Referred Sections:
Section 195 of the Act.
Section 5 and 9,
Section 9(l)(vii)
Sub-section (1)
Section 9(1 )(vii) of the I.T.
Section 5(2)
Sub-Section 2
Section 90(2)
Referred Cases / Judgments:
Gama Industries Coimbatur Ltd. Vs. CIT (2012) 54 SOT 104 (Che.Tri.)
Grasim Industries Ltd. & ors Vs. CIT(A) (2011) 332 ITR 276
ACIT Vs. Paradigim Geo Physical Pvt. Ltd. (2008) 11 DTR 174 (Del. Tri.).
GVK Industries vs. ITO (2015) 54 taxmann.com 347 (SC)
AP Limited and another Vs. CIT(A) (1999) 239 ITR 587.
1 ITA No. 715/Del/2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `F' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 715/DEL/2016 ( A.Y 2012-13)
Pure Software Pvt. Ltd. Vs ITO
C/o. M/s RRA Tax India, Ward-20(2)
D-28, South Extension, Part-1 C. R. Building
New Delhi New Delhi
AADCP5432B
(APPELLANT) (RESPONDENT)
Appellant by Dr. Rakesh Gupta, Sh. Somil
Aggarwal, Sh. Deepesh Garg,
& Sh. Shubham Sobti, Advs
Respondent by Sh. Surender Pal, Sr. DR
Date of Hearing 06.06.2019
Date of Pronouncement 19.06.2019
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 23/12/2015
passed by CIT(A)-7 for Assessment Year 2012-13.
2. The grounds of appeal are as under:-
1. "That having regard to the facts and circumstances of the case, Ld. CIT(A)
has erred in law and on facts in confirming the action of Ld. AO in making
disallowance of Rs.20,02,770/- u/s 40(a)(i) of the Act on account of non
deduction of TDS on payment made to two non-residents i.e. J2S Inc, USA
and Navos B.V.B.A., Belgium and in invoking the provisions of section 195 of
the Act.
2. That in any case and in any view of the matter, action of Ld. CIT(A) in
confirming the action of Ld. AO in making disallowance of Rs.20,02,770/- u/s
40(a)(i) for non deduction of tax on payment made to two non-residents i.e.
2 ITA No. 715/Del/2016
J2S Inc, USA and Navos B.V.B.A., Belgium, is bad in law and against the
facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A)
has erred in law and on facts in confirming the action of Ld. AO in treating the
"order procurement services" rendered by the non residents and commission
/retainer fee as royalty and fees for technical services and ignoring the fact
that the order procurement services rendered outside India are not taxable in
India.
3. The assessee company is engaged in the business of software
development, testing and trainings. The assessee filed its Return of Income on
22.09.2012 for A.Y. 2012-13 declaring income of Rs. 14,63,886/- as deemed
income U/s 115JB. The case was taken up by the Assessing Officer for
scrutiny. During the course of scrutiny, the Assessing Officer asked for the
details of Professional Expenses amounting to Rs. 73,99,546/-. This sum
included two payments as follows:-
J2S Inc, USA Rs. 13,44,524/-
Navos B.V.B.A, Belgium Rs.6,58,242/-
The Assessing Officer observed that no tax was deducted at source on
these payments under section 195 of the Income tax Act. Both these parties are
non-residents. They have rendered the order procurement services abroad and
have no business connection or permanent establishment in India. Since their
income was not chargeable under the provisions of I.T. Act read with Section 5
and 9, no tax was deductible under section 195 of the I.T. Act. Without
prejudice to the above, the services rendered by both the above parties are
neither royalty nor fees for technical services. In the previous year relevant to
A.Y. 2012- 13, only the retainer fee was paid and no services infact were
rendered by the above parties and hence provisions of section 9(l)(vii) will not
be attracted. Even otherwise, such services when rendered will fall under the
exception clause of sub-clause (b) of clause (vii) of sub-section (1) of section 9
as such service are for the purpose of making or earning any income from the
3 ITA No. 715/Del/2016
customers outside India. Even then, the Assessing Officer has considered these
payments in the nature of royalties and fees for technical services within the
meaning of Section 9(1 )(vii) of the I.T. Act and has made disallowance of
Rs.20,02,767/- U/s 40(a)(i) of the I.T. Act and assessed the income at Rs.
20,02,767/- as against the returned income of Rs. 14,63,886/-. While arriving
at the assessed income of Rs.20,02,770/-. The Assessing Officer also adjusted
the brought forward loss of Rs.30,27,046/- as against the assessed brought
forward loss of Rs.42,88,991/- of the A.Y. 2009-10.
4. Being aggrieved by the assessment order, the assessee field appeal before
the CIT(A).
5. The Ld. AR submitted that disallowance u/s 40(a)(ia) will be applicable
when tax deductable at source under Chapter XVII B has not been deducted
under Chapter XVII B. The relevant Section is Section 195 which requires any
person to deduct income tax from any payment made to a non-resident when
such payment is chargeable under the provisions of the Income Tax Act. Thus,
no deduction of tax at source will be applicable when the payment of the non-
resident is not taxable in India. The charging Section is Section 5(2) which
states that if any income is received or deem to be received in India in the
hands of a non-resident or accrues or arises or is deem to accrue or arise in
India to the non-resident, same shall be taxable in India. Explanation 1 to
Section 5 states that income accruing or arising outside India shall not be
deem to be received in India by reason only of the fact that it is taken into
account in a balance-sheet prepared in India. In case of the assessee
company, two non-resident foreign companies, one by the name of J2S INC,
USA and another by the name of NAVOS, Belgium were appointed to locate
foreign buyers to whom the assessee company could sale its services. Thus,
both the foreign companies rendered order procurement services outside India
which is their business activity. Invoices received from the parties also show
that services rendered by them were sales procurement services and not fees
4 ITA No. 715/Del/2016
for technical services or royalties. The Ld. AR submitted that the Assessing
Officer wrongly alleged in Para 2.3 of his order that services rendered by the
above parties where from royalties or fee for technical services. It shows that
the Assessing Officer himself was not show as to whether the income received
by non residence was royalty or fee for technical services. In Para 2.4 of his
order, the Assessing Officer quoted Article 12 of the DTAA between India and
Belgium which has given the definition of both royalty and fees for technical
services. The Ld. AR submitted that in a case of assessee company both the
foreign parties for rendered or procurement services as their business activity
and for which they were paid commission/retainer ship fee. These services can
neither be called as technical or Consultancy Services nor as a royalty as per
definition given in the relevant Article to DTAA. None of these two companies
were having any office or permanent establishment in India. No payment was
received by these non-resident parties in India and thus their income was not
taxable in India and accordingly Sub-Section 2 of Section 5 was not attracted
and consequently Section 195 of the Act was not applicable. Even Section 9 of
the Act is not applicable as the amount received by both the non residence was
neither royalty nor fees for technical services as alleged by the Assessing
Officer. The payments were business provides of both the non-resident
assessee's and as per Article 7 of the DTAA between India and USA, business
profit shall be taxable only in the contracting state unless the enterprise carries
on business in the other contacting states through a permanent establishment
situation therein. Both the non-resident assessee's earn their income from the
assessee company as their business income outside India they carrying given
any business in India through a permanent establishment and thus their
income from the assessee company was covered by Article 7 and was taxable in
their respective contracting states and not in India. The Ld. AR submitted that
as per provisions of Section 90(2) provisions of DTAA shall be applicable with
regard to applicability in the hands of non-resident in as held by the Apex
Court in Azadi Bachao Andolan 263 ITR 706 according to which the provisions
of DTAA over rights income tax in any cases where the DTAA is beneficial to
5 ITA No. 715/Del/2016
non residence. The Ld. AR relied upon the following judicial decisions
(i) Gama Industries Coimbatur Ltd. Vs. CIT (2012) 54 SOT 104 (Che.
Tri.)
(ii) Grasim Industries Ltd. & ors Vs. CIT(A) (2011) 332 ITR 276
(ii) ACIT Vs. Paradigim Geo Physical Pvt. Ltd. (2008) 11 DTR 174 (Del.
Tri.).
6. The Ld. AR further submitted that the Assessing Officer was not correct
in attracting provisions of Section 9(1)(vii) by treating the payment as royalty
and fees for technical services whereas the fact was that in the previous year
relevant to the Assessment Year 2012-13 only the retainer fee as per the
agreement was paid and even no order procurement services in real terms were
materialized by the said non-resident and whenever such services were
rendered in future. Same will fall in the Explanation Clause of Sub Clause B of
Clause (vii) of Sub Section 1 of Section 9 of the Act on the ground that income
will be from the source outside in India. Both the non-resident assessee
derived their income as their business activity and his business profit Article 7
of DTAA between India and USA also Article 7 of DTAA between India and
Belgium were applicable to determine as to where business income will be
taxable. Therefore, none of the provisions of the Section 9 of the Act will be
applicable in the present case, business income cannot be treated as fees for
technical services as alleged by the Assessing Officer. Even commission
income has also been considered as business income as held by AAR in Tele
soft Pvt. Ltd 267 ITR 725 recently CBDT has issued Circular No. 4/15 dated
26/3/2015 emphasizing legislative intent with regard to Section 9 read with
Section 195 of the Act. Legislative intend is very clear as to Section 5 including
Sub Section 2 of the Section 5 wherein it is clearly state that if income does not
accrue or arise in India nor is it received in India income in the hands of non-
resident will not be taxable in India. In such a situation, neither Section 9 is
attracted nor Section 195 of the Act. Therefore, the Ld. AR submitted that no
TDS is required to be deducted on the payments made to non residence by the
6 ITA No. 715/Del/2016
assessee company and thus question of disallowance u/s 40(a)(ia) does not
arise.
7. The Ld. DR submitted that the CIT(A) as well as the Assessing Officer
was correct in making addition. The Ld. DR submitted that it is evident from
the terms of the agreement that consulting services are the running theme in
the agreements drawn up with the non-residents. The services provided is in
the nature of advisory services based upon the skills of the non-resident. The
agreements clearly are in the nature of end to end services beginning with
consulting and concluding with invoices being raised by the assessee company
on the identified clients. The Ld. DR further submitted that it is only an
exercise in semantics under taken by the assessee company to escape the
provisions of section 9(1)(vii) of the Act which includes nature of such
payments as fees for technical services obligating the assessee to deduct tax as
per provisions for section 195(1) of the Act. If it was only an order procurement
agreement, it is not understood as to why payments were made subject to TDS
as applicable. The Ld. DR relied upon the decision of Hon'ble Apex Court in
case of GVK Industries vs. ITO (2015) 54 taxmann.com 347 (SC) as well as the
decision of the Hon'ble Supreme Court in case of Transmission Corporation of
AP Limited and another Vs. CIT(A) (1999) 239 ITR 587. The Ld. DR also relied
on the intention of the parliament relating to the insertion and amendment of
Section 9 & Section 195 of the Act.
8. We have heard both the parties and perused all the relevant material
available on record. It is pertinent to note here that in case of the assessee
company, two non-resident foreign companies, one by the name of J2S INC,
USA and another by the name of NAVOS, Belgium were appointed to locate
foreign buyers to whom the assessee company could sale its services. Thus,
both the foreign companies rendered order procurement services outside India
which is their business activity. Invoices received from the parties also show
that services rendered by them were sales procurement services and not fees
7 ITA No. 715/Del/2016
for technical services or royalties. The contention of the Ld. DR that the
services provided is in the nature of advisory services based upon the skills of
the non-resident, is contrary to the terms and conditions of the agreements. In
the previous year relevant to the Assessment Year 2012-13 only the retainer fee
as per the agreement was paid and no order procurement services in real terms
were materialized by the said non-resident. Thus, the Explanation Clause of
Section 9 (vii) of the Act will not be applicable on the ground that income was
from the source outside India. Both the non-resident assessee derived their
income as their business activity and their business profit is determined under
Article 7 of DTAA between India and USA as well as from Article 7 of DTAA
between India and Belgium and will then decide as to where business income
will be taxable. Therefore, none of the provisions of the Section 9 of the Act will
be applicable in the present case, business income cannot be treated as fees for
technical services as held by the Assessing Officer. Therefore, the Assessing
Officer as well as CIT(A) was not correct in treating the "order procurement
services" rendered by the non-residents and commission/retainer fee as royalty
and fees for technical services. The decisions of the Hon'ble Apex Court relied
upon by the Ld. DR are factually different as the transactions was between
India and Switzerland and not between two different non-resident as is in the
present case. The order of the CIT(A) is set aside. Thus appeal of the assessee is
allowed.
9. In result, appeal of the assessee is allowed.
Order pronounced in the Open Court on 19th June, 2019.
Sd/- Sd/-
(R. K. PANDA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 19/06/2019
R. Naheed
Copy forwarded to:
8 ITA No. 715/Del/2016
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date of dictation 6.6.2019
Date on which the typed draft is placed before the 7.6.2019
dictating Member
Date on which the typed draft is placed before the
Other Member
Date on which the approved draft comes to the Sr.
PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr. 19.6.2019
PS/PS
Date on which the final order is uploaded on the 19.6.2019
website of ITAT
Date on which the file goes to the Bench Clerk 19.6.2019
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the Order
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