Important points:
The finances obtained by the resident company was utilized in India for setting up a gas based power project at Andhra Pradesh-Without reference to whether the non-resident has rendered services in India, the fees payable by the resident to the non-resident for consultancy services would be taxable under the IT Act.

JUDGMENT :

Vinod Chandran, J.

The appeal raises the question whether the commission paid to a non-resident, in the particular facts arising herein, is taxable under the Income Tax Act, 1961 ['IT Act' for brevity].

2. The appellant, a hundred percent Export Oriented Unit, is a Private Limited Company engaged in development and export of software. For the assessment year 2009-10, the appellant filed a return declaring a total income of Rs.17,204/-, after claiming deduction under Section 10B in respect of profit from export of software. Under Section 143(1) the return was processed and the payments made to Mr.Balaji Bal, a resident of Switzerland, who also was a Director of the Company, was disallowed under Section 40(a)(i) of the Act. The dis-allowance under Section 40(a)(i) was on the ground that the commission paid was fees for technical services on which tax is deductible at source, which the assessee failed to deduct. The amount shown as commission paid to the non-resident was added to the total income of the Company.

3. On appeal, the first appellate authority concurred with the Assessing Officer with respect to the dis-allowance; but, however, allowed deduction under Section 10A. The Department approached the Tribunal and the assessee filed a cross objection. The Department's appeal was allowed and the Assessing Officer was directed to consider the deduction under Section 10A. The cross objection of the assessee was rejected. The assessee is now not concerned with the remand made, since the Assessing Officer has allowed the deduction. The assessee is aggrieved with the order of the Tribunal affirming the dis allowance under Section 40(a)(i).

4. Sri.Raja Kannan, learned Counsel for the appellant, refers to Section 9(1)(vii) and Section 195 of the Act. It is the specific case of the appellant-assessee that the recipient of the commission is a non-resident, not taxable under the Act of 1961. It is admitted that the non-resident was also a Director of the assessee-Company, but the commission was paid under Annexure-B Commission Agency Contract. On a reading of the various terms of the contract, it is submitted that the activity carried on by the non-resident, in terms of the contract, was outside India; specifically in the territories of the European Union, North America and Middle East. The activities carried on under the contract would not fall under the definition of 'fees for technical services' as seen from Explanation 2 of Section 9(1)(vii). It is also argued that even if it falls under Explanation 2, it is exempted under sub-clause (b) of Section 9(1)(vii). To buttress the above contention, C.I.T. v. Toshoku Ltd. [(1980) 125 ITR 525 (SC)] is relied on. It is pointed out that the activity of the non-resident for which he was paid the commission was entirely outside India and the income had no territorial nexus with India, as has been held in Ishikawajima-Harima Heavy Industries v. Director of I.T. [(2007) 288 ITR 408 (SC)]. Though an explanation was brought into Section 9 in the year 2010 with retrospective effect from 01.06.1976, in Jindal Thermal Power Co. Ltd. v. Deputy CIT (TDS) [(2010) 321 ITR 31 (Karn)] the Karnataka High Court held that the effect of the Supreme Court decision in Ishikawajima had not been obliterated. Insofar as how the explanation has to be construed, reliance has been placed on Sedco Forex International Drill Inc. v. CIT [(2015) 279 ITR 310 (SC)].

5. Section 195 casts a liability on the person making a payment to a non-resident to deduct tax at source only when it is a sum chargeable under the provisions of the Act, as has been held in GE India Technology Centre (P) Ltd. v. CIT [(2010) 10 SCC 29 = (2010) 327 ITR 456 (SC)]. A non-resident is not taxable in India and the payment is made for services not coming within the definition of 'fees for technical services'. The activities for which the payment was made having been carried out entirely outside India, there is no tax chargeable on the commission p