PRINCIPAL COMMISSIONER OF IN vs. M/S. MPS LTD.,

1 In the High Court of Judicature at Madras Dated : 05.7.2019 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.423 of 2019 Principal Commissioner of Income Tax-4, Chennai-34 ...Appellant Vs M/s.MPS Ltd., Chennai-32 ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 to set aside the order dated 23.4.2014 made in ITA.No.105/Mds/2014 on the file of the Income Tax Appellate Tribunal, Chennai 'C' Bench for the assessment year 2005-06. For Appellant : Mr.Karthik Ranganathan, SC assisted by Mr.S.Rajesh For Respondent : Mr.Sandeep Bagmar & Mr.SP.Chidambaram Judgment was delivered by

T.S.Sivagnanam,J

We have heard Mr.Karthik Ranganathan, learned Standing Counsel assisted by Mr.S.Rajesh, learned counsel for the Revenue and Mr.Sandeep Bagmar and Mr.SP.Chidambaram, learned counsel accepting notice on behalf of the respondent. http://www.judis.nic.in 2 2. This appeal, filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short, the Act), is directed against the order dated 23.4.2014 in ITA.No.105/Mds/2014 on the file of the Income Tax Appellate Tribunal, Chennai 'C' Bench for the assessment year 2005-06. 3. The Revenue has filed this appeal by raising the following substantial questions of law : “i. Whether the Tribunal was justified in holding that overseas commission payment of Rs.5,77,90,724/- without deduction of tax at source, does not entail disallowance under Section 40(a)(i) read with Section 195, without taking cognizance of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1), both by the Finance Act, 2012, squarely apply to the fact of the present case ? And ii. Whether the Tribunal was right in not appreciating the fact that the earlier decisions relied upon by it, are no longer good law, after introduction of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1) in the statute book by the Finance Act, 2012 with retrospective effect from 01.4.1962?” 4. The learned Standing Counsel appearing for the Revenue submits that the substantial questions of law raised in this appeal were considered by the Hon'ble First Bench of this Court in the case of M/s.Evolv Clothing Company Pvt. Ltd. Vs. ACIT [reported in (2018) 407 ITR 72] and the http://www.judis.nic.in 3 questions were answered against the Revenue. 5. The relevant portions in the said judgment read thus : “30. There is 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. In this case, there is nothing which shows that the income in question was attributable to operations in India. That was not even the factual finding of the Assessing Officer. The Assessing Officer proceeded on the basis that the situs of the rendering of services was not relevant. It was only the situs of the payer and the situs of the utilization of services which determine taxability of such services in India. 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 Commissioner of Income Tax (International Taxation) Vs. Samsung Electronics Co. Ltd., reported in (2010) 320 ITR 209 (Kar), has been overruled by the Supreme Court in GE India Technology Centre P. Ltd. v. CIT, reported in http://www.judis.nic.in 4 (2010) 327 ITR 456 (SC). 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 Indian did have a permanent establishment, but income was earned without availing of such permanent establishment, the http://www.judis.nic.in 5 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 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 http://www.judis.nic.in 6 agents for performance of services outside India are not liable to be taxed in India. 35. In Commissioner of Income Tax, Delhi-IV, New Delhi v. EON Technology (P) Ltd., (2011) 15 Taxmann.com 391 (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 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. http://www.judis.nic.in 7 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.” 6. Following the said judgment of the First Bench of this Court, the above tax appeal is dismissed and the substantial questions of law are answered against the Revenue. No costs. 05.7.2019 RS http://www.judis.nic.in 8 T.S.SIVAGNANAM,J AND V.BHAVANI SUBBAROYAN,J RS Speaking (or) Non Speaking Order Index : Yes (or) No Internet: Yes (or) No To The Income Tax Appellate Tribunal, Chennai 'C' Bench TCA.No.423 of 2019 05.7.2019 http://www.judis.nic.in