FOODS AND INNS LIMITED ,MUMBAI vs. DCIT, CIRCLE 2(1)(1), MUMBAI

Foods and Inns Limited 6. The learned CIT(A), while affirming the disallowance, reasoned that the payments to non-residents were covered by the deeming provisions of Section 9(1). According to him, once commission and warehousing charges partook the character of consultancy, technical or managerial services, they fell within the ambit of “fees for technical services” and were deemed to accrue in India. He thus concluded that the assessee was a defaulter for not deducting tax under Section 195, though he directed the AO to verify the actual figures of commission and warehousing charges claimed.

The learned CIT(A) observed as under: “I have considered the above submission of the appellant with respect to grounds of appeal and related facts and gone through the AO's observation & decision in assessment order Considering the entire conspectus of the case I fully agree with the observation and decision of the AO in as much as the amount paid to the non-resident are deemed to arise in India u/s 9(1) and therefore, chargeable to tax in India. Moreover as per assessment order the AO has established that the provisions of Section 9(1) of the Income Tax Act, 1961 would squarely come into place, as soon as commission and warehousing Charges is having an element of Consultancy Technical and Managerial services for which said commission on export sale and Overseas warehousing Charges is paid in as much as Section 9(1) would classify and cover all incomes as accruing and arising in India which partake the character of payment on account of Fee for Technical Services', which in turn, has been defined to include any payment for rendering of any managerial consultancy services rendered, by the non- resident agent. In view of above, I do not find any infirmity in the order of the AO and resultantly, I have no hesitation in holding that the appellant as defaulter in making TDS on commission on export sale and Overseas warehousing Charges which is required to be deducted u/s 195 r.w.s 9(1)(i) r.w.s 5(2)(b) of the Income Tax Foods and Inns Limited Act 1961 Accordingly I have no hesitation in holding that the impugned additions/disallowances of the AO are based on apropos consideration of facts and law and hence the same does not warrant interference. However the AO is directed to verify the actual payment, as claimed by the appellant regarding export commission paid of Rs. 25,84,396/- in lieu of Rs. 29,76,591/- and actual overseas warehousing charges paid of Rs. 3,19,64,028/- in lieu of Rs. 4,22,93,051/-. Therefore I am of opinion that AO's decision of addition of Rs. 29,76,591/- ( 25,84,396/- claim of "A") and Rs. 4,22,93,051/-( Rs. 3,19,64,028/-, claim of "A") invoking section 40(a)(ia) of the Act in respect to the appellant, is justified and in accordance with law. Accordingly impugned additions stand confirmed. The ground in this regard is dismissed.”

Before us, the learned counsel for the assessee submitted that in earlier years, from assessment years 2013- 14 to 2015-16, the Tribunal has already decided this very issue in assessee’s favour. It was contended that the income in the hands of the foreign agents is purely business income accruing outside India, taxable here only if they had a business connection or permanent establishment in India, which has not been demonstrated. He further argued that warehousing charges are simple commercial payments for storage abroad and cannot be regarded as fees for technical services.

The learned Departmental Representative, on the other hand, placed heavy reliance on the order of the CIT(A). She submitted that the payments made, though remitted abroad, were intrinsically connected with the business carried on in India. By applying the deeming provisions of Section 9(1), the CIT(A) had rightly held that the services partook the character of consultancy and managerial services, thereby falling within Foods and Inns Limited the scope of fees for technical services. According to her, the assessee had failed in its statutory obligation to deduct tax at source, and hence the disallowance under Section 40(a)(ia) was fully justified.

We have carefully considered the rival submissions and examined the record. The foundation of Section 195 is that the obligation to deduct tax at source arises only if the payment to the non-resident is chargeable to tax in India. The Hon’ble Supreme Court in GE India Technology Centre (P.) Ltd. has unequivocally held that unless the remittance carries an element of income chargeable under the Act, the payer cannot be saddled with the obligation of deduction. The law thus draws its strength not from the mere fact of remittance, but from the inherent character of the income itself.

The commission paid to foreign agents in this case is clearly business income. Business income of a non-resident becomes taxable in India only if it is linked to a business connection or a permanent establishment within India. Neither the Assessing Officer nor the learned CIT(A) have shown any such presence. The foreign agents carried out their business entirely overseas, their efforts culminated abroad and their remuneration was received abroad. Business income follows the situs of the business activity, not the location of the payer. It is the soil in which the enterprise operates that gives rise to the income, not the country from which payment is remitted. To treat such receipts as taxable in India, without territorial nexus, is to stretch the charging provision beyond its legitimate reach.

Foods and Inns Limited 12. Equally, the attempt to describe such commission as fees for technical services is misconceived. The statutory definition of FTS contemplates the rendering of managerial, consultancy or technical services. These terms presuppose the imparting of specialised knowledge or the provision of considered advice. A foreign agent who merely canvasses orders abroad does not advise on management strategy, impart technical know-how, or provide consultancy. He performs a commercial function of his own, engaging with prospective buyers and securing business for the assessee. To regard such activity as FTS is to confuse what is essentially the fruit of enterprise with what the law contemplates as the imparting of expertise. Business income and FTS are two distinct statutory categories, and their boundaries cannot be blurred by interpretative elasticity.

The warehousing charges, too, must be seen in their proper light. The assessee engaged warehouses in Europe to store its exported goods before delivery to customers. Warehousing is an arrangement for safekeeping of goods. It involves providing space, not providing skill. It is the renting of facilities, not the rendering of advice. No consultancy, technical expertise, or managerial oversight is involved in this process. The warehouse operator earns business income in the country where it operates. Absent a permanent establishment in India, there is no jurisdictional basis to tax such income here. To elevate mere storage into a technical service is to inflate a simple commercial transaction into something it is not, and never was intended to be.

This issue has already been considered and decided by the Tribunal in assessee’s own case for assessment years 2013-14 to 2015-16. Vide order dated 21st February 2022, the co-ordinate bench held that such payments were not taxable in India in absence of a permanent establishment and that the disallowance made under Section 40(a)(ia) was liable to be deleted. For ready reference, the relevant findings are as under: