I.t.a v. Director

“C.R” IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE T.R.RAVI TUESDAY, THE 13TH DAY OF OCTOBER 2020 / 21ST ASWINA, 1942 I.T.A.No.257 OF 2014 * [(AGAINST THE ORDER IN ITA.NO.282/2013 DATED 29.11.2013 OF THEINCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, KOCHI RECEIVED BY THEAPPELLANT ON 10.12.2013). * APPELLANT/ RESPONDENT IN ITA: M/S. DEVICE DRIVEN (INDIA) PVT. LTD.,GROUND FLOOR, PADMANABHAM, TECHNOPARK, KARIYAVATTOM, THIRUVANANTHAPURAM, REP BY ITS DIRECTOR, MS.INDU LAKSHMY LAL * RESPONDENT/ APPELLANT IN ITA: THE COMMISSIONER OF INCOME TAX,AAYAKAR BHAVAN, KOWADIYAR, THIRUVANANTHAPURAM-695003] * CAUSE TITLE AMENDED. AMENDED CAUSE TITLE: **(AGAINST THE ORDER IN C.O.NO.9/COCH/2013 DATED 29.11.2013 ARISING OUR OF I.T.A.NO.282/COCH/2013 OF THE INCOME TAXAPPELLATE TRIBUNAL, COCHIN BENCH, KOCHI, RECEIVED BY THE APPLLANT ON 10.12.2013). ** APPELLANT/ CROSS -OBJECTOR IN I.T.A.: M/S. DEVICE DRIVEN (INDIA) PVT. LTD.,GROUND FLOOR, PADMANABHAM, TECHNOPARK, KARIYAVATTOM, THIRUVANANTHAPURAM – 695 011, REP BY ITS DIRECTOR, MS.INDU LAKSHMY LAL. BY ADVS.SRI.M.GOPIKRISHNAN NAMBIARSRI.P.BENNY THOMASSRI.K.JOHN MATHAISRI.JOSON MANAVALANSRI.KURYAN THOMAS ** RESPONDENT/ RESPONDENT IN CROSS OBJECTION IN I.T.A: THE COMMISSIONER OF INCOME TAX,AAYAKAR BHAVAN, KOWADIYAR, THIRUVANANTHAPURAM-695003 ** CAUSE TITLE AMENDED VIDE ORDER DATED 13.10.2020 IN I.A.NO.1/2020 IN I.T.A.NO.257/2014. R1 BY ADV. SRI.P.K.RAVINDRANATHA MENON, SENIOR COUNSEL, GOVT. OF INDIA (TAXES),R1 BY SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON24-09-2020, THE COURT ON 13-10-2020 DELIVERED THE FOLLOWING: ----------------------------------- ----------------------------------- Dated, this the 13[th] day of October, 2020 JUDGMENT Vinod Chandran, J. The appeal raises the question whether thecommission paid to a non-resident, in the particular factsarising herein, is taxable under the Income Tax Act, 1961['IT Act' for brevity]. 2. The appellant, a hundred percent Export Oriented Unit, is a Private Limited Company engaged indevelopment and export of software. For the assessment year2009-10, the appellant filed a return declaring a totalincome of Rs.17,204/-, after claiming deduction underSection 10B in respect of profit from export of software.Under Section 143(1) the return was processed and thepayments made to Mr.Balaji Bal, a resident of Switzerland,who also was a Director of the Company, was disallowedunder Section 40(a)(i) of the Act. The dis-allowance underSection 40(a)(i) was on the ground that the commission paidwas fees for technical services on which tax is deductibleat source, which the assessee failed to deduct. The amountshown as commission paid to the non-resident was added to the total income of the Company. 3. On appeal, the first appellate authority concurred with the Assessing Officer with respect to thedis-allowance; but, however, allowed deduction underSection 10A. The Department approached the Tribunal and theassessee filed a cross objection. The Department's appealwas allowed and the Assessing Officer was directed toconsider the deduction under Section 10A. The crossobjection of the assessee was rejected. The assessee is nownot concerned with the remand made, since the AssessingOfficer has allowed the deduction. The assessee isaggrieved with the order of the Tribunal affirming the dis-allowance under Section 40(a)(i). the total income of the Company. 3. On appeal, the first appellate authority concurred with the Assessing Officer with respect to thedis-allowance; but, however, allowed deduction underSection 10A. The Department approached the Tribunal and theassessee filed a cross objection. The Department's appealwas allowed and the Assessing Officer was directed toconsider the deduction under Section 10A. The crossobjection of the assessee was rejected. The assessee is nownot concerned with the remand made, since the AssessingOfficer has allowed the deduction. The assessee isaggrieved with the order of the Tribunal affirming the dis-allowance under Section 40(a)(i). 4. Sri.Raja Kannan, learned Counsel for theappellant, refers to Section 9(1)(vii) and Section 195 ofthe Act. It is the specific case of the appellant-assesseethat the recipient of the commission is a non-resident, nottaxable under the Act of 1961. It is admitted that thenon-resident was also a Director of the assessee-Company,but the commission was paid under Annexure-B CommissionAgency Contract. On a reading of the various terms of thecontract, it is submitted that the activity carried on bythe non-resident, in terms of the contract, was outside India; specifically in the territories of the EuropeanUnion, North America and Middle East. The activitiescarried on under the contract would not fall under thedefinition of 'fees for technical services' as seen fromExplanation 2 of Section 9(1)(vii). It is also argued thateven if it falls under Explanation 2, it is exempted undersub-clause (b) of Section 9(1)(vii). To buttress the abovecontention, C.I.T.v. Toshoku Ltd.[(1980) 125 ITR 525(SC)] is relied on. It is pointed out that the activity ofthe non-resident for which he was paid the commission wasentirely outside India and the income had no territorial-nexus with India, as has been held in IshikawajimaHarimaHeavy Industries v. Director of I.T. [(2007) 288 ITR 408(SC)]. Though an explanation was brought into Section 9 inthe year 2010 with retrospective effect from 01.06.1976, inJindal Thermal Power Co. Ltd. v. Deputy CIT (TDS)[(2010)321 ITR 31 (Karn)] the Karnataka High Court held that theeffect of the Supreme Court decision in Ishikawajimahadnot been obliterated. Insofar as how the explanation has tobe construed, reliance has been placed on Sedco ForexInternational Drill Inc. v. CIT[(2015) 279 ITR 310 (SC)].5. Section 195 casts a liability on the personmaking a payment to a non-resident to deduct tax at source only when it is a sum chargeable under the provisions ofthe Act, as has been held in GE India Technology Centre (P)Ltd.v. CIT [(2010) 10 SCC 29 = (2010) 327 ITR 456 (SC)]. Anon-resident is not taxable in India and the payment ismade for services not coming within the definition of 'feesfor technical services'. The activities for which thepayment was made having been carried out entirely outsideIndia, there is no tax chargeable on the commission paideven by virtue of the deeming provision. The appellanthence has no obligation to deduct tax at source, is theargument. Even otherwise, the Direct Taxation AvoidanceAgreement ['DTAA' for brevity] between India andSwitzerland, where the non-resident is located, absolvesthe entire liability to income tax in India. To further thecontention of the payment not being a part of the technicalservices as per the DTAA, a Division Bench judgment of thisCourt in US Technology Resources (Pvt.) Ltd.v. CIT[(2018)407 ITR 327 (Ker)] is relied on. To advance the case of noliability under the DTAA, the decision in C.I.T.v.P.V.A.L. Kulandagan Chettiar[(2004) 267 ITR 654 (SC)] hasalso been relied on. 6. Sri.P.K.Ravindranatha Menon, learned SeniorCounsel appearing for the respondent, would specifically 6. Sri.P.K.Ravindranatha Menon, learned SeniorCounsel appearing for the respondent, would specifically refer to the Explanation added in the year 2010, which hasretrospective effect from 1976 onwards. The Explanation wasspecifically introduced to get over the decision inIshikawajima. The Explanation furthers the deemingprovision under Section 9 to make it applicable, whether ornot the non-resident has rendered services in India. Thereis no ground available to the appellant to escape from itsliability to deduct tax at source on the ground that theactivity of the non-resident was outside India. Theenduring benefit of the services rendered by thenon-resident was enjoyed by the assessee's business and,hence, the commission earned by the non-resident is incomeaccrued within India. To further assert the taxability the'source rule' as dilated upon in GVK Industries Ltd. v. ITO[(2015) 371 ITR 453 (SC)] is urged. It is argued thatinterpretation of Section 9(1)(vii) invoking the 'sourcerule' is purposeful and indicative of the provision beingunderstood synonymous with its object. The source ofpayment was read as where the payer is located, is thecompelling argument of the Revenue.7. The assessee, who is the appellant herein, hasfiled the appeal against the Cross Objection. The assesseedoes not challenge the order of the Tribunal in the Department’s appeal remanding the matter to the AssessingOfficer for consideration as to the allowance under Section10A. The Assessing Officer is said to have allowed theclaim. 8. The questions of law arising in the appeal are: i)Whether on the facts and in the circumstances ofthe case the Appellate Tribunal was justified inupholding the order of the AppellateCommissioner, that the payments made by theappellant to Shri Balaji Bal, attracts Sec.40(a)(ia) of the Income Tax Act and therefore notdeductible from the income of the appellant? ii)Whether the Appellate Tribunal erred in holdingthat the appellant is liable for deduction oftax at source, under section 195 of the IncomeTax Act, without a specific finding as to howthe receipts of Shri Balaji Bal, would attractcharge of Income Tax in India, going by theprovisions of the Indian Income Tax Act, and theprovisions of the India-Switzerland DoubleTaxation Avoidance Agreement?that the appellant is liable for deduction oftax at source, under section 195 of the IncomeTax Act, without a specific finding as to howthe receipts of Shri Balaji Bal, would attractcharge of Income Tax in India, going by theprovisions of the Indian Income Tax Act, and theprovisions of the India-Switzerland DoubleTaxation Avoidance Agreement? iii)Whether the Appellate Tribunal erred in notconsidering the application of Article 14 of theIndia-Switzerland Double Taxation AvoidanceAgreement, with reference to the materialbrought on record by the appellant and to haveaccepted the version of the department, madewithout any material evidence?considering the application of Article 14 of theIndia-Switzerland Double Taxation AvoidanceAgreement, with reference to the materialbrought on record by the appellant and to haveaccepted the version of the department, madewithout any material evidence? iv) Is not the finding of fact by the AppellateTribunal erroneous and perverse?Tribunal erroneous and perverse? 9. The question as to whether Article 14 of theIndia-Switzerland DTAA is applicable need be consideredonly if the first two questions are answered in favour ofthe Revenue, finding the non-resident and the specificreceipt taxable under the IT Act, as income receivedor deemed to be received or accrued, or arose or deemedto arise in India. The taxability will depend uponthe interpretation of Section 5(2) read with Section9(1)(vii)(b). iv) Is not the finding of fact by the AppellateTribunal erroneous and perverse?Tribunal erroneous and perverse? 9. The question as to whether Article 14 of theIndia-Switzerland DTAA is applicable need be consideredonly if the first two questions are answered in favour ofthe Revenue, finding the non-resident and the specificreceipt taxable under the IT Act, as income receivedor deemed to be received or accrued, or arose or deemedto arise in India. The taxability will depend uponthe interpretation of Section 5(2) read with Section9(1)(vii)(b). 10. The admitted facts are as herein after stated.The non-resident, who was paid commission by the appellantherein, was a Director of the appellant company, but thepayment made was not in that status. A Commission AgencyContract [Annexure-B] was entered into by the appellant andthe non-resident, by which the latter was appointed asCommission Agent in the territories of European Union,North America and Middle East; all outside India. Theappellant had procured orders from these outsideterritories by reason of the activities carried on by thenon-resident commission agent. The assessee had receivedincome in such business generated by the non-resident Commission Agent in those territories, outside India, andin terms of Annexure-B agreement, payments were made to theCommission Agent amounting to Rs.55,51,605/-. The non-resident was a resident of Switzerland. The appellant didnot deduct any tax under Section 195 from the commissionpaid to the non-resident on the ground that it is nottaxable. 11. We have already detailed the variouscontentions of the appellant and the Revenue herein before.The first contention of the assessee is that there is notechnical element in the appointment of the agent and evenif for argument sake, there is said to be a technicalelement, the nature of the agency does not change per seand the commission paid would not come under the definitionof ‘technical services’ as has been provided inExplanation-2 of Section 9(1)(vii). As per the Explanation,‘fees for technical services’ for the purpose of clause(vii) means any consideration for rendering any managerial,technical or consultancy services (including the provisionof services of technical or other personnel) but excludesconstruction, assembly, mining or like project or thesalaries; the latter of which does not fall under the saidclause. Admittedly the services carried on under the - 11 - Commission Agency Contract is not one falling under any ofthe exclusions provided in Explanation-2. A similarcontention was dealt with by a Division Bench of this Courtin US Technology Resources. Therein, the services offered were (i) management decision-making (ii) financialdecision-making, (iii) legal matters and public relationactivities, (iv) treasury services and (v) risk managementservices. Reading the Explanation, it was found that thesaid services would come within the ambit of ‘technicalservices' as consultancy services. The Explanation does notconfine the technical services to those which are strictlytechnical in nature. 12. Annexure-B contract specifically defines therole of the Commission Agent, which is stated to beconcerned with 'marketing', 'pre-sales' and 'sales'support, which essentially comprises general counsel,assistance and support in areas of a wide range, a few ofwhich were enumerated as clause 2.1 to 2.7, which are extracted here under: "2.1Sizing up market situations and businessopportunities in the region.opportunities in the region. 2.2 Assisting and supporting DEVICEDRIVEN (INDIA)in developing and bundling an appropriatemarketing mix and service offering for theRegion.in developing and bundling an appropriatemarketing mix and service offering for theRegion. 12. Annexure-B contract specifically defines therole of the Commission Agent, which is stated to beconcerned with 'marketing', 'pre-sales' and 'sales'support, which essentially comprises general counsel,assistance and support in areas of a wide range, a few ofwhich were enumerated as clause 2.1 to 2.7, which are extracted here under: "2.1Sizing up market situations and businessopportunities in the region.opportunities in the region. 2.2 Assisting and supporting DEVICEDRIVEN (INDIA)in developing and bundling an appropriatemarketing mix and service offering for theRegion.in developing and bundling an appropriatemarketing mix and service offering for theRegion. 2.3 Identifying specific target-prospects andmaking preliminary introductory contacts.making preliminary introductory contacts. 2.4 Securing meetings with target-prospects forDEVICEDRIVEN (INDIA) to make credentialpresentations and marketing pitches.DEVICEDRIVEN (INDIA) to make credentialpresentations and marketing pitches. 2.5 Review DEVICEDRIVEN (INDIA)'s proposals fortarget-prospects and provide advice andassistance where appropriate to help secureproject.target-prospects and provide advice andassistance where appropriate to help secureproject. 2.6Hold periodic meetings with DEVICEDRIVEN(INDIA) to track project progress and status.(INDIA) to track project progress and status. 2.7. COMMISSION AGENT shall assist in all paymentcollection from the Client".collection from the Client". The duties enumerated herein above would clearly indicatethat there is an element of managerial function coupledwith all encompassing consultancy services and also purelytechnical services too. The appellant cannot raise acontention that the services of the non-resident do notfall under the scope of ‘technical services’ as spoken ofin Section 9(1)(vii) and defined in Explanation-2.13. The further contention taken is as to theactivities carried out by the commission agent, who is anon-resident, to be covered under the exception to clause(b) of Section 9(1)(vii). The ground, in a nutshell, isthat the non-resident was appointed as an agent formarketing the goods (software) of the appellant, in threeterritories falling outside India. The commission payable to the non-resident, as per the contract was only withrespect to such business canvassed by the non-resident fromthose three outside territories. When such business iscarried out by the appellant on the basis of the servicesof the non-resident agent, commission is paid to the extentof that spoken of in the contract agreement. Thecommission, as is seen from Annexure-B, is 15% of thecontracts/projects executed by the appellant on the basisof the marketing services rendered by the commission agent.The income derived by the appellant from the marketingservices rendered by the commission agent is sourced fromthe three territories which are outside India. Theactivities of the non-resident agent are confined to thoseterritories outside India. In such circumstances, thecommission paid is ‘fees payable in respect of services forthe purposes of making or earning any income from anysource outside India’ is the compelling argument, which wefind favour with. The income derived by the appellant isun-disputedly from the three territories mentioned in theagreement, which are admittedly outside India. In thiscontext, we have to notice the various decisions on whichreliance was placed by both sides. 14. Toshuku Ltd. is identical to the facts of thiscase but sub-clause (vii) of Section 9(1) was not dealtwith. The non-resident, respondent in that case, wasappointed by a dealer in tobacco in the State of AndhraPradesh, as exclusive sales agent in Japan, of tobaccoexported by the dealer. Likewise, a non-resident businesshouse was appointed for the same purpose in France. Thequestion arose whether the commission amounts sent to theJapanese company and the French business house wereassessable under Section 161 of the IT Act. The Hon’bleSupreme Court dealt with the provisions of the IT Act,specifically Sections 5(2), 9(1)(i), 160, 161 and 163.Section 5(2) of the Act deals with the chargeability of theincome of a non-resident. The above provisions were dealtwith in the following manner:"The relevant provisions of the Act on whichreliance is placed before us are Sections 5(2),9(1)(i), 160, 161 and 163. Section 5(2) of the Actwhich deals with the chargeability of the incomeof a person who is a non-resident under the Actprovides that subject to the provisions of theAct, the total income of any previous year of a-person who is a nonresident includes all incomefrom whatever source derived (a) which is receivedor is deemed to be received in India in such yearby or on behalf of such person, or (b) accrues or arises or is deemed to accrue or arise in Indiaduring such year. Explanation 1 to Section 5(2) ofthe Act declares that an income arising abroad cannot be deemed to be received in India for thepurpose of that section by reason only of the factthat it is included in a balance sheet prepared inIndia. Section 9(1)(i) of the Act provides thatall income accruing or arising whether directly orindirectly, through or from any businessconnection in India, or through or from anyproperty in India, or through or from any asset orsource of income in India, or through the transferof a capital asset situate in India shall bedeemed to accrue or arise in India.TheExplanation to this clause provides that in thecase of a business of which all the operations arenot carried out in India, the income of thebusiness deemed under this clause to accrue orarise in India shall be only such part of theincome as is reasonably attributable to theoperations carried out in India and in the case ofa non-resident no income shall be deemed to accrueor arise in India to him through or fromoperations which are confined to the purchase ofgoods in India for the purpose of export". [Underlining by us for emphasis] 15. It was found that un-disputedly the assessees, who were the respondents therein, rendered services asselling agent to the statutory agent outside the taxableterritories (India). The mere fact that the commission payable to those assessees, non-residents, were shown inthe balance sheet of the dealer in India would not byitself bring it under the total income of the non-residentas is specified by Explanation-1 to Section 5(2). Thedecision in P.V.Raghava Reddiv. CIT [(1962) 44 ITR 720(SC)] was distinguished. In Raghava Reddi, Mica being notdirectly importable by a Japanese buyer, it had to beexported to a Japanese State organization. An agent wasappointed in Tokyo, which agent, as per the agreementitself made it a condition that due to difficulties intheir country the Indian party to the contract shall creditthe commission amounts to their (Tokyo agent's) account anddisburse it in accordance with the instructions of theTokyo agent. It was found that the character of the moneychanged from a debt, as shown in the balance sheet, to adeposit, which attracts the application of Section 4(1)(a)of the IT Act. 16. As far as Toshuku Ltd.is concerned, all itsoperations were carried out outside India. Clause (a) ofthe Explanation to Section 9(1)(i) provides that in thecase of a business of which all operations are not carriedout in India, the income of the business deemed under thatclause to arise or accrue in India shall be only such part of the income as is reasonably attributed to the operationscarried out in India. It was held so by their Lordships: "In the instant case, the non-resident assesseedid not carry on any business operations in thetaxable territories. They acted as selling agentsoutside India. The receipt in India of the saleproceeds of tobacco remitted or caused to beremitted by the purchasers from abroad does notamount to an operation carried out by the assesseesin India as contemplated by cl.(a) of theExplanation to S.9(1)(i) of the Act. The commission-amounts which were earned by the nonresidentassessee for services rendered outside Indiacannot, therefore, be deemed to be incomes whichhave either accrued or arisen in India.The HighCourt was, therefore, right in answering thequestion against the department". [underlining by us for emphasis] 17. The appellant had also argued that there is noterritorial nexus based on Ishikawajima, which however wascountered by the Department based on the Explanationsubstituted by Finance Act, 2010 with retrospective effectfrom 01.06.1976. The learned Senior Counsel had alsospecifically referred to GVK Industries Ltd. to buttresstheir argument, which is countered by the learned Counselfor the appellant with Jindal. By placing reliance on GVKIndustries Ltd., it is urged by the Revenue that the - 18 - ‘source rule’ as discussed therein makes it mandatory thatthe income of the recipient is to be charged or becomeschargeable in the country where the source of payment islocated. On the other hand, the appellant relies on thedecision in Jindalto argue that the Explanation assubstituted by Finance Act 2010 does not take away theeffect ofIshikawajima. Before we deal with theExplanation, we would just look at the facts and lawdeclared in the decisions. 18. Ishikawajimaconsidered a turnkey project,wherein there were a number of parties who were obliged tocarry out different parts of the contract. With respect tothe non-resident Ishikawajima, the contract involvedoffshore supply & services, onshore supply & services asalso construction and erection. There was no dispute raisedwith respect to onshore supply & services and constructionand erection, which were admitted to be taxable. Thedispute was with respect to the amounts received orreceivable by the non-resident from the resident for thoseoffshore supply & services. The non-resident claimed thatthe comprehensive contract of onshore and offshoreactivities, is a divisible contract. Those activitiesattributable to be carried out within India would be taxable and those outside India would be non-taxable. Thecontention of the Revenue was that the contract being anintegrated and composite one, the assessee was liable topay tax. Their Lordships of the Hon’ble Supreme Court foundthat in construing a contract, the terms and conditions areto be read as a whole keeping in view the intention of theparties. The applicability of the tax laws though dependenton the nature of the contract, the contract itself cannotbe construed based on the taxing provisions. There was nodoubt that the offshore supplies and services, as is clearfrom their description itself, were offshore. TheDepartment had rendered its opinion against that, only onthe premise that offshore supplies and services wereintimately connected with the turnkey project. Looking alsoat the provisions of the DTAA, it was held that thebusiness connection as spoken of in Section 9(1) and thepermanent establishment as stated in DTAA should not bemixed up. 19. It was categorically found in Ishikawajimathat 'the services which are the source of the income thatis sought to be taxed, has to be rendered in India, as wellas utilized in India, to be taxable in India' (sic. para91). It was held: "...Whatever is payable by a resident to anon-resident by way of fees for technical services,thus, would not always come within the purview ofsection 9(1)(vii) of the Act.It must havesufficient territorial nexus with India so as tofurnish a basis for imposition of tax. Whereas aresident would come within the purview of section-9(1)(vii) of the Act, a nonresident would not, as-services of a nonresident to a resident utilizedin India may not have much relevance in determining-whether the income of the nonresident accrues orarises in India. It must have a direct live linkbetween the services rendered in India. When such alink is established, the same may again besubjected to any relief under the DTAA. Adistinction may also be made between rendition ofservices and utilization thereof". 20. Jindalagain was a case in which the residententered into a contract with three companies, two of whichwere companies registered outside the territory of India.The question was also as to the services rendered by theforeign company (non-resident) to the Indian company. TheDivision Bench of the Karanataka High Court held thatIshikawajimastill held the field. The contract between theforeign company and the resident Indian company was foundto have three aspects, one, technical services involvingoverall conceptualization of the plant, the technical logistics and designs, etc., in which the foreign Companydid not have any role to play. The job of the foreigncompany was to execute the contract as conceptualized,which was to be done only offshore and outside India. But,with respect to start up services and overallresponsibility, which was envisaged as the responsibilityof the foreign companies, that component was found to betaxable. 21. Ishikawajima,Jindaland also US TechnologyResources, considered the question as to whether thepayment made by a resident to a non-resident entity wastaxable or not on the basis of the income derived by theresident company attributable to any activity carried onwithin India, by the non-resident thus deeming such incometo be accruing or arising or deemed to have accrued orarisen within India. The Hon’ble Supreme Court and theKarnataka High Court while dealing with the issueconsidered the provision under Section 9(1)(vii)(c). Withall respect at our command, we have to notice that theapplicable provision should have been clause (b) of Section9(1)(vii). In the decision of this Court too, one of us[KVC.J] committed the same mistake of extracting clause (c)instead of clause (b). We notice that in Kanga & Palkhivala's 'The Law and Practice of Income Tax', EleventhEdition 2020 by Aravind P Datar, dealing with Section 9 atparagraph 32 with the nominal heading 'Taxability andTerritorial Nexus – The Uncertainty Continues', has stated: "A serious mistake in this decision was that theSupreme Court referred to and interpreted S.9(1)(vii)(c) when the applicable clause was S.9(1)(vii)(b). This renders the decision per incuriam butneed not be discussed further as the Ishikawajimadecision is no longer good law after two successiveamendments in 2007 and 2010". Palkhivala's 'The Law and Practice of Income Tax', EleventhEdition 2020 by Aravind P Datar, dealing with Section 9 atparagraph 32 with the nominal heading 'Taxability andTerritorial Nexus – The Uncertainty Continues', has stated: "A serious mistake in this decision was that theSupreme Court referred to and interpreted S.9(1)(vii)(c) when the applicable clause was S.9(1)(vii)(b). This renders the decision per incuriam butneed not be discussed further as the Ishikawajimadecision is no longer good law after two successiveamendments in 2007 and 2010". 22. We, however, do not subscribe to the view ofthe learned author in the authoritative text since clause(b) and clause (c) are two sides of the same coin. Even ifclause (b) was noticed there would not have been adifferent interpretation possible. As we noticed, Section5(2) expands the scope of total income. With respect to anon-resident, it inter alia includes all income fromwhatever source derived, accruing or arising or is deemedto accrue or arise, to him in India during such year. Byclause (vii) of Section 9(1), income by way of fees fortechnical services is deemed to accrue or arise in India ifthe conditions therein are satisfied. As per sub-clause (a)of clause (vii), any fees payable by the Government becomesthe income accruing or arising in India as provided in Section 5(2). Sub-clause (b) deems fees for technicalservices payable by a resident to be income accruing orarising in India, except where the fees are payable in twosituations as provided in the very same sub-clause itself.Those exceptions are – when the fees payable for technicalservices (i) is in respect of services utilized in abusiness or profession carried on by such person (resident)outside India or (ii) when it is payable for the purposesof making or earning any income from any source outsideIndia. Clause (c) deems fees for technical services by aresident, to be income arising or accruing in India onlywhen either (i) the fees are payable in respect of servicesutilized in a business or profession carried on by suchperson in India or (ii) when the fees are payable for thepurposes of making or earning any income from any source inIndia. 23. We extract Section 9(1)(vii): -"9. Income deemed to accrue or arise in India (1) The following income shall be deemed to accrueor arise in India--xxxxxxxxx (vii) income by way of fees for technical servicespayable by-- (a) the Government; or (b) a person who is a resident, except where the feesare payable in respect of services utilised in a business or profession carried on by such personoutside India or for the purposes of making or earningany income from any source outside India; or (c) a person who is a non-resident, where the fees arepayable in respect of services utilised in a businessor profession carried on by such person in India or forthe purposes of making or earning any income from anysource in India: Provided that nothing contained in this clauseshall apply in relation to any income by way of feesfor technical services payable in pursuance of anagreement made before the 1st day of April, 1976, andapproved by the Central Government. Explanation 1.--For the purposes of the foregoingproviso, an agreement made on or after the 1st day ofApril, 1976, shall be deemed to have been made beforethat date if the agreement is made in accordance withproposals approved by the Central Government beforethat date. Explanation 2.--For the purposes of this clause, "feesfor technical services" means any consideration(including any lump sum consideration) for therendering of any managerial, technical or consultancyservices (including the provision of services oftechnical or other personnel) but does not includeconsideration for any construction, assembly, mining orlike project undertaken by the recipient orconsideration which would be income of the recipientchargeable under the head "Salaries". Explanation 1.--For the purposes of the foregoingproviso, an agreement made on or after the 1st day ofApril, 1976, shall be deemed to have been made beforethat date if the agreement is made in accordance withproposals approved by the Central Government beforethat date. Explanation 2.--For the purposes of this clause, "feesfor technical services" means any consideration(including any lump sum consideration) for therendering of any managerial, technical or consultancyservices (including the provision of services oftechnical or other personnel) but does not includeconsideration for any construction, assembly, mining orlike project undertaken by the recipient orconsideration which would be income of the recipientchargeable under the head "Salaries". 24. In other words clause (b) excludes any fees fortechnical services payable by a resident to a non-resident,(i) on account of a business or profession carried outoutside India or (ii) for the purposes of earning an incomefrom a source outside India. When fees are so payable by aresident to a non-resident it is taken away from the charge to tax under the IT Act. Similarly clause (c) makes anypayment by a non-resident to a resident to be taxable whenthe technical fees paid by the non-resident to the residentis with respect to (i) a business or profession carried onin India or (ii) for the purpose of making or earning anyincome from any source in India. This is essentially theterritorial nexus that has been highlighted inIshikawajima. 25. We do not think that any Explanation couldmeddle with the inclusion or the exceptions provided in themain provision. Be that as it may, prior to looking at theExplanation, we also look at GVK Industries Ltd., again aninstance of a resident company having engaged a consultantnon-resident as Financial Advisor to its project to be setup in Andhra Pradesh. The non-resident renderedprofessional services from Zurich and the resident companyobtained finances, both from the IDBI for its Rupee loanrequirement and part of its foreign currency loanrequirement from one international financier in the USA. Onfacts it was found that the non-resident company did nothave a place of business in India. The Revenue did not havea case that the income had actually arisen or received bythe non-resident in India. The conclusion of the High Court that the 'success fee' received by the non-resident, onfinancial facilities being obtained by the residentcompany, was not taxable under Section 9(1)(i) as thetransaction or activity did not have any businessconnection was approved. The remaining question was as towhether the payment made by the resident to thenon-resident would be taxable under Section 9(1)(vii)(b).The Explanation as it was inserted by the Finance Act, 2007and the Finance Act, 2010 was specifically referred to. Itwas stated so in paragraph 22: "22. The principal provision is clause (b) of section 9(1)(vii) of the Act. The saidprovision carves out an exception. The exceptioncarved out in the latter part of clause (b)applies to a situation when fee is payable inrespect of services utilised for business orprofession carried out by an Indian payeroutside India or for the purpose of making orearning of income by the Indian assessee, i.e.,the payer, for the purpose of making or earningany income from a source outside India. On astudied scrutiny of the said clause, it becomesclear that it lays down the principle what isbasically known as the "source rule", that is,income of the recipient to be charged orchargeable in the country where the source ofpayment is located, to clarify, where the payeris located. The clause further mandates and requires that the services should be utilised inIndia". requires that the services should be utilised inIndia". 26. Dilating on the ‘source rule’ and the twoprinciples behind it; ie: 'situs of residence' and 'situsof source of income’, it was found that the source rule isin consonance with the nexus theory and does not fall foulof the said doctrine on the ground of extra-territorialoperation. Emphasizing the doctrine of source rule, thecharge to tax was held to be arising in the country wherethe income or wealth is physically or economicallyproduced. It was held that the payment of 'success fee'hence was taxable. It was found in paragraph 28 that the'success fee' does not fall in any of the exclusions ofExplanation-2. The resident company having not foundanybody capable of extending professional services withinIndia, had approached the non-resident for their services.To understand the scope of services, the letter of the non-resident offering their services to the resident companywas re-produced. A resolution of the Board of Directorsapproving the appointment of the non-resident was alsoextracted. From the aforesaid extracts; the obligationsof the non-resident were found to be : development ofcomprehensive financial model, to tie up the rupee/foreign currency loan requirement of the project, assess exportcredit agencies world wide and obtain commercial bankssupport on the competitive terms and assist the appellantcompany in loan negotiations and documentation. TheirLordships first considered whether the documents would fallunder managerial, technical or consultancy services asspoken of in Explanation-2. It was found that theenumerated functions would fall under the concept ofconsultancy services. Undoubtedly from the given facts inthat case, the result of the technical services of thenon-resident, which is the financial facilities wereutilized by the resident company in India. This makes the'success fee' taxable under Section 5(2) read with Section9(1)(vii)(b).27. We find, in the present case, a cleardistinction from GVK Industries Ltd. As we observed, thenon-resident agent was appointed for the purpose ofgenerating business from three territories, which areEuropean Union, North America and Middle East. Theactivities of the non-resident were only in thoseterritories from which territories he was generatingbusiness for the appellant-resident. The responsibility ofthe non-resident agent as per the contract was also to facilitate the marketing of the products of the residentcompany, a fully Export Oriented Unit. The services of thenon-resident agent was in those outside territories toprovide free sales support as well as expertise forprojects to be executed at the customer site or at theresident’scompanycentreinThiruvananthapuram.Essentially there is no activity carried on by thenon-resident within India. There could be a question raisedinsofar as the sales expertise provided by the agent, forthe execution of contracts at the Thiruvananthapuram centreof the resident company. This again is only for thepurpose of sales effected in the foreign countries. Thebusiness generated by the non-resident agent is executed bythe resident company, which is a software developer eitherat the foreign site or at its centre at Thiruvananthapuram.The site where the development is carried out is notcrucial for taxation, since the income generated is out ofthe sale carried out in the foreign territory. The sourceof income decides the taxability. The income generated bythe resident company by reason of the sales canvassed bythe non-resident agent, in the territories of EuropeanUnion, North America and Middle East are income sourcedfrom those countries. This clearly falls under the second exception as provided under clause (b) of Section9(1)(vii). The amounts payable to the non-resident bythe resident company is by way of fee for technicalservices; payable for the purpose of making or earningincome from a source outside India. There can be notaxability on such income, which has been clearly excludedfrom the deeming fiction as provided by Section 5(2) readwith Section 9(1)(vii). 28. The further contention is with respect to theExplanation added by Finance Act, 2010, which is extractedhereunder: Explanation.--For the removal of doubts, it ishereby declared that for the purposes of thissection, income of a non-resident shall be deemed toaccrue or arise in India under Clause (v) or Clause(vi) or Clause (vii) of Sub-section (1) and shall beincluded 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 in India." Clause (i) is with respect to residence, place of businessor business connection which has no relevance insofar asdetermining the total income taxable under Section 9(1)(vii)(b) or the exceptions provided therein. Clause (ii) ofthe Explanation speaks of the income deemed to arise in India whether or not a non-resident has rendered servicesin India. It does not in any manner interfere with theexceptions in sub-clause (b) of clause (vii), which dealswith services utilized in a business or profession carriedon by a resident outside India or services for the purposeof making or earning income from any source outside India.If the services are utilized in India, then necessarily themere fact that the non-resident has always been acting fromabroad does not absolve him from the charging section underthe IT Act is the purport of Clause (ii) of theExplanation. Again we notice GVK Industries Ltd., whereinthe consultancy services offered by the non-resident wasfrom Zurich alone. However, the finances obtained by theresident company was utilized in India for setting up a gasbased power project at Andhra Pradesh. In suchcircumstances, without reference to whether thenon-resident has rendered services in India, the feespayable by the resident to the non-resident for consultancyservices would be taxable under the IT Act. 29. In this case, there is no utilization of theservices rendered by the non-resident agent within India.The projects executed by the resident company even withinIndia was for sale to the foreign buyer and it cannot be said that merely for reason of the execution in India theservice was utilized in India. The software developed inIndia was also for export; the appellant being a 100% EOU.The services rendered by the non-resident agent was forfacilitating sale in the three outside territories. Theservices rendered for effecting exports by the appellantcompany to foreign buyers, makes the foreign countries thesource of income. The execution of the project within Indiawould not attract income tax since the income is derivedfrom the sale of the product outside the territories ofIndia and the execution is only to obtain such income fromterritories outside India.