DIGI DRIVES PVT. LTD.,FARIDABAD vs. ACIT, CIRCLE- 1, FARIDABAD

PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Digi Drives Pvt. Ltd. (hereinafter referred to as the ‘appellant’) by filing the present appeal sought to set aside the impugned order dated 31.10.2019 passed by the Commissioner of Income - tax (Appeals), Faridabad on the grounds inter alia that:-

2. That in any case and in any view of the matter, action of Ld. CIT(A) in not deleting the addition made by Ld. AO amounting to Rs.39,70,224/- and has erred in enhancing the disallowance by Rs.92,63,856/-, aggregating to Rs.l,32,34,080/- by wrongly observing the commission receipts in the hands of TEI as fee for technical services u/s 9(1)(vii) of the Act read with explanation 2 and further erred in applying the provisions of section 195, in bad in law and against the facts and circumstances of the case.

3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not reversing the action of Ld. AO in charging interest u/s 234B and 234C of Income Tax Act, 1961.”

Assessing Officer (AO) made addition of Rs.39,70,224/- being 30% of the amount claimed to have been paid to M/s. Taiyo Enterprises Inc. (for short ‘TEI’) to the tune of Rs.1,32,34,080/- as commission without deducting the tax at source (TDS) on the ground that u/s 195 of the Act, TDS was required to be deducted on payment made to a non-resident company i.e. TEI and thereby framed the assessment at Rs.5,15,93,770/-.

3. Assessee carried the matter by way of an appeal before the ld. CIT (A) who has enhanced the income of the assessee by disallowing entire commission paid of Rs.1,32,34,080/- u/s 40(a)(i) of the Act as against disallowance of 30% i.e. Rs.39,70,224/- made by the AO. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.

“1. The Second Party will introduce the prospective buyer with the First Party and shall also help to First Party in getting order from the prospective buyer.

2. The First Party completes the order as per terms 7 conditions of the order to the satisfaction of the prospective buyer.

4. In lieu of above the First Party has agreed to pay a referral commission @ 6% of the total base value of the order received from the above said prospective buyer.

5. The above commission shall be all inclusive and no expenses shall be reimbursed by the First Party to the Second Party. The Second Party will render its services entirely from out of India.

7. Terms of Payment : The total commission shall be paid in two installments, (I) 50% on receipt of at least 30% (of the order value) advance from the customer; (II) Balance 50% on receipt of at least 90% (of the order value) payment from the customer.

6. AO as well as ld. CIT (A) rejected the contentions raised by the assessee that such income is not taxable in India in terms of Article 12 of Double Taxation Avoidance Agreement (DTAA) entered into between India and Japan as the commission income in the hands of TEI in this case is not chargeable to tax in India as ‘fee for technical services’ under Article 12 and not as business income under Article 7.

“as to whether payment of $2,09,400 being 6% of $34,90,000 made by the assessee company to TEI without deducting any TDS is to be treated as a ‘commission payment’ or ‘fee for technical services’ as has been held by the ld. CIT (A)?”

8. Ld. AR for the assessee company challenging the impugned order passed by the ld. CIT (A) contended that services rendered by a non-resident company to the Indian assessee for procurement of export order cannot be treated as managerial/consultancy services and relied upon the order passed by the coordinate Bench of the Tribunal in case of DCIT vs. M/s. Tej International Pvt. Ltd. in order dated 20.07.2018. However, ld. DR for the Revenue relied upon the order passed by the ld. CIT (A).

"The expression 'managerial, technical and consultancy services' have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word 'services' to understand and appreciate their purport and meaning. One has to examine the general or common usage of these words or expressions, how they are interpreted and understood by the persons engaged in business and by the common man who is aware and understands the said terms. [Para 14]

The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent-assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinizing the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever. This is dear from the facts as recorded by the Commissioner (Appeals), which have been affirmed by the Tribunal. [Para 15]

The non-resident, it is dear was appointed as a commission agent for sale of products within the territories specified and subject to and in accordance with the terms set out, which the non-resident accepted. The non-resident, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services. Further, the respondent-assessee was legally bound with the nonresidents' representations and acts, only when there was a written and signed authorization issued by the respondent-assessee in favour of the non-resident. Thus, the respondent- assessee dictated and directed the non-resident. The Commissioner (Appeals) has also dealt with quantification of the commission and as per agreement, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent-assessee received in items of the purchase contract or order, in addition to a predetermined guarantee consideration. Again, an indication contra to the contention that the non- resident was providing management service to the respondent- assessee. [Para 16] The revenue has not placed copy of the agreement to contend that the aforesaid clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the relevant clauses, which certainly was not the right way to deal with the issue and question. [Para 17] Further, would be incongruous to hold that the non- resident was providing technical services. The non-resident had not undertaken or performed 'technical services', where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences. [Para 19] The moot question and issue is whether the non-resident was providing consultancy services. [Para 20]

The word 'consultant' refers to a person, who is consulted and who advises or from whom information is sought. In Black's Law Dictionary, Eighth Edition, the word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there should be a provision of service by the non-resident, who undertakes to perform it, which the acquirer may use. The service must be rendered in the form of an advice or consultation given by the non-resident to the resident Indian payer. [Para 21] In the present case commission paid for arranging of export sales and recovery of payments cannot be regarded as consultancy service rendered by the non-resident. The non- resident had not rendered any consultation or advice to the respondent-assessee. The nonresident no doubt had acquired skill and expertise in the field of marketing and sale of automobile products, but in the facts, as noticed by the Tribunal and the commissioner (Appeals), the nonresident did not act as a consultant, who advised or rendered any counseling services. The skill, business acumen and knowledge acquired by the nonresident were for his own benefit and use. The non- resident procured orders on the basis of the said knowledge, information and expertise to secure their commission. It is a case of self-use and benefit, and not giving advice or consultation to the assessee on any field, including how to procure export orders, how to market their products, procure payments etc. The assessee upon receipt of export orders, manufactured the required articles/goods and then the goods produced were exported. There was no element of consultation or advice rendered by the non- resident to the respondent-assessee. [Para 22] The technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allows him to do so. In the present case, the aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to view them in watertight compartments, but in the present case this issue or differentiation is again not relevant. [Para 25]"

Ld. CIT (A) also relied upon the judgment rendered by Hon’ble Apex Court in the case of GVK Industries Ltd. vs. CIT (2015) 371 ITR 453 (SC).

“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"”

From the facts on record and terms & conditions contained in the MOU, it is difficult to deduce if the TEI has rendered any type of managerial, technical or consultancy services for installation and successful implementation of cold rolling mill (turnkey project) rather introduced M/s. Mabati Rolling Mills, a Kenyan company for supply of cold rolling mills and thereby procured order of $34,90,000. There is not an iota of evidence on file as to what type of managerial, technical or consultancy services have been rendered by TEI to the assessee company for installation or successful commissioning of cold rolling mill. There is also not an iota of evidence on file if TEI was having any such technical expertise and skills, as its functional profile is not on record nor claimed to have perused by AO/CIT(A), for installation and successful commissioning of cold rolling mill (turnkey project).