Income Tax Appellate Tribunal - Chennai
Evolv Clothing Company Pvt. Ltd., ... vs Department Of Income Tax on 7 February, 2013
IN THE INCOME-TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI.
Before Shri N.S. Saini, Accountant Member &
Shri S.S. Godara, Judicial Member
I.T.A. No. 2100/Mds/2012
Assessment Year : 2009-10
The Assistant Commissioner of M/s. Evolv Clothing Company Pvt.
Income Tax, Company Circle II(1), Ltd., New No. 471, M K N Road,
Chennai - 34. Vs. Alandur, Chennai 600 016.
[PAN:AAACI0900L]
(Appellant) (Respondent)
Appellant by : Shri Shaji P. Jacob, Addl. CIT
Respondent by : Shri Vikram Vijayaraghavan, Advocate
Date of Hearing : 07.02.2013
Date of pronouncement : 11.03.2013
ORDER
PER S.S. Godara, Judicial Member
This Revenue's appeal is directed against the order of the Commissioner of Income Tax (Appeals) I, Coimbatore dated 23.08.2012 in Appeal No. 449/11-12 for the assessment year 2009-10, in proceedings under section 143(3) of the Income Tax Act 1961 [in short the "Act"].
2. The grounds of appeal raised by the Revenue are as under:
"1. The Order of the learned Commissioner of Income Tax(Appeals) is contrary to the Law and facts of the case.
2. The learned CIT(A) erred in deleting the disallowance u/s.40(a)(i) of the Act holding that the assessee is not liable to deduct at 2 I.T.A. No.2100 No.2100/M/12 2100/M/12 source on the overseas commission payments made to the non resident u/s.195(2) of the Act;
2.1) The learned CIT(A) failed to appreciate the fact that in the case of GE India Technology Cen. P Ltd. (327 ITR 456(2010)(SC) it was held that "Sec.195(2) is not a mere provision to provide information to ITO(TDS) so that department can keep track of remittances being made to non residents outside India; rather it gets attracted to cases where payments made is a composite payment in which certain proportion of payment has an element of income chargeable to tax in India and payer seeks a determination of appropriate proportion of sum chargeable.
2.2) It is submitted that the Apex Court in the case of MIs. Transmission Corporation of AP Ltd. Vs. CIT (239 ITR 587) held that the assessee who makes payments to non residents under contract entered into is under obligation to deduct tax at source u/s.195 and the obligation is limited only to appropriate proportion of income chargeable under the Act;
2.3) It is submitted that the assessee did not submit any application for non deduction of tax at source before the TDS authorities and it is not open to the assessee to assume the provisions of Act on the payments made to non residents suo moto and say that no part of income accrue or deemed to accrue in India;
2.4) It is further submitted that payments made to non residents at abroad is the commission for the services rendered u/s.9(1)(vii) of the Act and deemed to have arisen in India;
2.5) It is submitted that as per Explanation inserted by the Finance Act 2010 with retrospective effect from 01.06.1976, payments of this nature are taxable in India irrespective of the PE of the non resident and also the place in which the service was rendered;
2.6) The learned CIT(A) failed to appreciate the provisions of India Italy Double Taxation Avoidance Agreement involving this aspect of taxation and the nature of services that need to suffer withholding tax depending upon the country of residence of the non resident.
2.7) It is submitted that according to Article 13.4 of the DTAA between the two countries, "Fee for Technical Services" means any payments of any amount to any person other than the payments to an employee of the person making payments in consideration of the 3 I.T.A. No.2100 No.2100/M/12 2100/M/12 services of managerial, technical or consultancy nature including the provisions of services of technical or other personal.
2.8) It is further submitted that the decisions relied upon by the CIT(A) were prior to the withdrawal of Circular No.786 dated 07.02.2000;
2.9) It is submitted that the decision of the Delhi High Court in the case of CIT Vs. Eon Technology P Ltd. 15 taxmann.com 391 cannot be said to be applicable because of the principle of "res judicata".
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (Appeals) be set aside and that of the Assessing Officer be restored."
3. In support of the grounds, the DR vehemently argued that the CIT(A) has wrongly deleted the addition made by the Assessing Officer under section 40(a)(ia) of the "Act" for not deducting TDS qua the payment made by the assessee to its overseas agent. By placing reliance on the case law [2012] 134 ITD 697 (Mumbai) in the case of De Beers UK Ltd. v. DCIT [Intl. Taxation] and [2007] 288 ITR 534 (AAR), he prayed for acceptance of the appeal.
4. Opposing this, the assessee strongly argued that the CIT(A) has rightly deleted the addition. In addition to this, the AR placed on record a paper book containing CBDT Circular Nos.786 dated 07.02.2000 and 7/2009 dated 22.10.2009, agreement executed by the assessee with its agency dated 29.12.2008, DTAA notification dated 25.04.1996 between India and Italy as well as following case law and prayed for rejection of the appeal: 4 I.T.A. No.2100
No.2100/M/12 2100/M/12 CIT v. Eon Technology P. Ltd. [2012] 343 ITR 366 (Del) Armayesh Global v. ACIT [2012] 32 CCH 159 (Mum. Trib.) DCIT v. Sanjiv Gupta [2011] 135 TTJ 641 (Lucknow) ACIT v. Modern Insulator Ltd. [2011] 140 TTJ 715 (Jaipur).
We have heard both sides at length and perused the assessment order, CIT(A)'s order as well as other material on record produced during the course of hearing.
5. Admitted facts of the case are that the assessee is a company. It is engaged in the business of manufacturing and export of textile garments. On 28.09.2009, it had filed its 'return' declaring income of `.92,88,070/-. Owing to merger duly approved by the Hon'ble Jurisdictional High Court and change in its name, the assessee also preferred to file a revised 'return' on 30.03.2010. This time the income stood at `.1,30,71,350/-.
6. In the previous year relevant to the impugned assessment year, the assessee had paid an amount of `.3,74,09,773/- to an Italian entity by name of B & T SRL., without deducting any TDS. Per Assessing Officer, the same attracted application of section 195 of the "Act". On this, the assessee pleaded that payee/agent did not have any permanent establishment in India and the services were rendered outside India. Therefore, its contention was that since the amount paid was not taxable in India, it had not deducted any TDS.
7. As a perusal of the assessment order dated 19.12.2011 shows, the 5 I.T.A. No.2100 No.2100/M/12 2100/M/12 Assessing Officer negated the above explanation tendered by the assessee by holding that the amount in question paid above said was liable to be taxed in India and required tax deduction in the hands of the assessee. Further, he also held that the assessee should have taken recourse to the proceedings under section 195(2) of the "Act" in the event of non-deduction of tax at source. On this analogy, he invoked section 40(a)(ia) of the "Act" and disallowed/added the amount in question of `.3,74,09,773/-.
8. The assessee carried the matter in appeal, wherein the CIT(A) has deleted the addition by holding as under:
"4.3 I have gone through the submissions made by the appellant and also the order of the Assessing Officer. The Assessing Officer observed that the assessee company has not deducted TDS on the commission payments as per provisions 195 of the Income tax Act and disallowed the sum of commission paid. The Assessing Officer has also examined the agreement copies filed by the assessee with regard to the commission paid to foreign agent. The AO opined that the services rendered by the foreign agent we" in the nature of technical services and concluded that as the amounts paid to the non-residents are deemed to have arisen in India u/s 9(1)(vii) and therefore, are chargeable to tax in India. The assessee company ought to have deducted TDS u/s 195 of the Income tax Act. The AO further concluded that in the absence of application u/s 195(2) to the concerned AO, the assessee ought to have deducted tax either at the rates prescribed for the relevant assessment year as per DTA, as applicable on the said payments made to these non- residents.
4.4 The AR filed copy of the Agency Agreement during the course of appellate proceedings. The foreign agent was from Italy and is doing business of agency, sourcing and procurement of readymade garments in Italy. The appellant company is a manufacturer and exporter of readymade garments in India, entered into an agreement with this foreign agent with the following obligation of the foreign agent.6 I.T.A. No.2100
No.2100/M/12 2100/M/12
(i) To procure order for the appellant and to negotiate terms of such orders and contracts with said foreign buyers but the terms thereof shall be subject to prior written concurrence of the appellant.
(ii) To carry out systematic research with regard to the needs of the products in the territory and to send to the appellant reports and suggestions for adopting necessary measure in order to increase sale of the products.
(iii) To coordinate with the appellant for the timely completion of all export obligations and to render all assistance in the fulfilment of the terms of the supply contract.
(iv) To take all necessary efforts and ensure timely payment by the buyers for all exports performed by the appellant which have been negotiated by the foreign agent.
(v) To render all other assistance to the appellant and its representatives while on visits to the territory and to make available the agency office for all secretarial and other assistance.
4.5 As seen from the agent obligations, it is clear that the agent was rendering the services with respect to the order to be executed by the appellant. The appellant exports the readymade garments as per the orders procured by the foreign agent. With regard to the systematic market research to the needs of the products in the territory governing the appellant, they cannot be termed as technical services. When you take into consideration the type of garment to be exported and the potential for readymade garments, the necessities and requirements of the foreign buyers have to be taken into account for increase in the sale of the products. This obligation can only be termed as market survey and in my opinion cannot be termed as technical services. The AO has considered the provisions of Section 9(1)(vii) where it is income by way of fees for technical services payable. On going through the obligations of the foreign agent, it cannot be said that any technical services are provided by the foreign agent. The agents were acting on behalf of the appellant in supplying the products to the foreign buyers and also ensuring timely payment by the buyers for all exports performed by the appellant.
4.6 The AO has also drawn reference to the withdrawal of Circular No.786 dated 7.2.2000 and Circular No.23 of 1969 to support his view. 7 I.T.A. No.2100
No.2100/M/12 2100/M/12 The Circular No.7 of 2009 was issued only on 22nd October, 2009 which is much after the end of the assessment year and therefore the same cannot be held applicable for the assessment year 2009-10. The ld. AR also submitted some judicial pronouncements relating to above withdrawal of Circulars.
(i) M/s Siemens Aktiengeselischaft (2009) 34 SOT 16 (Mum.) A circular in operation through the relevant assessment year cannot be held to be inoperational simply by reason of the fact that it has been withdrawn in the year 2009. The withdrawal of such circulars will be effective only after the said dated of 22nd October, 2009 by which these circulars have been withdrawn "with immediate effect".
(ii) DCIT vs. Sanjeev Gupta (2001) 50 DTR 225
(iii) ACIT v. Modern Insulators 56 DTR 362 (2011) Circular No.7 of 2009 dated 22.10.2009, withdrawing the Circular No.23 of 1969 and Circular NO.786 of 2000 will be operative only from 22nd October, 2009 and not prior to that date. The Id.AR also referred to the decision of the Hon'ble High Court of Delhi in the case of CIT Vs Eon Technology (P) Limited 246 CTR 40 (2012). The Court held that the "The income of non-resident agent from providing marketing and sales support for the sales executed by the taxpayer for its overseas clients cannot be included u/s 5(1) of the Income tax Act. "Section 9 of the Income tax Act, 1961 refers to the deemed income to accrue or arise in India whether is applicable to the commission paid to British parent / holding company ETUK on sales and amounts realized on export contracts procured by ETUK for assessee. The AO held that commission income earned by ETUK had accrued in India or was deemed to have accrued in India and therefore the assessee was liable to deduct tax at source and as there was no failure, the said expenditure should be disallowed u/s 40(a}(ia). The Court held that for applying Section 9, the AO was required to examine whether said commission income was accruing or arising directly or indirectly from any business connection in India. Since the facts found by the AO did not make out a case of business connection as stipulated in Section 9(l)(i), the commission income could not be said to have accrued from ETUK in India and, therefore, the assessee was not liable to deduct tax at source from payment of commission to ETUK. Similarly, in the case of the appellant, the AO has not brought any fact on record to say that the income to the foreign agent has accrued or arisen in India directly or indirectly from 8 I.T.A. No.2100 No.2100/M/12 2100/M/12 any business connection in India. The AO also at Page 4 of the order concluded that the assessee company has no business outside India.
From the facts evident on record, it is clear that the app was exporting the readymade garments outside India and his deriving income from the sale of these garments abroad. It cannot be concluded that the assessee company has no business outside India. In my opinion, the commissions paid to the non-resident cannot be an income under the provisions of Section 9(l)(vii) which is the basis of the taxation by the AO. The Hon'ble Supreme Court in the case of GE India Technology Cen.(P) Ltd. Vs CIT (2010) 193 Taxman 234 held that "In our view, Section 195(2) is based on the "principle of proportionality". The said subsection gets attracted only in cases where the payment is made composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "if no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS".
4.7 As seen from the facts of this case,
• Agent is a non-resident.
• Agent is operating his business activities outside India.
• The commission paid related to services provided outside India.
• The agent does not have any permanent establishment or
permanent business place in India.
• The commission was remitted to the agent directly outside India.
4.8 All the above conditions bring to a reasonable conclusion that the
commission paid in the facts of the present case to the non-resident agent is not taxable in India. The ITAT Madras 'A' Bench in the case of Indopel Garments Pvt. Limited 72 TTJ 702 stated that "the commission payable to foreign concern for acting as a selling agent for canvassing order outside India was not liable to tax as income arising or accruing to the foreign concern in India and therefore, no disallowance could be made u/s 40A(i) on the ground that tax was not deducted at source under section 195". The Id.AR submitted that there is double taxation agreement with Italy and the foreign agents were not liable for taxation in India.
4.9 The Hon'ble Supreme Court overruled the decision of the Karnataka High Court in Samsung Electronics Limited case in the case of GE India Technology Cen.(P) ltd. Vs CIT (2010) 3271TR 456 (sq. The 9 I.T.A. No.2100 No.2100/M/12 2100/M/12 ITAT, Mumbai 'D' Bench in the case of DICT Range-7(2), Mumbai Vs Rediff.com India Limited in Appeal No.3061 (Mum.) of 2009 held that "As held by the Supreme Court in the case of GE India Technology Centre (P.) Ltd v. OT [2010] 327 ITR 456/193 Taxman 234, tax deduction at source obligations under section 195(1) arise only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a default in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. The underlying principle is this. Tax withholding liability of the payer is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, the Assessing Officer cannot proceed on the basis that the payer had an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. That exercise was not carried out by the Assessing Officer on the facts of this case. The Assessing Officer was thus clearly in error in proceeding to invoke disallowance under section 40{a )(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance". The ITAT 'D' Bench, in the case of ACIT, Company Circle-II(l) Vs M/s Eagle Piers (P) Limited on similar facts, relying on the judgement of Hon'ble Supreme Court in case of GE India Technology Centre (P.) Ltd v. Commissioner of Income tax and another 327 ITR 456. Referring to the above discussion and the judgements relied on by the appellant in his submissions, I direct the Assessing Officer to delete the addition. This ground of appeal is allowed."
Therefore, the Revenue is aggrieved.
9. In the instant case, the only contention of the Revenue before us is that the payee in question had rendered technical services in the nature of 'systematic research' to the assessee and received fee in lieu thereof, which 10 I.T.A. No.2100 No.2100/M/12 2100/M/12 is liable to be taxed as per Article 13 (clause 4) of the Indo-Italian DTAA. In reply, the assessee has produced before us copy of the agreement (supra) wherein the obligations of the payee are stated as under:
"The SECOND PARTY agrees to undertake and carryout the following services on behalf of the FIRST PARTY:
1. To procure orders for the FIRST PARTY and to negotiate the terms of such orders and contracts with said foreign buyers but the terms thereof shall be subject to prior, written concurrence of the FIRST PARTY.
2. To carry out systematic market research with regard to the needs of the products in the territory and to send to the FIRST PARTY reports and suggestions for adopting necessary measure in order to increase sale of the products.
3. To co-ordinate with the FIRST PARTY for the timely completion of all export obligations and to render all assistance in the fulfillment of the terms of the supply contract.
4. To take all necessary efforts and ensure timely payment by the buyers for all exports performed by the FIRST PARTY which have been negotiated by the SECOND PARTY.
5. To render all other assistance to the FIRST PARTY and its representatives while on visits to the territory and to make available the agency office for all secretarial and other assistance."
In the light thereof, the assessee would contend before us that the CIT(A) has rightly treated the services rendered by the foreign entity as market survey only, which does not partake the character of a 'technical' service.
10. We have given our thoughtful consideration to the rival contentions and perused the assessment order, CIT(A)'s order, paper book filed by the 11 I.T.A. No.2100 No.2100/M/12 2100/M/12 assessee, DTAA as well as agreement in question as available on record before us. In view of the different stands adopted by the parties, the issue which arises for our consideration is as to whether the 'systematic research' giving rise to payment in question made by the assessee could be termed as 'fee for technical services' or not. Before proceeding further, we deem it appropriate to refer the relevant statutory provisions i.e. section 9 of the "Act" sub-section 1(i), (vii) and Explanation (2) which read as under:
"9. (1) The following incomes shall be deemed56 to accrue or arise in India :--
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection58 in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
(ii) to (vi) xxxxxxxxxxx
(vii) income by way of fees for technical services payable by--
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in
respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
[Explanation 1 xxxxxxxxxxxxxxx] Explanation [2].--For the purposes of this clause, "fees for technical services" means any consideration (including any 12 I.T.A. No.2100 No.2100/M/12 2100/M/12 lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]"
Similarly, in the Finance Act, 2010, the legislature also inserted Explanation 2 in the aforesaid provision with effect from 01.06.1976 which reads as under:
"[Explanation.--For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clauses (v), clause (vi) and clause (vii) of sub-section (1), and shall be included in the total income of the non-resident, whether or not, -
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.]"
A combined reading of the above provision makes it clear that for the purpose of applicability of section 9, sub-section 1(i) prescribes that the income would be deemed to accrue and arises in India, whether directly or indirectly, if it is through or from any business connection. Then, in sub- section (1)(vii) income by way of 'fee for technical services' is defined. In other words, section 9(1)(i) is a general provision whereas, clause (vii) is in the nature of specific provision. Thereafter comes the Explanation substituted by the Finance Act, 2010 with retrospective effect from 01.06.1976. This explanation makes it categoric that in cases covered by 13 I.T.A. No.2100 No.2100/M/12 2100/M/12 clause (vii) or for that section 9, sub-section (1)(vi) - (vii), it would not be necessary for the non-resident to have residence or place of business or business connection in India. To simplify, in case of 'fee for technical services', the mandate of the legislative is that clause (vii) would have overriding effect by virtue of aforesaid explanation to section 9(1)(i).
11. Proceeding on this analogy, now we deal with assessee's agreement. There is no issue between the parties that the assessee has paid for 'systematic research' made by the overseas entity. Its only contention is that the 'systematic research' does not fall under the definition of 'technical services'. In Explanation 2 of clause (vii) (supra) of section 9(1) with effect from 01.04.1977, fee for 'technical services' means any consideration paid for 'technical' or 'consultancy' services. Further, the legislature itself provides for some conditions which are admittedly not applicable this case. In these facts and circumstances, we hold that the word 'technical' services would imply an operation involving skilled precision which 'systematic research' also involves. Therefore, we find that assessee's agreement in question leading to payment in hand made to the overseas entity amounts to fees for 'technical' services. Hence, the assessee was liable to deduct TDS as per the provisions of the "Act", failure of which would entail disallowance under section 40(a)(ia) of the "Act".
12. We have also perused the case law submitted by the assessee. 14 I.T.A. No.2100
No.2100/M/12 2100/M/12 Admittedly, in the circular relied upon by the assessee as well as in the case law, the aforesaid explanation substituted by the Finance Act, 2010 was not subject matter of the dispute. Hence, it is not applicable qua facts of the case.
13. As sequel to our above discussion, the Revenue succeeds in the present appeal and the order of the Assessing Officer is restored.
14. Accordingly, the appeal stands allowed.
Order pronounced on Monday, the 11th of March, 2013 at Chennai.
Sd/- Sd/- (N.S. SAINI) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 11.03.2013 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.