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M/s D & H Secheron Electrodes Pvt. Ltd, Inidore v. ITO (IT & TP), Bhopal

Income Tax Appellate Tribunal

Mar 6, 2020

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Structured Summary of the Tribunal Opinion — M/s D&H Secheron Electrodes Pvt. Ltd. (AY 2016-17)

Factual and Procedural Background

The appeal arises from orders of the Commissioner of Income Tax (Appeals)-3, Ahmedabad dated 17.01.2018, which in turn arose from an assessment order framed by the ITO (IT & TP), Bhopal dated 20.01.2016 under section 250 of the Income Tax Act, 1961. The assessee is M/s D&H Secheron Electrodes Pvt. Ltd., a manufacturer of welding electrodes.

During Financial Year 2015-16 (relevant to Assessment Year 2016-17), the assessee paid M/s Korea Search (a South Korean head-hunting/placement concern) amounts of Rs. 1,31,670 on 21.09.2015 and Rs. 4,70,304 on 24.12.2015 (total Rs. 6,01,974) for sourcing engineers. No tax was deducted at source under section 195 of the Income Tax Act on these payments; the assessee had obtained a certificate in Form No. 15CB from a Chartered Accountant.

The Assessing Officer, after issuing a verification letter dated 06.05.2015 and examining the arrangement, concluded that the payments constituted fees for technical services within the meaning of section 9(1)(vii) and were therefore chargeable to tax deduction at source under section 195. The AO grossed up the payment to Rs. 7,52,468, computed a tax-default of Rs. 1,55,009 and levied interest under section 201(1A) of Rs. 22,718.

The assessee appealed to the CIT(A), which confirmed the AO's view. The assessee then appealed to the Tribunal. The Tribunal heard submissions and examined the agreement between the parties and the statutory provision (section 9(1)(vii)) before delivering the impugned opinion.

Legal Issues Presented

Whether the payments made by the assessee to the non-resident entity M/s Korea Search were liable to tax deduction at source under section 195 of the Income Tax Act because they constituted "fees for technical services" within the meaning of section 9(1)(vii) of the Act?
Whether the Assessing Officer was justified in treating the assessee as an assessee-in-default for non-deduction of tax and in imposing a tax-demand of Rs. 1,55,009 and interest under section 201(1A) of Rs. 22,718?

Arguments of the Parties

Appellant's Arguments (Assessee)

The payments were made to a non-resident (M/s Korea Search) which had no permanent establishment in India.
The amounts were not in the nature of technical services or managerial/consultancy services; they were placement/headhunting fees. The assessee's submissions distinguished "managerial, technical and consultancy" services and contended these words did not cover the services in question.
Reference was made to the Double Taxation Avoidance Agreement (DTAA) between India and South Korea under section 90 of the Income Tax Act (including Articles 12, 14 and 15), to support the contention that the services were provided outside India and not taxable as technical fees in India.
Because the services were provided outside India and did not amount to fees for technical services under section 9(1)(vii), the assessee was not liable to deduct tax at source under section 195.

Respondent's Arguments (Revenue / Departmental Representative)

The Departmental Representative supported the orders of the Assessing Officer and the CIT(A).
The Revenue contended that the payments to M/s Korea Search were for technical services within the meaning of section 9(1)(vii), and therefore liable to deduction under section 195; hence the assessee was rightly treated as in default with the consequential demand and interest.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Tribunal identified the sole issue as whether the payments to M/s Korea Search were chargeable to deduction of tax at source under section 195 because they amounted to fees for technical services under section 9(1)(vii), and whether the AO correctly treated the assessee as in default and levied interest under section 201(1A).

The Tribunal examined the actual agreement between the assessee and M/s Korea Search (the agreement text was placed on record). The Tribunal summarized the relevant contractual terms:

Client's responsibility: the client (assessee) provides a detailed job description and feedback; Korea Search would require a copy of signed Letter of Offer for documentation and billing; client to notify upon hiring.
Guarantee: Korea Search would provide a replacement candidate at no extra cost if a placed permanent employee voluntarily left within the first 90 days (subject to exceptions where the client terminates within 90 days).
Terms of payment: invoices are to be raised on the first day of work by selected candidate and settled within 14 days.
Placement fee: fee rate specified as 13% of Annual Gross Income of selected candidate; VAT may be added where applicable.

On the basis of these contractual provisions, the Tribunal made the following factual and legal observations:

The agreement establishes that Korea Search maintained a database of candidate profiles, matched candidates to the client's job descriptions, and referred candidates to the client; the service was a placement/search service rather than rendering technical expertise to the client.
The agreement contained no specification requiring Korea Search to provide any particular technical expertise itself; Korea Search's role was to supply candidates, subject to the client's vetting, interview, testing and final appointment decisions, and to provide limited replacement guarantees.
Deciding whether a referred candidate possessed the requisite technical expertise rested with the assessee (the client) through its recruitment processes.
The Tribunal reproduced section 9(1)(vii) of the Income Tax Act and, in particular, Explanation 2 which defines "fees for technical services" as consideration for rendering managerial, technical or consultancy services (including provision of technical or other personnel), while excluding consideration chargeable as "Salaries" or consideration for construction/assembly/mining type projects.

Applying the statutory definition to the facts and the contract, the Tribunal concluded that the payments were for placement services — matching and referring candidates — which "by no canon require any technical expertise" on the part of Korea Search. Therefore, the services did not fall within the definition of fees for technical services under section 9(1)(vii).

Because the payments did not constitute "fees for technical services" deemed to accrue or arise in India under section 9(1)(vii), there was no obligation on the assessee to deduct tax at source under section 195. Consequently, the Assessing Officer's treatment of the assessee as in default and the imposition of demand and interest were not sustainable.

Holding and Implications

Holding: The Tribunal allowed Ground No.1 of the assessee's appeal, set aside the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals), and directed the Revenue authorities to delete the demand of Rs. 1,55,009 for non-deduction of tax at source and to delete the consequential interest of Rs. 22,718 levied under section 201/201(1A).

Implications:

Direct effect: The specific demand and interest raised against M/s D&H Secheron Electrodes Pvt. Ltd. in respect of payments to M/s Korea Search for FY 2015-16 (AY 2016-17) are deleted as the Tribunal found no obligation to deduct TDS under section 195 because the payments were for placement services and not fees for technical services under section 9(1)(vii).
No broader precedent: The opinion confines its conclusion to the facts and agreement before it; the text does not assert the creation of any new legal precedent beyond deciding the disputed claim between the parties.

Ground No.1 raised by the assessee was expressly allowed by the Tribunal. The opinion does not cite judicial precedents; it rests on contractual analysis and the statutory definition in section 9(1)(vii) of the Income Tax Act.

Show all summary ...

PER MANISH BORAD, AM The above captioned appeal filed at the instance of the assessee pertaining to Assessment Year 2016-17 is directed against the orders of Ld. Commissioner of Income Tax (Appeals)-3 (in short Ld.CIT(A)], Ahmedabad dated 17.01.2018 which is arising out of the order u/s 250 of the Income Tax Act 1961(In short the Act) dated 20.01.2016 framed by ITO (IT & TP), Bhopal. M/s. D&H Secheron Electrodes Pvt. Ltd, 44-46, Industries Estate, Kila Maidan, Indore ITO (IT & TP), Bhopal (Appellant) (Respondent ) PAN No.BPLD00066D

2. The assessee has raised following grounds of appeal; 01]. That on the facts and in the circumstances of the case the Learned. CIT(A) erred in confirming the action of the assessing officer by treating the Assessee company as assessee in default in respect of non-deduction of Tax at Source u/s 195 of the Income Tax Act of Rs.1,55,009/- in respect of payment made to M/s Korea Search of Rs. 6,01,974/- during the year under consideration and also interest charged by the A.O. u/s 201/201(lA) of the Income Tax Act of Rs. 22,718/- without properly appreciating the facts of the case and submissions made before her even when the assessee was not liable to deduct TDS on t his payment. 02]. The assessee reserve its right to add, alter, modify or amend the grounds of appeal as and when required.

3. Brief facts relating to this issue are that the assessee is engaged in the business of manufacturing of welding electrodes. The assessee is responsible for deducting tax at source under Chapter XVII of the Income Tax Act, 1961 and it is an assessee-deductor for the purpose of tax deductible at source and payable to Central Govt. account under the Act. The Ld. A.O issued letter dated 6.5.2015 to assessee for verification of payments made to Non Residents during Financial Year 2014-15 and 2015-16 without deducting tax at source u/s 195 of the Act. For Financial Year 2015-16 relevant to Assessment Year 2016-17 Ld. A.O observed that the assessee company in order to search engineer for new product development contacted Head Hunting Concern located in South Korea with the name M/s Korea Search and agreement was entered with this Korean concern for supply of engineers as per job description which will be employed by the assessee company. For this work assessee remitted Rs.1,31,670/- and Rs.4,70,304/- on 21.09.2015 and 24.12.2015 respectively to M/s. Korea Search, South Korea. No tax was deducted u/s 195 of the Act on these payment. The remittances was made after obtaining a certificate on form No. 15CB from a Chartered Accountant. The assessee when show caused submitted that the alleged payment is made to the Non Resident having no permanent establishment in India and payment is not in the nature of any technical services. However Ld. A.O was of the considered view that the alleged payment to M/s Korea Search is the fees for technical services and thus liable for tax deduction at source u/s 195 of the Act and accordingly grossed up an amount of payment at Rs.7,52,468/- as against Rs.6,01,974/- paid by the assessee and computed the default of tax deducted at source at Rs.1,55,009/- and also levied interest u/s 201(1A) at Rs.22,718/-.

4. Aggrieved by the order of Ld. A.O assessee preferred appeal before CIT(A) but could not succeed.

5. Now the assessee is in appeal before the Tribunal.

6. Ld. Counsel for the assessee referring to the synopsis placed on record firstly briefed about the facts of the case and thereafter took us through the provisions of Section 195 of the Act Section 5 of the Act and Section 9(1)(vii) of the Income Tax Act. He also made submissions for explaining the words managerial, technical and consultancy. He also referred to Double Taxation Avoidance Agreement between India and South Korea under section 90 of the

I.T. Act including Article 12, 14 and 15 of this DTAA agreement. Similarly he submitted that the amount paid by the assessee company to M/s Korea Search do not fall under the provisions of either technical fee or managerial fee. The services were provided by M/s Korea Search outside India and therefore the assessee company was not liable to deduct TDS on the same.

7. Per contra Ld. Departmental Representative vehemently argued supporting the orders of both the lower authorities.

8. We have heard rival contentions and perused the records placed before us. The sole issue for adjudication before us is to examine that whether the payment for services taken by the assessee in the Non Resident foreign company M/s. Korea Search were liable for deduction of tax at source u/s 195 of the Act and whether the Ld. A.O was justified in treating assessee in default for non deduction of tax at source at Rs. 1,55,009 and charging interest thereon u/s 201(1A) of the Act at Rs.22,718/-.

9. We observe that the assessee company entered into an agreement with South Korean concern M/s. Korea Search for providing engineers fit for the job description required by the Internal Production team of the company. For providing this service assessee made payment of Rs.6,01,974/- during the financial year 2015-16. Assessee did not deduct tax at source u/s 195 of the Act and obtained certificate from Chartered Accountant in Form No.15CB of the I.T. rules. When the matter was examined by the Ld. A.O he was of the view that the alleged services are technical services in nature and falls under the provisions of Section 9(1)(vii) of the Act and thus liable for deduction of tax at source u/s 195 of the Act and accordingly treated the assessee in default.

10. Now we have to examine the type of services rendered by M/s. Korea Search to the assessee company. For this we need to go through the agreement and the terms and conditions mentioned therein. In the paper book dated 8.7.2019 copy of agreement is placed at page 8 & 9. In this agreement the clients responsibility, guarantee, terms of payment and placement fee for contingency base searches are mentioned and the same is reproduced below:- Article 3. (Client's responsibility) The Client will provide a detailed job description of the required position. The Client will provide feedback to Korea Search within 5 working days upon receipt of-the candidate's profile. Korea Search will require a copy of the signed Letter of Offer for documentation and billing purposes, The Client agrees to notify to the Korea Search immediately upon hiring or completion of assignment. Article 4. (Guarantee) Should a candidate recruited and placed as permanent employee with The Client voluntarily leave the job for first 90 days .from the date of employment, Korea Search will endeavor to provide a suitable replacement at no additional cost. It is necessary that The Client understands that Korea Search will not offer a replacement for a candidate who has been terminated by The Client within first 90 days of employment. Article 5. (Terms of Payment) Invoices will be raised on the first day of work by selected candidate and should be settled within 14 (fourteen )days from that date in order for guaranteed service to apply. Article 6 (Placement Fee for Contingency Base Searches) Upon appointment of the successful candidate, the Client will pay Korea Search a placement fee according to following structure. (Annual Gross Income (AGI) includes base salary and bonus) VAT will be added unless the Client does not have legal entity in Korea (10% of placement fee) Fee rate is 13% of Annual Gross Income (AGI) of selected candidate.

11. Now before moving further we also would like to go through Section 9(1)(vii) of the I.T. Act which relates to the income by way of fees or technical services deemed to accrue arise in India. SEC. 9(1)(vii) OF THE ACT

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

(vii) income by way o(fees (or technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1. =For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. 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.

12. Now we examine the type of services. Detailed job description is provided by the assessee company to M/s. Korea Search which has a data base of profiles of various eligible candidates. After examining the profile and matching it with the clients job description candidates are referred to the assessee company with guarantee that if the candidates so recruited leaves the job for first

90 days from the date of employment, suitable replacement will be made at no additional cost. There is no specification for any technical expertise which the assessee company has sought from M/s. Korea Search. From all the angles the agreement shows that M/s Korea Search (which is a foreign company) have no permanent establishment in India is working only as a placement services having data base of various persons who want job. M/s. Korea Search has various clients based across the globe who need such experts who are well versed and expert in their fields. M/s. Korea Search after matching requirement of the client with the job profile of the candidate refers it to the client after charging fees as agreed.

13. Now to decide whether the candidate who is referred by M/s Korea Search, is technical expert or not in the particular field is on the sole discretion of the assessee company who interview and test the candidate and appoints as an employee for the period and conditions to be decided or it requests for replacement.

14. As far as Section 9(1)(vii) of the Act (as reproduced above), Explanation 2 provides that 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.

15. After examining the agreement, nature of services provided by M/s. Korea Search to the assessee and the provisions of Section 9(1)(vii) of the Act we are of the considered view that the services taken by the assessee company from M/s Korea Search do not fall under the category of technical services and it is merely fee paid for placement services which by no canon require any technical expertise. Therefore since the services in question provided by M/s. Korea Search to the assessee company do not fall in the category of fees for technical services as provided under Section 9(1)(vii) of the Act there was no liability of the assessee to deduct tax at source u/s 195 of the Act. We therefore set aside the order of both the lower authorities and direct the Revenue authorities to delete the demand raised for default of deduction of tax at source at Rs.1,55,009/-. Interest levied u/s 201/201(1A) at Rs.22,178/- also deserves to be deleted being consequential in nature. Ground No.1 raised by the assessee is allowed.