The Above Appeal Was Admitted On The Following Substantialquestions Of Law v. Fluidtherm Technology (P). Ltd.],Wherein The Hon'ble Division Bench Held As Follows

THE HON'BLE MR.JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE R.HEMALATHA Commissioner of Income Tax VIII,121, Mahatma Gandhi Salai,Chennai - 600 034.... Appellant M/s.Habeen Tanning Company,Railway Station Road,Ammanankuppam Village,Gudiyatham, R.S.Post, GudiyathamPAN : AAA FH 0373 B... Respondent Appeal preferred under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal,Madras, "C" Bench, dated 07.02.2014 in I.TA.No.1029/Mds/2013 forthe assessment year 2008-2009. filed against the proceedings passed by the Commission ofIncome Tax – VIII, Chennai-34 in C.No.21(23)/CIT-VIII/2011-12,dated 18.02.2013 against the order passed by the DeputyCommissioner of Income Tax Circle-1, Vellore. JUDGMENT (Judgment was delivered by M.DURAISWAMY, J.) Challenging the order passed in I.TA.No.1029/Mds/2013 inrespect of the assessment year 2008-2009 on the file of theIncome Tax Appellate Tribunal, Chennai, "C" Bench, the Revenuehas filed the above appeal. https://hcservices.ecourts.gov.in/hcservices/ 2.The above appeal was admitted on the following substantialquestions of law: “(i) Whether on the facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in holding that theTribunal was justified in cancelling the orderof the CIT under section 263 without consideringthat the CIT had validly exercised his powersunder section 263 of the Income Tax Act, 1961? (ii) Whether on the facts and in thecircumstances of the case, the AppellateTribunal was right in law in holding that thejurisdiction of the CIT while invoking section263 of the Income Tax Act is confined only tothose issues which form part of the Show CauseNotice ? (iii) Whether the facts and in thecircumstances of the case, the Appellate Tribunalwas right in holding that the CBDT Circular No.7of 2009 will not apply to assessments completedafter issuance of the said Circular ;and thatthe assessee can claim the benefit of earliercirculars, which were withdrawn by Circular No.7of 2009 ?” 3.When the appeal is taken up for hearing, Mr.M.Swaminathan,learned Senior Standing Counsel appearing for the appellant–Revenue fairly submitted that the questions of law which areraised in the above appeal were decided against the Revenue,by a decision of the Hon'ble Division Bench of this Courtreported in [2015] 57 taxmann.com 87 (Madras) [Commissioner ofIncome Tax, Chennai Vs. Fluidtherm Technology (P). Ltd.],wherein the Hon'ble Division Bench held as follows: “...7. This Court, in the case of CIT v. Faizan Shoes(P.) Ltd. [2014] 367 ITR155 / 226 Taxman 115/ 48taxmann.com 48 (Mad.), had an occasion to consider asimilar issue and after exhaustive analysis of thedifferent provisions of the Income Tax Act and alsotaking into consideration the law laid down by theSupreme Court with regard to the said provisions, heldas follows :- '6. Before adverting the merits of the case,it would be apposite to refer to section 9(1)(i), section 9(1)(vii) and section 9(2) of the Act,which read as under: Section 9. Income deemed to accrue or arise inIndia.(1)The following incomes shall be deemed toaccrue 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 technical servicespayable- 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. section 9(1)(vii) and section 9(2) of the Act,which read as under: Section 9. Income deemed to accrue or arise inIndia.(1)The following incomes shall be deemed toaccrue 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 technical servicespayable- 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 to aperson 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 15th day ofAugust, 1947, to be a Judge of the Federal Courtor of a High Court within the meaning of the Government 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 in India." 7. On a reading of section 9(1)(vii) of the Act,we are not inclined to accept the plea taken bythe learned senior standing counsel appearing forthe Revenue that commission paid by the assesseeto the non-resident agent would come under theterm "fees for technical services". In the case onhand, for procuring orders for leather businessfrom overseas buyers wholesalers or retailers, asthe case may be, the non-resident agent is paid2.5 per cent. commission on FOB basis. Thatappears to be a commission simpliciter. What isthe nature of technical service that the so-callednonresident agent has provided abroad to theassessee is not clear from the order of theAssessing Officer. The opening of letters ofcredit for the purpose of completing exportobligation is an incident of export and,therefore, the non-resident agent is under anobligation to render such services to theassessee, for which commission is paid. The non-resident agent does not provide technical servicesfor the purposes of running of the business of theassessee in India. The services rendered by thenon-resident agent can at best be called as aservice for completion of the export commitment.We are, therefore, of the considered opinion thatthe commission paid to the non-resident agent willnot fall within the definition of fees fortechnical 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 technical servicesas set out in section 9(1)(vii) of the Act. 10. While dealing with section 9(1) of the Act,the Supreme Court in CIT v. Toshoku Ltd. [1980]125 ITR 525(SC), on considering a transactionwhere tobacco was exported to Japan and France andsold through non-resident assessees who were paidcommission, held as 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 have accruedor arisen in India to the non-resident assesseesduring the relevant year. This takes us to section9 of the Act. It is urged that the commissionamounts should be treated as incomes deemed tohave accrued or arisen in India as they, accordingto the department, had either accrued or arisenthrough and from the business connection in Indiathat existed between the non-resident assesseesand the statutory agent. This contention overlooksthe effect of clause (a) of the Explanation toclause (i) of sub-section (1) of section 9 of theAct which provides that in the case of a businessof which all the operations are not carried out inIndia, the income of the business deemed underthat clause to accrue or arise in India shall beonly such part of the income as is reasonablyattributable to the operations carried out inIndia. If all such operations are carried out inIndia, the entire income accruing therefrom shallbe deemed to have accrued in India. If, however,all the operations are not carried out in thetaxable territories, the profits and gains ofbusiness deemed to accrue in India through andfrom business connection in India shall be onlysuch profits and gains as are reasonably attributable to that part of the operationscarried out in the taxable territories. If nooperations of business are carried out in thetaxable territories, it follows that the incomeaccruing or arising abroad through or from anybusiness connection in India cannot be deemed toaccrue or arise in India (see CIT v. R. D.Aggarwal and Co. [1965] 56 ITR 20(SC) andCarborandum Co. v. CIT [1977] 108 ITR 335(SC)which are decided on the basis of section 42 ofthe Indian Income-tax Act, 1922, which correspondsto section 9(1)(i) of the Act). 9. In the instant case, the non-resident assesseesdid 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 theassessees in India as contemplated by clause (a)of the Explanation to section 9(1)(i) of the Act.The commission amounts which were earned by thenon-resident assessees for services renderedoutside India cannot, therefore, be deemed to beincomes which have either accrued or arisen inIndia. The High Court was, therefore, right inanswering the question against the Department." 9. In the instant case, the non-resident assesseesdid 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 theassessees in India as contemplated by clause (a)of the Explanation to section 9(1)(i) of the Act.The commission amounts which were earned by thenon-resident assessees for services renderedoutside India cannot, therefore, be deemed to beincomes which have either accrued or arisen inIndia. The High Court was, therefore, right inanswering the question against the Department." 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 theassessee engaged the services of non-residentagent to procure export orders and paidcommission. That apart, the Commissioner ofIncome-tax (Appeals) as well as the Tribunal havecorrectly applied the principle laid down in GEIndia Technology Centre (P.) Ltd.'s case, referredto supra, to hold that the assessee is not liableto deduct tax at source when the non-residentagent provides services outside India on paymentof commission. 12. In the light of the above said decisions andthe finding rendered by us on the earlier issuethat the services rendered by the non-residentagent can at best be called as a service forcompletion of the export commitment and would notfall within the definition of fees for technical services, we are the firm view that section 9 ofthe Act is not applicable to the case on hand and,consequently, section 195 of the Act does not comeinto play. In view of the above finding, thedecision of the Supreme Court in TransmissionCorporation of A. P. Ltd.'s case, referred tosupra, relied upon by the learned standing counselfor the Revenue is not applicable to the facts ofthe present case. We find no infirmity in theorder of the Tribunal in confirming the order ofthe Commissioner of Income-tax (Appeals). 8. The above decision of this Court in FaizenShoes (P.) case (supra) is squarely applicable to thefacts of the present case. 9. In the result, this Court finds no reason tointerfere with the order passed by the Tribunal. Noquestion of law, much less substantial question of lawarises for consideration in this appeal. Accordingly,the order passed by the Tribunal is confirmed and thisappeal is dismissed. No costs.” 4. Mr.Aasim Shezad, learned counsel appearing for therespondent–assessee submitted that the Hon'ble Supreme Courtin the Judgment reported in (2000) 2 Supreme Court Cases 718[Malabar Industrial Co. Ltd. v. Commissioner of Income Tax,Kerala State] had decided the issue in favour of the assessee.Para 10 of the Judgment of the Hon'ble Supreme Court readsas follows:- " ........... 10. The phrase “prejudicial to theinterests of the Revenue” has to be read in conjunctionwith an erroneous order passed by the AssessingOfficer. Every loss of revenue as a consequence of anorder of the Assessing Officer cannot be treated asprejudicial to the interests of the Revenue, forexample, when an Income Tax Officer adopted one of thecourses permissible in law and it has resulted in lossof revenue; or where two views are possible and theIncome Tax Officer has taken one view with which theCommissioner does not agree, it cannot be treated as anerroneous order prejudicial to the interests of theRevenue unless the view taken by the Income Tax Officeris unsustainable in law. It has been held by this Courtthat where a sum not earned by a person is assessed asincome in his hands on his so offering, the order passed by the Assessing Officer accepting the same assuch will be erroneous and prejudicial to the interestsof the Revenue. (See Rampyari Devi Saraogi v. CIT [(1968) 67 ITR 84 (SC)] and in Tara DeviAggarwal v. CIT [(1973) 3 SCC 482 : 1973 SCC (Tax)318 : (1973) 88 ITR 323] .)" 5. Having regard to the submissions made by the learnedcounsel on either side, following the ratio laid down by theHon'ble Supreme court in the Judgment reported in (2000)2 Supreme Court Cases 718 [cited supra] and the Hon'ble DivisionBench of this Court reported in [2015] 57 taxmann.com 87(Madras) [cited supra] the questions of law are decided againstthe appellant-Revenue and in favour of the respondent–assessee.Accordingly, the Tax Case Appeal is dismissed. No costs. Sd/- Assistant Registrar(CS IV)//True Copy// Sub Assistant RegistrarRjTo1.The Income Tax Appellate Tribunal, Chennai, "C" Bench2.The Commissioner of Income Tax VIII,Chennai-34.3.The Deputy Commissioner of Income Tax, Circle I, Vellore. +1cc to M/s.BFS Legal, Advocate, S.R.No.22361+1cc to Mr.M.Swaminathan, Advocate, S.R.No.22347 T.C.A.No.687 of 2014 GMI(CO)CS/10/06/2021