or activities shall constitute significant economic presence in India, whether or not—

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or place of business in India; or

(iii) the non-resident renders services in India:

Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.

Explanation 3.—Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India.]

[Explanation 4.—For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.

Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India:]

[Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non­resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015:]

[Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non­resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 61a[prior to their repeal], made under the Securities and Exchange Board of India Act, 1992 (15 of 1992):]

[Provided also that nothing contained in this Explanation shall apply to an asset or a capital asset, which is held by a non­resident by way of investment, directly or indirectly, in Category-I foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).]

[Explanation 6.—For the purposes of this clause, it is hereby declared that—

(a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets—

(i) exceeds the amount of ten crore rupees; and

(ii) represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be;

(b) the value of an asset shall be the fair market value as on the specified date, of such asset without reduction of liabilities, if any, in respect of the asset, determined in such manner as may be prescribed;

(c) “accounting period” means each period of twelve months ending with the 31st day of March:

Provided that where a company or an entity, referred to in Explanation 5, regularly adopts a period of twelve months ending on a day other than the 31st day of March for the purpose of—

(i) complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or

(ii) reporting to persons holding the share or interest, then, the period of twelve months ending with the other day shall be the accounting period of the company or, as the case may be, the entity:

Provided further that the first accounting period of the company or, as the case may be, the entity shall begin from the date of its registration or incorporation and end with the 31st day of March or such other day, as the case may be, following the date of such registration or incorporation, and the later accounting period shall be the successive periods of twelve months:

Provided also that if the company or the entity ceases to exist before the end of accounting period, as aforesaid, then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to exist;

(d) “specified date” means the—

(i) date on which the accounting period of the company or, as the case may be, the entity ends preceding the date of transfer of a share or an interest; or

(ii) date of transfer, if the book value of the assets of the company or, as the case may be, the entity on the date of transfer exceeds the book value of the assets as on the date referred to in sub-clause (i), by fifteen per cent.

Explanation 7.— For the purposes of this clause,— (a) no income shall be deemed to accrue or arise to a non­resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, referred to in the Explanation 5,—

(i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or

(ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;

(b) in a case where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity referred to in the Explanation 5, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in, such company or entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonably attributable to assets located in India and determined in such manner as may be prescribed;

(c) “associated enterprise” shall have the meaning assigned to it in section 92A;]

(ii) income which falls under the head “Salaries”, if it is earned63 in India.

[Explanation.—For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for—

(a) service rendered in India; and

(b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment,

shall be regarded as income earned in India ;]

(iii) income chargeable under the head “Salaries” payable by the Government63 to a citizen of India for service outside India ;

(iv) a dividend paid by an Indian company outside India ; [(v) income by way of interest payable by—

(a) the Government ; or

(b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of 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 interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India.

[Explanation.—For the purposes of this clause,—

(a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly;

(b) “permanent establishment” shall have the meaning assigned to it in clause (iiia) of section 92F;]

(vi) income by way of royalty67 payable by—

(a) the Government ; or

(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of 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 royalty is payable in respect of any right, property or information used or services utilised for the purposes of 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 so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government :

[Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.]

Explanation 1.—For the purposes of the [first] proviso, an agree-ment 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; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the 70[Assessing] Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.

Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting [, but not including consideration for the sale, distribution or exhibition of cinematographic films] ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to 71[(iv), (iva) and] (v).

[Explanation 3.—For the purposes of this clause, “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.]

[Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;]

(vii) income by way of fees for technical services75 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 76 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 consi-deration) 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 recipient78 or consideration which Expeditors International of Washington would be income of the recipient chargeable under the head “Salaries”;]”

28. Thus, on going through the provisions of the Act, facts of the case, business operations of the assessee, we hold that the services rendered by the assessee do not fall within the purview of managerial, consultancy or technical services. The payment for freight and logistics cannot be treated as technical services. Similarly, the provisions of Section 9(1)(i) are not attracted in this case as no income has accrued or arised from the business connection abroad in India. The explanation states that only that part of income from business operations can be said to be accruing or arising in India only if it is relatable to the carrying of operations in India. Thus, the payment received by the assessee neither falls under Section 9(1)(i) or Section 9(1)(vii). Hence, we hereby decline to interfere with the directions of the Dispute Resolution Panel in this case.

29. In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 30/09/2020.