AJAY ARORA,KANPUR vs. ADDL. CIT, KANPUR

I.T.A No.90/LKW/2017 1 Ajay Aroravs. Addl. CIT (AY 2011-12) IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW “SMC” BENCH, LUCKNOW (Virtual Hearing) BEFORE SHRI SANJAY ARORA,ACCOUNTANT MEMBER I.T.A. No. 90/LKW/2017 Assessment Year: 2011-12 AjayArora vs. Additional Commissioner of 112/364-A, Income Tax, Swaroop Nagar, Range -2, Kanpur Kanpur [PAN:ABJPA 3585C] (Appellant ) (Respondent)

Appellant by ShriPradeepMehrotra, Advocate Respondent by Shri Ajay Kumar,Sr. DR Date of hearing 18/11/2021 Date of pronouncement 25/11/2021

ORDER Per Sanjay Arora, AM: This is an Appeal by the Assessee agitating the Order by the Commissioner of Income Tax (Appeals)-III, Kanpur (‘CIT(A)’ for short) dated 09.11.2016, dismissing the assessee’s appeal contesting his assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for assessment year (AY) 2011- 12 vide order dated 25.3.2014. 2.1 The background facts of the case are that the assessee, a resident individual, is engaged in providing transcription and business process outsourcing (BPO) services through his proprietary concern, Lipi International (LI), to U.K. based clients drawn from the medical and legal profession. For the purpose, it stands provided, on payment of a charge, called ‘commission’, services by a U.K. based company, ‘Outsource Dictation Limited’ (OD). The service agreementbetween the

I.T.A No.90/LKW/2017 2 Ajay Aroravs. Addl. CIT (AY 2011-12) two, stated (by the ld. counsel) to have beenentered on-line, on the basis of which servicesstand provided and received, is as under: (PB pgs. 29-30) ‘THIS AGREEMENT is made the first day of April, 2010 BETWEEN 1. Outsource Dictation Ltd (‘OD’) of 30-32 Station Road Burgess Hill West Sussex RH15 9DS, UK 2. Lipi International (‘LI’) of 144 Naveen Market, Kanpur - 208001 (UP) India WHEREAS A. OD will use its best endeavours to source and refer digital dictation and outsourced business processing work to LI B. LI is a supplier of digital transcription services and business processing services IT IS HEREBY AGREED THAT 1. OD will promote digital dictation services and business to UK companies and partnerships (“customers”) and refer such customers on a non-exclusive basis to LI in order for LI to provide digital transcription services and outsourced business processing work. 2. LI will provide such service on the following basis: 2.1 Dictation to be uploaded and downloaded via secure website(s) designated by LI 2.2 Dictation uploaded by 6pm UK local time to be available for download by 1pm UK local time the following working day 2.3 LI to procure such transcription to 98.5% accuracy 2.4 LI will refer problems relating to, inter alia, dictation clarity and dictation speed to OD 2.5 Business processing services as agreed on a process by process basis with OD 3. Customers will be charged for transcription services by LI at a rate to be agreed between LI and OD and the customer and in accordance with the terms and conditions of LI. LI will make commission payments to OD at a rate of £0.0275 per 4. linestandard return time and £ 0.042 for express delivery or such other rates as shall be agreed between the parties.

I.T.A No.90/LKW/2017 3 Ajay Aroravs. Addl. CIT (AY 2011-12) 5. LI will make commission payments on business process work at such rate as is agreed between the parties. 6. This agreements can be terminated by either party on one months’ notice sent by post or fax to the address of the receiving party as set out above.’

2.2 The commission for the relevant year, being the first year of the agreement, having been paid at Rs.10,29,541, the Revenue’s case is that its disallowance u/s. 40(a)(i) is attracted on account of non-deduction and deposit of tax at source thereon in-as-much as the same qualifies as ‘fees for technical services’, which term stands given an extended meaning u/s. 9(1)(vii), which provision in the relevant part reads as under: (emphasis, supplied)

Income deemed to accrue or arise in India. 9. The following incomes shall be deemed to accrue or arise in India— (i) all income accruing or arising , whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India. (ii) to (vi) x xxxxx (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 non-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: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.

I.T.A No.90/LKW/2017 4 Ajay Aroravs. Addl. CIT (AY 2011-12) 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." Further, section 195 has been clarified by the insertion of Explanation2 thereto by Finance Act, 2012, with retrospective from 1.4.1962, reading as under, to be not dependent for its application on the presence, whether by way of place of residence or business,or businessconnection, or presence in any manner whatsoever, in India:

Other sums. 195. (1) Any person responsible for paying to a non-resident, not being a company or a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force; Provided xxxxxx Provided further x xxxx Explanation -1.—x xxxx Explanation 2.—For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has— (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. Section 40(a)(i), reading as under, shall accordingly apply; the payments to OD having been remittedoutside India by LI without deduction of tax at source : Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) in the case of any assessee—

I.T.A No.90/LKW/2017 5 Ajay Aroravs. Addl. CIT (AY 2011-12) (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or any subsequent year before the expiry of time prescribed under sub-section (1) of section 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of time period prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.” 2.3 The assessee’s case, on the other hand, is based on the absence of any activity of OD, the non-resident payee, in India, so that there is no question of any part of commission income allowed to it by the assessee as being regarded as having accrued or arisen in India, or deemed to be so, either u/s. 9(1)(i) or u/s. 9(1)(vii)(b). Reliance is placed onCIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 (SC);CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC); andGE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456 (SC), besides on theorder by the Agra Bench of the Tribunal in Asst. CIT v. Manufax India (in ITA Nos. 434 & 446/Agra/2015, dated 11.4.2018/copy on record).

I.T.A No.90/LKW/2017 6 Ajay Aroravs. Addl. CIT (AY 2011-12) case may be, determination of facts, with no material other than the service agreement referred to during hearing. The assessee’s reliance on case law has also been without any reference to the facts of the cited decisions, which were relied upon only qua the statement of law.The Revenue claims the services provided by OD to be ‘technical services’ u/s. 9(1)(vii), without stating what those services are, much less the basis of so stating. Why,the ld. Sr. DR, Sh. Kumar, would during hearing contend of the services having been in fact outsourced by OD (from LI) for its’ business, so that the assessee-payer is the source of income for OD, the payee. That apart, the Revenue’s reliance onthe amendment to sec.195 by way of Explanation 2 thereto w.r.e.f. 1.4.1962 is misplaced inasmuch as the same does not by itself make an income not chargeable to tax in India, i.e., under the Act, as so chargeable, so as to be then liable for deduction of tax at source by a payer- resident. The amendment is only clarificatory of the non-presence or non-residence in India being not available as a ground for non-deduction of tax at source on an income which is chargeable to tax under the Act. Besides, though the said amendment is retrospective, how could tax be thereby directed, or obliged, to be deducted during financial year 2010-11, the relevant previous year, by Finance Act, 2012, which came on the statute-book, after its passage through both the houses of the Parliament and by the Hon'ble President of India, only on April 1, 2012. Tax deduction, which is to be at the time of credit or payment, whichever is earlier, implies that the debtor/payer is aware of his obligation to do so,which thus could not possibly be by a retrospective amendment. The law, after all, cannot impose an impossibility. What would therefore be required to be seen is if the income under reference is otherwise, i.e., de hors the amendment to s.195 (by Finance Act, 2012), subject or chargeable to tax in India, i.e., under the Act. In this regard the assessee’s case is two-fold, i.e., absence of any activity and, thus, business connection in India. And, two, being only in the nature of a sales commission, the amount paid could not be regarded as‘fee for technical services’ for it to be deemed to accrue or arise in India.

I.T.A No.90/LKW/2017 7 Ajay Aroravs. Addl. CIT (AY 2011-12) 3.2 Before proceeding to examine the assessee’s case it would be necessary to see if there has been any corresponding(i.e., to the retrospective amendment to s. 195)amendment to sec.9, which section states the law with regard to income deemed to accrueor arise in India, to which though no referencewas made during hearing by either side. That is, clarifying, as the Act seeks to do per sec.195, of the place of residence or business or indeed undertaking any activity in India as being not a necessary ingredient for an income to be regarded as having accrued or arisen, or deemed to be so, in India, inasmuch as the same only would make the law complete. This is as where not so, the very fact – to exemplify in the context of the instant case, that OD has no place of business or residence in India, and neither has been shown to have carried activity in India, would oustthe commission thereto from being subject to tax in India and, thus, subject to withholding tax in India and, consequently, application of s.40(a)(i). Explanation below s.9, which stands inserted by Finance Act, 2010, w.r.e.f. 01.6.1976, reads 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. This, thus, clarifies unambiguously that the requirement of residence or place of business or business connection, or rendering service, in India, is not a pre-requisite for an income to be deemed to accrue or arise in India, i.e., in respect of incomes falling under clauses(v),(vi) and (vii) of section 9(1). It is in light of this clarification of law, effective 01/6/1976, that the assessee’s case would have to be examined, which shall, accordingly, have to be with reference to section 9(1)(vii)(b). Sh. Kumar’s contention that any income not excluded in Explanation2 to s. 9(1)(vii) would qualify as ‘technical service’, cannot be accepted. This is as the exclusion is, and could only be, from the included services. It cannot be said, and it could be nobody’s case, that all services stand included, so as to then

I.T.A No.90/LKW/2017 8 Ajay Aroravs. Addl. CIT (AY 2011-12) contendof all other, i.e., other than the excluded services, as liable to be regarded as a technical serviceu/s. 9(1)(vii). All one needs, to demonstrate the fallibility of the argument, is to, for the purpose, refer to the said Explanationitself, defining the included services, as well as the other clauses of section 9(1), which, similarly, specify incomes falling there-under for being regarded as deemed to accrue or arise in India and, thus, exposing its infirmity. It would be here also pertinent to state that the provisions of Double Tax Avoidance Agreement (DTAA) between India and UK were not referred to by either party nor have been at any stage earlier. This is relevant as where the same provide for taxing the ‘fees for technical services’ in the country of residence (i.e., of the non-resident service provider), there would be no occasion to tax the same, to any extent, in India, in view of s. 90, also clarified in Board Circular No. 728, dated 30/10/1995. 3.3 On facts, a perusal of the service agreement (SA), shows the following services for being provided by OD: (a) Digital Transcription (i) Source from and refer UK based clients to LI for digital dictation, which shall then provide them digital transcription services. (refer para 1 of SA) (ii) Resolve problems relating to, inter alia, dictation clarity and dictation speed, as referred to it by LI. (para 2.4) (iii) Provides inputs/negotiatethe rates/price to be charged by LI for transcription services, and the enabling agreement thereon between LI and the customers. (para 3) (b) Business process work (i) Source from and refer UK businesses for business processing services to LI, as may be agreed to between the parties (i.e., OD and LI). (para 1) (ii) Provide inputs for agreement onrates/price to be charged to clients for BPO services (this, though not specifically stated, is implicit inasmuch as even the processes to be outsourced to LI are to be decided/agreed upon in consultation with OD, which is in fact also involved in the rates to be charged for transcription services to the non-resident clients by LI (paras 2.5 and 3).

I.T.A No.90/LKW/2017 9 Ajay Aroravs. Addl. CIT (AY 2011-12) It is clear that consultation forms an integral part of the services to be provided by OD (to LI). How else could it otherwise resolve issues in relation to the quality and delivery of the transcription services, and for which, as apparent, it would need to engage, apart from LI, also with the UK-based clients. It is again apparent that it (OD) enjoys the confidence of the UK-based clients, and that it is only on the strength thereof that they agree to outsource work from LI, the Indian entity referred to them by OD, who thus assumes responsibility for all the issues in relation to the smooth functioning and performance of these services by LI. Could this be without OD assuming a managerial and/or consultative role? It does not appear to be so. Insofar as BPO services are concerned, it (OD) is also involved in identifying the business processes outsourced from LI, implying it being in consultation with both, LI and the UK based customers outsourcing the same (through its agency), for the purpose. It is also involved in finalization of the rates at which the services being provided by LI are to be charged by it to the UK clients. Again, why should the commission rates vary, and significantly at that, for a change in delivery time (of the transcription services), unless of course the same are constant (or nearly so) in percentage terms, which would be where LI charges significantly (and proportionately) higher rates for express delivery (para 4 of the SA). The services being provided by OD, thus, are clearly multifaceted, and not limited to merely referring the non-resident clients to LI, and have overtones of consultancy and managerial services.The terms ‘managerial’ and ‘consultancy’, as indeed ‘services’, are of wide import and find inclusionin the extended definition of ‘technical services’ under Explanation 2to section 9(1)(vii). None of the cited decisions is in the context of such services, to be applicable in the instant case, the facts of which are, again, indeterminate, requiring a remission to the Assessing Officer (AO) for the same. Shri Kumar’sargument of, rather, OD being in the business of providing digital transcription and BPO services in UK and, for the purpose, outsourcing some services/business processes from LI, i.e., for its’ own business, isinconsistent with the SA, which must be, unless there is material or evidence pointing to the contrary, regarded as acted upon.Be that as it may,

I.T.A No.90/LKW/2017 10 Ajay Aroravs. Addl. CIT (AY 2011-12) thematter surely needs to be examined on the aspect of the nature and the range of services being provided by OD to LI, and for which it has accordingly been paid what is called ‘commission’. The matter ought to have been examined from this stand-point by the Revenue authorities, which has not been, with the assessee on his part also not helping matters by continuing to insist on the same being only in the nature of referral services from UK, entitling OD to a commission, no part of which is accordingly chargeable to tax in India. As would be apparent from the foregoing, the nature and scope of the services being performed, as indeed agreed to be undertaken by OD, and for which it is therefore being paid ‘commission’, remain elusive,much less being examined on the anvil of ‘technical services’ as defined u/s. 9(1)(vii).As regards the claim of outsourcing services (by OD) from LI, i.e., for its own business, it is not clear as to how the same, even assuming so, would assist the Revenue’s case in-as-much as the same by itself does not constitute a business connection, which necessitates a commonality of interest, absent in an outsourcing arrangement, which is akin to purchase of goods by the non-resident (for its’ own business) from a resident. If anything, it signifiesa non- clarity on facts, on the edifice of which only the law could be applied. In sum 4.1 There is in fact no ambiguity in law, being well settled by the Apex Court, even as apparent from the cited decisions, to which others by it, as in Carborandum Co. v. CIT [1977] 108 ITR 335 (SC); Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC); CIT v. T.I. and M. Sales Ltd. [1987] 166 ITR 93 (SC); and GVK Industries Ltd. v. ITO [2015] 371 ITR 453 (SC) could be added with profit, and it is only the facts of each case which are thus determinative of a decision either way, even as apparent from the reading of the said decisions.The matter, in view of the foregoing, would merit being restored to the file of the AO for undertaking the necessary inquiry and verification, obliging the assessee to provide all the necessary details available or as may be required by the assessing authority to determine the nature and scope of the services being provided, or to be provided,by

I.T.A No.90/LKW/2017 11 Ajay Aroravs. Addl. CIT (AY 2011-12) OD (to LI) under the SA, i.e., for which it stands paid what is termed as ‘commission’.Where and to the extent the same fall to be regarded as technical services u/s. 9(1)(vii), the corresponding receipt is liable for tax deduction at source u/s. 195 and, in its absence, a disallowance u/s. 40(a)(i). Also would be required concomitantly is the expenditure incurred by OD towards rendering those services inasmuch as the same only would yield the income component of the receipt, on which tax is chargeable, and was accordingly liable to be deducted. The decision in Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 (SC) may be relevant in this regard. The provisions of DTAA (between India and UK) may also need to be visited, even as noted earlier.It would be open for the Revenue in the set aside proceedings todemonstrate a ‘business connection’ of OD in India, which, while obviating the need for the income deemed to accrue or arise being ‘technical services’, could only be on the basis of evidence – not specified by Shri Kumar during hearing, and upon due consideration of the assessee’s case qua the same, i.e., per speaking order and after observing the principles of natural justice. In other words, it is an open set aside, not prejudicing either side.

4.2 So, however, I may examine the assessee’s alternate claim inasmuch as, where acceptable, no such restoration may be required. The said claim is that the assessee’s income being deductible u/s. 10B, even if therefore the impugned disallowance u/s. 40(a)(i) is valid, it would not have any tax impact as the same would only go to swell his profits from the eligible undertaking, deductible in full u/s. 10B. The argument is unexceptional. Section 40(a)(i) is a non obstante clause which seeks to provide an additional condition in respect of an expense, otherwise allowable, i.e., in computing the assessee’s business income. It is akin to a disallowance under a deduction provision, as section 37(1) (say). If the business income itself is exempt, a disallowance of any expenditure claimed as a deduction in computing the same would impact only the quantum of the business income and not its character, so that it would, where so, continue to be exempt. No provision akin to Explanation 7 to section 271(1)(c), referred to during hearing by the Bench,

I.T.A No.90/LKW/2017 12 Ajay Aroravs. Addl. CIT (AY 2011-12) has been stated by the Revenue, or otherwise brought to notice so as to meet the argument of no tax impact afore-stated. It is also not the case that the statute has prescribed the income represented by the disallowance to be taxed as the income of a separate business, or as a separate class of income, subject to a separate tax rate. The disallowance u/s. 40(a)(i) would thus have no tax impact inasmuch as the assessee’s taxable income would, on account of an equal increase in deduction u/s. 10B, remain the same. The ld. CIT(A), on whose order the ld. Sr. DR relied in the matter, has rubbished the assessee’s alternate claim, I am afraid to say, on a speciousargument, i.e., that section 40(a)(i) is a non obstante, deeming provision, and is to be accordingly strictly construed. Sure, but the same would have to be read on its terms, and would not therefore result ina change in the nature of the profits & gains of the assessee’s business income, admittedly liable to deduction u/s. 10B, as all that is being done by the invocation of section 40(a)(i) is the disallowance ofan expenditure claimed in computing the same. This is a classical example of the limitations in importing one person’s income, through a deeming provision, as of another, due to non-compliance of withholding tax provisions, which provisions could even otherwise be pursued to their logical end, recovering the tax, along with interest, from the defaulting resident/payer. Why, the Act also contains provisions for assessment of income of a non-resident through a representative, resident assessee. 4.3 The remission to the AO for fresh determination after hearing the assessee is, thus, rendered of no consequence, i.e., in light of the assessee’s alternate ground, raised without prejudice, and on which he thus succeeds. The AO shall compute the assessee’s business income accordingly. I decide accordingly. 5. The appeal, vide Gd. 6, agitates the disallowances for minor sums qua telephone&conveyance expenses and depreciation in computing the assessee’s business income. The same was not pressed during hearing, and is accordingly dismissed as not pressed. So, however, where in relation to the assessee’s business undertaking, as indeed it is, the same would have no tax impact inasmuch as, as

I.T.A No.90/LKW/2017 13 Ajay Aroravs. Addl. CIT (AY 2011-12) explained hereinbefore, deduction u/s. 10B would stand to increase by like amount. I decide accordingly. 6. In the result, the assessee’s appeal is allowed. Order pronounced in the open Court on November25, 2021 Sd/- (Sanjay Arora) Accountant Member Date: 25/11/2021 *Aks/Singh Copy of the order forwarded to: (1) The Appellant (2) The Respondent (3) Pr. CIT/CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order

Assistant Registrar // True Copy//