Ambur Shoes, CHENNAI V. ACIT, CHENNAI

ITA 674/CHNY/2015

• Counselvise Citation: 67421714 RSA 2015
• Duration Of Justice: 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 21-05-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 06-04-2015
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN JCITD R
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Services rendered outside India; Deemed to accrue or arise in india; Retrospective amendment; Permanent establishment

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.674 /MDS./2015 ( !' #' / ASSESSMENT YEAR :2011-12) M/S.AMBUR SHOES , 10,VEPERY HIGH ROAD, PERIAMENT, CHENNAI 600 003. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, NON-CORPORATE CIRCLE 4(1), CHENNAI 600 034. PAN AABFA 1495 L ( / APPELLANT ) ( / RESPONDENT ) $% & ' / APPELLANT BY : MR.R.VIJAYARAGHAVAN,ADVOCATE ()$% & ' /RESPONDENT BY : MR.N.MADHAVAN,JCIT, D.R * + & ,- / DATE OF HEARING : 21. 05.2015 .# & ,- /DATE OF PRONOUNCEMENT : 02.06.2015 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: ITA NO.674 /MDS/2015 2 THIS APPEAL IS FILED BY THE ASSESSEE, AGGRIEVED B Y THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-V, CHENNA I DATED 10.03.2015 IN ITA NO.97/13-14 PASSED UNDER SEC.143 (3) READ WITH SECTION SEC. 250 OF THE ACT. 2. THE ASSESSEE HAS RAISED EIGHT ELABORATE GROUNDS IN ITS APPEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE LD. CIT (A), WHO HAD UPHELD THE OR DER OF THE LD. ASSESSING OFFICER IN DENYING THE PAYMENT OF AGENCY COMMISSION TO NON-RESIDENT AGENT ABROAD FOR THE SERVICES RENDERED OUTSIDE INDIA AS ALLOWABLE DEDUCTION. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM, ENGAGED IN THE BUSINESS OF MANUFA CTURING AND EXPORTING OF SHOES AND SHOE UPPER, FILED ITS RETU RN FOR ASSESSMENT YEAR 2011-12 ON 30.09.2011 ADMITTING TOTAL INCOME AS ` 29,08,550/-. SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY AN D THE ASSESSMENT WAS COMPLETED ON 29.01.2014 WHEREIN THE LD.A.O OBSERVED THAT THE COMMISSION PAID TO THE NON-RESIDE NT AGENTS FALLS ITA NO.674 /MDS/2015 3 WITHIN THE AMBIT OF SEC.9(1)(VII) OF THE ACT INTROD UCED BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 01.04.1962 AND HENCE, THE PROVISIONS OF SECTION 195 OF THE ACT WILL BE ATTRAC TED TOWARDS THE SUCH PAYMENT. ACCORDINGLY, THE ENTIRE OVERSEAS AGENCY CO MMISSION PAYMENT OF ` 56,16,825 WAS DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT FOR NON-DEDUCTION OF T DS. 4. ON APPEAL, THE LD. CIT(A) ENDORSED THE VIEW OF THE LD. A.O WITH THE FOLLOWING OBSERVATIONS:- 3.1.2 FROM THE ABOVE DISCUSSIONS, IT HAS COME TO T HE LIGHT THAT:- 1. THE PAYMENT OF COMMISSION TO THE NON-RESIDENT AG ENT BY THE APPELLANT POSSESSES THE CHARACTER/ ELEMENT OF FEES FOR TECHN ICAL SERVICES FOR THE RENDERING OF ANY MANAGERIAL OR CONSULTANCY SERVIC ES AS DEFINED U/S.9(1)(VII) OF THE ACT. 2. THE PAYMENT OF COMMISSION PAID BY THE APPELLANT RESTING IN THE HANDS OF THE NON-RESIDENT AGENTS SHALL BE INCOME DEEMED T O ACCRUE OR ARISE IN INDIA AS DEFINED U/S.9(1)(I) OF THE ACT. 3. THE PAYMENT OF COMMISSION PAID BY THE APPELLANT, TO THE NON-RESIDENT SHALL BE CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT. 4. THE PAYMENT OF COMMISSION TO THE NON-RESIDENT A GENTS BY THE APPELLANT IS LIABLE FOR TDS U/S.195 OF THE ACT. ITA NO.674 /MDS/2015 4 3.1.3 THE CASE LAWS CITED BY THE APPELLANT VIDE IT S SUBMISSIONS DATED 23.09.2014 ARE NOT RESCUING THE APPELLANT AS THE FA CTS AND CIRCUMSTANCES OF THE APPELLANTS CASE ARE DIFFERENT FROM THAT OF THE SAID CASE LAWS. UNDER THESE CIRCUMSTANCES, I DO NOT DEEM IT PROPER TO COUNTERMAND THE IMPUGNED ORDER DATED 29.01.2014 PASSED BY THE A.O I N RESPECT OF THE ASSESSMENT YEAR 2011-2. THEREFORE, THE ADDITION OF ` 56,16,825/- MADE BY THE A.O IS PROPER, VALID AND IN ACCORDANCE WITH LAW. IN THE RESULT, THE APPEAL OF THE APPELLANT IS DISMI SSED. 5. THE LD.A.R REITERATED THE SUBMISSIONS MADE BEFO RE THE REVENUE AND ARGUED THAT THE COMMISSION WAS PAID TO FOREIGN AGENTS, ONLY FOR PROCURING ORDERS TO SELL ITS MANUFACTURED PRODUCTS IN FOREIGN COUNTRIES AND NOT FOR RENDERING ANY MANAGERIAL OR CONSULTANCY SERVICES AND THEY HAVE NO PERMANENT ESTABLISHMENT IN INDIA. THER EFORE, THE INCOME WAS NOT CHARGEABLE TO TAX IN INDIA. FURTHER, THE LD. A.R. POINTED OUT THAT THE ISSUE IS DIRECTLY COVERED BY T HE DECISION OF THIS TRIBUNAL IN ITA NO.1459/MDS/2014 VIDE ORDER DATED 1 8.08.2014 IN THE CASE OF M/S.BONAVENTURE SHOES (P) LTD., FOR THE ASS ESSMENT YEAR 2008-09 AND ALSO PLACED RELIANCE IN THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN CIT VS.FAIZAN SHOES PV T LTD., REPORTED IN ITA NO.674 /MDS/2015 5 367 ITR 155(MAD.) AND THE DECISION OF HONBLE APEX COURT IN G.E TECHNOLOGY CENTER VS. CIT IN 327 ITR 256 (SC). THE LD.D.R ARGUED IN SUPPORT OF THE ORDERS OF THE REVENUE AND FURTHER POINTED OUT THAT THE ASSESSEE HAD ALSO PAID FEES TO THE OVERSEAS AGE NTS TOWARDS CONSULTANCY / TECHNICAL SERVICES FOR SHOES DESIGNIN G AND DEVELOPMENT AND FOR OTHER ALLIED SERVICES WHICH WIL L AMOUNT TO FEES FOR TECHNICAL SERVICES FALLING UNDER THE AMBIT OF SEC.9 (1)(VII) OF THE ACT. IT WAS THEREFORE PLEADED FOR THE MATTER TO BE REMITTED BACK TO THE FILE OF LD.A.O FOR SEGREGATING SUCH PAYMENTS AND TO PASS AP PROPRIATE ORDER AS PER LAW. 6. AFTER HEARING BOTH SIDES AND PERUSING THE ORD ERS OF THE TRIBUNAL & HONBLE JURISDICTIONAL HIGH COURT, WE FIND THAT T HE ISSUE WITH RESPECT TO COMMISSION ON SALES RECEIVED ABROAD BY T HE FOREIGN AGENTS FOR SERVICES RENDERED OUTSIDE INDIA IS COVER ED BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. FAIZAN SHOES PVT. LTD. (SUPRA) AS POINTED OUT BY THE LD. A .R. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- ITA NO.674 /MDS/2015 6 9. THE EXPLANATION TO SECTION 9(2) OF THE ACT WAS SUBSTITUTED BY THE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FRO M 1.6.1976. THE ABOVE SAID EXPLANATION WOULD COME INTO PLAY ONLY IF THE SAID AMOUNT PAID WOULD FALL UNDER THE HEADINGS: (I)INCOME BY WAY OF INTEREST AS SET OUT IN SECTION 9(1)(V) OF THE ACT; OR (II)INCOME BY WAY OF ROYALTY AS SET OUT IN SECTION 9(1)(VI) OF THE ACT; OR (III) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES AS SET OUT IN SECTION 9(1)(VII) OF THE ACT. 10. WHILE DEALING WITH SECTION 9(1) OF THE ACT, TH E SUPREME COURT IN COMMISSIONER OF INCOME TAX V. TOSHOKU LIMITED, ( 1980) 125 ITR 525, ON CONSIDERING A TRANSACTION WHERE TOBACCO WAS EXPORTED TO JAPAN AND FRANCE AND SOLD THROUGH NON-RESIDENT ASSE SSEES WHO WERE PAID COMMISSION, HELD AS UNDER: 8. THE SECOND ASPECT OF THE SAME QUESTION IS WHETH ER THE COMMISSION AMOUNTS CREDITED IN THE BOOKS OF THE STA TUTORY AGENT CAN BE TREATED AS INCOMES ACCRUED, ARISEN, OR DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA TO THE NON-RESID ENT ASSESSEES DURING THE RELEVANT YEAR. THIS TAKES US T O S. 9 OF THE ACT. IT IS URGED THAT THE COMMISSION AMOUNTS SH OULD BE TREATED AS INCOMES DEEMED TO HAVE ACCRUED OR ARISEN IN INDIA AS THEY, ACCORDING TO THE DEPARTMENT, HAD EITHER AC CRUED OR ARISEN THROUGH AND FROM THE BUSINESS CONNECTION IN INDIA THAT EXISTED BETWEEN THE NON-RESIDENT ASSESSEES AND THE STATUTORY AGENT. THIS CONTENTION OVERLOOKS THE EFFECT OF CL. (A) OF THE EXPLANATION TO CL. (I) OF SUB-S. (1) OF S. 9 OF THE ACT WHICH PROVIDES THAT IN THE CASE OF A BUSINESS OF WHICH AL L THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEMED UNDER THAT CLAUSE TO ACCRUE OR ARIS E IN INDIA SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONA BLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA . IF ALL SUCH OPERATIONS ARE CARRIED OUT IN INDIA, THE ENTIRE INC OME ACCRUING THERE FROM SHALL BE DEEMED TO HAVE ACCRUED IN INDIA . IF HOWEVER, ALL THE OPERATIONS ARE NOT CARRIED OUT IN THE TAXABLE TERRITORIES, THE PROFITS AND GAINS OF BUSINESS DEEM ED TO ACCRUE IN INDIA THROUGH AND FROM BUSINESS CONNECTION IN IN DIA SHALL BE ONLY SUCH PROFITS AND GAINS AS ARE REASONABLY AT TRIBUTABLE TO THAT PART OF THE OPERATIONS CARRIED OUT IN THE T AXABLE TERRITORIES. IF NO OPERATIONS OF BUSINESS ARE CARRI ED OUT IN THE ITA NO.674 /MDS/2015 7 TAXABLE TERRITORIES, IT FOLLOWS THAT THE INCOME ACC RUING OR ARISING ABROAD THROUGH OR FROM ANY BUSINESS CONNECT ION IN INDIA CANNOT BE DEEMED TO ACCRUE OR ARISE IN INDIA (SEE CIT V. R. D. AGGARWAL AND CO. [1965] 56 ITR 20 (SC) AND CARBORANDUM CO. V. CIT [1977] 108 ITR 335 (SC) WHIC H ARE DECIDED ON THE BASIS OF S. 42 OF THE INDIAN I.T. AC T, 1922, WHICH CORRESPONDS TO S. 9(1)(I) OF THE ACT). 9. IN THE INSTANT CASE, THE NON-RESIDENT ASSESSEES DID NOT CARRY ON ANY BUSINESS OPERATIONS IN THE TAXABLE TER RITORIES. THEY ACTED AS SELLING AGENTS OUTSIDE INDIA. THE REC EIPT IN INDIA OF THE SALE PROCEEDS OF TOBACCO REMITTED OR C AUSED TO BE REMITTED BY THE PURCHASERS FROM ABROAD DOES NOT AMO UNT TO AN OPERATION CARRIED OUT BY THE ASSESSEES IN INDIA AS CONTEMPLATED BY CL. (A) OF THE EXPLANATION TO S. 9( 1)(I) OF THE ACT. THE COMMISSION AMOUNTS WHICH WERE EARNED BY TH E NON- RESIDENT ASSESSEES FOR SERVICES RENDERED OUTSIDE IN DIA CANNOT, THEREFORE, BE DEEMED TO BE INCOMES WHICH HA VE EITHER ACCRUED OR ARISEN IN INDIA. THE HIGH COURT W AS, THEREFORE, RIGHT IN ANSWERING THE QUESTION AGAINST THE DEPARTMENT. 11. THE FACTS OF THE PRESENT CASE ARE AKIN TO THE FACTS OF THE DECISION IN TOSHOKU LIMITED CASE, REFERRED SUPRA. IN THE INSTANT CASE ALSO THE ASSESSEE ENGAGED THE SERVICES OF NON-RESID ENT AGENT TO PROCURE EXPORT ORDERS AND PAID COMMISSION. THAT A PART, THE COMMISSIONER OF INCOME (APPEALS) AS WELL AS THE TRI BUNAL HAVE CORRECTLY APPLIED THE PRINCIPLE LAID DOWN IN GE IND IA TECHNOLOGY CEN. (P) LTD. CASE, REFERRED SUPRA, TO HOLD THAT THE ASS ESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE WHEN THE NON-RESIDENT AGENT PR OVIDES SERVICES OUTSIDE INDIA ON PAYMENT OF COMMISSION. 12. IN THE LIGHT OF THE ABOVE SAID DECISIONS AND T HE FINDING RENDERED BY US ON THE EARLIER ISSUE THAT THE SERVIC ES RENDERED BY THE NON-RESIDENT AGENT CAN AT BEST BE CALLED AS A SERVI CE FOR COMPLETION OF THE EXPORT COMMITMENT AND WOULD NOT FALL WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES, WE ARE THE FIRM VIEW THAT SECTION 9 OF ITA NO.674 /MDS/2015 8 THE ACT IS NOT APPLICABLE TO THE CASE ON HAND AND C ONSEQUENTLY, SECTION 195 OF THE ACT DOES NOT COME INTO PLAY. IN VIEW OF THE ABOVE FINDING, THE DECISION OF THE SUPREME COURT IN TRANS MISSION CORPORATION OF A.P. LTD. CASE, REFERRED SUPRA, RELI ED UPON BY THE LEARNED STANDING COUNSEL FOR THE REVENUE IS NOT APP LICABLE TO THE FACTS OF THE PRESENT CASE. WE FIND NO INFIRMITY IN THE ORDER OF THE TRIBUNAL IN CONFIRMING THE ORDER OF THE COMMISSIONE R OF INCOME TAX (APPEALS). HOWEVER WE FIND THAT THE ISSUE WITH RESPECT TO FEES FOR CONSULTANCY / TECHNICAL SERVICES TOWARDS SHOE DESIGNS AND DEVEL OPMENT AND ALLIED SERVICES RENDERED STANDS ON A DIFFERENT FOOTING. TECHNICAL SERVICES ARE SERVICES RENDERED BY APPLYING SPECIAL KNOWLEDGE IN ANY FIELD BY HUMAN BEINGS AND NOT ANY SERVICE PROVIDED BY MACHINE OR ROBOT AS HELD BY THE DECISION OF THE MUMBAI TRIBUNA L IN THE CASE DY.DIT(INTERNATIONAL TAXATIONS) VS. AVAYA GLOBAL CO NNECT LTD REPORTED IN [2011] 43 SOT 439(MUM.). CONSIDERING TH E FACTS OF THE CASE BEFORE US, IT IS APPARENT THAT THE PAYMENTS MA DE TOWARDS DESIGN AND DEVELOPMENT OF SHOES & ALLIED SERVICES WILL FAL L WITHIN THE AMBIT OF FEES FOR TECHNICAL SERVICES AS PROVIDED UNDER SEC.9 (1)(VII) OF THE ACT. ITA NO.674 /MDS/2015 9 7. FURTHER ON EXAMINING THE ENTIRE ISSUE BEFORE US, IT APPEARS THAT THE ASSESSEE HAS PAID COMMISSION/FEES TO FOREIGN AG ENTS OUTSIDE INDIA TOWARDS MARKETING ITS PRODUCTS OUTSIDE INDIA AND ALSO FOR SHOES DESIGNING AND DEVELOPMENT & ALLIED SERVICES. WITH R ESPECT TO THE PAYMENT OF COMMISSION TO FOREIGN AGENTS OUTSIDE IND IA FOR MARKETING ITS PRODUCTS ABROAD, THE DECISION OF THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE CIT V. FAIZAN SHOES PVT. LTD., CI TED HEREIN ABOVE WILL BE SQUARELY APPLICABLE AND ACCORDINGLY WE HERE BY DIRECT THE LD. ASSESSING OFFICER TO ALLOW SUCH EXPENDITURE INCURRE D BY THE ASSESSEE AS DEDUCTION, SINCE THE PROVISIONS OF SEC.195 OF TH E ACT WILL NOT BE APPLICABLE FOR SUCH PAYMENTS AND CONSEQUENTLY SEC.4 0(A)(IA) OF THE ACT CANNOT BE INVOKED. HOWEVER, WITH RESPECT TO THE PAYMENT TOWARDS CONSULTANCY AND TECHNICAL SERVICES FOR DESI GNING AND DEVELOPMENT OF SHOES & ALLIED SERVICES PROVISIONS O F SECTION 9(1)(VII) OF THE ACT WILL COME INTO PLAY AND ACCORDINGLY THE PROVISIONS OF SEC.195 OF THE ACT WILL BE APPLICABLE AND SEC.40(A) (IA) OF THE ACT WILL BE ATTRACTED. ACCORDINGLY THE LD. ASSESSING OFFICE R IS HEREBY DIRECTED TO EXAMINE THE NATURE OF PAYMENT AND PASS APPROPRIA TE ORDER AS PER OUR DISCUSSIONS HEREIN ABOVE. ITA NO.674 /MDS/2015 10 8. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 2 ND JUNE, 2015 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 2 ND JUNE, 2015. K S SUNDARAM. & (,/0 1 0#, /COPY TO: 1. $% /APPELLANT 2. ()$% /RESPONDENT 3. * 2, ( ) /CIT(A) 4. * 2, /CIT 5. 05 (,6! /DR 6. 7' 8+ /GF