IN HIGH COURT OF JUDICATURE AT MADRAS DATE : 24.03.2015 CORAM HONOURABLE MR. JUSTICE R.SUDHAKAR AND HONOURABLE MR. JUSTICE R.KARUPPIAH T.C.A. NO. 137 OF 2015 Commissioner of Income Tax Chennai. .. Appellant - Vs - M/s.Fluidtherm Technology Pvt. Ltd., 132, 3rd Main Road, Industrial Estate, Ambattur, Chennai - 600 058. .. Respondent Appeal filed under Section 260A of Income Tax Act against order dated 22.05.2014 passed by Income Tax Appellate Tribunal, 'A' Bench, Chennai, made in ITA No.199/Mds/2014 for assessment year 2009-10. For Appellant : Mr. T.R.Senthil Kumar Standing Counsel JUDGMENT (DELIVERED BY R.SUDHAKAR, J.) This Tax Case (Appeal) is filed by appellant/Revenue as against order passed by Income Tax Appellate Tribunal for assessment year 2009-10 raising following questions of law :- 2 1) Whether under facts and circumstances of case, Income Tax appellate Tribunal was correct in deleting disallowance made under Section 40(a)(ia) by assessing officer towards export commission paid by assessee to non-resident on which it had failed to deduct TDS? 2) Whether under facts and circumstances of case, Income Tax Appellate Tribunal was correct in holding that assessee has no liability to deduct tax at source under Section 195 on payment made to non- resident towards export sales commission? 3) Whether under facts and circumstances of case, Income Tax Appellate Tribunal was correct in holding that non-resident has no business connection for export sales commission received from assessee? 4) Whether under facts and circumstances of case, Income Tax Appellate Tribunal was correct in holding that assessing officer did not establish existence of business connection and therefore there is no liability to deduct tax at source, without appreciating fact that onus is on assessee to show that it is not liable to deduct at source?" 2. facts, in nutshell, are as hereunder :- assessee is doing business of strategic and consultancy services limited and filed its return of income for assessment year 2009-10 3 declaring income of Rs.1,42,51,852/-. return was processed under Section 143 (1) of Act. Thereafter, case was selected for scrutiny and notice under Section 143 (2) was issued and served on assessee. Assessing Officer, after calling for details from assessee, completed assessment under Section 143 (3) and assessed total income at Rs.1,73,25,104/- by making disallowances under Section 40(a)(ia) of Income Tax Act. 3. Aggrieved by said order, assessee preferred appeal before Commissioner of Income Tax (Appeals), who by following decision of Tribunal in case of M/s.Farida Shoes P. Ltd. (ITA No.159/Mds/2013 dated 11.4.2013) and M/s.Delta Shoes P. Ltd. (ITA No.909/Mds/2013 dated 31.7.2013) allowed appeal filed by assessee. relevant portion of order of Commissioner of Income Tax (Appeals), is extracted hereunder, for better clarity :- In present appeals of assessee also facts and circumstances are exactly identical to those involved in case of M/s.Farida Shoes P. Ltd. for A.Y. 2008-09 (except type of product exported). Therefore, since issue involved in present appeals is same and facts are exactly identical, above decision of ITAT, (M/s.Farida Shoes P. Ltd., in ITA No.159/Mds/2013 dated 11.04.2013), is equally applicable to facts of present appeals of instant assessee for A.Y.2009-10 under consideration. Therefore, 4 respectfully following decision of ITAT, in case of M/s.Farida Shoes P. Ltd. (in ITA No.159/Mds/2013 dated 11.04.2013), I hold that above transactions of sales commission payments to non-resident for procuring export orders, are not assessable to tax in India and consequently assessee company is not under any obligation to deduct TDS on above commission payments u/s.195 of Act. Therefore, provisions of sec.40(a)(i) have no application in present case. Accordingly, additions made by Assessing Officer in assessment year under consideration, on account of disallowance of commission payments for non-deduction of TDS u/s.40(a)(i) r.w.s. 195 of Act, are not justified and deleted." 4. Against said order of Commissioner of Income Tax (Appeals), appellant/Revenue filed appeal before Tribunal. Tribunal while agreeing with findings of Commissioner dismissed appeal holding as follows: "When non-resident agent has rendered all services outside India and payments were also received outside India, having no PE or business connection in India, there is no reason to hold that foreign agent has earned any taxable income in India out of commission paid by assessee. Where no such tax liability is fastened on payee who received commission, there is no obligation on part of payer to deduct tax in India." 5 5. Aggrieved against said order, present appeal has been filed by appellant/Revenue. 6. Heard Mr.T.R.Senthil Kumar, learned standing counsel appearing for appellant/Revenue and perused materials found in typed set of documents. 7. This Court, in case of Commissioner of Income Tax Vs Faizan Shoes Pvt. Ltd. (48 Taxman.com 48), had occasion to consider similar issue and after exhaustive analysis of different provisions of Income Tax Act and also taking into consideration law laid down by Supreme Court with regard to said provisions, held as follows :- 6. Before adverting merits of case, it would be apposite to refer to section 9(1)(i), section 9(1)(vii) and section 9(2) of Act, which read as under : Section 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 ; ... (vii) income by way of fees for technical services payable by 6 Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of agreement made before 1st day April, 1976, and approved by Central Government. Explanation 1. For purposes of foregoing proviso, agreement made on or after 1st day of April, 1976, shall be deemed to have been made before that date if agreement is made in accordance with proposals approved by Central Government before that date. 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'. (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to person residing permanently outside India shall not be deemed to accrue or arise in India, if pension is payable to person referred to in article 314 of Constitution or to person who, having been appointed before 15th day of August, 1947, to be Judge of Federal Court or of High Court within meaning of Government of India Act, 1935, continues to serve on or after commencement of Constitution as Judge in India. Explanation. For removal of doubts, it is hereby 7 declared that for purposes of this section, income of non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub- section (1) and shall be included in total income of non-resident, whether or not, (i) non-resident has residence or place of business or business connection in India ; or (ii) non-resident has rendered services in India." 7. On reading of section 9(1)(vii) of Act, we are not inclined to accept plea taken by learned senior standing counsel appearing for Revenue that commission paid by assessee to non-resident agent would come under term "fees for technical services". In case on hand, for procuring orders for leather business from overseas buyers wholesalers or retailers, as case may be, non-resident agent is paid 2.5 per cent. commission on FOB basis. That appears to be commission simpliciter. What is nature of technical service that so-called nonresident agent has provided abroad to assessee is not clear from order of Assessing Officer. opening of letters of credit for purpose of completing export obligation is incident of export and, therefore, non-resident agent is under obligation to render such services to assessee, for which commission is paid. non-resident agent does not provide technical services for purposes of running of business of assessee in India. services rendered by non-resident agent can at best be called as service for completion of export commitment. We are, therefore, of considered opinion that commission paid to non- resident agent will not fall within definition of fees for 8 technical services. * * * * * * * * * 9. Explanation to section 9(2) of Act was substituted by Finance Act, 2010, with retrospective effect from June 1, 1976. above said explanation would come into play only if said amount paid would fall under headings : (i) income by way of interest as set out in section 9(1)(v) of Act ; or (ii) income by way of royalty as set out in section 9(1)(vi) of Act ; or (iii) income by way of fees for technical services as set out in section 9(1)(vii) of Act. 10. While dealing with section 9(1) of Act, Supreme Court in CIT v. Toshoku Ltd. [1980] 125 ITR 525(SC), on considering transaction where tobacco was exported to Japan and France and sold through non-resident assessees who were paid commission, held as under : "8. second aspect of same question is whether commission amounts credited in books of statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to non-resident assessees during relevant year. This takes us to section 9 of Act. It is urged that commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to department, had either accrued or arisen through and from business connection in India that existed between non-resident assessees and 9 statutory agent. This contention overlooks effect of clause (a) of Explanation to clause (i) of sub-section (1) of section 9 of Act which provides that in case of business of which all operations are not carried out in India, income of business deemed under that clause to accrue or arise in India shall be only such part of income as is reasonably attributable to operations carried out in India. If all such operations are carried out in India, entire income accruing therefrom shall be deemed to have accrued in India. If, however, all operations are not carried out in taxable territories, profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of operations carried out in taxable territories. If no operations of business are carried out in taxable territories, it follows that income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (see CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20(SC) and Carborandum Co. v. CIT [1977] 108 ITR 335(SC) which are decided on basis of section 42 of Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of Act). 9. In instant case, non-resident assessees did not carry on any business operations in taxable territories. They acted as selling agents outside India. receipt in India of sale proceeds of tobacco remitted or caused to be remitted by purchasers from abroad does not amount to operation carried out by 10 assessees in India as contemplated by clause (a) of Explanation to section 9(1)(i) of Act. commission amounts which were earned by non- resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. High Court was, therefore, right in answering question against Department." 11. facts of present case are akin to facts of decision in Toshoku Ltd.'s case, referred supra. In instant case also assessee engaged services of non-resident agent to procure export orders and paid commission. That apart, Commissioner of Income-tax (Appeals) as well as Tribunal have correctly applied principle laid down in GE India Technology Centre (P.) Ltd.'s case, referred to supra, to hold that assessee is not liable to deduct tax at source when non-resident agent provides services outside India on payment of commission. 12. In light of above said decisions and finding rendered by us on earlier issue that services rendered by non-resident agent can at best be called as service for completion of export commitment and would not fall within definition of fees for technical services, we are firm view that section 9 of Act is not applicable to case on hand and, consequently, section 195 of Act does not come into play. In view of above finding, decision of Supreme Court in Transmission Corporation of A. P. Ltd.'s case, referred to supra, relied upon by learned standing counsel for Revenue is not applicable to facts of 11 present case. We find no infirmity in order of Tribunal in confirming order of Commissioner of Income-tax (Appeals). 8. above decision of this Court in Faizen Shoes case (supra) is squarely applicable to facts of present case. 9. In result, this Court finds no reason to interfere with order passed by Tribunal. No question of law, much less substantial question of law arises for consideration in this appeal. Accordingly, order passed by Tribunal is confirmed and this appeal is dismissed. No costs. Index : Yes/No (R.S.J.) (R.K.J.) Internet : Yes/No 24.03.2015 sl 12 R.SUDHAKAR, J. AND R.KARUPPIAH,J. sl To 1. Commissioner of Income Tax Chennai. 2. Income Tax Appellate Tribunal 'A' Bench, Chennai. T.C.A. NO. 137 OF 2015 24.03.2015 Commissioner of Income-tax, Chennai v. M/s. Fluidtherm Technology Pvt. Ltd