A. Mohan Alankamony, Accountant Member - This appeal is filed by the Revenue, aggrieved by the order of the Learned Commissioner of Income Tax (A), Tiruchirappalli dated 28.02.2012 in ITA No.391/2010-11 passed under Sec.143(3) read with section Sec. 250 of the Act.
2. The Revenue has raised five elaborate grounds in its appeal, however the crux of the issue is that:—
(i) The Ld. CIT(A) had erroneously held by relying in the decision of the Hon'ble Apex Court in the case CIT v. Toshoku Ltd. [1980] 125 ITR 525 that, the remuneration paid in foreign currency by the assessee, for services rendered outside India being product designing charges, is not liable to be taxed in India, and accordingly Tax is not required to be deducted at source under Section 195 of the Act.
Additional Ground
(ii) The Ld. CIT(A) had erroneously held that, in the case where rent is paid to the partners by the firm, the provisions of Section 195-I of the Act will not be attracted.
3. The assessee has filed a letter dated 04.06.2014 requesting the Tribunal not to admit the additional grounds filed by the Revenue since there was no justification for the same. After perusing the letter, we do not find any merit in the contention of the assessee and therefore, we hereby reject the same.
4. The brief facts of the case are that the assessee is a firm, engaged in the business of exporting handloom clothes, filed its return of income on 11.09.2008 admitting its total income as Rs. 25,37,417/-. Subsequently, the case was taken up for scrutiny and the assessment u/s.143(3) was completed on 28.12.2010 wherein the Ld. Assessing Officer made disallowance of Rs. 15,37,994/- and Rs. 8,40,000/- U/s.40(a)(ia) of the Act towards non-deduction of TDS for the payment made to foreign agent and towards payment of rent to partners of the firm respectively.
5.1 Ground No.1 - Non-deduction of TDS for payment of product designing charges outside India for services rendered outside India.
During the course of assessment proceedings it was observed by the Ld. Assessing Officer that the assessee had not deducted tax at source while making payment of Rs. 15,37,994/- to Ms Joanne Collins in USA towards product design charges. The assessee had explained before the Revenue that payment made to non-resident for service rendered outside India is not liable for TDS under the provisions of the Act and therefore, disallowance of the same invoking the provisions of section 40(a)(ia) of the Act will not arise. However, the Ld. Assessing Officer held that by virtue of Section.9(1)(vi) of the Act and Article-12 of Double Taxation Avoidance Agreement entered into between India & USA, "royalties" and "fees for services rendered" will be taxable at the contracting state in which they arise and accordingly as per the law TDS has to be deducted. The relevant portion of the order of the Ld. Assessing Officer is extracted herein below for reference:—
'2.1. Regarding the taxability of income earned by non-residents, it is pertinent to note that as per Section-5(2), the total income of the non- resident includes all income from whatever source derived which is received or is deemed to be received in India by or on behalf of such person and which accrues or arises or is deemed to accrue or arise to him in India during such year. Section 9(1) deals with income deemed to arise or accrue in India. It is to be seen as to whether the payment to the non-resident mentioned above falls under any of the categories mentioned in Section.9(1) of the Act. Hence, the assessee was asked to furnish the details of the above payment and its nature. In this connection, the assessee's representative produced a copy of the agreement entered into between the assessee and Ms. Joanne Collins Product Design, according to which the above payments were claimed to have been made. Examination of the agreement produced reveals that the assessee firm has paid to Ms. Joanne Collins, C/o. Joanne Collins Product Design, 4656 Nine Mile Greek Pareway, Minneapolis, MN 55437 USA in terms of 3% of the value of the proceeds realized on account of exports of products designed by Ms. Joanne Collins, USA.
2.2. The payment of this type is covered under the term "royalty" within the provisions of section 9(1)(vi) of the IT Act. In Explanation 2 to Section-9(1)(vi) has been defined so as to include the following,
"(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic, or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (1) to (v)"
From the above, it is clear that the royalty income in the hands of Ms.Joanne Collins, USA is assessable to tax in India by virtue of Section.9(1)(vi) of the IT Act. Further, Article 12 of the Double Taxation Avoidance Agreement entered into between India and USA states that royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State.'
5.2 On appeal, the Ld. CIT (A) deleted the addition by placing reliance in the decision of the Hon'ble Apex Court in the case Toshoku Ltd. (supra) and held that the assessee is not required to deduct tax at source for the payments made in foreign currency to Ms Joanne Collins towards services rendered outside India being product design charges. The relevant portion of the Order of the Ld. CIT(A) is extracted herein below for reference:—
"On verifying the submissions made by the Authorized Representative of the appellant, assessment order and also material on record the appellant firm engaged the services of one Ms. Joanne Collins as a design and fashion consultant on remuneration basis. She was rendering services outside India by suggesting design and fashion changes to cater to the requirements of customers in USA and European countries. The appellant being a exporter of handloom textiles to USA and European countries need the services of Ms. Joanne Collins and paid a total sum of Rs. 15,37,994/- as remuneration. The Assessing Officer was under the impression that above payment was made without deduction of tax. She being a non resident and here services were rendered outside India paid the remuneration also outside India in foreign currency, the Authorized Representative of the pat argued that no taxable event had happened in India to attract tax liability. She is not liable to pay any tax in India and hence no TDS is required to be deducted when the payee is a NRI, who is not liable to tax in India. A non-resident Payee has neither a business connection in or with India nor a permanent establishment in India even the double taxation agreement would not make the payee liable to pay tax in India. I am fully convinced with the argument of the Authorized representative of the appellant since the appellant firm has paid remuneration in foreign currency outside India for the services rendered also outside India when the payee is not liable to pay any tax in India, being NRI, no TDS is required to be deducted. The same view was held in apex court judgment in the case of Toshuku Ltd 125/525(SC) wherein it was held that if services rendered outside India TDS need not be deducted. Therefore, provisions of section 40(a)(i) are not applicable and addition made at Rs.1537994 as remuneration is deleted."
5.3 Ld. D.R argued in support of the order of the Ld. Assessing Officer while as Ld. A.R relied in the decisions placed before us in the paper book and the order of the Ld. CIT(A).
5.4 We have heard both the parties and carefully perused the materials available on record. From the facts of the case, it is apparent that payment in foreign currency is made to non-resident outside India for services rendered outside India. As pointed out by the Ld. CIT (A), the decision of the Hon'ble Apex Court in the case Toshoku Ltd. (supra) is squarely applicable to the facts of the case of the assessee. The assessee had also explained that Ms Joanne Collins was only acting as selling agent and also advising the assessee on the product trend in USA based on which the assessee was manufacturing garments for marketing in USA. The assessee had paid in foreign currency as remuneration to Ms Joanne Collins @3% on the value of the export sales proceeds. In such circumstances, the Hon'ble Apex court has categorically held that the commission amount which was earned by a non-resident for services rendered outside India would not be deemed to be income which is either accrued or arisen in India. Moreover in the recent decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Faizan Shoes (P.) Ltd. [2014] 367 ITR 155/226 Taxman 115/48 taxmann.com 48 (Mad.) it has been held as follows:—
'9. The Explanation to Section 9(2) of the Act was substituted by the Finance Act, 2010 with retrospective effect from 1.6.1976. The above said explanation would come into play only if the said amount paid would fall under the headings:
(i) income by way of interest as set out in Section 9(1)(v) of the Act; or
(ii) income by way of royalty as set out in Section 9(1)(vi) of the Act; or
(iii) income by way of fees for technical services as set out in Section 9(1)(vii) of the Act.
10. While dealing with Section 9(1) of the Act, the Supreme Court in Commissioner of Income Taxv. Toshoku Limited, (1980) 125 ITR 525, on considering a transaction where tobacco was exported to Japan and France and sold through non-resident assessees who were paid commission, held as under:
"8. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing there from shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India (See CIT v. R.D. Aggarwal and Co. [1965] 56 ITR 20 (SC) andCarborandum Co. v. CIT [1977] 108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian I.T. Act, 1922, which corresponds to s. 9(1)(i) of the Act).
9. In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned by the non- resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department."
11. The facts of the present case are akin to the facts of the decision in Toshoku Limited case, referred supra In the instant case also the assessee engaged the services of non-resident agent to procure export orders and paid commission. That apart, the Commissioner of Income (Appeals) as well as the Tribunal have correctly applied the principle laid down in GE India Technology Cen. (P.) Ltd. case, referred supra, to hold that the assessee is not liable to deduct tax at source when the non-resident agent provides services outside India on payment of commission.
12. In the light of the above said decisions and the finding rendered by us on the earlier issue that the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services", we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above finding, the decision of the Supreme Court in Transmission Corporation of A.P. Ltd. case, referred supra, relied upon by the learned Standing Counsel for the Revenue is not applicable to the facts of the present case. We find no infirmity in the order of the Tribunal in confirming the order of the Commissioner of Income Tax (Appeals).'
Since the facts are identical in the case of the assessee with respect to the facts of the case decided by the Hon'ble Apex Court and Jurisdictional Madras High Court supra wherein The Hon'ble Courts has held the issue in favour of the assessee, we do not find it necessary to interfere in the order of the Ld. CIT (A) on this issue since he has only followed those decisions.
6.1 Ground No.2 - Non-deduction of TDS towards payment of rent to the partners of the firm.
During the course of assessment proceedings, the Ld. A.O. further observed that the assessee firm had paid rent to its partners Shri M. Sivaknnu, Rs. 4,80,000/- & Shri Prem Anand Rs. 3,60,000/- without deducting tax at source in accordance with Section 195(I) of the Act. The assessee's representatative had stated before the Ld. Assessing Officer that the payment of rent by the firm to its partners is not liable for deduction of tax at source since the firm is only collective entity and not different from the partners. However, the Ld. Assessing Officer opined that there was no exemption granted under the provisions of the Act for not deducting tax at source while making the payment of rent by firm to its partners. Therefore the Ld. Assessing Officer invoked the provisions of section 40(a)(ia) of the Act and added the aggregate amount of Rs. 8,40,000/- to the income of the assessee invoking the provisions of section 40(a)(ia) of the Act. On appeal, the Ld. CIT (A) deleted the addition of Rs. 8,40,000/- because he was of the view that the expenditure in the form of rent is not a deduction falling under any of the Sections 32 to 38 of the Act and only a legitimate debit in the trading account.
6.2 Ld. D.R argued in support of the order of the Ld. Assessing Officer while as Ld. A.R. relied on the order of the Ld. CIT (A) and also relied in the decision of the case CIT v. R.M. Chidambaram Pillai[1977] 106 ITR 292 (SC), the decision of CIT v. N.S.M. Sankarapandian [1996] 222 ITR 289/88 Taxman 497 (Mad.) & the decision of the case CIT v. V. Sivakumar [2013] 354 ITR 9/32 taxmann.com 62 (Mad.).
6.3 We have heard both the parties and carefully perused the materials available on record. The decision cited by the Ld. A.R. in the case of R.M. Chidambaram Pillai is not applicable to the facts of the case because it is in regard to payment of salary by the partnership firm to its partners and applicability of Rule 24 of the Income Tax Rules, 1922. In the case V. Sivakumar (supra), also the facts are not identical. In that case, the issue was with respect to penalty proceedings U/s.271D of the Act against the loan taken by the assessee from the firm wherein the Hon'ble jurisdictional High Court held that the assessee's action was bonafide and there was a reasonable cause within the meaning of Section-273B of the Act and therefore penalty could not be imposed. Further in the case CIT v. N.S.M. Sankarapandian (supra) also, the facts are not identical because in that case the issue was with respect to salary paid by the partnership firm to its partner who is the Karta of the HUF representing the HUF in the firm and therefore standard deduction was denied on such salary by the Ld. A.O which was upheld by the Hon'ble Jurisdictional High Court. In the case before us the issue is with respect to deduction of tax at source U/s.194-I of the Act. Section 194-I of the Act provides that tax has to be deducted at source on payment of rent by an assessee who is not an individual or a HUF at the specified rate. In this case, the assessee is a firm assessable under the provisions of the Act and therefore bound to deduct tax at source on payment of rent to its partners who are individuals and distinct assessable entities as held by the Ld. Assessing Officer. It is pertinent to mention that the provisions of "TDS" represent an alternative and more efficient tax collection mechanism for the Government. Neither provisions of TDS is a separate charge nor levy in addition to income tax under the Act. Non-compliance of the provisions of TDS will result in disallowance u/s 40(a)(ia) of the Act, rising of demand U/s.201(1) of the Act, charging of interest U/s.201(1A) of the Act and levy of penalty U/s.271C of the Act. There is no provision under the Act to suggest that the relationship between the two assessable entities will determine the applicability of Section.194-I of the Act. Therefore, we hereby set aside the order of the Ld. CIT (A) and confirm the order of the Ld. Assessing Officer on this issue.
7. In the result, the appeal of Revenue is partly allowed.