M/s. Electrosteel Casting Limited., Kolkata V. ITO (International Taxation) Ward, Kolkata , Kolkata

ITA 140/KOL/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 9074 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 31-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K TULSIYAN ADV SH N
• Keywords: Capital asset; Business income; Double taxation relief; Services rendered outside India; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment; Non-deduction of tax; TDS; Capital Gains
• Section: 133(6); 195; 250; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA C BENCH, KOLKATA (BEFORE SRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER & SRI ABY T. VARKEY, JUDICIAL MEMBER) I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD......................................................................................................... APPELLANT [PAN : AAACE 4975 B] VS. ITO (INTERNATIONAL TAXATION) WARD, KOLKATA................................................RESPONDENT APPEARANCES BY: SH. S.K. TULSIYAN, ADV., APPEARED ON BEHALF OF THE ASSESSEE. SH. N.B. SOM, ADDL. CIT(DR), APPEARED ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : AUGUST 26 TH , 2019 DATE OF PRONOUNCING THE ORDER : SEPTEMBER 27 TH , 2019 ORDER PER J. SUDHAKAR REDDY, AM :- THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-22, KOLKATA (CIT FOR SHORT) DATED 23.11.2017 U/S 250 OF THE INCOME TAX ACT, 1961 (THE ACT FOR SHORT), WHEREIN HE CONFIRMED THE ORDER PASSED BY THE ASSESSING OFFICER (AO FOR SHORT) U/S 201(1)/201(1A) OF THE ACT ON 03.03.2016. FACTS OF THE CASE ARE AS FOLLOWS: THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CI PIPES, DI PIPES AND FITTINGS, PIG IRON SPONGE IRON, METALLURGICAL COKE, SINTERED PRODUCT, AND PAINT ETC. IT ALSO SETTING UP A NEW OFFICE, DEVELOPMENT OF MARKET AND STOCKING AREA IN ITALY. THE GOODS OF APPELLANT ARE SOLD BOTH IN DOMESTIC MARKET AS WELL AS EXPORTED TO MANY COUNTRIES IN THE WORLD. FOR THE FINANCIAL YEAR 2013-14 THE CASE OF APPELLANT WAS SELECTED FOR 15CA VERIFICATION BY THE DIT SYSTEMS. VIDE NOTICE DATED 7.8.2015 UNDER SECTION 133(6) DETAILS OF VARIOUS TRANSACTIONS WERE ASKED BY THE ASSESSING OFFICER. THE SAID DETAILS WERE PROVIDED BY THE APPELLANT'S LETTER DATED 10.09.2015. OUT OF THE SAID DETAILS SUBMITTED VIDE LETTER DATED 18.2.2016, THE ASSESSING OFFICER ASKED THE DETAILS OF THE AMOUNT REMITTED TO MR. ALFIO FIRPO ('MR. ALFIO') FOR A REMITTANCE OF 15,000 EUROS (RS. 10,65,000/-) AS NO TDS WAS DEDUCTED ON THE SAME. THE APPELLANT VIDE LETTER DATED 23.02.2016 MADE A DETAILED SUBMISSION FOR NON-DEDUCTION OF TAX AT SOURCE ON REMITTANCE MADE TO MR. ALFIO BY CITING RELEVANT PROVISIONS OF THE DTAA AND JUDICIAL PRECEDENTS. SUBSEQUENTLY, VIDE LETTER DATED 29.02.2016, THE APPELLANT SUBMITTED THE PROFESSIONAL QUALIFICATION CERTIFICATE OF MR. ALFIO. MR. ALFIO IS AN INDEPENDENT PROFESSIONAL WHO WAS APPOINTED BY THE APPELLANT VIDE AGREEMENT DATED 7.2.2012 FOR VARIOUS RESPONSIBILITIES INCLUDING SETTING UP AN OFFICE, MANAGING STOCK INVENTORY AND OTHER ALLIED SERVICES FOR THE APPELLANTS PRODUCT IN ITALY AND SUBMITTED THAT 2 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. THE SERVICES RENDERED BY MR. ALFIO IS IN THE NATURE OF PROFESSIONAL SERVICES AND IN HIS CAPACITY AS AN ENGINEER. OUR PRODUCTS I.E. DI PIPES AND FITTINGS ETC. ARE CAPITAL ITEMS. TO UNDERSTAND THE NEED OF THE CUSTOMERS AND TO GIVE THE TECHNO COMMERCIAL OFFERS/ BIDS REQUIRE ENGINEERING KNOWLEDGE. THEREFORE, HIS QUALIFICATIONS AS AN ENGINEER WAS ESSENTIAL AND WITHOUT HIS ENGINEERING QUALIFICATION THERE COULD NOT HAVE BEEN ANY EFFECTIVE SERVICES RENDERED BY HIM AS REQUIRED BY US FOR PROCURING ORDERS FOR THE COMPANY. COPY OF THE AGREEMENT WAS ALSO FILED WITH THE ASSESSING OFFICER. THE ASSESSING OFFICER IN HIS ORDER DATED 30.03.2016 HELD THAT THE SERVICES RENDERED BY MR. ALFIO IS NOT IN THE NATURE OF INDEPENDENT PROFESSIONAL SERVICES BUT IN THE NATURE OF FEES FOR TECHNICAL SERVICES AND HENCE APPLYING THE DTAA RATE, 20% TDS WAS DETERMINED TO BE SHORT DEDUCTED. THE ASSESSING OFFICER HAS NOT CONSIDERED THE SUBMISSIONS OF THE APPELLANT AND THAT THE TERM 'PROFESSIONAL SERVICES' IS AN INCLUSIVE TERM UNDER THE DTAA AND COULD NOT BE CONSTRUED NARROWLY. IN ANY EVENT THE SERVICES ARE NOT EVEN TAXABLE UNDER THE PROVISIONS OF THE INCOME TAX ACT, 1961. THUS ORDER PASSED BY THE ASSESSING OFFICER IS ERRONEOUS AND HENCE THIS APPEAL IS BEING PREFERRED. 2. ON APPEAL THE LD. FIRST APPELLATE AUTHORITY HELD AS FOLLOWS: 4. IN THE ORAL & WRITTEN SUBMISSIONS, THE LD. AR HAS VEHEMENTLY ARGUED THAT THE SERVICES WERE RENDERED OUTSIDE INDIA AND IN RELATION TO SOURCE OUTSIDE INDIA AND THEREFORE EVEN IF THE PAYMENTS QUALIFIED AS 'FEES FOR TECHNICAL SERVICES' U/S 9(1)(VII), IT WAS STILL NOT TAXABLE IN INDIA. THE LD. AR OF THE APPELLANT PLACED RELIANCE ON THE JUDGMENTS OF ITO(IT)TDS-3 VS M/S BAJAJ HINDUSTHAN LTD [ ITA NO. 63/MUM/09] & ITO(IT)TDS-3 VS M/S BAJAJ HINDUSTHAN LTD [ ITA NO. 63/MUM/09]. I HOWEVER FIND THE SUBMISSIONS OF THE LD. AR TO BE UNTENABLE IN THE CONTEXT OF THE AMENDMENTS BROUGHT IN SECTION 9(1)(VII) BY THE LEGISLATURE IN THE FINANCE ACT, 2010. 5. THE EXPLANATION TO SECTION 9(2) WAS INSERTED BY THE LEGISLATURE WHICH CLARIFIED THAT IRRESPECTIVE WHETHER SERVICES ARE RENDERED IN INDIA OR NOT, SINCE THE PAYMENT HAS A BUSINESS CONNECTION IN INDIA; THE SAME IS TAXABLE UNDER THE PROVISIONS OF THE INCOME-TAX ACT, 1961. IN THE FACTS OF THE PRESENT CASE, IT IS AN UNDISPUTABLE POSITION THAT THE PAYMENTS MADE TO NON-RESIDENT BY THE APPELLANT-COMPANY FOR HIS SERVICES INDEED HAD BUSINESS CONNECTION IN INDIA. THE ID. AR'S PROPOSITION THAT THE SERVICES MAY HAVE BEEN RENDERED OUTSIDE INDIA IS NO LONGER OF ANY RELEVANCE. THE JUDGMENTS RELIED UPON BY THE LD. AR OF THE APPELLANT WAS RENDERED IN THE CONTEXT OF SECTION 9(1)(VII) WHICH STOOD PRIOR TO THE AMENDMENT BROUGHT IN BY THE FINANCE ACT, 2010 AND THEREFORE THESE JUDGMENTS ARE DISTINGUISHABLE. 3. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT, THE ASSESSEE WAS SETTING UP A NEW BUSINESS ABROAD AND IT WAS A CASE, WHERE THE ASSESSEE WAS SOUGHT TO CREATE A NEW SOURCE OF INCOME OUTSIDE INDIA. HENCE HE SUBMITTED THAT THE PAYMENT IN QUESTION FELL WITHIN THE EXCEPTION TO SECTION 9(1)(VII)(B) OF THE ACT AND HENCE NOT TAXABLE UNDER THE DOMESTIC LAW AND HENCE NO DEDUCTION OF TAX WAS MADE U/S 195 OF THE ACT. THUS, HE SUBMITS THAT THE ORDER PASSED U/S 201(1)/(1A) IS BAD IN LAW. HE FILED A PAPER BOOK, WHEREIN CONSULTANCY CONTRACT BETWEEN THE ASSESSEE AND MR. FIRPO AND POINTED OUT THAT THE ENTIRE ACTIVITIES OF MR. FIRPO WERE OUTSIDE THE COUNTRY AND UNDER THOSE CIRCUMSTANCES NO INCOME IS DEEMED TO ACCRUE OR ARISE TO MR. FIRPO IN INDIA AND CONSEQUENTLY THERE WAS NO REQUIREMENT OF DEDUCTING TAX ON SOURCE U/S 195 OF THE ACT 3 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. ON PAYMENTS MADE TO MR. FIRPO. HE RELIES ON THE ORDER OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. BAJAJ HINDUSTHAN LTD. FOR THE ASSESSMENT YEAR (AY FOR SHORT) 2014-15 IN ITA NO. 63/MUM/2009 DATED 12.08.2011. HE SUBMITTED THAT THE ISSUES ARE COVERED IN HIS FAVOUR. 5. THE LD. DR ON THE OTHER HAND SUBMITTED THAT THE FACTS DO NOT DEMONSTRATE THAT THE ASSESSEE HAS SET UP A NEW BUSINESS ABROAD. HE SUBMITTED THAT SETTING UP A NEW OFFICE DOES NOT LEAD TO A CONCLUSION THAT A NEW BUSINESS HAS BEEN SET UP. HE SUBMITTED DETAILED WRITTEN SUBMISSIONS AND ARGUED THAT THERE IS NO NEW SOURCE OF INCOME CREATED BY THE ASSESSEE SO AS TO FALL WITHIN THE EXCEPTIONS TO SECTION 9(1)(VII)(B) OF THE ACT. HE REFERRED TO THE COPY OF THE CONTRACT WITH MR. FIRPO AND POINTED OUT THAT HE WAS APPOINTED AS EXECUTOR CONSULTANT TO SET UP A NEW OFFICE AND STOCKING AREA IN ITALY FOR THE ASSESSEE AND HIS SUBSIDIARIES. HE REFERRED TO THE SUBMISSION MADE BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AND POINTED OUT THAT IT WAS THE CASE OF THE ASSESSEE THAT THIS OFFICE IS BEING SET UP FOR INCREASING EXPORTS OF THE COMPANY TO NEWER COUNTRIES. HE RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. HAVELLS INDIA LTD. [2013] 352 ITR 376 (DELHI) WHEREIN THE TERM NEW SOURCE OF INCOME HAS BEEN EXPLAINED AND THAT INCREASE IN EXPORTS DOES NOT FALL WITHIN THE EXCEPTIONS TO SECTION 9(1)(VII)(B) OF THE ACT. 6. THUS, HE SUBMITTED THAT THE AMOUNT PAID TO MR. FIRPO CONSEQUENTLY FALLS WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES. HE FURTHER SUBMITTED THAT THE PAYMENT IN QUESTION IS NOT COVERED BY ARTICLE 15 OF THE DTAA BETWEEN INDIA AND ITALY, WHICH IS ON THE ISSUE OF INDEPENDENT PERSONAL SERVICES. HE REFERRED TO THE SERVICES OF MR. FIRPO AND THE NATURE OF SERVICES MENTIONED AS PROFESSIONAL SERVICES IN ARTICLE 15 AND SUBMITTED THAT THE NATURE OF SERVICES OF MR. FIRPO IS NEITHER SCIENTIFIC, LITERARY, ARTISTIC, EDUCATIONAL ETC., NOR THAT OF A PHYSICIAN, SURGEON, LAWYER ETC. HE DISTINGUISHED THE CASE LAWS RELIED UPON, BY THE LD. COUNSEL FOR THE ASSESSEE. 7. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, PERUSAL OF THE PAPERS ON RECORD, ALL THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS CASE LAW CITED, WE HOLD AS FOLLOWS. 8. THE DUTIES AND RESPONSIBILITIES OF MR. FIRPO FOR WHICH THE PAYMENT IS MADE ARE BROUGHT OUT THE CONSULTANCY CONTRACT WHICH IS EXTRACTED FOR READY REFERENCE: 4 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. CONSULTANCY CONTRACT MR ALFIO FIRPO (HEREIN REFERRED TO AS 'MR FIRPO') WITH RESIDENCE AT CAPOTERA, VIA DEL GINEPRO NO. 3B (PROVINCE, SARDINIA, ITALY) IDENTITY CARD NO AK 0191378 AND M/S ELECTROSTEEL CASTINGS LIMITED, INDIA (HEREIN REFERRED TO AS 'ELECTROSTEEL') 19, CAMAC STREET KOLKATA- 700017, INDIA THE FOLLOWING HAS BEEN AGREED BETWEEN THE TWO PARTIES: RESPONSIBILITIES OF MR FIRPO MR FIRPO HAS BEEN APPOINTED AS 'EXECUTIVE CONSULTANT 1 TO SET UP A NEW OFFICE AND STOCKING AREA IN ITALY OF ELECTROSTEEL OR ITS WHOLLY OWNED SUBSIDIARIES. ADDITIONAL RESPONSIBILITIES IN THIS RESPECT MAY BE ASSIGNED TO HIM BY ELECTROSTEEL FROM TIME TO TIME. THE IMMEDIATE WORKS OF MR FIRPO IN THIS CONNECTION ARE THE FOLLOWING: A) TO ASSIST IN ALL THE LEGAL FORMALITIES REQUIRED FOR OPENING OF THE NEW OFFICE. B) TO SEARCH FOR OFFICE SPACE IN ITALY PREFERABLY IN THE CITY OF MILAN. C) TO RECRUIT AND APPOINT EMPLOYEES FOR THIS NEW OFFICE. D) TO BUY DAY TO DAY ASSETS FOR THE NEW OFFICE. E) TO IDENTIFY BANKS AND FACILITATE IN OPENING ACCOUNTS. F) TO DISCUSS, NEGOTIATE WITH THE BANKS TO START FACTORING OF INVOICES OF THE NEW OFFICE. G) TO SEARCH AND APPOINT AN ACCOUNTING FIRM FOR DOING THE ACCOUNTING WORKS OF THE NEW FIRM. H) FINALIZE THE SOFTWARE REQUIRED FOR THE WORKING OF THE OFFICE. I) TO SETUP STOCKYARDS FOR STORING OF PIPES IN MAINLAND ITALY AND/OR ITS ISLANDS. J) TO NEGOTIATE AND FINALIZE CREDIT INSURANCE, MARINE INSURANCE CONTRACTS. K) TO APPOINT AUDITORS. L) TO PREPARE THE CATALOGUES, PRICE LIST ETC. M) TO MAKE THE OFFICE PROFITABLE AS SOON AS POSSIBLE. RESPONSIBILITIES OF ELECTROSTEEL ELECTROSTEEL WILL BE RESPONSIBLE TO HELP FACILITATE MR FIRPO TO DO THE ABOVE ACTIVITIES WILL ALL ITS GUIDANCE AND SUPPORT MR FIRPO WILL INTERACT MAINLY WITH MR RAJESH BANG, MR DEEPAK KUMAR AGARWAL, MR ARPAN PODDAR AND WITH SENIOR MANAGEMENT OF ELECTROSTEEL, AS AND WHEN REQUIRED. CONSULTANCY FEES THE TOTAL CONSULTANCY FEES TO BE PAID TO MR FIRPO BY ELECTROSTEEL HAS BEEN AGREED AS EURO 1,00,000 (ONE HUNDRED THOUSAND) AND WILL BE PAID IN INSTALLMENTS AS MENTIONED BELOW: A) FIRST INSTALLMENT - EURO 30000 (EURO THIRTY THOUSAND) TO BE PAID ONCE THE OFFICE IS OPERATIONAL OR SIX MONTHS FROM THE DATE OF THIS CONTRACT WHICHEVER IS LATER. B)SECOND INSTALLMENT - EURO 40000 (FORTY THOUSAND) WILL BE PAID ONCE ALL THE ABOVE ACTIVITIES COMPLETED IN FULL OR 12 MONTHS FROM THIS CONTRACT WHICHEVER IS LATER. C)THIRD INSTALLMENT - EURO 30000 (THIRTY THOUSAND) WILL BE PAID ONLY IF THE OFFICE IS MADE PROFITABLE IN THE FINANCIAL YEAR 2012-13 I.E. ENDING 31 ST MARCH 2013 OR WITHIN A REASONABLE PERIOD THEREAFTER IF ELECTROSTEEL FEELS THAT THERE WERE GENUINE REASONS FOR THE DELAY IN ACHIEVING THE PROFITABILITY. THE ABOVE CONSULTANCY FEES INCLUDES ALL TRAVELLING AND THE OTHER OUT OF POCKET EXPENSES IN ITALY WHICH MAY BE INCURRED BY MR FIRPO. CONFIDENTIALITY MR FIRPO FORMALLY AGREES NOT TO REVEAL TO ANYBODY, ANY INFORMATION RELATED TO ELECTROSTEEL, UNDER COMPLETE PROFESSIONAL SECRET CONDITIONS. MR FIRPO ALSO FORBIDS HIMSELF TO PUBLISH WITHOUT THE CONSENT OF ELECTROSTEEL ANY STUDY BASED ON WORKS DONE FOR THE COMPANY. ARBITRATION OR GOVERNING LAW ANY DISPUTE ARISING OUT OF THE CONTRACT SHALL BE SETTLED IN ACCORDANCE WITH THE RULES OF 5 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. ARBITRATION OF THE INTERNATIONAL CHAMBER OF COMMERCE. THE LAWS OF U.K. WILL APPLY. 7 TH FEBRUARY, 2012 9. THE ISSUE BEFORE US IS WHETHER THE FUNCTIONS OF MR. FIRPO AS PER THE ABOVE CONTRACT FALL, WITHIN THE EXPLANATION MENTIONED IN SECTION 9(1)(VII)(B) OF THE ACT. 10. THE CONTENTION OF THE ASSESSEE IS THAT, IT IS SETTING UP A NEW BUSINESS IN ITALY AND THAT THIS IS A NEW SOURCE OF INCOME. THE PERUSAL OF THE FACTS DOES NOT DEMONSTRATE THAT THE ASSESSEE HAS SET UP A NEW BUSINESS, WHICH CAN BE SAID TO GIVE IT A NEW SOURCE OF INCOME. THE ASSESSEE IS SETTING UP A NEW OFFICE AND GODOWN FOR THE PURPOSE OF BOOSTING ITS EXPORTS. THE HONBLE DELHI HIGH COURT IN THE CASE OF HAVELLS INDIA LTD. (SUPRA) IN PARA 9 OBSERVED AS FOLLOWS: IF THAT IS SO, THE ONLY QUESTIONS WHICH ARE REQUIRED TO EXAMINE IS (A) WHETHER THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE OUTSIDE INDIA OR (B) THEY WERE PAID FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. IN EITHER OF THESE TWO CASED THE AMOUNT PAID WILL NOT BE TAXABLE IN THE HANDS OF THE NON-RESIDENT COMPANY AND CORRESPONDINGLY THERE WILL BE NO LIABILITY UPON THE ASSESSEE TO DEDUCT TAX U/S 195 OF THE ACT. 11. AFTER EXAMINING THE ARGUMENT ON THE ISSUE OF A SOURCE LOCATED OUTSIDE INDIA AT PARA 19 THE HONBLE HIGH COURT HELD AS FOLLOWS: THE ASSESSEE CARRIED THE MATTER IN FURTHER APPEAL BEFORE THE TRIBUNAL. THE TRIBUNAL EXAMINED THE DIRECTORS REPORT, THE FINANCIAL STATEMENTS AND THE NOTES APPENDED THERETO ETC. AND FOUND THAT THERE WAS COMPLETE INTERLACING AND INTERMINGLING OF THE FUNDS OF THE ASSESSEE IN ALL ITS UNITS BESIDES THERE BEING A COMMON MANAGEMENT. THE TRIBUNAL ALSO REFERRED TO THE JUDGMENT OF THIS COURT IN CIT V. MONNET INDUSTRIES LTD., (2009) 221 CTR 266 AND APPLYING THIS DECISION TO THE FACTS FOUND, IT HELD THAT THE EXPENDITURE WAS REVENUE IN NATURE HAVING BEEN INCURRED FOR THE EXPANSION OF THE EXISTING BUSINESS AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO ALLOW THE SAME AS DEDUCTION. 12. IN THE CASE ON HAND WE ARE OF THE CONSIDERED OPINION THAT THE FACTS OF THE CASE LEADS US TO A CONCLUSION THAT THE ASSESSEE GETS BENEFITS OF THE FIRST EXPLANATION TO SECTION 9(1)(VII)(B) OF THE ACT AS THE TECHNICAL SERVICES WHEN NOT UTILIZED FOR THE BUSINESS ACTIVITIES OF PRODUCTION IN INDIA AND IT WAS FOR SERVICES WHICH WERE UTILIZED IN THE BUSINESS CARRIED OUT OUTSIDE INDIA. THE INCOME OF MR. FIRPO HAS NOT ACCRUED OR RISE IN INDIA FOR THE REASON THAT. THE ENTIRE SERVICES WERE RENDERED OUTSIDE INDIA. SECTION 9(1)(VII)(B) OF THE ACT READS AS FOLLOWS: FOR THE PURPOSES OF THIS CLAUSE, 'ROYALTY' MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS') FOR 6 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (II) THE IMPARTING OF ANY INFORMATION CONCERNING THE WORKING OF, OR THE USE OF, A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (III) THE USE OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL ; (IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB; (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS ; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WITH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO (IV), (IVA) AND (V). 13. I BENCH OF TRIBUNAL IN ITA NO. 48/RJT/2015 IN THE CASE OF DCIT VS. WELSPUN CORPORATION LIMITED ORDER DATED03.01.2017 HAD HELD AS FOLLOWS: 34. COMING TO SECTION 9(1 )(VII)(B), THIS DEEMING FICTION- WHICH IS FOUNDATIONAL BASIS FOR THE ACTION OF THE ASSESSING OFFICER, INTER ALIA, PROVIDES THAT THE INCOME BY WAY OF TECHNICAL SERVICES PAYABLE BY A PERSON RESIDENT IN INDIA, EXCEPT IN CERTAIN SITUATIONS- WHICH ARE NOT ATTRACTED IN THE PRESENT CASE ANYWAY, ARE DEEMED TO BE INCOME ACCRUING OR ARISING IN INDIA. EXPLANATION 2 TO SECTION 9(1 )(VII) DEFINES FEES FOR TECHNICAL SERVICES AS ANY CONSIDERATION (INCLUDING ANY LUMPSUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISIONS OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD SALARIES [RELEVANT PORTION HIGHLIGHTED BY UNDERLINING]. 35. IN THE LIGHT OF THE ABOVE LEGAL POSITION, WHAT WE NEED TO DECIDE AT THE OUTSET IS WHETHER THE AMOUNTS PAID BY THE ASSESSEE TO THE NON-RESIDENT AGENTS COULD BE TERMED AS CONSIDERATION FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL AND CONSULTANCY SERVICES. AS WE DO SO, IT IS USEFUL TO BEAR IN MIND THE FACT THAT EVEN GOING BY THE STAND OF THE ASSESSING OFFICER, AT BEST SERVICES RENDERED BY THE NONRESIDENT TO THE AGENT INCLUDED TECHNICAL SERVICES BUT IT IS FOR THIS REASON THAT THE AMOUNTS PAID TO THESE AGENTS, ON ACCOUNT OF COMMISSION ON EXPORTS, SHOULD BE TREATED AS FEES FOR TECHNICAL SERVICES. EVEN PROCEEDING ON THE ASSUMPTION THAT THESE NON- RESIDENT AGENTS DID RENDER THE TECHNICAL SERVICES, WHICH, AS WE WILL SEE A LITTLE LATER, AN INCORRECT ASSUMPTION ANYWAY, WHAT IS IMPORTANT TO APPRECIATE IS THAT THE AMOUNTS PAID BY THE ASSESSEE TO THESE AGENTS CONSTITUTED CONSIDERATION FOR THE ORDERS SECURED BY THE AGENTS AND NOT THE SERVICES ALLEGED RENDERED BY THE AGENTS. THE EVENT TRIGGERING CRYSTALLIZATION OF LIABILITY OF THE ASSESSEE, UNDER THE COMMISSION AGENCY AGREEMENT, IS THE EVENT OF SECURING ORDERS AND NOT THE RENDITION OF ALLEGED TECHNICAL SERVICES. IN A SITUATION IN WHICH THE AGENT DOES NOT RENDER ANY OF THE SERVICES BUT SECURES THE BUSINESS ANYWAY, THE AGENT IS ENTITLED TO HIS COMMISSION WHICH IS COMPUTED IN TERMS OF A PERCENTAGE OF THE VALUE OF THE ORDER. IN A REVERSE SITUATION, IN WHICH AN AGENT RENDERS ALL THE ALLEGED TECHNICAL SERVICES BUT DOES NOT SECURE ANY ORDER FOR THE PRINCIPAL I.E. THE ASSESSEE, THE AGENT IS NOT ENTITLED TO ANY COMMISSION. CLEARLY, THEREFORE, THE EVENT TRIGGERING THE EARNINGS BY THE AGENT IS SECURING THE BUSINESS AND NOT RENDITION OF ANY SERVICES. IN THIS VIEW OF THE MATTER, IN OUR CONSIDERED VIEW, THE AMOUNTS PAID BY THE ASSESSE TO ITS NON- RESIDENT AGENTS, EVEN IN THE EVENT OF HOLDING THAT THE AGENTS DID INDEED RENDER TECHNICAL SERVICES, CANNOT BE SAID TO BE CONSIDERATION FOR RENDERING OF ANY MANAGERIAL, TECHNICAL OR 7 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. CONSULTANCY SERVICES (EMPHASIS BY UNDERLINING SUPPLIED BY US). THE SERVICES RENDERED BY THE AGENTS, EVEN IF THESE SERVICES ARE HELD TO BE IN THE NATURE OF TECHNICAL SERVICES, MAY BE TECHNICAL SERVICES, BUT THE AMOUNTS PAID BY THE ASSESSEE ARE NOT FOR THE RENDITION OF THESE TECHNICAL SERVICES NOR THE QUANTIFICATION OF THESE AMOUNTS HAVE ANY RELATION WITH THE QUANTUM OF THESE TECHNICAL SERVICES. THE KEY TO TAXABILITY OF AN AMOUNT UNDER SECTION 9(1 )(VII) IS THAT IT SHOULD CONSTITUTE CONSIDERATION FOR RENDITION OF TECHNICAL SERVICES. THE CASE OF THE REVENUE FAILS ON THIS SHORT TEST, AS IN THE PRESENT CASE THE AMOUNTS PAID BY THE ASSESSEE ARE CONSIDERATION FOR ORDERS SECURED BY THE ASSESSEE IRRESPECTIVE OF HOW AND WHETHER OR NOT THE AGENTS HAVE PERFORMED THE SO CALLED TECHNICAL SERVICES. 36. LET US SUM UP OUR DISCUSSIONS ON THIS PART OF THE SCHEME OF SECTION 9, SO FAR AS TAX IMPLICATIONS ON COMMISSION AGENCY BUSINESS CARRIED OUT BY NON-RESIDENTS FOR INDIAN PRINCIPALS IS CONCERNED. IT DOES NOT NEED MUCH OF A CEREBRAL EXERCISE TO FIND OUT WHETHER THE INCOME FROM THE BUSINESS CARRIED ON BY A NON-RESIDENT ASSESSEE, AS A COMMISSION AGENT AND TO THE EXTENT IT CAN BE SAID TO DIRECTLY OR INDIRECTLY ACCRUING THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, IS REQUIRED TO BE TAXED UNDER SECTION 9(1 )(I) OR UNDER SECTION 9(1 )(VII), OF THE INCOME TAX ACT, 1961. THE ANSWER IS OBVIOUS. DEEMING FICTION UNDER SECTION 9(1 )(I) READ WITH PROVISO THERETO, AS WE HAVE SEEN IN THE EARLIER DISCUSSIONS, HOLDS THE KEY, AND LAYS DOWN THAT ONLY TO THE EXTENT THAT WHICH THE OPERATIONS OF SUCH A BUSINESS IS CARRIED OUT IN INDIA, THE INCOME FROM SUCH A BUSINESS IS TAXABLE IN INDIA. WHEN NO OPERATIONS OF THE BUSINESS ARE CARRIED ON INDIA, THERE IS NO TAXABILITY OF THE PROFITS OF SUCH A BUSINESS IN INDIA EITHER. THE QUESTION THEN ARISES WHETHER IN A SITUATION IN WHICH, IN THE COURSE OF CARRYING ON SUCH BUSINESS, THE ASSESSEE HAS TO NECESSARILY RENDER CERTAIN SERVICES, WHICH ARE OF SUCH A NATURE AS COVERED BY EXPLANATION 2 TO SECTION 9(1 )(VII), AND EVEN THOUGH THE ASSESSEE IS NOT PAID ANY FEES FOR SUCH SERVICES PER SE, ANY PART OF THE BUSINESS PROFITS OF THE ASSESSEE CAN BE TREATED AS FEES FOR TECHNICAL SERVICES AND TAXED AS SUCH UNDER SECTION 9(1 )(VII). THIS QUESTION DOES NOT POSE MUCH DIFFICULTY EITHER. IN THE LIGHT OF THE DISCUSSIONS IN THE FOREGOING PARAGRAPH, UNLESS THERE IS A SPECIFIC AND IDENTIFIABLE CONSIDERATION FOR THE RENDITION OF TECHNICAL SERVICES, TAXABILITY UNDER SECTION 9(1 )(VII) DOES NOT GET TRIGGERED. THEREFORE, IRRESPECTIVE OF WHETHER ANY TECHNICAL SERVICES ARE RENDERED DURING THE COURSE OF CARRYING ON SUCH AGENCY COMMISSION BUSINESS ON BEHALF OF INDIAN PRINCIPAL, THE CONSIDERATION FOR SECURING BUSINESS CANNOT BE TAXED UNDER SECTION 9(1 )(VII) AT ALL. THIS PROFITS OF SUCH A BUSINESS CAN HAVE TAXABILITY IN INDIA ONLY TO THE EXTENT SUCH PROFITS RELATE TO THE BUSINESS OPERATIONS IN INDIA, BUT THEN, AS ARE THE ADMITTED FACTS OF THIS CASE, NO PART OF OPERATIONS OF BUSINESS WERE CARRIED OUT IN INDIA. THE COMMISSION AGENTS EMPLOYED BY THE ASSESSEE, THEREFORE, DID NOT HAVE ANY TAX LIABILITY IN INDIA IN RESPECT OF THE COMMISSION AGENCY BUSINESS SO CARRIED OUT. 38. AS IS CLEAR FROM THE ABOVE PROVISIONS OF THE AGREEMENT, THE WORK THAT THE AGENT HAS TO DONE UNDER THIS AGREEMENT, AS IS STATED UNAMBIGUOUSLY IN THE AGREEMENT ITSELF, IS TO CARRY OUT AIL THE DUTIES NORMALLY RENDERED BY AN AGENT INCLUDING BUT NOT LIMITED TO THE ACTIVITIES SPECIFIED THEREIN. THE CONSIDERATION FOR WHICH THE PAYMENT MADE TO THE COMMISSION AGENT IS OBTAINING OF THE ORDERS AND NOT ANY SERVICES PER SE. THE CONSIDERATION IS COMPUTED ON THE BASIS OF BUSINESS PROCURED. OBVIOUSLY, IF THERE ARE NO BUSINESS GENERATED FOR THE PRINCIPAL, THE AGENT GETS NOTHING. QUITE CLEARLY, WHAT IS DONE BY THE AGENT IS NOT A RENDITION OF SERVICE BUT PURE ENTREPRENEURIAL ACTIVITY. THE WORK ACTUALLY UNDERTAKEN BY THE AGENT IS THE WORK OF ACTING AS AGENT AND SO PROCURING BUSINESS FOR THE ASSESSEE BUT AS THE CONTEMPORARY BUSINESS MODELS REQUIRE THE WORK OF AGENT CANNOT SIMPLY AND ONLY BE TO OBTAIN THE ORDERS FOR THE PRODUCT, AS THIS OBTAINING OF ORDERS IS INVARIABLY PRECEDED BY AND FOLLOWED BY SEVERAL PREPARATORY AND FOLLOW UP ACTIVITIES. THE DESCRIPTION OF AGENTS OBLIGATION SETS OUT SUCH COMMON ANCILLARY ACTIVITIES AS WELL BUT THAT DOES NOT OVERRIDE, OR RELEGATE, THE CORE AGENCY WORK. THE CONSIDERATION PAID TO THE AGENT IS ALSO BASED ON THE BUSINESS PROCURED AND THE AGENCY AGREEMENTS DONOT PROVIDE FOR ANY INDEPENDENT, STANDALONE OR SPECIFIC CONSIDERATION FOR THESE SERVICES. THE SERVICES RENDERED UNDER THE AGREEMENT CANNOT, THEREFORE, BE CONSIDERED TO BE TECHNICAL SERVICES IN NATURE OR CHARACTER. THE SERVICES RENDERED IN THE COURSE OF RENDERING AGENCY SERVICES ARE ESSENTIALLY BUSINESS SERVICES AND TO OBTAIN THE BUSINESS. WE HAVE ALSO NOTED THAT, SO FAR AS RENDITION OF TECHNICAL SERVICES IS CONCERNED, ONE OF THE MAIN POINTS IN THE CASE OF THE REVENUE, AS EVIDENT FROM A PLAIN READING OF THE IMPUGNED ORDER UNDER SECTION 201, IS THAT MANUFACTURING OF SPECIALIZED PIPE WAS A HIGHLY TECHNICAL ACTIVITY INVOLVING VERY COMPLEX TECHNICAL EXERCISE OF TECHNOLOGY AND SKILLED LABOUR AND FINEST GRADE OF RAW 8 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. MATERIAL AND THAT OBVIOUSLY, TO PROCURE THE ORDERS, THE ASSESSEE COMPANY WILL NEED SPECIALIST AGENTS WHO CAN UNDERSTAND THE NITTY GRITTY OF THE ASSESSEES BUSINESS AND CAN DEMONSTRATE THE ASSESSEES BUSINESS PROFILE AND QUALITY OF PRODUCTS OF THE ASSESSEE TO THE POTENTIAL CLIENTS TO CONVINCE THEM TO ENTER INTO A CONTRACT WITH THE ASSESSEE COMPANY. JUST BECAUSE A PRODUCT IS HIGHLY TECHNICAL DOES NOT CHANGE THE CHARACTER OF ACTIVITY OF THE SALE AGENT. WHETHER A SALESMAN SELLS A HANDCRAFTED SOUVENIR OR A TOP OF THE LINE LAPTOP, HE IS SELLING NEVERTHELESS. IT WILL BE ABSURD TO SUGGEST THAT IN THE FORMER CASE, HE IS SELLING AND THE LATTER, HE WILL BE RENDERING TECHNICAL SERVICES. THE OBJECT OF THE SALESMAN IS TO SELL AND FAMILIARITY WITH THE TECHNICAL DETAILS, WHATEVER BE THE WORTH OF THOSE TECHNICAL DETAILS, IS ONLY TOWARDS THE END OF SELLING. IN A TECHNOLOGY DRIVEN WORLD THAT WE LIVE IN, EVEN SIMPLEST OF DAY TO DAY GADGETS THAT WE USE ARE FAIRLY TECHNICAL AND COMPLEX. UNDOUBTEDLY WHEN A TECHNICAL PRODUCT IS BEING SOLD, THE PERSON SELLING THE PRODUCT SHOULD BE FAMILIAR WITH TECHNICAL SPECIFICATIONS OF THE PRODUCT BUT THEN THIS ASPECT OF THE MATTER DOES NOT ANYWAY CHANGE THE ECONOMIC ACTIVITY. NOTHING, THEREFORE, TURNS ON THE DETAILS OF THE PRODUCTS BEING TECHNICAL. IT WAS ALSO NOTED THAT BY THE ASSESSING OFFICER THAT IT IS A VERY TECHNICAL EXERCISE TO OBTAIN THE CONTRACTS SINCE IT INVOLVES COMPLEX PROCESS REQUIRING ELABORATE DISCUSSION, TECHNICAL EXPERTISE AND PRESENT OF COMPLEX TECHNICAL PRESENTATION, ON BEHALF OF THE ASSESSEE, WHICH CAN ONLY BE DONE BY A SPECIALIST IN THIS FIELD SO AS TO CONVINCE THE CLIENTS ABOUT WELSPUNS SUITABILITY TO THE CONTRACT. THIS AT BEST SIGNIFIES COMPLEXITY IN THE BUSINESSES AND THE NEED OF TECHNICAL INPUTS IN THE PROCESS OF BUSINESSES, PARTICULARLY WHEN THE PRODUCTS BEING DEALT WITH ARE TECHNICAL PRODUCTS, BUT THEN MERELY BECAUSE TECHNICAL INPUTS ARE NEEDED IN CARRYING OUT BUSINESS ACTIVITY, IT DOES NOT BECOME A TECHNICAL SERVICE RATHER THAN A BUSINESS ACTIVITY. AT THE COST OF REPETITION, WE MUST EMPHASIZE THE IMPORTANT DISTINCTION BETWEEN A BUSINESS ACTIVITY, REQUIRING UNDERSTANDING OF RELATED TECHNOLOGY, AND RENDITION OF TECHNICAL SERVICES SIMPLICTOR. IN ANY CASE, WHAT HAS BEEN DESCRIBED AS A TECHNICAL SERVICE IS THE SERVICE BEING RENDERED TO THE BUYER BUT THE PAYMENT RECEIVED BY THE COMMISSION AGENTS IS NOT FOR THIS SERVICE PERSE BUT FOR GENERATING BUSINESS ORDERS FOR THE ASSESSEE. GENERATING BUSINESS OR SECURING ORDERS IS AN ENTREPRENEURIAL ACTIVITY AND CANNOT, BY ANY STRETCH OF LOGIC, BE TREATED AS A TECHNICAL SERVICE PER SE. THE SAME IS THE POSITION WITH REGARD TO ASSISTANCE WITH RESPECT OF LOGISTICS, SUCH AS SHIPPING AND HANDLING SERVICES, WITH RESPECT TO SALE FORECASTING, WITH RESPECT TO GATHERING INFORMATION ON MARKETS, BUSINESS ENVIRONMENT AND ON SPECIFIC BUYERS AND WITH RESPECT TO DEVELOPMENT OF SALES NETWORK. ALL THESE SERVICES ARE ESSENTIALLY INTEGRAL PART OF, AND ARE THUS AIMED AT, DEVELOPING BUSINESS FOR THE ASSESSEE AND SECURING ORDERS FOR THE ASSESSEE FROM THE RIGHT PERSONS. NEITHER THESE SERVICES CAN BE VIEWED ON A STANDALONE BASIS DIVORCED FROM THE ECONOMIC ACTIVITY OF SECURING ORDERS, NOR ANY PAYMENT CAN BE SAID TO BE FOR RENDITION OF THESE SERVICES INASMUCH AS IT IS NOT THE RENDITION OF THESE SERVICES BUT SECURING BUSINESS OF THE ASSESSEE WHICH TRIGGERS THE INCOME ACCRUING TO THE NON-RESIDENT AGENTS OF THE ASSESSEE AND IT IS SECURING OF BUSINESS FOR THE ASSESSEE WHICH IS THE PROXIMATE CAUSE OF THE INCOME ACCRUING TO THE ASSESSEE. THIS ISSUE IS ALSO COVERED, IN FAVOUR OF THE ASSESSEE, BY A COORDINATE BENCH DECISION IN THE CASE OF DCIT VS TROIKAA PHARMACEUTICALS LTD AND VICE VERSA (ITA NO. 2028/AHD/13 AND CO NO 13/AHD/14) WHEREIN IT HAS BEEN, INTER ALIA, OBSERVED AS FOLLOWS: 5. AS REGARDS THE REFERENCES TO SECTION 9(1)(VII), AS MADE BY THE ASSESSING OFFICER AND THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT ASPECT OF THE MATTER IS ALSO COVERED, IN FAVOUR OF THE ASSESSEE, BY A LARGE NUMBER OF JUDICIAL PRECEDENTS- INCLUDING HONBLE MADRAS HIGH COURTS JUDGMENT IN THE CASE OF CIT VS FARIDA LEATHER CO. [(2016) 66 TAXMANN.COM 321 (MADRAS)], WHEREIN THEIR LORDSHIPS HAVE, INTER ALIA, OBSERVED AS FOLLOWS: 5. THE MAIN CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE /RESPONDENT IS THAT THE AGENCY COMMISSION / SALES COMMISSION PAID BY THE ASSESSEE TO NON-RESIDENT AGENTS, FOR THE SERVICES RENDERED BY THEM, OUTSIDE INDIA, IN PROCURING EXPORT ORDERS FOR THE ASSESSEE, WOULD NOT ATTRACT OR PARTAKE THE CHARACTER OF 'FEES FOR TECHNICAL SERVICES' AS EXPLAINED IN THE CONTEXT OF 9 (1) (VII) OF THE ACT AND THEREFORE, THERE IS NO SCOPE FOR THE APPLICATION OF THE PROVISIONS OF SECTION 195 OF THE ACT (TAX DEDUCTED AT SOURCE). IT IS ALSO CONTENDED THAT AS THE NON-RESIDENT AGENTS HAVE NEITHER BUSINESS CONNECTION IN INDIA NOR THEY HAVE PERMANENT ESTABLISHMENT IN INDIA, THEY ARE LIABLE TO BE TAXED IN INDIA. 5.1 YET ANOTHER CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT: (A) THE ASSESSEE PAID THE AMOUNT BY WAY OF COMMISSION TO FOREIGN AGENTS FOR THE SERVICES RENDERED OUTSIDE 9 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. INDIA; (B) THE TAX DEDUCTION AT SOURCE (TDS) IS REQUIRED TO BE MADE ON ALL PAYMENTS TO NON- RESIDENTS, ONLY IF SUCH PAYMENTS ARE LIABLE TO BE TAXED IN INDIA, (C) FOLLOWING THE DECISION OF THIS COURT, CIT V. FAIZAN SHOES (P.) LTD. [2014] 367ITR 155/226 TAXMAN 115/48 TAXMANN.COM 48 (MAD.), THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE, WHEN THE NONRESIDENT AGENT PROVIDES SERVICES OUTSIDE INDIA ON PAYMENT OF COMMISSION. 5.2 THE CONTENTION OF THE REVENUE IS THAT SUCH SERVICES ARE ATTRACTED BY EXPLANATION (2) TO SECTION 9 (1) (VII) OF THE ACT AND THEREFORE TDS CERTIFICATE IS ESSENTIAL. 6. WHETHER THIS CONTENTION IS CORRECT, IS THE ISSUE TO BE DECIDED. 7. IN ORDER TO APPRECIATE THIS CONTENTION, IT IS NECESSARY TO CONSIDER THE RELEVANT PROVISIONS OF THE ACT: (I) SECTION 40(A) (I) OF THE ACT: 'SECTION 40 - AMOUNTS NOT DEDUCTIBLE: NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION', (A) IN THE CASE OF ANY ASSESSEE (I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISSUED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYABLE, (A) OUTSIDE INDIA; OR (B) IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY OR TO A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVIIB AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139: PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCTED DURING THE PREVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB- SECTION (1) OF SECTION 139, SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. EXPLANATION: FOR THE PURPOSES OF THIS SUB-CLAUSE, (A) 'ROYALTY' SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9: (B) 'FEES FOR TECHNICAL SERVICES' SHALL HAVE THE SAME MEANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1) OF SECTION 9: (IA) THIRTY PER CENT OF ANY SUM PAYABLE TO A RESIDENT, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVIIB AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID ON OR BEFORE THE DUE DATE SPECIFIED IN SUBSECTION (1) OF SECTION 139. PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR, OR HAS BEEN DEDUCTED DURING THE PREVIOUS YEAR BUT PAID AFTER THE DUE DATE SPECIFIED IN SUB SECTION (1) OF SECTION 139 THIRTY PER CENT OF, SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX HAS BEEN PAID. PROVIDED FURTHER THAT WHERE AN ASSESSEE FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII-B ON ANY SUCH SUM BUT IS NOT DEEMED TO BE AN ASSESSEE IN DEFAULT UNDER THE FIRST PROVISO TO SUB-SECTION (1) OF SECTION 201, THEN, FOR THE PURPOSE OF THIS SUB-CLAUSE, IT SHALL BE DEEMED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INCOME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVISO.' (II) EXPLANATION 2 TO SECTION 195(1) OF THE ACT: 10 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. 'SECTION 195 - OTHER SUMS: (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NONRESIDENT NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, ANY INTEREST (NOT BEING INTEREST REFERRED TO IN SECTION 194LB OR SECTION 194LC) OR SECTION 194LD OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD 'SALARIES') SHALL, AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME-TAX THEREON AT THE RATES IN FORCE: PROVIDED THAT IN THE CASE OF INTEREST PAYABLE BY THE GOVERNMENT OR A PUBLIC SECTOR BANK WITHIN THE MEANING OF CLAUSE (23D) OF SECTION 10 OR A PUBLIC FINANCIAL INSTITUTION WITHIN THE MEANING OF THAT CLAUSE, DEDUCTION OF TAX SHALL BE MADE ONLY AT THE TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE : PROVIDED FURTHER THAT NO SUCH DEDUCTION SHALL BE MADE IN RESPECT OF ANY DIVIDENDS REFERRED TO IN SECTION 115-0. [EXPLANATION 1]: [EXPLANATION 2.- FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED THAT THE OBLIGATION TO COMPLY WITH SUB-SECTION (1) AND TO MAKE DEDUCTION THEREUNDER APPLIES AND SHALL BE DEEMED TO HAVE ALWAYS APPLIED AND EXTENDS AND SHALL BE DEEMED TO HAVE ALWAYS EXTENDED TO ALL PERSONS, RESIDENT OR NON-RESIDENT, WHETHER OR NOT THE NON-RESIDENT PERSON HAS (I) A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR (II) ANY OTHER PRESENCE IN ANY MANNER WHATSOEVER IN INDIA.' EXPLANATION 4 TO SECTION 9(1) (I) OF THE ACT: 'SECTION 9 - INCOME DEEMED TO ACCRUE OR ARISE IN INDIA (1) THE 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 THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. EXPLANATION 4.- FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED THAT THE 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 7.1 SECTION 40 OF THE ACT SPELLS OUT WHAT AMOUNTS ARE NOT DEDUCTIBLE FROM THE INCOME CHARGED TO TAX UNDER THE PROFITS AND GAINS OF BUSINESS OR PROFESSION. 7.2 SECTION 40(A)(I) OF THE ACT DEALS WITH INTEREST AND OTHER SUMS PAYABLE OUTSIDE INDIA. THE PROVISIONS OF THIS SUB-CLAUSE MADE APPLICABLE TO INTEREST HAVE BEEN EXTENDED TO PAYMENT OF ROYALTY, TECHNICAL FEES AND ANY OTHER SUM CHARGEABLE UNDER THIS ACT. THE SECTION PROVIDES THAT THE SUMS COVERED BY THE SUB-CLAUSE, WHICH ARE CHARGEABLE UNDER THE ACT AND ARE PAYABLE OUTSIDE INDIA, SHALL NOT BE ALLOWED AS AN EXPENDITURE TO THE ASSESSEE, UNLESS TAX IS PAID THEREON OR IS DEDUCTED THEREFROM UNDER CHAPTER XVIL-B OF THE ACT. 7.3 SECTION 195(1) OF THE ACT DEALS WITH DEDUCTION OF TAX FROM PAYMENT TO NON-RESIDENTS AND FOREIGN COMPANIES. SECTION 195(1) OF THE ACT COMES INTO PLAY AT A STAGE WHERE THE PAYER, WHO IS ENJOINED TO DEDUCT THE TAX, EITHER CREDIT SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR MAKE PAYMENT THEREOF, WHETHER IN CASH / CHEQUE / DRAFT OR ANY OTHER MODE. THE TAXABILITY OF SUCH AMOUNT IN THE HANDS OF THE PAYEE OR OCCASIONING OF THE TAXABLE EVENT IS ALIEN FOR THE PURPOSE OF SECTION 195(1) OF THE ACT. 7.4 SECTION 195(2) IS AN ENABLING PROVISION, ENABLING AN ASSESSEE TO FILE AN APPLICATION BEFORE THE ASSESSING OFFICER TO DETERMINE THE APPROPRIATE PROPORTION OF THE SUM CHARGEABLE AND UPON SUCH DETERMINATION, THE TAX HAS TO BE DEDUCTED UNDER SECTION 195(1) OF THE ACT. THE PAYMENT IS MADE CREDITED TO THE ACCOUNT OF THE PAYEE. 8. THE QUESTION NOW IS, WHETHER THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE AS CONTEMPLATED UNDER SECTION 195 OF THE ACT, WHEN THE ASSESSEE PAID COMMISSION TO FOREIGN 11 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. AGENT. 9. THIS QUESTION HAS BEEN ANSWERED BY THE HON 'BLE SUPREME COURT, IN THE CASE OF G.E. INDIA TECHNOLOGY CENTRE (P.) LTD. (SUPRA), IN WHICH, IT IS VERY CATEGORICALLY HELD THAT THE TAX DEDUCTED AT SOURCE OBLIGATIONS UNDER SECTION 195(1) OF THE ACT ARISES, ONLY IF THE PAYMENT IS CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESIDENT RECIPIENT. 9.1 THEREFORE, MERELY BECAUSE A PERSON HAS NOT DEDUCTED TAX AT SOURCE OR A REMITTANCE ABROAD, IT CANNOT BE INFERRED THAT THE PERSON MAKING THE REMITTANCE, NAMELY, THE ASSESSEE, IN THE INSTANT CASE, HAS COMMITTED A DEFAULT IN DISCHARGING HIS TAX WITHHOLDING OBLIGATIONS BECAUSE SUCH OBLIGATIONS COME INTO EXISTENCE ONLY WHEN THE RECIPIENT HAS A TAX LIABILITY IN INDIA. 9.2 THE UNDERLYING PRINCIPLE IS THAT, THE TAX WITHHOLDING LIABILITY OF THE PAYER IS INHERENTLY A VICARIOUS LIABILITY ON BEHALF OF THE RECEIPIENT AND THEREFORE, WHEN THE RECIPIENT / FOREIGN AGENT DOES NOT HAVE THE PRIMARY LIABILITY TO BE TAXED IN RESPECT OF INCOME EMBEDDED IN THE RECEIPT, THE VICARIOUS LIABILITY OF THE PAYER TO DEDUCT TAX DOES NOT ARISE. THIS VICARIOUS TAX WITHHOLDING LIABILITY CANNOT BE INVOKED, UNLESS PRIMARY TAX LIABILITY OF THE RECIPENT / FOREIGN AGENT IS ESTABLISHED. IN THIS CASE, THE PRIMARY TAX LIABILITY OF THE FOREIGN AGENT IS NOT ESTABLISHED. THEREFORE, THE VICARIOUS LIABILITY ON THE PART OF THE ASSESSEE TO DEDUCT THE TAX AT SOURCE DOES NOT EXIST. 10. FURTHER, JUST BECAUSE, THE PAYER / ASSESSEE HAS NOT OBTAINED A SPECIFIED DECLARATION FROM THE REVENUE AUTHORITIES TO THE EFFECT THAT THE RECIPENT IS NOT LIABLE TO BE TAXED IN INDIA, IN RESPECT OF THE INCOME EMBEDDED IN THE PARTICULAR PAYMENT, THE ASSESSING OFFICER CANNOT PROCEED ON THE BASIS THAT THE PAYER HAS AN OBLIGATION TO DEDUCT TAX AT SOURCE. HE STILL HAS TO DEMONSTRATE AND ESTABLISH THAT THE PAYEE HAS A TAX LIABILITY IN RESPECT OF THE INCOME EMBEDDED IN THE IMPUGNED PAYMENT. 11. IN THE INSTANT CASE, IT IS SEEN, ADMITTEDLY THAT THE NONRESIDENT AGENTS WERE ONLY PROCURING ORDERS ABROAD AND FOLLOWING UP PAYMENTS WITH BUYERS. NO OTHER SERVICES ARE RENDERED OTHER THAN THE ABOVE. SOURCING ORDERS ABROAD, FOR WHICH PAYMENTS HAVE BEEN MADE DIRECTLY TO THE NON-RESIDENTS ABROAD, DOES NOT INVOLVE ANY TECHNICAL KNOWLEDGE OR ASSISTANCE IN TECHNICAL OPERATIONS OR OTHER SUPPORT IN RESPECT OF ANY OTHER TECHNICAL MATTERS. IT ALSO DOES NOT REQUIRE ANY CONTRIBUTION OF TECHNICAL KNOWLEDGE, EXPERIENCE, EXPERTISE, SKILL OR TECHNICAL KNOW- HOW OF THE PROCESSES INVOLVED OR CONSIST IN THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR DESIGN. THE PARTIES MERELY SOURCE THE PROSPECTIVE BUYERS FOR EFFECTING SALES BY THE ASSESSEE, AND IS ANALOGOUS TO A LAND OR A HOUSE / REAL ESTATE AGENT / BROKER, WHO WILL BE INVOLVED IN MERELY IDENTIFYING THE RIGHT PROPERTY FOR THE PROSPECTIVE BUYER / SELLER AND ONCE HE COMPLETES THE DEAL, HE GETS THE COMMISSION. THUS, BY NO STRETCH OF IMAGINATION, IT CANNOT BE SAID THAT THE TRANSACTION PARTAKES THE CHARACTER OF 'FEES FOR TECHNICAL SERVICES' AS EXPLAINED IN THE CONTEXT OF SECTION 9(1)(VII) OF THE ACT. 12. AS THE NON-RESIDENTS WERE NOT PROVIDING ANY TECHNICAL SERVICES TO THE ASSESSEE, AS HELD ABOVE AND AS HELD BY THE COMMISSIONER OF INCOME TAX (APPEALS), THE COMMISSION PAYMENT MADE TO THEM DOES NOT FALL INTO THE CATEGORY OF 'FEES OF TECHNICAL SERVICES' AND THEREFORE, EXPLANATION (2) TO SECTION 9(1)(VII) OF THE ACT, AS INVOKED BY THE ASSESSING OFFICER, HAS NO APPLICATION TO THE FACTS OF THE ASSESSEE'S CASE. 13. IN THIS CASE, THE COMMISSION PAYMENTS TO THE NON RESIDENT AGENTS ARE NOT TAXABLE IN INDIA, AS THE AGENTS ARE REMAINING OUTSIDE, SERVICES ARE RENDERED ABROAD AND PAYMENTS ARE ALSO MADE ABROAD. 14. THE CONTENTION OF THE LEARNED COUNSEL FOR THE REVENUE IS THAT THE TRIBUNAL OUGHT NOT TO HAVE RELIED UPON THE DECISION G.E. INDIA TECHNOLOGY'S CASE, CITED SUPRA, IN VIEW OF INSERTION OF EXPLANATION 4 TO SECTION 9(1 )(I) OF THE ACT WITH CORRESPONDING INTRODUCTION OF EXPLANATION 2 TO SECTION 195(1) OF THE ACT, BOTH BY THE FINANCE ACT, 2012, WITH RETROSPECTIVE EFFECT FROM 01.04.1962. 15. THE ISSUE RAISED IN THIS CASE HAS BEEN THE SUBJECT MATTER OF THE DECISION, IN THE RECENT 12 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. CASE, CIT V. KIKANI EXPORTS (P.) LTD. [2014] 369 ITR 96/[2015] 232 TAXMAN 255/49 TAXMANN.COM 601 (MAD.) WHEREIN THE CONTENTION OF THE REVENUE HAS BEEN REJECTED AND ASSESSEE HAS BEEN UPHELD AND THE RELEVANT OBSERVATION READS AS UNDER: THE SERVICES RENDERED BY THE NON-RESIDENT AGENT COULD 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' AND, THEREFORE, SECTION 9 WAS NOT APPLICABLE AND, CONSEQUENTLY, SECTION 195 DID NOT COME INTO PLAY. THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER TOWARDS EXPORT COMMISSION PAID BY THE ASSESSEE TO THE NON-RESIDENT WAS RIGHTLY DELETED.' 16. WHEN THE TRANSACTION DOES NOT ATRACT THE PROVISIONS OF SECTION 9 OF THE ACT, THEN THERE IS NO QUESTION OF APPLYING EXPLANATION 4 TO SECTION 9 OF THE ACT. THEREFORE, THE REVENUE HAS NO CASE AND THE TAX CASE APPEAL IS LIABLE TO BE DISMISSED. 6. CLEARLY, THEREFORE, THE PAYMENT OF COMMISSION IN THE HANDS OF THE NONRESIDENT AGENT, AS LONG AS SUCH AN AGENT CARRIES OUT ITS ACTIVITIES OUTSIDE INDIA, DOES NOT RESULT IN TAXABILITY IN THE HANDS OF THE AGENT IN INDIA 39. AS WE DEAL WITH THIS ASPECT OF THE MATTER, WE MAY ALSO TAKE NOTE OF THE FOLLOWING ANALYSIS, IN THE CASE OF UPS SCS ASIA LIMITED VS ADIT [(2012) 50 SOT 268 (MUM)], ABOUT THE SCOPE OF MANAGERIAL, CONSULTANCY AND TECHNICAL SERVICES WHICH THE SERVICES RENDERED MUST FULFIL SO AS TO LEAD TO TAXABILITY AS FEES FOR TECHNICAL SERVICES: 5. A BARE PERUSAL OF THE ABOVE QUOTED PROVISION INDICATES THAT THE 'FEES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION FOR RENDERING OF ANY 'MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES' BUT DOES NOT INCLUDE THE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY ETC. THE LEARNED CIT(A) HAS HELD THE SERVICES RENDERED BY THE ASSESSEE AS FEES FOR TECHNICAL SERVICES' COMING WITH IN THE SWEEP OF 'MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES'. ON THE CONTRARY, THE CONTENTION OF THE ASSESSEE HAS REMAINED BEFORE THE AUTHORITIES BELOW AS WELL AS US THAT THE SUCH SERVICES DO NOT FALL WITHIN THE AMBIT OF ANY OF THE CATEGORIES TAKEN NOTE OF BY THE AUTHORITIES BELOW. WE WILL EXAMINE AS TO WHETHER THE SERVICES SO PROVIDED BY THE ASSESSEE FALL WITHIN THE SCOPE OF 'MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES' AS PER EXPLANATION 2 TO SECTION 9(1)(VII). 6. IN ORDER TO APPRECIATE THE NATURE OF SERVICES MORE ELABORATELY, IT IS RELEVANT TO CONSIDER THE TERMS OF THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND MENLO INDIA EXECUTED ON NOVEMBER 1, 2006 WITH EFFECT FROM 1ST JUNE, 2005, A COPY OF WHICH IS AVAILABLE ON PAGE 1 ONWARDS OF THE PAPER BOOK. THE SCOPE OF SERVICES HAS BEEN GIVEN IN CLAUSE 1.1. IN THE RECITAL CLAUSE IT HAS BEEN PROVIDED THAT THE ASSESSEE- COMPANY MAY REQUIRE MENLO INDIA TO PERFORM LOGISTICS SERVICES SUCH AS TRANSPORT, PROCUREMENT, CUSTOM CLEARANCE, SORTING, DELIVERY, WAREHOUSING AND PICKING UP SERVICES (LOCAL SERVICES) WITHIN INDIA (LOCAL OPERATING AREA). IT HAS FURTHER BEEN PROVIDED THAT MENLO INDIA MAY ALSO SEEK SIMILAR SERVICES FROM THE ASSESSEE- COMPANY SUCH AS TRANSPORT, PROCUREMENT, CUSTOMS CLEARANCE, SORTING, DELIVERY, WAREHOUSING AND PICK UP SERVICES (INTERNATIONAL SERVICES) OUTSIDE INDIA. IN THE PRESENT APPEAL WE ARE CONCERNED WITH THE 'INTERNATIONAL SERVICES' PROVIDED BY THE ASSESSEE TO MENLO OUTSIDE INDIA. THESE SERVICES COMPRISE OF TRANSPORT, PROCUREMENT, CUSTOMS CLEARANCE, SORTING, WAREHOUSING AND PICK UP SERVICES ON THE CARGO EXPORTED BY MENLO ON BEHALF OF ITS CUSTOMERS. HAVING NOTED THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE OUTSIDE INDIA, FOR WHICH MENLO INDIA MADE THE PAYMENT, LET US CONSIDER IF THESE CAN BE DESCRIBED AS MANAGERIAL OR TECHNICAL OR CONSULTANCY SERVICES. 7. FIRST WE WILL CONSIDER THE AMBIT OF 'MANAGERIAL SERVICES' TO TEST WHETHER THE INSTANT SERVICES CAN QUALIFY TO BE SO CALLED. ORDINARILY THE MANAGERIAL SERVICES MEAN MANAGING THE AFFAIRS BY LAYING DOWN CERTAIN POLICIES, STANDARDS AND PROCEDURES AND THEN EVALUATING THE ACTUAL PERFORMANCE IN THE LIGHT OF THE PROCEDURES SO LAID DOWN. THE MANAGERIAL SERVICES CONTEMPLATE NOT ONLY EXECUTION BUT ALSO THE PLANNING PART OF THE ACTIVITY TO BE DONE. IF THE OVERALL PLANNING ASPECT IS MISSING AND ONE HAS TO FOLLOW A DIRECTION FROM THE OTHER FOR EXECUTING PARTICULAR JOB IN A PARTICULAR MANNER, IT CANNOT BE SAID THAT THE FORMER IS MANAGING THAT AFFAIR. IT WOULD MEAN THAT THE DIRECTIONS OF THE LATTER ARE EXECUTED SIMPLICITY WITHOUT THERE 13 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. BEING ANY PLANNING PART INVOLVED IN THE EXECUTION AND ALSO THE EVALUATION OF THE PERFORMANCE. IN THE ABSENCE OF ANY SPECIFIC DEFINITION OF THE PHRASE 'MANAGERIAL SERVICES' AS USED IN SECTION 9(1)(VII) DEFINING THE 'FEES FOR TECHNICAL SERVICES', IT NEEDS TO BE CONSIDERED IN A COMMERCIAL SENSE. IT CANNOT BE INTERPRETED IN A NARROW SENSE TO MEAN SIMPLY EXECUTING THE DIRECTIONS OF THE OTHER FOR DOING A SPECIFIC TASK. FOR INSTANCE, IF GOODS ARE TO BE LOADED AND SOME WORKER IS INSTRUCTED TO PLACE THE GOODS ON A CARRIER IN A PARTICULAR MANNER, THE ACT OF THE WORKER IN PLACING THE GOODS IN THE PRESCRIBED MANNER, CANNOT BE DESCRIBED AS MANAGING THE GOODS. IT IS A SIMPLE DIRECTION GIVEN TO THE WORKER WHO HAS TO EXECUTE IT IN THE WAY PRESCRIBED. IT IS QUITE NATURAL THAT SOME SORT OF APPLICATION OF MIND IS REQUIRED IN EACH AND EVERY ASPECT OF THE WORK DONE. AS IN THE ABOVE EXAMPLE WHEN THE WORKER WILL LIFT THE GOODS, HE IS EXPECTED TO BE VIGILANT IN PICKING UP THE GOODS MOVING TOWARDS THE CARRIER AND THEN PLACING THEM. THIS ACT OF THE WORKER CANNOT BE DESCRIBED AS MANAGING THE GOODS BECAUSE HE SIMPLY FOLLOWED THE DIRECTION GIVEN TO HIM. ON THE OTHER HAND, 'MANAGING' ENCOMPASSES NOT ONLY THE SIMPLE EXECUTION OF A WORK, BUT ALSO CERTAIN OTHER ASPECTS, SUCH AS PLANNING FOR THE WAY IN WHICH THE EXECUTION IS TO BE DONE COUPLED WITH THE OVERALL RESPONSIBILITY IN A LARGER SENSE. THUS IT IS MANIFEST THAT THE WORD 'MANAGING' IS WIDER IN SCOPE THAN THE WORD 'EXECUTING'. RATHER THE LATER IS EMBEDDED IN THE FORMER AND NOT VICE VERSA. 8. ADVERTING TO THE FACTS OF THE INSTANT CASE IT IS OBSERVED THAT THE ASSESSEE PERFORMED FREIGHT AND LOGISTICS SERVICES OUTSIDE INDIA IN RESPECT OF CONSIGNMENTS ORIGINATING FROM INDIA UNDERTAKEN TO BE DELIVERED BY MENLO INDIA. THE ROLE OF THE ASSESSEE IN THE ENTIRE TRANSACTION WAS TO PERFORM ONLY THE DESTINATION SERVICES OUTSIDE INDIA BY UNLOADING AND LOADING OF CONSIGNMENT, CUSTOM CLEARANCE AND TRANSPORTATION TO THE ULTIMATE CUSTOMER. IN OUR CONSIDERED OPINION, IT IS TOO MUCH TO CATEGORIZE SUCH RESTRICTED SERVICES AS MANAGERIAL SERVICES. WE, THEREFORE, JETTISON THIS CONTENTION RAISED ON BEHALF OF THE REVENUE. 9. NOW WE TAKE UP THE NEXT COMPONENT OF THE DEFINITION OF 'FEES FOR TECHNICAL SERVICES', BEING 'CONSULTANCY SERVICES', WHICH HAS BEEN PRESSED INTO SERVICE BY THE LEARNED CIT(A) TO FORTIFY HIS VIEW THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS COVERED WITHIN SECTION 9(1)(VII). THE WORD 'CONSULTANCY' MEANS GIVING SOME SORT OF CONSULTATION DE HORS THE PERFORMANCE OR THE EXECUTION OF ANY WORK. IT IS ONLY WHEN SOME CONSIDERATION IS GIVEN FOR RENDERING SOME ADVICE OR OPINION ETC., THAT THE SAME FALLS WITHIN THE SCOPE OF 'CONSULTANCY SERVICES'. THE WORD 'CONSULTANCY' EXCLUDES ACTUAL 'EXECUTION'. THE NATURE OF SERVICES, BEING FREIGHT AND LOGISTICS SERVICES PROVIDED BY THE ASSESSEE TO MENLO INDIA HAS NOT BEEN DISPUTED BY THE AUTHORITIES BELOW. THERE IS NOTHING LIKE GIVING ANY CONSULTATION WORTH THE NAME. RATHER SUCH PAYMENT IS WHOLLY AND EXCLUSIVELY FOR THE EXECUTION IN THE SHAPE OF TRANSPORT, PROCUREMENT, CUSTOMS CLEARANCE, DELIVERY, WAREHOUSING AND PICKING UP SERVICES. THAT BEING THE POSITION, WE OPINE THAT THE PAYMENT IN LIEU OF FREIGHT AND LOGISTICS SERVICES CANNOT BE RANKED AS CONSULTANCY SERVICES. 10. THE ONLY LEFT OVER COMPONENT OF THE DEFINITION OF 'FEES FOR TECHNICAL SERVICES' TAKEN NOTE OF BY THE ID. CIT(A) IS 'TECHNICAL SERVICES'. HE OBSERVED THAT THE ASSESSEE'S BUSINESS STRUCTURE IS TIME BOUND SERVICE COUPLED WITH CONTINUOUS REAL TIME TRANSMISSION OF INFORMATION BY USING AND ALSO MAKING AVAILABLE ITS TECHNOLOGY IN THE FORM OF SOPHISTICATED EQUIPMENTS AND SOFTWARE ETC. THE LEARNED CIT(A) HAS HELD THAT: 'IN ORDER TO ENSURE EFFICIENT AND TIMELY DELIVERY AND TO PROVIDE CONTINUOUS REAL TIME INFORMATION, THE APPELLANT IS REQUIRED TO USE SOPHISTICATED TECHNOLOGY FOR WHICH THE INDIAN ENTITY IS ALSO EQUALLY INVOLVED AND TO WHOM THE APPELLANT IS COMMITTED TO PROVIDING THE REQUISITE SOFTWARE AND EQUIPMENT'. THE LEARNED CIT(A) HAS ALSO ACCENTUATED ON THE CLAUSE 2 OF THE AGREEMENT WHICH READS AS UNDER- '2. CONTRACTOR SHALL SEPARATELY EXECUTE A TECHNOLOGY AND SOFTWARE LICENSE AGREEMENT FOR THE PROVISION OF COMPUTER EQUIPMENT AND SOFTWARE SUPPLIED BY SCS. CONTRACTOR SHALL SEPARATELY EXECUTE A TRADEMARK LICENSE AGREEMENT FOR THE USE OF ANY MARKS OR BRANDS OWNED BY UNITED PARCEL SERVICE OF AMERICA, INC. THE FEE PAYABLE BY CONTRACTOR UNDER PARAGRAPH 3.1 WILL NOT INCLUDE ANY ROYALTY AMOUNT RELATING TO THE USE OF INTANGIBLE PROPERTY OR INFORMATION.' 11. ON GOING THROUGH CLAUSE 2 OF THE AGREEMENT, IT IS OBVIOUS THAT MENLO INDIA SHALL 'SEPARATELY EXECUTE A TECHNOLOGY AND SOFTWARE LICENSE AGREEMENT' FOR THE PROVISION OF COMPUTER EQUIPMENT AND SOFTWARE SUPPLIED BY THE ASSESSEE. IT IS NOBODY'S CASE THAT THE CONSIDERATION IN QUESTION RELATES TO THE SUPPLY OF ANY COMPUTER EQUIPMENT AND SOFTWARE BY THE ASSESSEE TO 14 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. MENLO INDIA. WE FAIL TO APPRECIATE AS TO HOW THIS CLAUSE 2 MAKES THE SERVICES PROVIDED BY THE ASSESSEE AS 'TECHNICAL'. RATHER CLAUSE 2 MANDATES TO EXECUTE A SEPARATE TECHNOLOGY AND SOFTWARE LICENSE AGREEMENT FOR THE PROVISION OF COMPUTER EQUIPMENT AND SOFTWARE. HOW IS IT THAT THE CONSIDERATION FOR THE SERVICES CAN BE ATTRIBUTED TO A PROPOSED AGREEMENT, WHICH HAS YET TO SEE THE LIGHT OF THE DAY. 12. THE LEARNED CIT(A) HAS ALSO HARPED ON 'TRANSPORTATION OF TIME SENSITIVE PACKAGES' WITH A VIEW TO BRING THE SERVICES PROVIDED BY THE ASSESSEE WITHIN THE FOLD OF 'TECHNICAL SERVICES'. IN REACHING THIS CONCLUSION THE LEARNED CIT(A) ALSO RELIED ON THE ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN BLUE DART EXPRESS LIMITED VS. JCIT. LET US EXAMINE THE FACTS OF THAT CASE. THE ASSESSEE THERE CLAIMED DEDUCTION U/S 80-0 IN RESPECT OF ITS FOREIGN EXCHANGE EARNINGS FOR RENDERING TECHNICAL / PROFESSIONAL SERVICES TO A US MULTI INTERNATIONAL COMPANY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A. 0. REQUIRED THE ASSESSEE TO FURNISH THE NATURE OF SERVICES RENDERED AND ALSO THE CALCULATION OF DEDUCTION. THE ASSESSEE DID IT. ON BEING SATISFIED THE A.O. GRANTED DEDUCTION U/S 80-0. BY EXERCISING THE POWER U/S 263, THE LEAMEDCIT HELD THE ASSESSMENT ORDER TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE TO THE EXTENT OF GRANTING DEDUCTION U/S 80-0. WHEN THE MATTER CAME UP BEFORE THE TRIBUNAL, IT WAS OBSERVED THAT THE ISSUE IS DEBATABLE AND HENCE OUTSIDE THE AMBIT OF SECTION 263. APART FROM THAT, IT WAS ALSO OBSERVED THAT THE ASSESSEE WAS ENGAGED IN INTEGRATED AIR AND GROUND TRANSPORTATION OF TIME SENSITIVE PACKAGES TO VARIOUS DESTINATIONS RENDERING COMMERCIAL SERVICES. IT WAS IN THIS CONTEXT THAT THE ASSESSEE WAS HELD TO BE ELIGIBLE FOR DEDUCTION U/S 80-0. AT THIS JUNCTURE IT WILL BE USEFUL TO NOTE THAT AT THE MATERIAL TIME SECTION 80-0 PROVIDED FOR DEDUCTION ON ANY 'INCOME BY WAY OF ROYALTY, COMMISSION, FEES OR ANY SIMILAR PAYMENT RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT OF A FOREIGN STATE OR A FOREIGN ENTERPRISE IN CONSIDERATION FOR THE USE OUTSIDE INDIA OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS, OR SIMILAR PROPERTY RIGHT, OR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL MADE AVAILABLE OR PROVIDED OR AGREED TO BE MADE AVAILABLE OR PROVIDED TO SUCH GOVERNMENT OR ENTERPRISE BY THE ASSESSEE, OR IN CONSIDERATION OF TECHNICAL OR PROFESSIONAL SERVICES RENDERED OR AGREED TO BE RENDERED OUTSIDE INDIA TO SUCH GOVERNMENT OR ENTERPRISE BY THE ASSESSEE'. FROM THE ABOVE QUOTED PART OF SEC. 80-0, IT CAN BE SEEN THAT THE DEDUCTION AT THAT TIME WAS AVAILABLE NOT ONLY IN RESPECT OF INCOME AS A CONSIDERATION FOR THE USE OF 'TECHNICAL OR PROFESSIONAL SERVICES' BUT ALSO ANY 'COMMERCIAL....KNOWLEDGE EXPERIENCE OR SKILL'. THESES TWO SOURCES ARE DISTINCT FROM EACH OTHER AS CAN BE SEEN FROM THE EMPLOYMENT OF WORD 'OR' BETWEEN THEM. IN ORDER TO QUALIFY FOR DEDUCTION UNDER THIS SECTION, THE INCOME COULD HAVE RESULTED FROM THE RENDERING OF 'TECHNICAL OR PROFESSIONAL SERVICES' OR COMMERCIAL KNOWLEDGE, EXPERIENCE OR SKILL ETC. WHEN THE TRIBUNAL IN BLUE DART EXPRESS LIMITED (SUPRA) HELD THE ASSESSEE TO BE ENTITLED TO DEDUCTION, IT WAS CONSIDERING ALL THE SPECIES OF THE SERVICES SET OUT IN SECTION 80-0 AND NOT ONLY 'TECHNICAL OR PROFESSIONAL SERVICES'. IT WAS IN THE LIGHT OF SUCH LANGUAGE OF THE PROVISION THAT THE TRIBUNAL HELD THE ASSESSEE TO BE ELIGIBLE FOR RELIEF U/S 80-0. WE ARE CURRENTLY DEALING WITH SECTION 9(1)(VII), BEING THE 'FEES FOR TECHNICAL SERVICES' AND THE DEFINITION OF SUCH EXPRESSION IS RESTRICTED ONLY TO 'MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES' AND DOES NOT HAVE ANY SUCH ELEMENTS AS ARE THERE IN SECTION 80-0. THE DECISION IN THE CASE OF BLUE DART EXPRESS LIMITED (SUPRA) CAME UP FOR CONSIDERATION BEFORE THE MUMBAI BENCH OF THE TRIBUNAL IN DAMPSKIBSSELSKABET AF 1912 VS. ADDL.DIT (INTERNATIONAL TAXATION) [(2011) 51 DTR 148] (TO WHICH ONE OF US, NAMELY, THE ID. JM IS PARTY) IN WHICH IT HAS BEEN HELD THAT THE RATIO LAID DOWN IN THAT CASE CANNOT BE UNIVERSALLY APPLIED. DUE TO MATERIAL DIFFERENCE IN THE LANGUAGE OF SECTIONS 9(1)(VII) AND 80-0 AS DISCUSSED ABOVE, WE HOLD THAT THE DECISION IN BLUE DART EXPRESS LIMITED (SUPRA),CAN NOT BE HELD TO BE SUPPORTING THE CASE OF THE REVENUE. 13. THE ID. CIT(A) IN REACHING THE CONCLUSION THAT THE ASSESSEE RENDERED 'TECHNICAL SERVICES' ALSO OBSERVED THAT ITS 'BUSINESS STRUCTURE IS TIME BOUND SERVICE COUPLED WITH CONTINUOUS REAL TIME TRANSMISSION OF INFORMATION BY USING AND ALSO MAKING AVAILABLE ADVANCED TECHNOLOGY IN THE FORM OF SOPHISTICATED EQUIPMENT AND SOFTWARE.' HE WAS SWAYED BY THE CONTENTION OF THE ASSESSEE THAT THE MANLO INDIA OR THE ULTIMATE CUSTOMER COULD TRACK THE MOVEMENT OF CARGO WITH THE HELP OF COMPUTERS. WE HAVE NOTED SUPRA THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE DID NOT INCLUDE ANY CONSIDERATION FOR THE SUPPLY OF ANY EQUIPMENT TO MANLO INDIA. NOW WE WILL EXAMINE AS TO WHETHER THE USE OF COMPUTER IN ANY MANNER FOR KNOWING THE LOCATION OF THE CARGO AT A PARTICULAR TIME, CAN BE HELD AS TECHNICAL SERVICE. 15 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. 14. EXPLANATION TO SECTION 9(1)(VII) DEFINES THE EXPRESSION 'FEES FOR TECHNICAL SERVICES' AS CONSIDERATION FOR RENDERING 'MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES'. IT IS SEEN THAT THERE IS NO DEFINITION OF THE TERM 'TECHNICAL SERVICES' IN THE ACT. 15. THE PRINCIPLE OFNOSCITUR A SOCIIS MANDATES THAT THE MEANING OF A WORD IS TO BE JUDGED BY THE COMPANY OF OTHER WORDS WHICH IT KEEPS. THIS RULE IS WIDER IN SCOPE THAN THE RULE OFEJUSDEM GENERIS. IN ORDER TO DISCOVER THE MEANING OF A WORD WHICH HAS NOT BEEN DEFINED IN THE ACT, THE HON'BLE SUPREME COURT HAS APPLIED THE PRINCIPLE OFNOSCITUR A SOCIIS IN SEVERAL CASES INCLUDING ARAVINDAPARAMILA WORKS VS. CIT [(1999) 237ITR 284 (SC)]. AS NOTED ABOVE THE WORD 'TECHNICAL' HAS BEEN SANDWICHED BETWEEN THE WORDS 'MANAGERIAL' AND 'CONSULTANCY' IN EXPLANATION 2 TO SEC. 9(1)(VII) AND NO DEFINITION HAS BEEN ASSIGNED TO THE 'TECHNICAL' SERVICES IN THE RELEVANT PROVISION, WE NEED TO ASCERTAIN THE MEANING OF THE 'TECHNICAL SERVICES' FROM THE OVERALL MEANING OF THE WORDS 'MANAGERIAL' AND 'CONSULTANCY 1 SERVICES BY APPLYING THE PRINCIPLE OF NOSTICUR A SOCIIS. IT HAS BEEN HELD ABOVE THAT THE 'MANAGERIAL SERVICES' AND 'CONSULTANCY SERVICES' PRE-SUPPOSE SOME SORT OF DIRECT HUMAN INVOLVEMENT. THESE SERVICES CANNOT BE CONCEIVED WITHOUT THE DIRECT INVOLVEMENT OF MAN. THESE SERVICES CAN BE RENDERED WITH OR WITHOUT ANY EQUIPMENT, BUT THE HUMAN INVOLVEMENT IS INEVITABLE. MOVING IN THE LIGHT OF THIS RULE, THERE REMAINS NO DOUBT WHATSOEVER THAT THE TECHNICAL SERVICES CANNOT BE CONTEMPLATED WITHOUT THE DIRECT INVOLVEMENT OF HUMAN ENDEAVOR. WHERE SIMPLY AN EQUIPMENT OR A STANDARD FACILITY ALBEIT DEVELOPED OR MANUFACTURED WITH THE USE OF TECHNOLOGY IS USED, SUCH A USER CANNOT BE CHARACTERIZED AS USING 'TECHNICAL SERVICES'. 16. COMING BACK TO THE FACTS OF THE PRESENT CASE, EVEN IF WE ACCEPT THE LEARNED FIRST APPELLATE AUTHORITY'S POINT OF VIEW THAT THE COMPUTER COULD BE USED IN TRACING THE MOVEMENT OF THE GOODS, SUCH USE OF COMPUTER, THOUGH INDIRECT, REMOTE AND NOT NECESSARY, CAN NOT BRING THE PAYMENT FOR FREIGHT AND LOGISTICS SERVICES WITHIN THE PURVIEW OF 'TECHNICAL SERVICES'. THE ESSENCE OF THE CONSIDERATION FOR THE PAYMENT IS RENDERING OF SERVICES AND NOT THE USE OF COMPUTER. IF INCIDENTALLY COMPUTER IS USED AT ANY STAGE, WHICH IS OTHERWISE NOT NECESSARY FOR RENDERING SUCH SERVICES, THE PAYMENT FOR FREIGHT AND LOGISTICS WILL NOT PARTAKE OF THE CHARACTER OF FEES OF TECHNICAL SERVICES'. WE, THEREFORE, REPEL THIS CONTENTION RAISED ON BEHALF OF THE REVENUE. 17. THUS IT CAN BE NOTICED THAT THE PAYMENT MADE TO THE ASSESSEE IN QUESTION IS NOT A CONSIDERATION FOR MANAGERIAL OR TECHNICAL OR CONSULTANCY SERVICES. THAT BEING THE POSITION, IT CANNOT FALL WITHIN THE AMBIT OF SECTION 9(1)(VII). 40. WE MAY ALSO TAKE NOTE OF ANOTHER DECISION OF A COORDINATE BENCH DEALING WITH MATERIALLY SIMILAR QUESTION DEALING WITH TAXABILITY OF INCOME IN THE HANDS OF NON RESIDENT COMMISSION AGENTS, REPRESENTING INDIAN PRINCIPAL, IN WHICH SIMILAR ACTIVITIES WERE SAID TO HAVE BEEN PERFORMED. IN THE CASE OF ARMYESH GLOBAL VS ACIT [(2012) 51 SOT 564 (MUM)], THE COORDINATE BENCH HAS, INTER ALIA, OBSERVED AS FOLLOWS: 16. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FACTS ON RECORD. THE LEARNED ASSESSING OFFICER TRIED TO INVOKE THE DEFINITIONS OF TECHNICAL SERVICES ON THE COMMISSION PAID TO THE FOREIGN COMPANY. THE REASON BEING THAT COMMISSION PAYMENT TO NON RESIDENT IS NOT COVERED BY THE PROVISIONS OF SECTION 40(A)(IA), AS IT HAS ONLY APPLICABLE TO ANY INTEREST ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT WHICH PAYABLE OUTSIDE INDIA ON WHICH TAX IS DEDUCTIBLE AT SOURCE BUT HAS NOT BEEN DEDUCTED. THE ASSESSING OFFICER MADE OUT A CASE THAT THE COMMISSION PAID IS TEES FOR TECHNICAL SERVICES' WITHOUT SPECIFYING WHAT ARE THE TECHNICAL/MANAGERIAL SERVICES RENDERED BY THE SAID COMPANY TO THE ASSESSEE. ASSESSEE INDEED ENTERED INTO AN AGREEMENT FOR PROPAGATION OF ITS HANDICRAFT PRODUCTS WITH THE NON RESIDENT COMPANY. THE COPIES OF THE AGREEMENT HAVE BEEN PLACED BEFORE THE AUTHORITIES. THE AGREEMENT CLEARLY SHOWS THAT THE NON RESIDENT COMPANY WAS TO GET COMMISSION FOR PROMOTING THE PRODUCTS OF THE ASSESSEE COMPANY AND RENDERING INCIDENTAL SERVICES ON SALES SUCH AS RECOVERY ETC. FOR DOING EXPORT SALES. IT IS ALSO RESPONSIBILITY OF THE NON RESIDENT COMPANY TO DISSEMINATE THE INFORMATION AND INQUIRE ABOUT VARIOUS IMPORTERS IN VARIOUS COUNTRIES SO THAT ASSESSEE EXPORTS CAN BE INCREASED. THE AGREEMENT CLEARLY SHOWS THAT NON RESIDENT COMPANY WAS TO GET THE COMMISSION FOR PROMOTING THE PRODUCT OF ASSESSEE COMPANY AFTER SALES PROCEEDS ARE RECEIVED. THE DETAILED TERMS OF THE AGREEMENT ARE AS UNDER: 16 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. 'AGENCY AGREEMENT IN THIS AGREEMENT BETWEEN M/S ARMAYESH GLOBAL, KAMANWALA CHAMBERS, 2ND FLOOR, SIR P.M. ROAD, FORT, MUMBAI 400 001, INDIA HEREINAFTER REFERRED TO AS 'PRINCIPAL' AND INDIJACK LIMITED, 99 BRECK NOCK ROAD, LONDON N19 5 AB, U.K. HEREINAFTER REFERRED TO AS 'AGENT' THE FOLLOWING IS AGREED UPON: - ARTICLE 1- OBJECT OF AGREEMENT 1.1. THE PRINCIPAL ENTRUSTS THE AGENT WITH THE NON EXCLUSIVE AGENCY FOR THE FOLLOWING CONTRACTUAL TERRITORY (AREA): WORLDWIDE 1.2. THE PRINCIPAL ALSO HAS THE RIGHT TO OPERATE ACTIVELY' IN HE AFOREMENTIONED TERRITORY (AREA). 1.3. THE AGENCY COVERS THE FOLLOWING PRODUCTS: HAND EMBROIDERED PRODUCTS OF ANY AND ALL KINDS. 1.4. THE AGENT COVENANTS AND AGREES TO REPRESENT THE PRINCIPAL ON A COMMISSION BASIS. ARTICLE 2 DUTIES OF THE AGENT 2.1 IT SHALL BE THE AGENT'S DUTY TO NEGOTIATE CONTRACTS WITH THE OVERSEAS PARTY. FURTHERMORE, THE AGENT SHALL ACT ON THE PRINCIPAL'S BEHALF IN CONFORMITY WITH PROVISIONS HEREINAFTER ENUMERATED. THE AGENT SHALL NOT BE AUTHORIZED TO ENTER INTO A CONTRACT OR OTHERWISE TO BIND THE PRINCIPAL. THE PRINCIPAL SHALL BE FREE TO CONCLUDE, OR TO REFUSE THE CONCLUSION OF A CONTRACT NEGOTIATED BY THE AGENT. 2.2 WHILE NEGOTIATING CONTRACTS OF SALE THE AGENT SHALL ACT IN CONFORMITY WITH ALL THE CONDITIONS AND PARTICULARLY OF DELIVERY AND PAYMENT AS FIXED BY THE PRINCIPAL. 2.3 THE AGENT SHALL BE RESPONSIBLE FOR NEGOTIATING WITH ALL PARTIES IN THEIR TERRITORY (AREA). THE AGENT SHALL TRAVEL IN THEIR TERRITORY (AREA) REGULARLY TO VISIT CUSTOMERS, AND IS BOUND TO KEEP CONCLUDED CONTRACTS SECRET. THE AGENT SHALL ALWAYS KEEP THE PRINCIPAL INFORMED ABOUT THEIR ACTIVITIES AND SHALL SUPPLY THE PRINCIPAL, AT LEAST ONCE EVERY QUARTER, WITH REPORTS ON ECONOMIC DEVELOPMENTS AND MARKET CONDITIONS IN THE TERRITORY (AREA) AND AT THE SAME TIME, CONVEY TO THE PRINCIPAL, THE AGENT'S OBSERVATIONS WITH RESPED TO ADIVITIES OF COMPETITORS. THE AGENT SHALL REPORT IMMEDIATELY ON PARTICULAR PROFITABLE BUSINESS POSSIBILITIES AND EXTRAORDINARY EVENTS. 2.4. THE AGENT SHALL ABSTAIN FROM ANY COMPETITION WHATSOEVER AGAINST THE PRINDPAL AND SHALL NOT PROMOTE COMPETITION BY THIRD PERSONS. IN PARTICULAR, THE AGENT SHALL NOT ACT FOR COMPETITIVE FIRMS AS A COMMERCIAL AGENT, COMMISSION MERCHANT OR DISTRIBUTOR, NOR SHALL THE AGENT ASSOCIATE DIRECTLY OR INDIREDLY WITH COMPETITIVE FIRMS. THE AGENT SHALL NOT, FOR ALL TIME EXPLOIT OR DISCLOSE TO OTHER PERSONS ANY BUSINESS AND PRODUCTION SECRETS OF THE PRINCIPAL THAT HAVE BEEN COMMUNICATED TO THEM OR WHICH THEY HAVE OTHERWISE COME TO KNOW, IRRESPECTIVE OF WHETHER OR NOT THE CONTRACT IS STILL IN FORCE. 2.5 THE AGENT SHALL OBSERVE THE RULES OF FAIR COMPETITION AND BE RESPONSIBLE FOR ANY VIOLATION OF THE SAME. 2.6 THE AGENT IS NOT AUTHORIZED TO ACCEPT PAYMENTS DIRECTLY IN THEIR OWN NAME BUT SHALL ASSIST THE PRINCIPAL IN COLLECTING OUTSTANDING PAYMENTS. THE AGENT IS ALSO AUTHORIZED TO ACCEPT NOTIFICATION OF DEFECTS BY A CUSTOMER, AS WELL AS THE STATEMENT OF A CUSTOMER THAT HE WILL THE GOODS AT THE DISPOSABLE OF THE PRINCIPAL OR ANY SIMILAR STATEMENT BY WHICH THE CUSTOMER EXERCISES HIS RIGHTS RESULTING FROM DEFEDIVE DELIVERY. THE AGENT SHALL IMMEDIATELY II PRINCIPAL AND SHALL SEE TO IT THAT THE NECESSARY EVIDENCE IN FAVOUR OF THE PRINCIPAL IS OBTAINED. 2.7 THE AGENT SHALL ESTABLISH BUSINESS RELATIONS ONLY WITH SUCH CUSTOMERS WHOSE SOLVENCY IS SATISFADORY TO THE BEST OF THE KNOWLEDGE AND BELIEF OF THE AGENT. 17 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. 17. THUS AS CAN BE SEEN FROM THE ABOVE, ALL THE TERMS DO INDICATE THAT THE SAID COMPANY WAS ONLY ACTING AS AN AGENT ON COMMISSION BASIS AND HAS NOT BEEN PROVIDING ANY MANAGERIAL/TECHNICAL SERVICES. FURTHER THERE IS NO EVIDENCE ON RECORD THAT THEY ARE PROVIDING ANY TECHNICAL/MANAGERIAL SERVICES. THE SAID COMPANY WAS RESPONSIBLE FOR ARRANGING TIMELY PAYMENT FROM THE CUSTOMERS AND COMMISSION WAS PAID ONLY AFTER THE SALES AMOUNT WAS RECEIVED. SINCE THE SERVICES WERE RENDERED OUTSIDE INDIA, THE PROVISIONS OF SECTION 5 CANNOT BE APPLIED TO THE COMMISSION PAID SO AS TO MAKE IT TAXABLE IN INDIA. 18. THIS ASPECT CAN ALSO BE EXAMINED IN ANOTHER WAY AS ALREADY GIVEN A FINDING BY THE BENCH EARLIER AND WHICH IS ALSO NOT IN DISPUTE, THAT THE FOREIGN COMPANY DOES NOT HAVE ANY PE IN INDIA. THEREFORE, THE COMMISSION PAID TO THE FOREIGN COMPANY WHICH HAS TO BE CONSIDERED AS BUSINESS INCOME AND CANNOT BE TAXED IN INDIA AS PER THE DTAA BETWEEN INDIA AND UK. THE DEFINITION OF 'FEE FOR TECHNICAL SERVICES' BETWEEN UK AND INDIA DOES NOT INCLUDE MANAGERIAL SERVICES. HOWEVER, NEITHER THE ASSESSING OFFICER NOR THE CIT (A) CONSIDERED THE ISSUE OF DTAA, EVEN THOUGH ASSESSEE MENTIONED THE SAME IN ITS SUBMISSIONS BEFORE THE AUTHORITIES. THE DEFINITION OF TECHNICAL SERVICES AS PER THE INCOME TAX ACT IS AS UNDER: '9.(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA: (I)...(II)...(III)....(IV)...(V)...(VI) (VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY- FA) THE GOVERNMENT; OR (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; OR (C) A PERSON WHO IS A NON-RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE IN INDIA: [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 AN AGREEMENT MADE BEFORE THE 1ST DAY OF APRIL, 1976, AND APPROVED BY THE CENTRAL GOVERNMENT.] [EXPLANATION 1.FOR THE PURPOSES OF THE FOREGOING PROVISO, AN AGREEMENT MADE ON OR AFTER THE 1ST DAY OF APRIL, 1976, SHALL BE DEEMED TO HAVE BEEN MADE BEFORE THAT DATE IF THE AGREEMENT IS MADE IN ACCORDANCE WITH PROPOSALS APPROVED BY THE CENTRAL GOVERNMENT BEFORE THAT DATE.] EXPLANATION [2],FOR THE PURPOSES OF THIS CLAUSE, 'FEES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION (INCLUDING 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 RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'SALARIES'. 19. AS CAN BE SEEN FROM THE ABOVE SECTION 9(1)(VII)(B), FEE PAYABLE FOR THE PURPOSES OF MAKING OR EARNING INCOME FROM ANY SOURCE OUTSIDE INDIA IS NOT INCLUDED IN THE DEFINITION. THE AMOUNT HAS TO BE CONSIDERED AS BUSINESS INCOME. SINCE THE SERVICES ARE RENDERED OUTSIDE INDIA, THAT AMOUNT IS NOT TAXABLE AS IT DOES NOT ACCRUE OR ARISE IN INDIA. THE SAME VIEW WAS CONSIDERED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CEAT INTERNATIONAL S.A. VS.CIT 237 ITR 859, WHERE CERTAIN EXPORT COMMISSION WAS PAID TO A NON RESIDENT COMPANY AND IT WAS HELD THAT THE ASSESSEE DID NOT IMPART ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE EXPORTS OR SKILL, NOR RENDERED ANY MANAGERIAL TECHNICAL OR CONSULTANCY SERVICES. THE COMMISSION ATTRIBUTABLE TO THE SERVICES RENDERED CANNOT BE REGARDED AS ROYALTY OR FEES FOR TECHNICAL SERVICES AND IT WAS HELD THAT THE SAME WAS NOT TAXABLE UNDER SECTION 9(1)(VII). SIMILAR ISSUE WAS ALSO CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME TAX VS. SHERATON INTERNATIONAL INC. 313 ITR 267 WHERE CERTAIN PAYMENTS FOR ADVERTISING, PUBLICITY AND SALES PROMOTION SERVICES WERE CONSIDERED AND HELD THAT THOSE PAYMENTS CANNOT BE CONSIDERED AS EITHER ROYALTY OR FOR TECHNICAL SERVICES. SINCE THE NON RESIDENT DOES NOT HAVE ANY PE IN INDIA, SUCH INCOME WHICH IS TO BE CONSIDERED AS BUSINESS 18 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. INCOME WAS NOT TAXABLE IN INDIA. 41. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS SO EXPRESSED BY THE COORDINATE BENCH. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD WELL REASONING FINDINGS OF THE LEARNED CIT(A) THAT THE COMMISSION PAYMENTS MADE TO THE NON RESIDENT AGENTS DID NOT HAVE ANY TAXABILITY IN INDIA, EVEN UNDER THE PROVISIONS OF THE DOMESTIC LAW I.E. SECTION 9. ONCE WE COME TO THE CONCLUSION THAT THE INCOME EMBEDDED IN THESE PAYMENTS DID NOT HAVE ANY TAX IMPLICATIONS IN INDIA, NO FAULT CAN BE FOUND IN NOT DEDUCTING TAX AT SOURCE FROM THESE PAYMENTS OR, FOR THAT PURPOSE, EVEN NOT APPROACHING THE ASSESSING OFFICER FOR ORDER UNDER SECTION 195. IN OUR CONSIDERED VIEW, THE ASSESSEE, FOR THE DETAILED REASONS SET OUR ABOVE, DID NOT HAVE TAX WITHHOLDING LIABILITY FROM THESE PAYMENTS. AS HELD BY HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT LTD VS CIT [(2010) 327 ITR 456 (SC)], PAYER IS BOUND TO WITHHOLD TAX FROM THE FOREIGN REMITTANCE ONLY IF THE SUM PAID IS ASSESSABLE TO TAX IN INDIA. THE ASSESSEE CANNOT, THEREFORE, BE FAULTED FOR NOT APPROACHING THE ASSESSING OFFICER UNDER SECTION 195 EITHER. AS REGARDS THE WITHDRAWAL OF THE CBDT CIRCULAR HOLDING THAT THE COMMISSION PAYMENTS TO NON RESIDENT AGENTS ARE NOT TAXABLE IN INDIA, NOTHING REALLY TURNS ON THE CIRCULAR, AS DE HORS THE AFORESAID CIRCULAR, WE HAVE ADJUDICATED UPON THE TAXABILITY OF THE COMMISSION AGENTS INCOME IN INDIA IN TERMS OF THE PROVISIONS OF THE INCOME TAX ACT AS ALSO THE RELEVANT TAX TREATY PROVISIONS. 14. COMING TO THE DECISION IN THE CASE OF BAJAJ HINDUSTHAN LTD. (SUPRA) RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE, WE ARE OF THE CONSTANT OPINION THAT THE SAME DOES NOT APPLY TO THE FACTS OF THIS CASE. IN THAT CASE THE ASSESSEE WANTED TO ACQUIRE A SUGAR PLANT AND DISTILLERY PLANT IN BRAZIL AND WHEREAS THE CASE ON HAND IT WAS A CASE FOR BOOSTING EXPORTS. 15. THE HONBLE MADRAS HIGH COURT IN THE CASE OF M/S. EVOLV CLOTHING CO. P. LTD. VS. ACIT[TAX CASE (APPEAL)NO. 572OF 2013, JUDGEMENT DATED 14.06.2018] AT PARA 29 AND 30 HELD AS FOLLOWS: 29. FROM THE SERVICE AGREEMENT WITH THE AGENTS ABROAD, IT IS CLEAR THAT THE SERVICE RENDERED IS ESSENTIALLY BROKERAGE SERVICE. THE VERY FIRST CLAUSE OF THE AGREEMENT STATES TO PROCURE ORDERS. THE REFERENCE TO MARKET RESEARCH ABROAD OR CO-ORDINATION WITH THE SUPPLIER OR TO ENSURE TIMELY PAYMENT OR MAKING AVAILABLE ITS OFFICE SPACE FOR VISIT BY THE SUPPLIERS, WERE ORDINARILY THINGS WHICH ANY AGENT OR BROKER UNDERTOOK INCIDENTAL TO BROKERAGE SERVICE. 30. THERE IS NO FINDING THAT ANY OF THE COMMISSION AGENTS HAD ANY PLACE OF BUSINESS IN INDIA. EXPLANATION 1 TO SECTION 9(I)(I) OF THE IT ACT WOULD ATTRACT LIABILITY TO INDIAN TAX FOR A NON- RESIDENT WITH BUSINESS CONNECTIONS IN INDIA, ONLY IN RESPECT OF INCOME ATTRIBUTABLE TO HIS OPERATIONS IN INDIA. IN THIS CASE, THERE IS NOTHING WHICH SHOWS THAT THE INCOME IN QUESTION WAS ATTRIBUTABLE TO OPERATIONS IN INDIA. THAT WAS NOT EVEN THE FACTUAL FINDING OF THE ASSESSING OFFICER. THE ASSESSING OFFICER PROCEEDED ON THE BASIS THAT THE SITUS OF THE RENDERING OF SERVICES WAS NOT RELEVANT. IT WAS ONLY THE SITUS OF THE PAYER AND THE SITUS OF THE UTILIZATION OF SERVICES WHICH DETERMINE TAXABILITY OF SUCH SERVICES IN INDIA. 31. SECTION 195 OF THE IT ACT ATTRACTS TAX ONLY ON CHARGEABLE INCOME, IF ANY, PAID TO A NON- RESIDENT. WHERE THERE IS NO LIABILITY, THE QUESTION OF TAX DEDUCTION DOES NOT ARISE. WHERE NO PART OF THE INCOME IS CHARGEABLE IN INDIA, EVEN CLEARANCE UNDER SECTION 195(2) OR 195(3) OF THE IT ACT IS NOT NECESSARY. THE DECISION OF THE KARNATAKA HIGH COURT IN COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) V. SAMSUNG ELECTRONICS CO. LTD., REPORTED IN (2010) 320 ITR 209 (KAR), HAS BEEN OVERRULED BY THE SUPREME COURT IN GE INDIA TECHNOLOGY CENTRE P. LTD. V. CIT, REPORTED IN (2010) 327 ITR 456 (SC). THE SUPREME COURT HELD AS UNDER: THIS REASONING FLOWS FROM THE WORDS 'SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN SECTION 19 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. I95(I)- THE FACT THAT THE REVENUE HAD NOT OBTAINED ANY INFORMATION PER SE CANNOT BE A GROUND TO CONSTRUE SECTION 195 WIDELY SO AS TO REQUIRE DEDUCTION OF TAS EVEN IN A CASE WHERE AN AMOUNT PAID IS NOT CHARGEABLE TO TAX IN INDIA AT ALL. WE CANNOT READ SECTION 195, AS SUGGESTED BY THE DEPARTMENT, NAMELY, THAT THE MOMENT THERE IS REMITTANCE THE OBLIGATION TO DEDUCT TAS ARISES. IF WE WERE TO ACCEPT SUCH A CONTENTION IT WOULD MEAN THAT ON MERE PAYMENT INCOME WOULD BE SAID TO ARISE OR ACCRUE IN INDIA. THEREFORE, AS STATED EARLIER, IF THE CONTENTION OF THE DEPARTMENT WAS ACCEPTED IT WOULD MEAN OBLITERATION OF THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT FROM SECTION 195(1). 34. IN GE INDIA TECHNOLOGY CENTRE P. LTD., SUPRA, THE SUPREME COURT CLEARLY HELD THAT NO TAX IS DEDUCTIBLE UNDER SECTION 195 OF THE IT ACT ON COMMISSION PAYMENTS AND CONSEQUENTLY THE EXPENDITURE ON EXPORT COMMISSION PAYABLE TO NON-RESIDENTS FOR SERVICES RENDERED OUTSIDE INDIA BECOMES ALLOWABLE EXPENDITURE. IN TOSHOKU LTD., SUPRA, THE SUPREME COURT HELD THAT PAYMENTS TO AGENTS FOR PERFORMANCE OF SERVICES OUTSIDE INDIA ARE NOT LIABLE TO BE TAXED IN INDIA. 35. IN COMMISSIONER OF INCOME TAX, DELHI-IV, NEW DELHI V. EON TECHNOLOGY (P) LTD., (2011) 15 TAXMANN.COM 391 (DELHI), THE HIGH COURT OF DELHI HELD THAT PAYMENT OF SALES COMMISSION TO NON-RESIDENT WHO OPERATES OUTSIDE THE COUNTRY WOULD NOT ATTRACT TAX, IF PAYMENT WAS REMITTED ABROAD DIRECTLY. MERELY BECAUSE AN ENTRY HAD BEEN MADE IN THE BOOKS OF ACCOUNTS OF THE APPELLANT/ASSESSEE, THAT WOULD NOT MEAN THAT THE NON-RESIDENT AGENT HAD RECEIVED PAYMENT IN INDIA AND, THEREFORE, DISALLOWANCE UNDER SECTION 4O(A)(I) OF THE IT ACT WAS FOUND UNCALLED FOR. 16. APPLYING THE PROPOSITIONS OF LAW LAID DOWN IN THIS CASE LAWS THE FACTS OF THE CASE WE HAVE NO HESITATION IN HOLDING THAT THE SERVICES RENDERED BY MR. FIRPO WHICH WERE IN ITALY AND NOT IN INDIA ARE NOT TAXABLE IN INDIA UNDER INCOME TAX ACT, 1961 AS THE SAME HAS NOT ACCRUED OR ARISEN IN INDIA AND HENCE, NO TAX NEED BE DEDUCTED U/S 195 OF THE ACT. 17. IN VIEW OF THE ABOVE DISCUSSION, THE ORDER PASSED U/S 201(1)/201(1A) OF THE ACT ARE HEREBY CANCELLED. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. KOLKATA, THE 27 TH SEPTEMBER, 2019. SD/- SD/- [ABY T. VARKEY] [J. SUDHAKAR REDDY] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 27.09.2019 BIDHAN 20 I.T.A. NO. 140/KOL/2018 ASSESSMENT YEAR: 2014-15 M/S. ELECTROSTEEL CASTING LTD. COPY OF THE ORDER FORWARDED TO: 1. M/S. ELECTROSTEEL CASTING LTD., G.K. TOWER, 19, CAMAC STREET, KOLKATA-700 017. 2. INCOME TAX OFFICER (INTERNATIONAL TAXATION) WARD, KOLKATA. 3. CIT(A)- 22, KOLKATA. (SENT THROUGH MAIL) 4. CIT- 5. CIT(DR), KOLKATA BENCHES, KOLKATA. (SENT THROUGH MAIL) TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, KOLKATA BENCHES