Gama Industries Coimbatore Ltd., Coimbatore V. ACIT, Coimbatore

ITA 755/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61339 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 11-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 25-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VI KRAMADITYA
• Assessee Lawyers: K RAGHU
• Keywords: Business income; Double taxation relief; Retrospective amendment; Permanent establishment; Advance ruling
• Section: 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NO. 755/MDS/2011 (ASSESSMENT YEAR : 2006-07) M/S GAMA INDUSTRIES COIMBATORE LTD., 90, EAST SOUTH GARDEN ROAD, VADACHITTOR MAIN ROAD, CHETTIPALAYAM, COIMBATORE 641 201. PAN : AACCG2799P (APPELLANT) V. THE COMMISSIONER OF INCOME TAX-III, INCOME TAX OFFICE, RACE COURSE, COIMBATORE 641 018. (RESPONDENT) APPELLANT BY : SHRI K. RAGHU, CA RESPONDENT BY : SHRI VIKRAMADITYA, JCIT DATE OF HEARING : 11.07.2012 DATE OF PRONOUNCEMENT : 11.07.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, IT ASSAILS AN ORDER DATED 23.3.2011 OF COMMISSIONER OF INCOME TAX-III, COIMBA TORE, PASSED UNDER SECTION 263 OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). 2 I.T.A. NO. 755/MDS/11 2. SHORT FACTS APROPOS ARE THAT ASSESSEE, A COMPANY ENGAGED IN MANUFACTURE AND EXPORT OF COTTON YARN FABRICS AND G ARMENTS, HAD FILED ITS RETURN FOR IMPUGNED ASSESSMENT YEAR SHOWING A LOSS OF ` 1,14,27,692/-. DURING THE COURSE OF ORIGINAL ASSESSMENT PROCEEDING S, ASSESSEE WAS REQUIRED TO FILE VARIOUS DETAILS BY THE ASSESSING O FFICER. SUCH DETAILS WERE FILED AND ASSESSMENT WAS COMPLETED ACCEPTING T HE LOSS. THEREAFTER, ON 28.1.2011, THE CIT ISSUED A NOTICE U NDER SECTION 263 OF THE ACT PROPOSING REVISION OF THE ORDER OF A.O. AC CORDING TO HIM, ASSESSEE HAD PAID A SUM OF ` 25,11,946/- TO ONE M/S THIN RED LINE, UNITED KINGDOM, AS FEES FOR MARKET DEVELOPMENT OVER SEAS IN UK. AS PER THE CIT, PROVISIONS OF SECTION 9 OF THE ACT APP LIED AND INCOME HAD TO BE CONSIDERED AS ACCRUING IN INDIA IN THE HANDS OF THE NON RESIDENT. SINCE NO TAX WAS DEDUCTED AT SOURCE AS MANDATED UND ER SECTION 195 OF THE ACT, AS PER THE CIT, RIGOURS OF SECTION 40(A)(I A) OF THE ACT WAS ATTRACTED. ASSESSING OFFICER HAVING NOT MADE ANY DISALLOWANCE INVOKING SUCH SECTION, CIT WAS OF THE OPINION THAT THE ASSESSMENT WAS ERRONEOUS INSOFAR AS IT WAS PREJUDICIAL TO THE INTE RESTS OF REVENUE. REPLY OF THE ASSESSEE WAS THAT SECTION 9(1)(VII) OF THE ACT, WHICH DEALT WITH FEES FOR TECHNICAL SERVICES, WAS NOT APPLICABL E FOR THE IMPUGNED PAYMENT FOR A REASON THAT THE SERVICES RENDERED BY THE PARTY ABROAD WAS ONLY FOR MARKET DEVELOPMENT AND WAS NOT IN THE NATURE OF ANY 3 I.T.A. NO. 755/MDS/11 MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES FALLI NG UNDER EXPLANATION 2 TO SECTION 9(1)(VII). AS PER THE ASSESSEE, SERVICE S OF M/S THIN RED LINE WERE UTILIZED ONLY FOR MARKETING DONE IN UNITED KIN GDOM. IN ANY CASE, ACCORDING TO ASSESSEE, VIDE ARTICLE 6 OF DOUBLE TAX ATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND UNITED KINGDOM, PROFITS OF AN ENTERPRISE ARISING IN UNITED KINGDOM WILL BE TAXABL E IN INDIA ONLY IF SUCH ENTERPRISE WAS HAVING A PERMANENT ESTABLISHMENT IN INDIA. SINCE M/S THIN RED LINE WAS NOT HAVING ANY PERMANENT ESTABLIS HMENT IN INDIA, ITS PROFITS COULD NOT BE CONSIDERED AS TAXABLE IN INDIA . FURTHER, ACCORDING TO IT, SUCH RECEIPTS IN THE HANDS OF M/S THIN RED LINE COULD NOT BE CONSIDERED AS TECHNICAL SERVICES, UNDER DTAA, AS WE LL. 3. HOWEVER, THE CIT WAS NOT IMPRESSED. ACCORDING T O HIM, WHAT WAS PAID BY THE ASSESSEE IN THE GUISE OF MARKET DEVELOP MENT FEES WAS NOTHING BUT CONSULTANCY CHARGES AND IT FELL WITHIN THE DEFINITION OF TECHNICAL SERVICES GIVEN UNDER EXPLANATION 2 TO S ECTION 9(1)(VII) OF THE ACT. AS FOR THE CONTENTION OF THE ASSESSEE THAT MA RKET DEVELOPMENT FEES, WAS NOT TAXABLE IN INDIA, IN VIEW OF ARTICLE 6 OF DTAA, CIT WAS OF THE OPINION THAT SUCH PAYMENTS WERE NOTHING BUT FEE S FOR TECHNICAL SERVICES, AND SECTION 9(1)(VII) SQUARELY APPLIED. HE THUS DIRECTED THE A.O. TO REVISE THE ASSESSMENT CONSIDERING THE ORIGI NAL ASSESSMENT ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVEN UE. 4 I.T.A. NO. 755/MDS/11 4. NOW BEFORE US, LEARNED A.R. STRONGLY ASSAILING T HE ORDERS OF AUTHORITIES BELOW, SUBMITTED THAT IN THE FIRST PLAC E WHAT WAS PAID BY THE ASSESSEE TO M/S THIN RED LINE UK WAS MARKET DEVELOP MENT FEE AND NOT FEES FOR TECHNICAL SERVICES. ACCORDING TO HIM, ADM ITTEDLY, THE PAYEE WAS A NON-RESIDENT. IF THE AMOUNTS RECEIVED BY THE PAY EE WERE BUSINESS INCOME IN ITS HAND, THEN IT WOULD NOT BE TAXABLE IN INDIA FOR THE SIMPLE REASON THAT IT WAS NOT HAVING ANY PERMANENT ESTABLI SHMENT IN INDIA. FURTHER, ACCORDING TO HIM, IF SUCH MARKET DEVELOPME NT FEE WAS TREATED AS FEE FOR TECHNICAL SERVICES, THEN VIDE ARTICLE 13 .4 OF DTAA SUCH TECHNICAL SERVICES UNLESS IT WAS MADE AVAILABLE TO THE ASSESSEE, COULD NOT BE TAXED IN INDIA. THERE WAS NOTHING THAT WAS MADE AVAILABLE TO THE ASSESSEE. ON THE OTHER HAND, M/S THIN RED LINE UK WAS DOING MARKET SURVEY FOR THE ASSESSEE OUTSIDE INDIA. LEARNED A.R . ALSO POINTED OUT THAT PAYMENTS MADE BY ASSESSEE SQUARELY FELL WITHIN THE EXCLUSION MENTIONED IN CLAUSE (B) OF SECTION 9(1)(VII). SAID CLAUSE CLEARLY EXCLUDED FROM PURVIEW OF FEE FOR TECHNICAL SERVICES , FEES PAID IN RESPECT OF SERVICES AS WELL AS BUSINESS PROMOTION CARRIED O N BY A NON-RESIDENT OUTSIDE INDIA. RELIANCE WAS PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GRASIM INDUSTRIES LTD. V. CIT (332 ITR 276) AND ALSO THAT OF AUTHORITY FOR ADVANCE RULING IN TH E CASE OF INTERTEK TESTING SERVICES INDIA (P) LTD. IN RE (307 ITR 418) . 5 I.T.A. NO. 755/MDS/11 5. PER CONTRA, LEARNED D.R. SUPPORTING THE ORDER OF CIT, SUBMITTED THAT WHAT WAS PAID BY THE ASSESSEE WAS NOTHING BUT FEE FOR TECHNICAL SERVICES. ONCE IT WAS CONSIDERED AS FEE FOR TECHNI CAL SERVICES, THERE WAS NO NECESSITY FOR THE CONCERNED NON-RESIDENT TO HAVE A PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA FOR TAXING SUCH AMOUNT UNDER SECTION 9(1)(VII) OF THE ACT. ACCORDING TO HIM, TH IS POSITION WAS CLEAR IN VIEW OF THE EXPLANATION ADDED TO SECTION 9 BY FINAN CE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1.6.1976. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. RELEVANT QUESTION TO BE DECIDED, IN OUR OPINION, IS NOT WHETHER THE PAYMENT MADE BY THE ASSESSEE TO M/S THIN RED LINE U K WAS FEE FOR MARKET DEVELOPMENT OVERSEAS OR FEE FOR TECHNICAL SE RVICES. NO DOUBT, THIS ISSUE HAS NOT BEEN DISCUSSED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AT ALL. THE QUESTION IS, EVEN IF WE CONSIDER IT AS FEE FOR TECHNICAL SERVICES, WOULD IT BE TAXABLE IN INDI A IN THE HANDS OF M/S THIN RED LINE UK. SECTION 9(1)(VII) OF THE ACT, WH ICH SPECIFIES THAT INCOME BY WAY OF FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA, IS REPRODUCED HEREUNDER:- (VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY - (A) THE GOVERNMENT; OR 6 I.T.A. NO. 755/MDS/11 (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEE S ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINE SS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM A NY SOURCE OUTSIDE INDIA; OR (C) A PERSON WHO IS A NON-RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINE SS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FO R THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY S OURCE IN INDIA; [PROVIDED THAT NOTHING CONTAINED IN THIS CLAUSE SHA LL APPLY IN RELATION TO ANY INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE IN PURSUANCE OF AN AGREEMENT MADE BEFORE TH E 1 ST 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 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 APPR OVED BY THE CENTRAL GOVERNMENT BEFORE THAT DATE.] EXPLANATION [2] FOR THE PURPOSES OF THIS CLAUSE, F EES FOR TECHNICAL SERVICES MEANS ANY CONSIDERATION (INCLUD ING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL CONSULTANCY SERVICES (INCLUDI NG THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONN EL) 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 RECIP IENT CHARGEABLE UNDER THE HEAD SALARIES.] 7. HERE, IF WE CONSIDER THE AMOUNT PAID BY THE ASSE SSEE AS FEE FOR TECHNICAL SERVICES, IT WOULD FALL UNDER CLAUSE (B) ABOVE. SUCH CLAUSE CLEARLY MENTIONS EXCLUSION OF FEES THAT ARE PAYABLE IN RESPECT OF SERVICES 7 I.T.A. NO. 755/MDS/11 UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING AN EARNING ANY I NCOME FROM ANY SOURCE OUTSIDE INDIA. HONBLE BOMBAY HIGH COURT IN THE CASE OF GRASIM INDUSTRIES LTD. (SUPRA) RELIED ON BY THE LEARNED A. R., HAD CLEARLY MENTIONED THAT THE EXPRESSION BY SUCH PERSON APPE ARING IN SECTION 9(1)(VII) (B), REFERRED TO THE RECIPIENT OF THE INC OME AND NOT TO THE PERSON MAKING THE PAYMENT. HERE, THE RECIPIENT OF THE INC OME WAS M/S THIN RED LINE UK AND THERE IS NO DISPUTE THAT SO FAR AS M/S THIN RED LINE UK WAS CONCERNED, THEY WERE RENDERING SUCH SERVICES TO THE ASSESSEE IN THE COURSE OF THEIR BUSINESS. THEREFORE, SUCH PAYM ENT CLEARLY WENT OUT OF THE AMBIT OF SECTION 9(1)(VII) THROUGH THE EXCLU SION SPECIFIED IN CLAUSE (B) THEREUNDER. IRRESPECTIVE OF THE FACT WHETHER T HE NON-RESIDENT HAD A PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA, THE AMOUNT RECEIVED BY IT WOULD NOT FALL WITHIN THE PURVIEW OF SECTION 9(1)(VII) OF THE ACT. FURTHER, THE CIT HAS NOT MENTIONED HOW THE AMOUNT C OULD BE CONSIDERED AS FEE FOR TECHNICAL SERVICES UNDER DTAA BETWEEN IN DIA AND UK. CLAUSE (4) OF ARTICLE 13 THEREOF CLEARLY GIVES WHAT IS CON STRUED AS TERM FEE FOR TECHNICAL SERVICES UNDER THE SAID DTAA. THE SAID CLAUSE IS REPRODUCED HEREUNDER:- 4. FOR THE PURPOSES OF PARAGRAPH 2 OF THIS ARTICLE, A ND SUBJECT TO PARAGRAPH 5 OF THIS ARTICLE, THE TERM FEES FOR TE CHNICAL SERVICES MEANS PAYMENTS OF ANY KIND OF ANY PERSON I N 8 I.T.A. NO. 755/MDS/11 CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SE RVICES OF 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 TH E PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECEIVED; OR (C) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKIL L KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMEN T AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIG N. GIVING MARKETING SERVICES OUTSIDE INDIA, EVEN IF WE CONSIDER IT AS TECHNICAL SERVICES, NOTHING WAS MADE AVAILABLE TO T HE ASSESSEE IN THE NATURE OF ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKIL L KNOW-HOW OR PROCESSES. THERE WAS NO DEVELOPMENT OR TRANSFER OF ANY TECHNICAL PLAN OR TECHNICAL DESIGN. CIT IN HIS ORDER UNDER SECTIO N 263 HAS NOT POINTED OUT ANY SORT OF SIMILAR TRANSFER OR ANY SORT OF TEC HNICAL KNOWLEDGE BEING MADE AVAILABLE TO THE ASSESSEE. HE SIMPLY RELIED O N SECTION 9(1)(VII) OF THE ACT FOR COMING TO THE CONCLUSION THAT AMOUNTS R ECEIVED BY M/S THIN RED LINE UK TAXABLE IN INDIA. WE ARE OF THE OPINIO N THAT THIS FINDING OF THE CIT IS INCORRECT IN VIEW OF SECTION 9(1)(VII) ( B) OF THE ACT AND ALSO IN VIEW OF DTAA BETWEEN INDIA AND UK. ASSESSEE COULD ALWAYS FALL BACK ON THE DTAA IF IT WAS BENEFICIAL TO IT. THUS, IN O UR OPINION, THE TWIN CONDITIONS REQUIRED FOR INVOKING SECTION 263, THAT THERE SHOULD BE AN 9 I.T.A. NO. 755/MDS/11 ERROR IN THE ORDER OF ASSESSING OFFICER AND SUCH ER ROR SHOULD BE PREJUDICIAL TO THE INTERESTS OF REVENUE, HAVE NOT B EEN SATISFIED. WE, THEREFORE, QUASH THE ORDER UNDER SECTION 263 OF THE ACT PASSED BY THE CIT. 8. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON WEDNESDAY, THE 11 TH OF JULY, 2012, AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 11 TH JULY, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT-III, COIMBATORE (4) D.R. (5) GUARD FILE