ACIT, CIRCLE-8(2), KOLKATA, KOLKATA vs. M/S. NISSIN ABC LOGISTIC PVT. LTD., KOLKATA

1 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 आयकर अपील�य अधीकरण, �यायपीठ – “A” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA (सम�)�ी पी. एम.जगताप, उपा�य� एवं �ी ए.ट�. वक�,�या�यक सद�य) [Before Shri P.M. Jagtap, Vice President & Shri A. T. Varkey, JM]

I.T.A. No. 641/Kol/2017 Assessment Year: 2010-11

Assistant Commissioner of Income-tax Vs. M/s. Nissin ABC Logistic Pvt. Ltd. Circle-8(2), Kolkata. (PAN: AABCN0379D) Appellant Respondent Date of Hearing 15.01.2019 Date of Pronouncement 05.04.2019 For the Appellant Shri C. J. Singh, JCIT, Sr. DR For the Respondent S/Shri S. K. Agarwal, FCA, Avisekh Kejriwal, FCA & Abhishek Sureka, FCA

ORDER Per Shri A.T.Varkey, JM This is an appeal preferred by the revenue against the order of Ld. CIT(A)-12, Kolkata dated 09.01.2017 for AY 2010-11.

2 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 shipping agent of any non-resident ship owners or charters in respect to which provision of sec. 172 of the Act applies. According to AO, since no evidence was submitted before him, he disallowed Rs.3,07,54,392/- u/s. 40(a)(ia) of the Act. Aggrieved, assessee preferred an appeal before the Ld. CIT(A), who was pleased to allow the same. Aggrieved by the decision of the Ld. CIT(A) the revenue is before us.

(i) Consignment originating in India to be delivered to a destination outside India

The subject service can be broadly divided into two parts -

(1) Services from the customer's premises to the Indian port/loading in ship - Rendered by the assessee.

(2) Services from the destination port to the delivery point outside India - Rendered by the non-resident group companies of the assessee, activities carried on outside India.

In this case, the non-resident company raises an invoice on the assessee for reimbursement of expenses incurred on behalf of the assessee after the consignment reaches the destination port outside India. Such expenses, incurred at ports outside India, are primarily on account of customs clearance fee, handling charge, truckage,

3 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 terminal charge, consumption tax, inspection charge, service charge, bank charges, etc.

Consignment originating outside India to be delivered to India

The subject service can be broadly divided into two parts -

(1) Services from the foreign customer’s premises to the foreign port/loading in ship – Rendered by group companies of the assessee outside India.

(2) Services from the Indian port to the delivery point in India - Rendered by the assessee in India.

In this case, the non-resident company raises an invoice on the assessee for reimbursement of expenses incurred on behalf of the assessee at the origin port outside India. Such expenses, incurred at ports outside India, are primarily on account of customs clearance fee, packing charge, handling charge, truckage, ocean freight, gate charges, inland charge, register fee, delivery fee, etc.

4 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 remand report and considering the same and the rejoinder filed by the assessee (which has been reproduced in the impugned order), the Ld. CIT(A) has allowed the claim of the assessee. Before us, the Ld. DR vehemently submitted that the payments have been made to the related parties (group entities) and, therefore, automatically there is a business connection and, therefore, payments made to them had to be subjected to TDS. We do not agree with the Ld. DR’s contention that merely because the foreign companies are related parties there is automatically a business connection and, therefore, sec. 9 is attracted. According to us, if there is a related party transaction then what is to be examined is whether the payments have been made at an arms length price or not. Unless the foreign company which is an independent legal entity incorporated in a foreign country have a business activity in India or a PE in India, it cannot be brought to tax for the income which it earns for the services rendered outside India. We note that the assessee has made payment to foreign companies towards logistic services undertaken by them from the foreign port onwards which is not in the domain of India.

5 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 functions and carries on business on its own, instead of functioning as an agent of the foreign group entities and accordingly, the assessee cannot be construed to have business connection with foreign group entities in India. Further, we note that the assessee does not have an authority to conclude contracts on behalf of foreign group companies. The assessee being in the business of logistic service, the question of maintaining a stock of goods in India also does not arise and the assessee does not secure orders in India mainly or wholly for the foreign group entities but carries business on its own. Thus, the assessee cannot be construed to have created a business connection in India for foreign group entities. It is not the case of the AO that the services rendered are not at arms length so, therefore, we do not find any merit in the grounds of appeal raised by the revenue in this regard. We also observe that the precise question as to whether a foreign company incorporated under the respective foreign country laws when engaged in the business of providing freight and forwarding and logistic services with an Indian entity needs to deduct TDS at source came before the coordinate bench of this Tribunal Mumbai bench reported in (2012) 18 Taxman.com 302 in UPS SCS (Asia) Ltd. Vs. ADIT (International Taxation) wherein the facts of the case are as under:

“The assessee, a foreign company incorporated under the laws of Hong Kong, was engaged in the business of provision of supply chain management, including the provision of freight and forwarding and logistics services. It entered into a 'Regional Transportation Services Agreement' with 'M' an Indian company for providing freight and logistics services to each other. As per this agreement, each party agreed to render services to the other in respect of import and export of consignments. The Assessing Officer noted two types of consignments, viz., Import consignments and Export consignments. He observed that Import consignments were those which originated outside India and were to be delivered in India. The services in origin of foreign country broadly comprised of overseas local pick, overseas ground transportation, overseas custom clearance, overseas documentation, loading and unloading and stuffing consignment in cargo, agreed to be performed outside India. 'M', undertook to perform destination services on the arrival of consignment in India. Destination services to be carried out in India by 'M' comprised of local unloading and loading of consignment, local custom clearance, local ground transportation, local documentation etc. On the other hand, export consignments originated from India for the delivery of consignments outside India. The assessee, as per the agreement, undertook to perform the destination services outside India, similar to those performed by 'M' in India in the context of Import consignments. During the year in question the assessee earned Rs. 2,32,89,208 as international transportation fee under the agreement from 'M' towards services rendered by it abroad on the above described Export consignments. Such amount was claimed by the assessee to be not chargeable to tax in India as per the provisions of section 5, read with section 9. It was so claimed on the premise that the income arose from services rendered by it outside India and no operations in this regard were carried out in India. The assessee also claimed that its relationship with 'M' was that of independent contractor and the business between them was done on principal to principal basis and at arm's length. The Assessing

6 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 Officer observed that the services rendered by the assessee under the agreement were in the nature of freight and logistics services such as transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services. In his opinion such services were covered under the provisions of section 9(1)(vii), being 'fees for technical services'. In order to buttress his viewpoint, the Assessing Officer also observed that 'M' had deducted tax at source from the transportation fees paid to the assessee and in that view of the matter the assessee's contention that the amount was not chargeable to tax in India, was bereft of any force. The Commissioner (Appeals) echoed the assessment order on this point by holding that the transportation fees received by the assessee from 'M' was taxable in India as 'fees for technical services' under section 9(1)(vii) as it was for the services in the nature of 'managerial, technical or consultancy services'.” On second appeal it was held by Tribunal as under:

“The entire dispute centers around the taxability of the amount received by the assessee from 'M' in respect of services performed outside India on the export consignments of 'M' originating from India. There is no quarrel over the nature of services for which the above referred amount has been paid to the assessee being, freight and logistics services such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services. Now the primary question which arises for consideration is as to whether the payment in respect of these services can be held as 'fees for technical services' within the meaning of section 9(1)(vii ). [Para 4] A bare perusal of the provision of Explanation 2 to section 9(1)(vii ) indicates that the 'fees for technical services' means any consideration for rendering of any 'managerial, technical or consultancy services' but does not include the consideration for any construction, assembly etc. The Commissioner (Appeals) has held the services rendered by the assessee as 'fees for technical services' coming within the sweep of 'managerial, technical or consultancy services'. On the contrary, the contention of the assessee has remained before the authorities below as well as in instant appeal that such services do not fall within the ambit of any of the categories taken note of by the authorities below. Thus, it is necessary to examine as to whether the services so provided by the assessee fall within the scope of managerial, technical or consultancy services', as per Explanation 2 to section 9(1)(vii). [Para 5] In order to appreciate the nature of services more elaborately, it is relevant to consider the terms of the agreement entered into between the assessee and 'M'. The scope of services has been given in clause 1.1. In the recital clause it has been provided that the assessee-company may require 'M' to perform logistics services such as transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services (Local services) within India (Local operating area). It has further been provided that 'M' may also seek similar services from the assessee-company such as transport, procurement, customs clearance, sorting, delivery, warehousing and pick up services (International services) outside India. The present appeal is concerned with the "International services" provided by the assessee to 'M' outside India. These services comprise of transport, procurement, customs clearance, sorting, warehousing and pick up services on the cargo exported by 'M' on behalf of its customers. Having noted the nature of services provided by the assessee outside India, for which 'M' India made the payment, it is necessary to consider if these can be described as managerial or technical or consultancy services. [Para 6]

7 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 First one has to consider the ambit of 'managerial services' to test whether the instant services can qualify to be so-called. Ordinarily the managerial services mean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect is missing and one has to follow a direction from the other for executing particular job in a particular manner, it cannot be said that the former is managing that affair. It would mean that the directions of the latter are executed without there being any planning part involved in the execution and also the evaluation of the performance. In the absence of any specific definition of the phrase "managerial services" as used in section 9(1)(vii ) defining the "fees for technical services", it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. For instance, if goods are to be loaded and some worker is instructed to place the goods on a carrier in a particular manner, the act of the worker in placing the goods in the prescribed manner, cannot be described as managing the goods. It is a simple direction given to the worker who has to execute it in the way prescribed. It is quite natural that some sort of application of mind is required in each and every aspect of the work done. As in the above example when the worker will lift the goods, he is expected to be vigilant in picking up the goods moving towards the carrier and then placing them. This act of the worker cannot be described as managing the goods because he simply followed the direction given to him. On the other hand, 'managing' encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word 'managing' is wider in scope than the word 'executing'. Rather the later is embedded in the former and not vice versa. [Para 7] Adverting to the facts of the instant case it is observed that the assessee performed freight and logistics services outside India in respect of consignments originating from India undertaken to be delivered by 'M' India. The role of the assessee in the entire transaction was to perform only the destination services outside India by unloading and loading of consignment, custom clearance and transportation to the ultimate customer. It is too much to categorize such restricted services as managerial services. Therefore, this contention raised on behalf of the revenue has to be rejected. [Para 8] The next component of the definition of "fees for technical services", being 'consultancy services', which has been pressed into service by the Commissioner (Appeals) to fortify his view that the amount received by the assessee is covered within section 9(1)(vii ). The word "consultancy" means giving some sort of consultation de hors the performance or the execution of any work. It is only when some consideration is given for rendering some advice or opinion etc., that the same falls within the scope of "consultancy services". The word 'consultancy' excludes actual 'execution'. The nature of services, being freight and logistics services provided by the assessee to 'M' has not been disputed by the authorities below. There is nothing like giving any consultation worth the name. Rather such payment is wholly and exclusively for the execution in the shape of transport, procurement, customs clearance, delivery, warehousing and picking up services. That being the position, the payment in lieu of freight and logistics services cannot be ranked as consultancy services. [Para 9] The only left over component of the definition of "fees for technical services" taken note of by the ld. CIT(A) is "technical services". He observed that the assessee's

8 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 business structure is time-bound service coupled with continuous real time transmission of information by using and also making available its technology in the form of sophisticated equipments and software etc. The CIT(A) has held that : "in order to ensure efficient and timely delivery and to provide continuous real time information, the assessee is required to use sophisticated technology for which the Indian entity is also equally involved and to whom the assessee is committed to providing the requisite software and equipment". [Para 10] On going through clause 2 of the Agreement, it is obvious that 'M' shall 'separately execute a technology and software license agreement' for the provision of computer equipment and software supplied by the assessee. It is nobody's case that the consideration in question relates to the supply of any computer equipment and software by the assessee to 'M'. One fails to appreciate as to how this clause 2 makes the services provided by the assessee as "technical". Rather clause 2 mandates to execute a separate technology and software license agreement for the provision of computer equipment and software. How is it that the consideration for the services can be attributed to a proposed agreement, which has yet to see the light of the day. [Para 11] The Commissioner (Appeals) in reaching the conclusion that the assessee rendered 'technical services' also observed that its 'business structure is time-bound service coupled with continuous real time transmission of information by using and also making available advanced technology in the form of sophisticated equipment and software.' He was swayed by the contention of the assessee that the 'M' or the ultimate customer could track the movement of cargo with the help of computers. As noted supra that the consideration received by the assessee did not include any consideration for the supply of any equipment to 'M'. Now it is to be examined as to whether the use of computer in any manner for knowing the location of the cargo at a particular time, can be held as technical service. [Para 13] Explanation to section 9(1)(vii ) defines the expression "fees for technical services" as consideration for rendering 'managerial, technical or consultancy services'. It is seen that there is no definition of the term "technical services" in the Act. [Para 14] The principle of noscitur a sociis mandates that the meaning of a word is to be judged by the company of other words which it keeps. This rule is wider in scope than the rule of ejusdem generis in order to discover the meaning of a word which has not been defined in the Act. As noted above the word 'technical' has been sandwiched between the words 'managerial' and 'consultancy' in Explanation 2 to section 9(1)(vii) and no definition has been assigned to the 'technical' services in the relevant provision, one needs to ascertain the meaning of the 'technical services' from the overall meaning of the words 'managerial' and 'consultancy' services by applying the principle of nosticur a sociis. It has been held above that the 'managerial services' and 'consultancy services' pre suppose some sort of direct human involvement. These services cannot be conceived without the direct involvement of man. These services can be rendered with or without any equipment, but the human involvement is inevitable. Moving in the light of this rule, there remains no doubt whatsoever that the technical services cannot be contemplated without the direct involvement of human endeavour. Where simply an equipment or a standard facility albeit developed or manufactured with the use of technology is used, such a user cannot be characterized as using 'technical services'. [Para 15]

9 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 Coming back to the facts of the present case, even if one accepts the First Appellate Authority's point of view that the computer could be used in tracing the movement of the goods, such use of computer, though indirect, remote and not necessary, cannot bring the payment for freight and logistics services within the purview of "technical services". The essence of the consideration for the payment is rendering of services and not the use of computer. If incidentally computer is used at any stage, which is otherwise not necessary for rendering such services, the payment for freight and logistics will not partake of the character of fees of 'technical services', therefore, this contention raised on behalf of the revenue has to be repealed. [Para 16] Thus it car be noticed that the payment made to the assessee in question is not a consideration for managerial or technical or consultancy services and that being the position, it cannot fall within the ambit of section 9(1)(vii). [Para 17] Section 4 provides that the income tax shall be charged on the total income of any assessee of the previous year for any assessment year at the rates in accordance with and subject to the provisions of this Act. Scope of total income of any person has been enshrined in section 5. The assessee in question is a non-resident company. Section 5(2) mandates that the total income of a non-resident includes the income from whatever source derived which is received or is deemed to be received in India; or accrues or arises or is deemed to accrue or arise in India. The only possibility of the receipt by the assessee in the present facts and circumstances qualifying for inclusion in the total income, can be under section 9. It has been observed that section 9(1)(vii ) is not applicable. Now it is necessary to examine the prescription of section 9(1)(i ) which deals with the income accruing or arising from any business connection in India. It provides that where an income accrues or arises whether directly or indirectly through or from any business connection in India etc., it shall be deemed to accrue or arise in India. Explanation 1(a)states that in the case of a business of which all operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. This Explanation makes it prominent that only that part of the income from business operations can be said to be accruing or arising in India, as is relatable to the carrying on of operations in India. In other words, if a non-resident earns any income from India by means of operations carried on outside India, that will not fall within the scope of section 9(1)(i ). Even Explanation below section 9(2), as relied on by the revenue, requiring inclusion of income 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 or the non-resident has rendered services in India, is applicable only in respect of clauses (v) to (vii ). Clause (i) of section 9 has not been included by the legislature within the ambit of this Explanation. It shows that unless a non-resident earns income from business operations carried out in India, such income cannot be deemed as accruing or arising in India. Reverting to the facts of the instant case, it is crystal clear that the assessee rendered "International services" outside India which required the payment in question. If this is the position, which has not even been disputed by the revenue, then there can be no question of roping such income within the ken of section 9(1)(i). [Para 18] It is, therefore, patent that the payment received by the assessee neither falls under section 9(1)(i) nor under section 9(1)(vii). Since the income cannot be described as deemed to accrue or arise in India and there is no doubt about such income having not

10 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 been received or deemed to be received or accruing or arising in India, the taxability of such income fails. Therefore, the impugned order has to be set aside and it has to be held that the amount in question cannot be charged to tax. [Para 19] In the result, the appeal is allowed. [Para 20]”

11 ITA No.641/Kol/2017 Nisasin ABC Logistic Pvt. Ltd, AY- 2010-11 the assessee towards carrying of any work/service by the said parties. The payments were in the nature of taxes etc. which was paid by the respective parties on behalf of the assessee where no withholding of taxes is necessary. The Ld. CIT(A) had taken note of the decision of the Hon’ble Calcutta High Court in the case of Hightension Switchgears Private Limited Vs. CIT, ITA 8 of 2011, wherein it was held by the Hon’ble High Court that TDS is not required to be deducted on the amount reimbursed to the suppliers/vendor. We note that the said amount of reimbursements were made primarily to two parties M/s. Siddessur Sen & Co. (Merchants) Private Limited and M/s. Divna Shipping & Clearing Agency. Taking note of the sample invoice filed before us, we agree with the view taken by the Ld. CIT(A) that the expenses/payments were in the nature of reimbursement with no element of income chargeable to tax in India or no part of such payment was made towards carrying on any work by the parties /vendors and, therefore, taxes need not to be withheld by assessee on such payments so, we confirm the decision of the Ld. CIT(A). Therefore, this ground of appeal of revenue is dismissed.

Order is pronounced in the open court on 5th April, 2019 Sd/- Sd/- (P. M. Jagtap) (Aby. T. Varkey) Vice President Judicial Member Dated : 5th April, 2019 Jd.(Sr.P.S.) Copy of the order forwarded to: 1. Appellant – ACIT, Circle-8(2), Kolkata

2 Respondent – M/s. Nissin ABC Logistic Pvt. Ltd., 46C, Rafi Ahmed Kidwai Road, Kolkata-700 016. 3. CIT(A)-12, Kolkata (sent through e-mail) CIT- , Kolkata. 4.

/True Copy, By order,

Assistant Registrar