Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Expeditors International Of ... on 30 September, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Ms. Sushma Chowla, Vice President
Dr. B. R. R. Kumar, Accountant Member
(E-Court Module)
ITA No. 1740/Del/2015 : Asstt. Year : 2010-11
Asstt. Commissioner of Income Vs M/s Expeditors International of
Tax, Circle-1(2)(2), International Washington, 1015, 3rd Avenue,
Taxation, New Delhi 12th Floor, Seattle Washington
(APPELLANT) (RESPONDENT)
PAN No. AACCE4315R
Assessee by : Sh. Deepak Chopra, Adv.
Revenue by : Sh. Satpal Gulati, CIT DR
Date of Hearing: 25.08.2020 Date of Pronouncement: 30.09.2020
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the revenue against the order dated 28.01.2015 passed by the AO u/s 144C(13)/143(3) of the Income Tax Act, 1961.
2. Following grounds have been raised by the revenue:
"1. Whethe r on the facts and in the circumstances of the case and in law, the Hon'ble DRP is correct in holding that the receipts are not in the nature of fees for technical services.
2. Whether on the facts and in the circumstances of the case and in law, the Hon'ble DRP is correct in holding that the receipts of the asse ssee do not fall within the scope of section 9(1)(i) of the Inco me Tax Act."2 ITA No. 1740/Del/2015
Expeditors International of Washington
3. The facts and the arguments have bee n taken from the order of the ld. DRP.
4. The assessee is headquartered in Seattle, Washington, and is engaged in the business of providing global logistics services worldwide . The Company carries out operations in vario us segments such as airfreight, ocean freight & ocean services, customs brokerage and import services. The nature of services primarily includes consolidation o r forwarding of air and ocean freight. Additionally these services include distribution management, ve ndor consolidation, cargo insurance, purchase order management, and customized logistics info rmation. These ope rations are rendere d by the assessee from outside India.
Logistics Operations:
5. During AY 2010-11, the assessee entered into logistics transactions with Expediters International (India) Private Limited ('EI India') which is its Associated Enterprise. The Indian leg of the logistics co ntrary with me customers is handled by EI India from the customers premises to the Indian port of airport, while the assessee typically handles similar services at the other end o f the consignment for the USA re gion and vice-versa. The contract is entered into between El and the customer i.e. at the consignor's end in the case of export of consignment from India to overseas countries viz. USA and between the assesse and the customer i.e. at the consignor's end in the case of impo rt o f consignment from other countries viz. USA to India.
3 ITA No. 1740/Del/2015Expeditors International of Washington
6. The logistics o peratio ns covers a range of activities from packing, loading/unloading, trucking, /containe rization, custom clearance and other cargo handling activities besides moving the goods via air/sea. The nature of these operations is purely logistics support provided by the asse ssee for shipment of transport of goods, performed outside of India.
Reimbursement of Global Account Management ('GAM') expenses:
7. During the course of assessment procee dings, the assessee submitted the nature of GAM expenses which are incurred in relation to ro utine' business support services rendere d by a team of employees ("team") of the assessee, which has the respo nsibility to manage a set of global customers of the Expeditors gro up, having operations in many countries.
8. Global Account Managers ("GAMs") are appointed in order to manage the clients globally. GAMs manage global customer sales and act as a marke ting interface . They instruct, coach the local account teams belonging under them and support the account te ams throughout the whole project. The cost of these GAMs is allocated to all the re spective countries benefiting from these services. Accordingly, El India paid the assessee on account of GAM expe nses incurre d outside India.
9. The GAM staff is employed with the assessee and there is no employer - employee relationship be tween the employees and EI India. The assesse incurs expenses on the employees working as part of the GAM te am, viz. their salary, operational expenses (including salary, telephone e xpenses o f GAM team, 4 ITA No. 1740/Del/2015 Expeditors International of Washington conveyance, tour and travelling expe nses, entertainment expenses e tc). These actual expenses incurred by the assessee are allocated in proportion to the revenue earned by the relevant Expediter group entity in that country from that particular customer acco unt, which is managed by the GAM team.
10. These allocated expenses without any income element embedded in them are then reimbursed to the assessee on actual basis by El India.
11. The AO in the draft assessment order o n 26March 2014has proposed the following additions to the income and disallo wance of expe nses:
S.No. Particulars A mount (in
INR)
1. Returned income (Royalty income as
per return of incom e)
246,183,805
2. Fe e for Included S ervices Share in
logisti cs operations 1,653,922,311
Reimb ursement of GA M expenses 1,684,798,121
20,875,810
Total taxa ble inco me 1,930,981 ,9 30
12. Issue-1: Whether in the facts of the case, the AO is- right in assessing the cost allocation of international freight logistic support service s and reimbursement of Global Account Management ('GAM') expenses as Technical Services / Fee for Included Services ('FIS') as per the provisions of section 9(1)(vii) of the Act.
5 ITA No. 1740/Del/2015Expeditors International of Washington Briefly stated the facts of the case are that the assessee, a foreign company incorporated under the laws of USA, is engaged in the business of the provision of freight and forwarding and logistics services. The assessee company agreed with Expedito rs Inte rnational an Indian Company for providing the freight and logistics services to each other. Each party agreed to render services to the other in respect of impo rt and export of consignments. It is observed that Import consignments are those which originate outside India and are to be delive red in India. The services in origin of foreign country broadly comprise of overseas local pick, overseas ground transportation, overseas customer clearance, overseas documentation, loading and unlo ading and stuffing consignment in- cargo, agreed to be performed outside India. Expeditors Internatio nal, undertook to perfo rm destinatio n services on the arrival of consignment in India. The destination services to be carried o ut in India by Expe ditors International comprises of local unloading and loading of consignment, local custom clearance, local ground transpo rtation, local documentation etc. On the other hand, export consignments originate from India for the delivery of consignments outside India. The taxpaye r, unde rtook to perform the de stination, services outside India, similar to those performed by Expeditors Inte rnational in India as discussed above in the context o f Import consignments. During the year in question, the taxpayer received INR- 1,663,922,311 as inte rnational transportation fee from Expeditors International towards services rende red by it abroad on the above described export consignments. In addition, the taxpayer received the reimbursement of Global Account Management ('GAM') e xpanses of INR 20,875,810. Such amount 6 ITA No. 1740/Del/2015 Expeditors International of Washington was claimed by the taxpayer to be not chargeable to tax in India as per the provisions of sectio n 5 read with se ction 9 of the Inco me-tax Act, 1961. It was so claimed on the premise that the income arose from services rendered by it outside India and no operations in this regard were carried out in India. The taxpayer also claimed that its relationship with Expeditors Internatio nal was that of independent contractor and the business between them was done on principal to principal basis and at arm's le ngth. The Assessing Officer observed that the services rendered by the taxpayer were in the nature of freight and logistics services such as transport, procurement, custom clearance, sorting, delivery, wareho using and picking up services. In his opinion such services were covered under the provisions of section 9(1)(vii), being "fees for technical services".
13. The entire dispute centers around the taxability of the amo unt received by the assessee from Expe dito rs International in respect of se rvices performed outside India on the expo rt consignments of Expeditors Inte rnational originating from India. There is no quarrel over the nature of se rvices fo r which the abo ve referred amount has been paid to the assessee being, freight and logistics services such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services. The primary question which arises for conside ration of is as to whether the payme nt in respect of these services can be held as 'fees for technical services' within the meaning of section 9(1)(vii). The expression fees for te chnical services" has been defined in Explanation 2 to section 9(1)(vii) as under:-
fees for technical services" means any consideration (including 7 ITA No. 1740/Del/2015 Expeditors International of Washington any 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 recipie nt or consideration which would be income of the recipient changeable under the head 'Salaries".
14. A bare perusal of the above quoted pro vision indicates that the "fees for technical services" means any co nsideration for rendering of any "managerial, technical or consultancy se rvices"
but does not include the consideration for any construction, assembly etc. The Assessing Officer has held the services rendered by the assessee as Tee s fo r technical services' co ming within the sweep of "managerial, technical or consultancy services". On the contrary, the contention of the assessee has remaine d that the such services do no t fall within the ambit of any of the categories taken note of by the authorities belo w. It is to be examined as to whether the se rvices so provided by the assessee fall within the scope of 'managerial, technical or consultancy services' as per Explanation 2 to section 9 (1)(vii).
15. The ld. AR made the follo wing submission in this regard:
"The nature of such freight and logistics services range from packing, loading/unloading, trucking, containerization, customer clearance and other cargo handling activities besides moving the goods via air/sea.
16. In the case of a typical logistic consignment requiring impo rt of goods to India / export of goods from USA, the 8 ITA No. 1740/Del/2015 Expeditors International of Washington assessee executes the respective portion of the consignment in the USA region only whereas El India inde pendently carries out its part of the consignment in the India region. For the purpose of execution of such consignment, involving the export of the goods from the USA, the following activities are undertaken by the assessee until the consignment leaves the US airport/port:
i. Pick-up services which involve procuring goods/ packages from the customers in USA;
ii. Sorting of goods/ packages if required;
iii. Warehousing of goods due to the time lag between the
procurement and shipment of goo ds, if any;
iv. Nominating Customs Housing Agent (CHA) for export of
goods at the customs station;
v. Obtaining custom clearance at the airport/port;
vi. Loading of goods o nto cargo airplane or ship for
transportation.
17. After the goo ds have been loaded to the airplane / ship, the US portion of the logistic co ntract involving transportation of the consignment is completed.
18. Similarly, in respect of logistic consignment requiring export of goo ds from India/ import of goo ds to USA, the assessee executes the respective portion of the consignment in the USA region only whereas EI India independently carries out its part of the consignment in the India region. For the purpose of execution of such consignment, involving the import of goods to USA, the follo wing activities are unde rtake n by the assessee once the consignment reaches to the US airport/port:9 ITA No. 1740/Del/2015
Expeditors International of Washington i. Unloading of goods from cargo airplane or ship for transportation purposes in USA;
ii. Obtaining customs clearance at the airport/port; iii. Nominating Customs Housing Agent (CHA) for import of goods at the custom station;
iv. Warehousing of goods (if required) till the time the necessary customs -clearance s are obtained; v. Transportation of goods to the ultimate co nsumer in USA;
19. In line with worldwide acceptable standards in the logistics industry and the group's policy, the income from freight logistics operations represents gross inco me less costs for the actual transportatio n expense paid to third parties and other direct costs such as third party fees, commission, allowance, discount, delivery costs, cost of carrier's liability insurance, gateway costs, terminal fee etc. for the services provided at the origin. The reafter, the residual profits is then shared equally (i.e. 50/50 between assessee and El India) in respect of the impo rt and export of internatio nal cargo.
20. The assessee undertakes the logistics operations with respect to the consignment in the USA and no part of the ope rations or business was carried out by the assessee in India.
21. Further, the assessee places reliance on the decision of UPS SCS Asia Limited (Mumbai ITAT) wherein it was held that international freight forwarding logistics services performed by the upon resident tax payer o utside India is neither managerial nor technical nor consultancy in nature and hence would not be taxable as FTS as per provisions of the Act. It was further held 10 ITA No. 1740/Del/2015 Expeditors International of Washington that as such services were held outside India the same will not fall within the scope o f section 9(1 )(i) of the Act.
22. The assessee submits that the Transfe r Pricing officer (TPO) has already accepte d the logistics operations at arm's length price and no adverse observation has been given by him.
23. Also, no disallowance has been made with respect to freight logistics transactio ns in the scrutiny assessment proceedings of El India in any of the previous years."
24. The adjudication of the ld. DRP on the issue of 'managerial service' is as under:
"First, the Panel will consi der the ambit of 'managerial services' to test wheth er the instant services can qualify to be so call ed. Ordinaril y the managerial services mean manag ing the affairs b y laying down certain policies, standards and procedures and then evaluating th e actual p erforman ce in the light of th e p ro cedures so laid down. Th e managerial services co ntemplate not only execu tion bu t also the planning part of the activi ty to be done. If the overall planning asp ect is missing and o ne has to follow a di rection from th e other fo r executing p arti cular jo b in a particular manner, it canno t be said that the former is managing that affair. It would mean that th e directions o f the latter a re executed simplicity without there bei ng an y plann ing part invo lved in the execution and al so the evaluation of the performance. In the absence of any specific definition of th e ph rase "managerial services" as used in sectio n 9(1)(vii) d efining th e "fees for technical services", it need s to be considered in a commercial sense. It can not be interpreted in a narrow sense to mean simply execu ting the di rections of the o th er for doing a specific task. For instance, if good s are to b e lo aded an d some worker i s instru cted to place the goods on a carrier in a particu lar man ner, the 11 ITA No. 1740/Del/2015 Expeditors International of Washington act of the worker i n placin g the good s i n the prescribed manner, canno t be d escribed as man aging th e good s. It is a simple direction given to the wo rker who has to execute it in th e way prescrib ed. It is quite natu ral that some sort of application of mind is required in each and every asp ect of the work don e. As in the ab ove examp le when the worker will lift th e good s, he is expected to be vigi lant in picking up the goods moving towards th e carrier an d then pl acing them. Th is act of th e worker canno t be describ ed as manag ing th e goods b ecause he si mply followed the direction given to him. On th e other hand, 'managing' en compasses not o nly the simple execu tion of a wo rk, bu t also certain other aspects, such as planning for th e way in wh ich the execution is to be don e coupled wi th the overall responsibili ty in a larg er sense. Thus it is manifest that the word 'managing' is wider in sco pe th an the wo rd 'executing'. Rather th e later is embedd ed in the former and not vice versa.
Adverting to the facts of th e in stan t case, it is observed that th e taxpayer p erformed the freight and logistics servi ces outside India in respect of consignments originati ng, from India undertaken to be delivered by Exped ito rs Internation al. The ro le of the taxpayer i n the en ti re transaction was to perform only the destinatio n services ou tside India by unloading and- loading of con sign men t, custom clearan ce and transportation to th e ultimate customer. In the considered op inion of th is Pan el, it is too much to categorize such restricted services as manageri al services, this Panel, therefore, jettison this con tention rai sed by the Assessing Officer."
25. On the issue of 'fee fo r technical services' and with regard to the pro visions of Section 9(1 )(vii), the order of the ld. DRP is as under:
"Now the Panel takes up the next compon ent of the definition of "fees fo r technical services", being 'con sultancy services', whi ch has 12 ITA No. 1740/Del/2015 Expeditors International of Washington been pressed into service by the Assessing Officer to fortify his view that the amo unt recei ved by the assessee is covered within section 9(1)(vii). The word "consultancy" means giving some sort of consultation de hors the performance o r the execu ti on of any work. It is only when some con sideration is. given for rend ering some ad vice or opinion etc., that the same falls wi thin the scop e of "co nsul tancy services". The word 'con sultancy' exclud es actu al 'execution'. The nature of services, being freight and logi stics services p ro vided by the taxpayer to E l has not been disputed by th e Assessing Officer. Th ere is no thing like giving an y consu ltation worth the name. Rather such p ayment is wholl y and exclusively fo r th e execution in the sh ape of transport, p ro curement, customs clearan ce, delivery, wareh ousing and picking up services. That being the po sition, th is Panel op ine that the payment in lieu of freigh t and logistics services cannot b e ranked as consultan cy services. The on ly left over component o f the definition o f "fees for technical services"
taken n ote of by the Assessi ng Officer is "technical services". He ob served th at the taxpayer's business structure is time bound service co upled with con tinuous real time transmission o f informatio n by using and also making available its technolog y in the form of sophisticated eq uipments and software etc. Th e Assessing Officer has held that in order to ensure efficient and timely delivery an d to provide continuous real time info rmation, the taxpayer is required to use sophisticated technology for which the Indian entity is also eq ually in volved and to whom the taxpayer is committed to provide the req uisite software and equipment.
Th e Assessing Officer i n reachin g the concl usio n that the ta xpayer rend ered 'techn ical services' also o bserved th at its 'b usin ess structure is time bo und servi ce cou pled with continuo us real time transmissio n of informatio n by using an d also maki ng availab le ad van ced technolog y in the form of sophisticated equipment and software. He was swayed by the conten tion of the taxpayer that th e 13 ITA No. 1740/Del/2015 Expeditors International of Washington Expedi to rs Internatio nal o r th e ultimate custo mer could track th e mo vement of cargo with th e help of computers. The Panel no ted that the consideratio n received b y the taxp aye r did not incl ude an y consideratio n for the sup ply of any equipment to Expedito rs International. Now the Panel will examine as to wheth er the use of computer in an y mann er for kno wing th e location of the cargo at a particular time, can be held as technical service.
Explan ation to section 9(1)(vii) d efines the expression "fees for technical services" as con sideration fo r rendering 'manag erial, technical or consultan cy services'. It is seen that there is no definition o f th e term "tech nical services" in the Act.
Th e prin ciple of noscitur a socii s mand ates that the meaning of a word is to be judged b y th e company of other words which it keep s. Th is rule is wider in scop e than the rule of ejusdem generi s. In order to disco ver the meaning of a word which h as no t b een d efined in th e Act, the Hon 'ble Su preme Co urt has app lied the p rin cip le of noscitur a so ciis in several cases in clu ding Aravi nda Paramila Wo rks Vs. CIT repo rted .in 23 7 ITR 28 4 (SC). As noted above the Word 'technical' has been sandwiched between th e words 'managerial' and 'consultancy' in Explan ation 2 to sec. 9(1)(vii) an d no defin ition has been assigned to the 'technical' services in the relevant provision, we need to ascertain the meanin g of the 'technical services' from the overall meaning of th e wo rd s 'managerial' an d 'con sul tancy' services by applying the p rin cipl e or nosticur a so ciis. It has been held above that the 'managerial services' and 'consultan cy services' pre-suppose some so rt of direct human invo lvement. These services cannot b e conceived without the direct invol vement of man. These services can be rendered with or without any equipment, but the human involvement is inevitab le. Moving in the light of th is rule, th ere remains no doubt whatsoever th at the technical services can not b e contemplated wi thout the d irect involvement of human endeavor.
14 ITA No. 1740/Del/2015Expeditors International of Washington Wh ere simply an equipment or a stan dard facility alb eit develop ed or manufactured with the use of technolo gy is used, such a user cannot be characterized as using 'technical services'.
Coming back to th e facts o f the present case,, even if the Pan el accept th e Assessing Officer's po int o f view that the computer could be used , in tracing th e movement of the goods, such use of computer, thou gh indirect, remo te and not n ecessary, can not b ri ng the payment fo r freigh t and logistics servi ces within the. p urview of "tech nical services". The essen ce of the consideratio n for the payment is rendering o f services and not the use of computer. If incidentally compu ter is used at an y stage, which is otherwise not necessary fo r rendering such services, the paymen t for freight and logistics will not partake of the ch aracter of fees of 'technical services'. The Panel, th erefore, repel this co ntention raised by the Assessing Officer.
Th us, it can b e noticed that the paymen t made to the taxp aye r in qu estion is not a consideration fo r manag erial or technical or consultancy services. Th at being the po sition, it cannot fall within the ambit of section 9(1)(vii).
Section 4 provides that the income tax shall be ch arged o n th e to tal income of any ta xpayer of the p reviou s year fo r any assessmen t year at the rates in accordan ce with and subject to the p ro visions of this Act. S cop e of total income of any person h as b een enshrined in section 5. The taxpayer in question is a no n-resid ent co mpany. Section 5(2) man dates th at th e to tal income of a n on-resid ent includ es the income from wh atever source d erived which is received or is deemed to b e received in India; or accrues or arises or is deemed to accrue o r arise in India. The only possibili ty of the receipt by th e assessee in the p resen t facts and circumstances q ualifying for inclusion in the total in come, can be under sectio n 9. The Panel has 15 ITA No. 1740/Del/2015 Expeditors International of Washington ob served that se ction 9 (1 )(vii) is not applicabl e. Now let u s ex amine the prescrip tion of section 9 (1 )(i) which deals with the income accruin g or arisi ng from any business con nection in Ind ia. It provides that where an inco me accru es o r ari ses whether directly or i ndirectly through or from any b usiness conn ectio n in India etc., it sh all b e deemed to accrue or arise in India. Explan ation 1(a) states that in the case o f a b usin ess of wh ich al l operation s are not carried out in India, th e income of the business deemed u nder this clau se to accrue or arise in India shall be only such p art of the in come as is reasonably attributab le to the operations carried o ut in India. Thi s Explan ation makes it prominent that on ly that part of th e in come from business operati ons can be said to be accruing or arising in India, as is relatable to the carryi ng on of op erations in India. In other words, if a non-residen t earns any income fro m India b y means' of op erations carried on ou tside In dia, that will no t fall within the scope of section 9 (1)(i). It shows that unless' a non-resid ent earn s in come from business operati ons carried out in India, such income can not be deemed accrui ng or arising in India. Reverting to the facts o f the instant case, it is crystal clear tha t, the ta xpayer rend ered "International services" outside In dia which required th e payment in question . If this-is th e position, which has not even been disputed b y th e Assessing Officer, then there can be no question of roping su ch in come within the ken of section 9(1)(i) of th e Act.
It is, therefo re, patent that the p ayment recei ved by the taxpa yer neither falls u/s 9(1)(i) no r u/s 9 (1 )(vii). Since the inco me canno t b e descri bed as d eemed to accrue or arise in Ind ia an d there is no do ubt abou t such in come having not been received o r deemed to be received or accruing or ari sing in India, the taxabi lity of su ch income fail s. This Panel, th erefore, direct the Assessing Officer to delete th e ad dition made to th e income of the taxpaye r."
16 ITA No. 1740/Del/2015Expeditors International of Washington
26. Before us, the ld. DR relied on the order of the T PO while the ld. AR reiterated the submissions made before the ld. DRP and on the order of the ld. DRP.
27. The provisions of Section 9(1)(vii) are as under:
"9. (1) The fol lowing incomes sh all be deemed45 to accrue or arise in Indi a :--
(i) all in come accruin g or arising, wheth er directly or ind irectly, through or fro m any business connection in In dia, or through or from any property in India, or through or from an y asset or source of income in Indi a, [*** ] or throu gh the transfer of a capital asset situate in India.
[Exp lanation 1].--Fo r the purposes of this clau se--
(a) i n th e case of business of which all the op erations are not carri ed out in India, the income of the bu sin ess deemed under this clause to accrue or arise in India shall be o nly su ch part of the income as is reaso nably attri b utable to th e operations50 carri ed out in Ind ia ;
(b) in the case of a non-resid ent, no income shall be deemed to accrue or arise in India to him through or from operation s which are confin ed to the purchase of goods in India for the pu rpose of export ;
[* * *] [(c) in the case of a n on-resid ent, b eing a person engag ed in the business of running a n ews agency or of pub lishi ng newspap ers, magazin es or journals, no income shall be deemed to accrue o r arise in India to him thro ugh o r from 17 ITA No. 1740/Del/2015 Expeditors International of Washington activities which are confin ed to the co llection of news and vi ews in Ind ia for transmission o ut of India ;] [(d ) in th e case of a non-residen t, being--
(1) an individu al who is not a citizen of India ; or (2) a fi rm whi ch do es no t h ave any partner who is a citizen of India or who is resident in India ; or (3) a comp any which does not have any sh areho lder who is a citizen of In dia o r who i s resident in India, no in come sh all be deemed to accrue or arise in India to such ind ividu al, firm o r co mpany through o r from operations which are confin ed to the shooting of any cinematog raph film in India;] [(e) in the case of a foreign company engaged in the b usi ness of min ing of diamonds, no in come shall b e d eemed to accrue or arise i n India to it through or from th e activities which are confined to th e di splay o f uncut an d un assorted diamond in an y special zone no tified by the Central Go vernment in the Official Gazette in this behalf.] [Explanatio n 2.--Fo r the removal of do ubts, it is hereby declared th at "bu siness connection" shal l in clude any b usi ness activity carried out through a person who, acting on behalf of the non-resid ent,--
[(a) h as and habitually exercises in India, an au thority to conclude contracts on behalf of the non-resid ent or habitually concludes con tracts or h abitually plays th e princip al role leading to con clusion o f contracts by th at non-resident an d the contracts are--
18 ITA No. 1740/Del/2015Expeditors International of Washington
(i) in the name of the non-resid ent; o r
(ii) fo r the transfer of th e ownership of, or fo r the granting of the right to use, prop erty o wned by that no n-resident o r that no n-resident has the right to use; or
(iii) for th e provi sion of services by th e non-residen t; or]
(b) h as no such authority, but habitually maintains in In dia a sto ck of good s or merchandise from which he reg ularly d elivers goods or merchand ise on beh alf of the non-resid ent; or
(c) habitu ally secures orders in India, mainly or who lly for the no n-resident o r for th at n on-resid ent and other non -residents controlling, con trol led by, or sub ject to the same co mmon control, as th at non-residen t:
Provided that such business con nection shall not include any bu siness acti vity carried o ut through a broker, gen eral commission agent or any other agent having an independ ent status, if such broker, gen eral co mmi ssion agent o r an y other ag ent h aving an indep endent status is acting in the ordi nary course of his busi ness :
Provided further th at where such broker, general commission ag ent or any other agent wo rks mainly or wholly on behalf of a no n-resident (hereafter in this proviso referred to as the principal non-resid ent) or on beh alf o f such no n-resident and other non-resid ents which are controlled by the p rin cip al non- residen t or have a co ntrolling interest in the principal non- residen t or are subject to th e same common control as the principal non-resident, he shall no t be deemed to be a broker, general commission ag ent or an agent of an independ ent status.19 ITA No. 1740/Del/2015
Expeditors International of Washington [Exp lanation 2A.--For th e removal of doubts, it is hereby clarified that the signifi can t economic presence of a non- residen t in India shall constitute "business connection " in India an d "significant economic presence" for this purpose, sh all mean--
(a) transacti on in respect of any goods, services or p roperty carri ed out by a non-residen t in India in cluding provision of do wn load of data or so ftware in India, if the aggregate of payments arising from su ch transaction or transacti ons during the previous year exceeds such amount as may be p rescri bed;
or
(b) systematic and con tinuou s soliciting o f business activities or engaging in interaction with such n umb er of users as may be prescribed, in In dia through dig ital means:
Provided th at the transactions o r activi ties shall constitute significant econo mic presence in India, whether or not,--
(i) the agreement for such transactions or activities is en tered in Ind ia; or
(ii) the non -residen t has a residence or pl ace of business in India; o r
(iii) th e non -resident renders services in India:
Provided fu rther that only so much of income as is attributab le to the transactio ns or activities referred to in clause (a) or clause (b) shall be deemed to accrue o r ari se in In dia.] Following E xplanation 2 A shall be inserted in clau se (i) o f sub- section (1) of section 9 by the Fin ance Act, 2020, w.e.f. 1 -4- 20 22 :
Explan ation 2A.--For the removal of doubts, it is hereby declared that the si gnificant econo mic p resence of a non-20 ITA No. 1740/Del/2015
Expeditors International of Washington residen t in India shall constitute "b usi ness connection " in India an d "significant economic presence" for this purpose, sh all mean--
(a) transacti on in respect of any goods, services or p roperty carri ed out by a non-resident with any person in India includ ing provision of download of data o r software in In dia, if the aggregate o f payments arising fro m such transaction or transac tio ns du ring the previous year exceeds such amount as may be prescribed; or
(b) systematic and con tinuou s soliciting o f business activities or eng agin g in interacti on with such numb er of u sers i n India, as may be p rescrib ed:
Provided th at the transactions o r activi ties shall constitute significant econo mic presence in India, whether or not--
(i) the agreement for such transactions or activities is en tered in Ind ia; or
(ii) the non -residen t has a residence or pl ace of business in India; o r
(iii) th e non -resident renders services in India:
Provided fu rther that only so mu ch of in come as is attributab le to the transactio ns or activities referred to in clause (a) or clause (b) shall be deemed to accrue o r ari se in In dia.
Explan ation 3.--Where a b usin ess is carried on in India through a perso n referred to in clause (a) or clause (b) or clause (c) of E xplanation 2, onl y so much of income as is attributab le to the operations carried out in India shall be deemed to accrue o r ari se in Ind ia.] 21 ITA No. 1740/Del/2015 Expeditors International of Washington [Exp lanation 4.--Fo r the remo val of doub ts, it is hereby clarified that the expression "throug h" shall mean and in clu de an d shall be deemed to have always meant an d in clu ded "b y means of", "in consequ ence of" or "by reason of".
Explan ation 5.--Fo r the removal of doubts, it is hereby clarified that an asset or a capital asset bein g any share or interest in a comp any or entity registered o r in corpo rated ou tside Ind ia sh all be d eemed to be and shall always be deemed to have been situated in India, if the share or in terest derives, directly or indirectly, its valu e substantially fro m the assets located in India:] [Provi ded that nothi ng contained in this Exp lanation sh all ap ply to an asset or capital asset, which is held by a non- residen t b y way of in vestmen t, directly o r in directly, in a Fo reign In stitution al Investo r as referred to in clause (a) of the Explan ation to sectio n 115AD for an assessment year commencing on or after th e 1 st day of April, 2012 but before the 1 st day of April, 2015:] [Provid ed furth er that n othing contained in this Explanati on shall apply to an asset o r capital asset, which is held by a non- residen t by way of in vestmen t, directly or indirectly, in Category-I o r Category-II foreign po rtfolio investor under the Securities and Exchange Board of Indi a (Foreign Portfolio Investors) Regulation s, 2014 61a[p rior to their repeal], made under the Securities an d Exchange Board of India Act, 1992 (15 of 19 92):] [Provid ed al so that no thing contained in this Explanati on sh all ap ply to an asset or a capital asse t, which is held by a non- residen t by way of in vestmen t, directly or indirectly, in Category-I foreign portfolio investo r und er the Securities and 22 ITA No. 1740/Del/2015 Expeditors International of Washington Exchange Board of India (Forei gn Portfolio Investors) Reg ulatio ns, 2 019, made und er the Securiti es and Exchan ge Board of India Act, 1992 (15 o f 1992).] [Exp lanation 6.--Fo r the purposes of this clause, i t is hereby declared that--
(a) th e sh are or interest, referred to in E xplanation 5 , shal l be deemed to d erive its value su bstantially from the assets (whether tangible or in tangible) located in India, if, on the specified d ate, the value of such assets--
(i) exceeds th e amount of ten crore rupees; and
(ii) represents at least fifty p er cent o f the valu e o f all the assets owned by the compan y or entity, as the case may be;
(b) the value of an asset shall be the fair market value as on the specified date, of su ch asset without reduction of liabilities, if any, in respect of the asset, d etermin ed in such manner as may be p rescri bed;
(c) "acco unting period" means each period of twelve mon th s en ding with the 31st day of March :
Provided that where a company or an en ti ty, referred to in Explan ation 5, reg ularly adopts a period of twelve mon th s en ding on a day other than the 31st day of March for the pu rpose of--
(i) compl ying with the provision s of th e tax laws of the territory, of which it is a resident, for tax purposes; o r
(ii) reporting to p erson s holding th e share or interest, then , the period o f twelve months en ding with the oth er day shall be the accounting period o f the comp any o r, as the case may be, the entity:23 ITA No. 1740/Del/2015
Expeditors International of Washington Provided further that the first acco unting period of the comp any or, as the case may b e, the en tity shall begin from the date of its registrati on or incorpo rati on and end with the 31 st day of March o r such o th er day, as the case may be, following the date of such registration or in corpo ration, and the later acco unting perio d shall b e th e successi ve periods of twelve mon th s:
Provided also that i f the company o r the entity ceases to exist before the en d of accounting period , as aforesaid , then, the acco unting period shall end immediately befo re the co mpany or, as the case may b e, the en ti ty, ceases to exist;
(d) "specified d ate" means the--
(i) date on which the accoun ting period o f the company or, as the case may be, the entity end s preceding the d ate of transfer of a sh are or an in terest; or
(ii) date of transfer, if the book value of the assets o f the comp any or, as the case may be, the entity o n the date of transfer e xceeds the book value of th e assets as o n th e d ate referred to in sub -clause (i), b y fifteen per cent.
Explan ation 7.-- For the pu rposes of thi s cl ause,--
(a) no income shall be deemed to accrue or arise to a non-
residen t from transfer, outside India, o f any share of, or interest in, a co mpany or an en tity, reg istered o r in corpo rated ou tside India, referred to in th e Explanati on 5,--
(i) if su ch company or entity d irectly own s the assets situated in India and the transferor (whether in dividually o r along with its asso ciated enterprises), at an y time in th e twelve mon th s preceding the date of transfer, nei th er holds the right of manag ement o r control in relation to su ch company or entity, no r hol ds votin g power o r sh are cap ital o r interest exceedi ng 24 ITA No. 1740/Del/2015 Expeditors International of Washington five per cent o f the to tal voting power or total sh are capital or total in terest, as the case may be, of such co mpany or entity; or
(ii) if such comp any or en tity in directl y owns the assets situated in India and the transferor (wh ether individually or al ong with its associated en terp ri ses), at any time in the twelve months preceding the date of transfer, neither hold s the right of manag ement or control in relation to such comp any or en tity, no r hold s any rig ht in, or in relation to, such company o r entity wh ich would entitle him to the right of manag ement o r contro l in the company o r entity that directly owns the assets situated in Ind ia, nor holds such percentage of voting po wer o r share capital or interest in such company or en ti ty which results in holding of (eith er in dividually o r along with associated enterprises) a vo ti ng power or sh are capital or interest exceedi ng five per cent of the total votin g power or total share capital o r total interest, as the case may b e, of the comp any or entity that directly o wn s the assets situated in India;
(b) in a case where all the assets owned, directly or indirectly, by a company or, as the ca se may be, an entity referred to in the Explan ation 5, are not located in India, the in come of the no n-resident tran sferor, from transfer o utside In dia of a share of, or interest in, su ch comp any o r entity, deemed to accrue or arise in India under this clause, shall be only such part of the income as is reasonab ly attrib utable to assets located in Ind ia an d determined in such manner as may be p rescribed;
(c) "associated en terprise" sh all have the meaning assign ed to it in section 92A;] 25 ITA No. 1740/Del/2015 Expeditors International of Washington
(ii) inco me which falls under the h ead "Sal aries", if it i s earn ed63 in India.
[Explanatio n.--For th e removal of doubts, it is hereby declared that the inco me o f th e natu re referred to in thi s clause payabl e for--
(a) service ren dered i n India; and
(b) the rest p eriod o r l eave period which is p receded and succeed ed by services rendered in India and fo rms part of the service co ntract of employment, shall be regarded as income earned in In dia ;]
(iii) in come chargeabl e under th e head "Salaries" payab le by the Go vernment63 to a citizen of India for service outsi de India ;
(iv) a dividen d paid by an In dian company outside India ; [(v) in come by way of interest payable by--
(a) th e Governmen t ; or
(b) a person who is a residen t, except wh ere the interest i s payab le in respect o f an y debt incurred, o r moneys borrowed an d used, fo r the p urposes of a bu siness o r profession carri ed on b y such person ou tside India or for the purposes o f making or earn ing an y income fro m any source outside In dia ; or
(c) a person who is a non-resident, where the interest is payab le in respect o f an y debt incurred, o r moneys borrowed an d used, fo r the p urposes of a bu siness o r profession carri ed on by such p erson in India.
[Exp lanation.--For th e purpo ses of this clau se,--
26 ITA No. 1740/Del/2015Expeditors International of Washington
(a) it i s h ereby declared that in the case o f a non-resi dent, being a person eng aged in th e business of ban king , any interest p ayab le b y the permanent establishment in India of such non -resident to the head office or any permanent establishment o r an y o th er part of such non-resi dent outsi de India shall b e deemed to accrue o r arise in India and shall be chargeable to tax in addition to any in come attributab le to the permanent establi shment in India and th e p erman ent establishment in Indi a shall be deemed to be a person separate and independent of the non -resident p erson o f which it is a permanen t establishment and the provi sions of the Act relatin g to computation of to tal in come, d etermin ation of tax an d collection an d reco very shall apply accordingly;
(b) "permanent establishmen t" shall have the mean ing assi gned to it in clause (iiia) of section 92 F;]
(vi) income by way o f ro yalty6 7 payable by--
(a) th e Governmen t ; or
(b) a person who is a resident, excep t where th e royalty is payab le in respect of an y right, prop erty o r information used or services utilised fo r th e pu rposes of a bu sin ess or profession carried on b y such person outsid e Ind ia or for the pu rposes o f making or earn ing any income from any source ou tside India ; or
(c) a person who is a non -resident, where th e ro yal ty is payab le in respect of an y right, prop erty o r information used or services utilised fo r th e pu rposes of a bu sin ess or profession carried on by such person in India or for the pu rposes of making or earni ng any in come from any source in India :
Provided that nothin g contained in this clause shall ap ply in relatio n to so much of the in come by way of royalty as con sists 27 ITA No. 1740/Del/2015 Expeditors International of Washington of lump sum consid eration for the transfer outside India of, or the imp arting of info rmation ou tside India in resp ect of, any data, do cumentation, d rawin g o r speci fi cation relating to any patent, inven tion, mod el, design, secret formula or process or trade mark or simi lar prop erty, if such in come is payable in pu rsuan ce of an agreement made before th e 1 st day of April, 19 76, and the agreemen t is approved by the Central Government :
[Provi ded furth er that n othing co ntained in this clause sh all ap ply in relation to so mu ch o f the income b y way of royalty as consists of lu mp sum payment made b y a person, who is a residen t, fo r the tran sfer o f all o r any rights (i ncluding the gran ti ng of a licence) in resp ect of computer software supplied by a non-resident manufacturer along with a co mputer or computer-b ased equi pmen t un der any scheme approved u nder the Po licy on Computer Software Expo rt, Software Developmen t and Train ing, 19 86 of the Government of India.] Explan ation 1 .--For the p urposes o f th e [fi rst] proviso , an ag ree-men t made on o r after the 1st day of April, 1 976, sh all be deemed to have been made before that date if the ag reement is made in accordance with p roposals approved by the Central Govern men t befo re that date; so, however, that, where the recipient of the income b y way o f royalty is a foreign compan y, the agreement shall not b e deemed to have been mad e b efore th at date u nless, before the exp iry of the time allowed under sub -secti on (1 ) or sub -section (2 ) of section 139 (whether fixed origin ally o r on extension ) for furnishing the return of income for the assessment year commencing on the 1st d ay of April, 1977, or th e assessment year in resp ect of which such income first b eco mes chargeab le to tax und er th is Act, which ever as sessmen t year is l ater, the 28 ITA No. 1740/Del/2015 Expeditors International of Washington comp any exercises an option by furn ish ing a declaration in writing to the 7 0[Assessing ] Officer (su ch option bei ng final for that assessmen t year and fo r every subsequent assessment year) that the ag reement may be regarded as an a greement made b efore the 1st day of April, 197 6.
Explan ation 2.--For th e p urposes of this clause, "ro yalty"
means consideration (in cluding any lu mp sum considerati on bu t excluding an y con sid eration which would be the in come of the recipient charg eab le und er th e head "Capital g ains") for--
(i) the transfer of all or any ri ghts (including the granting of a licence) in respect of a patent, in vention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any info rmation co ncern ing th e working of, or the use of, a p atent, in ven tion, model, design, secret formula or process or trade mark or si milar prop erty ;
(iii) the use of any paten t, invention, model, design, secret formula or process or trade mark or si milar prop erty ;
(iv) the imparting o f any in formation concern ing technical, ind ustrial, commercial or scien tific knowledge, experience or skill ;
[(i va) the use or righ t to use any industri al, commercial or scientific equ ipment but not incl uding the amou nts referred to in section 44BB;]
(v) th e transfer o f all or any rights (including th e grantin g of a licence) in respect of any copyrig ht, literary, artistic or scientific work inclu ding films or vi deo tapes for use in connection with television o r tapes for u se in connection with radio broadcasting [, but not includ ing con sideration fo r the sale, distribution or exhibition of cinematog raphic films] ; or 29 ITA No. 1740/Del/2015 Expeditors International of Washington
(vi) th e rendering of any services in con nection with the activities referred to in sub -clau ses (i) to 71[(iv), (iva) and]
(v).
[Exp lanation 3.--For the purposes of this cl ause, "computer software" means any computer prog ramme recorded on any disc, tape, p erforated media or other information storage device and in cludes any su ch programme or an y customized el ectroni c data.] [Exp lanation 4.--Fo r the remo val of doub ts, it is hereby clarified that the transfer of all or any rights in respect o f any right, prop erty or informati on includes an d has always included transfer o f al l o r an y rig ht fo r use or righ t to use a computer software (including gran ting of a licence) irrespective of the medium through whi ch such right is transferred.
Explan ation 5.--Fo r the removal of doubts, it is hereby clarified that th e royalty includes an d has always included consideratio n i n respect of any right, property or information, whether o r not--
(a) the possession or co ntrol of such righ t, property or info rmation i s with the payer;
(b) such right, prop erty or in formation is used directly b y the payer;
(c) the location of such right, prop erty or in fo rmation is in India.
Explan ation 6.--Fo r the removal of doubts, it is hereby clarified that the exp ression "p ro cess" in clu des and shall be deemed to h ave always in clud ed transmission by satellite (including up-lin king, ampl ificatio n, conversion for down-
30 ITA No. 1740/Del/2015Expeditors International of Washington lin king of any signal), cable, o ptic fib re o r b y any other similar technology, whether or not su ch process is secret;]
(vii) in come by way o f fees for technical services7 5 payab le by--
(a) th e Governmen t ; or
(b) a p erson who is a resident, excep t where the fees are payab le in respect of services utilised in a business or profession carri ed on b y su ch p erson76 ou tside Ind ia or for the pu rposes o f making or earn ing any income from any sou rce ou tside India ; or
(c) a person who is a no n-resident, wh ere the fees are payab le in respect of services utilised in a business or profession carri ed on by such person in In dia o r fo r the purpo ses of making or earning any inco me from any source in India :
[Provi ded that nothing contain ed in th is clause shall ap ply in relatio n to any income by way of fees for technical services payab le in pu rsuan ce o f an agreement made before th e 1st day of Ap ril , 1976, and app ro ved b y the Central Govern ment.] [Exp lanation 1.--For the purposes of the foregoing p roviso, an ag reement made on o r after th e 1 st day of April, 1 976, sh all be deemed to have been made before that date if the ag reement is made in accordance with p roposals approved by the Central Govern men t b efore that date.] Explan ation [2].--For the pu rposes of this clau se, "fees for technical services" means any consideration (in clu ding any lump sum co nsi-deration) for the rendering o f any manag erial, technical o r con sultancy services (includ ing the provision of services of tech nical or oth er person nel) but does not in clu de consideratio n for any constru ction, assembly, mining or like project undertaken by th e recipient78 or consideration which 31 ITA No. 1740/Del/2015 Expeditors International of Washington would be income o f the recip ient chargeable under the head "Salaries";]"
28. Thus, on going through the provisions of the Act, facts of the case, business operations of the assessee, we hold that the services rende red by the assessee do not fall within the purview of managerial, consultancy o r technical services. The payment for freight and logistics cannot be treated as technical services. Similarly, the provisions of Se ction 9(1)(i) are not attracted in this case as no inco me has accrued or arised from the business connection abroad in India. The explanation states that only that part of income from business operations can be said to be accruing or arising in India only if it is relatable to the carrying of operations in India. T hus, the payment received by the assessee neither falls unde r Section 9(1)(i) or Section 9(1)(vii). Hence, we hereby decline to interfere with the directions of the Dispute Resolution Panel in this case.
29. In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 30 /09/2020.
Sd/- Sd/-
(Sushma Chowla) (Dr. B. R. R. Kumar)
Vice President Accountant Member
Dated: 30/09/2020
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR