Allahabad H.C : The provisions of section 9(1)(vii), read alongwith the explanation introduced by Finance Act, 2010 with retrospective effect from 1.6.1976, of the Income-tax Act, 1961, are applicable for services rendered by the non-resident entities

High Court Of Allahabad

CIT (Central) vs. Model Exims

Assessment Year : 2008-09

Section : 9, 195

Sunil Ambwani And Surya Prakash Kesarwani, JJ.

IT Appeal No. 361 Of 2013

December  17, 2013

ORDER

1. We have heard Shri Bharat Ji Agrawal, Senior Counsel assisted by Shri Ashok Kumar, learned counsel for the income tax department. Shri S.D. Singh, Senior Counsel assisted by Shri Krishna Deo Vyas appears for the respondent assessee.

2. This income tax appeal under Section 260A of the Income Tax Act arises out of order dated 31.5.2013 passed by the Income Tax Appellate Tribunal, Lucknow Bench ‘A’, Lucknow in ITA No.190/Lko/2012 relating to assessment year 2008-09.

3. The department has preferred the appeal on following questions of law:—

“(1) Whether the Hon’ble Income tax Appellate Tribunal has erred in deleting the disallowance of Rs. 1,50,20,871/- on account of non-deduction of income tax as per provisions of Section 195 of the Income-tax Act, 1961?

(2) Whether the Hon’ble Income Tax Appellate Tribunal has erred in law in deleting the disallowance of Rs. 1,50,20,871/- without appreciating the facts that the provisions of section 9(1)(vii), read alongwith the explanation introduced by Finance Act, 2010 with retrospective effect from 1.6.1976, of the Income-tax Act, 1961, are applicable for services rendered by the non-resident entities?

(3) Whether the Hon’ble Income Tax Appellate Tribunal has erred in law in deleting the disallowance without appreciating the facts that the Assessing Officer disallowed the payment u/s 40(a)(ia) of the Act in respect of commission paid to agents in violation of provisions of section 195 read with section 9(1)(vii) of the I.T. Act, 1961?”

4. We find that all the questions as framed by the department are covered by our judgment in CIT v. Model Exims [2013] 358 ITR 72/219 Taxman 289/38 taxmann.com 319 (All.), decided in favour of the assessee and against the revenue on 10.09.2013 and the judgment in CIT v. Allied Exims, Income Tax Appeal No.313 of 2013 decided on 13.11.2013. In both these judgments we have held that A.O. did not bring anything on record, which could demonstrate that non-resident agents were appointed as selling agents, designers or technical advisers. The payment of commission to foreign agents did not entitle such foreign agents to pay tax in India and thus the TDS was not liable to be deducted under Section 195 of the Act. The disallowance made by A.O. under Section 40(a)(i) for non-deduction of tax at source under Section 195 were not justified.

5. Shri Bharat Ji Agrawal has tried to distinguish the judgments on the ground that in the present case there was sufficient material by way of written submissions of the assessee, who had stated in his reply on 20.12.2010 that the assessee is engaged in business of manufacture and export of finished leather, shoe upper and leather products. The assessee’s main business being export business it has to take the service of foreign agents, who secure export orders and help in execution of such business. For the services rendered by the foreign agents, they are paid commission in foreign exchange by remitting the amount through bank.

6. We find that the CIT (A) has considered the alleged admission in the reply of the assessee and has also perused the agreement from which he found that there was nothing, which could demonstrate that these agents were appointed as selling agents, designers or technical advisers for invoking the provisions of Section 9(1)(vii) of the Act. The findings recorded by the CIT (A), which have been confirmed by the ITAT is quoted as below:—

“5.3.2 The A.O. has also invoked the provisions of Section 9(1)(vii) on the premise that such payments also fall under FTS. In this regard she has observed that normally the exporter appoints the agents as his selling agent, designer & technical adviser for his products. He has further observed that being commission agent required managerial acumen & expertise and therefore, would be covered under Section 9(1)(vii) of the Act as managerial services. On perusal of the assessment order and assessment folder, I find that the A.O. has not brought anything on record which could demonstrate that these agents had been appointed as selling agents, designers & technical advisers. Rather on the contrary I find that the agreement is of for procuring orders and nothing else. In absence of any such evidence, this observation of the A.O. is mere conjecture and therefore, no cognizance of the same can be taken. It is a trite law that suspicion, no matter how grave, cannot take place of evidence. In this case, there is even no case of suspicion, leave aside any evidence to the effect that the agents were not only selling agents but also designers and technical advisers. The confirmation from the respective foreign agents that the foreign agents did not have any branch or PE in India further supports the case of the appellant.

5.3.3 The A.O.’s observation that as a selling agent, the agent has to have managerial acumen and, therefore, hit by the provisions of Section 9(1)(vii), is baseless. The provisions of Section 9(1)(vii) deals with fees for technical services and it has to be read in that context. For that matter, everything in life requires managerial skills, like running the household, being an Assessing Officer, running a shop etc. Will that tantamount to providing managerial services in the context of Section 9(1)(vii)? The answer is clear No. Thus, the aforesaid payments do not fall within the meaning of “FTS’ as described in Section 9(1)(vii) of the Act.

5.3.4 The income of the non-resident was not chargeable to tax in India since the same was neither received in India nor had it accrued or deemed to accrue in India. Accordingly, the appellant was not required to deduct Tax at Source u/s 195 in respect of commission paid to the Foreign Agents. Disallowance u/s 40(a)(i) is, therefore, deleted.”

7. Shri Bharat Ji Agrawal submits that the CIT (A) and ITAT have not considered the Explanation added to Section 9(1)(vii) by the Finance Act, 2010 w.e.f. 1.6.1976 and which provides that for the purpose of second proviso the income of such non-resident shall be deemed to accrue or arise in India under Clause (v) or Clause (vi) or Clause (vii) [of sub-section (1)] and shall be included in total income of non-resident whether or not, non-resident has residence or place of business or business commission in India; or non-resident has rendered services in India.

8. We do not find that the fact situation contemplated or clarified in the Explanation added by Finance Act, 2010 is applicable to the present case as in the present case the agents appointed by the assessee had their offices situate in a foreign country and that they did not provide any managerial services to the assessee. Section 9(1)(vii) deals with technical services and has to be read in that context. The agreement of procuring orders would not involve any managerial services. The agreement did not show the applicability or requirement of any technical expertise as functioning as selling agent, designer or any other technical services.

9. There are no distinguishing feature in this case, nor do we find that the ratio of the Constitution Bench decision in CCE v. Ratan Melting & Wire Industries 2008 (231) E.L.T. 22 (SC) (para 6) is applicable in as much as in the present case there was no decision of the Supreme Court or High Court or any statutory provision, which was contrary to the circular, which was withdrawn on 22.10.2009.

10. The questions of law are covered by the judgments of this Court cited as above, and are decided in favour of the assessee and against the department.

11. The income tax appeal is dismissed.

[Citation : 363 ITR 66]