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Before: Shri Duvvuru RL Reddy & Shri S. Jayaraman
आयकर अपीलीय अिधकरण, ‘‘सी” �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘C’ BENCH, CHENNAI �ी धु�ु� आर.एल रे�ी, �ाियक सद� एवं �ी एस जयरामन, लेखा सद� के सम� Before Shri Duvvuru RL Reddy, Judicial Member & Shri S. Jayaraman, Accountant Member आयकर अपील सं./I.T.A. Nos. 223 and 224/Chny/2019 िनधा�रण वष�/Assessment Years:2012-13 & 2013-14 M/s. SQS India BFSI Ltd. (formerly The Deputy Commissioner of known as M/s. Thinksoft Global Vs. Income Tax, Services Ltd.) Door No. 6A, 6th Floor, Corporate Circle 6(2), Prince Infocity II, 283/3 & 283/4, Rajiv Chennai. Gandhi Salai (OMR), Kandanchavadi, Chennai 600 036. [PAN:AABCT0976G] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri Vikram Vijayaraghavan, Advocate ��थ� की ओर से/Respondent by : Shri G. Johnson, Addl. CIT सुनवाई की तारीख/ Date of hearing : 25.03.2021 घोषणा की तारीख /Date of Pronouncement : 03.05.2021 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: Both the appeals filed by the same assessee are directed against the common order of the ld. Commissioner of Income Tax (Appeals) 15, Chennai, dated 31.10.2018 relevant to the assessment years 2012-13 & 2013-14. Besides challenging confirmation of disallowance of export commission payment in the assessment year 2012-13, the assessee also challenged confirmation of disallowance towards payments for professional services rendered for both the assessment years 2012-13 and 2013-14.
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With regard to the disallowance of export commission in the assessment year 2012-13, the assessee company paid an amount of ₹.76,94,733/- towards commission. The assessee is dealing in software development and services. After considering the submissions of the assessee, the Assessing Officer has observed that the services rendered by the agent not only involves sourcing of orders from customers for assessee’s products but also include rendering of such specialized technical services as updating the assessee of changes, market trend, etc. in the respective markets and examination and accreditation of the financial stability of the buyers, etc., which requires specialized provisions of technical knowledge, experience, skill knowhow. Also a person without any technical knowledge cannot find market for these products. By holding that the expenditure incurred by the assessee was fees for technical services and applying the provision of section 195 of the Act, the Assessing Officer disallowed the export commission payment of ₹.76,94,733/- under section 40(a)(ia) of the Act and brought to tax. On appeal, the ld. CIT(A) confirmed the disallowance made under section 40(a)(ia) of the Act.
On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the Assessing Officer has not disputed the payment of export commission to foreign agent for sourcing of orders from foreign customers for assessee’s products. It was
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further submission that the ld. CIT(A) has wrongly characterized the services rendered by the foreign agents as fees for technical services instead of business profits taxable only in the country of residence of the foreign agent under section 9(1) of the Act r.w. Article 7 of the DTAA in the absence of any permanent establishment for the foreign agents in India. The ld. Counsel for the assessee has further submitted that the payment was made by the assessee for the purpose of earning an income from outside India and hence the payment made by the assessee would be covered by exclusionary clause of section 9(1)((vii)(b) of the Act as has been upheld by the Hon’ble Madras High Court in the case of CIT v. KKK West Germany 262 ITR 513 besides heavily relying on the decision in the case of Evolv Clothing Company Pvt. Ltd. v. ACIT 307 ITR 72 and prayed for deleting the addition. On the other hand, the ld. DR strongly supported the orders of authorities below.
We have heard both the parties, perused the materials available on record and gone through the orders of authorities below along with paper book and copy of the agreement. Against the disallowance of export commission, before the Assessing Officer, the assessee has submitted that both the overseas agents are not having any permanent establishment (PE) in India and are residents of the respective foreign countries. Relying on the decision of the Hon’ble Supreme Court in the case of CIT v. Toshoku Ltd.
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125 ITR 525, wherein, it was opined that payment of commission to non- resident agents would not be taxable in India, the assessee has pleaded that the TDS would not be applicable on sales commission paid to non-resident agents. The Assessing Officer did not heed to the above contention of the assessee and proceeded to invoke the provisions of section 40(a)(i) r.w.s 195 of the Act stating that the said payment required to be subjected to deduction of tax at source, in the absence of which, the said expenditure would be liable for disallowance under section 40(a)(ia) of the Act and accordingly, disallowed the sales commission paid to non-resident agents which was confirmed by the ld. CIT(A).
The assessee has incurred expenditure towards payment of foreign agent commission of ₹.76,94,733/- [₹.59,16,736/- to M/s. Fayafi Infomatic Co. LLC, UAE and ₹.17,77,997/- to M/s. Micro Center, Bahrain] for procuring orders for the assessee in middle east region. The assessee is an India based software service provider primarily delivering software validation and verification services to the banking and financial services industry worldwide. The nature of business carried by the assessee is that the assessee would take complete responsibility for project delivery which would include planning and execution of the project, ensuring the quality of deliverables, managing project commitments and ensuring delivery within the agreed schedule. In its line of business and to get sales and marketing support as well as admin
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support, the assessee has entered into an agreement with foreign commission agent and the responsibilities of the agent as well as commission structure are reproduced below: 3. Responsibilities of Fayafi: 1. Sales and Marketing Support a. Help to initiate and participate in 10 meetings / per year with C- level executives in the Territory. b. Participate in 2 events per year involving Media, prospects and customers (no financial commitments from Fayafi) c. Play a high level role in growth of identified "growth accounts" d. Assist in lead generation on a best effort basis through local contact base. e. Participation in CXO level relationship meetings f. Assistance in sales closure and contracting. g. Help in sorting out/prevention of contract violations by customer. Assistance in negotiating contract changes 2. Admin support a. Follow up support for Account Receivables for specific cases (exceeding 90 days due) b. Arranging for cost effective local accommodation for Thinksoft resources c. Business visa and work permit support for Sales and Marketing, support and corporate staff from India 4. Commission Structure 1. Commissions are payable to Fayafi on net billing done for projects (excluding expenses towards airfare, airport transfers, visa and work permits). This could be in the form of reimbursements from the customer or as a percentage of the project cost. 2. For all local customers including New Client additions/ Existing clients as on date of the agreement the commission payable shall be: a. 5% on billing from projects executed within the Territory. b. 2.5 % on billing from project roll outs /projects in GCC and MENA region, only for orders awarded and billable in the Territory.
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c. The current time limit of cessation or commission payments after 36 months shall be stand removed for all Territory accounts. 3. For all Named Growth accounts within the Territory region, if the account growth is 25% on year on year basis, an additional 2.5 0;;, overall commission is payable .The list of named accounts eligible for this scheme will be updated from time to time in Annexure 2 of this agreement. New clients will be eligible to be nominated into this category 12 months after the first invoice is raised. The list will be updated based on mutual agreement. 4. For all Global MNC Customers ( as updated in Annexure I) a. commission payable will be 2.5% of on-site billing from projects executed within the Territory. No commissions are payable for projects outside the Territory 5. For Large Deals brought by Fayafi with confirmed order size of USD 5 Million+ for a single order with new customers. a. a special onetime additional commission of 5% of deal size will be paid b. commission payments will be prorata alongside the payments realized on progress of the project. c. If the deal is foreclosed at a value less than 5 million USD then the special commission would not be applicable. Any amount already paid would be adjusted against other commission payable. 6. Commission becomes payable after receipt of payment from the customer. 7. Any exceptions to the above and for deals falling into any other category, parties shall discuss and mutually agree on a case to case basis. 5. Invoicing and payments process 1. Commission a. Thinksoft to provide Fayafi on a monthly basis, a statement of invoices raised as well as the payments received for the customers covered in the agreement. b. Based on the payments received information, Fayafi in turn would raise their invoice for commission payable for the month. c. Thinksoft to verify Fayafi invoice for commission and organize for the payment of Fayafi invoices within 10 working days of receipt of accurate invoice from Fayafi. 2. Other expenses
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a. Wherever it involves reimbursement or expenses to Fayafi. Fayafi would send an invoice with supporting documents as and when the expense is incurred. b. Thinksoft would organize for the payment to be remitted to Fayafi within 7 working days from receipt of accurate invoice. c. Any clarification required by Thinksoft including supporting documents, if any, shall be provided by Fayafi immediately to facilitate quick processing of the invoices. 6. Intellectual Property Any existing Thinksoft Intellectual Property being deployed for the execution of the project and used by an Employee during the period of secondment, continues to belong to Thinksoft and neither Employee nor Fayafi can use it outside of the Project, except with express written permission from Thinksoft. Similarly, any Intellectual Property developed by Employee during the period of secondment, belongs to Thinksoft and/or Customer. Neither Employee nor Fayafi has any rights to this Intellectual Property. 7. Notice of Termination Either party may terminate this Agreement, without assigning any reason, by providing 90 days prior notice to the other party. On such termination notice being given, both parties shall mutually draw up a statement of accounts I dues I credits, reconcile balances and come lip with a final financial settlement before the expiry of the agreement. During the notice period Fayafi shall continue to support Thinksoft on Work permits and other admin support for all projects including new projects. Where projects extend beyond the notice period a service fee of 10% of the payroll would be paid. 8. Indemnities Each party agrees to indemnify the other party against all claims arising out of non- performance of their respective responsibilities/duties/activities. 9. Non-compete Clause Fayaf will not enter into the business of providing Software Testing Services to Banking, Financial Services and Insurance related companies - a business that Thinksoft is in, nor will it directly approach any of Thinksoft Customers offering the services of it's employees directly or indirectly, during the tenancy of this contract.” 6. However, in the appellate order, the ld. CIT(A) has just reproduced para 3 of the agreement viz., “Responsibilities of Fayafi” and held that the
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foreign agents extended managerial services in addition to being just a sales agent and confirmed the assessment order, which appears to be incorrect in view of the fact that the general coordination work as given in para3 were ordinarily things which any agent or broker undertook incidental to brokerage services as has been held by the Hon’ble Jurisdictional High Court in the case of Evolv Clothing Company Pvt. Ltd. v. ACIT (supra) . The ld. CIT(A) has failed to completely go through the entire agreement, wherein, clause 1 to 7 in para 4 deals with commission structure, purpose for which commission payment was agreed by the assessee, more specifically, clause 5 clearly speaks about the deal, which is reproduced once again for the sake of clarity: “5. For Large Deals brought by Fayafi with confirmed order size of USD 5 Million+ for a single order with new customers. a. a special onetime additional commission of 5% of deal size will be paid b. commission payments will be prorata alongside the payments realized on progress of the project. c. If the deal is foreclosed at a value less than 5 million USD then the special commission would not be applicable. Any amount already paid would be adjusted against other commission payable.” 7. Similarly, the agreement entered into by the assessee with M/s. MicroCenter, Bahrain also speaks that each contract signed by the client for the supply of THINKSOFT services or every subsequent purchase of THINKSOFT services by the client for the duration of the agreement, the
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assessee-partner was liable to pay 5% of the revenues realized from billing of the onsite resources from the relevant contract and the agreement runs so on besides clear-cut term of agreement was executed that all information disclosed by either party (in writing, orally or in any other form) that is described as confidential or proprietary, or provided under circumstances indicating it is confidential or proprietary, including, without limitation, projections, business plans, marketing plans, technical data, product ideas, pricing, cost, customer, vendor and supplier lists and identification, channel of distribution, terms and identification of proposed and actual contracts and financial information, and all information learned by the each Party pertaining in any manner to the business of the other party. However, in both the agreements executed with foreign agent do not speak any technical services, whatsoever, as observed by the authorities below, could be rendered to the assessee for which the assessee was liable to pay the commission.
It is not in dispute that the non-resident agents to whom commission was paid by the assessee have rendered services outside India for sourcing orders from the clients. It is not in dispute that the said non-resident agents do not have any PE in India and that they are domiciled in UAE and Bahrain. In view of these facts, it could be safely concluded that there is no income chargeable to tax in India in terms of section 195(1) of the Act in the hands
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of the non-resident agents and accordingly, the provisions of section 195(2) of the Act would not come into operation at all. The head notes in the case of GE Technology Center Pvt. Ltd. in 327 ITR 456 (SC) are reproduced hereunder:- Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident -the moment a remittance is made to a nonresident, obligation to deduct tax at source does arise; it arises only when such remittance is a sum chargeable under Act, i.e., chargeable under 4, 5 and 9 - Held, yes - Whether section 195(2) is not a mere provision to provide information ITO(TDS) so that department can keep track of remittances being made to non-residents outside rather it gets attracted to cases where payment made is a composite payment in which certain proportion of payment has an element of 'income' chargeable to tax in India and payer seeks a determination of appropriate proportion of sum chargeable - Held, yes” 9. The ld. CIT(A) has relied on the decision of the jurisdictional Tribunal in the case of ACIT v. Evolv Clothing Company Pvt. Ltd. 142 ITD 618(Che- Trib), wherein, it was held that the payment made by the assessee for systematic research to its overseas entity not having PE in India, without deducting tax at source, could be disallowed under section 40(a)(i) of the Act. The above case law relied on by the ld. CIT(A) is not applicable since in the case of Evolv Clothing Company Pvt. Ltd. v. ACIT [2018] 407 ITR 72, the Hon’ble Jurisdictional High Court has reverted the above findings of the Tribunal by observing as under: “22. The appeal was admitted by a Division Bench comprising Chitra Venkataraman and K.B.K.Vasuki, JJ. The substantial questions of law on which the appeal was admitted need to be re-framed and are re-framed as follows:
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(i) Whether commission paid by an exporter to a non-resident agent and/or a foreign agent for service provided outside India for procuring orders is taxable in India? (ii) Whether rendering of the service of market survey abroad would tantamount to rendering of technical service so as to attract taxes in India? (iii) Whether an assessee is liable to deduct TDS on commission paid to overseas agents operating abroad? (iv) Whether the amendment of the Income Tax Act with retrospective effect from 1.6.1976 by the Finance Act, 2010 clarifying that income of nonresident would be deemed to accrue or arise in India under Clause (v) or clause (vi) or clause (vii) of sub-section(1) and be included in the total income of the non- resident whether or not the non-resident has a residence or place of business or business connection in India, and whether or no the non-resident has rendered services in India is attracted in the facts and circumstances of this case? 23. The first question necessarily and obviously has to be answered in favour of the appellant/assessee and against the Revenue, the question being covered by the judgment of Supreme Court in Toshoku Ltd., supra. The issue before the learned Tribunal was whether the appellant/assessee had paid for systematic research or for procuring export orders. It was all along the contention of the appellant/ assessee that the foreign agent was paid for procuring orders and assessing the market. The learned Tribunal erred in concluding that there was no issue between the parties that the assessee had paid for systematic research. For the sake of convenience, the second, the third and the fourth questions are dealt with together. 24. The learned Tribunal found, on facts, on perusal of the agreement copies filed by the appellant/assessee that commission was paid to the foreign agents for (i) marketing the products of the assessee company; (ii) to procure orders for the assessee company; and (iii) for systematic market research with regard to the needs of the products, etc. 25. There is no factual finding of any activity on the part of the payee in India. The Assessing Officer proceeded on the basis that the business of the appellant/assessee was in India and payments were made from India.
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Having found that the payments were for marketing the products of the assessee company, for procuring of orders for the assessee company and for systematic research with regard to the demand for the products of the assessee. The Assessing Officer erred in arriving at the conclusion that payments made by the appellant assessee could not be said to have been made for the purpose of overseas commission. The Assessing Officer as also the learned Tribunal misinterpreted the Explanation 2 of Section 9(1)(vii) of the IT Act, where under “fee for technical services” means any managerial, technical or consultancy services. It is nobody's case that the service rendered by the overseas agent was either managerial or technical. As held by the Appellate Commissioner, payment for research with regard to need for products was incidental to the job of procuring orders on commission basis. Consultancy services contemplate comprehensive expert technical advisory services based on technical expertise and research, of business and marketing strategies as a whole, including adoption of cost effective measures, organizational and infrastructural requirements, business management, personnel management and other strategies, for business efficacy of a business entity as a whole and not mere market survey of the need for any particular product. The amendment with retrospective effect from 1.6.1976 by insertion of Explanation to Section 9(2) can only apply to income by way of interest, by way of royalty and by way of fees for technical services and not to brokerage or job wise commission on activities incidental to procurement of orders. 27. The Assessing Officer, in effect, held that income could be deemed to accrue or arise in India under Section 9(1)(vii) of the IT Act even if the non-resident did not have place of business or business connection in India or had not rendered services in India. The exceptions provided under Section 9(1)(vi)(b) / 9(1)(vii)(b) of the IT Act, which apply to utilization of services of business outside India, did not cover the assessee's case. 28. The Assessing Officer had also taken note of withdrawal of two circulars: (i) Circular No.786, dated 7.2.2000, dealing with payment of export commission, opining that withdrawal, being procedural in nature, would apply to proceedings pending; and (ii) Circular No.23 of 1969, which exhaustively dealt with subject of “Nonresidents Income accruing or arising through or from business connection in India – Liability to tax – Section 9 of the Income Tax Act, 1961”. 29. From the Service Agreement with the agents abroad, it is clear that the service rendered is essentially brokerage service. The very first clause of the agreement states “to procure orders”. The reference to market
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research abroad or co-ordination with the supplier or to ensure timely payment or making available its office space for visit by the suppliers, were ordinarily things which any agent or broker undertook incidental to brokerage service. 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) v. 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 (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
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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 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 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 (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
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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. 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.” 10. The ld. DR could not controvert the above finding of the Hon’ble Jurisdictional High Court. In the present case also, as per specific clause 5 of agreement entered into with M/s. Fayafi Infomatic Co. LLC clearly speaks that “5. For Large Deals brought by Fayafi with confirmed order size of USD 5 Million+ for a single order with new customers…..” and so on as well as payment of commission of 5% of the revenues realized from billing of the onsite resources from the relevant contract as executed by the assessee with M/s. MicroCenter, Bahrain under clause 3 of the agreement, which
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clearly indicates that the services rendered by the foreign agent was essentially brokerage/commission service for procuring orders to the assessee.
As has been held by the Hon’ble Jurisdictional High Court in the case law referred and reproduced hereinabove, that at para 32, both the non- residents have 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 income for services rendered abroad could not have been liable for tax deduction at source. In the present case also, both the non- residents do not have any PE in India.
The reference to arranging meetings, publicity through media, etc. were incidental to the brokerage services. There was no finding that the commission agent had any place of business in India. Explanation 1 to section 9(1)(i) of the 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. The Assessing Officer had in the assessment order, accepted that the assessee had paid commission charges to overseas agents. It was not the case of the Assessing Officer that any lump sum
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consideration had been paid for any specific managerial, technical or consultancy services. Thus, we are of the considered opinion that the commission was not taxable in India and moreover the assessee was not liable to deduct tax on such payment. Under the above facts and circumstances and in view of the decision in the case of Evolv Clothing Company Pvt. Ltd. v. ACIT (supra), the addition made towards disallowance of export commission stands deleted.
With regard to the common ground raised in the appeals for the assessment years 2012-13 and 2013-14 towards disallowance of payments for professional services rendered, during the course of assessment proceedings, the Assessing Officer observed that the assessee has paid professional fees without deducting TDS on the same. In the assessment year 2012-13, there are payments amounting to ₹.3,17,60,968/- as professional fees, out of which ₹.30,81,969/- has been paid to foreign entities which fall under the category of fees for technical services and professional services. After considering the submissions of the assessee, the Assessing Officer was of the opinion that the payment of ₹.30,81,969/- falls under the category of fees for technical services and professional services, which shall be disallowed under section 40(a) r.w. section 9(1)(vii)(b) and section 195 of the Act and accordingly disallowed the same and brought to tax. Similarly, for the assessment year 2013-14, the
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Assessing Officer disallowed the payment of ₹.37,55,687/- under section 40(a) r.w. section 9(1)(vii)(b) and section 195 of the Act and brought to tax.
On appeal, after considering the submissions of the assessee, the ld. CIT(A) has observed that the assessee has appointed foreign agents as consultants for the purpose of assisting foreign branches and rendered services in the area of accounting, legal, filing tax returns, secretarial assistance, etc., which are covered under DTAA. Accordingly, the ld. CIT(A) confirmed the disallowance for both the assessment years.
We have heard the rival contentions. Before us, the ld. Counsel for the assessee has submitted that the appellate authority has erroneously confirmed the disallowance by concluding that the professional services rendered by the foreign vendors to branches outside India would be taxable in India as ‘fees for technical services’. It was further submission that the payments made to professionals outside India was taxable only in the foreign country as business profits and not in India in the absence of any PE in India as per section 9(1)(i) of the Act and Article 7 r.w. Article 5 of the DTAA. It was further submission that the payments made by foreign branches to foreign vendors via foreign branch bank account are not taxable in India. It was further submission that the payments made to ‘firms’ will not be taxable in India as per ‘Independent Personal Services’ clause in Article
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14 of DTAA. It was also a submission that the payment was made by the assessee for the purpose or carrying on business outside India and hence, the same would be covered by exclusionary clause of section 9(1)(vii)(b) as held by the Hon’ble Madras High Court in the case of CIT v. KKK West Germany 262 ITR 513. We find force in the submissions of the ld. Counsel. The issue of interpretation of agreements for avoidance of double taxation has always been ongoing. More particularly when it involves importing the meaning of any expressions from the interpretation adopted for any other tax treaty. India has signed tax treaties with various countries including Australia, with ‘Make Available’ clause which contains a restrictive definition of fees for technical services/fees for included services as against the wider definition of ‘Fees for Technical Services’ as provided under section 9(1)(vii) of the Act and certain DTAA’s contains ‘Most Favoured Nation’ clause which requires a country to provide any concessions, privileges, or immunities granted to one nation of a particular body (say, OECD to all other nations of that particular body (say, OECD).
Article 7 of the DTAA reads as under: 1. The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to: a. that permanent establishment; or
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b. sales within that other Contracting State of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on, through that permanent establishment. 16. In this case, the authorities below have not given any findings of taxability in the absence of any PE in India as per section 9(1)(i) of the Act and Article 7 r.w. Article 5 of the DTAA, but also not appreciated the facts as argued by the ld. Counsel that the payment made to vendors in Australia and Belgium are not taxable in India due to presence of ‘make available’ clause and “Most Favoured Nation” clause in the DTAAs with Australia and Belgium respectively. Moreover, it was also not considered by the authorities below the provisions of Article 14 of DTAA, wherein, it was agreed upon that wherever applicable, that the payments made to ‘Firms’ will not be taxable in India as per ‘Independent Personal Service’ clause. More particularly, the Double Taxation Avoidance Agreement [DTAA] entered into with a foreign country is a statutory document recognized under the Income Tax Act, 1961 and by sub-section (2) of section 90 the provisions of the Act would apply only to the extent that they are more beneficial to the assessee. Over and above, when it was the submission of the assessee that the professional services were utilized by the assessee’s branches located abroad and payments made abroad, it is not clear from the assessment/appellate order as to whether the deduction for the related expenditure was claimed by the assessee under sections 30 to 38 of the Act. In case, if the assessee has not
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claimed deduction, the Assessing Officer cannot invoke section 40(a)(i) of the Act for its disallowance in computation of business income. Accordingly, we set aside the order of the ld. CIT(A) on this issue and remit the matter back to the file of the ld. CIT(A) to consider the above observations and decide the issue afresh by passing speaking order in accordance with law after allowing an opportunity of being heard to the assessee.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes for both the assessment years. Order pronounced on the 03rd May, 2021 in Chennai.
Sd/- Sd/- (S. JAYARAMAN) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, 03.05.2021 Vm/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु� (अपील)/CIT(A), 4. आयकर आयु�/CIT, 5. िवभागीय �ितिनिध/DR & 6. गाड� फाईल/GF.