The main legal point established in the judgment is that the payment made to a non-resident for procuring export orders did not constitute a fee for technical services under Section 9(1)(vii) of the Income Tax Act, 1961.

Sanjiv Khanna, J.

1. The present appeal by the Revenue, which arises out of proceedings under Section 195/197 of the Income Tax Act, 1961 (Act, for short), relating to assessment year 2010-11 on an application filed by Panalfa Autoelektrik Ltd. (assessee, for short), requires adjudication of the following substantial question of law:-

“Whether the ITAT was right in holding that the commission paid to M/s. Agenta World Trading and Consulting Establishment for procuring export orders, is not fee for technical services under Section 9(i)(vii) of the Income Tax Act, 1961?”

2. For the sake of clarity, we record that the impugned order passed by the Income Tax Appellate Tribunal (‘Tribunal’, for short) is dated 25th October, 2013 and was passed in I.T.A. 4654/Del/2012.

3. The assessee made an application dated 16th February, 2010 under Section 195(2) for authorization to remit Euro 1,40,055.53 as commission for arranging export sales and realizing payments to M/s. Agenta World Trading and Consulting Establishment, a non-resident company registered in Liechtenstein. There is no Double Taxation Avoidance Agreement between India and Liechtenstein and, therefore, in the present appeal we are only concerned with the question of receipt, accrual or deemed accrual of the said income in India as per the mandate of the Act.

4. The Assessing Officer relying upon the decision of the Authority for Advance Rulings In Re: M/s. Wallace Pharmaceuticals Pvt. Ltd. (2005) 278 ITR 97 (AAR) held that the commission payment to the non-resident company on procuring orders was taxable as fee for technical service under sub-clause (b) to Section 9(1) (vii) of the Act. The initial direction that the tax should be deducted at source @ 20% recorded in the order dated 4th May, 2010, was modified/reduced to 10% vide order dated 8th November, 2010 after recording that deduction at a higher rate would not be applicable in the present case.

5. The Commissioner of Income Tax (Appeals), however, reversed the aforesaid finding holding that the commission payment in the present case was not in the nature of fee for technical service and he distinguished the decision in the case of Wallace Pharmaceuticals Pvt. Ltd. (supra). The said finding has been affirmed by the Tribunal in the impugned order.

6. In order to appreciate the controversy, we would first like to refer and interpret Sections 5(2), 9(1)(i) and 9(1)(vii) of the Act, though, the Assessing Officer in the present case had not invoked Section 9(1)(i) of the Act. The relevant provisions read as under:-

“5. Scope of total income —

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which —

(a) Is received or is deemed to be received in India in such year by or on behalf of such person.

(b) Accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1 — Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance-sheet prepared in India.

9. Income deemed to accrue or arise in India — (1) The following incomes shall be deemed to accrue or arise in India —

(i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.

Explanation 1 — For the purposes of this clause —

(a) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this 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.

Explanation 4 — For the removal of doubts, it is hereby clarified that the expressi