CIT vs. Farida Leather Company (Madras High Court)

The High Court had to consider whether a disallowance u/s 40(a)(i) could be made with respect to payment of commission to non-resident foreign agents without deduction of tax at source in the light of insertion of Explanation 4 to Section 9(1)(i) and Explanation 2 to Section 195(1) of the Act, which was introduced by Finance Act, 2012, w.e.f. 01.04.1962. The department contended that the judgement of the Supreme Court in G. E India Technology Center P. Ltd., v. CIT (2010) 327 I.T.R. 456 (SC) was not good law. It was also contended that after the insertion of Explanation below Section 9 (2) of the Act by the Finance Act, 2010, w.e.f. 01.06.1976 the income of foreign agents is taxable in India as fee for technical services under Section 9(1)(vii) of the Act and consequently tax needed to be deducted at source while paying the foreign agents. HELD by the High Court rejecting the contentions:

(i) Admittedly that the nonresident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of “fees for technical services” as explained in the context of Section 9 (1) (vii) of the Act.

(ii) As the non-residents were not providing any technical services to the assessee, the commission payment made to them does not fall into the category of “fees of technical services” and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the Assessing Officer, has no application to the facts of the assessee’s case.

(iii) The commission payments to the non-resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad. The contention of the Revenue that the Tribunal ought not to have relied upon G.E.India Technology’s case, cited supra, in view of insertion of Explanation 4 to Section 9 (1) (i) of the Act with corresponding introduction of Explanation 2 to Section 195 (1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962 is not correct as held in (2014) 369 I.T.R. 96 (Mad) (Commissioner of Income Tax v. Kikani Exports Pvt. Ltd.)

(iv) When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.