Non-resident – Income deemed to accrue or arise in India – Section 9(1)(vii) – Fees for technical services – Effect of Explanation 2 to section 9(1)(vii) – Agreement for export of garments – Non-resident company inspecting garments, ensuring quality and export within stipulated time – No technical services performed by non-resident – Income received by non-resident not taxable in India

31. DIT (International
Taxation) vs. Jeans Knit Pvt. Ltd. [2020]
428 ITR 285 (Kar.) Date
of order: 10^th September, 2020 A.Y.: 2007-08

Non-resident
– Income deemed to accrue or arise in India – Section 9(1)(vii) – Fees for
technical services – Effect of Explanation 2 to section 9(1)(vii) – Agreement
for export of garments – Non-resident company inspecting garments, ensuring
quality and export within stipulated time – No technical services performed by
non-resident – Income received by non-resident not taxable in India

The assessee was
engaged in the business of manufacturing and export of garments and was a 100%
export-oriented undertaking. The assessee company imported accessories from
other countries, mostly from Europe. For this purpose it had engaged a Hong
Kong company to render various services at the time of import such as
inspection of fabrics and timely dispatch of material. The assessee paid 12.5%
of the import value as charges to the non-resident company. The assessee made
payments to the non-resident company in the A.Y. 2007-08 without deduction of
tax at source. The A.O., by an order, inter alia held that the non-resident company was a service provider and was
not an agent of the assessee and the services rendered by the non-resident
company had to be treated as technical services and were squarely covered under
the scope and ambit of section 9(1)(vii). The assessee failed to deduct tax at
source at the rate of 10% and therefore the assessee was treated as an assessee
in default.

The Commissioner
(Appeals) upheld the order of the A.O. But the Tribunal set aside the order.

On appeal by the
Revenue, the Karnataka High Court upheld the decision of the Tribunal and held
as under:

‘i)    From the agreement executed by the assessee
with the non-resident company it was evident that the non-resident company was
required to inspect the quality of fabrics and other accessories in accordance
with the sample approved by the assessee and coordinate with the suppliers to
ship the goods within the stipulated date. The assessee in consultation with
the exporters identified the manufacturers as well as the quality and price of
the material to be imported.

ii)    The non-resident company was nowhere involved
either in identification of the exporter or in selecting the material and
negotiating the price. The quality of material was also determined by the
assessee and the non-resident company was only required to make physical
inspection to see if it resembled the quality specified by the assessee. For
rendering this service, no technical knowledge was required.

iii)   The Tribunal on the basis of meticulous
appreciation of the evidence on record had recorded a finding that the
non-resident company was not rendering any consultancy service to the assessee.
Therefore, it would not fall within the services contemplated u/s 9(1)(vii).

iv) The substantial
questions of law framed by a Bench of this Court are answered against the
Revenue and in favour of the assessee.’