Fees for technical services not cover order specific commission at small percentage of order value. Order wise commission based on order value not covered u/s 40(a)(i)
ABCAUS Case Law Citation:
ABCAUS 2378 (2018) 06 HC
The instant appeal was filed against the order passed by the Income Tax Appellate Tribunal (ITAT) allowing the appeal of the Revenue, reversing an order of the CIT(A) deleting the addition 40(a)(i) of the Income Tax Act, 1961 (the Act) made by the Assessing Officer (AO).
The appellant assessee entered into an Agency Agreements with a non-resident Italian Agent for procuring export orders for the appellant at a commission. During the relevant financial year the appellant had paid commission to the said foreign agent.
According to the appellant assessee, the foreign agent rendered service akin to the service of a broker, procuring orders upon market survey with regard to demand for the products of the appellant in the foreign country. Since no amount of agency commission was chargeable to tax in India, no tax deduction at source (TDS) was made from the payment of commission to the foreign agent.
However, The AO passed the assessment order disallowing the entire commission under Section 40(a)(i) of the Act holding that as per the agreement, the commission was paid to the foreign agents for marketing the products, to procure orders and systematic market research with regard to the needs of the products, etc.
Relying upon the meaning of ‘fee for technical services’ as per Explanation (2) of Section 9(1)(vii) of the Act, the AO opined that it could not be said that the payments made by the company were solely for the purpose of overseas commission. He further found that income could be deemed to accrue or arise in India even if the non-resident did not have residence or place of business in India or business connection in India and even if the non resident Indian had not rendered services in India. He concluded that the exceptions provided under Section 9(1)(vi)(b) / 9(1)(vii)(b) did not cover the case of the appellant assessee.
According to the AO, though the assessee company had no business outside India, the assessee company had made payments from sources which were taxable in India. The non-residents did not file any return in India or pay Indian taxes in respect of the services rendered by them, nor obtained exemption under Section 195(2) of the Act. The amounts paid to the non-residents were, therefore, to be deemed to be income that had arisen in India under Section 9(1)(vii) of the Act, for which the appellant ought to have deducted TDS under Section 195 of the Act.
Accordingly he disallowed the amount of commission paid to the non-resident under Section 40(a)(i) of the Act and added to the income of the appellant.
The CIT-A, allowed the appeal who observed that the service rendered by the agents was of brokerage, to procure orders and to do market research abroad. These were ordinarily the tasks which any agent or broker undertook incidental to brokerage service.
The CIT-A held that if the commission agent did not have permanent establishment in India or if they did have one, but had no activity in India for earning such income, there would be no tax liability, as held by the Supreme Court.
The Tribunal however reversed the order of the Commissioner of Income-tax (Appeals). On consideration of the terms and conditions of the said agreement, the Tribunal formulated the question of whether systematic research giving rise to payment in question made by the assessee could be termed as “fee for technical services” or not. The question was answered in the affirmative. The learned Tribunal held that the word “technical services” would imply an operation involving skilled precision, which “systematic research” also involves.
The Tribunal, thus, concluded that the assessee’s agreements in question leading to payment to the overseas entity amounted to fees for technical services, for which the appellant was liable to deduct TDS, failure of which would entail disallowance under Section 40(a)(ia) of the Act.
The Hon’ble High Court observed that both the AO and the Tribunal misinterpreted the Explanation 2 of Section 9(1)(vii) of the Act, whereunder “fee for technical services” means any managerial, technical or consultancy services. The CIT-A had rightly held that the payment for research with regard to need for products was incidental to the job of procuring orders on commission basis. Whereas, consultancy services contemplate comprehensive expert technical advisory services based on technical expertise and research, of business and marketing strategies as a whole, including adoption of cost effective measures, organizational and infrastructural requirements, business management, personnel management and other strategies, for business efficacy of a business entity as a whole and not mere market survey of the need for any particular product. The amendment with retrospective effect from 1.6.1976 by insertion of Explanation to Section 9(2) can only apply to income by way of interest, by way of royalty and by way of fees for technical services and not to brokerage or job wise commission on activities incidental to procurement of orders.
The Hon’ble High Court observed that the very first clause of the agreement stated “to procure orders”. Thus it was clear that the service rendered was essentially brokerage service. 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.
It was observed that there was no finding that any of the commission agents had any place of business in India. Explanation 1 to Section 9(1)(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.
The Hon’ble High Court observed that where there is no liability in India, there can be no question of disallowance under Section 40(a)(i) or Section 40(a)(ia) of the Act on the ground of non-deduction of tax at source. Moreover, where a non-resident has no permanent establishment in India, there can be no liability either under the domestic law or under Double Taxation Avoidance Agreement. In any case, even if a non-resident Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the income for services rendered abroad could not have been liable for tax deduction at source.
The Hon’ble High Court noted that in view of Explanation (2) to Section 9(1)(vii), technical services means any consideration, including lumpsum consideration, for 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. Service of market survey only to ascertain the demand for the product in the market is incidental to the function of a commission agent of procuring orders and is, in any case, not managerial, technical or consultancy service.
It was observed that , the Hon’ble Supreme Court clearly held that no tax is deductible under Section 195 of the Act on commission payments and consequently the expenditure on export commission payable to non-residents for services rendered outside India becomes allowable expenditure. The Supreme Court also held that payments to agents for performance of services outside India are not liable to be taxed in India.
The Hon’ble High Court observed that on a reading of Explanation (2) to Section 9(1)(vii), fees for technical services means consideration, including lumpsum consideration for rendering any managerial, technical or consultancy services. Whereas, in the instant case, the AO had, in the assessment order, accepted that the appellant assessee had paid commission charges to overseas agents. It was not the case of the AO that any lumpsum consideration has been made for any specific managerial, technical or consultancy services.
The Hon’ble High Court held that on a overall reading of the Explanation, it was apparent that fees for technical services does not contemplate commission which is order specific and computable at a small percentage of the order value. Section 40(a)(i) does not contemplate order wise commission based on the order value.
The appeal was allowed and the questions framed were answered in favour of the assessee against the Revenue.
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