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IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI
, ,
BEFORE SHRI JOGINDER SINGH, JM AND SHRI SANJAY ARORA, AM
./I.T.A. Nos. 4108/Mum/2012 & 6279/Mum/2012
( / Assessment Years: 2008-09 & 2009-10)
Elve Corporation Asst. CIT-12(3),
/
Elve Chambers, Green Street, Aayakar Bhavan,
Fort, Mumbai-400 001 Vs. Mumbai
. / . /PAN/GIR No. AAAFE 4847 R
( /Assessee) : ( /Revenue)
&
./I.T.A. No. 6229/Mum/2012
( / Assessment Year: 2009-10)
Asst. CIT-12(3), Elve Corporation
/
Aayakar Bhavan, Elve Chambers, Green Street,
Mumbai Vs. Fort, Mumbai-400 001
. / . /PAN/GIR No. AAAFE 4847 R
( /Revenue) : ( /Assessee)
/Revenue by : Shri M. C. Naniwadekar
/ Assessee by : Shri Vivek Anand Perapurna
/
: 21.08.2015
Date of Hearing
/
: 20.11.2015
Date of Pronouncement
/ 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,
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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.
2. The only issue arising in these appeals is the maintainability or otherwise in
law of section 40(a)(i) of the Act on the following expenditure incurred/payments
allowed by the assessee:
Sr. No. Nature of payment A.Y. 2008-09 A.Y. 2009-10
a) Freight Rs.3,13,54,353 Rs.2,40,09,150/-
b) Commission Rs.1,41,00,556/- Rs.1,41,56,894/-
There was admittedly neither deduction of tax at source by the assessee, nor
any certificate toward non-deduction of tax u/s. 195(2) stood obtained by it. Though
the ld. CIT(A) approved the Revenue's case in principle, i.e., qua the applicability of
section 40(a)(i) of the Act to the said payments in the facts and circumstances of the
case, he accepted the assessee's alternate contention of the said provision being
applicable only on that part of the expenditure incurred for the year that remained
unpaid as at the year-end. This argument, then, constitutes the assessee's alternate
plea (vide Ground 5) for A.Y. 2008-09, and also explains the Revenue's appeal for
A.Y. 2009-10, i.e., to the extent of disallowance deleted on account of payment during
the year.
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,
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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
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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. We have heard the parties, and perused the material on record.
4.1 We shall take up both the sums (payments) separately. With regard to freight
allowed to shipping companies, the matter, in our view, is squarely covered against
the assessee by the decision in the case of Orient (Goa) (P.) Ltd. (supra). This was in
fact conceded to by the ld. Authorized Representative (AR), the assessee's counsel,
before us. Per the said decision, the Hon'ble jurisdictional High Court has
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unequivocally held that payment of demurrage charges, which assume the same nature
as of freight charges, to a non-resident without deduction of tax at source, would
attract section 40(a)(i) of the Act, i.e., unless certified for non-deduction u/s. 195(2).
The contention with regard to the application of G. E. India Technology Centre (P.)
Ltd. (supra) would be of no assistance in-as-much as it is nobodys' case that no part of
the freight charges is assessable as income in the hands of the shipping companies.
Rather, the very plea of the same being covered u/s. 172, as found favour with the
Tribunal in Orient (Goa) (P.) Ltd.(supra), admits of the same being chargeable to tax
under the provisions of the Act. Section 172, falling under Chapter XV-H, titled
`Liability in special cases', has been found by the Hon'ble jurisdictional High Court in
Orient (Goa) (P.) Ltd.(supra) to operate in a field different from Chapter XVII, i.e.,
`Collection and recovery of tax', under which Chapter section 195 falls. The assessee,
accordingly, fails on its Grounds 1 & 2 for both the years.
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. 195. True, s. 195(2) operates as a safeguard, but would not by itself
lead to the satisfaction of the condition of `chargeable under the provisions of the Act'
specified in s. 195(1). It is only on this condition being met that the provision of s.
195, falling under Chapter XVII, shall come into play. This, then, provides the legal
basis to resolve the issue before us.
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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
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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
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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
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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.
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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.
5. We, next, consider the Revenue's appeal, toward which the assessee places
reliance on the decision in the case of Arcadia Share & Stock Brokers (P.) Ltd.
(supra); the tribunal itself in the assessee's case for A.Y. 2007-08 (in ITA No.
4648/Mum/2011 dated 25.4.2012) having, likewise, directed the matter to be decided
in light of the decision by the Special Bench in Merilyn Shipping & Transports v.
Addl. CIT [2012] 136 ITD 23 (Vish) (SB). This then forms the subject matter of the
assessee's alternate plea, raised per its Ground 5 (for A.Y. 2008-09), and the
Revenue's appeal for A.Y. 2009-10, where, again (as in A.Y. 2007-08), this
contention of the assessee stands accepted.
6. We have heard the parties, and perused the material on record.
In view of our decision qua `commission', restoring the matter back to the file
of the A.O., the assessee's argument would, firstly, apply only in relation to the
application of section 40(a)(i) on freight charges. Two, on merits, the decision in the
case of Merilyn Shipping & Transports (supra) holds the field no longer in view of the
decisions by the Hon'ble Courts, as in the case of CIT vs. Crescent Export
Syndicate [2013] 216 Taxmann 258 (Cal) and CIT vs. Sikandarkhan N. Tunvar [2013]
357 ITR 312 (Guj), overruling Merilyn Shipping & Transports (supra). The matter
stands also discussed at length by the tribunal, as in the case of Raviraj
Relempaadu [2014] 29 ITR 387 (Mum.)(Trib.) and ITO vs. Pratibhuti Viniyog Ltd. (in
ITA No. 1689/Mum/2011 dated 22.08.2014), relied upon by the Revenue before us,
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also discussion and distinguishing the decision by the Hon'ble Allahabad High Court
in the case of CIT vs. Vector Shipping Services [2013] 85 CCH 201 (All); the issue of
`paid' and `payable' being not before the Hon'ble Court. The relevance on the
decision in the case of Arcadia Share & Stock Brokers (P.) Ltd. (supra), which further
relies on Vector Shipping Services (supra), would therefore be of no moment. The
assessee fails on its relevant ground and the Revenue succeeds.
7. In the result, the assessee's appeals are partly allowed for statistical purposes,
and the Revenue's appeal is partly allowed.
Order pronounced in the open court on November 20, 2015
Sd/- Sd/-
(Joginder Singh) (Sanjay Arora)
/ Judicial Member / Accountant Member
Mumbai; Dated : 20.11.2015
. ../Roshani, Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent
3. () / The CIT(A)
4. / CIT concerned
5. , , / DR, ITAT, Mumbai
6. / Guard File
/ BY ORDER,
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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