Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Tej International Pvt. Ltd., New ... on 20 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D' NEW DELHI
BEFORE SHRI G.D. AGRAWAL, HON'BLE PRESIDENT
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No. 6140/Del/2014
AY: 2011-12
Dy.Commissioner of Income Tax, vs M/s Tej International Pvt. Ltd.,
Circle 16(1), S-506, Greater Kailash Part-I,
New Delhi. New Delhi-110048
(PAN:AAACT0098E)
(Appellant) (Respondent)
Appellant by: S/Shri Rakesh Gupta, Somil Aggarwal
Respondent by: Shri Deepesh Gupta, Advocate
Date of hearing: 25.04.2018
Date of pronouncement: 20.07.2018
ORDER
PER SUDHANSHU SRIVASTAVA, J.M.
This appeal is preferred by the department against the order dated 26.08.2014 passed by the Ld. CIT (Appeals)-19, New Delhi for assessment year 2011-12.
2. Brief facts of the case are that the assessee company is engaged in the business of manufacturing, trading and marketing of footwear. The return of income was filed declaring total income of Rs. 3,75,22,940/-. The case was selected for scrutiny under CASS and during the course of assessment proceedings, the Assessing Officer observed that the assessee had ITA No. 6140/Del/2014 Assessment year 2011-12 been paying commission to non-resident agents who procured orders from parties situated outside India. The Assessing Officer noted that these payments to the non-resident commission agents were being made without deduction of tax at source. The Assessing Officer opined that these payments were not allowable as a deduction in view of non-deduction of tax in terms of section 195 of the Income Tax Act, 1961 (hereinafter called 'the Act'). The assessee was asked to show cause as to why these payments may not be disallowed. In response, the assessee submitted before the Assessing Officer that the obligation to deduct tax at source was attracted only when the payment was chargeable to tax in India u/s 4 of the Act. The assessee also submitted before the Assessing Officer that the commission paid by the assessee to the agents was attributable to the orders booked by them and was not related to any other service and, therefore, on this ground also, the provisions for deduction of tax at source were not attracted. However, the Assessing Officer was of the opinion that in view of section 9(vii)(c) of the Act, the amount being paid as commission was actually in the nature of fees for consultancy services and, therefore, the income of such parties accrued through a business connection in India. The Assessing Officer 2 ITA No. 6140/Del/2014 Assessment year 2011-12 invoked section 40(i) of the Act and disallowed an amount of Rs. 1,46,00,693/- and completed the assessment at Rs. 5,21,23,633/-.
2.1 Aggrieved, the assessee approached the learned First Appellate Authority who allowed the assessee's appeal by accepting the averments of the assessee that the nature of services provided by commission agents was not in the nature of consultancy services requiring deduction of tax at source. Ld. Commissioner of Income Tax (A) also noted that the assessee had been regularly paying similar commission in earlier assessment years as well and no tax had been deducted at source from payments made in earlier assessment years but no disallowance had been made by the Assessing Officer.
2.2 Now, the department is in appeal before the ITAT challenging the deletion of disallowance by the Ld. Commissioner of Income Tax (A).
3. The Ld. Sr. DR placed extensive reliance on the findings of the Assessing Officer and submitted that the Assessing Officer had examined the correspondences between the assessee and the commission agents and based on the correspondences, the 3 ITA No. 6140/Del/2014 Assessment year 2011-12 Assessing Officer had reached a conclusion that the role of agents was not confined to that of mere marketing agents but they were found to be constantly in touch with the assessee regarding various transactions leading to export by the assessee. The Ld. Sr. DR submitted that the correspondences reveal that the various agents were providing valuable inputs regarding the kind of samples to be made available which include descriptions regarding the size, the lining to be used, the design, the pricing, the quantity, the delivery dates, the style, material to be used, colour etc. and, therefore, in view of section 9(vii)(c) of the Act, the nature of services being provided by the parties was more in the nature of consultancy services. Ld. Sr. DR also placed reliance on a ruling of the Hon'ble Authority for Advanced Rulings (IT), New Delhi in the case of SKF Boilers and Driers Pvt. Ltd. in AAR No. 983-984 of 2010 and submitted that u/s 9(1)(i) of the Act, the income accruing or arising directly or indirectly, through or from any business connection in India or source of income in India shall be deemed to accrue or arise in India. Ld. Sr. DR submitted that although the agents rendered services abroad and solicited orders from parties situated outside India but the right to receive the commission arose in India when the 4 ITA No. 6140/Del/2014 Assessment year 2011-12 order was executed in India. It was further submitted that the fact that the agents had rendered services abroad in the form of soliciting the orders and the commission was to be remitted to them abroad was wholly irrelevant for the purpose of determining the situs of their income. Reliance was also placed on the judgment of Hon'ble Apex Court in the case of GVK Industries Ltd. vs. ITO in Civil Appeal No. 7796 of 1997 wherein the Hon'ble Apex Court had held that where the services rendered by the agents pertain to skill, acumen and knowledge in the specialized field, the nature of services would come within the ambit and sweep of the term 'consultancy services' and, therefore, the tax at source would be deductible as the amount paid would be taxable under the head 'fee for technical services'. Ld. Sr. DR submitted that the impugned order deserved to be set aside.
4. In response, the Ld. AR submitted that the conclusion drawn by the Assessing Officer that the agents had provided any other service than that of marketing was factually incorrect. It was submitted that the ld. Commissioner of Income Tax (A) had also examined the various correspondences which had been submitted before the Assessing Officer and had, thereafter, recorded a finding that the agents were only commission agents 5 ITA No. 6140/Del/2014 Assessment year 2011-12 and that they did not perform any specialised services requiring special skills and acumen. It was further submitted that these commission agents procured orders and followed up the recovery of payments on behalf of the assessee but had no role in deciding the product to be sold by the exporter or bought by the buyer. It was also submitted that the correspondences nowhere implied that the agents were providing any service in the nature of technical or consultancy service and further there was no transfer of any technical know-how, skill, technical knowledge or expertise for the purpose of business of the assessee. Ld. AR emphasised that the payments made to the foreign agents had a direct nexus with the quantum of sales. It was also submitted that the rate of commission paid to the foreign agents was at the same rate at which the commission agents situated in India were remunerated. Ld AR also submitted that these commission agents had no Permanent Establishment in India so as to fall within the mischief of section 9(i) of the Act and were only sales agents. Ld. AR also submitted that the department has accepted and allowed payment of commission to foreign agents without deduction of tax at source in earlier assessment years as well as in subsequent assessment years. It was submitted that in view 6 ITA No. 6140/Del/2014 Assessment year 2011-12 of principle of consistency also, commission paid was deductible. The Ld. AR also submitted a chart depicting details of commission paid to the foreign agents in the previous and subsequent assessment years and submitted that there were parties which were common in all these assessment years. Ld. AR also placed on record copies of assessment orders passed u/s 143(3) of the Act for assessment years 2010-11, 2012-13, 2013- 14 and 2014-15 wherein the payments of similar commission was not disallowed. Ld. AR also placed reliance of a plethora of judicial precedents wherein it had been held that tax would not be deductible at source in the case of non-resident commission agents.
5. We have heard the rival submissions and perused the material available on record. We find that the main objection of the Assessing Officer while disallowing the impugned payment was that the foreign commission agents were allegedly rendering services to the assessee which were beyond the scope and definition of marketing agents. The Assessing Officer has referred to certain correspondences and has reached a conclusion that the foreign commission agents were rendering services which were rather in the nature of consultancy services. 7 ITA No. 6140/Del/2014 Assessment year 2011-12 However, the Ld. Commissioner of Income Tax (A) has reached a conclusion contrary to that of the Assessing Officer in this regard. Although the Ld. Sr. DR has argued vehemently against the impugned act of the Ld. Commissioner of Income Tax (A), he was unable to bring on record any cogent evidence to establish that the services being rendered by the foreign agents were something more than that of an ordinary marketing agent who was procuring orders from the foreign buyers on behalf of the assessee. The ITAT Delhi Bench in the case of Adidas Sourcing Ltd. vs. Asstt. DIT (International Taxation) reported in 150 TTJ 801 (Delhi) had the occasion to distinguish between services rendered under a 'Buying Agency Services Agreement' and 'Fee for Technical Services'. In this case, the coordinate Bench of ITAT Delhi has held that as per Explanation (2) to section 9(1)(vii) of the Act, in order to characterise a particular stream of income as fee for technical services, it is necessary that some sort of 'managerial' or 'technical' or 'consultancy' services should have been rendered in consideration. The ITAT Delhi Bench opined that the term 'managerial', 'technical' or 'consultancy' do not find a definition in the Income Tax Act and that it is settled law that they need to be interpreted based on their understanding in 8 ITA No. 6140/Del/2014 Assessment year 2011-12 common parlance. The Bench went on to conclude that the commission received by the non-resident company for procuring product and rendering incidental services for purchases to the resident company was not taxable in India as 'fees for technical services'.
5.1 We also note that the different Benches of this Tribunal have been taking a consistent view in a series of cases that whenever payments are made on account of commission for procuring sales orders, tax was not required to be deducted at source.
5.2 The Hon'ble High Court of Allahabad in the case of CIT vs. Model Exims reported in 366 ITR (All) has also held that payment of commission to foreign agents did not make liable such foreign agents to pay tax in India and, thus, tax was not liable to be deducted at source u/s 195 of the Act. The scope of Explanation 2 to section 9(l)(vii) of the Act by the Finance Act, 2010 was also examined by the Hon'ble Allahabad High Court in the case of CIT vs. Model Exims (supra) which was followed by the Tribunal in that assessee's own case for the immediately preceding year. The relevant observations of the Tribunal are extracted hereunder for the sake of ready reference:-
9ITA No. 6140/Del/2014
Assessment year 2011-12 "5. The ld. counsel for the assessee has contended that this issue is covered by the order of the jurisdictional High Court and various orders of the Tribunal, particularly in the case of ACIT vs. M/s Model Exims, Kanpur in I. T.A. No. 697/LKW/2013 in the light of CBDT circular and amendments. We find that the view taken by the Tribunal has been approved by the Hon'bie High Court of Allahabad in the case of CIT vs. M/s Model Exims, 358 ITR 2 (Alld). The relevant observations of the Hon'bie High Court are extracted hereunder:-
"We find that all the questions as framed by the department are covered by our judgment in CIT v. M/s Model Exims, Kanpur, Income Tax Appeal (Def.) No. 164 of 2011, decided in favour of the assessee and against the revenue on 10.09.2013 and die judgment in CIT, Kanpur v. M/s Allied Exims, Income Tax Appeal No. 3 13 of 2013 decided on 13.11.2013. In both these judgments we have held, that A.0. did not bring anything on record, which could demonstrate that non- resident agents were appointed as selling agents, designers or technical advisers. The payment of commission to foreign agents did not entitle such foreign agents to pay tax in India and thus the TDS was not liable to be deducted under Section 195 of the Act. The disallowance made by A.O. under Section 40
(a) (i) for nondeduction of tax at source under Section 195 were not justified.
Shri Bharat Ji Agrawal has tried to distinguish the judgments on the ground that in the present case there was sufficient material by way of written submissions of the assessee, who had stated in his reply on 20.12.2010 that the assessee is engaged in business of manufacture and export of finished leather, shoe upper and leather products. The assessee's main business being export business it has to take the service of foreign agents, who secure export orders and help in execution of such business. For the services rendered by the foreign agents, they are paid commission in foreign exchange by remitting the amount through bank.
10ITA No. 6140/Del/2014 Assessment year 2011-12 We find that the CIT (A) has considered the alleged admission in the reply of the assessee and has also perused the agreement from which he found that there was nothing, which could demonstrate that these agents were appointed as selling agents, designers or technical advisers for invoking the provisions of Section 9 (1) (vii) of the Act. The findings recorded by the CIT (A), which have been confirmed by the ITAT is quoted as below:-
"5.3.2 The A. O. has also invoked the provisions of Section 9 (1) (vii) on the premise that such payments also full under FTS. In this regard she has observed that normally the exporter appoints the agents as his selling agent, designer & technical adviser for his products. He has further observed that being commission agent required managerial acumen & expertise and therefore, would be covered under Section 9 (1) (vii) of the Act as managerial services. On perusal of the assessment order and assessment folder, I find that the A.O. has not brought anything on record which could demonstrate that these agents had been appointed as selling agents, designers & technical advisers. Rather on me contrary I find that the agreement is of for procuring orders and nothing else. In absence of any such evidence, this observation of the A.O. is mere conjecture and therefore, no cognizance of the same can be taken. It is a trite law that suspicion, no matter how grave, cannot take place of evidence. In this case, there is even no case of suspicion, leave aside any evidence to the effect that the agents were not only selling agents but also designers and technical advisers. The confirmation from the respective foreign agents that the foreign agents did not have any branch or PE in India further supports the case of the appellant.
5.3.3 The A.O.'s observation that as a selling agent, the agent has to have managerial acumen and, therefore, hit by the provisions of Section 9 (1) (vii), is baseless. The provisions of Section 9 (1) (vii) deals with fees for technical services and it has to be read in that context. Par that matter, everything in life requires managerial 11 ITA No. 6140/Del/2014 Assessment year 2011-12 skills, like running the household, being an Assessing Officer, running a shop etc. Will that tantamount to providing managerial services in the context of Section 9 (1) (vii)? The answer is dear NO. Thus, the aforesaid payments do not fall within the meaning of "FTS' as described in Section 9 (1) (vii) of the Act. 5.3.4 The income of the non-resident was not chargeable to tax in India since the same was neither received in India nor had it accrued or deemed to accrue in India. Accordingly, the appellant was not required to deduct Tax at Source u/s 195 in respect of commission paid to the Foreign Agents. Disallowance u/s 40 (a) (i) is, therefore, deleted."
Shri Bharat Ji Agrawal submits that the CIT (A) and ITA T have not considered the explanation added to Section 9 (1) (vii) by the Finance Act, 2010 w.e.f. 1.6.1976 and which provides that for the purpose of second proviso the income of such nonresident shall be deemed to accrue or arise in India under Clause (v) or Clause (vi) or Clause (vii) [of sub-section (1)] and shall be included in total income of non-resident whether or not, non- resident has residence or place of business or business commission in India; or non-resident has rendered services in India.
We do not find that the fact situation contemplated or clarified in the explanation added by Finance Act, 2010 is applicable to the present case as in the present case the agents appointed by the assessee had their offices situate in a foreign country and that they did not provide any managerial services to the assessee. Section 9 (1) (vii) deals with technical services and has to be read in mat context. The agreement of procuring orders would not involve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services. There are no distinguishing feature in this case, nor do we find that the ratio of the Constitution Bench decision in Commissioner of C. Ex., Bolpur v. Ratan Melting & Wire Industries, (2008) (231) E.L T. 22 (SC) (para 6) is 12 ITA No. 6140/Del/2014 Assessment year 2011-12 applicable in as much as in the present case there was no decision of the Supreme Court or High Court or any statutory provision, which was contrary to the circular, which was withdrawn on 22.10.2009.
The questions of law are covered by the judgments of this Court cited as above, and are decided in favour of the assessee and against the department"
6. We, therefore, following the aforesaid judgment of the jurisdictional High Court, decide the issue in favour of the assessee and confirm the order of the Id. CIT(A) in this regard."
5.3 Similarly, the Hon'ble Delhi High Court in the case of Director of Income Tax (International Taxation) vs. Panalfa Autoelektrik Ltd. reported in 49 taxmann.com 412 (Delhi) examined different types of services and their Lordships have held that services rendered for procurement of export orders etc. cannot be treated as managerial services provided by the non- resident to the respondent assessee. Their Lordships further defined the consultancy services and technical services. For the sake of reference, we extract the relevant observations of the Hon'ble High Court of Delhi as under:-
"The expression 'managerial, technical and consultancy services' have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word 'services' to understand and appreciate their purport and meaning. One has to examine the general or common usage of these words or expressions, how they are interpreted and understood by the persons engaged in business 13 ITA No. 6140/Del/2014 Assessment year 2011-12 and by the common man who is aware and understands the said terms. [Para 14] The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent- assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinizing the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever. This is dear from the facts as recorded by the Commissioner (Appeals), which have been affirmed by the Tribunal. [Para 15] The non-resident, it is dear was appointed as a commission agent for sale of products within the territories specified and subject to and in accordance with the terms set out, which the non-resident accepted. The non-resident, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services. Further, the respondent-assessee was legally bound with the nonresidents' representations and acts, only when there was a written and signed authorization issued by the respondent-assessee in favour of the non-resident. Thus, the respondent- assessee dictated and directed the non-resident.
The Commissioner (Appeals) has also dealt with quantification of the commission and as per agreement, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent-assessee received in items of the purchase contract or order, in addition to a predetermined guarantee consideration. Again, an indication contra to the contention that the non-resident was providing management service to the respondent- assessee. [Para 16] The revenue has not placed copy of the agreement to contend that the aforesaid clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the 14 ITA No. 6140/Del/2014 Assessment year 2011-12 relevant clauses, which certainly was not the right way to deal with the issue and question. [Para 17] Further, would be incongruous to hold that the non- resident was providing technical services. The non- resident had not undertaken or performed 'technical services', where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences. [Para 19] The moot question and issue is whether the non- resident was providing consultancy services. [Para 20] The word 'consultant' refers to a person, who is consulted and who advises or from whom information is sought. In Black's Law Dictionary, Eighth Edition, the word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there should be a provision of service by the non-resident, who undertakes to perform it, which the acquirer may use. The service must be rendered in the form of an advice or consultation given by the non- resident to the resident Indian payer. [Para 21] In the present case commission paid for arranging of export sales and recovery of payments cannot be regarded as consultancy service rendered by the non- resident. The non-resident had not rendered any consultation or advice to the respondent-assessee. The nonresident no doubt had acquired skill and expertise in the field of marketing and sale of automobile products, but in the facts, as noticed by the Tribunal and the commissioner (Appeals), the nonresident did not act as a consultant, who advised or rendered any counselling services.
The skill, business acumen and knowledge acquired by the nonresident were for his own benefit and use. The non-resident procured orders on the basis of the said knowledge, information and expertise to secure 'their' 15 ITA No. 6140/Del/2014 Assessment year 2011-12 commission. It is a case of self-use and benefit, and not giving advice or consultation to the assessee on any field, including how to procure export orders, how to market their products, procure payments etc. The assessee upon receipt of export orders, manufactured the required articles/goods and then the goods produced were exported. There was no element of consultation or advice rendered by the non-resident to the respondent-assessee. [Para 22] The technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allows him to do so. In the present case, the aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to view them in watertight compartments, but in the present case this issue or differentiation is again not relevant. [Para 25]"
5.4 We, therefore, after considering the facts of the case and also after considering the aforesaid judicial precedents, coupled with the fact that the Assessing Officer was unable to bring any cogent material on record to establish that the non-resident commission agents had rendered any technical, consultancy or managerial services, are unable to take a view contrary to that of the Ld. CIT (A) who has given a categorical finding to this effect. We also note that the assessee had been making similar payments in earlier as well as subsequent assessment years which were accepted by the department in assessment orders 16 ITA No. 6140/Del/2014 Assessment year 2011-12 framed u/s 143(3) of the Act and no adverse inference had been drawn by the department in this regard. Accordingly, we find no reason to interfere with the findings of the Ld. CIT (A) in this regard and we dismiss the grounds raised by the department.
6. In the result, the appeal of the department stands dismissed.
Order pronounced in the Open Court on 20th July, 2018.
Sd/- Sd/-
(G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA)
PRESIDENT JUDICIAL MEMBER
Dated: 20th JULY, 2018
'GS'
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT (A)
4. CIT(A)
5. DR, ITAT
By Order
ASSTT. REGISTRAR
17
ITA No. 6140/Del/2014
Assessment year 2011-12
Date of dictation
Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order 1 18