Commissioner Of Income Taxbusiness Circle Ivchennai v. M/S.orient Express26B, Jawaharlal Nehru Salaiekkaduthangalchennai 600 032

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATE : 02.03.2015 CORAM THE HONOURABLE MR. JUSTICE R.SUDHAKARANDTHE HONOURABLE MS. JUSTICE S.VIMALA T.C.A. NO. 92 OF 2015 Commissioner of Income TaxBusiness Circle IVChennai... Appellant/Appellant - Vs - M/s.Orient Express26B, Jawaharlal Nehru SalaiEkkaduthangalChennai 600 032... Respondent/Respondent Appeal filed under Section 260A of the Income Tax Act againstthe order dated 7.10.14 passed by the Income Tax Appellate Tribunal,'D' Bench, Chennai, made in ITA No.1794/Mds/2013. Against the order of the Commissioner of Income Tax Business,Circle IV, Chennai dt.21.1.2013 in PAN AAAF00565A. Against the order of the Commissioner of Income Tax (Appeals-V)2nd Floor, Main Building, 121 M.G.Road, Nungambakkam, Chennai-34dt.10.5.2013 and made in ITA.No.68/12-13 (A) VI. For Appellant: Mr. M.Swaminathan JUDGMENT (DELIVERED BY R.SUDHAKAR, J.) Aggrieved by the order passed by the Tribunal in dismissing theappeal filed by it, the appellant/Revenue is before this Court byfiling the present appeal by raising the following questions of law :-“1) Whether on facts and in the circumstances of thecase, the Income Tax appellate Tribunal has failed toappreciate that the payments made by the assessee tothe non-residents attract the provisions of Sec. 195and thereby provisions of Section 40 (1) (ii)?2) Whether on the facts and in the circumstances ofthe case the finding of the Tribunal is proper,especially when the agent's services are technical innature and would fall under the purview of Section 9 https://hcservices.ecourts.gov.in/hcservices/ (i) (vii) and the explanation to Section 9 (2) wouldapply? 3) Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal wasjustified in placing reliance on the decision of thejurisdictional High Court in the case of Commissionerof Income Tax – Vs – Faizan Shoes Pvt. Ltd. (48Taxman.com 48) even though the facts aredistinguishable since the agent has renderedmanagerial, technical and consultancy services to theassessee and in the cited case, the agent was merely acommission agent?” 2. The facts, in a nutshell, are as hereunder :-The assessee is engaged in the manufacturing and exporting ofleather garments. The assessee filed return of income for theassessment year 2010-2011 on 13.10.10 showing a total income ofRs.1,05,18,306/=. The return was processed under Section 143 (1) ofthe Act. Thereafter, the case was selected for scrutiny and noticeunder Section 143 (2) was issued and served on the assessee. TheAssessing Officer, after calling for details from the assessee,completed the assessment under Section 143 (3) by determining thetotal income at Rs.2,25,06,053/=. The assessee, in its return,claimed Rs.1,09,03,259/= as expenditure for the purpose of payment ofcommission to foreign agents, which was disallowed by the AssessingOfficer on the ground that the assessee has not deducted TDS underSection 195 of the Act. The Assessing Officer was of the opinionthat the income is deemed to be accrued in India by virtue of Section9 (1) (i) of the Income Tax Act and, therefore, the assessee isliable to deduct TDS and disallowed the claim of the assessee. 3. Aggrieved by the said order, the assessee preferred appealbefore the CIT (Appeals), who by order dated 10.5.13, allowed theappeal filed by the assessee. The relevant portion of the order ofCIT (Appeals), is extracted hereunder, for better clarity :-“5.1 Therefore, I am of the considered view thatthe assessee could not be put in a position where itcan be visited with the rigours associated with non-deduction of tax at source. It cannot be fastenedwith any liability associated with non-deduction oftax at source on such payments. Keeping in view ofthe various judicial pronouncements mentioned supraand respectively following the ratios held in theabove case laws as well as considering varioussubmissions made by the AR of the appellant, thecommission paid by the appellant does not constituteincome in the hands of the non-resident agents anddoes not come within the purview of Sec. 195. Theappellant neither received any services such asmanagerial, technical from the foreign agents except procurement of orders on commission basis which isreceived abroad constituting income in the hands ofthe agents accruing and arising outside India. Thusthe relationship between the appellant and the agentsis contractual and entire service is provided outsideIndia and duly compensated by way of commissionpayment which is also paid outside India. No limb ofactivity has taken place within India and withdrawalCBDT circulars referred to in the assessment orderdoes not in any way rendered the commission paidtaxable in the hands of the foreign agents in India.For the reason discussed above, the disallowance u/s40 (1) (ia) of Rs.1,09,03,259/- stands deleted.” 4. Against the said order of the CIT (Appeals), theappellant/Revenue filed appeal before the Tribunal. The Tribunal,relying upon the decision of this Court in the case of Commissionerof Income Tax, Chennai – Vs – Faizen Shoes (P) Ltd. (2014 (48)Taxmann.com 48 (Mad)), held that the Revenue has no material tocontrovert the facts that the present case is in any way differentfrom the one decided in Faizen Shoes case (supra) and, accordingly,dismissed the appeal. Aggrieved against the said order, the presentappeal has been filed by the appellant/Revenue. 5. Heard Mr.M.Swaminathan, learned standing counsel appearing forthe appellant/Revenue and perused the materials found in the typedset of documents as also the judgment of this Court in Faizen Shoescase (supra). 6. This Court, in Faizen Shoes case (supra), had occasion toconsider a similar issue and after exhaustive analysis of thedifferent provisions of the Income Tax Act and also taking intoconsideration the law laid down by the Supreme Court with regard tothe said provisions, held as follows :- “6. Before adverting the merits of the case, itwould be apposite to refer to section 9(1)(i),section 9(1)(vii) and section 9(2) of the Act, whichread as under :Section 9. Income deemed to accrue or arise inIndia.—(1) The following incomes shall be deemedto accrue or arise in India—(i) all income accruing or arising, whetherdirectly or indirectly, through or from anybusiness connection in India, or through or fromany property in India, or through or from anyasset or source of income in India, or through thetransfer of a capital asset situate in India ; . ..(vii) income by way of fees for technicalservices payable by— Provided that nothing contained in this clauseshall apply in relation to any income by way offees for technical services payable in pursuanceof an agreement made before the 1st day April,1976, and approved by the Central Government. Explanation 1.—For the purposes of the foregoingproviso, an agreement made on or after the 1st dayof April, 1976, shall be deemed to have been madebefore that date if the agreement is made inaccordance with proposals approved by the CentralGovernment before that date. Provided that nothing contained in this clauseshall apply in relation to any income by way offees for technical services payable in pursuanceof an agreement made before the 1st day April,1976, and approved by the Central Government. Explanation 1.—For the purposes of the foregoingproviso, an agreement made on or after the 1st dayof April, 1976, shall be deemed to have been madebefore that date if the agreement is made inaccordance with proposals approved by the CentralGovernment before that date. Explanation 2.—For the purposes of this clause,'fees for technical services' means anyconsideration(includinganylumpsumconsideration) for the rendering of anymanagerial, technical or consultancy services(including the provision of services of technicalor other personnel) but does not includeconsideration for any construction, assembly,mining or like project undertaken by the recipientor consideration which would be income of therecipient chargeable under the head 'Salaries'. (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India toa person residing permanently outside India shallnot be deemed to accrue or arise in India, if thepension is payable to a person referred to inarticle 314 of the Constitution or to a personwho, having been appointed before the 15[th] day ofAugust, 1947, to be a Judge of the Federal Courtor of a High Court within the meaning of theGovernment of India Act, 1935, continues to serveon or after the commencement of the Constitutionas a Judge in India. Explanation.—For the removal of doubts, it ishereby declared that for the purposes of thissection, income of a non-resident shall be deemedto accrue or arise in India under clause (v) orclause (vi) or clause (vii) of sub-section (1) andshall be included in the total income of the non-resident, whether or not,— (i) the non-resident has a residence or place ofbusiness or business connection in India ; or (ii) the non-resident has rendered services inIndia." 7. On a reading of section 9(1)(vii) of the Act, weare not inclined to accept the plea taken by thelearned senior standing counsel appearing for theRevenue that commission paid by the assessee to the non-resident agent would come under the term "feesfor technical services". In the case on hand, forprocuring orders for leather business from overseasbuyers — wholesalers or retailers, as the case maybe, the non-resident agent is paid 2.5 per cent.commission on FOB basis. That appears to be acommission simpliciter. What is the nature oftechnical service that the so-called nonresidentagent has provided abroad to the assessee is notclear from the order of the Assessing Officer. Theopening of letters of credit for the purpose ofcompleting export obligation is an incident of exportand, therefore, the non-resident agent is under anobligation to render such services to the assessee,for which commission is paid. The non-resident agentdoes not provide technical services for the purposesof running of the business of the assessee in India.The services rendered by the non-resident agent canat best be called as a service for completion of theexport commitment. We are, therefore, of theconsidered opinion that the commission paid to thenon-resident agent will not fall within thedefinition of fees for technical services. 9. The Explanation to section 9(2) of the Act wassubstituted by the Finance Act, 2010, withretrospective effect from June 1, 1976. The abovesaid explanation would come into play only if thesaid amount paid would fall under the headings : (i) income by way of interest as set out insection 9(1)(v) of the Act ; or (ii) income by way of royalty as set out insection 9(1)(vi) of the Act ; or (iii) income by way of fees for technicalservices as set out in section 9(1)(vii) of theAct. 9. The Explanation to section 9(2) of the Act wassubstituted by the Finance Act, 2010, withretrospective effect from June 1, 1976. The abovesaid explanation would come into play only if thesaid amount paid would fall under the headings : (i) income by way of interest as set out insection 9(1)(v) of the Act ; or (ii) income by way of royalty as set out insection 9(1)(vi) of the Act ; or (iii) income by way of fees for technicalservices as set out in section 9(1)(vii) of theAct. 10. While dealing with section 9(1) of the Act, theSupreme Court in CIT v. Toshoku Ltd. [1980] 125 ITR525(SC), on considering a transaction where tobaccowas exported to Japan and France and sold throughnon-resident assessees who were paid commission, heldas under : "8. The second aspect of the same question iswhether the commission amounts credited in thebooks of the statutory agent can be treated asincomes accrued, arisen, or deemed to haveaccrued or arisen in India to the non-resident assessees during the relevant year. This takes usto section 9 of the Act. It is urged that thecommission amounts should be treated as incomesdeemed to have accrued or arisen in India asthey, according to the department, had eitheraccrued or arisen through and from the businessconnection in India that existed between the non-resident assessees and the statutory agent. Thiscontention overlooks the effect of clause (a) ofthe Explanation to clause (i) of sub-section (1)of section 9 of the Act which provides that inthe case of a business of which all theoperations are not carried out in India, theincome of the business deemed under that clauseto accrue or arise in India shall be only suchpart of the income as is reasonably attributableto the operations carried out in India. If allsuch operations are carried out in India, theentire income accruing therefrom shall be deemedto have accrued in India. If, however, all theoperations are not carried out in the taxableterritories, the profits and gains of businessdeemed to accrue in India through and frombusiness connection in India shall be only suchprofits and gains as are reasonably attributableto that part of the operations carried out in thetaxable territories. If no operations of businessare carried out in the taxable territories, itfollows that the income accruing or arisingabroad through or from any business connection inIndia cannot be deemed to accrue or arise inIndia (see CIT v. R. D. Aggarwal and Co. [1965]56 ITR 20(SC) and Carborandum Co. v. CIT [1977]108 ITR 335(SC) which are decided on the basis ofsection 42 of the Indian Income-tax Act, 1922,which corresponds to section 9(1)(i) of the Act).9. In the instant case, the non-residentassessees did not carry on any businessoperations in the taxable territories. They actedas selling agents outside India. The receipt inIndia of the sale proceeds of tobacco remitted orcaused to be remitted by the purchasers fromabroad does not amount to an operation carriedout by the assessees in India as contemplated byclause (a) of the Explanation to section 9(1)(i)of the Act. The commission amounts which wereearned by the non-resident assessees for servicesrendered outside India cannot, therefore, bedeemed to be incomes which have either accrued orarisen in India. The High Court was, therefore, right in answering the question against theDepartment." right in answering the question against theDepartment." 11. The facts of the present case are akin to thefacts of the decision in Toshoku Ltd.'s case,referred supra. In the instant case also the assesseeengaged the services of non-resident agent to procureexport orders and paid commission. That apart, theCommissioner of Income-tax (Appeals) as well as theTribunal have correctly applied the principle laiddown in GE India Technology Centre (P.) Ltd.'s case,referred to supra, to hold that the assessee is notliable to deduct tax at source when the non-residentagent provides services outside India on payment ofcommission. 12. In the light of the above said decisions and thefinding rendered by us on the earlier issue that theservices rendered by the non-resident agent can atbest be called as a service for completion of theexport commitment and would not fall within thedefinition of fees for technical services, we are thefirm view that section 9 of the Act is not applicableto the case on hand and, consequently, section 195 ofthe Act does not come into play. In view of the abovefinding, the decision of the Supreme Court inTransmission Corporation of A. P. Ltd.'s case,referred to supra, relied upon by the learnedstanding counsel for the Revenue is not applicable tothe facts of the present case. We find no infirmityin the order of the Tribunal in confirming the orderof the Commissioner of Income-tax (Appeals).”The above decision of this Court in Faizen Shoes case (supra) issquarely applicable to the facts of the present case. 7. In the result, this Court finds no reason to interfere withthe order passed by the Tribunal. No question of law, much lesssubstantial question of law arise for consideration in this appeal.Accordingly, the order passed by the Tribunal is confirmed and thisappeal is dismissed. Sd/-Assistant Registrar True Copy Sub Assistant Registrar To 1. Commissioner of Income Tax Business Circle IV Chennai. Business Circle IV Chennai. 2. The Assistant Registrar, Income Tax Appellate Tribunal 'D' Bench, III Floor, Rajaji Bhavan, Besant Nagar, Chennai-90. Income Tax Appellate Tribunal 'D' Bench, III Floor, Rajaji Bhavan, Besant Nagar, Chennai-90. 3. The Commissioner of Income Tax (Appeals-V) 2nd Floor, Main Building, 121 M.G.Road, Nungambakkam, Chennai-34 2nd Floor, Main Building, 121 M.G.Road, Nungambakkam, Chennai-34 +1 cc to M/s.M.Swaminathan, Advocate,SR.11476. gg(co)krd 30/3krd 30/3 T.C.A. NO. 92 OF 2015