ORDER SHEET IN HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax] ORIGINAL SIDE ITAT No. 19 of 2013 GA No. 188 of 2013 COMMISSIOINER OF INCOME TAX, KOL-IV Versus M/S. ANDAMAN SEA FOOD PVT. LTD. BEFORE: Hon'ble JUSTICE GIRISH CHANDRA GUPTA Hon'ble JUSTICE SUDIP AHLUWALIA Date : 23rd July, 2014. For Appellant : Mr. S. N. Dutta, Advocate For Respondent : Mr. R. K. Murarka, Advocate with Mrs. S. Roy Chowdhury, Advocate Court : subject matter of challenge in this appeal is judgment and order dated 19th June, 2012 by which learned Income Tax Appellate Tribunal agreeing with views of CIT (A) dismissed appeal preferred by revenue. Aggrieved by order of learned Tribunal, revenue has come up in appeal. facts and circumstances, briefly stated, are as follows: 2 During assessment year 2008-09 assessee paid consultancy charges amounting to sum of Rs.37,97,246/- on 27th March, 2008 and sum of Rs.2,62,25,400/- was credited to account of foreign party on 31st March, 2008. Thus, aggregate sum of Rs.3,00,22,646/- was claimed to have been incurred on account of consultancy charges, deduction in respect whereof was claimed by assessee. assessing officer issued show cause notice as to why payment should not be treated to have been made towards fees of technical services covered by explanation below Section 9(1)(vii) of Income Tax Act for which provisions of Section 95 were applicable for deduction of tax at source. assessee was also directed to show cause why expenditure allegedly incurred on account of consultancy charges should not be disallowed under Section 40(a)(i). assessee replied by letter dated 22nd November, 2010 whereby following explanations were furnished: In response to your above mentioned notice, we state that amount of Rs.2,62,25,400/-, being 1% of total value of forex derivatives was payable to non resident company M/s. Global Maharaja Pte. Ltd., Singapore, on a/c, of service rendered in relation to Forex Derivative Transacstions. Global Maharaja Pte. Ltd., rendered services outside India and its income is accrued outside India and payment is made outside India. company received show cause notice to explain why payment should not be treated as fees for technical services and non deduction of TDS, why same should not be disallowed as deduction. 3 In this regard we would submit that TDS was not made as payment related to service rendered from outside India. assessee was of opinion that these amount is not taxable in India, if there is any mistake for non deduction of TDS then it was inadvertent misteake purely on technical ground. On receipt of show cause notice assessee submits that this matter may be considered on merit as per law. assessee would request that no penal consequences should be thrust upon assessee. Please note that though assessee company provided liability for payment of Rs.2,62,25,400/- as on 31/03/2008 but out of this total liability, Rs.42,10,500/- already paid on 03/04/2008 i.e. next financial year. In meantime, company incurred huge loss in derivative transaction due to global financial crisis amounting to Rs.22.00 Crores. (Approx). In this context company requested to GMPL to waive liability and give us relief from huge payment burden for survival of company and foreign company after considering our present financial condition, gave consent to waive this liability and accordingly we have added back as income and reflected in profit & loss account for taxation purpose in next financial year amounting to Rs.2,20,14,900/-. assessing officer concluded that aforesaid payments were on account of technical services within meaning of Explanation 2 to Clause (vii) of sub-section (1) of Section 9. He also referred to Explanation introduced by 4 Finance Act, 2010 with effect from 1st June, 1976 which has been placed below sub-section (2) of Section 9 of Act. Aggrieved by order of assessing officer, assessee preferred appeal. CIT(A) in paragraph 18 of his judgment held as follows: 18. In circumstances even though consultancy services availed by assessee in India and which were rendered by GMPL from Singapore; fell within definition of fees for technical services envisaged by Sec. 9(1)(vii) of I T Act read with Explanation thereto; yet said consultancy services did not fall within scope of fees for technical services defined by Article 12(4) of DTAA between India and Singapore. Since in present case transaction was between tax residents of India and Singapore, tax resident of Singapore had option to avail provisions of said DTAA if provisions thereof were more beneficial to it. As per provisions of DTAA amounts received by GMPL were not taxable in India as fees for technical services because these services were outside ambit of Article 12(4). It is also noted that services rendered by GMPL were not in nature of independent personal services either and therefore not covered by Article 14 of DTAA. It is not AO s case that services were rendered, performed or provided by service provider in India. Services provided by GMPL had no connection or nexus with any permanent establishment of said Singapore Company in India. Under Article 7 of DTAA; income derived from provision of consultancy services in course of business of service provider; is taxable as business profits in country where permanent establishment of service provider is located. Provision or rendering of consultancy services by GMPL had nexus with its permanent establishment in Singapore. Nothing was brought on record by AO in his impugned order which even suggests that Singapore company had any permanent establishment in India. There is also no material on record which in any manner showed that rendering or provision of services took place or had any connection or nexus with GMPL s PE in India. In absence of any such information or evidence it 5 cannot be held that Singapore company received fees for consultancy services for services provided or rendered in India or they had connection with its PE in India. On facts and circumstances of case therefore I have no hesitation in holding that in absence of any PE in India belonging to Singapore company and as no evidence is on record which in any manner proved that services were rendered in India, fees for consultancy services were not chargeable to tax in India. learned Tribunal has endorsed views of CIT(A). Aggrieved by order of learned Tribunal, revenue has come up in appeal. questions, which fall for determination are: (a) Whether sum of Rs.3,00,22,646/- paid or credited to account of foreign resident by assessee on account of service rendered in relation to forex derivative transactions is chargeable to tax in India under Section 9(1)(vii) of Income Tax Act; (b) In case answer to first question is in affirmative, whether assessee was liable to deduct tax. Mr. Dutta, learned Advocate appearing for revenue-appellant, submitted that payment on account of technical services to non-resident is chargeable under Section 9(1)(vii). He drew our attention to Explanation 2, which provides as follows: Explanation [2] : For purposes of this clause, fees for technical services means any consideration (including any lump 6 sum consideration) for rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by recipient or consideration which would be income of recipient chargeable under head Salaries . He also drew our attention to Explanation introduced by Finance Act, 2007 with retrospective effect from 1st June, 1976 which provides as follows: Explanation.- For removal of doubts, it is hereby declared that for purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in total income of non-resident, whether or not non-resident has residence or place of business or business connection in India. He contended that both CIT(A) and learned Tribunal erred in taking view that aforesaid payment was not taxable in India. Mr. Murarka, learned Advocate, appearing for assessee, advanced following submissions: Double Taxation Avoidance Agreement, according to him, did not apply to transaction. He, however, drew our attention to Article 23 thereof, which provides as follows: 7 ARTICLE 23: INCOME NOT EXPRESSLY MENTIONED: Items of income which are not expressly mentioned in foregoing Articles of this Agreement may be taxed in accordance with taxation laws of respective Contracting States . He contended that although provisions contained in Double Taxation Avoidance Agreement did not apply to transaction in question and Article 23 of Double Taxation Avoidance Agreement left such matters to be dealt with in accordance with taxation laws of respective Contracting States sight cannot be lost of fact that under Article 7 of Double Taxation Avoidance Agreement, income arising out of business to non resident who does not have permanent establishment in this country is not taxable in India. He contended that Supreme Court in case of Director of Supplies and Disposal vs. Member, Board of Revenue, West Bengal, reported in (1967) 20 Sales Tax Cases 398 held as follows: expression business though extensively used is word of indefinite import. In taxing statutes it is used in sense of occupation or profession which occupies time, attention and labour of person, normally with object of making profit. To regard activity as business there must be course of dealings, either actually continued or contemplated to be continued with profit-motive, and not for sport or pleasure. In Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, Das, J., delivering judgment of Court observed: 8 word business connotes some real, substantial and systematic or organised course of activity or conduct with set purpose . He contended that since word business is word of indefinite import , it cannot be said that services rendered by non resident was not in course of their business. It should, therefore, be held that income accrued to non resident on account of business. Since non resident does not have any permanent establishment in this country, under Article 7 of Double Taxation Avoidance Agreement, income would not be taxable in India. second submission advanced by Mr. Murarka is that explanation under sub-section (2) of Section 9 of Income Tax Act was inserted by Finance Act, 2010 albeit with retrospective effect from 1st June, 1996. He contended that assessee could not have foreseen amendment to be made in year 2010. transaction, in fact, took place during financial year 2007-2008. Therefore, for such lapse, assessee should not be held liable. We have considered rival submissions. first submission of Mr. Murarka has not impressed us. Sub-section (2) of Section 90 of Income Tax Act may, in that regard, be taken into consideration which provides as follows: 90. (2) Where Central Government has entered into agreement with Government of any country outside India or specified territory outside India, as case may be, under sub- section (1) for granting relief of tax, or as case may be, avoidance of double taxation, then, in relation to assessee to whom such 9 agreement applies, provisions of this Act shall apply to extent they are more beneficial to that assessee. rigour of Income Tax Act can be lessened only in those cases where agreement entered into between Central Government and Government of any other country outside India is applicable to transaction. When agreement admittedly is not applicable to transaction, question of avoiding applicable laws of this country cannot legitimately arise. Mr. Murarka wants us to give benefit of Article 7 of Double Taxation Avoidance Agreement although same does not apply to this transaction. When Contracting States wanted to make provision for profits arising out of business, they also had agreed as to nature of transaction to which agreement arrived at by them shall be applicable. Court cannot extend field of Article-7 of agreement entered into between Central Government and Government of Singapore. word business may be used as word of indefinite import . word business is word of general use. It is not case of assessee that sum of more than Rs.3,00,00,000/- was paid or credited to non resident on account of business profits. case of assessee, on contrary, is that said sum was paid or credited on account of services in relation to Forex Derivative Transactions . Therefore, case of assessee is that some sort of service was rendered in lieu whereof aforesaid sum was paid or credited. During hearing we are told that service was advisory in nature. copy of agreement dated 14th April, 2007 claimed to have been entered into between assessee 10 and non-resident was also placed on record. Clause 5 thereof reads as follows: 5) It is here in agreed under this MOU between ASF and GMPL that GMPL will provide expert guidance and consultancy using either its own in house expertise or by outsourcing same to ASF for all its forex deals related to derivatives, futures and options entered into by ASF from this date till 31/3/2008. From Clause 5 it appears that non-resident agreed to provide expert guidance and consultancy in lieu of agreed consideration. Money was payable on account of specific purpose indicated above. It is not, therefore, possible for us to hold that aforesaid sum accrued to non-resident on account of business profit as contended by Mr. Murarka. For aforesaid reasons, first submission of Mr. Murarka is rejected. second submission advanced by Mr. Murarka is not of much significance either. Before explanation was added to sub-Section (2) of Section 9 of Act by Finance Act, 2010, there was already explanation introduced by Finance Act, 2007 with retrospective effect from 1st June, 1976 which provides as follows: (i) Explanation.- For removal of doubts, it is hereby declared that for purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in total income of non-resident, 11 whether or not non-resident has residence or place of business or business connection in India. Mr. Murarka contended that explanation added by Finance Act, 2007 quoted above did not contain provision whether or not non- resident has rendered services in India. We fail to understand how can it be said that services were not rendered in India in case before us. It is admitted position that services were consumed in India. nature of service, as already indicated, was providing expert guidance and consultancy which may have been communicated from abroad through electronic media. But service would not be complete until it reached assessee. Therefore, service must have been received in India. It is, therefore, difficult to see how argument can be sustained that services were not rendered in India. case of assessee is that services were rendered from out of country. That may be true. process may have originated from out of country but process culminated into service in this country only. Any service which never reached assessee cannot be said to have been rendered to him. Only service which reached assessee can be said to have been rendered to him. assessee does not have any place of business in Singapore. assessee has received whatever services have been rendered only in India. media used for purpose of communicating service has not been disclosed. Even if we presume that service was rendered through electronic media, conclusion is irresistible that process of rendering services could not have been concluded outside India. We are as such of opinion that even without 12 amendment introduced by Finance Act, 2010, liability of foreign resident to taxation under Indian laws was there. amendment introduced by Finance Act, 2010 has specifically been made with retrospective effect from 1st June, 1976. These are clarificatory amendments. They always have retrospective effect. In this case expressly they have been made retrospective. In matter of taxation, equity has no place. When law has been amended with retrospective effect Court has to proceed on basis that amendment was always there with effect from 1st June, 1976. Therefore, transaction which took place during financial year 2007-08 could not have been saved, in any case. second submission of Mr. Murarka is, therefore, not acceptable. For reasons discussed above, first question formulated above is answered in affirmative and in favour of revenue. second question is consequential question and is also answered in affirmative and in favour of revenue. appeal is, thus, allowed. Mr. Murarka prayed for stay of operation of this order. order shall remain stayed for period of eight weeks. (GIRISH CHANDRA GUPTA, J.) (SUDIP AHLUWALIA, J.) 13 Sm./Km./A/s. Commissioner of Income-tax, Kol-IV v. M/s. Andaman Sea Food Pvt. Ltd