IN HIGH COURT OF DELHI AT NEW DELHI + ITA No. 292/2014 Reserved on : 22nd July, 2014 % Date of Decision : 18th September, 2014 DIRECTOR OF INCOME TAX (INTL. TAX.)-II ....Appellant Through Mr. Kamal Sawhney, Sr. Standing Counsel with Mr. Sanjay Kumar, Jr. Standing Counsel. Versus PANALFA AUTOELEKTRIK LTD. Respondent Through Mr. Satyen Sethi, Advocate. CORAM: HON BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO SANJIV KHANNA, J. present appeal by Revenue, which arises out of proceedings under Section 195/197 of Income Tax Act, 1961 ( Act , for short), relating to assessment year 2010-11 on application filed by Panalfa Autoelektrik Ltd. (assessee, for short), requires adjudication of following substantial question of law:- Whether ITAT was right in holding that commission paid to M/s. Agenta World Trading and Consulting Establishment for procuring export orders, is not fee for technical services under Section 9(i)(vii) of Income Tax Act, 1961? 2. For sake of clarity, we record that impugned order passed by Income Tax Appellate Tribunal ( Tribunal , for short) is dated 25th October, 2013 and was passed in ITA 4654/Del/2012. 3. assessee made application dated 16th February, 2010 under Section 195(2) for authorization to remit Euro 1,40,055.53 as ITA 229/2014 Page 1 of 17 commission for arranging export sales and realizing payments to M/s. Agenta World Trading and Consulting Establishment, non-resident company registered in Liechtenstein. There is no Double Taxation Avoidance Agreement between India and Liechtenstein and, therefore, in present appeal we are only concerned with question of receipt, accrual or deemed accrual of said income in India as per mandate of Act. 4. Assessing Officer relying upon decision of Authority for Advance Rulings in In Re: M/s. Wallace Pharmaceuticals P. Ltd. [2005] 278 ITR 97 (AAR) held that commission payment to non-resident company on procuring orders was taxable as fee for technical service under sub-clause (b) to Section 9(1) (vii) of Act. initial direction that tax should be deducted at source @ 20% recorded in order dated 4th May, 2010, was modified/reduced to 10% vide order dated 8th November, 2010 after recording that deduction at higher rate would not be applicable in present case. 5. Commissioner of Income Tax (Appeals), however, reversed aforesaid finding holding that commission payment in present case was not in nature of fee for technical service and he distinguished decision in case of Wallace Pharmaceuticals P. Ltd. (supra). said finding has been affirmed by Tribunal in impugned order. 6. In order to appreciate controversy, we would first like to refer and interpret Sections 5(2), 9(1)(i) and 9(1)(vii) of Act, though, Assessing Officer in present case had not invoked Section 9(1)(i) of Act. relevant provisions read as under:- ITA 229/2014 Page 2 of 17 5. Scope of total income. xxx (2) Subject to provisions of this Act, total income of any previous year of person who is non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1. Income accruing or arising outside India shall not be deemed to be received in India within meaning of this section by reason only of fact that it is taken into account in balance-sheet prepared in India. xxx 9. Income deemed to accrue or arise in India. (1) following incomes shall be deemed to accrue or arise in India (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through transfer of capital asset situate in India. Explanation-1 For purposes of this clause (a) in case of business of which all operations are not carried out in India, income of business deemed under this clause to accrue or arise in India shall be only such part of income as is reasonably attributable to operations carried out in India; xxx Explanation 4 For removal of doubts, it is hereby clarified that expression through shall mean and include and shall be deemed to have always meant and included by means of , in consequence of or by reason of . xxx (vii) income by way of fees for technical services payable by xxx (b) person who is resident, except where fees are payable in respect of services utilised in business or profession carried on by such person outside India or for purposes of making or earning any income from any source outside India; or xxx ITA 229/2014 Page 3 of 17 Explanation 2. For purposes of this clause, fees for technical services means any consideration (including any lump 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 . 7. Section 5(2) states that total income of person, who is non- resident, includes income from all sources which (a) is received or deemed to be received in India in such year by or on behalf of such person; (b) accrues or arises in India; or (c) is deemed to accrue or arise in such year in India. Explanation 1 of aforesaid section clarifies that income accruing or arising out of India shall not be deemed to be received in India by reason of fact that it is taken into account in balance sheet prepared in India. We are required to decide, whether commission paid to non-resident would be income deemed to be earned in India. 8. Section 9, as is clear from heading itself, does not deal with income which is received or accrued or has arisen in India but deals with income which does not fall under any of aforesaid categories. Section 9 creates deeming fiction of income which is not received in India or accrues or arises in India but is deemed to accrue or arise in India. While interpreting deeming clause, courts have to be cautious that they should not expand scope beyond what is mandated and required by deeming clause. deeming clause by its very nature enacts fiction to treat what is unreal as real and, therefore, unless situation is covered under language of provision, its scope should not be expanded and widened beyond what is clearly apparent and perceivable. In such cases, purpose should be ITA 229/2014 Page 4 of 17 ascertained why legal fiction is created and then full effect should be given to it without being boggled down or bidden when it comes to inevitable corollaries, because we imagine unreal as real. 9. Section 9(1)(i) brings to tax income of non-resident accruing or arising, whether directly or indirectly, through and from any business connection in India, or through or from any property in India etc. 10. What is meant by business connection has been interpreted by Supreme Court in case of CIT, Punjab versus R.D. Aggarwal and Co. [1965] 56 ITR 20 and subsequently in Barendra Prasad Ray versus ITO [1981] 129 ITR 295. We need not dwell on said aspect in detail for several reasons, though Circular No. 23 dated 23rd July, 1969 issued by Central Board of Direct Taxes would not be applicable as it stands withdrawn with effect from 22nd October, 2009 vide Circular No.7 of 2009. Firstly, Assessing Officer had not invoked said provision; secondly, as per Explanation 1 clause (a) to Section 9, in case of business of which all operations are not carried out in India, only such part of income as is reasonably attributable to operations carried out in India is deemed to be accrued or arisen in India under clause 9(1)(i). By Finance Act, 2012, Explanation 4 has been added with retrospective effect from 1 st April, 1962, clarifying expression through to have always meant and included, by means of , in consequence of or by reason of . There is no finding by Assessing Officer and there is no allegation that non-resident was carrying on any operation whatsoever in India. Thus, there is no question of attributing any income to operations carried on by non-resident in India. No such argument has been addressed. ITA 229/2014 Page 5 of 17 11. Assessing Officer in his order under Section 195/197 of Act has relied upon judgment in case of Wallace Pharmaceuticals P. Ltd. (supra), which has been distinguished on facts by first appellate authority and Tribunal. factual matrix, including agreement between assessee and non- resident and terms, have not been spoken of by Assessing Officer. These have been referred to and examined by Commissioner of Income Tax (Appeals). But first, we examine Section 9(1)(vii) of Act. 12. In present case, clause (b) to Section 9(1)(vii) would be applicable as respondent-assessee, payer was resident of India. exceptions carved out under clause (b) are not applicable as it is not case of respondent-assessee that fee paid was in respect of services to be utilised in business or profession carried out by payer outside India, or for purpose of making or earning of any income from any source outside India. respondent-assessee s manufacturing unit was in India and it would be proper to hold that source of income would be manufacturing unit of respondent-assessee in India, even if sale proceeds were on account of exports. 13. main question and issue, which would arise is whether payment made to non-resident would be covered under expression, fee for technical services as defined in Explanation 2 quoted above. There are three categories of technical services as per Explanation 2; managerial services, technical services and consultancy services, and it includes provisions for services of ITA 229/2014 Page 6 of 17 technical and other personnel albeit there are specific exclusions, but we are not concerned with same in present appeal. 14. expressions managerial, technical and consultancy services have not been defined either under Act or under General Clauses Act, 1897. said terms have to be read together with word services to understand and appreciate their purport and meaning. We have to examine general or common usage of these words or expressions, how they are interpreted and understood by persons engaged in business and by common man who is aware and understands said terms. expression management services was elucidated upon by this Court in J.K. (Bombay) Limited versus CBDT and Another, [1979] 118 ITR 312 in following terms:- 6. It may be asked whether management is not technical service. According to Article on Management Sciences , in 14 Encyclopaedia Britannica 747, management in organisations include at least following: (a) discovering, developing, defining and evaluating goals of organization and alternative policies that will lead toward goals, (b) getting organization to adopt policies, (c) scrutinizing effectiveness of policies that are adopted, (d) initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organisations. Traditionally administration was distinguished from management, but it is now recognised that management has role even in civil services. According to Fontana Dictionary of Modern Thought, page 366, management was traditionally identified with running of business. Therefore, management as process is practised throughout every organization from top management through middle management to operational management. ITA 229/2014 Page 7 of 17 Recently this Court in CIT versus Bharti Cellular Limited and Others, [2009] 319 ITR 139 had observed:- word "manager" has been defined, inter alia, as: "a person whose office it is to manage organization, business establishment, or public institution, or part of one; person with primarily executive or supervisory function within organization, etc., person controlling activities of person or team in sports, entertainment, etc." It is, therefore, clear that managerial service would be one which pertains to or has characteristic of manager. It is obvious that expression "manager" and consequently "managerial service" has definite human element attached to it. To put it bluntly, machine cannot be manager. Reference can be also made to decision of Authority for Advance Rulings in In Re: Intertek Testing Services India Private Limited, [2008] 307 ITR 418, wherein it was elucidated:- First, about connotation of term managerial . adjective managerial relates to manager or management. Manager is person who manages industry or business or who deals with administration or person who organizes other people s activity [New Shorter Oxford Dictionary]. As pointed out by Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, management includes act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering business. 15. services rendered, procurement of export orders, etc. cannot be treated as management services provided by non- resident to respondent-assessee. non-resident was not acting as manager or dealing with administration. It was not controlling policies or scrutinising effectiveness of policies. It did not perform as primary executor, any supervisory function whatsoever. This is clear from facts as recorded by Commissioner of ITA 229/2014 Page 8 of 17 Income Tax (Appeals), which have been affirmed by Tribunal. Commissioner of Income Tax (Appeals) has quoted excerpts of agreement between respondent-assessee, who has been described as PAL , and non-resident, who has been described as AGENTA . relevant portions thereof read as under:- 2. Appointment (1) PAL hereby appoint AGENTA as its commission agent for sale of its products within territory to purchaser(s) during terms of this agreement, subject to and in accordance with terms and conditions set out herein and AGENTA agrees to and accepts same. (2) It is agreed by and between parties that AGENTA S representations and acts on behalf and for PAL viz-a-viz any third party shall be legally binding on PAL only when same are authorized by virtue of written and signed authorisation executed by PAL in favour of AGENTA. XXXXX 4. Commission (a) PAL agrees and AGENTA accepts that amount of commission payable to it shall be difference between consideration which PAL receives in terms of purchase contract/order form purchaser(s) and pre determined guaranteed consideration settled and agreed between parties, as described in Annexure 1 annexed hereto; (b) parties agree that all taxes applicable and required to be deducted in India to transaction contemplated herein at date of execution of this agreement and at any time in future during terms of this agreement shall be deducted from commission (as described herein above) before same is paid and transferred to bank account of AGENTA (herein referred to as commission payable) 16. non-resident, it is clear was appointed as commission agent for sale of products within territories specified and subject to and in accordance with terms set out, which non-resident accepted. non-resident, therefore, was acting as agent for ITA 229/2014 Page 9 of 17 procuring orders and not rendering managerial advice or management services. Further, respondent-assessee was legally bound with non-residents representations and acts, only when there was written and signed authorization issued by respondent-assessee in favour of non-resident. Thus, respondent-assessee dictated and directed non-resident. Commissioner of Income Tax (Appeals) has also dealt with quantification of commission and as per clause 4, commission payable was difference between price stipulated in agreement and consideration that respondent-assessee received in terms of purchase contract or order, in addition to pre-determined guarantee consideration. Again, indication contra to contention that non-resident was providing management service to respondent-assessee. 17. Revenue, which is appellant before us, has not placed copy of agreement to contend that aforesaid clauses do not represent true nature of transaction. Assessing Officer in his order had not bothered to refer and to examine relevant clauses, which certainly was not right way to deal with issue and question. 18. It would be incongruous to hold that non-resident was providing technical services. To quote from Skycell Communications Ltd. and Anr. Vs. Deputy Commissioner of Income Tax and Ors. (2001) 251 ITR 53 (Mad), word technical has been interpreted in following manner:- ITA 229/2014 Page 10 of 17 Thus while stating that technical service would include managerial and consultancy service, Legislature has not set out with precision as to what would constitute technical service to render it technical service . meaning of word technical as given in New Oxford Dictionary is adjective 1. of or relating to particular subject, art or craft or its techniques: technical terms (especially of book or article) requiring special knowledge to be understood: technical report. 2. of involving, or concerned with applied and industrial sciences: important technical achievement. 3. resulting from mechanical failure: technical fault. 4. according to strict application or interpretation of law or rules: arrest was technical violation of treaty. Having regard to fact that term is required to be understood in context in which it is used, fee for technical services could only be meant to cover such things technical as are capable of being provided by way of service for fee. popular meaning associated with technical is involving or concerning applied and industrial science . 19. said term was also interpreted by this Court in case of Bharti Cellular Limited and Others (supra) where emphasis was laid on element of human intervention, but we are not concerned with said aspect in present case. non-resident had not undertaken or performed technical services , where special skills or knowledge relating to 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 (see paragraph 24 below). 20. moot question and issue is whether non-resident was providing consultancy services. In other words, what do you mean by term consultancy services ? This Court in Bharti Cellular ITA 229/2014 Page 11 of 17 Limited and Others (supra) had referred to term consultancy services in following words:- 14. Similarly, word consultancy has been defined in said Dictionary as work or position of consultant; department of consultants. Consultant itself has been defined, inter alia, as person who gives professional advice or services in specialized field. It is obvious that word consultant is derivative of word consult which entails deliberations, consideration, conferring with someone, conferring about or upon matter. Consult has also been defined in said Dictionary as ask advice for, seek counsel or professional opinion from; refer to (a source of information); seek permission or approval from for proposed action . It is obvious that service of consultancy also necessarily entails human intervention. consultant, who provides consultancy service, has to be human being. machine cannot be regarded as consultant. AAR in case of In Re: P.No. 28 of 1999, reported as [1999] 242 ITR 208 had observed:- By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. category of technical and consultancy services are to some extent overlapping because consultancy service could also be technical service. However, category of consultancy services also includes advisory service, whether or not expertise in technology is required to perform it. 21. word consultant refers to person, who is consulted and who advises or from whom information is sought. In Black s Law Dictionary, Eighth Edition, word consultation has been defined as act of asking advice or opinion of someone (such as lawyer). It may mean meeting in which parties consult or confer. For consultation service under Explanation 2, there should be provision of service by non-resident, who undertakes to perform it, which acquirer may use. service must be rendered in form ITA 229/2014 Page 12 of 17 of advice or consultation given by non-resident to resident Indian payer. 22. In present, case commission paid for arranging of export sales and recovery of payments cannot be regarded as consultancy service rendered by non-resident. non-resident had not rendered any consultation or advice to respondent-assessee. non-resident no doubt had acquired skill and expertise in field of marketing and sale of automobile products, but in facts, as notice by Tribunal and Commissioner of Income Tax (Appeals), non-resident did not act as consultant, who advised or rendered any counseling services. skill, business acumen and knowledge acquired by non-resident were for his own benefit and use. non-resident procured orders on basis of said knowledge, information and expertise to secure their commission. It is case of self-use and benefit, and not giving advice or consultation to respondent-assessee on any field, including how to procure export orders, how to market their products, procure payments etc. respondent-assessee upon receipt of export orders, manufactured required articles/goods and then goods produced were exported. There was no element of consultation or advise rendered by non- resident to respondent-assessee. 23. Decision in case of M/s Wallace Pharmaceuticals Private Limited (supra) is clearly distinguishable as in said case non- resident consultant had to perform several services in nature of attending meetings on mutually agreeable dates and providing advice and counseling, which were in nature of consultancy services as they entailed support from product team, compliance with all legal ITA 229/2014 Page 13 of 17 and administrative formalities, including registration and marketing strategy, creation of entry into new markets, development and distribution channels, etc. work being rendered was in nature of services as consultant to Indian assessee. It included element of advice and was certainly recommendatory in nature. 24. OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- Technical services 39. For Group, services are of technical nature when special skills or knowledge related to technical field are required for provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, provision of knowledge acquired in fields such as arts or human sciences would not. As illustration, whilst provisions of engineering services would be of technical nature, services of psychologist would not. 40. fact that technology is used in providing service is not indicative of whether service is of technical nature. Similarly, delivery of service via technological means does not make service technical. This is especially important in e-commerce environment as technology underlying internet is often used to provide services that are not, themselves, technical (e.g. offering on-line gambling services through internet). 41. In that respect, it is crucial to determine at what point special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to service business. fee for provision of service will not be technical fee, however, unless that special skill or knowledge is required when service is provided to customer. For example, special skill or knowledge will be required to develop software and data used in computer game that would subsequently be used in carrying on business of allowing consumers to play this game on internet for fee. Similarly, special skill or knowledge is used to create ITA 229/2014 Page 14 of 17 troubleshooting database that customers will pay to access over Internet. In these examples, however, relevant special skill or knowledge is not used when providing service for which fee is paid, i.e. allowing consumer to play computer game or consult troubleshooting database. 42. Many categories of e-commerce transactions similarly involve provision of use of, or access to, data and software (see, for example, categories 7, 8, 9, 11, 13, 15, 16, 20 and 21 in annex 2). service of making such data and software, or functionality of that data or software, available for fee is not, however, service of technical nature. fact that development of necessary data and software might itself require substantial technical skills is irrelevant as service provided to client is not development of that data and software (which may well be done by someone other than supplier) but rather service of making data and software available to that client. For example, mere provision of access to troubleshooting database would not require more than having available such database and necessary software to access it. payment relating to provision of such access would not, therefore, relate to service of technical nature. Managerial services 43. Group considers that services of managerial nature are services rendered in performing management functions. Group did not attempt to give definition of management for that purpose but noted that this term should receive its normal business meaning. Thus, it would involve functions related to how business is run as opposed to functions involved in carrying on that business. As illustration, whilst functions of hiring and training commercial agents would relate to management, functions performed by these agents (i.e. selling) would not. 44. comments in paragraphs 40 to 42 above are also relevant for purposes of distinguishing managerial services from service of making data and software (even if related to management), or functionality of that data or software, available for fee. fact that this data and software could be used by customer in performing management functions or that development of necessary data and software, and management of business of providing it to customers, might itself require substantial management expertise is irrelevant as service provided to client is neither managing client s business, managing ITA 229/2014 Page 15 of 17 supplier s business nor developing that data and software (which may well be done by someone other than supplier) but rather making software and data available to that client. mere provision of access to such data and software does not require more than having available such database and necessary software. payment relating to provision of such access would not, therefore, relate to service of managerial nature. Consultancy services 45. For Group, consultancy services refer to services constituting in provision of advice by someone, such as professional, who has special qualifications allowing him to do so. It was recognised that this type of services overlapped categories of technical and managerial services to extent that latter types of services could well be provided by consultant. We broadly agree with aforesaid observations. However, in case of selling agents, we add note of caution that taxability would depend upon nature of character of services rendered and in given factual matrix, services rendered may possibly fall in category of consultancy services. Paragraphs 41 and 42 do not emanate for consideration in present case, and effect thereof can be examined in appropriate case [However, see Commissioner of Income Tax vs. Estel Communication P. Ltd. (2009) 318 ITR 185 (Del) and Skycell Communications Ltd. (supra)]. 25. Thus, 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 allow him to do so. In present case, aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to ITA 229/2014 Page 16 of 17 view them in water tight compartments, but in present case this issue or differentiation is again not relevant. 26. In view of aforesaid discussion, substantial question of law mentioned above has to be answered in favour of respondent- assessee and against appellant-Revenue. appeal is accordingly dismissed. There will be no order as to costs. (SANJIV KHANNA) JUDGE (V. KAMESWAR RAO) JUDGE September 18th, 2014 VKR/NA/kkb ITA 229/2014 Page 17 of 17 Director of Income-tax (Intl. Tax.)-II v. Panalfa Autoelektrik Ltd