TEXTURES & WEAVES (INDIA) P LTD.,CHENNAI vs. ACIT, CHENNAI

Both the appeals of the assessee are directed against the common order passed by the Commissioner of Income Tax (Appeals) – III, Chennai, dated 07.07.2014 and pertain to assessment years 2009-10 and 2010-11.

Shri S. Sridhar, the Ld.counsel for the assessee, submitted that the only issue arises for consideration in both the appeals is disallowance of foreign agent commission for non-deduction of tax at source under Section 195 of the Income-tax Act, 1961 (in short 'the Act'). According to the Ld. counsel, for the assessment year 2009-10, the Assessing Officer disallowed a sum of `59,28,699/- and for the assessment year 2010-11, the Assessing Officer disallowed a sum of `1,00,73,295/-. Referring to the orders of the Assessing Officer, the Ld.counsel submitted that the assessee had an agent by name Textile Creations Inc at New Jersey, USA. According to the Ld. counsel, the agency rendered service outside India and it has no permanent establishment in India. Therefore, according to the Ld. counsel, the income derived by the USA company is not taxable in India, hence the provisions of Section 195 of the Act is not applicable. In other words, according to the Ld. counsel, the assessee is not expected to deduct tax at the time of payment, therefore, the disallowance made by the Assessing Officer is not justified. Placing reliance on the decision of this Bench of the Tribunal in dated 19.06.2015 and I.T.A. No.158/Mds/2016 dated 19.05.2016, the Ld.counsel submitted that when the agency of the foreign country communicated the latest trend in the fashion to the assessee in India so as to enable the assessee to produce / manufacture its products in tune with latest trend, which is prevalent outside the country, cannot be construed as providing technical service in India. In view of the decision of the co-ordinate Bench of this Tribunal, according to the Ld. counsel, the commission paid by the assessee to Textile Creations Inc and Studio 40 Inc at New Jersey cannot be disallowed under Section 40(a)(ia) of the Act.

On the contrary, Shri A.V. Sreekanth, the Ld. Departmental Representative, submitted that the assessee is engaged in the business of fabric exports. During the assessment year 2009-10, the assessee has paid foreign agent commission to the extent of `59,28,699/-. Similarly for the assessment year 2010-11, the assessee claimed a sum of `1,00,73,295/- as payment made to foreign agent commission. For the assessment year 2009-10, the assessee paid a sum of `59,28,699/- to M/s Textile Creations Inc at New Jersey, USA. For the assessment year 2010-11, the assessee paid a sum of `1,00,73,295/- to M/s Studio 40 Inc, New Jersey, USA. According to the Ld. D.R., the Assessing Officer as well as CIT(Appeals) found that the foreign agencies are providing routine service like follow up of payments, etc. The foreign agencies have also provided fashion forecast and trend from time to time to facilitate development of new merchandise. According to the Ld. D.R., fashion forecast and latest trend in the fabric market can be provided only by persons who are specialists in the garment industry and not by a common man. According to the Ld. D.R., the foreign agencies are really skilled and creative for the purpose of observing the latest trend in fashion. The assessee has also deducted tax in respect of payment made to M/s Studio 40 Inc on the payment made in the subsequent years. Therefore, according to the Ld. D.R., the assessee itself admitted that the service rendered by M/s Studio 40 Inc is in the nature of technical service. Therefore, according to the Ld. D.R., the CIT(Appeals) has rightly confirmed the order of the Assessing Officer for both the assessment years.

We have considered the rival submissions on either side and perused the relevant material available on record. As rightly submitted by the Ld. D.R., the assessee has paid a sum of `59,28,699/- to M/s Textile Creations Inc at New Jersey, USA for the assessment year 2009-10 and similarly for the assessment year 2010-11, the assessee has paid a sum of `1,00,73,295/- to M/s Studio 40 Inc. The assessee is admittedly engaged in the business of fabric exports. The agents at New Jersey, namely, Textile Creations Inc and Studio 40 Inc, admittedly, communicated the latest fashion and trend in the market apart from providing details of fashion forecast. The question arises for consideration is whether the communication made by the foreign agents would amount to service rendered in India and whether it can be treated as technical services? This fact was examined by this Tribunal elaborately in the case of ACIT v. Kamil Leathers in dated 19.06.2015. This Tribunal, after considering the material available on record found that the communication of latest trend in fashion cannot amount to providing technical service. This Tribunal further found that technical service is something which goes in the manufacturing process by applying the techniques provided by the non-resident. In this case, no such technique was provided by the non-residents and what was provided were changes in fashion and trend prevailing in the market outside India. Therefore, this Tribunal found that opinion or communication given by the foreign agent does not amount to providing technical service. This order of the Tribunal was followed by another Division Bench of this Tribunal in I.T.A. No.158/Mds/2016.

In view of the above decisions of co-ordinate Bench of this Tribunal, this Tribunal is of the considered opinion that mere providing fashion forecast and latest trend in the fashion cannot be considered to be technical service. Therefore, the assessee is not expected to deduct tax for payment made to foreign agents, under Section 195 of the Act. Therefore, the disallowance made by the Assessing Officer by applying the provisions of Section 40(a)(ia) of the Act is not justified. Accordingly, the orders of the authorities below are set aside and the addition made by the Assessing Officer for both the assessment years is deleted.

In the result, both the appeals of the assessee are allowed.