ORDER
SHEET IN THE HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax].ORIGINAL SIDE ITAT No.19 of 2013 GA No.188 of 2013 COMMISSIOINER OF INCOME TAX, KOL-IV Versus M/S.ANDAMAN SEA FOOD PVT.LTD.BEFORE: The Hon'ble JUSTICE GIRISH CHANDRA GUPTA The Hon'ble JUSTICE SUDIP AHLUWALIA Date : 23rd July, 2014.
For Appellant : For Respondent : Mr.S.N.
Dutta, Advocate Mr.R.K.
Murarka, Advocate with Mrs.S.Roy Chowdhury, Advocate The Court : The subject matter of challenge in this appeal is a judgment and order dated 19th June, 2012 by which the learned Income Tax Appellate Tribunal agreeing with the views of the CIT (A) dismissed an appeal preferred by the revenue.
Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal.
The facts and circumstances, briefly stated, are as follows: During the assessment year 2008-09 the assessee paid consultancy charges amounting to a sum of Rs.37,97,246/- on 27th March, 2008 and a sum of Rs.2,62,25,400/- was credited to the account of the foreign party on 31st March, 2008.
Thus, an aggregate sum of Rs.3,00,22,646/- was claimed to have been incurred on account of consultancy charges, deduction in respect whereof was claimed by the assessee.
The assessing officer issued a show cause notice as to why the payment should not be treated to have been made towards fees of technical services covered by explanation below Section 9(1)(vii) of the Income Tax Act for which the provisions of Section 95 were applicable for deduction of tax at source.
The assessee was also directed to show cause why the expenditure allegedly incurred on account of consultancy charges should not be disallowed under Section 40(a)(i).The assessee replied by a letter dated 22nd November, 2010 whereby the following explanations were furnished: “In response to your above mentioned notice, we state that an amount of Rs.2,62,25,400/-, being 1% of the total value of forex derivatives was payable to a non resident company M/S.Global Maharaja Pte.
Ltd., Singapore, on a/c, of service rendered in relation to Forex Derivative Transacstions.
The Global Maharaja Pte.
Ltd., rendered services outside India and its income is accrued outside India and payment is made outside India.
The company received the show cause notice to explain why the payment should not be treated as fees for technical services and non deduction of TDS, why the same should not be disallowed as deduction.
In this regard we would submit that TDS was not made as the payment related to service rendered from outside India.
The assessee was of the opinion that these amount is not taxable in India, if there is any mistake for non deduction of TDS then it was an inadvertent misteake purely on technical ground.
On receipt of show cause notice the assessee submits that this matter may be considered on merit as per law.
The assessee would request that no penal consequences should be thrust upon the assessee.
Please note that though the assessee company provided the liability for payment of Rs.2,62,25,400/- as on 31/03/2008 but out of this total liability, Rs.42,10,500/- already paid on 03/04/2008 i.e.the next financial year.
In the meantime, the company incurred huge loss in derivative transaction due to global financial crisis amounting to Rs.22.00 Crores.
(Approx).In this context the company requested to GMPL to waive the liability and give us relief from the huge payment burden for the survival of the company and the foreign company after considering our present financial condition, gave consent to waive this liability and accordingly we have added back as income and reflected in profit & loss account for taxation purpose in the next financial year amounting to Rs.2,20,14,900/-.” The assessing officer concluded that the aforesaid payments were on account of technical services within the meaning of Explanation 2 to Clause (vii) of sub-section (1) of Section 9.
He also referred to the Explanation introduced by the Finance Act, 2010 with effect from 1st June, 1976 which has been placed below the sub-section (2) of Section 9 of the Act.
Aggrieved by the order of the assessing officer, the assessee preferred an appeal.
The CIT(A) in paragraph 18 of his judgment held as follows: “18.
In the circumstances even though the consultancy services availed by the assessee in India and which were rendered by the GMPL from Singapore; fell within the definition of “fees for technical services” envisaged by Sec.
9(1)(vii) of the I T Act read with Explanation thereto; yet the said consultancy services did not fall within the scope of “fees for technical services” defined by Article 12(4) of DTAA between India and Singapore.
Since in the present case transaction was between tax residents of India and Singapore, the tax resident of Singapore had option to avail provisions of the said DTAA if provisions thereof were more beneficial to it.
As per the provisions of DTAA the amounts received by GMPL were not taxable in India as “fees for technical services” because these services were outside the ambit of Article 12(4).It is also noted that the services rendered by GMPL were not in the nature of independent personal services either and therefore not covered by Article 14 of DTAA.
It is not the AO’s case that the services were rendered, performed or provided by the service provider in India.
Services provided by GMPL had no connection or nexus with any permanent establishment of the said Singapore Company in India.
Under Article 7 of DTAA; income derived from provision of consultancy services in the couRs.of business of the service provider; is taxable as “business profits” in the country where the permanent establishment of the service provider is located.
Provision or rendering of consultancy services by GMPL had nexus with its permanent establishment in Singapore.
Nothing was brought on record by the AO in his impugned order which even suggests that Singapore company had any permanent establishment in India.
There is also no material on record which in any manner showed that rendering or provision of services took place or had any connection or nexus with GMPL’s PE in India.
In absence of any such information or evidence it cannot be held that the Singapore company received fees for consultancy services for services provided or rendered in India or they had connection with its PE in India.
On the facts and circumstances of the case therefore I have no hesitation in holding that in absence of any PE in India belonging to Singapore company and as no evidence is on record which in any manner proved that the services were rendered in India, the fees for consultancy services were not chargeable to tax in India.” The learned Tribunal has endorsed the views of the CIT(A).Aggrieved by the order of the learned Tribunal, the revenue has come up in appeal.
The questions, which fall for determination are: (a) Whether the sum of Rs.3,00,22,646/- paid or credited to the account of the foreign resident by the assessee on account of service rendered in relation to forex derivative transactions is chargeable to tax in India under Section 9(1)(vii) of the Income Tax Act; (b) In case the answer to the fiRs.question is in the affirmative, whether the assessee was liable to deduct tax.
Mr.Dutta, learned Advocate appearing for the revenue-appellant, submitted that payment on account of technical services to a non-resident is chargeable under Section 9(1)(vii).He drew our attention to Explanation 2, which provides as follows: “Explanation [2].: For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
” He also drew our attention to the Explanation introduced by the Finance Act, 2007 with retrospective effect from 1st June, 1976 which provides as follows: “Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v).(vi) and (vii) of sub-section (1).such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.” He contended that both the CIT(A) and the learned Tribunal erred in taking a view that the aforesaid payment was not taxable in India.
Mr.Murarka, learned Advocate, appearing for the assessee, advanced the following submissions: The Double Taxation Avoidance Agreement, according to him, did not apply to the transaction.
He, however, drew our attention to Article 23 thereof, which provides as follows: “ARTICLE23 INCOME NOT EXPRESSLY MENTIONED: Items of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States”.
He contended that although the provisions contained in the Double Taxation Avoidance Agreement did not apply to the transaction in question and Article 23 of the Double Taxation Avoidance Agreement left such matters to be dealt with in accordance with the taxation laws of the respective Contracting States sight cannot be lost of the fact that under Article 7 of the Double Taxation Avoidance Agreement, an income arising out of business to a non resident who does not have a permanent establishment in this country is not taxable in India.
He contended that the Supreme Court in the case of Director of Supplies and Disposal versus Member, Board of Revenue, West Bengal, reported in (1967) 20 Sales Tax Cases 398 held as follows: “The expression ‘business’ though extensively used is a word of indefinite import.
In taxing statutes it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit.
To regard an activity as business there must be a couRs.of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure.
In Narain Swadeshi Weaving Mills v.
Commissioner of Excess Profits Tax, Das, J., delivering the judgment of the Court observed: “The word ‘business’ connotes some real, substantial and systematic or organised couRs.of activity or conduct with a set purpose”.
He contended that since the word ‘business’ is a word of ‘indefinite import’, it cannot be said that the services rendered by the non resident was not in couRs.of their business.
It should, therefore, be held that the income accrued to the non resident on account of business.
Since the non resident does not have any permanent establishment in this country, under Article 7 of the Double Taxation Avoidance Agreement, the income would not be taxable in India.
The second submission advanced by Mr.Murarka is that the explanation under sub-section (2) of Section 9 of the Income Tax Act was inserted by the Finance Act, 2010 albeit with retrospective effect from 1st June, 1996.
He contended that the assessee could not have foreseen the amendment to be made in the year 2010.
The transaction, in fact, took place during the financial year 2007-2008.
Therefore, for such a lapse, the assessee should not be held liable.
We have considered the rival submissions.
The fiRs.submission of Mr.Murarka has not impressed us.
Sub-section (2) of Section 90 of the Income Tax Act may, in that regard, be taken into consideration which provides as follows: “90.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under subsection (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.” The rigour of the Income Tax Act can be lessened only in those cases where the agreement entered into between the Central Government and the Government of any other country outside India is applicable to the transaction.
When the agreement admittedly is not applicable to the transaction, the question of avoiding applicable laws of this country cannot legitimately arise.
Mr.Murarka wants us to give the benefit of Article 7 of the Double Taxation Avoidance Agreement although the same does not apply to this transaction.
When the Contracting States wanted to make provision for profits arising out of business, they also had agreed as to the nature of the transaction to which the agreement arrived at by them shall be applicable.
Court cannot extend the field of Article-7 of the agreement entered into between the Central Government and the Government of Singapore.
The word ‘business’ may be used as a word of ‘indefinite import’.
The word ‘business’ is a word of general use.
It is not the case of the assessee that a sum of more than Rs.3,00,00,000/- was paid or credited to the non resident on account of business profits.
The case of the assessee, on the contrary, is that the said sum was paid or credited “on account of services in relation to Forex Derivative Transactions”.
Therefore, the case of the assessee is that some sort of service was rendered in lieu whereof the aforesaid sum was paid or credited.
During hearing we are told that the service was advisory in nature.
A copy of the agreement dated 14th April, 2007 claimed to have been entered into between the assessee and the non-resident was also placed on record.
Clause 5 thereof reads as follows: “5) It is here in agreed under this MOU between ASF and GMPL that GMPL will provide expert guidance and consultancy using either its own in house expertise or by outsourcing the same to ASF for all its forex deals related to derivatives, futures and options entered into by ASF from this date till 31/3/2008.” From Clause 5 it appears that the non-resident agreed to provide expert guidance and consultancy in lieu of the agreed consideration.
Money was payable on account of a specific purpose indicated above.
It is not, therefore, possible for us to hold that the aforesaid sum accrued to the non-resident on account of business profit as contended by Mr.Murarka.
For the aforesaid reasons, the fiRs.submission of Mr.Murarka is rejected.
The second submission advanced by Mr.Murarka is not of much significance either.
Before the explanation was added to sub-Section (2) of Section 9 of the Act by the Finance Act, 2010, there was already an explanation introduced by the Finance Act, 2007 with retrospective effect from 1st June, 1976 which provides as follows: (i) “Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v).(vi) and (vii) of sub-section (1).such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.” Mr.Murarka contended that the explanation added by the Finance Act, 2007 quoted above did not contain the provision “whether or not the nonresident has rendered services in India.” We fail to understand how can it be said that the services were not rendered in India in the case before us.
It is an admitted position that the services were consumed in India.
The nature of service, as already indicated, was providing “expert guidance and consultancy” which may have been communicated from abroad through electronic media.
But the service would not be complete until it reached the assessee.
Therefore, service must have been received in India.
It is, therefore, difficult to see how the argument can be sustained that the services were not rendered in India.
The case of the assessee is that the services were rendered from out of the country.
That may be true.
The process may have originated from out of the country but the process culminated into service in this country only.
Any service which never reached the assessee cannot be said to have been rendered to him.
Only the service which reached the assessee can be said to have been rendered to him.
The assessee does not have any place of business in Singapore.
The assessee has received whatever services have been rendered only in India.
The media used for the purpose of communicating the service has not been disclosed.
Even if we presume that the service was rendered through electronic media, the conclusion is irresistible that the process of rendering services could not have been concluded outside India.
We are as such of the opinion that even without the amendment introduced by the Finance Act, 2010, the liability of the foreign resident to taxation under the Indian laws was there.
The amendment introduced by the Finance Act, 2010 has specifically been made with retrospective effect from 1st June, 1976.
These are clarificatory amendments.
They always have a retrospective effect.
they have been made retrospective.
place.
In this case expressly In the matter of taxation, equity has no When a law has been amended with retrospective effect Court has to proceed on the basis that the amendment was always there with effect from 1st June, 1976.
Therefore, the transaction which took place during the financial year 2007-08 could not have been saved, in any case.
The second submission of Mr.Murarka is, therefore, not acceptable.
For the reasons discussed above, the fiRs.question formulated above is answered in the affirmative and in favour of the revenue.
The second question is a consequential question and is also answered in the affirmative and in favour of the revenue.
The appeal is, thus, allowed.
Mr.Murarka prayed for stay of operation of this order.
The order shall remain stayed for a period of eight weeks.
(GIRISH CHANDRA GUPTA, J.) (SUDIP AHLUWALIA, J.) Sm./Km./A/s.