The assessee is a 100% export oriented undertaking and is engaged in the business of manufacturing and export of garments. During the relevant financial year, the assessee made remittances to M/s Sharp Eagle International Ltd. (SEL), a non-resident company incorporated in Hongkong. The AO observed that the assessee made these remittances without deduction of tax at source as per provision of sec. 195(1) read with sec. 9(i)(vii) of the Act. The assessee submitted that SEL was acting on directions of the assessee for inspection of fabrics, timely dispatch of material etc. and for these services, the assessee paid 12.5% of imported value as charges to the non- resident company.
The AO held that the charges paid to the non-resident company are fees for technical services (FTS) as defined in explanation 2 to sec. 9(1)(vii) and therefore, held the assessee to be defaulter u/s 201(1A) for non deduction of tax.
The assessee filed an appeal before the CIT(A) and the CIT(A) also upheld the order of the AO.
- M/s SEL is only an agent appointed by the assessee to oversee the quality and quantity of the shipment and also that the shipment reaches the assessee company on time.
- It was the assessee in joint consultancy with its buyers, who decides on the type and quality of the material to be imported and also the prices at which the said material is to be imported and the samples are then sent to M/s SEL only to compare and see that the material being shipped conforms to the quality and the quantity ordered by the assessee.
- There is no technical expertise required nor are any managerial or consultancy services rendered by M/s SEL.
- Only a physical verification of the material is required and also to act on behalf of the assessee in accordance with the directions of the assessee, which definitely cannot fall within the purview of technical and managerial services.
- As per the CBDT Circular No.23 dated 23.7.1969, (para 4), where the foreign agent of an Indian exporter operates in his own country and no part his income arises in India and his commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India, such an agent is not liable to Income-tax in India on the commission. The relevant sections, namely sec. 5(2) and sec. 9 of the Income-tax Act 1961 not having undergone any change in this regard, the clarification in CBDT Circular No.23 shall prevail.
Tax Authority’s Arguments:
- The duties of the service provider are not clearly spelt out in the agreement between the parties.
- The inspection of fabrics is not a simple job and requires the technical knowledge and technical skills in the field of textiles and therefore the services rendered by the non-resident are in the nature of technical services.
- The service provider has to advice on any defects in the material to the assessee and has to clarify whether the material is to be imported or to be rejected and these activities would fall within the category of consultancy services.
- The non- resident has to attend to the work given by the assessee and has to manage things as desired by the assessee and, therefore, is also discharging the managerial services.
- The charges paid to the non-resident company are nothing but fees for technical services (FTS) as defined in explanation 2 to sec. 9(1)(vii) of the Income-tax Act
- The agreement between the assessee and M/s SEL stipulates that M/s SEL shall be responsible for the shipment of raw material to the assessee from its importers within the stipulated time and as per the specific quality and quantity.
- SEL nowhere is involved in the above identification of the exporter or in selecting the material and negotiating the price.
- In such circumstances, it cannot be said that SEL is rendering any of the consultancy services
- The elementary knowledge of the type of material and fair sense of identifying the correctness of the quality is sufficient. Therefore in our opinion, SEL is not required to employ any skilled technical personnel to discharge its obligation under the agreement and, therefore, we hold that the assessee is not discharging any technical services.