Income Tax Appellate Tribunal - Delhi
M/S Sahasra Electronics Pvt. Ltd.,, New ... vs Acit, New Delhi on 18 April, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'G' NEW DELHI
BEFORE SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
&
SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER
ITA No.ll89/Del/2013
ITA No.8049/Del/2018
Asstt. Years: 2009-10 & 2010-11
Sahasra Electronics P. Ltd., vs ACIT, Circle 7(1),
House No33, Pocket -1, New Delhi.
Jasola, New Delhi.
PAN: AAFCS4634L
Appellant Respondent
Assessee by: Shri Salil Kapoor, Advocate
Department by: Shri N.K. Bansal, Sr. DR
ORDER
PER NARASIMHA K. CHARY. JM Aggrieved by the orders dated 17.01.2013 and 16.10.2018 in Appeal No. 117/2011-12 and No.06/13-14/09/14-15 in respect of Asstt. Years 2009-10 and 2010-11 respectively passed by the Learned Commissioner of Income-tax (Appeals), New Delhi {"CIT(A)"}, assessee preferred these appeals. Since the facts involved and grounds raised in both these appeals are same and identical, for the sake of convenience taking into account the facts in ITA No.8049/Del/2013 for Asstt. Year 2010-11, we pass a consolidated order.
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2. Brief facts of the case are that the assessee is a com pany and has been engaged in the business of im porting of electronic goods and com ponents, m anufacturing and export of electronic assem blies/ populated PCBs. For the assessm ent year 2010-11, they have filed their return of income on 30/9/2010 declaring a total income of Rs.2,07,79,620/-. During the course of assessm ent proceedings, learned Assessing Officer noticed that the assessee had debited a sum of Rs.98,27,357/- tow ards com m ission paid to the foreign agents. On a perusal of the MOU signed by the assessee with the agents, learned Assessing Officer felt that the nature of services to be provided by the foreign agents are in the nature of m anagerial/technical services covered under section 9 (l)(viii) of the Incom e-tax Act, 1961 ("the Act") being paid by a resident and these are not being utilised in a business or profession carried on by such person outside India or for the purposes of m aking or earning any income from any sources outside India.
3. Assessee pleaded that the sale com m ission paid to the non residents for the services provided outside India and the amount was not chargeable to tax in India as the said com panies were not having any perm anent establishm ent in India and whatever services being rendered by them were outside India. It was further contended that the assessee had not complied with the provisions of section 195 of the Act for w ithholding of tax on rem ittances to contended that the assessee had not com plied with the provisions of section 195 of the Act for w ithholding of tax on rem ittances to the non-residents on account of com m ission/m anagerial services/technical services and consultancy etc relying on the circular No. 786, dated 7/2/2000 of the CBDT.
4. After hearing the assessee on this aspect and considering the reply of the assessee, learned Assessing Officer recorded that during the Assessm ent year 2007-08, an addition was made under section 40(a)(i) of the Act on account of com m ission paid to the two parties abroad nam ely M/s Cee-Jan Beevers, Belgium and M/s MK group on the ground of the assessee com pany not com plying with the provisions of the w ithholding tax, but in appeal Ld. CIT(A) had deleted the addition relying on the judgem ent of the Hon'ble Apex Court in the case of GE India technology Centre private limited vs. CIT 327 ITR 456 (SC), wherein it was held that section 195 of the Act has to be read in conform ity with the charging provisions, that is, section 4, 5 and 9 of the Act and that the obligation to deduct TDS arises only when there is a sum chargeable to tax.
5. Learned Assessing Officer further recorded that for the Assessm ent year 2009-10, Ld. CIT(A) vide order dated 17/1/2013 in Appeal No. 117/11-12 held that the paym ent relates to m anagem ent and technical services covered under section 9 (l)(vii) 4 of the Act and accordingly the disallowance made by the learned assessing officer was valid. Learned Assessing Officer held that in the case of paym ent of 'Fee for Technical Services' (FTS) or interest on royalty, it is not necessary to establish the territorial nexus between the income deemed to accrue or arise to the non resident under the said clauses (v), (vi) or (vii) of subsection (1) of section 9 of the Act. Learned Assessing Officer, therefore, holding that the rem ittances made by the assessee on account of com m ission to foreign agent as "sales com m ission", are covered under the expression 'Fee for Technical Services' (FTS) as defined in Section 9 (l)(v ii) (b) of the Act and are to be deem ed income of the payee accrued or arising in India and consequently is liable for withholding tax, disallowed the expense of Rs.98,27,357/-under section 40(a)(i) of the Act.
6. In the appeal preferred by the assessee, Ld. CIT(A) recorded a finding that on the identical facts and relevant term s and conditions of MOU, disallowance of com m ission expenses of Rs.56,92,085/-under section 40(a)(i) of the Act was made in Assessm ent year 2009-10 by treating the said expense in the nature of m anagerial/technical services covered under section 9 (l)(viii) of the Act and the Ld. CIT(A) confirm ed the said disallow ance after discussing the facts and relevant provisions of MOU in the light of legal position. Following the said decision of Ld. CIT(A) for the Assessm ent year 2009-10, Ld. CIT(A) for this year also upheld the disallow ance of com m ission expenses of Rs.98,27,357/- made by the AO and accordingly dism issed the appeal of the assessee.
7. In the alternative, Ld. CIT(A) recorded that even the paym ents made by the assessee have to be considered as com mission expenses, as claimed by the assessee, the same are not allowable as per the discussion of learned Assessing Officer in the remand report wherein he had clearly m entioned that the first com m ission agent namely MK group LLC, though w orking in USA but its control is within India as the m anaging director and sole proprietor of the assessee com pany, namely, Mr A. Manwani is having 50% stakes in the said com pany and, therefore, assessee is having control and m anagem ent of the said com m ission agent com pany in India as per section 6(3) of the Act. Sim ilarly in the case of M/s Cee-Jan Bevers, learned Assessing Officer had clearly mentioned that the assessee was having 50% shares in M/s Sahasra Europe BVBA after the com pletion of two years of agreem ent and Cee-Jan Bevers was sim ply a nam esake to show that the paym ents were being made to a non-resident. On this premise, Ld. CIT(A) held that in case of both the com mission agents, the control and m anagem ent was with the assessee as per provisions of Section 6 (3) of Act and, therefore, these agents were 6 residents in India during the year under consideration and the paym ents made to them were liable for deduction to tax at source, and in such case also learned Assessing Officer was justified in disallow ing the com m ission expense under section 40(a)(i) of the Act.
8. Assessee is, therefore, before us in this appeal challenging the findings of the authorities below as to the disallow ance of Rs.98,27,357/-, being the am ount of com mission paid to the two non-resident sales agents namely Mr Cee-Jan Bevers, Belgium and M/s MK group LLC, USA.
9. It is the argum ent of the Ld. AR that in the Asstt. year 2007- OS, learned Assessing Officer disallowed this expense, but the Ld. CIT(A) allowed the same while follow ing the decision of the Hon'ble Apex Court in the case of GE India technology Centre private limited (supra) but in further appeal, a coordinate Bench of this Tribunal, by order dated 6.9.2013 in ITA No. 5101/Del/2011 found that the question whether the recipients of the commission has Perm anent Establishm ent (PE) or not, was not looked into by the Ld. CIT(A) and for such purpose the matter had to go back to the file of the learned Assessing Officer for fresh adjudication with liberty to the assessee to subm it any details he desire before the Assessing officer. Subsequently, learned Assessing Officer passed the fresh order dated 26/6/2014 making disallow ance of 50% of 7 com mission paid to M/s Cee-Jan Beevers on the ground that M/s Cee-Jan Beevers was not an independent agency and control and m anagem ent of M/s Sahasra Europe rest with M/s Sahasra Electronics Private limited (Assessee). Likewise, learned Assessing Officer disallowed the com m ission paid to M/s MK group LLC in excess of 3%. Ld. AR subm itted that such an order dated 26/6/2014 post remand by the Tribunal, is pending consideration in appeal before the Ld. CIT(A).
10. Ld. AR further submitted that though for the Asstt. Year 2011-12, learned Assessing Officer passed the assessm ent order similar to that of the order dated 26/6/2014 for assessm ent year 2007-08, however, for the Assessm ent Year 2012-13 to Assessm ent Year 2014-15, the contentions of the assessee were accepted and no disallow ance was made in respect of the com m ission paid to the non-resident sales agents. Ld. AR subm its that the fundam ental facts for all these assessm ent years being similar, the conclusions reached by the learned Assessing Officer in the subsequent years to the effect that no technical services are involved in respect of the paym ents of com m ission to the non-resident sales agents, and the paym ents are only towards the com m ission for sales.
11. He placed reliance on the decisions reported in CIT vs. EON Technology (P) Ltd (2012) 343 ITR 366 (Delhi); DCIT vs. Divi's laboratories Ltd (2011) 10 ITR (T) 501 (Hyderabad), Ciena 8 Com m unications India Private Limited vs. ACIT (2018) 98 taxm ann.com 458 (Delhi-Trib) in support of his contention that in the absence of the learned Assessing Officer establishing on the basis of relevant material that there is business connection, llearned Assessing Officer is not justified in treating the com m ission paid to the non-residents for the sales affected outside India, as 'Fee for Technical Services' (FTS).
12. Ld. DR placed reliance on the orders of the authorities below and subm itted that that the circular No. 786 dated 7/2/2000 relied upon by the assessee has no application to the facts of the case but, on the other hand, the facts for the AY 2010-11 are covered by circular 7 dated 22/10/2009 issued by the CBDT and also the am endm ent to section 9 by way of Finance Act 2010. He submitted that circular No. 786 dated 7/2/2000 was w ithdraw n by the CBDT by issuing a fresh circular No. 7 dated 22/10/2009. He further subm itted that through the Finance Act 2010 further explanation was inserted in Section 9 stating that even if the non-resident has not rendered any services in India and received any income by way of interest, royalty and fee for technical services, the income shall be deemed to accrue or arise in India and this explanation was inserted with retrospective effect from the year 1976 itself, being a clarificatory in nature. He, therefore, subm itted that in the case of paym ent of 'Fee for Technical Services' (FTS) or interest on royalty, 9 it is not necessary to establish the territorial nexus between the income that were to accrue or arise to the non-resident under the clauses (v), (vi) or (vii) of subsection (1) of Section 9 of the Act and the territory of India or that the services were rendered in India.
13. We have gone through the record in the light of the subm issions made on either side. The services provided by the non-resident sales agents are forw arding enquiry, obtaining quotes, processing purchase orders and paym ent etc. These services were held to be fee for technical services by the learned Assessing Officer for the assessm ent Year 2007-08 and upheld by the first appellate authority by follow ing the decision of the Hon'ble Apex Court in the case of GE India Technology Centre Private Limited. In the second appeal, however, a coordinate Bench of this Tribunal thought it fit to remand the m atter to the file of the learned Assessing Officer to make enquiries in respect of the existence of the Perm anent Establishm ent (PE) of either or both of these non-resident sales agents.
14. Subsequent to the remand of the matter relating to the Assessm ent Year 2007-08 by the Tribunal, learned Assessing Officer did not bring to tax the com m ission am ount on the ground of any 'Fee for Technical Services' (FTS), in such an order learned Assessing Officer did not dispute the contention of the assessee that the two com m ission agents were not rendering any services of 10 technical/m anagerial or consultancy nature so as to bring the paym ent within the m ischief of Section 9 (l)(vii) of the Act. There is no allegation that either M/s Cee-Jan Beevers or MK group have any Perm anent Establishm ent (PE) in India. Additions were made on a different score. In respect of the addition on the commission paid to M/s Cee-Jan Beevers, learned Assessing Officer recorded a finding that M/s Cee-Jan Beevers is not an independent agency and control and m anagem ent of M/s Sahasra Europe rest with M/s Sahasra Electronics Private limited, 50% of the com m ission paid to M/s Cee-Jan Beevers was disallowable on the ground that such 50% should be the income of the Permanent Establishm ent (PE) in Indian territory. So also in respect of the com m ission paid to M/s MK group, learned Assessing Officer disallowed the com m ission in excess of 3% stating that there was no reason or justification for making paym ent at any rate higher than the minimum commission agreed in the MOU at 3%.
15. Assessm ent order for the Assessm ent year 2010-11 was passed on 15/3/2013, whereas a coordinate Bench of this Tribunal remanded the matter for the assessm ent year 2007-08 on 6/9/2013. We are in agreem ent with the Ld. AR that as on the date of passing of the order for the Assessm ent year 2010-11 by the learned Assessing Officer on 15/3/2013 or the order for the Assessm ent year 2009-10 by the Ld. CIT(A) on 17/1/2013, Ld. 11 CIT(A) could not have the benefit of the findings of a coordinate Bench of this Tribunal in ITA No.5101/Del/2011 by order dated 6/9/2013 of the post remand assessm ent order passed by the learned Assessing Officer for the Assessm ent Year 2007-08 on 26/6/2014. Now, we shall proceed to look at the law laid down by the Hon'ble jurisdictional High Court and follow ed by the coordinate benches of this Tribunal.
16. In EON technology (supra), the assessee was in the business of developm ent and export of software, paid com m ission to its British parent/holding com pany, namely, ETUK on the sales and amount is realised on export contracts procured by them. Learned Assessing Officer held that the com m ission income earned by the ETUK had accrued in India are was deemed to accrue in India and, therefore, the assessee was liable to deduct tax at source there from and as there was failure, the said expenditure should be disallowed under section 40(a)(ia) of the Act, w hereas Ld. CIT(A) while placing reliance on the circular is issued by CBDT No. 23 dated 23/7/1969 and circular No. 786 dated 7/2/2000 deleted the same. Findings of Ld. CIT(A) were upheld by the Tribunal. During further appeal Hon'ble jurisdictional High Court held that where non-resident agent operates outside the country, no part of his income arises in India, and since paym ent is remitted directly abroad, and m erely because an entry in the books of account was 12 made, it does not mean that the non-resident had received any paym ent in India and in circular No. 786 it was stated that in such cases, the Indian assessee is not liable to deduct the TDS under section 195 of the Act from the com m ission and other related charges payable to such non-resident having rendered services outside India. On this premise, Hon'ble judicial High Court held that there was no error in the orders of the first and second appellate authorities in deleting the disallowance.
17. In Divi's laboratories (supra) the assessee paid com mission to the foreign agent for the services rendered outside India and the learned Assessing Officer disallowed the said expenditure under section 40(a)(ia) of the Act on the ground that the assessee had not deducted the tax at source on such payment. Assessee contended that the paym ent was made to foreign agent for services rendered outside India and paym ents were remitted to the banking channels as per the requirem ents of the RBI regulations and there was obligation to deduct the tax at source. The first appellate authority accepted the contention of the assessee and deleted the disallowance. In the appeal by the revenue, a Bench of Hyderabad Tribunal after noticing the CBDT circular No. 7, dated 22/10/2009 held that the w ithdrawal of the earlier circular No. 786, dated 7/2/2000 was of no assistance to the revenue in anyway in disallowing the expenditure and basing on f ' ' 13 the decision of the Hon'ble Apex Court in the case of Toshoku Ltd (1980) 125 ITR 525 (SC), it was held that insofar as the overseas agent of Indian exporter operates in his own country and no part of his incom e arises in India and the com m ission is usually remitted directly to him, such overseas agent is not liable to incom e tax in India on the com m ission earned.
18. In Ciena com m unications (supra), the assessee was providing installation, com m issioning services for equipm ent supplied by its group entities to custom ers and made several paym ents to foreign com panies, on which no TDS was directed. Learned Assessing Officer made disallow ance for non-deduction of TDS under section 195 of the Act read with section 40(a)(i) of the Act on paym ents so made. A coordinate Bench of this Tribunal held that the payments received by the associated enterprises for the services rendered outside India are not taxable in India and, therefore, the assessee was not expected to deduct TDS and section 195 of the Act has no application. Consequently, it was held that no disallow ance under section 40(a)(i) of the Act was called for.
19. On application of the settled law to the facts involved in this matter, the irresistible inference that flows is that the com mission received by the foreign sales agents is not taxable in India and consequently, the assessee is not under any obligation to deduct TDS, and, therefore, Section 195 has no application to the facts of 14 the case and consequently the disallowance made in this matter cannot be sustained.
20. Further, it could be seen from the record that in the order dated 30/3/2015 for the Assessm ent year 2011-12, learned Assessing Officer made the disallowance in respect of the com m ission paid to these two foreign entities not of the ground of 'Fee for Technical Services' (FTS) technical services requiring the tax deduction at source but on the grounds sim ilar to those of the Assessm ent Year 2007-08. Page num bers 58 to 69 is the assessm ent order for the Assessm ent Year 2011-12. So also page No. 74-77 of the paper book contain the assessm ent order for the Assessm ent year 2013-14 and page No. 78 contain the assessment order for the Assessm ent Year 2014-15. These two orders also clearly show that the theory of fee for technical services is given a go bye and the learned Assessing Officer accepted the contentions of the assessee and it did not bring to tax any am ount by disallowing any part of the com mission paid to these two foreign entities. It is further seen that the assessm ent orders for the Assessm ent Years 2012-13, 2013-14 and 2014-15 are passed by the learned Assessing Officer after making enquiry in respect of the com m ission paid to M/s Cee-Jan Beevers and MK group LLC in those years. It could further be seen that in respect of those years it was represented by the assessee that an affidavit showing that neither the assessee nor any of its directors/associated enterprises had any interest in the ownership or m anagem ent of the agent namely M/s Cee-Jan Beevers and/or his associated enterprises namely M/s Sahasra Europe and the fact that neither he nor his enterprises had Perm anent Establishm ent (PE) in India. This assertion of the assessee was accepted by the learned Assessing Officer in these three years and also was acted upon.
21. Even otherwise, M/s Cee-Jan Beevers is a non-resident Indian and resident of Belgium whereas M/s MK group LLC is a resident of USA. M/s Cee-Jan Beevers is covered by the India Belgium Double Taxation Avoidance Agreem ent which if read with the protocol dated 26/4/1993 and the Treaty between India and the USA is applicable. So also case of M/s MK group LLC is covered by the Double Taxation Avoidance Agreem ent between India and USA. In either case the paym ent of com mission would not be 'Fee for Technical Services' (FTS) since such services did not "make available" any technical knowledge, experience, skill, know-how or processes or consists of the developm ent and transfer of technical plan or a technical design.
22. In the circum stances, as a matter of fact, we find that the services rendered by these two foreign entities are outside India and in respect of the sales effected by them, and at the same time neither of these entities had any perm anent establishm ent in India 16 nor does the assessee or its directors/associated enterprises had any interest in the ownership or m anagem ent of these entities more particularly M/s Sahasra Europe. We, therefore, allow the grounds of appeal of the assessee.
23. Since the appeal of the assessee for the AY 2010-11 is allowed, as above, we, taking consistent view, allow ITA N o .ll8 9 /D e l/2 0 1 3 for the AY 2009-10 also.
24. In the result appeals of the assessee for both the years are allowed.
Order pronounced in the Open Court on \t> April, 2019.
Dated: April, 2019.
VJ
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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Draft dictated on 08.04.2019
Draft placed before author 09.04.2019
Draft proposed & placed before the second member Draft discussed/approved by Second Member.
Approved Draft comes to the Sr.PS/PS Kept for pronouncement on Date of uploading order on the website File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk.
Date of dispatch of Order.