The Commissioner Of Income Taxchennai v. M/S.fluidtherm Technology Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAMTHE HONOURABLE MR. JUSTICE R.SUDHAKARANDTHE HONOURABLE MR. JUSTICE R.KARUPPIAH T.C.A. NO. 137 OF 2015 The Commissioner of Income TaxChennai. .. Appellant- Vs - M/s.Fluidtherm Technology Pvt. Ltd.,132, 3rd Main Road, Industrial Estate,Ambattur, Chennai - 600 058. .. Respondent Appeal filed under Section 260A of the Income Tax Act againstthe order dated 22.05.2014 passed by the Income Tax AppellateTribunal, 'A' Bench, Chennai, made in ITA No.199/Mds/2014 for theassessment year 2009-10 arising out of the order of the Commissionerof Income Tax (Appeals) II Chennai-34 for the assessment year 2009-2010 dated 23.9.2013 in ITA.No.519/2013-14 preferred against theorder of the Assistant Commissioner of Income Tax, Nungambakkam,Chennai-34 dated 16.12.2011 in PAN/GIR/No. . For Appellant: Mr. T.R.Senthil Kumar Standing Counsel JUDGMENT (DELIVERED BY R.SUDHAKAR, J.) This Tax Case (Appeal) is filed by the appellant/Revenue asagainst the order passed by the Income Tax Appellate Tribunal forthe assessment year 2009-10 raising the following questions oflaw :-“1) Whether under the facts and circumstances ofthe case, the Income Tax appellate Tribunal wascorrect in deleting the disallowance made underSection 40(a)(ia) by the assessing officer towardsexport commission paid by the assessee to the non-resident on which it had failed to deduct TDS? https://hcservices.ecourts.gov.in/hcservices/ 2) Whether under the facts and circumstances ofthe case, the Income Tax Appellate Tribunal wascorrect in holding that the assessee has noliability to deduct tax at source under Section 195on the payment made to non-resident towards exportsales commission? 3) Whether under the facts and circumstances ofthe case, the Income Tax Appellate Tribunal wascorrect in holding that the non-resident has nobusiness connection for the export sales commissionreceived from the assessee? 4) Whether under the facts and circumstances ofthe case, the Income Tax Appellate Tribunal wascorrect in holding that the assessing officer didnot establish the existence of business connectionand therefore there is no liability to deduct tax atsource, without appreciating the fact that the onusis on the assessee to show that it is not liable todeduct at source?" 2. The facts, in a nutshell, are as hereunder :-The assessee is doing business of strategic and consultancyservices limited and filed its return of income for the assessmentyear 2009-10 declaring an income of Rs.1,42,51,852/-. The return wasprocessed under Section 143 (1) of the Act. Thereafter, the casewas selected for scrutiny and notice under Section 143 (2) wasissued and served on the assessee. The Assessing Officer, aftercalling for details from the assessee, completed the assessmentunder Section 143 (3) and assessed the total income atRs.1,73,25,104/- by making disallowances under Section 40(a)(ia) ofthe Income Tax Act. 3. Aggrieved by the said order, the assessee preferred appealbefore the Commissioner of Income Tax (Appeals), who by followingthe decision of the Tribunal in the case of M/s.Farida Shoes P. Ltd.(ITA No.159/Mds/2013 dated 11.4.2013) and M/s.Delta Shoes P. Ltd.(ITA No.909/Mds/2013 dated 31.7.2013) allowed the appeal filed bythe assessee. The relevant portion of the order of Commissioner ofIncome Tax (Appeals), is extracted hereunder, for better clarity :-“In the present appeals of the assessee also thefacts and circumstances are exactly identical tothose involved in the case of M/s.Farida Shoes P.Ltd. for A.Y. 2008-09 (except the type of productexported). Therefore, since the issue involved inthe present appeals is the same and the facts areexactly identical, the above decision of the ITAT,(M/s.Farida Shoes P. Ltd., in ITA No.159/Mds/2013dated 11.04.2013), is equally applicable to thefacts of the present appeals of the instant assessee https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ for the A.Y.2009-10 under consideration. Therefore,respectfully following the decision of ITAT, in thecase of M/s.Farida Shoes P. Ltd. (in ITANo.159/Mds/2013 dated 11.04.2013), I hold that theabove transactions of sales commission payments tothe non-resident for procuring the export orders,are not assessable to tax in India and consequentlythe assessee company is not under any obligation todeduct the TDS on the above commission paymentsu/s.195 of the Act. Therefore, the provisions ofsec.40(a)(i) have no application in the presentcase. Accordingly, the additions made by theAssessing Officer in the assessment year underconsideration, on account of disallowance ofcommission payments for non-deduction of TDS u/s.40(a)(i) r.w.s. 195 of the Act, are not justified anddeleted." 4. Against the said order of the Commissioner of Income Tax(Appeals), the appellant/Revenue filed appeal before the Tribunal.The Tribunal while agreeing with the findings of the Commissionerdismissed the appeal holding as follows:"When the non-resident agent has rendered allservices outside India and payments were also receivedoutside India, having no PE or business connection inIndia, there is no reason to hold that the foreign agenthas earned any taxable income in India out of thecommission paid by the assessee. Where no such taxliability is fastened on the payee who received thecommission, there is no obligation on the part of thepayer to deduct the tax in India." 5. Aggrieved against the said order, the present appeal hasbeen filed by the appellant/Revenue. 6. Heard Mr.T.R.Senthil Kumar, learned standing counselappearing for the appellant/Revenue and perused the materials foundin the typed set of documents. 7. This Court, in the case of Commissioner of Income Tax – Vs– Faizan Shoes Pvt. Ltd. (48 Taxman.com 48), had an 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 : https://hcservices.ecourts.gov.in/hcservices/ 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 throughthe transfer 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 theforegoing proviso, an agreement made on or afterthe 1st day of April, 1976, shall be deemed tohave been made before that date if the agreementis made in accordance with proposals approved bythe Central Government before that date.Explanation 2.—For the purposes of thisclause, 'fees for technical services' means anyconsideration(includinganylumpsumconsideration) for the rendering of anymanagerial, technical or consultancy services(including the provision of services oftechnical or other personnel) but does notinclude consideration for any construction,assembly, mining or like project undertaken bythe recipient or consideration which would beincome of the recipient chargeable under thehead 'Salaries'. Explanation 1.—For the purposes of theforegoing proviso, an agreement made on or afterthe 1st day of April, 1976, shall be deemed tohave been made before that date if the agreementis made in accordance with proposals approved bythe Central Government before that date.Explanation 2.—For the purposes of thisclause, 'fees for technical services' means anyconsideration(includinganylumpsumconsideration) for the rendering of anymanagerial, technical or consultancy services(including the provision of services oftechnical or other personnel) but does notinclude consideration for any construction,assembly, mining or like project undertaken bythe recipient or consideration which would beincome of the recipient chargeable under thehead 'Salaries'. (2) Notwithstanding anything contained in sub-section (1), any pension payable outside Indiato a person residing permanently outside Indiashall not be deemed to accrue or arise in India,if the pension is payable to a person referredto in article 314 of the Constitution or to aperson who, having been appointed before the 15[th]day of August, 1947, to be a Judge of theFederal Court or of a High Court within themeaning of the Government of India Act, 1935,continues to serve on or after the commencementof the Constitution as a Judge in India. Explanation.—For the removal of doubts, it ishereby declared that for the purposes of this section, income of a non-resident shall bedeemed to accrue or arise in India under clause(v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the totalincome of the non-resident, whether or not,—(i) the non-resident has a residence or placeof business 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,we are not inclined to accept the plea taken by thelearned senior standing counsel appearing for theRevenue that commission paid by the assessee to thenon-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 ofexport and, therefore, the non-resident agent isunder an obligation 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 the non-resident agent can at best be called as a servicefor completion of the export commitment. We are,therefore, of the considered opinion that thecommission paid to the non-resident agent will notfall within the definition of fees for technicalservices. 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 in https://hcservices.ecourts.gov.in/hcservices/ section 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,the Supreme Court in CIT v. Toshoku Ltd. [1980] 125ITR 525(SC), on considering a transaction wheretobacco was exported to Japan and France and soldthrough non-resident assessees who were paidcommission, held as under : https://hcservices.ecourts.gov.in/hcservices/ section 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,the Supreme Court in CIT v. Toshoku Ltd. [1980] 125ITR 525(SC), on considering a transaction wheretobacco was exported to Japan and France and soldthrough 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 haveaccrued or arisen in India to the non-residentassessees during the relevant year. This takesus to 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 thenon-resident assessees and the statutory agent.This contention overlooks the effect of clause(a) of the Explanation to clause (i) of sub-section (1) of section 9 of the Act whichprovides that in the case of a business of whichall the operations are not carried out in India,the income of the business deemed under thatclause to accrue or arise in India shall be onlysuch 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 therefromshall be deemed to have accrued in India. If,however, all the operations are not carried outin the taxable territories, the profits andgains of business deemed to accrue in Indiathrough and from business connection in Indiashall be only such profits and gains as arereasonably attributable to that part of theoperations carried out in the taxableterritories. If no operations of business arecarried out in the taxable territories, itfollows that the income accruing or arisingabroad through or from any business connectionin India 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 basisof section 42 of the Indian Income-tax Act,1922, which corresponds to section 9(1)(i) ofthe Act). 9. In the instant case, the non-residentassessees did not carry on any businessoperations in the taxable territories. Theyacted as selling agents outside India. Thereceipt in India of the sale proceeds of tobaccoremitted or caused to be remitted by thepurchasers from abroad does not amount to anoperation carried out by the assessees in Indiaas contemplated by clause (a) of the Explanationto section 9(1)(i) of the Act. The commissionamounts which were earned by the non-residentassessees 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." 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-resident agentto procure export orders and paid commission. Thatapart, the Commissioner of Income-tax (Appeals) aswell as the Tribunal have correctly applied theprinciple laid down in GE India Technology Centre(P.) Ltd.'s case, referred to supra, to hold thatthe assessee is not liable to deduct tax at sourcewhen the non-resident agent provides servicesoutside India on payment of commission. 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-resident agentto procure export orders and paid commission. Thatapart, the Commissioner of Income-tax (Appeals) aswell as the Tribunal have correctly applied theprinciple laid down in GE India Technology Centre(P.) Ltd.'s case, referred to supra, to hold thatthe assessee is not liable to deduct tax at sourcewhen the non-resident agent provides servicesoutside India on payment of commission. 12. In the light of the above said decisions andthe finding rendered by us on the earlier issue thatthe services rendered by the non-resident agent canat best be called as a service for completion of theexport commitment and would not fall within thedefinition of fees for technical services, we arethe firm view that section 9 of the Act is notapplicable to the case on hand and, consequently,section 195 of the Act does not come into play. Inview of the above finding, the decision of theSupreme Court in Transmission Corporation of A. P.Ltd.'s case, referred to supra, relied upon by thelearned standing counsel for the Revenue is notapplicable to the facts of the present case. We find no infirmity in the order of the Tribunal inconfirming the order of the Commissioner of Income-tax (Appeals).” 8. The above decision of this Court in Faizen Shoes case(supra) is squarely applicable to the facts of the present case. 9. 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 arises for consideration in this appeal.Accordingly, the order passed by the Tribunal is confirmed and thisappeal is dismissed. No costs. Sd/- Asst.Registrar (J ) /true copy/ Sub Asst. RegistrarslTo 1. The Commissioner of Income Tax 121 Mahatma Gandhi Road Nungambakkam, Chennai.34 2. The Income Tax Appellate Tribunal 'A' Bench, Chennai. 3. The Assistant Commissioner of Income Tax Company Circle II (2) Room No.512 New Block 121 MG Road, Nungambakkam, Chennai-34 4. The Commissioner of Income Tax (Appeals)Chennai-34 VSN (CO)kk 8/4 https://hcservices.ecourts.gov.in/hcservices/