Gujarat H.C : Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance made under Section 40[a](i) of the Act ?

High Court Of Gujarat

Pr.CIT vs. Motif India Infotech (P) Ltd

Section 9[1](vii)

Asst. Year 2009-2010

Akil Kureshi & B. N. Karia, JJ.

R/Tax Appeal No. 1177 of 2018

16th October, 2018

Counsel Appeared: Mauna M Bhatt, Advocate for the Petitioner.: B S Soparkar, Advocate for the Respondent

AKIL KURESHI, J.

1. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Ahmedabad [“Tribunal” for short] dated 9th April 2018, suggesting the following questions for our consideration:

[A] “Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance made under Section 40[a](i) of the Act ?”

[B] “Whether the Appellate Tribunal has err d in law and on facts in not holding that the said payment received by PHP, Philippines was deemed to be income of PHP Philippines in terms of Section 9[1](vii) read with Section 5 [2] of the Income Tax Act as it was not saved by the exclusion clause of the said subsection ?”

2. The respondent assessee is a company engaged in software development. It provides software related services to its overseas clients. During the course of scrutiny assessment for AY 2009-2010, the Assessing Officer raised question of non deduction of tax at source, while making payment of a sum of Rs. 5.51 Crores [rounded off] by the assessee towards fees for technical services to one foreign based company M/s. Pacific Hub Corporation, Philippines. The assessee argued that such payment received by the non-resident was not taxable and that therefore, there was no requirement for deducting tax at source while making such payment. The Assessing Officer, however, with an aid of Section 195 of the Income-tax Act, 1961 [“the Act” for short] and in particular, second explanation to sub-section [1] thereof, came to a conclusion that the assessee failed to adhere to the requirement of deducting tax at source and that therefore, the expenditure was required to be disallowed. The assessee carried the matter in appeal. CIT [A] held in favour of the assessee observing that there was no dispute that the services were in the nature of technical services, but would be covered under explanation clause contained in Section 9 [1] (vii) (b) of the Act. He was of the opinion that the services were utilized outside India in a business or profession carried outside India, or for the purpose of earning any income outside India. In the process, he also relied on a judgment of the Income Tax Appellate Tribunal, Ahmedabad in the case of Adani Enterprises in which, in the context of interest payment to a non-resident investor, it was held that no requirement of TDS would arise, if the interest payment was in respect of the amount borrowed outside India and used outside India for investment or for business carried outside India.

Revenue carried the matter in appeal. The Tribunal reiterated the factual findings and legal conclusion of the Commissioner. While rejecting the Revenue’s appeal, the Tribunal further observed as under :

“7. We further observe that revenue has not disputed the fact that the payee M/s. PHC, Philippines do not have any permanent establishment in India and further the services were provided outside to the overseas clients of the assessee in order to perform the services of providing human resources and infrastructure services. Further, under the provisions of Section 9[1](vii)(b) of th Act, an exception is provided, wherein, if the fees for technical services are paid in respect of services utilized outside India in a business or profession carried on outside India or for the purpose of earning any income from outside India, then in such circumstances, the deeming provisions of Section 9 [1] (vii) (b) of the Act will not be applicable. In the instant case, the assessee has certain contracts for rendering outsource in Philippines and for providing such services, it availed the services of PHC Philippines.

8. We therefore in the given facts and circumstances of the case as well as in view of the lucid findings of the learned CIT[A] given after taking into consideration the provisions of Section 5 [2] of the Act as well as Section
9[1](vii)(b) of the Act find no error and infirmity in the order of learned CIT[A] and we uphold the same. In the result, ground no. 1 &2 of the revenue are dismissed and the grounds no. 3 & 4 being general in nature needs no adjudication. Appeal of the revenue stands dismissed.”

The Revenue has therefore preferred this appeal. Having heard learned advocates for the parties, we notice that indisputably the assessee which provides software related services to many of its clients situated abroad, had hired services of the said M/s. Pacific Hub Corporation, Philippines. Th said M/s. PHC, Philippines does not have a permanent establishment in India. It would render services for obtaining human resources and infrastructure services to the assessee for serving its foreign based clients In this context, a question arises whether at the time of making payments for such services, deduction of tax at source was necessary.

In the case of G.E India Technology Center P. Limited vs Commissioner of Income Tax & Anr., reported in [2010] 327 ITR 456 (SC), the ratio laid down by the Supreme Court was that mere remittance of money to a non resident would not give rise to the requirement of deducting tax at source, unless such remittance contains wholly or partly taxable income. It is true that after such judgment was rendered, the legislature had amended Section 195 of the Act by inserting Explanation II by the Finance Act, 2012, but with retrospective effect from 1st April 1962. Such explanation provides that for removal of doubts, it is clarified that the obligation to comply with sub-section [1] of Section 195, and to make deduction as provided therein applies and shall be deemed to have always applied to all persons, resident or non-resident, whether or not the non-resident person has a residence or place of business or business connection in India; or any other presence in any manner whatsoever in India. Mere requirement of permanent establishment in India was thus done away with. Nevertheless, the basic principle that requirement of deduction of tax at source would arise only in a case where the payment made to a non resident was taxable, still remains. It was observed in a decision dated 9th April 2018 rendered in Tax Appeal No. 290 of 2018 by the Division Bench of this Court, as under

““It can thus be seen that while confirming the order of CIT [A], the Tribunal relied on judgment of the Supreme Court in the case of G.E India Technology Centre P. Limited vs. Commissioner of Income-Tax & Anr., reported in [2010] 327 ITR 456 (SC). In such judgment, it was held and observed that the most important expression in Section 195 [1] of the Act consists of the words, “chargeable under the provisions of the Act”. It was observed that, “..A person paying interest or any other sum to a nonresident is not liable to deduct tax if such sum is not chargeable to tax under the Act.” Counsel for the Revenue, however, drew our attention to the Explanation 2 to subsection [1] of Section 195 of the Act which was inserted by the Finance Act of 2012 with retrospective effect from 1st April 1962. Such explanation reads as under :

Explanation 2 -For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has

[i] a residence or place of business or business connection in India; or

[ii] any other presence in any manner whatsoever in India.

It is indisputably true that such explanation inserted with retrospective effect provides that obligation to comply with sub-section [1] of Section 195 would extend to any person resident or non-resident, whether or not non-resident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a non-resident was taxable under the Act or not. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Center P. Limited [Supra], sub-section [1] of Section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not seven seriously contended that the payment to foreign commission agent was not taxable in India.”

6. In this context, we would refer to Section 9[1](vii)(b) of the Act. Sub-se tion [1] of Section 9 enlists situations under which the income shall be deemed to accrue or arise in India. Clause

[vii] contained therein pertains to income by way of fees for technical services payable by the Government or a person who is a resident, or a person who is a non-resident under the circumstances specified therein. Clause (b) thereof pertains to a person who is a resident and reads as under :

“9. Income deeded to accrue or arise in India. [1] xx xx xx
(a) xx xx xx

(b) xx xx xx

(i) to (vi) xx xx xx

(vii) income by way of fees for technical services payable by

(a) the Government; or

(b) a person who is resident, except where the fees are payable in respect of services utilized 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; or .. .. ”

As per clause (b) thus, the income by way of fees for technical services payable by a person who is a resident would be deemed to accrue or arise in India. However, this clause contains two explanations namely where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source outside India. In other words, therefore, if the assessment of an assessee falls in either of these two clauses, the income by way of fees or technical services paid by the assessee would still not be covered within the deeming clause of sub-section [1] of Section 9.

In the present case, the Commissioner [Appeals] and the Tribunal have accepted assessee’s factual assertion that the payments were for technical services provided by a non-resident, for providing services to be utilized for serving the assessee’s foreign clients. Thus, the fees for technical services was paid by the assessee for the purpose of making or earning any income from any source outside India. Clearly, the source of income namely the assessee’s customers were the foreign based companies.

We are fortified in the view by a judgment of Karnataka High Court in the case of Commissioner of Income-tax, Bangalore v. ITC Hotels Limited, reported in [2015] 233 Taxmann 302 [Kar.] in which it was held that where the recipient of income of parent company is not chargeable to tax in India, then the question of deduction of tax at source by the payer would not arise.

Learned counsel for the revenue, however, relied on a decision of Delhi High Court in the case of Commissioner of Income-tax vs. Havells India Limited, reported in [2013] 352 ITR 376 (Delhi). In such case, however, the Court was of the opinion that the payment made by the assessee to a US based company for certification facilitating export was not in relation to the source of income which was based in India. The facts were thus different. It was also argued that the Commissioner [Appeals] had relied on a decision in the case of Adani Enterprises [Supra] against which, the Revenue’s appeal has been admitted by the High Court. It prima facie appears that the facts in case of Adani Enterprises were different. In the present case, we have primarily gone on the question of the nature of assessee’s activities and the nature of services rendered by the parent based company, for which commission was paid. Keeping the question pending before the High Court in the case of Adani Enterprises untouched, we can still dispose of this appeal.

In the result, Tax Appeal is dismissed.

[Citation : 409 ITR 178]