PRINCIPAL COMMISSIONER OF IN vs. SHRI GOPAKUMARAN NAIR

T.C.A.Nos.332 & 333 of 2021 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATE: 28.06.2021 CORAM: THE HON'BLE MR. JUSTICE M.DURAISWAMY AND THE HON'BLE MRS.JUSTICE R.HEMALATHA T.C.A.Nos.332 & 333 of 2021 The Principal Commissioner of Income Tax, Non-Corporate Circle-7(1), Chennai. ... Appellant in both TCAs Vs. Gopakumaran Nair ... Respondent in both TCAs Appeals preferred under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras, "B" Bench, dated 01.07.2019 in I.TA.No.2892/Chny/2018 for Assessment Year 2013-14 and I.T.A.No.2893/Chny/2018 for the assessment year 2014-15. For Appellant : Mr.R.Karthik, (in both TCAs) Senior Standing Counsel Page 1/10 T.C.A.Nos.332 & 333 of 2021 COMMON JUDGMENT (Judgment was delivered by M.DURAISWAMY, J.) Challenging the orders passed in I.T.A.Nos.2892 & 2893/ Chny/2018 on the file of the Income Tax Appellate Tribunal, “B” Bench, Chennai, the Revenue has filed the above appeals. 2.The assessee is an individual, engaged in the business of trading and export of leathers, filed its return of income for the Assessment Year 2013-14 and 2014-15. The case was selected for scrutiny under CASS. The Assessing Officer, during the course of the assessment proceeding noticed that the assessee had claimed Rs.1,28,34,756/- for the Assessment Year 2013-14 and Rs.26,23,59,611/- for the Assessment Year 2014-15 as selling expenses overseas. However, no TDS under Section 195 of the Income Tax Act, 1961 was made towards the payments made to parties. Hence, the Assessing Officer felt that these activities tantamount to managerial and technical services as envisaged under Section 9(1)(vii) of the Act. Hence, the above payments claimed as selling expenses has been disallowed under Section 40(a)(i) of the Act Page 2/10 T.C.A.Nos.332 & 333 of 2021 and added to the income of the assessee. Aggrieved over the order of the Assessing Officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals) and the Appellate Authority allowed both the appeals. Aggrieved over the orders of the Commissioner of Income Tax (Appeals), the Revenue filed appeals before the Income Tax Appellate Tribunal and the Income Tax Appellate Tribunal dismissed the appeals and confirmed the order of the Commissioner of Income Tax (Appeals). Aggrieved over the orders passed by the Income Tax Appellate Tribunal in the two appeals, the Revenue has filed the above appeals. 3.The appellant-Revenue has raised the following substantial question of law in the above appeals: “Whether on the facts and circumstances of the Tribunal was correct in holding that no TDS is liable to be made on the payments made by the assessee to M/s.Impact Fashion International when the service rendered by the non-resident is classified under Technical/managerial/professional services, which is deemed to accrue or arise in India under Section 9(i)(vii) of the Act and TDS has to be deducted under Section 195 of the Act?” Page 3/10 T.C.A.Nos.332 & 333 of 2021 4.When the appeals are taken up for hearing, Mr.Karthik Ranganathan, learned senior standing counsel appearing for the appellant-Revenue fairly submitted that the question of law that has been raised in the above appeals has already been decided against the Revenue and in favour of the assessee by the Hon'ble Division Bench of this Court in the judgment reported in [2018] 94 taxmann.com 449 (Madras) [Evolv Clothing Co. (P) Ltd. Vs. Assistant Commissioner of Income- tax, Company Circle-ii(1), Chennai], wherein the Hon'ble Division Bench held as follows: “... 31. Section 195 of the IT Act attracts tax only on chargeable income, if any, paid to a non-resident. Where there is no liability, the question of tax deduction does not arise. Where no part of the income is chargeable in India, even clearance under Section 195(2) or 195(3) of the IT Act is not necessary. The decision of the Karnataka High Court in CIT (International Taxation) v. Samsung Electronics Co. Ltd., [2010] 320 ITR 209/[2009] 185 Taxman 313 (Kar), has been overruled by the Supreme Court in GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Page 4/10 T.C.A.Nos.332 & 333 of 2021 Taxman 234/7 taxmann.com 18. The Supreme Court held as under: "This reasoning flows from the words 'sum chargeable under the provisions of the Act' in Section 195(1). The fact that the Revenue had not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1)." 32.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 IT 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 Page 5/10 T.C.A.Nos.332 & 333 of 2021 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. 33.Under Section 9(1)(vii)(b), income by way of fees for technical services payable by a person, who is a resident, is taxable income 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. 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. 34.In GE India Technology Centre P. Ltd., supra, the Supreme Court clearly held that no tax is deductible under Section 195 of the IT Act on commission payments and Page 6/10 T.C.A.Nos.332 & 333 of 2021 consequently the expenditure on export commission payable to non-residents for services rendered outside India becomes allowable expenditure. In Toshoku Ltd., supra, the Supreme Court held that payments to agents for performance of services outside India are not liable to be taxed in India. 35.In CIT v. EON Technology (P.) Ltd. [2011] 15 Taxmann.com 391/203 Taxman 266/[2012] 343 ITR 366 (Delhi), the High Court of Delhi held that payment of sales commission to non-resident who operates outside the country would not attract tax, if payment was remitted abroad directly. Merely because an entry had been made in the books of accounts of the appellant/assessee, that would not mean that the non-resident agent had received payment in India and, therefore, disallowance under Section 40(a)(i) of the IT Act was found uncalled for. 36.The expression "fees for technical services" has been defined in Explanation (2) of Section 9(1)(vii) of the Income Tax Act to mean any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personal) 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 Page 7/10 T.C.A.Nos.332 & 333 of 2021 salaries. Explanation (B) to Section 40(a)(i) provides that the expression "fees for technical services" in Section 40(a)(i) shall have the same meaning as in Explanation 2 to Clause (vii) of sub-section (1) of Section 9. 37.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. 38.In the instant case, the Assessing Officer has, in the assessment order, accepted that the appellant assessee has paid commission charges to overseas agents. It is not the case of the Assessing Officer that any lumpsum consideration has been made for any specific managerial, technical or consultancy services. 39.On a overall reading of the Explanation, it is 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. 40.For the reasons discussed above, the appeal is allowed and the questions framed are answered in favour of the assessee against the Revenue. No costs. Consequently, connected miscellaneous petition is closed.” Page 8/10 T.C.A.Nos.332 & 333 of 2021 5.Having regard to the submissions made by the learned Senior Standing Counsel for the appellant-Revenue and following the ratio laid down by the Hon'ble Division Bench of this Court in the judgment reported in [2018] 94 taxmann.com 449 (Madras) [Evolv Clothing Co. (P) Ltd. Vs. Assistant Commissioner of Income-tax, Company Circle- ii(1), Chennai], the question of law is decided against the Revenue and in favour of the assessee. Accordingly, the Tax Case Appeals are dismissed. No costs.

Index : Yes/No [M.D., J.] [R.H., J.] Internet : Yes 28.06.2021 va

(2/2) To The Income Tax Appellate Tribunal, Chennai, "B" Bench Page 9/10 T.C.A.Nos.332 & 333 of 2021 M.DURAISWAMY, J. and R.HEMALATHA, J. va T.C.A.Nos.332 & 333 of 2021 (2/2) 28.06.2021 Page 10/10