Madras high court approving by detailed analysis chennai itat leading order on commission payment no TDS u/s 195 to foreign agents (no taxability u/s 9) held: i) not technical services u/s 9(1)(vii) ii) mere business income : no operation in india ; Chennai ITAT in M/s Cosmic Global Ltd on extensive analysis of meaning og fees for technical services in context of Translation services : held not technical in nature (no disallowance for tds u/s 40(a)(i)); On behalf TDS concept clarified in case of Baskara Construction Pvt .Ltd
Kapil Goel
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 22.7.2014
T.C.(A).No.789 of 2013
The Commissioner of Income Tax
Chennai. .. Appellant
Vs.
Faizan Shoes Pvt. Limited
2.1. The facts in a nutshell are as under: The assessee is a company engaged in the business of manufacture and export of articles of leather. In the course of business, the assessee entered into an Agency Agreement with a non-resident agent to secure orders from various customers, including retailers and traders, for the export of leather shoe uppers and full shoes by the assessee. As per the terms of the Agency Agreement, the business will be transacted by opening letters of credit or by cash against document basis. The non-resident agent will be responsible for prompt payment in respect of all shipments effected on cash against document basis. The assessee undertook to pay commission of 2.5% on FOB value on all orders procured by the non-resident agent. The said commission paid by the assessee was claimed as expenditure in terms of Section 37 of the Income Tax Act (for brevity, the Act ).
2.2. The Assessing Officer disallowed the above said claim of the assessee under Section 40(a)(i) of the Act and held that payment of commission to the non-resident agent is to be dealt with in accordance with the provisions of Section 9(1) read with Section 195 of the Act. In paragraph (5) of the assessment order, referring to Section 9(1)(i) of the Act, the Assessing Officer held that the payment made to non-resident agent abroad is deemed to have been arisen in India. However, in paragraph (11) of the assessment order, the Assessing Officer held that the amount paid over to the non-resident agent is deemed to have accrued or arisen in India under Section 9(1)(vii) of the Act and the assessee failed to discharge its onus to prove that the payments were not made for the services covered under Section 9(1)(vii) of the Act. On this premise, the Assessing Officer concluded that since the assessee had not deducted tax at source on the payments made to the non-resident agent, as required under Section 195 of the Act, the claim made by the assessee that the amount paid over to the non-resident agent was expenditure was disallowed under Section 40(a)(i) of the Act.
.5. Challenging the said order passed by the Tribunal, the Revenue has preferred this appeal raising the following substantial questions of law:
1. Whether the Tribunal was right in holding that the disallowance of Rs.2,06,99,780/- being the payment made towards overseas agents commission paid to non-resident under Section 40(a)(i) for non deduction of TDS u/s. 195 is to be allowed?
2. Whether the finding of the Tribunal is proper, especially when the agent's service is technical in nature and would fall under the purview of Section 9(1)(vii) and the explanation to Section 9(2) would apply?
3.1. Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the Revenue, referring to Explanation (2) to Section 9(1)(vii) of the Act, would submit that the words fees for technical services are wide enough to engulf services in the nature of managerial, technical or consultancy services. He also relied upon the Explanation to Section 9(2) of the Act to plead that income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of Section 9(1) and shall be included in the total income of the non-resident, whether or not,
(1) the non-resident has a residence or place of business or business connection in India; or
(2) the non-resident has rendered services in India.
In other words, the argument advanced by the learned Senior Standing Counsel is that rendering of some services by the non-resident agent outside India would not make any difference, as the service rendered by him is more in the nature of technical services in relation to the business of the assessee.
3.2. The learned Senior Standing Counsel also relied upon certain observations made by the Assessing Officer to say that the nature of services rendered by the non-resident agent, which includes procuring orders and arranging letters of credit, would fall within the realm of the term fees for technical services as stated in Explanation (2) to Section 9(1)(vii) of the Act.
7. On a reading of Section 9(1)(vii) of the Act, we are not inclined to accept the plea taken by the learned Senior Standing Counsel appearing for the Revenue that commission paid by the assessee to the non-resident agent would come under the term fees for technical services . In the case on hand, for procuring orders for leather business from overseas buyers wholesalers or retailers, as the case may be, the non-resident agent is paid 2.5% commission on FOB basis. That appears to be a commission simpliciter. What is the nature of technical service that the so-called non-resident agent has provided abroad to the assessee is not clear from the order of the Assessing Officer. The opening of letters of credit for the purpose of completing export obligation is an incident of export and, therefore, the non-resident agent is under an obligation to render such services to the assessee, for which commission is paid. The non-resident agent does not provide technical services for the purposes of running of the business of the assessee in India. The services rendered by the non-resident agent can at best be called as a service for completion of the export commitment. We are, therefore, of the considered opinion that the commission paid to the non-resident agent will not fall within the definition of fees for technical services .
8. The other plea raised by Mr.T.Ravikumar, learned Senior Standing Counsel appearing for the appellant referring to Explanation to Section 9(2) of the Act is that the income of the non-resident shall be deemed to accrue or arise in India under Clauses (v) or (vi) or (vii) of Section 9(1) of the Act and shall be included in the total income of the non-resident, whether or not the non-resident has rendered services in India.
11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra. In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission.
12. In the light of the above said decisions and the finding rendered by us on the earlier issue that the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services , we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above finding, the decision of the Supreme Court in Transmission Corporation of A.P. Ltd. case, referred supra, relied upon by the learned Standing Counsel for the Revenue is not applicable to the facts of the present case. We find no infirmity in the order of the Tribunal in confirming the order of the Commissioner of Income Tax (Appeals).
refer:
i) Delhi high court in Eon case 246 CTR 40
ii) Bombay high court in Chirag bhakta case (2014 order)
iii) Allahabad high court in Model Exims etc
IN THE INCOME TAX APPELLATE TRIBUNAL
“B” BENCH, CHENNAI M/s Cosmic Global Ltd ./ITA No. 744/Mds/2014 Assessment Year : 2009- Date of Pronouncement : 30th July, 2014
We have heard the submissions made by the
representatives of both the sides and have perused the orders of
the authorities below. The Assessing Officer has made
disallowance of `2.63 Crores have held translation
services to be technical in nature. On the other hand, the
contention of the assessee is that the payment for translation services to non-residents does not fall within the ambit of “fees for
technical, managerial or consultancy services”.
7. Let us first understand the scope of the term “technical
services”. The expression “technical services” has not been
defined anywhere in the Act. However, “fees for technical
services” has been defined in Explanation 2 to Section 9(1)(vii) of
the Act, which reads as under:-
The dictionary meaning of the word “technical” as given in
Oxford English Dictionary is –
“(1) relating to a particular subject, art, or
craft, or its techniques requiring special
knowledge to be understood;
(2) involving or concerned with applied
and industrial sciences relating to the
operation of machines;
(3) according to a strict application or
interpretation of the law or rules”. The Chambers English Dictionary explains the term “technical” as
–
“(1) relating to practical skill or applied
science, especially those sciences useful
to industry;
(2) relating to a particular subject or
requiring knowledge of particular subject
to be understood;
(3) according to a strict interpretation of
the law or rules;
(4) belonging or relating to or showing a
quality of technique”.
In the present case, the assessee is getting the translation of the
text from one language to another. The only requirement for
translation from one language to other is, the proficiency of the
translators in both the languages, i.e. the language from which the
text is to be translated, to the language in which it is to be
translated. The translator is not contribution anything more to the
text which is to be translated. He is not supposed to explain or
elaborate the meaning of the text. Apart from the knowledge of
the language, the translator is not expected to have the
knowledge of applied science or the craft or the techniques in
respect of the text which is to be translated. A bare perusal of
Explanation 2 to Section 9(1)(vii), which explains “fees for
technical service” and the dictionary meaning of the word
“technical” makes it unambiguously clear that translation services rendered by the assessee are not technical services. Therefore,
the payment made by the assessee to the non-resident translators
would not fall within the scope of “fees for technical, managerial or
consultancy service” as detailed in Explanation 2. In our
considered view, the CIT(Appeals) has travelled beyond the
definition of “fees for technical service” to bring the translation
services within the compass of the term “fees for technical
services”. In our considered opinion, the payments made by the
assessee to non-residents on account of translation services do
not attract the provisions of Section 194J. The disallowance
made under Section 40(a)(i) is thus deleted. This ground of
appeal of the assessee is allowed
IN THE INCOME TAX APPELLATE TRIBUNAL , ‘B’ BENCH, CHENNAI ./
Assessment Year : 2008-09 I .T.A.No.1716/Mds/2013 M/s. Baskara Const ruct ion
Pvt .Ltd
On hearing both the parties, we are in agreement with
the conclusion of the Commissioner of Income Tax (Appeals)
that TDS deducted by Mr. Baskaran, Managing Director in his
individual capacity on behalf of the company can be treated
as compliance of deducting TDS by the company for the
purpose of section 40(a)(ia) of the Act. Thus, disallowance
cannot be made on this ground especially when the Managing Director has given an indemnity bond stating that
TDS was made on behalf of the company and he has not
claimed any credit for such TDS nor he will make any such
claim in future. Therefore, we reject the ground nos 3 to 3.4
of grounds appeal raised by the Revenue.