Case Law Details
ACIT Vs Lux Industries Ltd. (ITAT Kolkata)
Since export commission payments to non-resident agents were not taxable in India, as agents were remaining outside, services were rendered abroad and payments were also made abroad TDS under section 195 was therefore, not deductible from payment made to NRI agents.
FULL TEXT OF THE ITAT JUDGMENT
These Revenue’s appeals for A.Y.2012-13 & 2013-14 arise against the CIT(A)-1, Kolkata’s separate orders both dated 09.06.2015 passed in Appeal Nos. 1359 & 1408/CIT(A)-24/( 12-13)& (13-14)/15-16 respectively; reversing the Assessing Officer’s action raising principal and interest demands of Rs.72,05,567/- and Rs.23,05,781/- in former and Rs.63,44,293/- and Rs.14,59,187/- in latter assessment year; respectively, on account of tax payer’s failure in deducting TDS on export commission paid to various UAE based payees, involving proceedings u/s 201(1)/201(1A) of the Income Tax Act, 1961 (Act).
Both Learned Representatives state at the outset that the relevant facts giving rise to the impugned identical foreign export commission payments involve a common issue. We thus take up former assessment year 2012-13 in appeal No.1 144/Kol/2015 as the lead case.
2. This assessee is a company engaged in hosiery business. It admittedly incurred the impugned export commission in case of four Dubai based payees M/s Profile Trading Company, Dubai, M/s Pierre Donna Cloths Trading, M/s Ali Rashed Al Abdooli Trading and M/s Yellow Flower Trading Company involving sums of Rs.47,12,450/-, Rs.1,84,303/-, Rs.41,493/- and Rs.1,22,08,069 respectively totalling to Rs.1,71,46,315/- in the relevant previous year. There is no quarrel that it had not deduced any TDS thereupon. Its case before the Assessing Officer was that neither the said payees has rendered any services in India nor had they set up their permanent establishment in India so as to attract section 91 (vii) of the Act. It sought to explain the said payees to have rendered merely secured overseas export orders in lieu of charging commission. All these failed to evoke the Assessing Officer’s concurrence. He held in assessment order dated 23.05.2014 that the assessee had allotted its UAE and Middle East sales area territories to its payees for goods manufactured in India only, the said payees secured orders, the payer had to advertise its products in the said targeted territories, the agreements in question had been executed in Kolkata providing arbitration, if any to take place in local jurisdiction and the payees had to be paid @5% on sale orders after completion followed by realisation of sale proceedings; respectively. The Assessing officer therefore observed that the payees’ right to receive the commission income had received in India since the sale price had been received in Indian territory only. He quoted AAR’s decisions in M/s SKF Boilers & Driers (P) Ltd. [2012] 18 taxman.com 325 and in Rajiv Malhotra In re[2006] 284 ITR 564 to hold that mere services have been rendered and commission paid abroad would not absolve the payer assessee from deducting TDS in similar facts and circumstances. He also appears to have taken into consideration various legislative amendments in section 9(1) as well as section 9(2) of the Act to raise the impugned demand of principal and interest u/s 201(1) and section 201(1a) of Rs.72,05,567/ and Rs.23,05,78 1/-; respectively.
3. The assessee preferred appeal The CIT(A) accepted its grievance as under :-
“8.4 Observation and conclusion:
I have gone through the facts of the case placed on record by both the A. O. and the appellant. The following. facts of the case are not disputed:
1) The Agents in this case are non-residents having no permanent establishment in India.
2) The Agents are engaged in providing services in relation to sale of goods outside the country.
3) All the goods in question were sold in the foreign countries although these goods were manufactured in India.
4) The Agents received the entire commission through remittances made by the appellant to the foreign territory and no part of the commission was paid to them in India.
5) The payment of commission was made to the foreign agents only after the receipts of the sale proceeds by the Indian Manufacturer.
In the above facts of the case, the learned A. O. has held that since the goods are manufactured and / or supplied from India .and the payment is received by the agent only after the receipts of the sale proceeds by the Indian Exporter, the income earned by the agent accrues or arises in India and is therefore taxable in India and the appellant ought to have deducted TDS on same under section 195 of the Income Tax Act, 1961. On the contrary, the A. R. of the appellant has in his written submission stated that as the foreign agent is a non resident and has no permanent establishment in India as we1I as the fact that none of the services is rendered by the foreign agent in India and no part of the payment is made to him in India the income accruing to the foreign agent cannot be deemed to accrue or arise in India. The learned A. R. for the appellant has also referred to various Board Circulars and Case laws in this regard. He has also distinguished the facts of the case of the appellant from the case law cited by the A. O. He has alternatively argued that even if the income is deemed to accrue or arise in India, in view of the Double Taxation Avoidance Agreement between India and UAE, the same income is liable to be taxed in UAE and no part of the same is to be taxed in India.
The taxability of the income in India is to be determined with reference to Sec 5 and Sec 9 of the Income Tax Act’ 1961. On going through the facts of the case it is clear that entire services were rendered in relation to sales and the sales were effected in foreign territory and these. persons do not have any Permanent Establishment in India.
Based on these facts, law on the subject and the judicial decisions I am inclined to agree with the submission of the A.R. for the appellant. Since it is an undisputed fact that the entire services are rendered in relation to sales and the sales were effected in foreign territory, the income accruing to the agent has to be taken as arising. in the foreign territory. Further, the fact that the said commission becomes payable to the agent only after the receipt of the sales proceeds by the appellant in India also does not alter the character of the income because terms of payment has no bearing on the character of income, In this case., the income accrues to the foreign agent on the sales of goods but the same is payable only after the receipt of sales proceeds by the exporter. This has no material effect on the nature of income of the agent. I am also in agreement with the alternative argument put forward by the A.R. of the appellant that even if it is assumed that the income accruing to the foreign agent accrues or arises in India, the same is not taxable in view of the Double Taxation Avoidance Agreement between India and the U.A.E. I, therefore, hold that no TDS was to be deducted u/s 195 in respect of commission paid by the appellant to the foreign agents. Based on these facts, law on the subject and the judicial decisions I am inclined to agree with the submission of the A.R. for the appellant. Since it is an undisputed fact that the entire services are rendered in relation to sales and the sales were effected in foreign territory, the income accruing to the ‘agent has to be taken as arising in the foreign territory. Further, the fact that the said commission becomes payable to the agent only after the receipt of the sales proceeds by the appellant in India also does not alter the character of the income because terms of payment has no bearing on the character of income, In this case., the income accrues to the foreign agent on the sales of goods but the same is payable only after the receipt of sales proceeds by the exporter. This has no material effect on the nature of income of the agent. I am also in agreement with the alternative argument put forward by the A.R. of the appellant that even if it is assumed that the income accruing to the foreign agent accrues or arises in India, the same is not taxable in view of the Double Taxation Avoidance Agreement between India and the U.A.E. I, therefore, hold that no TDS was to be deducted u/s 195 in respect of commission paid by the appellant to the foreign agents.”
4. Learned Departmental Representative vehemently contends during the course of hearing that the CIT(A) has erred in law as well as on facts in concluding that the assesee’s payments are not liable to be taxed in India qua the impugned targeted sale export commission payments. He seeks to treat the said sums as commission u/s 194H setting into motion TDS deduction under Chapter XVII in the statute. We find no merit in Revenue’s above argument. This tribunal’s coordinate bench in DCIT vs Welspun Corporation Ltd. ITA No.48/Ahd/2015 decided on 03.01.2017 has considered all these issues in assesee’s favour as under :-
“4. We find that, as noted above, in the case of Welspun Corp Ltd (supra), the Co-ordinate Bench of this Tribunal has, inter alia, observed as follows:-
“31. The scheme of taxability in India, so far as the non-residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a non-resident, provides that “the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which– (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year”. There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is “deemed to accrue or arise in India”. Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context:
‘Section 9- Incomes deemed to accrue or arise in India (1) The following incomes will be deemed 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, Explanation: For the purpose of this clause [i.e. 9(1)(i)],
(a) in the case of a 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 operations carried out in India;
(b) (c) (d)** ** **”
(vii) income by way of fees for technical services payable by-
(a)** ** **”
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c)** ** **”
Explanation 1- * Explanation 2.- For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical 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”.’ * Not relevant for our purposes
32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient’s business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent’s business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore, Explanation 1 to Section 9(1)(i) comes into play.
33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(1)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case of SKF Boilers & Driers (P.) Ltd. In re [2012] 343 ITR 385/206 Taxman 19/1 8 com325 (AAR – New Delhi), we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra, In re [2006] 284 ITR 564/155 Taxman 101 (AAR – New Delhi) which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a ITA No. 1534/Ahd/2015 M/s. Panasonic Energy Inddia Co Ltd vs. Pri. CIT Assessment year: 2009-10 case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the non-resident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that “no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food & Wine Show (to be held in India), and makes full and final payment to the applicant in India” and that “the commission income would, therefore, be taxable under section 5(2)(b) read with section 9(1)(i) of the Act”. The Authority for Advance Ruling also held that “the fact that the agent renders services abroad in the form of pursuing and soliciting participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining situs of his income”. We do not consider this approach to be correct. When no operations of the business of commission agent is carried on in India, the Explanation 1 to Section 9(1)(i) takes the entire commission income from outside the ambit of deeming fiction under section 9(1)(i), and, in effect, outside the ambit of income ‘deemed to accrue or arise in India’ for the purpose of Section 5(2)(b). The point of time when commission agent’s right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to Section 9(1 )(i), which is what is material in the context of the situation that we are in seisin of. The revenue’s case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore. important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon ‘ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon’ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these rulings.
34. Coming to Section 9(1)(vii)(b), this deeming fiction- which is foundational basis for the action of the Assessing Officer, inter alia, provides that the income by way of technical services payable by a person resident in India, except in certain situations- which are not attracted in the present case anyway, are deemed to be income accruing or arising in India. Explanation 2 to Section 9(1)(vii)defines ‘fees for technical services’ as any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other 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’ [Relevant portion highlighted by underlining]”.
35. In the light of the above legal position, what we need to decide at the outset is whether the amounts paid by the assessee to the non-resident agents could be termed as “consideration for the rendering of any managerial, technical and consultancy services”. As we do so, it is useful to bear in mind the fact that even going by the stand of the Assessing Officer, at best services rendered by the non-resident to the agent included technical services but it is for this reason that the amounts paid to these agents, on account of commission on exports, should be treated as fees for technical services. Even proceeding on the assumption that these non-resident agents did render the technical services, which, as we will see a little later, an incorrect assumption anyway, what is important to appreciate is that the amounts paid by the assessee to these agents constituted consideration for the orders secured by the agents and not the services alleged rendered by the agents. The event triggering crystallization of liability of the assessee, under the commission agency agreement, is the event of securing orders and not the rendition of alleged technical In a situation in which the agent does not render any of the services but secures the business anyway, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order. In a reverse situation, in which an agent renders all the alleged technical services but does not secure any order for the principal i.e. the assessee, the agent is not entitled to any commission. Clearly, therefore, the event triggering the earnings by the agent is securing the business and not rendition of any services. In this view of the matter, in our considered view, the amounts paid by the assessee to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot be said to be consideration for rendering of any managerial, technical or consultancy services (Emphasis by underlining supplied by us) “. The services rendered by the agents, even if these services are held to be in the nature of technical services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor the quantification of these amounts have any relation with the quantum of these technical services. The key to taxability of an amount under section 9(1)(vii) is that it should constitute “consideration” for rendition of technical services. The case of the revenue fails on this short test, as in the present case the amounts paid by the assessee are “consideration” for orders secured by the assessee irrespective of how and whether or not the agents have performed the so called technical services.
36. Let us sum up our discussions on this part of the scheme of Section 9, so far as tax implications on commission agency business carried out by non-residents for Indian principals is concerned. It does not need much of a cerebral exercise to find out whether the income from the business carried on by a non-resident assessee, as a commission agent and to the extent it can be said to directly or indirectly accruing through or from any business connection in India, is required to be taxed under section 9(1)(i)or under section 9(1)(vii), of the Income Tax. The answer is Deeming fiction under section 9(1)(i) read with proviso thereto, as we have seen in the earlier discussions, holds the key, and lays down that only to the extent that which the operations of such a business is carried out in India, the income from such a business is taxable in India. When no operations of the business are carried on India, there is no taxability of the profits of such a business in India either. The question then arises whether in a situation in which, in the course of carrying on such business, the assessee has to necessarily render certain services, which are of such a nature as covered by Explanation 2 to Section 9(1)(vii), and even though the assessee is not paid any fees for such services per se, any part of the business profits of the assessee can be treated as ‘fees for technical services’ and taxed as such under section 9(1)(vii). This question does not pose much difficulty either. In the light of the discussions in the foregoing paragraph, unless there is a specific and identifiable consideration for the rendition of technical services, taxability under section 9(1)(vii) does not get triggered. Therefore, irrespective of whether any technical services are rendered during the course of carrying on such agency commission business on behalf of Indian principal, the consideration for securing business cannot be taxed under section 9(1)(vii) at all. This profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out.
37. On a more fundamental note, however, it is also a settled legal position by now that the services of the nature rendered by these commission agents cannot anyway be treated as fees for technical services anyway. Viewed thus, even the discussion on whether the amounts in question could be treated as ‘consideration’ for technical services, may be rendered academic in effect. Learned CIT(A) has very well summarized the judicial precedents in support of this line of reasoning, and, in an erudite and extended discussion, dealt with each limb of the definition of technical services. These findings are reproduced by us earlier in this order. While, for the sake of brevity, we need to repeat each of these reasons analysed by the learned CIT(A), suffice to say that we approve his well-reasoned findings and line of reasoning, and we will also briefly touch upon this aspect of the matter. Before we do so, we may take note of some of the clauses in a typical commission agreement entered into by the assessee with its commission agents. The key provisions in this agreement, a copy of which is placed before us at pages 103 to 109 of the paper-book, are as follows:
Article 5 – AGENT’S OBLIGATION The AGENT shall carry out all the duties normally rendered by an AGENT including but not limited to the following:
5.1 To act exclusively on behalf of the PRINCIPAL and not source, procure or market products of similar type manufactured by competitive companies without prior written consent of the PRINCIPAL.
5.2 To use its best endeavors and facilities to develop, expand and promote diligently, the sale and the market for the Products. The agent will be responsible of making the necessary market plans and establish the marketing network of representatives to help promote Welspun products . 5.3 To provide the PRINCIPAL with information such as marker developments, activities of competitors, intentions and plans of clients to the maximum of his knowledge.
5.4 Endeavor to provide the PRINCIPAL prompt advance information regarding tenders. To forward to the PRINCIPAL tender documents, inquiries etc, with full technical specifications well ahead – as much as he can – of tender closing.
5.5 The AGENT on behalf of the PRINCIPAL, will purchase tender documents and forward the same to the PRINCIPAL well ahead – as much as he can – of tender closing. The cost of purchase of such tender documents shall be reimbursed by the PRINCIPAL to the AGENT. 5.6 To assist for claims and complaints (if say) that may arise from third parties and help to reach appropriate settlement in close co-ordination with the PRINCIPAL.
5.7 The AGENT will not enter into Agreements or Contractual Obligations &. create any financial liabilities on behalf of the PRINCIPAL, without the PRINCIPAL’S prior written consent.
5.8 The AGENT hereby nominates Mr. Hossam Kawash as their contact point who will be totally responsible for the PRINCIPAL’S business for clarity of communication & expeditious action.
5.9 To assist the PRINCIPAL in all possible way, as and when requested by the PRINCIPAL for the fulfillment of its obligations, in case of a contract within the TERRITORY. It includes assisting the PRINCIPAL in identifying subcontractors like logistics, shippers, cargo handling agencies for smooth execution of such contracts.
5.9a To send the PRINCIPAL periodic reports on business activity. 5.9b To keep the PRINCIPAL continuously apprises of all relevant Political! Economic changes which would affect tie business, 5.9c To undertake not to divulge sales documents, catalogues, prices etc. to competitors and their agents and associates.
Article 7 – PRINCIPAL’S OBLIGATIONS During the continuance of this Agreement the PRINCIPAL agrees : 7.1 To give the AGENT full support for promoting and creating market for the products of the PRINCIPAL in the TERRITORY. 7.2 To inform the AGENT on receipt of an inquiry from the TERRITORY requiring direct supply .
7.3 The AGENT shall be entitled to commission as agreed upon in the contract.
ITA No. 1534!Ahd!2015 M!s. Panasonic Energy Inddia Co Ltd vs. Pri. CIT Assessment year: 2009-107.4 To take into consideration the recommendations made by the AGENT while making the offer.
7.5 To provide all informative data, catalogues and technical material (all in the English Language) regarding the PRINCIPAL’S products and activities and keep the AGENT informed about all relevant charges. 7.6 To offer competitive prices as far as possible to enable the sale of the products as the agent is only entitled for commissions and not fixed salary on his work.
7.7 The PRINCIPAL nominates Mr. Ranjit Lala as the contact person with the AGENT for all correspondences and communications. Article 9 – TERMINATION.
9.1 This Agreement shall remain valid for a period of One year from the date of signing. The said Agreement can also be terminated by either party anytime giving notice to the other party of at least 90 days in advance by fax and followed by registered letter stating reasons for the termination. The agreement can be reinstated for a further period of two years based on mutual agreement and then after its termination another period of five years. 9.2 In the event of the termination, the AGENT will furnish all the relevant information to the PRINCIPAL and will be responsible for realization of payments outstanding till date within the TERRITORY.
Also the AGENT shall return all the customers records and other data relating to the Company’s business or Services which may be in his possession. 9.3 In the event of termination, if any contract is concluded after the termination date, but the exercise has commenced prior to the termination date, the agent is entitled for the applicable commissions. SALES COMMISSION FOR THE SONATRACH GK3 PROJECT WELSPUN will pay GLOBAL SYNERGY INTERNATIONAL LTD. in its capacity as agent for WELSPUN a sales commission, based on the FOB mill sales price for the GK 3 project equal to:
(i) 2% of the FOB Mill value in U.S. Dollars for the ordered quantity. All sales commissions shall be paid in U.S. Dollars to the bank account to be advised by GLOBAL SYNERGY, details of which will be provided by the agent. The sales commission shall be payable by WELSPUN to GLOBAL SYNERGY INTERNATIONAL LTD. as interim payments on prorate basis after realization of the payments received by the PRINCIPAL within a reasonable time but not exceeding 30 days from receipt of payment by the PRINCIPAL.
SALES COMMISSION FOR THE SONATRACH GK3 PROJECT By the virtue of this addendum, WELSPUN agree to pay GLOBAL SYNERGY INTERNATIONAL LTD., in its capacity as agent for WELSPUN, a sales commission, based on the FOB mill sales price for the GK 3 project equal to:
(i) 4.10% of the FOB Mill value in U.S. Dollar for the quantity shipped is last ITA No. 1534/Ahd/2015 M/s. Panasonic Energy Inddia Co Ltd vs. Pri. CIT Assessment year: 2009-10 (18″) Shipment.
(a) GLOBAL SYNERGY INTERNATIONAL LTD agrees to unconditionally to fulfill the scope set therein by the virtue of this addendum.
(b) This commission is over the above the commission payable by Welspun to Global Synergy as specified in Annexure-1 of Agency agreement dated 29th day of June,
All sales commission shall be paid in U.S. Dollars to the bank account to be advised by GLOBAL SYNERGY, details of which are available with WELSPUN. Unless otherwise agreed, the sales commission shall be payable by WELSPUN to GLOBAL SYNERGY INTERNATIONAL LTD., as interim payments on prorate basis after realization of the payments received by the PRINCIPAL within a reasonable time but not exceeding 30 days from receipt of payment by WELSPUN.
38. As is clear from the above provisions of the agreement, the work that the agent has to done under this agreement, as is stated unambiguously in the agreement itself, is to “carry out all the duties normally rendered by an agent” including but not limited to the activities specified therein. The consideration for which the payment made to the commission agent is obtaining of the orders and not any services per se. The consideration is computed on the basis of business procured. Obviously, if there are no business generated for the principal, the agent gets nothing. Quite clearly, what is done by the agent is not a rendition of service but pure entrepreneurial activity. The work actually undertaken by the agent is the work of acting as agent and so procuring business for the assessee but as the contemporary business models require the work of agent cannot simply and only be to obtain the orders for the product, as this obtaining of orders is invariably preceded by and followed by several preparatory and follow up activities. The description of agent’s obligation sets out such common ancillary activities as well but that does not override, or relegate, the core agency work. The consideration paid to the agent is also based on the business procured and the agency agreements donot provide for any independent, standalone or specific consideration for these services. The services rendered under the agreement cannot, therefore, be considered to be technical services in nature or character. The services rendered in the course of rendering agency services are essentially business services and to obtain the business. We have also noted that, so far as rendition of technical services is concerned, one of the main points in the case of the revenue, as evident from a plain reading of the impugned order under section 201, is that “manufacturing of specialized pipe was a highly technical activity involving very complex technical exercise of technology and skilled labour and finest grade of raw material” and that “obviously, to procure the orders, the assessee company will need specialist agents who can understand the nitty gritty of the assessee’s business and can demonstrate the assessee’s business profile and quality of products of the assessee to the potential clients to convince them to enter into a contract with the assessee company Just because a product is highly technical does not change the character of activity of the sale agent. Whether a salesman sells a handcrafted souvenir or a top of the line laptop, he is selling nevertheless. It will be absurd to suggest that in the former case, he is selling and the latter, he will be rendering technical services. The object of the salesman is to sell and familiarity with the technical details, whatever be the worth of those technical details, is only towards the end of selling. In a technology driven world that we live in, even simplest of day to day gadgets that we use are fairly technical and complex. Undoubtedly when a technical product is being sold, the person selling the product should be familiar with technical specifications of the product but then this aspect of the matter does not anyway change the economic activity. Nothing, therefore, turns on the details of the products being technical. It was also noted that by the Assessing Officer that “it is a very technical exercise to obtain the contracts since it involves complex process requiring elaborate discussion, technical expertise and present of complex technical presentation, on behalf of the assessee, which can only be done by a specialist in this field so as to convince the clients about Welspun’s suitability to the contract”. This at best signifies complexity in the businesses and the need of technical inputs in the process of businesses, particularly when the products being dealt with are technical products, but then merely because technical inputs are needed in carrying out business activity, it does not become a technical service rather than a business activity. At the cost of repetition, we must emphasize the important distinction between a business activity, requiring understanding of related technology, and rendition of technical services simplictor. In any case, what has been described as a technical service is the service being rendered to the buyer but the payment received by the commission agents is not for this service per se but for generating business orders for the assessee. Generating business or securing orders is an entrepreneurial activity and cannot, by any stretch of logic, be treated as a technical service per se. The same is the position with regard to assistance with respect of logistics, such as shipping and handling services, with respect to sale forecasting, with respect to gathering information on markets, business environment and on specific buyers and with respect to development of sales network. All these services are essentially integral part of, and are thus aimed at, developing business for the assessee and securing orders for the assessee from the right persons. Neither these services can be viewed on a standalone basis divorced from the economic activity of securing orders, nor any payment can be said to be for rendition of these services inasmuch as it is not the rendition of these services but securing business of the assessee which triggers the income accruing to the non-resident agents of the assessee and it is securing of business for the assessee which is the proximate cause of the income accruing to the assessee. This issue is also covered, in favour of the assessee, by a coordinate bench decision in the case of Dy. CIT v. Troikaa Pharmaceuticals Ltd. [IT Appeal No. 2028/Ahd/13 and CO No 13/Ahd/14] and vice versa, wherein it has been, inter alia, observed as follows:
‘5. As regards the references to Section 9(1)(vii), as made by the Assessing Officer and the learned Departmental Representative, we find that aspect of the matter is also covered, in favour of the assessee, by a large number of judicial precedents- including Hon ‘ble Madras High Court’s judgment in the case of CIT v. Farida Leather Co. [(2016) 66 taxmann.com 321 (Madras)], wherein Their Lordships have, inter alia, observed as follows:
5. The main contention of the learned counsel for the assessee/respondent is that the agency commission/sales commission paid by the assessee to ITA No. 1534/A hd/2015 M/s. Panasonic Energy Inddia Co Ltd vs. Pri. CIT Assessment year: 2009-10 non-resident agents, for the services rendered by them, outside India, in procuring export orders for the assessee, would not attract or partake the character of “fees for technical services” as explained in the context of 9(1)(vii) of the Act and therefore, there is no scope for the application of the provisions of Section 195 of the Act (Tax Deducted at Source). It is also contended that as the non-resident agents have neither business connection in India nor they have permanent establishment in India, they are liable to be taxed in India.
5.1 Yet another contention of the learned counsel for the assessee is that:
(a) the assessee paid the amount by way of commission to foreign agents for the services rendered outside India; (b) the Tax Deduction at Source (TDS) is required to be made on all payments to non-residents, only if such payments are liable to be taxed in India. (c) following the decision of this Court, CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.), the assessee is not liable to deduct tax at source, when the non-resident agent provides services outside India on payment of commission.
5.2 The contention of the Revenue is that such services are attracted by Explanation (2) to Section 9 (1) (vii) of the Act and therefore TDS certificate is essential.
6. Whether this contention is correct, is the issue to be decided.
7. In order to appreciate this contention, it is necessary to consider the relevant provisions of the Act:–
(i) Section 40(a)(i) of the Act :–
“Section 40 – Amounts not deductible:
Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, —
(a) in the case of any assessee
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,–
(A) outside India; or
(B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139: Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation: For the purposes of this sub-clause,–
(A) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9:
(B) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9: (ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVIIB and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.
Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139 thirty per cent of, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub- clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.’
(ii) Explanation 2 to Section 195(1) of the Act :–
‘Section 195 – Other sums: (1) Any person responsible for paying to a non- resident not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.
[Explanation 1] :
[Explanation 2.- For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non- resident, whether or not the non-resident person has–
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.”
“Section 9 – Income deemed to accrue or arise in India — (1) The following incomes shall be deemed 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, or through the transfer of a capital asset situate 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”.’
7.1 Section 40 of the Act spells out what amounts are not deductible from the income charged to tax under the profits and gains of business or profession.
7.2 Section 40(a)(i) of the Act deals with interest and other sums payable outside India. The provisions of this sub-clause made applicable to interest have been extended to payment of royalty, technical fees and any other sum chargeable under this Act. The section provides that the sums covered by the sub-clause, which are chargeable under the Act and are payable outside India, shall not be allowed as an expenditure to the assessee, unless tax is paid thereon or is deducted therefrom under Chapter XVII-B of the Act.
7.3 Section 195(1) of the Act deals with deduction of tax from payment to non-residents and foreign companies. Section 195(1) of the Act comes into play at a stage where the payer, who is enjoined to deduct the tax, either credit such income to the account of the payee or make payment thereof, whether in cash / cheque / draft or any other mode. The taxability of such amount in the hands of the payee or occasioning of the taxable event is alien for the purpose of Section 195(1) of the Act. 7.4 Section 195(2) is an enabling provision, enabling an assessee to file an application before the Assessing Officer to determine the appropriate proportion of the sum chargeable and upon such determination, the tax has to be deducted under Section 195(1) of the Act. The payment is made credited to the account of the payee.
8. The question now is, whether the assessee ought to have deducted tax at source as contemplated under Section 195 of the Act, when the assessee paid commission to foreign agent.
9. This question has been answered by the Hon ‘ble Supreme Court, in the case of E.India Technology Centre (P.) Ltd. (supra), in which, it is very categorically held that the tax deducted at source obligations under Section 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non-resident recipient.
9.1 Therefore, merely because a person has not deducted tax at source or a remittance abroad, it cannot be inferred that the person making the remittance, namely, the assessee, in the instant case, has committed a default in discharging his tax withholding obligations because such obligations come into existence only when the recipient has a tax liability in India.
9.2 The underlying principle is that, the tax withholding liability of the payer is inherently a vicarious liability on behalf of the recipient and therefore, when the recipient / foreign agent does not have the primary liability to be taxed in respect of income embedded in the receipt, the vicarious liability of the payer to deduct tax does not arise. This vicarious tax withholding liability cannot be invoked, unless primary tax liability of the recipient / foreign agent is established. In this case, the primary tax liability of the foreign agent is not established. Therefore, the vicarious liability on the part of the assessee to deduct the tax at source does not exist.
10. Further, just because, the payer / assessee has not obtained a specified declaration from the Revenue Authorities to the effect that the recipent is not liable to be taxed in India, in respect of the income embedded in the particular payment, the Assessing Officer cannot proceed on the basis that the payer has an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment.
11. In the instant case, it is seen, admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of “fees for technical services” as explained in the context of Section 9(1)(vii) of the Act.
12. As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of “fees of technical services” and therefore, explanation (2) to Section 9(1)(vii)of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee’s
13. In this case, the commission payments to the non-resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad.
14. The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision G.E.India Technology’s case, cited supra, in view of insertion of Explanation 4 to Section 9(1)(i) of the Act with corresponding introduction of Explanation 2 to Section 195(1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962.
15. The issue raised in this case has been the subject matter of the decision, in the recent case, CIT v. Kikani Exports (P.) [2014] 369 ITR 96/[2015] 232 Taxman 255/49 taxmann.com601 (Mad.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- – ‘… the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of “fees for technical services” and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted.’
16. When the transaction does not atract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.
6. Clearly, therefore, the payment of commission in the hands of the non- resident agent, as long as such an agent carries out its activities outside India, does not result in taxability in the hands of the agent in India.’
39. As we deal with this aspect of the matter, we may also take note of the following analysis, in the case of UPS SCS Asia Ltd. v. Asstt. DIT, (International Taxation) [2012] 50 SOT 268/18 taxmann.com302 (Mum.), about the scope of managerial, consultancy and technical services which the services rendered must fulfil so as to lead to taxability as fees for technical services:
‘5. 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 learned CIT(A) has held the services rendered by the assessee as fees for technical services’ coming with in the sweep of “managerial, technical or consultancy services”. On the contrary, the contention of the assessee has remained before the authorities below as well as us that the such services do not fall within the ambit of any of the categories taken note of by the authorities below. We will examine 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).
6. In order to appreciate the nature of services more elaborately, it is relevant to consider the terms of the Agreement entered into between the assessee and Menlo India executed on November 7, 2006 with effect from 1st June, 2005, a copy of which is available on page 1 onwards of the paper book. The scope of services has been given in clause 1.1. In the recital clause it has been provided that the assessee- company may require Menlo India to perform logistics services such as transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services (Local services) within India (Local operating area). It has further been provided that Menlo India may also seek similar services from the assessee- company such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services (International services) outside India. In the present appeal we are concerned with the “International services” provided by the assessee to Menlo outside India. These services comprise of transport, procurement, customs clearance, sorting, warehousing and pick up services on the cargo exported by Menlo on behalf of its customers. Having noted the nature of services provided by the assessee outside India, for which Menlo India made the payment, let us consider if these can be described as managerial or technical or consultancy services.”
5. We follow the above detail discussion mutatis mutandis to conclude that the assessee’s commission expenditure in question is not taxable in the hands of its payees so as to attract TDS liability in its case as held in hon’ble apex court’s decision in GE India Technology Centre’s case 327 ITR 456 (SC) . The Revenue’s sole substantive ground as well as its appeal No. 1144/Kol/2015 fails accordingly.
6. Same order to follow in Revenue’s latter appeal No.1 145/Kol/2015 as both learned representatives have already indicated in the preceding paragraphs that the sole issue herein pertains to the very kind of payments made to Dubai based entities as involved in preceding assessment year 20 12-13. We appreciate this fair stand of the parties towards the bench to affirm the CIT(A)’s findings in the impugned latter assessment year as well.
7. These Revenue’s appeals are dismissed.
