ACIT CIR 12(3), MUMBAI vs. ELVE CORPORATION, MUMBAI

O R D E R Per Sanjay Arora, A. M.: These are set of three appeals for two consecutive years, being assessment years (A.Ys.) 2008-09 and 2009-10, by the Assessee and the Revenue respectively, 2 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation arising out of the separate Orders by the Commissioner of Income Tax (Appeals)-23, Mumbai (‘CIT(A)’ for short), u/s.250(6) of the Income Tax Act, 1961 (‘the Act’ hereinafter), disposing the assessee’s appeals contesting its assessment u/s.143(3) of the Act for the said years. The issues arising being common, the appeals were taken up for hearing together, and are being disposed of per the combined order.

The respective cases 3. The assessee’s case qua both the payments is essentially the same. The freight payment, which is on exports, is to the non-resident shipping companies, through their Agents in India. No services are rendered in India, nor do the payees have any Permanent Establishment (PE) in India. The ship owners (or companies), in any case, 3 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation pay the taxes due on their income that arises or accrues in India. Commission, again, is allowed to non-residents, who undertake promotion of the assessee’s – a manufacturer of engineering goods, products abroad, whereat the agents are located/ resident. No service is rendered in India for any part of the income to accrue or arise in India, which is paid directly to the non-resident agent/s outside India. This, in fact, is a pre-requisite for the application of section 195, as clarified by the Hon’ble Apex Court in G. E. India Technology Centre (P.) Ltd. vs. CIT [2010] 327 ITR 456 (SC), with the Hon’ble Court per CIT vs. Toshoku Ltd. [1980] 125 ITR 525 (SC) having clearly held in the context of commission that income earned by a non-resident for services rendered outside India could not be deemed to accrue or arise in India. The withdrawal of its Circulars Nos. 23 (dated 23.7.1961) and 786 (dated 7.2.2000) by the CBDT vide Circular No. 9/2007 dated 22.10.2009 is not retrospective, even as held in CIT vs. Modern Insulators Ltd. [2014] 369 ITR 138 (Raj). As such, these Circulars were in force when the payments were made, and the clarification per Circular 23 that no income shall be chargeable to tax in India in such a case shall prevail. The Revenue’s case is, again, two fold. Admittedly, the payments have been allowed without either deducting tax at source or obtaining a certificate from the A.O. as to non-deduction (or deduction of tax at a lower rate), as required u/s. 195(2) of the Act. As regards freight charges, the same is subject to tax in the hands of the shipping company u/s.172 of the Act, even as clarified in CIT vs. Orient (Goa)(P.) Ltd. [2010] 325 ITR 554 (Bom). The Hon'ble jurisdictional High Court in Orient (Goa) (P.) Ltd.(supra) has clearly held that deduction qua charges paid to non-resident (shipping companies) would be governed by section 40(a)(i) of the Act where no tax stands deducted thereon, and a disallowance u/s. 40(a)(i) is under such circumstances legal, proper and in accordance with the scheme of the Act. The same being, though, in the context of demurrage charges would be inconsequential in-as-much as per section 172(8) such charges assume the nature of receipt toward freight, i.e., are to be accordingly considered as part of the freight charges (income) of the shipping 4 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation company. The Hon’ble Court considered the Circular No. 723 dated 19.9.1995 issued by CBDT. As regards the commission income, the Revenue places reliance on the decision in the case of Elkem Technology vs. Dy. CIT [2001] 250 ITR 164 (AP), wherein it stands clarified that the income to accrue or arise in India, it is not necessary that the service should be rendered in India, i.e., in the territorial jurisdiction of India, and it would be sufficient if the services are utilized in India. In fact, the nomenclature ‘commission’ is misleading, and the services qualify as fees for technical services, as clarified in Wallace Pharmaceutical (P.) Ltd., In RE [2008] 195 CTR AAR 63. In that case, it was held that irrespective of the description as ‘commission’, consultancy fees payable to non-resident for developing business with foreign customers falls within the meaning of ‘fee for technical services’ as defined under Explanation 2 to s. 9(1)(vii). The Board Circulars would not apply in view of the amendment by way of insertion of Explanation below section 9 by Finance Act, 2009 w.r.e.f. 01.04.1976. This sums up the cases of both the parties, who have also relied on case law in support of their respective cases. In addition is the assessee’s alternate plea qua both the payments, i.e., of section 40(a)(i) as being applicable only on as much of the expenditure for the relevant year (A.Y. 2008-09) as outstands for payment, i.e., is ‘payable’, as at the end of the year, and toward which the assessee places reliance on the decision in Arcadia Share & Stock Brokers (P.) Ltd. vs. Dy. CIT (in ITA No. 1871/Mum/2013 dated 22.12.2014).

4.2 Coming, next, to the expenditure on the so called ‘commission’. The law in the matter can be said to be settled, and a payment to a non-resident would not be subject to tax deduction at source (TDS) and, correspondingly, disallowance u/s.40(a)(i), unless the corresponding receipt bears an element of income, taxable in India, i.e., under the Act. Reference in this context may be made to the decision in G. E. India Technology Centre (P.) Ltd. (supra). As such, the receipt shall not become taxable in India merely because the assessee did not apply for or seek a sanction of the Revenue to remit the payment to a non-resident without deduction of tax at source, as envisaged u/s.

6 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation The next question that confronts us is if any part of ‘commission’ income can be said to accrue or arise or deemed to accrue or arise in India. Toward this, the assessee’s contention is that no services are rendered in India (the taxable territory). It is on this basis, as a reading of its decision in Toshoku Ltd. (supra) would reveal, that the Hon’ble Apex Court held that the non-resident selling agents having acted outside India, their commission earned cannot be deemed to have either accrued or arisen in India. Where the services are rendered in India (taxable territory), the income therefrom, to that extent, would surely accrue or arise in India, so that one may not be required to even travel to the deeming provision of section 9, which in a way seeks to extend and to definition the scope of accrual by and through the concept of ‘business connection’. As explained in CIT vs. R. D. Aggarwal & Co. [1965] 56 ITR 20 (SC), which stands referred to in Toshoku Ltd. (supra), and continues to govern the field, business connection involves the relationship between the business carried on by a non-resident (outside taxable territories), which yields profits or gains, and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits and gains. It predicates an element of continuity, and postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity – the Agents in the present case. The matter is, thus, principally and primarily factual. This is also what the Board Circular 23 (supra) explains, i.e., whether the non-resident has a business connection in India, from which income, profits or gains can be said to arise within the meaning of section 9 has to be determined in the facts of each case. This is also what it states in substance, which will not get whittled down when in the latter part, by way of an illustration, it states that for a foreign agent operating in his own country, no part of his income can be said to arise in India – a proposition on which there could be no dispute in principle, and which is what the Hon’ble Apex Court has endorsed in Toshoku Ltd. (supra). This cannot, and by no means, is meant to 7 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation or could substitute a factual determination of whether there is any business connection which would only be upon examining the scope and activities in the taxable territory (India) and the relation with that carried in the territory outside India from which income is earned. A Circular cannot, and it would be presumptuous to think otherwise, decide whether there is in the facts and circumstances of the case, a business connection, i.e., a relation between the trading activity in the taxable and the non-taxable territories, and any income arises to the non-residents on account of that relationship, as the law is, and stands explained. That is, the said Circular is in conformity with the law. The same cannot even otherwise overrule the law as explained by the Hon'ble jurisdictional High Court in Orient (Goa) (P.) Ltd.(supra) with reference to the decision in CST vs. Indra Industries [2001] 248 ITR 338 (SC), and which is even otherwise trite law (refer: Commissioner of Central Excise vs. Ratan Melting & Wire Industries (in Civil Appeal No. 4022 of 1999 dated 14.10.2008). The subsequent withdrawal of the said Circular is thus, under the circumstances, of little assistance to the assessee. In the facts of the present case, the assessee claims likewise, i.e., of no services having been rendered in India (taxable territory). There has been, however, no examination of the activities carried out by the non-resident agents, even as the Revenue claims the same to involve managerial and consultancy services, so that in nature and by definition the same would be fee for technical services, covered by section 9(1)(vii). The ld. AR, on being questioned in the matter, i.e., as to the nature and scope of the services rendered by ‘selling’ or, as the case may be, ‘consulting’ agents, conceded to the same, i.e., a complete absence of any examination in the matter. We consider both the assessee – who only states of there being no written agreements between the assessee and the agents, as well as the Revenue, to be responsible for this. The law could not be applied without examining and determining the facts. The law provides the guidelines, the frame work, applying which to the facts as found, the issues as arising are to be decided/adjudicated. That is, the law could 8 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation only be applied on the terra firma of the facts, which form the building block of any case. Not so doing would only amount to matching the colour of one case with that of another, something which could not be countenanced, and disapproved by the apex court from time and again. Why, even in the case of G. E. India Technology Centre (P.) Ltd. (supra), the Hon’ble Apex Court, after clarifying the law, remitted the matter back to the Hon’ble High Court to consider on merits the question as to whether in the facts and circumstances of the case the tribunal was justified in holding that the amounts paid to foreign suppliers was not ‘royalty’ and that it did not give rise to income taxable in India, excluding the liability toward deduction of tax at source. Coming to the facts and circumstances of the case, the assessee, as given to understand, is a manufacturer of automobile parts in India. The vehicles plying on the roads abroad are, as is the common knowledge, very different in design and engineering from that in India. The profile of the auto parts would have to match and fit into the engineering and designing of the vehicles. How is the assessee’s product, then, sold and marketed, which would require penetration and establishment in new markets. It is only when the engineering details, in the form of drawings, etc. of these parts are made available to the assessee, that it could manufacture them. This would require extensive exchange of technical information and, perhaps, even expertise. Why, even the raw material or the raw material mix required may be different, including qua quality/grade. In fact, the production, as the final step, would only be preceded by a series of stages, beginning with the exchange of the technical details, including on product quality, leading to the production of the product prototype and approval thereof, to the trial production, before the regular production commences and supplies made. In other words, the assessee’s product is not a standardized, but a customized one, with, rather, customization itself being a long drawn process. All this, as indicated before, would require interaction of high calibre between the concerned parties, with the agents presumably co-coordinating the same – that being their function. Even subsequent to the stage of the regular supplies, there may be not so 9 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation infrequent changes – automobiles witnessing changes in design and models on a regular basis, or on account of changes in other variables impacting the terms of the trade, viz. fluctuations in foreign exchange market; the price of some imported or indigenous material, etc. which may require re-negotiation. The exchange, thus, would be on a regular basis, across different buyers, each with its own set of requirements and issues. The assessee’s view point on each aspect of the matter, and at each stage, has to be put across to the buyers, and vice-versa, constituting an effective dialogue between the two, which is the prime function of the agent as an intermediary. Why, it may also necessitate visits by either side, to another, besides by the Agent/s to India, apart from the regular exchange and flow of information through other modes of communication. How else, we wonder, the business take form and be undertaken? The ld. AR, on being questioned in the matter, i.e., as to the manner in which the business is undertaken, putting across this scenario, would fairly submit that the same is a distinct possibility, though he was not in a position to so affirm or commit in the matter. This is precisely why we stated both the assessee and the Revenue to be responsible for a complete factual indetermination of the matter. Merely stating that no services are rendered in India is under the circumstances of little consequence. It is, again, upon examining and ascertaining the nature of the services that the AAR in Wallace Pharmaceutical (P.) Ltd. (supra) held that the services provided by Penser Group, a tax resident of USA, were not limited to USA and, further, utilized in India and, accordingly, payments thereto warranted deduction of tax at source. The AAR has, in our view, sought to correctly apply the law in the matter – the issue being principally factual. It is again on account of this that the Hon’ble Court in Elkem Technology (supra), upon examining the nature and scope of the activities, held that no question of law, much less a substantial question of law, arises. In the case of Toshoku Ltd. (supra), the product was ‘tobacco’, essentially a commodity (or a generic product), and which could be sold as such, adhering to the specifications as may be stipulated by law.

10 6279 & 6229/Mum/2012 (A.Ys. 2008-09 & 09-10) Elve Corporation Under the circumstances, in view of the foregoing, we only consider it fit and proper, even as observed during hearing – and to the agreements by the parties, that the matter, setting aside the impugned order, is restored for proper factual as well as legal determination back to the file of the Assessing Officer (A.O.), who shall decide the same after allowing the assessee reasonable opportunity to present its case before him. This decides Grounds 3 & 4 of the Assessee’s appeals for both the years.