ACIT, New Delhi V. M/s. Evergreen International Ltd., Gurgaon

ITA 177/DEL/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3792 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-02-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 09-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHIMA NEB
• 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
• Section: 143(3); 5(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : B , NEW DELHI BEFORE SH. H.S. SIDHU , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 177 /DE L/ 2015 ASSESSMENT YEAR: 2010 - 11 ACIT, CIRCLE - 8(2), NEW DELHI VS. M/S. EVERGREEN INTERNATIONAL LTD., 746, UDYOG VIHAR, PHASE - V, GURGAON. PAN : AAACE2386A ( APPELLANT ) (RESPONDENT) APPELLANT BY MS. ASHIMA NEB, SR.DR RESPONDENT BY SH. RAKESH AGARWAL, CA DATE OF HEARING 15.01.2018 DATE OF PRONOUNCEMENT 07.02.2018 ORDER PER O.P. KANT , A. M. : THIS APPEAL BY THE R EVENUE IS DIRECTED AGAINST ORDER DATED 08/10/2014 PASSED BY THE LD. COMMISSIONER OF INCOME - TAX ( APPEALS) - XIII, NEW DE LHI [IN SHORT THE LD. CIT - (A) ] FOR ASSESSMENT YEAR 2010 - 11, RAISING FOLLOWING GROUNDS OF APPEAL: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER OF RS.1,39,60,134/ - ON ACCOUNT OF DISALL OWANCE OF SALES COMMISSION TO FOREIGN AGENTS. THE APPEAL IS IN RESPECT OF BALANCE AMOUNT OF RS.1,04,14,649/ - WHICH WAS PAYMENT TO NON - RESIDENTS ON WHICH NO TDS WAS MADE. 2 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF FURNITURE AND LEATHER GOODS ETC. THE ASSESSEE FILED ITS RETURN OF INCOME ON 01/10/201 0 DECLARING TOTAL INCOME OF RS. 1,07,47,960/ - . THE CASE WAS SELECTED FOR SCRUTINY AND NOTI CE UNDER SECTION 143(2) OF THE INCOME - TAX ACT, 1961 (IN SHORT THE ACT ) WAS ISSUED AND COMPLIED WITH. THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED ON 15/03/201 3 ASSESSING TOTAL INCOME AT RS.2, 56,15,450/ - AFTER MAKING DISALLOWANCE ON SALES COMMISSION AMOUNTING TO RS.1,39,60,134/ - AN D DISALLOWANCE UNDER SECTION 14 A OF THE ACT AMOUNTING TO RS. 9,07,361/ - . ON FURTHER APPEAL, THE LD. CIT - ( A ) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED, THE R EVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 3. THE GROUND NO. 2 OF THE APPEAL BEING GENERAL IN NATURE IS DISMISSE D AS INFRUCTUOUS. 4. THE GROUND NO. 1 OF THE APPEAL RELATES TO DISALLOWANCE OF SALE COMMISSION TO FOREIGN AGENTS AMOUNTING TO RS. 1,39,60,134/ - . THE FACTS QUA THE DISALLOWANCE ARE THAT THE ASSESSEE PAID SALES COMMISSION TO TWO FOREIGN AGENTS WHO WERE BASED IN THE CANADA AND THE UK RESPECTIVELY. THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE (TDS) ON THE PAYMENT TO THESE FOREIGN AGENTS. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE WAS REQUIRED TO DEDUCT TDS ON THESE PAYMENTS AND IN VIEW OF NON - DEDUCTION OF TAX AT SOURCE, THE PAYMENT WERE LIABLE FOR DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT FOREIGN AGENTS DID NOT OPERATE OUT OF INDIA AND THEY DID NOT CONSTIT UTE PERMANENT ESTABLISHMENT (PE ) IN INDIA. THE 3 ASSESSEE SUBMITTED THAT THOSE FOREIGN AGENTS HAVE ALSO NOT RENDERED ANY KIND OF TECHNICAL, MANAGERIAL AND CONSULT ANCY SERVICE AND , THEREFORE , PAYMENTS WERE ALSO NOT LIABLE FOR FEE FOR T ECHNICAL S ERVICES (FTS) UNDER THE PROVISIONS OF THE ACT. 4.1 THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE SUBMISSION OF THE ASSESSEE. ACCORDING TO HIM, SERVICES PROVIDED BY A NON - RESIDENT FOREIGN AGENTS, WERE MANAGERIAL SERVICES AND HAVE BEEN UTILIZED IN INDIA AND THEREFORE CLEARLY FALL WITHIN THE AMBIT OF INCOME D EEMED TO ACCRUE OR ARISE IN INDIA AND TAXABLE UNDER SECTION 9(1)(I) AND 9(1)(VII)(B) OF THE ACT. SINCE TAX WAS NOT DEDUCTED BY THE ASSESSEE ON THE SAID PAYMENT, THE ASSESSING OFFICER DISALLOWED THE PAYMENT UNDER THE PROVISIONS OF SECTION 40(A) (I) OF THE ACT. 4.2 BEFORE THE LD. CIT - ( A ) , THE ASSESSEE MADE WRITTEN SUBMISSION AS WHY THE SERVICES OF FOREIGN SALES AGENTS WERE NOT IN THE NATURE OF MANAGERIAL SERVICES LIABLE TO BE TAXED AS FEE FOR TECHNICAL S ERVICES (FTS). THE ASSESSEE ALSO SUBMITTED THA T AS PER THE D OUBLE TAXATION AVOIDANCE A GREEMENT (DTAA) BETWEEN CANADA AND IN INDIA THERE IS A MAKE AVAILABLE CLAUSE, ACCORDING TO WHICH THE SERVICE MUST BE MADE AVAILABLE TO THE RESIDENT SO THAT HE CAN USE THE SAME SERVICE FOR PERFORMING THE SAME KIND O F TASK WITHOUT THE HELP OF SERVICE PROVIDER, IN FUTURE. ACCORDING TO THE ASSESSEE , NO SUCH TECHNICAL KNOWLEDGE WAS PROVIDED BY THE FOREIGN AGENTS, HENCE THE SERVICES PROVIDED BY THE AGENT S WERE NOT LIABLE AS FTS IN INDIA. THE RELEVANT SUBMISSION OF THE A SSESSEE MADE BEFORE THE LD. CIT - ( A ) IS REPRODUCED AS UNDER: H. AS IS STATED ABOVE AT PARA 4 ON PAGE 14 OF THIS SUBMISSION THAT THE AO CLOTHED THE SALES COMMISSION WITH MANAGERIAL SERVICE AND CONSEQUENTLY INCLUDED IT AS FEES FOR TECHNICAL SERVICE. IN THIS REGARD, WE SUBMIT THAT THE OVERSEAS AGENTS ARE NOT BEING PAID FOR RENDERING ANY KIND OF TECHNICAL, MANAGERIAL OR CONSULTANCY SERVICES. 4 IT IS TO BE NOTED THAT MARKETING SERVICES DO NOT FALL IN ANY OF THE CATEGORIES MENTIONED IN SEC 9(1) (VII) OF THE ACT. T HE SECTION READS AS UNDER: SEC 9 (1) : (I) TO (VI) XXXXXX (VII) - INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY (A) XXXXXXXX (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED 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) XXXXXXXXXXX : [PROVIDED THAT NOTHING CONTAINED IN THIS CLAUSE SHALL APPLY IN RELATION TO ANY IN COME 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 L. FOR THE PURPOSES OF THE FOREGOING PROVISO, AN AGREEMENT MADE ON OR AFTER THE 1 ST 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'.] SEC 9 (2) - NOTWITHSTANDING ANYTHING CONTAINED IN SUB - SECTION (1), ANY PENSION PAYABL E OUTSIDE INDIA TO A PERSON RESIDING PERMANENTLY OUTSIDE INDIA SHALL NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA, IF THE PENSION IS PAYABLE TO A PERSON REFERRED TO IN ARTICLE 314 OF THE CONSTITUTION OR TO A PERSON WHO, HAVING BEEN APPOINTED BEFORE THE 5 15TH D AY OF AUGUST, 1947, TO BE A JUDGE OF THE FEDERAL COURT OR OF A HIGH COURT WITHIN THE MEANING OF THE GOVERNMENT OF INDIA ACT, 1935, CONTINUES TO SERVE ON OR AFTER THE COMMENCEMENT OF THE CONSTITUTION AS A JUDGE IN INDIA. [EXPLANATION. FOR THE REMOVAL OF DO UBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INCOME OF A NON - RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (V) OR CLAUSE (VI) OR CLAUSE (VIL) OF SUB - SECTION (1) AND SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON - RESIDENT, WHETHER OR NOT, (I) THE NON - RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON - RESIDENT HAS RENDERED SERVICES IN INDIA.] THE SALES AGENCY WORK DOESN'T FALL IN ANY OF THREE CATEGORIES OF SERVICES MEN TIONED IN EXPLANATION 2 - ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES. ANY OF THESE THREE TERMS IS NOT DEFINED IN THE ACT, SO A MEANING / INTERPRETATION WHICH IS GENERALLY UNDERSTOOD IS TO BE ADOPTED. IN THE GENERAL PARLANCE AND TO THE COMMERCIAL WO RLD THE THREE TERMS ARE UNDERSTOOD AS UNDER: MANAGERIAL SERVICE: THERE IS NO EXACT DEFINITION OF THIS TERM. IT COVERS SERVICES RENDERED IN PERFORMING MANAGEMENT FUNCTIONS. THE MANAGEMENT FUNCTIONS SHOULD NECESSARILY RELATE TO RUNNING A BUSINESS THE EXPRESSION 'MANAGEMENT' SHOULD BE INTERPRETED AS PER ITS NORMAL BUSINESS MEANING OR ORDINARY MEANING. IT MEANS HANDLING MANPOWER AND THEIR AFFAIRS. A 'MANAGERIAL SERVICE' IS TOWARDS THE ADOPTION AND CARRYING OUT THE POLICIES OF AN ORGANIZATION. MANAGERIAL SERVICES MUST NECESSARILY BE NON - TECHNICAL SERVICE TECHNICAL SERVICES 6 A 'TECHNICAL SERVICE' MEANS A SERVICE REQUIRING EXPERTISE IN TECHNOLOGY. THE MEANING ASSOCIATED WITH 'TECHNICAL' IS 'INVOLVING OR CONCERNING APPLIED AND INDUSTRIAL SCIENCE'. SERVICES ARE OF A 'TECHNICAL' NATURE WHEN SPECIAL SKILLS OR KNOWLEDGE RELATE TO A TECHNICAL FIELD. THESE INCLUDE SERVICES RELATED TO A PARTICULAR ART, SCIENCE OR APPLIED SCIENCE OR VOCATIONAL TRAINING DEALING WITH APPLIED SCIENCE; DICTIONAR Y MEANING INCLUDES PROFESSIONAL. DELIVERY OF A SERVICE VIA TECHNOLOGICAL MEANS DOES NOT MAKE THE SERVICE TECHNICAL. THE EXPRESSION 'TECHNICAL' HAS VERY WIDE AMPLITUDE AND DOES NOT RESTRICT ITS APPLICABILITY ONLY TO ENGINEERING OR SCIENTIFIC AREAS OF KNOWLEDGE. CONSULTANCY SERVICES SERVICES CONSTITUTING IN THE PROVISION OF ADVICE BY SOMEONE, SUCH AS A PROFESSIONAL, WHO HAS SPECIAL QUALIFICATIONS ALLOWING HIM TO DO SO. OVERLAP WITH TECHNICAL AND MANAGERIAL SERVICES POSSIBLE SO LONG AS PROVIDED BY A CONSULTANT. THE EXPRESSION 'CONSULTANCY' SERVICE INVOLVES GIVING OF AN ADVICE OR ADVISORY SERVICE BY A PROFESSIONAL. 4.3 THE ASSESSEE FURTHER CONTENDED BEFORE THE LD. CIT - ( A ) THAT THE FOREIGN AGENTS BEING NONRESIDENTS, WHO HAD NO OPERATIONS/PERMANENT ESTABLISHMENT INDIA AND THEREFORE NOT SUBJECTED TO BE ASSESSED IN INDIA. ACCORDINGLY, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE ON SUCH EXPENSES. IN SUPPORT OF THE CONTE NTION, THE ASSESSEE RELIED ON NUMBER OF 7 DECISIONS INCLUDING DECISION OF THE TRIBUNAL DELHI BENCH IN THE CASE OF ALLIED NIPPON LTD VERSUS DCIT (2013) 37 TAXMANN.COM 135 . 4.4 THE LEARNED CIT - ( A ) RELYING ON THE DECISION OF THE HON BLE DELHI HIGH COURT IN TH E CASE OF DCIT VS. EON TECHNOLOGY PRIVATE L IMITED , 46 SOT 323 AND DECISION OF THE TRIBUNAL DELHI BENCH, IN THE CASE OF ALLIED NIPPON LTD VERSUS DCIT REPORTED IN 37 TAXMANN.COM 135(145 ITD 81) HA S DELETED THE ADDITION. THE RELEVANT FINDING OF THE LD. CIT - (A ) IS REPRODUCED AS UNDER: .. REVERTING BACK TO THE CASE IN HAND, IT IS NOTICED THAT THE ASSESSEE IS MANUFACTURING THE PROCESSED LEATHER ETC AND 97% OF THE PRODUCT IS EXPORTED BY THE COMPANY. THE ASSESSEE HAS PAID THE COMMISSION TO THE AGENTS FOR THE SERVICES OF BOOKING OF THE EXPORT ORDERS FROM THE BUYERS ABROAD AND NO PART OF THE SERVICES HAVE BEEN PERFORMED IN INDIA. THE COMMISSION WAS PAID TO THEM FOR BOOKING THE S ALES ORDERS AGAINST WHICH THE ASSESSEE EXPORTED THE GOODS AND REALIZED THE EXPORT PROCEEDS IN CONVERTIBLE FOREIGN CURRENCY. THE FOREIGN AGENTS ARE INDEPENDENT PARTIES AND WORKED ON THE PRINCIPAL TO PRINCIPAL BASIS WITH THE ASSESSEE. THEY DID NOT HAVE ANY P OWER TO FINALIZE THE SALES CONTRACTS ON BEHALF OF THE COMPANY. BOTH THE FOREIGN AGENTS WERE NON RESIDENTS AND NO PART OF THE SERVICES WERE RENDERED IN INDIA AND DID NOT HAVE PERMANENT ESTABLISHMENT IN INDIA. IN VIEW OF THE PRECEDENTS DISCUSSED IN THE EARLI ER PART, THE DISALLOWANCE U/S 40(A) OF THE ACT MADE BY THE ASSESSING OFFICER IS DELETED. 4.5 B EFORE US, THE LD. SR. DR SUBMITTED THAT BY WAY OF C IRCULAR NO. 7/2009 DATED 22/10/2009, THE EARLIER CIRCULAR S ISSUED BY THE CENTRAL BOARD OF DIRECT T AXES (CBDT ) I.E. THE C IRCULA R NO. 163 DATED 29/05/1975 AND C IRCULAR NO. 786 DATED 7/02/2000 HAVE BEEN WITHDRAWN , WHICH PROVIDED CLARIFICATION IN RESPECT OF CERTAIN PROVISIONS OF CIRCULAR NO. 23 DATED 23 RD JULY, 1969. ACCORDING TO HER, IN VIEW OF THE WITHDRAWAL OF THE CIRCULARS, THE PAYMENT MADE BY THE ASSESSEE TO THE NON - RESIDENT ARE 8 INCOME ACCRUED OR ARISE N FROM BUSINESS CONNECTION IN INDIA AND , THUS , IN VIEW OF NON - DEDUCTION OF TAX AT SOURCE, SAID PAYMENTS ARE LIABLE FOR DISALLOWANCE UNDER SECTION 40(A) (I) OF THE ACT. 4.6 ON THE OTHER HAND, LD. COUNSEL RELIED ON THE ORDER OF THE LD. CIT - (A). THE LD. COUNSEL ALSO RELIED ON THE DECISION OF THE HON BLE SUPREME COURT IN T HE CASE OF ISHIKAWAJIMA HARIMA HEAVY I NDUSTRI ES LTD . VERSUS DIT (288 ITR 408) AND SUBMITTED THAT FOR ACCRUAL OF INCOME FROM FEE FOR TECHNICAL S ERVICES (FTS) BOTH THE CONDITION S - THE SERVICES ( WHICH IS SOURCE OF IN COME ), WHICH IS SOUGHT TO BE TAXED , HAS B E E N RENDERED IN INDIA, AS WELL AS UTILIZED IN INDIA AND BOTH THE CONDITION HAVE TO BE SATISFIED SIMULTANEOUSLY. THE LD. COUNSEL ALSO SUBMITTED THAT RETROSPECTIVE AMENDMENT IN SECTION 9 HAD CHANGED THE POS ITION OF TAXABILITY OF INCOME OF NON - RESIDENTS FROM RENDERING OF TECHNICAL SERVICES IN INDIA. ACCO RDING TO THE LD. COUNSEL , AMEN DMENT HAS BEEN INTRODUCED BY WAY OF F INANCE ACT , 2010, WHICH RECEIVED ASSENT OF THE PRESIDENT OF INDIA ON 8 TH MAY, 2010, WHEREAS THE PRESENT CASE OF THE ASSESSEE PERTAINS TO FINANCIAL YEAR 2009 - 10 AND , THUS , THE ASSESSEE HAD NO OCCASION TO KNOW/BELIEVE THAT TAX WAS TO BE DEDUCTED IRRESPECTIVE OF THE PLACE OF RENDERING OF SERVICES. THE LD. COUNSEL IN SUPPORT, RELIED ON THE DECISIONS OF THE TRIBUNAL, MUMBAI BENCH IN THE CASE OF KPMG VS. ACIT IN ITA NO.6286, 6694/MUM./2012 REPORTED IN (2016) ITR (TRIB.) 070. 4.7 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN THE CASE, THE ASSESSEE COMPANY IS 100% EXPORT HOUSE, EXPORTING LEATHER GARMENTS AND FURNITURE ETC . THE ASSESSEE COMPA NY PAID SALES C OMMISSION OF RS. 1, 04,14,339 TO TWO FORE IGN AGENTS NAMELY TS SACHS INC. , CANADA ( RS. 17,5 9,113/ - ) AND DEANSTON LTD, UK ( RS. 86,55,536/ - ). NO TAX WAS DEDUCTED BY THE ASSESSEE ON THE SAID COMMISSION PAYMENT S . THE ASSESSING OFFICER HELD THAT COMMISSION 9 PAYMENTS MADE BY THE ASSESSEE COMPANY TO FOREIGN AGENTS IS COVERED AS SUM CHARGEABLE UNDER SECTION 9(1)(I) AND 9(1)(VII) OF THE ACT AND , THEREFORE, DUE TO NON - DEDUCTION OF TAX SOURCE , T HE PAYMENT WAS LIABLE FOR DISALLOWANCE U/S 40(A)(I) OF THE ACT. THE LD . CIT - ( A ) DELETED THE ADDITION HOLDING THAT BOTH FOREIGN AGENTS WERE NON - RESIDENT AND NO PART OF SERVICES WERE RENDERED IN INDIA AND DID NOT HAVE PER MANENT ESTABLISHMENT IN INDIA, AND T H U S , THE PAYMENT WAS NOT CHARGEABLE TO THE TAX IN INDIA. 4.7.1 BEFORE US, THE ISSUE IS WHETHER THE SERVICES RENDERED BY THE FOREIGN AGENTS ARE CHARGEABLE TO TAX IN INDIA DURING RELEVANT PERIOD. 4.7.2 AS FAR AS SERVICES RENDERED BY THE FOREIGN AGENTS ARE CONCERNED, THE ASSESSEE EXPLAINED THAT SERVICES OF BOOKING OF EX PORT ORDERS FROM FOREIGN BUYERS WERE PERFORMED OUTSIDE INDIA AND NO PART OF SERVICES WERE RENDERED IN INDIA. THE ASSESSEE FURTHER SUBMITTED THAT COMMISSION WAS PAID TO THEM AFTER REALIZATION OF THE EXPORT SALE PROCEEDS FROM CUSTOMERS. THE R EVENUE HAS NOT D ISPUTED THE NATURE OF SERVICES RENDERED BY THE FOREIGN AGENT S . 4.7.3 ACCORDING TO THE ASSESSING OF FICER , THE INCOME FROM SERVICES ARE DEEMED TO ACCRUE OR ARISE IN THE HANDS OF NON - RESIDENT EITHER UNDER SECTION 9(1)(I) OR 9(VII)(B) OF THE ACT. 4.7.4 FIRS T WE EXAMINE THE TAXABILITY OF THE PAYMENTS UNDER SECTION 9 (1)(I) OF THE ACT. IN VIEW OF THE ASSESSING OFFICER AS PER THE SECTION 9(1)(I) OF THE ACT, INCOME HAS ACCRUED OR ARISEN IN THE HAND OF NON - RESIDENT THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA . 4.7.5 WE HAVE NOTED THAT THE CBDT FOLLOWING THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VERSUS RD AGGA RWAL & CO (1965) 56 ITR 20 (SC) , ISSUED A C IRCULAR NO. 23 DATED 23/07/1969, GIVING SOME 10 ILLUSTRATIVE INSTANCES OF NON - RESIDENT HAVIN G BUSINESS CONNECTION IN INDIA. P ARA - 2 OF THE SAID CIRCULAR READS AS UNDER: 2. THE EXPRESSION 'BUSINESS CONNECTION' ADMITS OF NO PRECISE DEFINITION. THE IMPORT AND CONNOTATION OF THIS EXPRESSION HAS BEEN EXPLAINED BY THE SUPREME COURT IN THEIR JUDGMENT IN CIT VS. R.D. AGGARWAL & CO. (1965) 56 ITR 20 (SC) : TC 39R.1098. THE QUESTION WHETHER A NON - RESIDENT HAS A 'BUSINESS CONNECTION' IN INDIA FROM OR THROUGH WHICH INCOME, PROFITS OR GAINS CAN BE SAID TO ACCRUE OR ARISE TO HIM WITHIN THE MEANING OF S. 9 OF THE IT ACT, 1961, HAS TO BE DETERMINED ON THE FACTS OF EACH CASE. HOWEVER, SOME ILLUSTRATIVE INSTANCES OF A NON - RESIDENT HAVING BUSINESS CONNE CTION IN INDIA, ARE GIVEN BELOW : (A ) MAINTAINING A BRANCH OFFICE IN INDIA FOR THE PURCHASE OR SALE OF GOODS OR TRANSACTING OTHER BUSINESS. (B) APPOINTING AN AGENT IN INDIA, FOR THE SYSTEMATIC AND REGULAR PURCHASE OF RAW MATERIALS OR OTHER COMMODITIES, OR FOR SALE OF THE NON - RESIDENT'S GOOD S OR FOR OTHER BUSINESS PURPOSES. (C) ERECTING A FACTORY IN INDIA WHERE THE RAW PRODUCE PURCHASED LOCALLY IS WORKED INTO A FIRM SUITABLE FOR EXPORT ABROAD. (D) FORMING A LOCAL SUBSIDIARY COMPANY TO SELL THE PRODUCTS OF THE NON - RESIDENT PARENT COMPANY. (E) HAVING FINANCIAL ASSOCIATION BETWEEN A RESIDENT AND NON - RESIDENT COMPANY. 4.7.6 FURTHER , PARA - 7 OF THE SAID CIRCULAR HAS LAID DOWN THAT TO CONSTITUTE A BUSINESS CONNECTION, SOME CONTINUITY OF RELATIONSHIP BETWEEN THE PERSON IN INDIA WHO HELPS TO MAKE THE PROFIT AND THE PERSON OUTSIDE INDIA WHO RECEIVES OR REALIZE THE PROFITS, IS NECESSARY AND WHERE THERE ARE FEW TRANSACTION OF PURCHASE OF RAW MATERIALS HAVE TAKEN PLACE IN INDIA AND MANUFACTURE AND SALE OF GOODS HAVE TAKEN PLACE OUTSIDE INDIA, THE PROF IT ARISING FROM SUCH SALES CANNOT BE CONSIDERED TO HAVE ARISE IN OUT OF BUSINESS CONNECTION IN INDIA . 4.7.7 I N PARA - 4 OF THE SAID CIRCULAR COMMISSION INCOME OF FOREIGN AGENT OF INDIAN EXPORTERS WAS HELD AS NOT LIABLE TO INCOME TAX: 11 4. FOREIGN AGENTS OF INDIAN EXPORTERS. A FOREIGN AGENT OF INDIAN EXPORTER OPERATES IN HIS OWN COUNTRY AND NO PART OF HIS INCOME ARISES IN INDIA. HIS COMMISSION IS USUALLY REMITTED DIRECTLY TO HIM AND IS, THEREFORE, NOT RECEIVED BY HIM OR ON HIS BEHALF IN INDIA. SUCH AN AGEN T IS NOT LIABLE TO INCOME - TAX IN INDIA ON THE COMMISSION. 4.7.8 IN C IRCULAR NO. 786 DATED 07/02/2000 THE CBDT ISSUED CLARIFICATION REGARDING DEDUCTION OF TAX UNDER SECTION 195 AND THE TAXABILITY OF EXPORT COMMISSION PAYABLE TO NON - RESIDENT AGENTS RENDERIN G SERVICES ABROAD. THE RELEVANT PART OF THE CIRCULAR IS REPRODUCED AS UNDER: IN THEIR AUDIT REPORT FOR 1997 - 98 [D.P. NO. 79(IT)] THE COMPTROLLER & AUDITOR GENERAL (C & AG) RAISED AN OBJECTION THAT THE ASSESSING OFFICER IN COMPUTING THE PROFITS AND GAINS OF BUSINESS OR PROFESSION, IN A CASE IN MUMBAI CHARGE, HAD WRONGLY ALLOWED A DEDUCTION IN RESPECT OF A PAYMENT TO A NON - RESIDENT WHERE TAX HAD NOT BEEN DEDUCTED AT SOURCE. THE NATURE OF THE PAYMENT IN THIS CASE WAS EXPORT COMMISSION AND CHARGES PAYABLE FOR SERVICES RENDERED OUTSIDE INDIA. IN THE VIEW OF C & AG THE EXPENDITURE SHOULD HAVE BEEN DISALLOWED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 40(A)(I) OF THE IT ACT, 1961. IT HAS COME TO THE NOTICE OF THE BOARD THAT A SIMILAR VIEW, ON THE SAME SET OF FA CTS HAS BEEN TAKEN BY SOME ASSESSING OFFICERS IN OTHER CHARGES. 2. THE DEDUCTION OF TAX AT SOURCE UNDER S. 195 WOULD ARISE IF THE PAYMENT OF COMMISSION TO THE NON - RESIDENT AGENT IS CHARGEABLE TO TAX IN INDIA. IN THIS REGARD ATTENTION TO CBDT CIRCULAR NO. 23, DATED 23RD JULY, 1969 IS DRAWN, WHERE THE TAXABILITY OF 'FOREIGN AGENTS OF INDIAN EXPORTERS' WAS CONSIDERED ALONG WITH CERTAIN OTHER SPECIFIC SITUATIONS. IT HAD BEEN CLARIFIED THEN THAT WHERE THE NON - RESIDENT AGENT OPERATES OUTSIDE THE COUNTRY NO PART OF HIS INCOME ARISES IN INDIA. FURTHER, SINCE THE PAYMENT IS USUALLY REMITTED DIRECTLY ABROAD IT CANNOT BE HELD TO HAVE BEEN RECEIVED BY OR ON BEHALF OF THE AGENT IN INDIA. SUCH PAYMENTS WERE THEREFORE, HELD TO BE NOT TAXABLE IN INDIA. THE RELEVANT SECTION S, NAMELY SECTION 5(2) AND SECTION 9 OF THE INCOME - TAX ACT, 1961 NOT HAVING UNDERGONE ANY CHANGE IN THIS REGARD, THE CLARIFICATION IN CIRCULAR NO. 23 STILL PREVAILS. NO TAX IS THEREFORE, DEDUCTIBLE UNDER SECTION 195 AND CONSEQUENTLY THE EXPENDITURE ON EXPO RT COMMISSION AND OTHER RELATED CHARGES PAYABLE TO A NON - RESIDENT FOR SERVICES RENDERED OUTSIDE INDIA BECOMES ALLOWABLE EXPENDITURE. ON BEING APPRISED OF THIS POSITION THE COMPTROLLER & AUDITOR GENERAL HAVE AGREED TO DROP THE OBJECTION REFERRED TO ABOVE. 4.7.9 FURTHER , VI DE CIRCULAR NO. 7/2009 DATED 22/10/2009, THE CBDT WITHDRAWN THE CIRCULAR NO. 23 DATED 23/07/1969 AND CIRCULAR NO. 786/2000 DATED 07/02/2000. 12 4.8 IN OUR OPINION, IT IS SETTLED POSITION THAT CIRCULARS ARE BINDING ON THE AUTHORITIES UNDER TH E CBDT BUT THESE ARE NOT BINDING ON THE INCOME - TAX A PPELLATE TRIBUNAL. WE NOTE THAT AS PER SECTION 119 OF THE ACT, THE CBDT IS EMPOWERED TO ISSUE ORDERS, INSTRUCT IONS, OR DIRECTIONS TO ALL THE INCOMES - TAX A UTHORITIES WORKING UNDER IT FOR PROPER ADMINISTRAT ION OF THE ACT AND IT HAS ALSO BEEN PROVIDED THAT THEY SHALL BE BINDING UPON THE INCOME - TAX A UTHORITIES. WE NOTE FURTHER THAT A PROVISION HAS BEEN INSERTED TO SUB - SECTION ( 1 ) OF SECTION 119, WHICH SAYS THAT NO SUCH ORDERS, INSTRUCTIONS OR DIRECTIONS SHALL BE ISSUED: (A) SO A S TO REQUIRE ANY INCOME - TAX A UTHORITY TO MAKE A PARTICULAR ASSESSMENT OR DISPOSE A PARTICULAR CASE IN A PARTICULAR MANNER; OR (B) SO AS TO INTERFERE WITH THE DISCRETION OF THE COMMISSIONER (A PPEALS) IN EXERCISE OF HIS APPELLATE FUNCTIONS . IT IS EVIDENT FROM THE ABOVE PROVISO THAT THE CBDT HAS NEITHER THE POWER TO DECIDE THE TAXABILITY OF PARTICULAR RECEIPT NOR IT HAS POWER TO INTERFERE WITH APPELLATE FUNCTIONS OF THE COMMISSIONER APPEALS. THEREFORE, THERE IS NO QUESTION OF THERE BEING ANY BINDING EFFECT OF THE CIRCULAR ON THE INCOME - TAX A PPELLATE TRIBUNAL AND THE ISSUE OF THE TAXABILITY OF PAY MENT TO NON - RESIDENT AGENTS HAS TO BE DECIDED IN ACCORDANCE WITH LAW. 4.8.1 WE HAVE FURTHER, NOTED THAT THE TERM BUSINESS CONNECTION HAS BEEN DEFINED IN EXPLANATION - 2 BELOW THE SECTION 9(1)(I) OF THE ACT, WHICH WAS INSERTED BY FINANCE ACT, 2003 W.E.F. 01/04/2004. THE BUSINESS CONNECTION DEFINED IS IDENTICAL TO DEPENDANT AGENT PERMANENT ESTABLISHMENT (PE) IN DTAA. THE SAID EXPLOANATION R EADS AS UNDER: EXPLANATION 2. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT 'BUSINESS CONNECTION' SHALL INCLUDE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A PERSON WHO, ACTING ON BEHALF OF THE NON - RESIDENT, 13 (A) HAS AND HABITUALLY EXERCISES IN INDIA, AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE NON - RESIDENT, UNLESS HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MERCHANDISE FOR THE NON - RESIDENT; OR (B) HAS NO SUCH AUTHORITY, BUT HABITUALLY MAINTAINS IN INDIA A STOCK OF GOODS OR ME RCHANDISE FROM WHICH HE REGULARLY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE NON - RESIDENT; OR (C) HABITUALLY SECURES ORDERS IN INDIA, MAINLY OR WHOLLY FOR THE NON - RESIDENT OR FOR THAT NON - RESIDENT AND OTHER NON - RESIDENTS CONTROLLING, CONTROLLED BY, OR SUBJECT TO THE SAME COMMON CONTROL, AS THAT NON - RESIDENT: 4.8.2 T HE SCOPE AND E FFECT OF THE AMENDMENT MADE IN S ECTION 9 AS WELL AS SECTION 163 BY THE F INANCE ACT , 200 3 HAS BEEN EXPLAINED BY THE CBDT IN C IRCULAR NO. 7 OF 2003 . 4.8.3 FURTHER, HON BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF GVK I NDUSTRIES LTD . VERSUS INCOME TAX OFFICER, (1997) 228 ITR 564 ANALYSED VARIOUS DECISIONS OF THE COURT S AND LAID CERTAIN PRINCIPLES TO DECIDE EXISTENCE OF BUSINESS CONNECTION , AS UNDER: 12. CLAUSE (I) OF SUB - S. (1) OF S. 9, EXTRACTED ABOVE, BRINGS WITHIN THE FOLD OF THE SAID EXPRESSION 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 F ROM ANY ASSET OR SOURCE OF INCOME IN INDIA, OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. HERE THE CONTENTION OF MR. DHANUKA THAT THE NRC HAD NO BUSINESS CONNECTION REQUIRES EXAMINATION. 13. 'THE EXPRESSION BUSINESS CONNECTION' IS ALSO USED IN S. 163(1)(B) WHICH REGARDS EVERY PERSON IN INDIA, WHO HAS ANY BUSINESS CONNECTION WITH THE NON - RESIDENT, AS AN AGENT OF THAT NON - RESIDENT. 14. THE IMPORT OF THAT EXPRESSION HAS BEEN EXPLAINED IN VARIOUS JUDICIAL PRONOUNCEMENTS. 15. IN CIT VS. R. D. AGGA RWAL AND CO. (1965) 56 ITR 20 (SC), THE EXPRESSION 'BUSINESS CONNECTION,' AS USED IN S. 42 OF THE INDIAN IT ACT, 1922, FELL FOR CONSIDERATION OF THE SUPREME COURT. IT IS OBSERVED THAT THE QUESTION WHETHER THERE IS 'BUSINESS CONNECTION' FROM OR THROUGH WHIC H THE INCOME, PROFITS OR GAINS ARISE OR ACCRUE TO A NON - RESIDENT MUST BE DETERMINED UPON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IT IS POINTED OUT THAT THE EXPRESSION BUSINESS CONNECTION POSTULATES A REAL AND INTIMATE RELATION BETWEEN THE TRADING ACTIV ITY CARRIED ON OUTSIDE THE TAXABLE TERRITORIES AND THE TRADING ACTIVITY WITHIN THE TERRITORIES, THE RELATION BETWEEN THE TWO CONTRIBUTING TO THE EARNING OF INCOME BY THE NON - RESIDENT IN HIS TRADING ACTIVITY. 'BUSINESS CONNECTION CONTEMPLATED BY S. 42 OF TH E 1922 ACT, IT IS EXPLAINED,' INVOLVES A RELATION BETWEEN A BUSINESS 14 CARRIED ON BY A NON - RESIDENT WHICH YIELDS PROFITS OR GAINS AND SOME ACTIVITY IN THE TAXABLE TERRITORIES WHICH CONTRIBUTES DIRECTLY OR INDIRECTLY TO THE EARNING OF THOSE PROFITS OR GAINS ; THERE MUST BE AN ELEMENT OF CONTINUITY BETWEEN THE BUSINESS OF A NON - RESIDENT AND THE ACTIVITY IN THE TAXABLE TERRITORIES AND A STRAY OR ISOLATED TRANSACTION IS NOT TO BE REGARDED AS BUSINESS CONNECTION.' IN CARBORANDUM CO. VS. CIT 1977 CTR (SC) 209 :(197 7) 108 ITR 335 (SC), A FOREIGN COMPANY ENTERED INTO AN AGREEMENT WITH AN INDIAN COMPANY FOR RENDERING TECHNICAL AND KNOW - HOW SERVICES TO THE INDIAN COMPANY. IN LIEU OF THOSE SERVICES, THE FOREIGN COMPANY WAS TO RECEIVE FROM THE INDIAN COMPANY AN ANNUAL FEE EQUAL TO THREE PER CENT. OF THE NET SALE PROCEEDS OF THE PRODUCTS MANUFACTURED BY THE INDIAN COMPANY EVERY YEAR. THE QUESTION WAS HOW MUCH OF THE MONEY RECEIVED BY THE FOREIGN COMPANY WOULD BE TAXABLE UNDER THE PROVISIONS OF THE ACT. THE INDIAN COMPANY EM PLOYED PERSONNEL MADE AVAILABLE BY THE FOREIGN COMPANY, WHO WORKED UNDER THE DIRECT CONTROL OF THE INDIAN COMPANY. THE SUPREME COURT HELD THAT THE SERVICES OF THE FOREIGN COMPANY IN MAKING THE EMPLOYEES AVAILABLE WERE RENDERED WHOLLY OUTSIDE INDIA AND THAT THE ACTIVITIES OF THE FOREIGN PERSONNEL LENT OR DEPUTED BY THE FOREIGN COMPANY DID NOT AMOUNT TO A BUSINESS ACTIVITY CARRIED ON BY THE FOREIGN COMPANY IN INDIA. IT WAS FURTHER HELD THAT THE FEE DID NOT ACCRUE OR ARISE IN INDIA NOR COULD IT BE DEEMED TO HA VE ACCRUED OR ARISEN IN INDIA AND THAT TO ROPE IN THE INCOME OF A NON - RESIDENT UNDER THE DEEMING PROVISION OF S. 42(1) OF THE 1922 ACT IT MUST BE SHOWN BY THE DEPARTMENT THAT SOME OF THE OPERATIONS WERE CARRIED OUT IN INDIA IN RESPECT OF WHICH THE INCOME I S SOUGHT TO BE ASSESSED. IN CIT VS. HINDUSTAN SHIPYARD LTD. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP), THE RESPONDENT - COMPANY ENTERED INTO AN AGREEMENT WITH A POLISH COMPANY FOR THE PURCHASE OF DIESEL ENGINES WITH ACCESSORIES. THE AGREEMENT PROVIDED THAT THE POLISH COMPANY WOULD RENDER SERVICES FOR THE EFFECTIVE FULFILMENT OF THE CONTRACT OF SALE, WHICH INCLUDED ORGANISING OF A TRAINING COURSE IN POLAND FOR TECHNICAL EMPLOYEES OF HINDUSTAN SHIPYARD AT THE EXPENSE OF THE POLISH COMPANY. IN THE CONTEXT OF TH E QUESTION REFERRED TO THIS COURT UNDER S. 256(1) OF THE ACT, THE DIVISION BENCH WHICH DEALT WITH THE CASE, CONSIDERED THE SCOPE OF THE EXPRESSION BUSINESS CONNECTION WITHIN THE MEANING OF SS. 9(1)(I) AND 163(1)(B) OF THE ACT AND HELD THAT TO CONFORM TO TH E REQUIREMENTS OF THAT EXPRESSION IT IS NECESSARY THAT THE COMMON THREAD OF MUTUAL INTEREST MUST RUN THROUGH THE FABRIC OF THE TRADING ACTIVITIES CARRIED ON OUTSIDE AND INSIDE THE TAXABLE TERRITORY WHICH HAS BEEN DESCRIBED AS A REAL AND INTIMATE CONNECTION AND THAT THERE MUST BE SOMETHING MORE THAN A MERE TRANSACTION OF PURCHASE AND SALE BETWEEN PRINCIPAL AND PRINCIPAL IN ORDER TO BRING THE TRANSACTION WITHIN THE PURVIEW OF THE EXPRESSION. 18. IN BARENDRA PRASAD RAY VS. ITO (1981) 22 CTR (SC) 157 : (1981) 1 29 ITR 295 (SC), A FIRM OF SOLICITORS AT CALCUTTA WAS INSTRUCTED BY CERTAIN SOLICITORS IN LONDON WHO WERE ACTING FOR A GERMAN CORPORATION. ON THEIR INSTRUCTIONS THE SOLICITORS IN INDIA RETAINED A BARRISTER OF LONDON IN THE SUIT PENDING BEFORE THE CALCUTTA HIGH COURT. THE BARRISTER ARGUED THE CASE FOR 15 DAYS AND WENT BACK TO LONDON WITHOUT MAKING ANY ARRANGEMENT FOR PAYMENT OF INDIAN INCOME - TAX ON THE FEES EARNED BY HIM. ON THE ITO INITIATING PROCEEDINGS TO TREAT THE FIRM OF 15 SOLICITORS AS THE AGENT OF THE S AID BARRISTER, THE FIRM OF SOLICITORS FILED A WRIT PETITION CHALLENGING THE SAID PROCEEDINGS WHICH WAS DISMISSED BY A LEARNED SINGLE JUDGE. AN APPEAL AGAINST THE JUDGMENT OF THE LEARNED SINGLE JUDGE, WAS ALSO DISMISSED TAKING THE VIEW THAT THERE WAS A 'BUS INESS CONNECTION' BETWEEN THE FIRM OF SOLICITORS AND THE BARRISTER. ON FURTHER APPEAL TO THE SUPREME COURT IT WAS HELD THAT THERE WAS CONNECTION BETWEEN THE INDIAN SOLICITOR AND THE BARRISTER WHICH WAS REAL AND INTIMATE AND NOT A CASUAL ONE AND THAT THE BA RRISTER EARNED THE FEE ARGUING THE CASE IN INDIA ONLY DUE TO THAT CONNECTION. E. S. VENKATARAMIAH J. (AS HE THEN WAS) SPEAKING FOR THE SUPREME COURT, OBSERVED THAT, IN THAT CASE THE TEST LAID DOWN BY THE SUPREME COURT IN AGGARWALS CASE (SUPRA), WAS SATISFI ED AND IN THE 'PROFESSIONAL CONNECTION THERE WAS A BUSINESS CONNECTION.' 19. IN ADDL. CIT VS. NEW CONSOLIDT. GOLD FIELDS LTD. (1983) 143 ITR 599 (PATNA), THE ASSESSEE - COMPANY AND THE FOREIGN COMPANY ENTERED INTO AN AGREEMENT UNDER WHICH THE FOREIGN COMPANY WAS TO BE TECHNICAL ADVISER OF THE ASSESSEE - COMPANY IN THE MATTER OF EXPLORATION, MINING AND MINERAL DRESSING OPERATIONS. THE FOREIGN COMPANY WAS TO BE PAID A RETAINERS FEE AT THE RATE OF 7,000 PER ANNUM IN LONDON. THE ITO TREATED THE ASSESSEE - COMPANY A S THE AGENT OF THE FOREIGN - COMPANY WITHIN THE MEANING OF S. 163 OF THE IT ACT AND TREATED 7,000 PAYABLE BY THE ASSESSEE - COMPANY TO THE FOREIGN COMPANY AS ITS INCOME ACCRUING IN THE HANDS OF THE ASSESSEE - COMPANY. ON APPEAL, THE AAC HELD THAT EVEN IF THE A SSESSEE - COMPANY WAS TO BE TREATED AS AN AGENT WITHIN THE MEANING OF S. 163(1), THERE WAS NO BUSINESS CONNECTION WITHIN THE MEANING OF S. 9(1) OF THE ACT SO THE INCOME ACCRUING TO THE NON - RESIDENT FOREIGN COMPANY COULD NOT BE ASSESSED THROUGH ITS AGENT. THA T ORDER WAS AFFIRMED BY THE TRIBUNAL. ON A REFERENCE TO THE HIGH COURT OF PATNA, IT WAS HELD THAT THE SUM OF 7,000 WAS NOT THE INCOME WHICH THE FOREIGN - COMPANY HAD RECEIVED IN INDIA OR AN INCOME WHICH HAD ACCRUED TO THE FOREIGN COMPANY WITHIN THE MEANING OF S. 5(2) OF THE ACT AND THAT THE SUM PAID TO THE FOREIGN COMPANY AT LONDON FOR TECHNICAL ADVICE GIVEN FROM LONDON COULD NOT BE ATTRIBUTED TO THE OPERATION CARRIED ON IN INDIA. IT WAS FURTHER HELD THAT THERE WAS NO CONTINUITY BETWEEN THE BUSINESS OF THE NON - RESIDENT AND THE ACTIVITY IN THE TAXABLE TERRITORIES IN RESPECT OF THE INCOME AND, THEREFORE, THERE WAS NO BUSINESS CONNECTION BETWEEN THE FOREIGN COMPANY AND THE ASSESSEE - COMPANY AND THE INCOME COULD NOT BE DEEMED TO ACCRUE OR ARISE TO THE FOREIGN CO MPANY IN INDIA WITHIN THE MEANING OF S. 9(1) AS SUCH, THE SAID SUM PAID TO THE FOREIGN COMPANY AT LONDON WAS NOT ASSESSABLE IN THE HANDS OF THE ASSESSEE - COMPANY EVEN AS AGENT OF THE FOREIGN COMPANY. 20. FROM THE ABOVE DISCUSSION THE FOLLOWING PRINCIPLES EM ERGED: (I) WHETHER THERE IS A BUSINESS CONNECTION BETWEEN AN INDIAN COMPANY AND A NON - RESIDENT (COMPANY) IS A MIXED QUESTION OF FACT AND LAW WHICH HAS TO BE DETERMINED ON THE FACTS AND CIRCUMSTANCES OF EACH CASE ; (II) THE EXPRESSION BUSINESS CONNECTION IS TOO WIDE TO ADMIT OF ANY PRECISE DEFINITION ; HOWEVER IT HAS SOME WELL KNOWN ATTRIBUTES ; (III) THE ESSENCE OF 16 BUSINESS CONNECTION IS THE EXISTENCE OF CLOSE, REAL, INTIMATE RELATIONSHIP AND COMMONNESS OF INTEREST BETWEEN THE NRC AND THE INDIAN PERSON ; (IV) WHERE THERE IS CONTROL OF MANAGEMENT OR FINANCES OR SUBSTANTIAL HOLDING OF EQUITY SHARES OR SHARING OF PROFITS BY THE NRC OF THE INDIAN PERSON, THE REQUIREMENT OF PRINCIPLE (III) IS FULFILLED ; (V) TO CONSTITUTE BUSINESS CONNECTION THERE MUST BE CONTI NUITY OF ACTIVITY OR OPERATION OF THE NRC WITH THE INDIAN PARTY AND A STRAY OR ISOLATED TRANSACTION IS NOT ENOUGH TO ESTABLISH A BUSINESS CONNECTION . 4.8.4 W E NOTE THAT IN THE INSTANT CASE , THE ASSESSING OFFICER HAS NOT MADE ANY EFFORTS TO ESTABLISH ANY BUSINESS CONNECTION FOR INVOKING SECTION 9(1)(I) OF THE ACT. IN OUR OPINION IN ABSENCE OF ESTABLI SHING ANY BUSINESS CONNECTION , THE ACTION OF THE ASSESSING OFFICER IN HOLDING THAT INCOME ACCRUED OR ARISEN IN THE HAND OF NON - RESIDENT THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA IS NOT JUSTIFIED. THE ASSESSING OFFICER HAS ALSO NOT ESTABLISHED THAT THE NON - RESIDENT WAS HAVING ANY PERMANENT ESTABLISHMENT IN INDIA, AND THUS IN TERMS OF DOUBLE TAX AVOIDANCE A GREEMENT (DTAA) WITH RELEVANT COUNTRIES I.E CAN ADA AND UK ALSO INCOME OF THE NON - RESIDENT S WAS NOT TAXABLE AS BUSINESS INCOME IN INDIA. 4.8.5 ANOTHER SECTION, RELIED UPON BY THE ASSESSING OFFICER FOR HOLDING THAT THE INCOME HAS ACCRUED OR ARISEN IN THE HANDS OF NON - RESIDENT, IS 9(1)(VII)(B) OF THE AC T. ACCORDING TO THE SAID SECTION INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY A PERSON WHO IS A RESIDENT IS DEEMED TO ACCRUE OR ARISE IN INDIA, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF THE SERVICES UTILIZED IN THE BUSINESS OR PROFESSION C ARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOU RCE OUTSIDE INDIA. FURTHER, THE E XPLANATION - 2 BELOW THE SAID SUB - SECTION 9(1)(VII) HAS DEFINED THE TERM FEE FOR TECHNICAL SERVICES. THE SAID E XPLANATION IS REPRODUCED AS UNDER: 17 INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. 9. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA : (VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY (A) THE GOVERNMENT ; OR (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED 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 NO N - RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED 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 : EXPLANATION 1. . 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 TECH NICAL 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'. 4.8.6 T HUS , IN TH E INSTANT CASE , THE FIRST ISSUE ARISES , WHETHER THE SERVICES OF PROCURING EXPORT ORDER BY THE NON - RESIDENT OUTSIDE INDIA FALLS UNDER THE DEFINITION OF FEE FOR TECHNICAL SERVICES. EVIDENTLY , THE SERVICES OF PROCURING EXPORT ORDER DOES NOT FALL EITHER IN THE TECHNICAL OR CONSULT ANCY SERVICES. THE CONTENTION OF THE ASSESSING OFFICER IS THAT SAID SERVICES ARE MANAGERIAL SERVICES AND THUS FALLS UNDER FEE FOR TECHNICAL SERVICES. THE ASSESSING OFFI CER HAS NOT MADE ANY ATTEMPT AS HOW THE SAID SERVICES OF PROCURING ORDER ARE MANAGERIAL SERVICES. THE ASSESSING OFFICER HAS FAILED TO DISCHARGE HIS ONUS IN THIS REGARD. 4.8.7 ACCORDING TO THE ASSESSEE , THE MANAGERIAL SERVICES THOUGH NOT DEFINED IN THE ACT , BUT AS PER NORMAL ORDINARY BUSINESS MEANING, IT COVERS SERVICES RENDERED IN PERFORMING MANAGEMENT FUNCTIONS WHICH RELATES TO RUNNING A BUSINESS OR HANDLING OF MANPOWER AND RELATED AFFAIRS 18 ETC . BUT IT CANNOT COVER THE SERVICES OF FO REIGN AGENT OF PROCURING EXPORT ORDERS , IN THE INSTANT CASE. 4.8.8 ON PERUSAL OF THE SUBMISSION OF THE ASSESSEE AND ORDER OF THE LOWER AUTHORITIES, WE FIND THAT THE NON - RESIDENT HAS RENDERED SERVICES OF BOOKING E XPORT ORDER FROM FOREIGN BUYERS . IN THE PROCESS OF PROCURING EXPORT ORDERS, THE NON - RESIDENT DISPLAYS OR DEMONSTRATES THE GOODS OF THE ASSESSEE TO THE FOREIGN BUYERS. IF THE FOREIGN BUYER PLACE ANY ORDER FOR PURCHASE OF THOSE GOODS, THE NON - RESIDENT AGENT FORWARD THOSE PURCHASE ORDERS TO THE ASSESSEE. FOR RENDERING THE SE RVICES OF PROCURING ORDERS, THE ASSESSEE PAYS CERTAIN COMMISSION AT THE RATE OF PERCENTAGE AGREED BY THE NON - RESIDENT AGENT. IN OUR OPINION, THIS ENTIRE PROCESS OF PROCURING ORDERS BY THE NON - RESIDENT CANNOT BE TERMED AS MANAGERIAL SERVICE, WHICH COULD FA LL UNDER FEE FOR TECHNICAL SERVICES AS DEFINED IN EXPLANATION - 2 BELOW THE SECTION 9(1)(VII) OF THE ACT. 4.8.9 FURTHER, WE FIND THAT THE ASSESSEE HAS CLAIMED THAT NO PART OF SERVICES WAS RENDERED IN INDIA. THE CONTENTION OF THE LD. DR IS THAT IN VIEW OF TH E EXPLANATION INSERTED BELOW THE SECTION 9(2), NOW EVEN IF SERVICES ARE RENDERED OUTSIDE INDIA, SAME MAY FALL UNDER FEE FOR TECHNICAL SERVICES. THE RELEVANT EXPLANATION IS REPRODUCED AS UNDER: EXPLANATION. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, INCOME OF A 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 THE TOTAL INCOME OF THE NON - RESIDENT, WHETHER OR NOT, (I) THE NON - RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR (II) THE NON - RESIDENT HAS RENDERED SERVICES IN INDIA. 4.9 T HUS , ACCORDING TO THE ABOVE E XPLANATION IRRESPECTIVE OF THE FACT WHETHER THE NON - RESIDENT HAS A RESID ENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA OR THE NON - RESIDENT HAS RENDERED SERVICES 19 IN INDIA, INCOME OF NON - RESIDENT FOR THE PURPOSE OF CLAUSE (VII) I.E. FEE FOR T ECHNICAL SERVICES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. THE CONTENTION OF LD. COUNSEL THAT THIS AM ENDMENT HAS BEEN INTRODUCED BY F INANCE ACT , 2010, WHICH RECEIVED ASSENT OF THE PRESIDENT ON THE 8TH MAY 2010, WHEREAS THE FINANCIAL YEAR PERTAINED IN THE CASE OF THE ASSESSEE IS 2009 - 10 WHICH ENDED ON 31/03/2010, THEREFORE , THE ASSESSEE HAD NO OCCASION TO KNOW/BELIEVE THAT TAX WAS TO BE DEDUCTED IRRESPECTIVE TO THE PLACE OF RENDERING SERVICE. THE LD. COUNSEL IN SUPPORT OF CONTENTION RELIED ON THE D ECISION OF THE TRIBUNAL MUMBAI B ENCH IN THE CASE OF KPMG VERSUS ACIT (SUPRA), WHERE THE TRIBUNAL HAS GIVEN FINDING AS UNDER: 4.10. IT IS FURTHER NOTED BY US THAT THE LAW AS IT STOOD IN THE YEAR BEFORE US I.E. A.Y. 2007 - 08, PROVIDED A MANDATORY CONDITION THAT SERVICES SHOULD BE RENDERED IN INDIA BEFORE IT COULD BE MADE TAXABLE U/S 9(1)(VII). THIS REQUIREMENT OF RENDERING SERVICES IN INDIA WAS DONE AWAY WITH INSERTION OF AN EXPLANATION BY THE FINANCE ACT, 2010, WITH RETROSPECTIVE EFFECT. BUT THE ISSUE THAT ARISES HERE IS THAT EVEN IF A RETROSPECTIVE AMENDMENT MAY LEGALLY CHANGE THE DETERMINATION OF TAX LIABILITY IN THE HANDS OF REC IPIENT OF INCOME WITH THE RETROSPECTIVE EFFECT, BUT WHETHER IT CAN ALSO CREATE AN OBLIGATION UPON THE PAYER TO DEDUCT TAX AT SOURCE, THAT TOO WITH RETROSPECTIVE EFFECT. THIS ISSUE HAS ALSO BEEN DISCUSSED AND DECIDED IN FAVOUR OF THE ASSESSEE IN MANY CASES BY HOLDING THAT OBLIGATION TO DEDUCT TAX AT SOURCE CANNOT BE CREATED WITH THE HELP OF AN AMENDMENT MADE WITH RETROSPECTIVE EFFECT. IT IS NOTED THAT SIMILAR ISSUE CAME BEFORE AGRA BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. VIROLA INTERNATIONAL (SUPRA); S OME RELEVANT OBSERVATIONS OF THE HON BLE BENCH ARE REPRODUCED HEREUNDER: 6. HON BLE SUPREME COURT, IN THE CASE OF ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES LTD VS DIT (288 ITR 408), HAD HELD THAT IN ORDER TO BRING A FEES FOR TECHNICAL SERVICES TO TAXABILITY IN INDIA, NOT ONLY THAT SUCH SERVICES SHOULD BE UTILIZED IN INDIA BUT THESE SERVICES SHOULD ALSO BE RENDERED IN INDIA. ANALYZING THIS LEGAL POSITION, HON BLE BOMBAY HIGH COURT HAS, IN THE CASE OF CLIFFORD CHANCE VS DCIT (318 ITR 237), OBSERVED AS FOLLOWS: 'T HE APEX COURT HAD OCCASION TO CONSIDER THE ABOVE QUESTION IN THE CASE OF ISHIKAWAJMA - HARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF IT (2007) 288 ITR 408 (SC), WHEREIN, WHILE INTERPRETING THE PROVISIONS OF S. 9(1)(VII)(C) OF THE ACT, THE SUPREME COURT HELD A S UNDER (P. 444): SEC. 9(1)(VII)(C) OF THE ACT STATES THAT A PERSON WHO IS A NON - RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR 20 PROFESSION CARRIED ON BY SUCH PERSON IN INDIA, OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OF INDIA . READING THE PROVISION IN ITS PLAIN SENSE, AS PER THE APEX COURT IT REQUIRES TWO CONDITIONS TO BE MET THE SERVICES WHICH ARE THE SOURCE OF THE INCOME THAT IS SOUGHT TO BE TAXED, HAS TO BE RENDERED IN INDIA, AS WELL AS UTILIZED IN INDIA, TO BE TAXABLE IN INDIA. BOTH THE ABOVE CONDITIONS HAVE TO BE SATISFIED SIMULTANEOUSLY. THUS FOR A NON - RESIDENT TO BE TAXED ON INCOME FOR SERVICES, SUCH A SERVICE NEEDS TO BE RENDERED WITHIN INDIA, AND HAS TO BE PART OF A BUSINESS OR PRO FESSION CARRIED ON BY SUCH PERSON IN INDIA. IN THE ABOVE JUDGMENT, THE APEX COURT OBSERVED THAT (P. 444) : SEC. 9(1)(VII) OF THE ACT MUST BE READ WITH S. 5 THEREOF, WHICH TAKES WITHIN ITS PURVIEW THE TERRITORIAL NEXUS ON THE BASIS WHEREOF TAX IS REQUIRED TO BE LEVIED, NAMELY, (A) RESIDENT; AND (B) RECEIPT OF ACCRUAL OF INCOME . ACCORDING TO THE APEX COURT, THE GLOBAL INCOME OF A RESIDENT ALTHOUGH IS SUBJECTED TO TAX, THE GLOBAL INCOME OF A NON - RESIDENT MAY NOT BE. THE ANSWER TO THE QUESTION WOULD DEPEND UP ON THE NATURE OF THE CONTRACT AND THE PROVISIONS OF THE DTAA. WHAT IS RELEVANT IS RECEIPT OR ACCRUAL OF INCOME, AS WOULD BE EVIDENT FROM A PLAIN READING OF S. 5(2) OF THE ACT SUBJECT TO THE COMPLIANCE WITH 90 DAYS RULE. AS PER THE ABOVE JUDGMENT OF THE AP EX COURT, THE INTERPRETATION WITH REFERENCE TO THE NEXUS TO TAX TERRITORIES ALSO ASSUMES SIGNIFICANCE. TERRITORIAL NEXUS FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY IS AN INTERNATIONALLY ACCEPTED PRINCIPLE. AN ENDEAVOR SHOULD, THUS, BE MADE TO CONSTRU E THE TAXABILITY OF A NONRESIDENT IN RESPECT OF INCOME DERIVED BY IT. HAVING REGARD TO THE INTERNATIONALLY ACCEPTED PRINCIPLE AND THE DTAA, NO EXTENDED MEANING CAN BE GIVEN TO THE WORDS INCOME DEEMED TO ACCRUE OR ARISE IN INDIA AS EXPRESSED IN S. 9 OF TH E ACT. SEC. 9 INCORPORATES VARIOUS HEADS OF INCOME ON WHICH TAX IS SOUGHT TO BE LEVIED BY THE REPUBLIC OF INDIA. WHATEVER IS PAYABLE BY A RESIDENT TO A NON - RESIDENT BY WAY OF FEES FOR SERVICES, THUS, WOULD NOT ALWAYS COME WITHIN THE PURVIEW OF S. 9(1)(VII) OF THE ACT. IT MUST HAVE SUFFICIENT TERRITORIAL NEXUS WITH INDIA SO AS TO FURNISH A BASIS FOR IMPOSITION OF TAX. WHEREAS A RESIDENT WOULD COME WITHIN THE PURVIEW OF S. 9(1)(VII) OF THE ACT, A NON - RESIDENT WOULD NOT, AS SERVICES OF A NON - RESIDENT TO A RESI DENT UTILIZED IN INDIA MAY NOT HAVE MUCH RELEVANCE IN DETERMINING WHETHER THE INCOME OF THE NON - RESIDENT ACCRUES OR ARISES IN INDIA. IT MUST HAVE A DIRECT LINK BETWEEN THE SERVICES RENDERED IN INDIA. WHEN SUCH A LINK IS ESTABLISHED, THE SAME MAY AGAIN BE S UBJECTED TO ANY RELIEF UNDER THE DTAA. A DISTINCTION MAY ALSO BE MADE BETWEEN RENDITION OF SERVICES AND UTILIZATION THEREOF. WITH THE ABOVE UNDERSTANDING OF LAW LAID DOWN BY THE APEX COURT, IF ONE TURNS TO THE FACTS OF THE CASE IN HAND AND EXAMINES THEM ON THE TOUCHSTONE, S. 9(1)(VII)(C) WHICH CLEARLY STATES ....... 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 . IT IS THUS, EVIDENT THAT S. 9(1)(VII)(C), READ IN ITS PLAIN, ENVISAGES THE FULFILLMENT OF TWO CONDITIONS : SERVICES, WHICH ARE SOURCE OF INCOME SOUGHT TO BE TAXED IN INDIA MUST BE (I) UTILIZED IN INDIA, AND (II) RENDERED IN 21 INDIA. IN THE PRESENT CA SE, BOTH THESE CONDITIONS HAVE NOT BEEN SATISFIED SIMULTANEOUSLY.' 7. THE LAW LAID DOWN BY HON BLE SUPREME COURT, IN THE CASE OF ISHIKAWAJMA - HARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF INCOME TAX (SUPRA), BINDS EVERYONE UNDER ARTICLE 141 OF THE CONSTITUTI ON OF INDIA. THE LEGAL POSITION THUS WAS THAT UNLESS THE SERVICES ARE RENDERED IN INDIA, THE SAME CANNOT BE BROUGHT TO TAX AS FEES FOR TECHNICAL SERVICES UNDER SECTION 9. HOWEVER, THIS LEGAL POSITION DID UNDERGO A CHANGE WHEN FINANCE ACT 2010 RECEIVED AS SENT OF THE PRESIDENT OF INDIA ON 8TH MAY 2010. EXPLAINING THE SCOPE OF THIS AMENDMENT, A COORDINATE BENCH OF THIS TRIBUNAL, IN THE CASE OF ASHAPURA MINICHEM LTD VS ADIT (131 TTJ 291), HAS EXPLAINED THUS: (THIS LEGAL POSITION) DOES NO LONGER HOLD GOOD IN VIEW OF RETROSPECTIVE AMENDMENT W.E.F. 1ST JUNE, 1976 IN S. 9 BROUGHT OUT BY THE FINANCE ACT, 2010. UNDER THE AMENDED EXPLANATION TO S. 9(1), AS IT EXISTS ON THE STATUTE NOW, IT IS SPECIFICALLY STATED THAT THE INCOME OF THE NON - RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CL. (V) OR CL. (VI) OR CL. (VII) OF S. 9(1), AND SHALL BE INCLUDED IN HIS TOTAL INCOME, WHETHER OR NOT (A) THE NONRESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR (B) THE NON - RESIDENT HAS REN DERED SERVICES IN INDIA. IT IS THUS NO LONGER NECESSARY THAT, IN ORDER TO ATTRACT TAXABILITY IN INDIA, THE SERVICES MUST ALSO BE RENDERED IN INDIA. AS THE LAW STANDS NOW, UTILIZATION OF THESE SERVICES IN INDIA IS ENOUGH TO ATTRACT ITS TAXABILITY IN INDIA. TO THAT EFFECT, RECENT AMENDMENT IN THE STATUTE HAS VIRTUALLY NEGATED THE JUDICIAL PRECEDENTS SUPPORTING THE PROPOSITION THAT RENDITION OF SERVICES IN INDIA IS A SINE QUA NON FOR ITS TAXABILITY IN INDIA. 8. IT IS THUS CLEAR THAT TILL 8TH MAY 2010, THE PREV AILING LEGAL POSITION WAS THAT UNLESS THE TECHNICAL SERVICES WERE RENDERED IN INDIA, THE FEES FOR SUCH SERVICES COULD NOT BE BROUGHT TO TAX UNDER SECTION 9(1)(VII). THE LAW AMENDED WAS UNDOUBTEDLY RETROSPECTIVE IN NATURE BUT SO FAR AS TAX WITHHOLDING LIABI LITY IS CONCERNED, IT DEPENDS ON THE LAW AS IT EXISTED AT THE POINT OF TIME WHEN PAYMENTS, FROM WHICH TAXES OUGHT TO HAVE BEEN WITHHELD, WERE MADE. THE TAX DEDUCTOR CANNOT BE EXPECTED TO HAVE CLAIRVOYANCE OF KNOWING HOW THE LAW WILL CHANGE IN FUTURE. A RET ROSPECTIVE AMENDMENT IN LAW DOES CHANGE THE TAX LIABILITY IN RESPECT OF AN INCOME, WITH RETROSPECTIVE EFFECT, BUT IT CANNOT CHANGE THE TAX WITHHOLDING LIABILITY, WITH RETROSPECTIVE EFFECT. THE TAX WITHHOLDING OBLIGATIONS FROM PAYMENTS TO NON - RESIDENTS, AS SET OUT IN SECTION 195, REQUIRE THAT THE PERSON MAKING THE PAYMENT 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 . WHEN THESE OBLIGATIONS ARE TO BE DISCHARGED AT THE POINT OF TIME WHEN PAYMENT IS MADE OR CREDITED, WHICHEVER IS EARLIER, SUCH ASSESSMENT YEAR : 2008 - 0 9 PAGE 6 OF 7 OBLIGATIONS CAN ONLY BE DISCHARGED IN T HE LIGHT OF THE LAW AS IT STANDS THAT POINT OF TIME. SECTION 40(A)(I) PROVIDES THAT, INTER ALIA, NOTWITHSTANDING 22 ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38, ANY AMOUNT PAYABLE OUTSIDE INDIA, OR PAYABLE IN INDIA TO A NON - RESIDENT, SHALL NOT BE DEDUCTED I N COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII - B AND SUCH TAX HAS NOT BEEN DEDUCTED'. THE DISALLOWANCE UNDER SECTION 40(A)(I) IS NOT FOR THE PAYMENTS M ADE TO NON - RESIDENTS, WHICH ARE TAXABLE IN INDIA, BUT FOR THE PAYMENTS ON WHICH TAX WAS DEDUCTIBLE AT SOURCE BUT TAX HAS NOT BEEN DEDUCTED, AND SUCH DEDUCTIBILITY OF TAX AT SOURCE, AS WE HAVE DISCUSSED ABOVE, HAS TO BE IN THE LIGHT OF THE LEGAL POSITION AS IT STOOD AT THE POINT OF TIME WHEN PAYMENT WAS MADE OR CREDITED - WHICHEVER IS EARLIER . CLEARLY, THEREFORE, THE DISALLOWANCE UNDER SECTION 40(A)(I) CAN COME INTO PLAY ONLY WHEN THE ASSESSEE HAD AN OBLIGATION TO DEDUCT TAX AT SOURCE FROM PAYMENTS TO NON - RES IDENTS, AND THE ASSESSEE FAILS TO COMPLY WITH SUCH AN OBLIGATION. IN VIEW OF THESE DISCUSSIONS, SO FAR AS PAYMENTS MADE BEFORE 8TH MAY 2010 ARE CONCERNED, THE ASSESSEE DID NOT HAVE ANY TAX WITHHOLDING LIABILITIES FROM FOREIGN REMITTANCES FOR FEES FOR TECHN ICAL SERVICES UNLESS SUCH SERVICES WERE RENDERED IN INDIA, AND A FORTIORI NO DISALLOWANCE CAN BE MADE UNDER SECTION 40(A)(I) FOR ASSESSEE S FAILURE TO DEDUCT TAX AT SOURCE FROM SUCH PAYMENTS. 9. IN THE CASE BEFORE US, THERE IS NO MATERIAL WHATSOEVER TO DEM ONSTRATE AND ESTABLISH THAT THE DESIGN AND DEVELOPMENT SERVICES, FOR WHICH IMPUGNED PAYMENTS WERE MADE, WERE RENDERED IN INDIA. THEREFORE, THE ASSESSEE DID NOT HAVE ANY LIABILITY UNDER SECTION 195 R.W.S. 9(1)(VII) TO DEDUCT TAX AT SOURCE FROM THESE PAYMENT S. ONCE WE COME TO THE CONCLUSION THAT THE ASSESSEE DID NOT HAVE ANY OBLIGATION TO DEDUCT TAX AT SOURCE FROM THESE PAYMENTS, IN THE LIGHT OF THE ABOVE DISCUSSIONS AND AS COROLLARY THERETO, NO DISALLOWANCE CAN BE MADE IN RESPECT OF THESE PAYMENTS. AS WE HAV E COME TO THESE CONCLUSIONS IN THE LIGHT OF THE PROVISIONS OF THE DOMESTIC LAW, I.E. INCOME TAX ACT, ITSELF, THERE IS NO NEED TO DEAL WITH THE TAXABILITY OF INCOMES EMBEDDED IN THESE PAYMENTS UNDER THE PROVISIONS OF THE APPLICABLE TAX TREATIES. THAT WOULD BE RELEVANT WITH RESPECT TO TAXABILITY OF THESE PAYMENTS IN THE HANDS OF THE RECIPIENTS, BUT, FOR THE REASONS SET OUT ABOVE AND IN THE LIGHT OF THE LEGAL POSITION DISCUSSED ABOVE, WILL BE ACADEMIC IN THE PRESENT CONTEXT. AS REGARDS LEARNED DEPARTMENTAL REP RESENTATIVE VEHEMENT RELIANCE ON A DECISION OF CHENNAI A BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS EVOLV CLOTHING PVT. LTD [(2013) 33 TAXMANN.COM 309] WHEREIN ON THE BASIS OF TAXABILITY OF INCOME ALONE, THE COORDINATE BENCH HAS CONFIRMED THE DISALLOWAN CE UNDER SECTION 40(A)(I), WE CAN ONLY SAY THAT A DECISION CANNOT BE AN AUTHORITY FOR A LEGAL QUESTION WHICH HAS NOT BEEN DEALT WITH IN THAT DECISION, OR NOT HAVING BEEN RAISE D IN THAT CASE. 10. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRE TY OF THE CASE, WE UPHOLD THE CONCLUSIONS ARRIVED AT BY THE LEARNED CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. AS WE HAVE DECIDED THIS APPEAL ON THIS SHORT LEGAL POINT REGARDING SCOPE OF SECTION 40(A)(I) R.W.S SECTION 195, WE SEE NO NEED TO DEAL WITH O THER ERUDITE CONTENTIONS OF THE PARTIES AS ALSO FINDINGS OF THE LEARNED CIT(A), WHICH, 23 GIVEN OUR ADJUDICATION ON THIS LEGAL ISSUE, ARE NOW RENDERED ACADEMIC IN THE PRESENT CONTEXT. 4.11. IT IS NOTED BY US THAT IN THE CASE BEFORE US, THE ASSESSMENT ORDER IN VOLVED IS IN A.Y. 2007 - 08 AND THEREFORE, AMENDMENT MADE BY THE FINANCE ACT, 2010 CANNOT BE PRESSED INTO SERVICE TO CREATE AN OBLIGATION UPON THE ASSESSEE FOR DEDUCTION OF TAX AT SOURCE, WHICH OTHERWISE, WAS NOT UPON THE ASSESSEE, AS PER LAW EXISTING AT THE TIME OF MAKING OF IMPUGNED REMITTANCES. 4.9.1 RESPECTFULLY , FOLLOWING THE ABOVE FINDING, WE HOLD THAT THE ASSESSEE CANNOT BE MADE LIABLE FOR DEDUCTION OF THE TAX AT SOURCE IN VIEW OF A RETROSPECTIVE AMENDMENT TO SECTION 9 OF THE ACT. 4.10 BEFORE THE LD. CIT - ( A ) , THE ASSESSEE ALSO CONTENDED THAT IN TERMS OF DTAA BOTH IN CASE OF THE CANADA AND THE UK, FOR TAXABILITY OF FEE FOR TECHNICAL SERVICES, THE SERVICES SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE TO THE ASSESSEE AND THE SAID CONDITION HAS NOT BEEN FULFILLED. THE RELEVANT PART OF THE SUBMISSION OF THE ASSESSEE IS REPRODUCED AS UNDER: I. AS PER INDIA - CANADA TREATY ARTICLE 12 , INCOME OF NON - RESIDENT FROM 'ROYALTY' OR 'FEES FOR INCLUDED SERVICES' (OR FTS) PAID FROM INDIA, CAN BE TAXED IN INDIA AT THE RATES SPECIFIED IN THE TREATY. THE SERVICES OF SELLING AGENTS FOR BOOKING OF ORDERS IS OUT OF THE SCOPE OF ROYALTY AND DOES NOT FALL IN THE NATURE OF 'ROYALTY', HENCE WE ARE NOT DISCUSSING HERE ON THE TAXABILITY OF 'ROYALTY' IN INDIA. NOW WE HAVE TO SEE WHETHER THE QUESTIONED SERVICES OF FOREIGN AGENTS ARE COVERED IN THE DEFINITION OF FTS. THE ARTICLE 12 (4) OF THE INDIA - CANADA TR EATY DEFINES THE TERM FEES FOR INCLUDED SERVICE AS UNDER: 12(4): FOR THE PURPOSES OF THIS ARTICLE, FEES FOR INCLUDED SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED; OR 24 (B) M AKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW - HOW, OR PROCESSES OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. THE CLAUSE (A) IS NOT APPLICABLE IN THE INSTANT CASE BECAUSE THE PARA 3 OF THE ARTICLE SPEAKS ABOUT 'ROYALTY' AND THE SELLING AGENT'S SERVICES ARE OUT OF THE PURVIEW OF ROYALTY. IN CLAUSE (B) ABOVE, THERE IS A 'MAKE AVAILABLE' CLAUSE WHICH MEANS THE SERVICE MUST BE MADE AVAILABLE TO RESIDENT SO THAT HE CAN USE THE SAME SERVICE FOR PERFORMING THE S AME KIND OF TASKS WITHOUT THE HELP OF SERVICE PROVIDER, IN FUTURE. FIRST OF ALL, IN CASE OF SELLING AGENT'S SERVICES RENDERED IN CONNECTION WITH BOOKING OF ORDERS, IT IS NOT OF THE NATURE OF 'TECHNICAL KNOWLEDGE', HENCE IS NOT TAXABLE AS FTS IN INDIA. THE DEFINITION OF FTS IN TREATY DOES NOT COVER MANAGERIAL SERVICES. AS SUCH SERVICES OTHER THAN DEFINED IN THE TREATY WILL NOT BE TAXED IN PAYING COUNTRY BUT WILL BE TREATED AS BUSINESS INCOME OF THE RECIPIENT. SINCE RECIPIENT DIDN'T HAVE A PE IN INDIA, THE B USINESS INCOME IS NOT TAXABLE IN INDIA. M. LIKEWISE THE INDIA - UK TREATY EXCLUDES THE PAYMENTS FOR 'FEES FOR TECHNICAL SERVICES' IF SERVICES WERE NOT MADE AVAILABLE TO THE PAYER. THE ARTICLE 13 (4) READS AS UNDER: 13(4): FOR THE PURPOSES OF PARAGRAPH 2 OF THIS ARTICLE, AND SUBJECT TO PARAGRAPH 5, OF THIS ARTICLE, THE TERM 'FEES FOR TECHNICAL SERVICES' MEANS PAYMENTS OF ANY KIND OF ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES O F A TECHNICAL OR OTHER PERSONNEL) WHICH : (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE IS RECEIVED; OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT OF THE PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECEIVED; OR (C) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL KNOW - HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND T RANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN WE GIVE BELOW MEANING OF THE WORD ' MAKE AVAILABLE' AS HAS BEEN EXPLAINED IN VARIOUS JUDGMENTS PRONOUNCED BY VARIOUS COURTS AND EXPLAINED IN THE COMMENTARIES WRITTEN BY LEARNED AUTHORS ON THE SUBJECT: - THE TECHNICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NATURE THAT IT 'MAKES AVAILABLE' TO THE RECIPIENT TECHNICAL KNOWLEDGE, KNOW - HOW AND THE LIKE. THE SERVICE SHOULD BE AIMED AT AND RESULT IN TRANSMITTING TECHNICAL KNOWLEDGE, ETC., SO THAT THE PAY ER OF THE SERVICE COULD DERIVE AN ENDURING BENEFIT AND UTILIZE 25 THE KNOWLEDGE OR KNOW - HOW ON HIS OWN IN FUTURE WITHOUT THE AID OF THE SERVICE PROVIDER. IN OTHER WORDS, TO FIT INTO THE TERMINOLOGY 'MAKING AVAILABLE', THE TECHNICAL KNOWLEDGE, SKILL?, ETC., MU ST REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CONTRACT COMES TO AN END. IT IS NOT ENOUGH THAT THE SERVICES OFFERED ARE THE PRODUCT OF INTENSE TECHNOLOGICAL EFFORT AND A LOT OF TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE P ROVIDER HAVE GONE INTO IT. THE TECHNICAL KNOWLEDGE OR SKILLS OF THE PROVIDER SHOULD BE IMPARTED TO AND ABSORBED BY THE RECEIVER SO THAT THE RECEIVER CAN DEPLOY SIMILAR TECHNOLOGY OR TECHNIQUES IN THE FUTURE WITHOUT DEPENDING UPON THE PROVIDER. TECHNOLOGY W ILL BE CONSIDERED 'MADE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. THE FACT THAT THE PROVISION OF THE SERVICE THAT MAY REQUIRE TECHNICAL KNOWLEDGE, SKILLS, ETC., DOES NOT MEAN THAT TECHNOLOGY IS MADE AVAILABLE TO T HE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF PARAGRAPH (4)(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGARDED AS 'FEE FOR TECHNICAL/INCLUDED SERVICES' ONLY IF THE TWIN TESTS OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDGE AVAILABLE AT THE SAME TIME IS SATISFIED. YOUR KIND ATTENTION IDS INVITED TO THE INCOME TAX COMMENTARY OF SAMPATH LYENGER, PAGE 1536 VOLUME 1 ED. 11TH, ON THE ISSUE OF INTERPRETATION OF THE TERM 'MAKE AVAILABLE'. BY THIS INTERPRETATION, TOO, THE SERVICES OF FOREIGN SELLING AGENTS RENDERED FOR BOOKING OF ORDERS ABROAD DON'T FALL WITHIN THE PURVIEW OF TAXABILITY OF THE INCOME IN INDIA. THE PHOT OCOPY OF THE RELEVANT PORTION OF COMMENTARY IS ENCLOSED FOR YOUR READY REFERENCE. THE APPELLANT PRAYS YOUR HONOUR THAT CONSIDERING THE AFORESAID EXPLANATION ON THE POSITION OF SEC. 9 (1) (VII) R.W. SEC. 195, ABOVE REPORTED JUDGMENTS DELIVERED BY VARIOUS C OURTS ON THE ISSUE AND THE APPLICATION OF THE PROVISIONS OF DTAA WITH CANADA AND UK (CONCERNED COUNTRIES), THE ADDITION MADE BY AO BE DELETED AND RELIEF BE GRANTED TO THE APPELLANT. 4.11 IT IS A SETTLED POSITION THAT THE ASSESSEE HAS A CHOICE OF APPLYING EITHER THE PROVISIONS OF THE DTAA OR THE INCOME - TAX ACT, WHICHEVER IS MORE BENEFICIAL TO HIM. IN VIEW OF THE ARTICLES OF THE DTAA, FOR HOLDING THE FEE FOR TECHNICAL SERVICES AS LIABLE TO TAX IN SOURCE COUNTRY, THE SERVICES SHOULD MAKE AVAILABLE THE TECHNI CAL KNOWLEDGE ETC TO THE ASSESSEE OF THE SOURCE COUNTRY. WE FIND THAT IN INSTANT CASE, THE ASSESSING OFFICER HAS NOT BEEN ABLE TO ESTABLISH THAT THE SERVICES OF PROCURING ORDERS HAS MADE AVAILABLE ANY TECHNICAL KNOWLEDGE , EXPERIENCE, SKILL KNOW - HOW ETC. TO THE ASSESSEE, A ND , THEREFORE , IN OUR CONSIDERED OPINION, THE SERVICES 26 RENDERED BY THE NON - RESIDENT AGENTS CANNOT BE TAXED AS FEE FOR TECHNICAL SERVICES UNDER THE DTAA. 4.12 IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT I N C O M E F R O M SERVICES OF THE NON - RESIDENTS OF PROCURING ORDERS ARE NOT CHARGEABLE TO TAX IN INDIA AND , THEREFORE , ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE ON THE PAYMENTS OF COMMISSION MADE TO THOSE AGENTS, ACCORDINGLY , NO DISALLOWANCE COULD HAVE BEEN MADE UNDER SECTION 40(A)(I) OF THE ACT. THE FINDING OF THE LD. CIT(A) ON THE ISSUE IN DISPUTE IS UPHELD AND ACCORDINGLY , T HE GROUND OF THE APPEAL OF THE R EVENUE IS DISMISSED. 5 . IN THE RESULT , APPEAL OF THE R EVENUE IS DISMISSED. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 7 T H F E B R U A R Y , 201 8 . S D / - S D / - ( H.S. SIDHU ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 7 T H F E B R U A R Y , 201 8 . RK / - (D.T.D) COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI