Income Tax Appellate Tribunal - Chandigarh
Ids Infotech Ltd., Chandigarh vs Dcit, Chandigarh on 9 March, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.130/Chd/2016
(Assessment Year : 2010-11)
M/s IDS Infotech Ltd., Vs. The D.C.I.T.,
SCO 144-145, Sector 34-A, Circle 4(1),
Chandigarh. Chandigarh.
PAN: AAACI4364E
(Appellant) (Respondent)
Appellant by : S/Shri Tej Mohan Singh
Krishan Vrind Jain
Respondent by : Shri Sushil Kumar, CIT DR
& Shri C.P.S. Rao, DR
Date of hearing : 14.12.2016
Date of Pronouncement : 09.03.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
The appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax(Appeals)-2, Chandigarh dated 29.1.2016, relating to assessment year 2010-11.
2. Ground No.1 raised by the assessee pertains to the transfer pricing adjustment amounting to Rs.45,68,000/- made by the Assessing Officer and upheld by the Ld. CIT (Appeals).
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3. Brief facts relating to the issue are that the assessee is engaged in the business of providing software solution and IT enabled service in the areas of litigation support, publishing and content management, engineering services and healthcare support services. During the impugned year, it entered into international transactions with its AEs and justified the arm's length price as under:
Nature of Amount(In Most Profit Level Tested Comparables International Rupees Appropriate Indicator Party's Operating Transaction Lacs) Method Operating Margin Margin Availing of 439.70 Transactional Operating 5.50% 10.03% marketing Net Margin Profit/Operating support Method Cost ('OP/TC') services from ('TNMM') IDS-A Provision of 336.67 TNMM Operating 1.50% 1.77% IT/IT enabled Profit/Sales Services to IDS- ('OP/Sales') A for resale Availing of 16.21 TNMM OP/TC 5.75% 6.68% marketing support services from IDS-UK Reimbursement 3.82 Comparable N.A Refer para Refer para of expenses Uncontrolled 5.4.1 5.4.1 paid/received Price Method ('CUP')
4. On a reference from the Assessing Officer the TPO determined the arm's length price of the international transactions. While the arm's length price of international transactions pertaining to market support services from IDS-A and IDS-UK and reimbursement of expenses paid/received to/from IDS-A was accepted by the TPO, the international transactions pertaining to provision of IT/IT enabled services to IDS-A for resale was subjected to detailed analysis/ scrutiny. The TPO found that the assessee had determined the arm's length price of the said transactions by applying TNMM method as the most 3 appropriate method. He further found that the operating profit to total cost (OP/TC) ratio was taken as the profit level indicator (PLI) in the TNMM and the associated enterprises i.e. the foreign entity IDS-A was taken as the tested party. The TPO rejected the foreign AE as the tested party and took the assessee as the tested party instead. Thereafter an independent search for comparables was carried out, OP/OC accepted as PLI and eight comparables determined to benchmark the international transactions relating to IT enabled services. The OP/OC of the comparable companies was determined at 31.76% and applying the same to the operating cost incurred by the assessee in providing the impugned service to the AE, the arm's length price of the said transaction was determined at Rs.382.35 lacs as against Rs.336.67 lacs made by the assessee. Thus an adjustment of Rs.45,768,000/- was made to the transfer price relating to IT enabled services given to the AE of the assessee and the same was added to the income of the assessee. The Ld. CIT (Appeals) upheld the arm's length price determined by the TPO and the addition made on account of the same.
5. During the course of hearing before us, a number of arguments were raise by the Ld. counsel for the assessee against the impugned adjustment made challenging the same on the ground that identical determination of arm's length price of the same 4 transaction i.e. IT enabled services in the preceding year had been accepted by the TPO, that merely because the tested party was a foreign party, it could not be the basis for rejecting the transfer pricing study conducted by the assessee. The Ld. counsel for the assessee also justified the selection of the foreign party as the tested party and also challenged the comparability analysis carried out by the TPO, objecting to the comparables selected by it.
6. The Ld. DR, on the other hand, supported the order of the TPO and Ld. CIT (Appeals) and stated that detailed valid reasons had been given for rejecting the foreign party as a tested party. The Ld. DR also supported the search and comparability analysis carried out by the TPO.
7. We have heard the contentions of both the parties and have gone through the orders of the authorities below as also the documents referred to before us during the course of arguments. Though we find that the order of the TPO was detailed leading to the aforesaid transfer pricing adjustment, we shall be confining ourselves only to the arguments raised by the Ld.counsel for the assessee and the Revenue ,both for and against the order passed by the Ld. CIT (Appeals).
8. The first contention raised before us by the Ld. counsel for the assessee is that the TP study of the assessee has been rejected for the reason that the foreign 5 AE was taken as a tested party. Arguments both for and against the action of the TPO were made before us. The impugned transaction relates to IT enabled services entered into with IDS-A amounting to Rs.336.67 lacs. The assessee had justified the arm's length price of the said transaction by applying TNMM method taking OP/TC as the PLI and the associate enterprise(AE) i.e. IDS-A as the tested party. All these facts are not disputed. The TPO rejected IDS-A as a tested party for the reason that the tested party should be one who has the least complex functions, which does not own valuable intangibles property or unique assets distinguishing it from its comparables and it should be the party for which most reliable data for comparables is available and in respect of which comparable transactions are available. As per the TPO by taking foreign AE as a tested party, the assessee had taken foreign comparables, about which very little information has been provided and, therefore, since no reliable data in respect of foreign comparables was available, the AE of the assessee i.e. IDS-A was not a good choice for tested party. The TPO has at para 13.2 to 13.10 discussed this issue at length and rejected the foreign AE as a tested party by stating as follows:
13.2 The OECD guidelines say that the choice of transfer pricing method and of the tested party are intrinsically linked. As a general rule the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparable can be found.6
13.3 The assessee has quoted the extract of the OECD Transfer Pricing Guidelines for justifying the choice of Associated Enterprise as the tested party:-
"3.43 The associated enterprise to which transactional net margin method is applied should be the enterprise for which reliable date on he most closely comparable transactions can be identified. This will often entail selecting the associated enterprise that is the least complex of enterprises involved in the controlled transaction and that does not own valuable intangible property or unique assets....."
The US Treasury Regulations under section 1.482-5 has defined tested party as below:
"...the tested party will be the participant in the controlled transaction whole operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayer and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables."
13.4 It emerges from the above guidelines that following factors play a major role in determining the choice of tested party:-
1. It should be a party for which the most reliable data for comparison is available.
2. It should be a party for which data in respect of comparable transactions is available.
3. It should be a party for which has the least complex functions
4. It should be a party for which does not own valuable intangible property or unique assets that distinguish it from comparables.7
13.5 When the facts and circumstances of the case are tested on these factors following position emerges:-
1. In the show cause notice, assessee was asked to establish with evidence how the costs taken are without markup:-
"Further, it has been stated that IDS Infotech has charged a markup on international transactions pertaining to provision of IT- Enabled services. However, no such segmental financials establishing the same have been given. Cost sheets given also do not provide any evidence to establish that the costs taken are without any markup."
13.6 It is seen that the comparables given are foreign comparables. Very little information in respect of the same has been provided except their P&L accounts. No description has been given in the TP report to establish whether the comparables are also involved in the same activity. Hence, no reliable date in respect of foreign comparables is available. Hence, on this factor, IDS-America is not a good choice for tested party. 13.7 It should be pointed out to the assessee that the according to database available to the Indian Revenue Administration, the information related to domestic comparables is readily available and can be easily processed. The same cannot be said to be true for the foreign comparables. Even if the department starts to look for foreign comparables it shall be very difficult to find companies in the same business setup as the assessee. On a careful analysis of the information provided by the assessee it has been seen that IDS-America employees 4 people to carry out services. In light of this information it is very clear that search for comparables having the same employee base as the associated enterprise is not an easy task. Also sufficient information on the financials of the associated enterprise has not been provided. So on grounds of the difficulty of availability of information, the analysis done by the assessee cannot be verified. (emphasis provided by us) 13.8 The margin accepted by the department on provision of IT-Enabled services is 25.98% and the same shall be considered in this case. The assessee earns only a margin of 8.26% and such a transaction cannot be called arm's length from the widely accepted view in the department. 8
13.9 Therefore, it is clear from above discussion that IDS Infotech is a better choice as Tested party on all the factors. Hence, the TP study prepared by the assessee taking IDS America as the tested party suffers from defect and analysis done in the show cause notice taking IDS Infotech is a better analysis on several accounts.
13.10 Since the analysis done by the assessee is based on the selection of IDS America, the same has been rightly rejected.
9. Thus the only reason for rejecting the foreign AE as the tested party is that no reliable data in respect of foreign comparables is available.
10. Supporting the foreign AE as the tested party the Ld. counsel for the assessee took up the following arguments:
a) That the foreign AE was taken as a tested party in the preceding year also i.e. assessment year 2009-
10 and arm's length price determined by the assessee was accepted by the TPO in is order passed for that year. The Ld. counsel for the assessee drew our attention to transfer pricing report for the preceding year, placed at Paper Book page No.417 and the order of the Transfer Pricing Officer for the preceding year i.e. assessment year 2009-10, placed at Paper Book page No.133 in this regard.
b) The next contention raised by the assessee was that the foreign tested party i.e. IDS-A was the least complex amongst the parties to the transactions, the other party being the assessee itself. The Ld. 9 counsel for the assessee stated that while the assessee was engaged in full-fledged product development and marketing/product selling covering a wide range of activities and other commercial or marketing intangibles and is the developer, owner and licensor of virtually all valuable intellectual property rights including proprietary products and processes, whereas it bears all significant business and entrepreneurial risks, product development, performance and financial risks and develops and sells products and services to unrelated parties across the globe, the IDS-A, on the other hand, indulged only in the activity of providing marketing support services to the assessee for the American market and took only routine risks associated with undertaking such activities without owning any intellectual property. Thus, the Ld. counsel for the assessee pointed out that IDS-A was the least complex of the two entities in the transactions and thus was rightly taken as a tested party. The Ld. counsel for the assessee drew our attention to the submissions made before the TPO also placed at Paper Book page Nos.40 to 45 vide their letter dated 22.1.2015.
c) The Ld. counsel for the assessee also pointed out that the entire process of selecting the comparables in relation to the foreign tested party 10 and the data base used was duly disclosed in transfer pricing report and all information pertaining to the comparables was also furnished in the report.
11. Thus, the Ld. counsel for the assessee contended that there was no reason for the TPO to reject the foreign party as a tested party. The Ld. counsel for the assessee further relied upon following decisions of the Tribunal in this regard:
1) Ranbaxy Laboratories Ltd. Vs. Addl.CIT, (2008)299 ITR (AT) 175 (Del).
2) General Motors India Pvt. Ltd. Vs. DCIT,(2013) 27 ITR (Trib) 373 (Ahd.)
3) Development Consultants Pvt. Ltd. Vs. DCIT,(2008) 115 TTJ 577 (Kol)
12. The Ld. DR, on the other hand, relied upon the order of the TPO and stated that very little information of the comparables was provided and no description was given in the TP report to establish whether the comparables were also involved in the same activity. The Ld. DR stated that there was thus no reliable data available in respect of the foreign comparables and hence the selection of the foreign entity as a tested party had been rightly rejected by the TPO.
13. We have heard both the parties on this aspect. The issue before us is whether the foreign entity in international transactions can be selected as a tested party for the purpose of carrying out comparability analysis.
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14. Both the parties agree that as per the OECD guidelines, the US Treasury Regulations and the UN practicing Manual of transfer pricing for developing country, there is a broad consensus that the tested party should be one:
i) It is the least complex party to the controlled transaction.
ii) The party in respect of which most reliable data for comparability is available and;
iii) Which does not own valuable intangible or unique assets.
15. In the present case, we find that TPO has rejected foreign AE as the tested party for the reason that no reliable data in respect of foreign comparables was available. Thus as far as the foreign party being the least complex entity to the controlled transactions and not owning any valuable intangible or unique assets is concerned, there is no dispute that the foreign entity to the transactions i.e. IDS-A is the least complex and does not own any valuable intangible or unique assets. The only issue on which the acceptance or rejection of the foreign entity as a tested party rests is vis-à-vis availability of the appropriate foreign comparables.
16. The only reason with the TPO for holding so , which emerges from the above discussion and arguments made before us and on the basis of the facts which were 12 brought to our notice for rejection of the foreign entity as the tested party, is that the data in respect of comparable transactions was not available. At this juncture, we would like to point out that the I.T.A.T. in a number of decisions, pointed out by the Ld.Counsel for the assessee, held that if an assessee wishes to take a foreign entity as a tested party, it can do so provided a relevant data for comparison is either available in the public domain or is furnished to the tax department/administration. The Delhi Bench of the I.T.A.T. in the case of Ranbaxy Laboratories Ltd. (supra) ,on this aspect of taking foreign entities as tested parties held as under:
"The tested party, generally the participant in the international transaction whose transfer price/profitability attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments and for which reliable data regarding uncontrolled comparable companies can be located, may be a local or foreign entity, i.e. one party to the transaction, If the assessee wishes to take a foreign associated enterprise as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in the public domain or it furnished to the tax administration. The assessee is not then entitled to take a stand that such data cannot be called for or insisted upon from the assessee."
17. The Ahmedabad Bench of the I.T.A.T. in the case of General Motors India Pvt. Ltd. (supra) held that a foreign entity could also be taken as a tested party for comparison and the same should not be rejected for the reason that data relating to the comparable companies is 13 not readily available. The I.T.A.T. in this case held that the Revenue can get all relevant particulars available globally by using latest technology under its thumb or even could direct the assessee to furnish the same. The relevant findings of the I.T.A.T. in this regard at para 11.4 and 11.6.5 are as follows:
"11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the 'tested party' either from local or foreign party and the United Nation's Practical Manual on transfer pricing for developing countries had observed that 'It may be the local or the foreign party', we tend to agree with the same.
11.5. Reverting back to the issue, the assessee submitted that in the transfer pricing documentation, it had provided the business profit of all 101 comparables selected by the assessee. 11.5.1. The DRP in its findings at para 11 had stated, among others, that in most cases the tested party will be the least complex of the controlled tax payers, and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. As GMDAT is not only a complex entity owning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available.
11.5.2. This view of the DRP has been denied by the learned Sr. Counsel during the course of hearing which has not been contradicted by the Revenue with any documentary evidence. 11.6. To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M&M should also be put to such a stringent comparability test. It was, further, argued that M&M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. It was, further, countered by the assessee if Force Motor Limited were to be rejected on the basis of different profit profile and then M&M should also be axed on the same logic. We find force in the above argument of the assessee. According to the assessee, GMDAT is only engaged in manufacturing and supply of certain components used in manufacturing of cars only. This has not been disputed by the revenue.
11.6.1. We are in disagreement with the revenue's argument that GMDAT should not be selected as a 'tested party' as the comparable as the comparable companies selected by the assessee doesn't fall within the ambit of TPO's jurisdiction and, thus, he can neither call for any additional information nor scrutinize their books of accounts. The Revenue can get all the relevant particulars around the globe by using the latest technology under its thumb or direct the assessee to furnish the same.
11.6.2. As rightly highlighted by the assessee, we find inconsistency in the approach of the TPO with regard to the issue of 'tested party'. On the one hand, the TPO averred that there was no reliable data 14 available for both GMDAT and comparables; however, on the other hand, he had conveniently taken GMDAT as the 'tested party' while making adjustment to transaction relating to payment of royalty by the assessee to GMDAT. This exposes the inconsistency approach of the TPO.
11.6.3. The financial statements of comparable companies have since been audited by the independent auditors and, thus, there can be no reservation in placing a reliance on the same. 11.6.4. However, the learned Sr. Counsel submitted that segment financial data for benchmarking - a part of GMDAT's business - was made available to the TPO and also on his request, the financial statements of GMDAT (at company level) was furnished to the TPO and the same is not disputed. Therefore, there should be no grievance on the part of the Revenue to say that no sufficient data was made available.
11.6.5. Taking all the above facts and circumstances of the issue as discussed in the foregoing paragraphs, in consonance with the case laws quoted (supra) and also the United Nation's Practical Manual on transfer pricing, we direct the TPO to adopt GMDAT as the 'tested party' for analyzing the inter-company transactions of the assessee for both the AYs under consideration. To facilitate the TPO to analyze the inter-company transactions in the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. It is ordered accordingly."
18. Further Kolkata Bench of the I.T.A.T. in the case of Development Consultancy (supra) held that the tested party should be the least complex of the controlled transaction and should not own valuable intangible property or unique assets and a foreign entity in the controlled transactions could also be treated as a tested party. Thus clearly, there is no bar as such in treating the foreign entity in a controlled transaction as a tested party merely for the reason that the data of the comparable companies was not available. What is essential in this regard is that the data should be available in the public domain which the Revenue with all its resources can have access to and or the assessee has furnished all relevant data to the tax administration. 15
19. In the present case, we find that both the conditions are being fulfilled. On perusal of the transfer pricing study conducted by the assessee placed at Paper Book page Nos.709 to 771, we find that it has been categorically mentioned therein that Global Symposium, a search engine covering financial and business datas for companies operating across the globe was used and it has data from four public databases/ sources:
i) Standard & Poor's Research Insight : Compustat North American data.
ii) Standard & Poor's Research Insight : Compustat Global Data.
iii) Primark Disclosure's SEC
iv) Primark Disclosure's Worldscope
20. It was also categorically mentioned that all the aforementioned sources of data were available in the public domain. The assessee in the TP report had given details of the search conducted for uncontrolled comparables and the determination of arm's length price, which was enclosed at Appendix-F of the report, placed at Paper Book page No.758. The report stated that the initial objective of the search of comparable companies was to identify such companies which performed activities comparable to activities undertaken by IDS-A. However, this search did not result in any comparable companies and hence it was broadened to identify companies in US involved in broadly functional similar operation to IDS-A. The activity codes selected for identifying the companies, 16 quantitative filters applied for eliminating those which were not comparable and qualitative review conducted was outlined and finally a list of 11 comparable companies was arrived at. The business description of these comparable companies was provided in the TP report at Paper Book page Nos.767 to 768.
21. Clearly, information relating to the comparable companies was available in the public domain and it was also furnished to the TPO. In fact, even the TPO has admitted that the profit and loss account of the comparables selected by the assessee was also provided.
It is not the case of the TPO that the results were un- audited. Further as stated above, business description of these companies was also provided. Therefore, we find no merit in the contention of the Revenue that the reliable data in respect of foreign companies was not available as admittedly in the present case, the data was available in public domain and the sources was also made known to the TPO. The Revenue with all resources available at hand could have accessed the said sources and conducted comparability analysis. Besides, we find that the assessee had given entire detail of the search conducted by it so as to finally arrive at the 11 comparable companies given business description of these companies also and also provided their profits and loss accounts to arrive at the PLI i.e. OP/ OC. Thus, all relevant data had been provided by the assessee to the TPO also. The TPO, we 17 find, besides giving a general statement which is also incorrect, that no description was given regarding activities in which the comparable companies were involved, pointed out no other anomaly was in the data of the comparable companies furnished by the assessee. Therefore, following the decisions of the I.T.A.T. as quoted above, we set aside the rejection of the foreign entity IDS- A as the tested party.
22. It is pertinent to point out that for determining the ALP of the international transactions relating to marketing services provided by IDS-A and IDS-UK also ,we find, that the assessee had taken the foreign entities as the tested party. These were not rejected by the TPO. Clearly, therefore, there is inconsistency in the stand of the TPO rejecting the selection of foreign entity as a tested party for the purpose of IT enabled services while accepting the same for marketing support services. For this reason also, the rejection of the foreign entities as a tested party needs to be set aside.
23. Further as pointed out by the Ld. counsel for the assessee, in the preceding assessment year also the assessee had taken IDS-A as its tested party, which was duly examined by the TPO. Submissions in this regard were also placed before the TPO, placed before us at Paper Book page No.455-483. The TPO in the preceding year had accepted the same and made no adjustment in this regard. Thus, having accepted foreign entity as a tested 18 party in the preceding year ,the Revenue cannot now take a different stand without pointing out any change in facts vis a vis the preceding year.
24. In the light of the above, we hold that the action of the TPO, accepted by the Assessing Officer and Ld. CIT (Appeals), in rejecting the foreign entity in the controlled transaction i.e. IDS-A, as a tested party is wrong and is, therefore, set aside. We may add that with regard to the rejection of the foreign entity as the tested party, we have considered all the arguments raised before us and no other arguments were raised before us. The decision rendered by us is on the context of solely the arguments which were raised before us.
25. Further since we have upheld the treatment of the foreign entity as a tested party and since no other anomaly was pointed out in the arm's length price determined by the assessee by treating foreign entity as a tested party, the arm's length price determined by the assessee is treated as correct and adjustment made in this regard by the TPO amounting to Rs.45,68,000/- is deleted.
26. The other arguments raised before us relate to search and comparability analysis conducted by the TPO after rejecting the assessee's transfer pricing report. Since we have accepted the TP analysis conducted by the assessee, there is no reason to deal with other arguments 19 made by both the parties. Ground No.1 raised by the assessee is, therefore, allowed.
27. Ground No.2, 3 and 4 raised by the assessee are connected and are against the action of the Ld. CIT (Appeals) in upholding the disallowance made u/s 40(a)(ia) of the Income Tax Act, 1961 (in short 'the Act') on account of non deduction of TDS on commission, legal and professional charges, marketing and selling expenses and outsourcing and business development expenses amounting in all to Rs.2,84,52,914/-.
28. The assessee has raised the following grounds of appeal:
2 . That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the disallowance of Rs.2,84,52,914/- made on account of non deduction of TDS on commission , legal and professional charges, marketing and selling expenses, out sourcing and business development expenses in as much as no TDS is required to be deducted and as such the order is illegal, arbitrary and unjustified.
3 . That the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate that the provisions of Section 195 are not attracted in as much as payments were made to parties who are outside of India and have no permanent establishment in India and as such the order passed is illegal, arbitrary and unjustified.
4 . That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding that income of non resident has accrued and arisen in India which is contrary to the facts of the case and as such the order passed is illegal, arbitrary and unjustified.
29. The brief facts relating to the case are that the assessee is the supplier of software related services and 20 had incurred expenses on account of commission, legal and professional charges, outsourcing expenses, market support fees to various companies/abroad some of which were its associated enterprises. During the course of assessment proceedings, the Assessing Officer noted that the assessee had made payments on account of above expenses amounting in all to Rs.2,84,52,914/- without deducting tax at source. The details of the expenses are as follows :
Nature Name of the recipients Amount paid Total of Expenditure amount under this head without TDS Legal Merit partner 5,96,564/- 5,96,564/- & Professional charges V2N accountants & 1,84,705/- 1,84,705/- Adviseurs Van Mens & Wisselink 1,08,347/- 1,08,347/-
VGDC 2,48,292/- 2,48,292/-
Outsourcing Doulton Associates 1,41,372/- 1,41,372/-
Expenses Limited
IDS America INC 1,10,16,708/- 1,10,16,708/-
MG Hartman Holding BV 2,68,668/- 2,68,668/-
Strand Engineering 14,65,682/- 14,65,682/-
& Consulting Limited
Tim Barden Limited 16,93,202/- 16,93,202/-
Commission Steven International LIC 5,34,683/- 5,34,683/-
Expenses
Atalan Makine 3,49,948/- 3,49,948/-
Muhendislik Savunma
Havacilik
Marketing & IDs America INC 1,01,98,422/- 1,01,98,422/-
selling expenses
IDS Infotech (UK) Ltd. 16,21,321/- 16,21,321/-
Total 2,84,52,914/- 2,84,52,914/-
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30. On being confronted with the same, the assessee submitted that no TDS has been deducted on the aforestated payments since the payees had no business connection in India, nor any permanent establishment in India and further by referring CBDT Circular No.23 of year 1969 and Circular No.786 of the year 2000, the assessee stated that it was not required to deduct any tax at source on the above stated payments. The Assessing Officer rejected the assessee's contention stating that u/s 195 TDS has to be deducted on all reimbursements whether the non-resident had a residence or place of business in India or business connection or any other persons in any manner in India. The Assessing Officer also observed that the benefit of various services provided by the above entities had been utilized in India, that the agreement had been entered into with an Indian company, the charges were payable by the Indian company and, therefore, the source of income of the above entities was India and the income accrued and arose in India and, therefore, was liable to be taxed in India. The Assessing Officer also stated that the assessee had not provided any evidence to prove that the services were rendered outside India. In view of this, he held that the assessee was liable to deduct tax on the aforesaid payments and having failed to do so, the provisions of section 40(a)(i) of the Act were attracted. He, therefore, made a disallowance of an amount of Rs.2,84,52,914/-.22
31. The matter was carried in appeal before the Ld. CIT (Appeals), where the assessee submitted that the said expenditure had been incurred for services rendered outside India to parties outside India, the said parties had no permanent establishment in India, nor any business connection in India and therefore the assessee stated that no TDS was required to be deducted on the aforesaid payments and, thus no disallowance was warranted on account of non-deduction of tax at source on the said payment as per the provisions of section 40(a)(ia) of the Act. The Ld. CIT (Appeals) after considering assessee's submission held that the source of income for the entities was the agreement with the assessee company and by virtue of the same, there was direct benefit to the assessee company. Ld .CIT(A) held that the source of income, therefore, for the services rendered by the non-resident entities was in India, since the Indian companies gave directions for the work abroad and therefore, the said income of the non-resident accrued and arose in India. Ld. CIT (Appeals) held that the services of the non-resident entities were directly utilized by the assessee company in India to boost its business abroad and, therefore, also the income of the non-residents accrued and arose in India. The Ld. CIT (Appeals) held that the provisions of section 195 of the Act were applicable on the payments made by the assessee company to the non-residents and upheld the disallowance made by the Assessing Officer.23
32. During the course of hearing before us, the Ld. counsel for the assessee pointed out that identical issue had arisen in the preceding year also in assessee's own case, which had been decided in its favour by the I.T.A.T., Chandigarh Bench vide its order in ITA No.52/Chd/2016 dated 24.5.2016. The Ld. DR fairly conceded that the issue was identical and hence covered by the decision of the I.T.A.T., Chandigarh Bench for the preceding year but at the same time relied on the order of the CIT(A) and AO.
33. We have heard the contentions of both the parties, gone through the facts of the case and also the order of the I.T.A.T. for the preceding year. The undisputed facts emerging in the present case are that on account of non-deduction of tax at source of various payments made to foreign entities as listed above, the Assessing Officer invoked the provisions of section 40(a)(ia) of the Act and made disallowance of the same for the reason that the said payments made to the foreign entities were taxable in India since the source of income accrued and arose in India by virtue of the agreement entered into with the assessee, an Indian company, and also on account of the fact that the benefit of the services rendered were utilized in India.
34. We have also gone through the order of the I.T.A.T. in the case of assessee for assessment year 2009- 10 in ITA No.52/Chd/2016 dated 24.5.2016. We find that identical disallowance of commission, legal and 24 professional, marketing and selling, business development, outsourcing and communication expenses was made in that year also amounting in all to Rs.5,31,28,742/- on account of the fact that these payments/expenses were made to foreign entities without deducting tax at source. In the said case also, the Assessing Officer had held the assessee liable to TDS on the said payments since he had observed that these payments constituted deemed incomes of the payees since the services rendered on account of the payments made were utilized in India, were not in connection with any business and profession carried outside India, were on account of agreement between the assessee which was an Indian company. The I.T.A.T. in the said case we find, deleted the disallowance made, by holding that the Assessing Officer nor the CIT (Appeals) given any finding whether the nature of income in the hands of the non-
residents is that of income accrued in India or income deemed to have accrued in India. The Hon'ble I.T.A.T. also held that there is no finding on record by any of the lower authorities that non-resident payees had any business connection in India or even any permanent establishment in India.
35. The I.T.A.T. exhaustively dealt with the issue at hand and went through various pertinent sections involved. It first dealt with section 40(a)(ia), invoking which disallowance had been made and pointed out that 25 as per the said section, only those payments made to non- residents on which tax is required to be deducted as provided under the relevant Chapter and if not deducted, the provisions of the said section could be invoked and disallowance made. Thereafter the I.T.A.T. pointed out that the relevant Chapter for deduction of tax at source is Chapter-XVII and analyzed the same and pointed out that as per the relevant section concerned in the present case being section 195 of the Act, liability to tax arises only if an amount is chargeable under the Income Tax Act. The Hon'ble I.T.A.T. then went on to deal with sections 4 and 5 of the Act which deal with the charge of income tax and the scope of income tax. Analyzing the same the I.T.A.T. held that the non-resident is chargeable to tax only if it receives or is deemed to have received any amount in India or is deemed to accrues or arises in India. Adverting at this point to the facts of the case, the I.T.A.T. held that in the present case it is not disputed that the amount is neither received in India, nor deemed to have been received in India and further pointed out that the dispute is only with regard to whether the amount is deemed to accrue or arises in India. Thereafter it dealt with the relevant provisions for the purpose of adjudicating the issue in the present case i.e. section 9(
1) of the Act and further dealt with the judgment of the Hon'ble Apex Court in the case of CIT Vs. R.D. Aggawal & Co. (1965) 56 ITR 20 which had illustrated instances of non-residents having business connection in India. The 26 I.T.A.T. thereafter held that the said disallowance in the present case was unwarranted, Firstly for the reason that no case has been made by the lower authorities as to whether the income accrued in India or was deemed to have accrued or arisen in India. Further the I.T.A.T. held that nothing was brought on record by the lower authorities to show that there was any business connection of the foreign entities in India and thus establishing that the income was deemed to accrue or arise in India. The I.T.A.T. also observed that there was also no finding of any permanent establishment of the said entities in India. In view of the same, the I.T.A.T. held that in the absence of any finding with regard to the income having deemed to have accrued or arisen in India, the said incomes of the foreign entities could not be said to be taxable in India and in view of the same, the applicability of provisions of tax deduction at source u/s 195 of the Act was not attracted and, therefore, no disallowance on account of non deducting tax at source should be made u/s 40(a)(ia) of the Act. The relevant findings of the I.T.A.T. at paras 21 to 38 of the order are as follows :
"21. We have heard the learned representatives of both the parties, perused the f indings of the authorities belo w and considered the material available on record. The f acts as culled out by us f rom the perusal of the orders o f t h e l o we r a u t h o r i t i e s a s we l l a s s u b m i s s i o n s o r a l a n d wr i t t e n f i l e d b y b o t h t h e p a r t i e s b e f o r e u s , a r e t h a t t h e issue is wi t h regard to the d i s a l l o wa n c e made by the 27 Assessing Off icer invoking the provisions of section 40(a)(i) o f t h e A c t , wh e r e b y o n c e r t a i n p a y m e n t s m a d e t o n o n - resident entities, the assessee f ailed to deduct tax at source. The impugned payments made to the respective n o n - r e s i d e n t e n t i t i e s a r e a s f o l l o ws :
Communication Commission Legal & Marketing Business Outsourcing expenses professional & selling Development B.V.Design Products, 1,26,794 5,63,949 Netherland Movates, Netherland 1,33,661 Dilenbech Finley, USA 28,06.949 Steven Intl.
USA 9,57,088 7,95,603 1,80,054
Van
Memm & 31,82,154
Wisselink,
Netherland
IDS
Infotech, 21,29,762
UK
IDS
Infotech, 2,08,87,085 1,39,86,202
USA
IMCS, 73,79,858
Tunisia
TOTAL 1,26,794 83,36,946 69,17,950 2,35,80,796 1,80,054 1,39,86,202
TOTAL- 5,31,28,742/=
22. Out of these non-resident entities, entities,
n a me l y I D S I n f o t e c h ( U K L t d . ) , I D S A me r i c a ( U S A I N C ) a n d B V D e s i g n s , N e t h e r l a n d a r e t h e wh o l l y o wn e d s u b s i d i a r i e s of the assessee co mp any. A p a r t f r o m t h i s , wi t h r e g a r d t o the payments made to IMCS, other issues have also been raised by the Assessing Off icer. One is with regard to comparison of the payments made to this concern with the other concern and other is whether payment made to this concern is not to be allowed to the assessee in view of the provisions of Explanation 1 to section 37(1) of the Act. The learned CIT ( A p p e a l s ) h a s t h o u g h c o n f i r me d t h e f i n d i n g g i v e n b y t h e Assessing Off icer. H o we v e r , i n s o me p a s s i n g r e f e r e n c e h e 28 also apprehended that these payments may be in the nature of 'fees for technical services'.
23. The learned counsel for the assessee made e l a b o r a t e s u b m i s s i o n s wi t h r e g a r d t o t h e f a c t t h a t t h e s e payments are not chargeable in the hands of the recipient.
T h e r e f o r e , n o t a x i s d e d u c t i b l e o n t h e s a me . Theref ore, provisions of section are not applicable on the same. Submissions we r e made wi t h regard to alternative contentions rais ed by the Assessing Off icer in respect of payment to IMCS. With respect to the ref erence of the l e a r n e d C IT ( A p p e a l s ) o n t h e p a y m e n t s b e i n g i n t h e n a t u r e of 'f ees f or technical services'. The learned counsel f or the assessee vehemently argued that no such f inding has actually been given by the learned C IT (Appeals). H o we v e r , h e a l s o m a d e s u b m i s s i o n s t h a t f o r t h e c o n c l u s i o n that these payments we r e in the nature of 'f ees for technical services', one has to go to the provisions of DTTA also. The learned D.R. on the issues raised by the Assessing Off icer placed reliance on the order of the l e a r n e d C IT ( A p p e a l s ) , wh i l e w i t h r e g a r d t o t h e i s s u e o f 'f ees for technical services' raised by the learned C IT ( A p p e a l s ) , h i s s u b m i s s i o n wa s t h a t i n t h e a b s e n c e o f e x a c t nature of services rendered by the assessee, coming out of t h e v a r i o u s a g r e e me n t s a n d i n v o i c e s , i t i s t o b e p r e s u me d that the payments are in the nature of 'f ees f or technical services'. With respect to the DT AA also, his submiss ion was that in the absence of any such nature coming out of r e c o r d , i t i s t o b e p r e s u me d t h a t t h e s e r v i c e s h a v e b e e n 'made available' to the assessee. Theref ore, the same is exigible to the provisions of tax deduction at source.
24. No w the issues for adjudication, coming in this b a c k g r o u n d , b e f o r e u s a r e a s f o l l o ws :
i) Whether the impugned payments are of the nature, wh e r e b y the provisions of TDS are 29 applicable, in the absence of wh i c h the d i s a l l o wa n c e i s c a l l e d f o r u n d e r s e c t i o n 4 0 ( a ) ( i ) of the Act.
ii) W i t h r e s p e c t t o p a y m e n t s m a d e t o I M C S , wh e t h e r the Explanation to section 37(1) of the Act is applicable to the said payments.
iii) W i t h r e s p e c t t o p a y m e n t m a d e t o I M C S , wh e t h e r the same is unreasonable in co mp ar ison to payment of same nature made to other entities.
iv) If the paymen ts, as such, are not ex ig ible to the provisions of TDS, wh e t h e r these are in the nature of 'f ees for technical services'. As such, the tax is to be deducted out of these payments.
25. The basic issue is wh e t h e r the tax is to be d e d u c t e d wh i l e m a k i n g t h e s e i m p u g n e d payments. The Assessing Off icer has invoked the provisions of section 40(a)(i) of the Act in this regard. The provisions of section 40(a)(i) of the Act to the extent relevant in the present case reads as under :
" 40(a)(i) Notwithstanding anything to the contrary in [sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession":
(a) in the case of any assessee--
[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,--
(A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous year, or in the subsequent year 30 before the expiry of the time prescribed under sub-section (1) of section 200]:
[Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.] Explanation : For the purposes of this sub-clause,--
(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;
(B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;
26. T h e mo s t i m p o r t a n t t e r m s i n t h e p r o v i s i o n s o f t h i s s e c t i o n a r e ' o n wh i c h t a x i s d e d u c t i b l e a t s o u r c e ' u n d e r C h a p t e r - X V I I , m e a n i n g t h e r e b y t h a t o n l y t h o s e p a y me n t s made to non-residents on wh i c h tax is required to be deducted as provided under the relevant Chapter, the provisions of this section can be invoked. Chapter-XVII d e a l s wi t h c o l l e c t i o n a n d r e c o v e r y o f t a x e s wh i l e p a r t - B o f this Chapter deals wi t h tax deduction at source, the provisions relating to tax to be deducted out of payment made to a non-resident are provided in section 195 of the A c t , wh i c h r e a d a s u n d e r :
"195(1) Any person responsible for paying to a non- resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head" Salaries" ]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income- tax thereon at the rates in force: "
27. The mo s t importan t t e r ms in this section are "chargeable under the provisions of this Act". From this, 31 it is very clear that only if an amoun t is chargeable under the I n c o me T a x A c t , the liability to deduct tax on the p a y m e n t o f s u c h a mo u n t a r i s e s . C h a r g e o f i n c o me t a x i s p r o v i d e d u n d e r s e c t i o n 4 o f t h e A c t , wh i l e s c o p e o f t o t a l i n c o me i s p r o v i d e d i n s e c t i o n 5 o f t h e A c t . The provisions o f s e c t i o n 5 o f th e A c t r e l a t i n g t o s c o p e o f t o t a l i n c o me i n respect of a non-resident are provided in sub-section (2) of s a i d s e c t i o n , wh i c h r e a d a s u n d e r :
"5(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; or
(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.
Explanation 2.- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India."
28. From the bare perusal of the provisions of the above section, it is quite clear that a non-resident is c h a r g e a b l e t o t a x i f i t r e c e i v e s o r d e e me d t o r e c e i v e a n y amount in India. The provisions e me r g i n g from the a n a l y s i s a r e v e r y c l e a r t h a t , wh e n i n c o me a c c r u e s , a r i s e s o r r e c e i v e d i n I n d i a , t h e s a m e i s t a x a b l e . I n c o me wh i c h i s d e e me d t o a c c r u e o r a r i s e i n I n d i a i s t a x a b l e i n I n d i a , e v e n 32 i f t h e s a me i s n o t a c t u a l l y a c c r u e s , a r i s e s o r r e c e i v e s i n India.
29. In the present case, this is not in dispute that the amount is not received or deemed to be received in India. The second situation under wh i c h the receipt of non- resident is tax able is if the income accrues or arises or is d e e me d t o a c c r u e o r a r i s e i n I n d i a . Undoubtedly, in the p r e s e n t c a s e n o i n c o me h a s a c c r u e d t o t h e n o n - r e s i d e n t person in India. T h e d i s p u t e m a y b e o n l y wi t h r e g a r d t o t h e i m p u g n e d a m o u n t b e i n g i n c o me ' d e e me d t o a c c r u e o r arise in India'. V a r i o u s i n s t a n c e s o f i n c o me c o n s i d e r e d t o b e d e e me d t o a c c r u e o r a r i s e i n I n d i a t o a n o n - r e s i d e n t a r e p r o v i d e d i n s e c t i o n 9 o f t h e I n c o me T a x A c t . For the purpose of adjudicating the issues arising in the present appeal, the relevant provisions are that of section 9(1)(i) of t h e A c t , wh i c h r e a d a s u n d e r :
"9 (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, 135[***] 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;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;
[* * * *] [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;] 33 [(d) in the case of a non-resident, being-- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;] [Explanation 2 : For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident:
Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business :
Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereinafter in this proviso referred to as to the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non- resident or have a controlling interest in the principal non- resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.]"
30. W e a r e t o j u d g e f r o m t h e f a c t s a n d c i r c u ms t a n c e s of the present case wh e t h e r t h e i m p u g n e d p a y m e n t s a r e 34 d e e me d to accrue or arise in India to the respective recipients, as we have already mentioned that only those p a y m e n t s wh i c h a r e o f t h e n a t u r e o f s u m c h a r g e a b l e u n d e r the provisions of the Act are exigible f or provision of tax deduction at source. H e r e we a r e i n c l i n e d t o r e f e r t o t h e j u d g me n t o f t h e H o n ' b l e S u p r e me C o u r t i n t h e c a s e o f G.E. I n d i a T e c h n o l o g y C e n t r e P v t . L t d . V s . C IT ( 2 0 1 0 ) 3 2 7 I T E 4 5 6 ( S C ) , wh e r e b y i t h a s b e e n h e l d t h a t s e c t i o n 1 9 5 ( 1 ) o f t h e A c t u s e s t h e e x p r e s s i o n ' s u m' c h a r g e a b l e u n d e r t h e p r o v i s i o n o f t h e A c t a n d we i g h t a g e i s n e e d e d t o b e g i v e n t o t h e s e wo r d s . F u r t h e r , s e c t i o n 1 9 5 u s e s t h e wo r d ' p a y e r ' a n d n o t t h e wo r d ' a s s e s s e e s ' . The payer is not assessee. T h e p a y e r b e c o m e s a n a s s e s s e e i n d e f au l t o n l y wh e n h e f ails to f ulf ill statu tory obligatio n under section 195(1) of the Act. If the paymen t does not h ave the elemen t of the i n c o me , t h e p a y e r c a n n o t b e m a d e l i a b l e . The Hon'ble S u p r e me Court thus rejected the contention of the D e p a r t me n t by holding that if the sum paid is not chargeable to tax, then no tax is required to be deducted.
31. F r o m t h e r e a d i n g o f t h e A . O . ' s o r d e r , we d o n o t u n d e r s t a n d h i s c a s e . N o wh e r e i n t h e e n t i r e o r d e r h e h a s g i v e n a n y f i n d i n g a s t o wh e t h e r t h e n a t u r e o f i n c o me i n t h e h a n d s o f t h e n o n r e s i d e n t i s t h a t o f ' i n c o me a c c r u e d i n I n d i a ' o r ' i n c o m e d e e me d t o h a v e a c c r u e d ' i n I n d i a . H e j u s t kept on harping the f act that the ultimate benef iciary of the services is the assessee in India. Even the C I T ( A ) wh i l e adjudicating the issue could not give any appropriate f i n d i n g i n t h i s r e g a r d . T h e r e l e v a n t p o r t i o n o f t h e C IT ( A ) ' s f indings are recorded at page 12 par a 10.3, in later par t of this paragraph, he states as under:
"The payment are made by the appellant co mp any and these are in the nature of marketing support services and selling e x p e n d i t u r e f o r g e t t i n g mo r e a n d mo r e b u s i n e s s abroad. The services provided by the nonresident 35 entities f or promoting sales and legal/prof ession s e r v i c e s a r e a s p e r t h e t e r ms o f c o n t r a c t wh i c h i s e n t e r e d b y t h e s e e n t i t i e s wi t h i n t h e a p p e l l a n t c o m p a n y wi t h t h e r e s p o n s i b i l i t y o f t h e a p p e l l a n t co mp any. T h e r e f o r e t h e s o u r c e o f i n c o me f o r t h e entities abroad is the agreement wi t h the appellant co mpan y and by virtue of these services there is a direct benef it to the appellant co mp any and hence the pay me nt made by the Ind ian co mp an y f or services util ized is not in c o n n e c t i o n wi t h b u s i n e s s / p r o f e s s i o n c a r r i e d o u t , outside of India. The business outside India is secured by the Indian co mp any i.e. the appellant co mp any. T h e s o u r c e o f i n c o me f o r t h e s e r v i c e s rendered by the nonresident entities is in India as the Ind ian c o mp any g ives directions f or the wo r k a b r o a d . T h e r e f o r e t h e i n c o me f o r t h e n o n - resident accrues and arise in India."
Here also the CIT(A) is getting conf used by the f a c t t h a t t h e s o u r c e o f i n c o me i s i n I n d i a . T h e r e i s n o d o u b t t h a t t h e I n d i a n c o m p a n y h a s m a d e t h e p a y me n t a n d a l s o the f act that the payments have been made in consideration for s o me services rendered by the non residents. H o we v e r the mo o t question is wh e r e the services, in respect of wh i c h the p a y me n t s have been m a d e , we r e r e n d e r e d .
32. As per the provisions of section 9(1) of the Act, t h e i n c o me i s d e e me d t o a c c r u e o r a r i s e i n I n d i a i f i t i s directly or indirectly through or from any business connection in India. Further, the business connection has to be an activity of the non-resident in the taxable territory is India having intimate and near relation of a continuous nature of the business of the non-resident and attributed to the earn ing prof its by the non-resident in his business. We should u n d e r s t a n d t h a t a l l c o m m e r c i a l r e l a t i o n s wi l l n o t 36 necessarily constitute business connection unless a commercial connection is really and intimately connected with the business activity of non-resident in India and is contributory to the earning of the prof its in the said activity of the non-resident. Some illustrative instances of non-residents having business connection in India have b e e n q u o t e d i n t h e j u d g me n t o f t h e H o n ' b l e S u p r e me C o u r t i n t h e c a s e o f R . D . A g g a r wa l ( s u p r a , wh i c h a r e a s u n d e r :
i) Maintain a branch off ice in India for
purchase or sale of goods or transacting
other business.
ii) Appointing an agent in India f or systematic
and regular purchase of raw material or
other c o m mo d i t i e s , or for sale of non-
resident goods or for other business
purposes.
iii) Erecting a f actory in India wh e r e raw
p r o d u c e p u r c h a s e d l o c a l l y i s wo r k e d i n t o a f ir m suitable f or sending abroad.
iv) Forming local co mp any to s ale products of non-resident parent co mp any.
v) Having f inancial association b e t we e n the resident and non-resident co mp any.
These activities have been culled out f rom the j u d g e me n t b y t h e C B D T i t s e l f i n i t s c i r c u l a r N o . 2 3 [ F . N O . 7 A / 3 8 / 6 9 - IT ( A - 1 1 ) ] , d a t e d 2 3 . 0 7 . 1 0 6 9 .
33. In the present case, no f inding has been brought o n r e c o r d b y a n y o f t h e l o we r a u t h o r i t i e s t h a t n o n - r e s i d e n t e n t i t i e s h a v e a n y s u c h c o n n e c t i o n wi t h I n d i a a s i l l u s t r a t e d above. All along the assessee has been maintaining that the non-resident entities to wh o m it has made the 37 payments do not have any business connection with India. T h e A s s e s s i n g O f f i c e r a s we l l a s t h e l e a r n e d C IT ( A p p e a l s ) h a d n o wh e r e i n t h e i r o r d e r s r e c o r d e d a n y s u c h f i n d i n g t h o u g h we mu s t a d d t h a t t h e y h a v e n o t e v e n i n t e n d e d t o make any investigation in this regard. H o we v e r , we a l s o observe that this stance has been consistently taken by the a s s e s s e e b e f o r e t h e l o we r a u t h o r i t i e s a s we l l a s b e f o r e u s a n d e v e n t h e l e a r n e d D . R . wh i l e a r g u i n g b e f o r e u s c o u l d not controvert the said submission of the assessee. In this manner, we d o n o t h e s i t a t e t o c o n c l u d e t h a t n o s e r v i c e s we r e r e n d e r e d b y n o n - r e s i d e n t s i n I n d i a . This conclusion of ours is also based on the proposition as laid d o wn b y t h e D e l h i H i g h C o u r t i n t h e c a s e o f CIT Vs. EON T e c h n o l o g i e s P v t . L t d . ( 2 0 1 2 ) 3 4 3 IT R 3 6 6 ( D e l ) .
34. I n v i e w o f t h i s , we f i n d t h a t t h e p r o v i s i o n s o f t a x deduction at source are not ap plicable to the impugned payments as the amounts received by the recipients are not i n t h e n a t u r e o f i n c o me d e e me d t o a c c r u e o r a r i s e i n I n d i a in their hands. Theref ore, provisions of section 40(a)(i) of the Act cannot be invoked.
35. T h o u g h t h e d e f i n i t i o n o f t h e i n c o me s d e e me d t o accrue or arise in India is provided in section 9 of the Act, we s h o u l d n o t f o r g e t t h a t t h e p r o v i s i o n s o f t h e A c t a r e s u b j e c t t o t h e t r e a t y e n t e r e d b y t h e C e n t r a l G o v e r n me n t w i t h t h e G o v e r n m e n t o f a c o u n t r y o u t s i d e I n d i a i n t e r ms o f the provisions of section 90 of the Act. T heref ore, as in the present case payments have been made to the residents of t h o s e c o u n t r i e s w i t h wh o m I n d i a h a s e n t e r e d i n t o D T A A , the provisions of sections 5 and 9 of the Act shall be s u b j e c t t o t h e a g r e e me n t e n t e r e d i n t o wi t h s u c h c o u n t r i e s .
36. With regard to the f act that all these entities r e l a t e t o t h e c o u n t r i e s wi t h wh o m I n d i a h a s D T A A s t h o u g h in vie w of the f inding given by us in the above paragraph t h a t t h e a mo u n t s a r e n o t i n the nature of income in the 38 h a n d s o f t h e r e c i p i e n t s , we n e e d n o t g o i n t o t h e r e s p e c t i v e t r e a t i e s , i n v i e w o f t h e f a c t t h a t t h e p r o v i s i o n s wh i c h a r e benef icial to the assessee are to be taken care wh i l e f astening tax liability.
37. The basic principle to be applied in such cases is t h a t o n e h a s t o f i r s t l o o k a t t h e d o me s t i c l a w t o f i n d o u t i f the non-resident assessee is taxable thereunder. If it is t a x a b l e , o n l y t h e n o n e h a s t o g o i n t o t h e t r e a t y , if a n y , b e t we e n I n d i a a n d t h e c o u n t r y t o wh i c h t h e n o n r e s i d e n t belongs, to, f ind out if there is an y benef icial provision in the tre aty to exe mp t the assessee f rom tax ation or reduce t h e r i g o u r s o f t h e d o me s t i c l a w. I f t h e r e i s s u c h a p r o v i s i o n in the treaty, the assessee is entitled to claim that it should be given the benef it of the treaty provisions. On the other hand, if the assessee is not taxable under the d o me s t i c law itself , there is no need to look into the provis ions of the DT AA, even if one exis ts, to f ind out if t h e r e i s a n y p r o v i s i o n u n d e r wh i c h t h e n o n - r e s i d e n t c a n b e b r o u g h t t o t a x . I n o t h e r wo r d s , t h e t r e a t y c a n n o t b e u s e d a s a t a x i n g s t a t u t e . T h e p r i n c i p l e i s t h a t wh e r e t h e n o n - r e s i d e n t i s t a x a b l e u n d e r t h e d o me s t i c l a w b u t t h e r e i s a provis ion in the tre aty to exe mp t the tr ans ac tion or reduce the rigor of taxation to the benefit of the non-resident, the provisions of the treaty override the provisions of the d o me s t i c l a w. These f u n d a m e n t a l p r i n c i p l e s a r e we l l - s e t t l e d b y t h e j u d g me n t s o f t h e S u p r e me C o u r t i n P . V . A . L . Kulandagan Chettiar (2008) 267 ITR 654 (SC) and Azadi B a c h a o A n d a l o n ( 2 0 0 3 ) 2 6 3 IT R 7 0 6 ( S C ) .
38. On going through the relevant article provided in t h e D T A A , we o b s e r v e t h a t i n v a r i a b l y i n a l l t h e D T A A s t o wh i c h we a r e c o n c e r n e d , t h e i n c o me i s t a x a b l e i n I n d i a only if that f oreign entity c arries on business in Ind ia through a permanent establishment situated in India. We a g a i n o b s e r v e t h a t n o s u c h f i n d i n g wi t h r e g a r d t o e x i s t e n c e o f a n y p e r m a n e n t e s t a b l i s h me n t i n I n d i a h a s b e e n b r o u g h t 39 o n r e c o r d b y a n y o f t h e l o we r a u t h o r i t i e s o r e v e n b y t h e l e a r n e d D . R . a t t h e t i me o f h e a r i n g b e f o r e u s . In vie w of t h i s , t h e p o s i t i o n e me r g e s t h a t t h e p a y me n t t o a p e r s o n wh o h a p p e n s t o b e a r e s i d e n t o f c o u n t r y wi t h wh o m I n d i a h a s e n t e r e d i n t o D T A A a n d wh e r e t h e b u s i n e s s p r o f i t s a r e taxed only in the country and does not have a permanent e s t a b l i s h me n t in India, the said p a y me n t s are not chargeable to tax in India. In vie w of this also, even as p e r D T A A , t h e i n c o me b e i n g n o t e x i g i b l e t o t a x i n I n d i a i n the hands of non-resident entity, the assessee is not required to deduct tax at source. Theref ore, the provisions of section 40a)(i) of the Act cannot be invoked.
39. N o w c o me s t h e s e c o n d q u e s t i o n , t h e A s s e s s i n g Off icer has apprehended in his order that the p a y me n t m a d e b y t h e a s s e s s e e t o I M C S i s n o t i n c o n s o n a n c e wi t h the commission paid to other concern. From the perusal of t h e o r d e r o f t h e l e a r n e d C IT ( A p p e a l s ) t h o u g h we o b s e r v e that he has not given any f inding in this regard, even the Assessing Off icer in h is order has not given any categoric al f inding ho w the paymen t made to IMCS is not co mp ar able to the commission payment made to Steven International. He has jus t tr ie d to co mp are the services rendered by the Steven International involving the potential business s e g me n t , organizing me e t i n g s and liaison wo r k s wi t h prospective clients, f acilitation and redressel and s e t t l e me n t o f d i s p u t e s . Further ref erring to the services rendered by IMCS, he explained that these are concerned w i t h t h e i n t r o d u c t i o n a n d a s s i s t a n c e i n e x e c u t i o n o f an a g r e e me n t a n d a s s i s t i n g i n s e l l i n g s e r v i c e s a n d f a c i l i t a t i n g r e l a t i o n s h i p wi t h A u g u s t a s t af f . In this background, he stated that the services provided by IMCS are not commensurate with the commission. Theref ore, the services are not being rendered for the purpose of business and prof ession. T h e r e i s n o d i s p u t e wi t h r e s p e c t t o t h e f act that both IMCS and Steven International are not related parties of the assessee co mp any. Analysis of 40 p a y m e n t m a d e t o a n e n t i t y wh i c h i s n o t r e l a t e d i n a n y wa y with the assessee is not an exercise expected f rom the Assessing Off icer. We do not understand under wh a t provis ions the Assessing Off icer is trying to make out the case that the payment made to IMCS are not commensurate w i t h t h e wo r k d o n e b y t h e m. It is the prerogative of the b u s i n e s s m a n t o r u n i t s b u s i n e s s t h e wa y h e wa n t s . The A s s e s s i n g O f f i c e r f o r t h e p u r p o s e o f I n c o me T a x A c t c a n n o t q u e s t i o n t h e r e a s o n a b l e n e s s o f a n y s u c h p a y me n t m a d e b y the assessee. T h e r e f o r e , we d o n o t f i n d t h i s a l l e g a t i o n o f the Assessing Off icer backed by any legal provision. I n c i d e n t a l l y , we wo u l d l i k e t o me n t i o n h e r e t h a t e v e n i f t h e A s s e s s i n g O f f i c e r wa n t s t o a s s e s s t h e r e a s o n a b l e n e s s o f a n y p a y me n t m a d e t o a n y s i s t e r c o n c e r n o f t h e a s s e s s e e , there is no doubt to the f act that the assessee has done d e t a i l e d t r a n s f e r p r i c i n g s t u d y i n t h e r e l e v a n t a s s e s s me n t y e a r , wh i c h wa s s u b j e c t t o t h e r e f e r e n c e u n d e r s e c t i o n 92CA(1) of the Act to the T ransf er Pric ing Off icer and the T r a n s f e r P r i c i n g O f f i c e r h a s s u g g e s t e d n o a d j u s t me n t wi t h respect to the A r m' s Length Price on the transaction b e t we e n t h e a s s e s s e e a n d i t s a s s o c i a t e e n t e r p r i s e s .
40. No w the question arises wh e t h e r t h e p a y m e n t made by the assessee can be held to be in the nature of 'f ee f or technical services'. T h e r e i s n o d i s p u t e wi t h respect to the f act that the issue of 'f ees technical services' was never raised by the Assessing Off icer. In his order r u n n i n g i n t o 2 2 p a g e s h e h a s n o wh e r e me n t i o n e d a n d e v e n n o wh e r e s h o we d h i s s u s p i c i o n as regards the p a y me n t being in the nature of 'fees f or technical services' that is t h e r e a s o n wh y a t t h e a s s e s s me n t s t a g e , t h e a s s e s s e e wa s never confronted by any query wi t h respect to the payments being that of the nature of 'f ees f or technical services'. T h e c o n t e n t i o n o f t h e l e a r n e d D . R . b e f o r e u s wa s t h a t t h e l e a r n e d C I T ( A p p e a l s ) h a s h e l d t h e s e p a y me n t s t o be in the nature of 'f ees f or technical services'. We have very caref ully perused the order of the learned C IT 41 (Appeals). Only at t wo places in his order he has mentioned the term 'f ees f or technical services'. At page 13 he has stated as under :
" T h e i s s u e i n h a n d i s t o d e c i d e wh e t h e r t h e service rendered by the nonresident entities and the p a y me n t made by the appellant co mp an y established business connection in India and as per the source of these payments, these are in the nature of f ees f or technical services."
41. I f we c a r e f u l l y a n a l y z e t h e a b o v e s e n t e n c e , we c a n v e r y e a s i l y i n f e r t h a t t h e l e a r n e d C IT ( A p p e a l s ) h a s n o t given any f inding as to the nature of being 'f ees for technical services'. Theref ore, from here we cannot conclude that the learned C IT (Appeals) has given a positive f inding that the payments in question are 'f ees f or technical services'.
42. On last page of his order at the conclusion of para (ii), he has again me n t i o n e d the wo r d 'f ees for t e c h n i c a l s e r v i c e s ' , wh i c h h e e x p r e s s e d i n f o l l o wi n g t e r ms :
" T h e H o n ' b l e S u p r e me C o u r t i n t h e c a s e o f GVK I n d u s t r i e s L t d . ( 2 0 1 5 ) 3 7 1 IT R has held that the nature of service rendered by the non-resident wo u l d c o me wi t h i n the ambit and seep of expression 'consultancy service' and hence tax should have been deducted at source as the amount paid as f ee could be taxable under he head 'f ees f or technical services'"
43. From bare perusal of the above sentence one can v e r y e a s i l y i n f e r t h a t t h e l e a r n e d C IT ( A p p e a l s ) h e r e a l s o h a s n o t g i v e n a n y f i n d i n g , i n f ac t h e r e h e i s o n l y r e f e r r i n g t o t h e j u d g me n t o f H o n ' b l e S u p r e me C o u r t i n t h e c a s e o f GVK Industries Ltd. (supra).
42
44. I n v i e w o f t h e a b o v e , we s e e t h a t t h e l e a r n e d C I T ( A p p e a l s ) h a s n o t g i v e n a n y f i n d i n g t h a t t h e p a y me n t s i n question are 'f ees f or technical services' in nature. We understand the law that in case a payment is held to be in the nature of 'f ees f or technical services', the place of rendering services b e c o me s irrelevant in view of the provisions of section 9(1)(vii) of the Act. H o we v e r , e v e n i f the a r g u me n t o f the learned D.R. is accepted that the learned C IT (Appeals) has given a f inding that these p a y m e n t s a r e ' f e e s f o r t e c h n i c a l s e r v i c e s ' , n o wh e r e f r o m t h e o r d e r o f t h e l e a r n e d C IT ( A p p e a l s ) we s e e a n y e f f o r t b e i n g m a d e b y h i m t o c o me t o s u c h a c o n c l u s i o n . It is not t o b e f o r g o t t e n t h a t t h e l e a r n e d C IT ( A p p e a l s ) a s s u me s c o t e r m i n u s p o we r s wi t h t h a t t h e A s s e s s i n g O f f i c e r . In f act, h e e n j o y s t h e p o we r s o f e n h a n c e me n t a l s o . Theref ore, in case he had any apprehension as to the real nature of the payment, wh o stopped him to carry out f urther investigations in this regard? In the absence of any f inding given by the Assessing Off icer or the CIT (Appeals ) i n t h i s r e g a r d , we a r e n o t i n c l i n e d t o e x a m i n e t h e c a s e o f t h e a s s e s s e e wi t h a v i e w wh e t h e r t h e p a y me n t s a r e i n t h e nature of 'f ees for technical services' or not. It is not a case wh e r e certain queries we r e put either by the A s s e s s i n g O f f i c e r o r b y t h e l e a r n e d C IT ( A p p e a l s ) t o t h e assessee wi t h respect to the payments being 'f ees for t e c h n i c a l s e r v i c e s ' , wh i c h t h e a s s e s s e e f a i l e d t o r e p l y . It i s a l s o n o t a c a s e wh e r e t h e a s s e s s e e h a d n o t c o - o p e r a t e d w i t h t h e l o we r a u t h o r i t i e s in order to f ind out the real nature of the payments made to the non-residents. All the relevant agreements and invoices we r e f i l e d b e f o r e t h e l o we r a u t h o r i t i e s . In vie w of this, the assessee cannot be p u n i s h e d a t t h i s s t a g e wi t h o u t t h e r e b e i n g a n y f a u l t o f h i s , specially in view of t h e f a c t t h a t e v e n a t t h e t i me o f hearing bef ore us, the learned D.R. could not bring any material or evidence in support of his claimed that the impugned payments we r e in the nature of 'f ees for technical services'. His only a r g u me n t is that in the 43 absence of the nature of services being rendered by non- residents, coming out from the evidence f iled by the a s s e s s e e , t h e s a m e s h o u l d b e p r e s u me d t o b e i n t h e n a t u r e of 'f ees f or technical services'. No such presumption exists i n t h e I n c o me T a x A c t . No such presump tion c an be raised without any backing material or evidence on record. The a r g u me n t o f t h e l e a r n e d D . R . t h a t e v e n i f t h e p r o v i s i o n s o f DTAA are applied, in the absence of any services coming o u t f r o m t h e e v i d e n c e s , i t s h o u l d b e p r e s u me d t h a t n o n - residents have 'made available' certain technical services to the assessee, is too f arf etched. We are not inclined to entertain such a plea at this stage. In vie w of this also, we h o l d t h a t t h e s e r v i c e s r e n d e r e d b y t h e n o n - r e s i d e n t s a r e n o t i n t h e n a t u r e o f t e c h n i c a l s e r v i c e s , n o i n c o me d e e me d t o have accrued to the non-resident entities, there is no liability on the assessee to deduct tax at source on such payment. Theref ore, the provisions of section 40(a)(i) of the Act are not exigible in the present case.
45. W e m a y c l a r i f y t h a t we h a v e n o t d e a l t wi t h e a c h expenditure specif ically, since the issues involved in all t h e s e e x p e n s e s we r e c o m mo n a n d we d i d n o t f i n d a n y inclination to deal each expenditure separately. Ground N o o s . 2 , 3 a n d 4 a r e a l l o we d . "
36. As we have already stated above, the facts in the present case are identical to that in the case of assessee for assessment year 2009-10, with the impugned disallowance of expenses having been made for the reason that the same were taxable in India since they were sourced from India on account of the agreement entered into with the assessee an Indian Company and also on account of the utilization of the services for the benefit of the assessee Indian Company. In the present case also we 44 find that there is no finding of the lower authorities with regard to the fact that the income to the payees of the said expenses arose or was deemed to arise in India as per the provisions of section 9 of the Act. There is no finding regarding the existence of any business connection, as defined, under section 9(1) of the Act nor of any permanent establishment of the payees in India. Moreover in the present case also there is no finding that the payments in question were "fees for technical services".
Therefore the decision laid down in the preceding year will squarely apply to the present case also, following which we delete the disallowance made u/s 40(a(ia) of the Act amounting to Rs. .2,84,52,914/-.
37. The grounds of appeal No.2,3 & 4 raised by the assessee are, therefore, allowed.
38. Ground No.5 raised by the assessee reads as under :
5. That the Ld. Commissioner of Income Tax (Appeals) further erred in upholding the addition of Rs.18,09,790/- for non deduction of tax u/s 1941 applying the provisions of Section 40a(ia) in utter disregard of the explanations rendered which is arbitrary and unjustified.
39. In the said ground, the assessee has challenged the action of the Ld. CIT (Appeals) in upholding the addition made by invoking the provisions of section 40(a)(ia) on account of non deduction of TDS on rent paid as per the provisions of section 194I of the Act. 45
40. Brief facts relating to the issue are that the assessee had paid rent to various parties on which TDS had not been deducted. On being confronted with the same, the assessee submitted that the rent had been paid to the representatives of the family and if the same was apportioned among the family members the rent received by each member would be below the limit laid down u/s 194(I) for deduction of tax. The Assessing Officer rejected the assessee's contention since he found that the assessee did not produce any proof that the payments were bifurcated and the limit specified u/s 194(I) had not been surpassed. He, therefore, disallowed the same by invoking the provisions of section 40(a)(ia) of the Act.
41. During the appellate proceedings the assessee reiterated the contentions made before the Assessing Officer. The Ld. CIT (Appeals) upheld the disallowance made by the Assessing Officer by holding that the assessee had not been able to demonstrate that the rent paid had been apportioned to various family members.
42. During the course of hearing before us, the Ld. counsel for the assessee reiterated the contentions made before the lower authorities and stated that the property was owned by a number of persons while rent had been paid to one person who was so authorized to receive the rent on behalf of other co-owners vide lease agreement entered into between the owners and the assessee. The assessee, therefore, stated that the amount of rent paid 46 was not the income of the recipient alone but constituted that of the co-owners also between whom it should have been apportioned and then determined whether the limit specified u/s 194I of the Act, for tax deduction at source of rent, was crossed in the case of any person. The Ld. counsel for the assessee drew our attention to the copy of lease agreement for letting out of the property placed at Paper Book page no. 242, 255 and 258 in this regard.
43. The Ld. DR, on the other hand, relied upon the order of the lower authorities and further stated that even if the contention of the Ld. counsel for the assessee is accepted, the matter should be remanded back to the Assessing Officer to examine the issue in the light of the contentions made and thereafter re-work/re-determine the disallowance to be made u/s 40(a)(ia) of the Act.
44. We have heard the contentions of both the parties. We find merit in the contentions of the Ld. counsel for the assessee that the rent had been paid to one person on behalf of various co-owners of the said property. The lease agreement placed at Paper Book page No.242 is the lease deed entered into between the co- owners of the property SCO 142 to 145, Sector 34, Chandigarh and the assessee for leasing the said premises to the assessee. At page No.2 of the said agreement, it has been specifically stated that the said agreement has been entered between the following parties: 47
R.S.Sandhu, M.s. Sandhu, advocate f or self and as attorney of Shri Gurbrinder Kaur and Navdeep Kaur his daughters and as guardian of A mr i t a K a u r ( M i n o r ) , A m a r S i n g h C h a h a l , S u r j i t Kaur, Daljit Kaur, Manpreet Singh and Harpree K a u r , B r i g . S wa r a n S i n g h ( R e t d . ) f o r s e l f a n d o n behalf of Gurmeet Kaur, his wif e, Major C.S. Lehal, his daughter Kan wal Lehal and D r . S e r b me e t Singh wh o are the o wn e r s and landlords of SCO 140 to 145, Sector 34, (City Centre), Chandigarh. This persons h e r e i n af t e r r e f e r r e d t o a s t h e l e s s o r s wh i c h t e r m i n c l u d e d their heirs, executors, administrators, legal representatives, succesors and assignees.
AND Ids Inf otech L:imited (Earlier name Inde Dutch systems (India) Limited) having its registered off ice at SCO 144-145, Sector 34A, Chandig arh through its H e a d - C o m me r c i a l , Mr.Satish Goel, (duly au thorized by the Co mp any by a resolution attached h e r e i n af t e r to be called the lessee', wh i c h term shall include its heirs, executors, ad ministrators, legal representatives, successors and assigns."
45. At para 17 of the said lease agreement, it is stated that the rental in each month would be paid to each of the parties in the following manner:
"(i) 25% of the total i.e.rs.9500/- p e r mo n t h t o B r i g . S wa r a n S i n g h ( R e t d . ) o r h i s n o m i n e e , i f any, at H.No.282, Sector 10-A, Chandigarh.48
(ii) 3 7 . 5 % o f t h e t o t a l i . e . R s . 1 4 2 5 0 / - p e r mo n t h to Shri M..S. Sandhu or his nominee, if any, M.S. Sandhu, Kothi 284/10A, Chandigarh.
(iii) Balance 37.5% of the total i.e. Rs.14250/-
p e r mo n t h t o S h r i A . S . C h a h a l o r M r s . S u r j i t Kaur, his wi f e at Kothi No.115/8-B, Chandigarh.
WITNESS WHEREOF the parties ref erred to above set their hands on these presents, on the day, m o n t h a n d t h e y e a r me n t i o n e d af o r e .
46. Further, the lease deed placed at Paper Book page No.255 entered into by the assessee for taking SCO 148 to 149, Sector 34 on lease also shows that there were several co-owners in the same. Further at para 21 of the Said lease agreement at Paper Book page No.28, the said lease agreement specifically states that all payments are to be made in favour of Brig.N.S. Sandhu though there are 15 owners and landlords of the said property specifically mentioned in the lease deed at Paper Book page No.255.
47. It is evident from the said lease deeds, which was there even before the Assessing Officer, that there are several co-owners of the properties which have been taken on lease by the assessee and rent paid thereon. The income in such circumstances cannot, therefore, be said to be the income of the recipient of the rent only. When they have received the same only on behalf of other co- owners the rent paid constitutes the income of all the co- owners and the same is to be apportioned among them as 49 per the method prescribed, if any, in the lease agreement or in proportion of their co-ownership and thereafter only if the rental income in the case of any co-owners exceeds the prescribed limit for the purpose of deduction of tax u/s 194I of the Act, the tax is to be deducted at source.
48. In the light of the above, we, therefore, restore the matter back to the Assessing Officer to apportion the rental income in the hands of the co-owners as per legally permissible, determine the rental income attributable to each co-owner and thereafter apply the provisions of section 194(I) of the Act to the same as also the provisions of section 40(a)(ia) of the Act for non deduction of tax, if found in any case. This ground of appeal No.5 of the assessee is, therefore, allowed for statistical purposes.
49. The ground No.6 raised by the assessee reads as under :
"6. That the Ld. Commissioner of Income Tax(Appeals) further erred in upholding the addition of Rs.39,73,746/- for non deduction of tax on salaries paid outside India applying the provisions of Section 40a(iii) in utter disregard of the explanations rendered which is arbitrary and unjustified."
50. In the said ground, the assessee has challenged the action of the Ld. CIT (Appeals) in upholding the disallowance made of Rs.39,73,746/- being salaries paid outside India, for non-deduction of tax at source on the same, by invoking the provisions of section 40(a)(iii) of the Act.
50
51. Brief facts relating to the issue are that during assessment proceedings the Assessing Officer noticed that the assessee had made payment of salaries to the following persons outside India without deducting tax at source :
Particular A mo u n t ( I N R )
Salary paid to Martin 18,98,320/-
Salary paid to Rob 20,75,426/-
Total 39,73,746/-
52. On being asked as to why disallowance u/s
40(a)(iii) not be made on the same, the assessee submitted that the services were rendered outside India, therefore, TDS provisions were not applicable on the same. The Assessing Officer rejected the contention of the assessee by stating that the provisions of section 40(a)(iii) of the Act are applicable since the payments have been made outside India and to a non-resident.
53. Before the Ld. CIT (Appeals), the assessee reiterated that the said payments of salaries were made to its employees outside India who were residents of Netherlands Origin and had performed entire activities outside India. The assessee also contended that the said salary was subject to taxation by Netherlands only, which was accordingly deducted and deposited to Netherlands Government Authorities. The Ld. CIT (Appeals) after going through assessee's submissions, held that the Assessing Officer had rightly disallowed the said amount since the salary had been paid outside India to non-residents and 51 the assessee had not demonstrated that the tax had been deducted and paid in Netherlands.
54. During the course of hearing before us, the Ld. counsel for the assessee reiterated the contentions made before the lower authorities stating that the said salaries had been paid to employees on account of services rendered outside India and, therefore, the salary was not taxable in India and thus there was no requirement to deduct tax at source on the same. The Ld. counsel for the assessee stated that for the aforesaid reason, since there was no liability to deduct tax at source, no disallowance on account of non-deduction of TDS could be made u/s 40(a)(iii) of the Act.
55. The Ld. DR, on the other hand, supported the orders of the lower authorities and stated that the salary being paid outside India to non-residents, the same was taxable in India and thus liable to TDS and same having not been deducted, disallowance u/s 40(a)(iii) had been rightly made.
56. We have considered the contentions of both the parties. The issue in the present ground is relates to invoking the provisions of section 40(a)(iii) of the Act, which deals with disallowance of payment which is chargeable under the head "salary" and is payable outside India or to a non-resident and on which tax has not been paid, nor deducted therefrom as per the provisions of 52 Chapter-XVII-B of the Act. The undisputed and unchallenged facts relating to the present issue are that the salary amounting to Rs.39,73,746/- was paid to two persons outside India as per the detail already reproduced above. The fact that the payment was in the nature of salary is not disputed, as also the fact that the said payment was made to non-residents and has been made outside India. The issue in this ground relates to disallowance made u/s 40(a)(iii) of the Act. The said section is being reproduced hereunder for a better understanding:
"(iii) any payment which is chargeable under the head"
Salaries", if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII- B;"
57. As per the said section the following conditions need to be fulfilled before making any disallowance under the same:
i) The payment should be chargeable under the head "Salaries".
ii) It should be payable outside India or to non-
resident.
iii) No tax is deducted or paid thereon.
58. The first basic condition for invoking section 40(a)(iii) is that the payments should be chargeable under the head "salaries" and secondly it should be payable outside India to non-residents. Alongwith same is to be read the condition that no tax has been paid thereon or 53 deducted therefrom under Chapter XVII-B. The relevant provisions of Chapter XVII-B dealing with tax deduction at source on salaries is section 192, which reads as under:
"192. Salary.- (1) Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income- tax omputed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.
(1A) Without prejudice to the provisions contained in sub-section (1), the person responsible for paying any income in the nature of a perquisite which is not provided for by way of monetary payment, referred to in clause (2) of section 17, may pay, at his option, tax on the whole or part of such income without making any deduction therefrom at the time when such tax was otherwise deductible under the provisions of sub-section (1).
(1B) For the purpose of paying tax under sub-section (1A), tax shall be determined at the average of income-tax computed on the basis of the rates in force for the financial year, on the income chargeable under the head "Salaries" including the income referred to in sub-section (1A), and the tax so payable shall be construed as if it were, a tax deductible at source, from the income under the head "Salaries" as per the provisions of sub-section (1), and shall be subject to the provisions of this Chapter.
59. A perusal of the above section shows that for attracting the liability of tax deduction at source, the said income should be chargeable to tax under the said head. Even section 40(a)(iii) begins with any payment which is chargeable under the head "salaries" meaning thereby that the salary paid should be chargeable to tax as such in India. Chargeability to tax and the scope of total income is dealt with in sections 4 and 5 of the Act which have already been discussed above in ground Nos.2, 3 and 4 dealt with above by us. As per the said sections in the case of non-residents income which is either received or deemed to have been received in India or which accrues or arises or deemed to accrues or arises in India is 54 chargeable to tax in India. In the present case, the salary undisputedly has been paid outside India and thus not received or deemed to have been received in India to be chargeable to tax in India. Therefore, it has to be seen whether the salary accrued or arose or deemed to have been arisen or accrued in India. Section 9(ii) of the Act deals with the situation or condition in which salary is deemed to accrues or arises in India. The said section is reproduced hereunder:
"9. (1) The following incomes shall be deemed to accrue or arise in India :--
(ii) income which falls under the head "Salaries", if it is earned in India.
[Explanation.--For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for--
(a) service rendered in India; and
(b) the rest period or leave period which is preceded and
succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India ;]"
60. A bare perusal of the above would reveal that salary is deemed to accrue or arise in India only if it is earned in India which has been explained as having been earned on account of services rendered in India. Thus, only if salary is paid for services rendered in India it would be treated as having been earned in India. In the present case, we find that it has been the contention of the assessee all along that the said salary has not been paid for any service rendered in India and has in fact been 55 paid for services which has been rendered outside India. This fact has not been controverted either by the Assessing Officer, CIT (Appeals) or even the Ld. DR before us. Thus, going by the provisions of section 9(1)(ii), clearly and undisputedly the salary has not been earned in India. Having said so, the income of the non-residents on account of this salary is not deemed to have accrued or arisen in India and, therefore, was not chargeable to tax in India as salary. Thus, in such circumstances, section 192 was not applicable requiring the assessee to deduct tax at source on the said payment of salary and consequently, provisions of section 40(a)(iii) could also not be invoked to disallow the same. The contention of the Revenue all along we find, has been that section 40(a)(iii) is attracted because the payments have been made outside India to non-residents. The Revenue, we find, has picked up only one of the conditions enumerated u/s 40(a)(iii) for making disallowance, choosing to completely ignore the basic condition required to be fulfilled, which is taxability of the said salary in India. Therefore, the disallowance, we hold, has been made on an incorrect interpretation of law. In view of the above, we hold that no disallowance u/s 40(a)(iii) on account of non deduction of tax on salary paid outside India is warranted and the disallowance made amounting to Rs.
39,73,746/- is directed to be deleted 56
61. In view of the above, ground No.6 raised by the assessee is allowed.
62. Ground No.7 raised by the assessee reads as under:-
"7. T h a t t h e L d . C IT ( A ) h a s e r r e d i n l a w a s we l l as on f acts in upholding the addition of Rs.25,02,206/- made by the Assessing o f f i c e r wh e r e b y s h e d i s a l l o we d t h e i n t e r e s t paid up by applying the provisions of section 36(i)(iii) wh i c h is a l l o wa b l e arb itr ar ily and unjus tif ied."
63. The issue raised in the present ground relates to disallowance of interest made by invoking the provisions of section 36(i)(iii) of the Act.
64. Brief facts related to the issue are that during the course of assessment proceedings the Assessing officer noted that the assessee had debited financial charges of Rs.93,51,000/- on secured loans which consisted of term loan from bank, car and packing credit. The Assessing officer observed that the assessee had substantially invested amount of Rs.1,59,90,000/- in wholly owned subsidiaries of the appellant companies in U.S. and U.K. The Assessing officer further noted that in assessment year 2004-05, proportionate interest had been disallowed against which the assessee had not preferred an appeal. In view of the aforesaid facts the Assessing officer made disallowance u/s 36(i)(iii) and worked the same at Rs. 57 28,42,206/-. Further, he reduced the notional interest already disallowed by the assessee u/s 36(1)(iii) amounting to Rs.25,02,206/- and added back the balance amount of Rs.3,40,000/- to the income of the assessee.
65. Before the Ld. CIT(A), the assessee contended that the subsidiary of the assessee company generated revenue for the assessee and therefore, the interest paid was revenue expenditure and had been rightly claimed in the books of the assessee. The assessee also stated that the subsidiary renders marketing support to the assessee company. The Ld. CIT(A) after going through the assessee's submissions held that the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Ltd 286 ITR 1 has held that interest u/s 36(1)(iii) is to be disallowed if the amounts are invested for non- business purposes. In the present case, since the assessee has not proved the nexus of borrowed funds, the amount invested in the subsidiaries was for extraneous considerations. Further since identical disallowance had been made in the assessment year 2004-05 also, which had not been contested by the assessee, Ld. CIT(A) upheld the order of the Assessing officer disallowing interest of Rs. 3,40,000/- u/s 36(1)(iii) of the Act.
66. During the course of hearing before us, Ld. Counsel for the assessee drew our attention to the fact that identical issue had arisen in assessment year 2009- 10 also, which had been decided in favour of the assessee 58 by the ITAT Chandigarh Bench in its order in ITA No. 52/Chd/2016 dated 24.5.2016. Copy of the order was placed before us.
67. The Ld. DR conceded that on identical set of facts and circumstances, disallowance made u/s 36(i)(iii) had been deleted by the ITAT in the said order. He further relied on the order of the CIT(A).
68. We have heard the contentions of both the parties, perused the orders of the authorities below and also order of the ITAT in ITA No. 52/Chd/2016 dated 24.5.2016 rendered in the case of the assessee for assessment year 2009-10. On going through the same, we find that in the said assessment year, disallowance of interest amounting to Rs. 16,59,106/- was made u/s 36(1)(iii), being proportionate amount of interest paid on secured loans, on account of investment made in wholly owned subsidiaries of the assessee company in U.S. and U.K, amounting to of Rs.1,66,23,000/-. The ITAT in the said case held that the investment had been made in the wholly owned subsidiaries of the assessee companies, the financial health of these concerns effect the financial health of the assessee companies also and therefore, the investment made in the subsidiaries companies are for commercially expedient purposes. The ITAT relied upon the decision of the Apex court in the case of S.A. Builders Vs. CIT (2007) 288 ITR 1 in this regard. The ITAT held that since no fact had been brought on record by the 59 lower authorities, that the amount used by the subsidiaries companies were for purposes other than business, the said investments were commercially expedient. The ITAT, therefore, held that no disallowance under the provisions of section 36(i)(iii) could, therefore, be made. Reliance was placed on the judgement of the Apex Court in the case of Hero Cycles (P) Ltd (2015) 279 ITR 347 in this regard. The relevant findings of the ITAT at para 7 & 8 of the order are as follows:-
"7. We have heard the learned representatives of both the parties, perused the f indings of the au thor ities below and considered the material available on record. We are in total a g r e e me n t wi t h the submissions made by the learned D.R. that the assessee has to d e mo n s t r a t e t h a t t h e l o a n a d v a n c e s f u l f i l l s t h e criteria of commercial expediency. It is also the p r o p o s i t i o n l a i d d o wn b y t h e H o n ' b l e S u p r e m e Court in the case of Hero Cycles (P) Ltd. (supra). H o we v e r , we are also inclined to accept the submissions made by the learned counsel f or the a s s e s s e e t h a t t h e e n t i t i e s t o wh o m t h e mo n e y h a s b e e n g i v e n a r e wh o l l y o wn e d s u b s i d i a r i e s o f t h e assessee co mpan y. Theref ore, the f inancial health of these concerns matter to the f inancial heal th of the assessee comp an y also. In our v i e w, i t c a n b e s a i d t h a t t h e a m o u n t g i v e n t o t h e wh o l l y o wn e d subsidiary companies are for commercial expediency. I n t h i s v i e w, we wo u l d like to ref er certain observations made by the Hon'ble Supreme Court in the case of S.A. B u i l d e r s L i m i t e d V s . C IT ( 2 0 0 7 ) 2 8 8 IT R 1 ( S C ) . I n t h i s c a s e , wh i l e i n t e r p r e t i n g t h e me a n i n g o f 60 the wo r d ' c o m m e r c i a l expediency', the Hon'ble Apex Court held as under :
"32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."
8. I n v i e w o f t h e a b o v e , we o b s e r v e t h a t e v e n t h e H o n ' b l e S u p r e me C o u r t h a s e n d o r s e d t h e vie w that since a holding company has a deep interest in its subsidiary and if the holding co mp any advances b o r r o we d mo n e y to a subsidiary and the same is used by the subsidiary for s o me business purposes, the assessee is entitled to deduction of interest on t h e b o r r o we d f u n d s . In the present case, there is no dispute about the f act that the amounts have b e e n a d v a n c e d t o t h e wh o l l y o w n e d s u b s i d i a r i e s o f t h e a s s e s s e e c o m p a n y a n d t h e r e i s n o f ac t b r o u g h t o n r e c o r d b y a n y o f t h e l o we r a u t h o r i t i e s that the amounts have been used by these subsid iary co mp an ies f or any pur pose other than 61 their business purposes. I n v i e w o f t h i s , we a r e inclined to hold that the amounts given to subsidiary companies we r e on account of commercial expediency. Theref ore, no d i s a l l o wa n c e i n v o k i n g t h e p r o v i s i o n s o f s e c t i o n 36(1)(iii) of the Act can be made in this case. The g r o u n d N o . 1 r a i s e d b y t h e a s s e s s e e i s a l l o we d .
69. The facts in the present case, we find are identical to that in assessment year 2009-10, wherein, disallowance has been made on account of investment made by the assessee company in wholly owned subsidiary. Since the ITAT in the preceding year has held the said investment to be for business purposes, being commercially expedient, following the same, we hold the identical investment in the impugned year also to be commercial expedient for the assessee company and having held so, there can be no case for making any disallowance u/s 36(i)(iii) on account of making the aforesaid investment. In view of the same, the disallowance made u/s 36(i)(iii) amounting to Rs. 3,40,000/- is therefore, deleted and the order of the CIT(A) on this ground is therefore, set aside.
70. Ground No.7 raised by the assessee therefore, stands allowed.
71. Ground No.8 raised by the assessee reads as under :
"8. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the addition of Rs.57,68,163/- made of account of alleged non declaration of receipts on 62 sale of assets to M/s Aeromatrix Info Solutions Private limited which is contrary to the facts and as such the order passed is arbitrary and unjustified."
72. Brief facts relating to the case are that during the year the assessee had sold it entire business August Westland unit including software licenses, employees, etc. to M/s Aeromatrix Info Solutions Pvt. for an amount of Rs.2,75,79,928/-. During the course of assessment proceedings, the assessee submitted that the income of Rs.2,18,11,765/- received from M/s Aeromatrix Info Solution Pvt. Ltd. had been shown under the head 'income from other sources'. The Assessing Officer found that as per the details, the total amount received or receivable by the assessee was Rs.2,75,79,928/-. Therefore, the balance receipts of Rs.57,68,163/- found to have not been declared by the assessee were brought to tax since the assessee was following mercantile system of accounting.
73. During appellate proceedings, the assessee submitted that the balance amount had also been accounted for in its books and, therefore, no addition was called for. The assessee submitted that the amount received by it for selling Catia V5 licence had been accounted for/ adjusted against written down value of the said asset and similarly an amount of Rs.70,443/- had been adjusted against advance money given by the company to one of the transferee employee. The Ld. CIT (Appeals) rejected the assessee's contention stating that the assessee had not substantiated the same by filing 63 details of block of asset, WDV etc. He, therefore, upheld the addition made by the Assessing Officer.
74. During the course of hearing before us, the Ld. counsel for the assessee reiterated the contentions made before the lower authorities and stated that receipt of Rs.57,68,163/- had been duly accounted for in the books of the assessee having been received on account of sale of Catia V5 licence and shown in the ledger account of M/s Aeromatrix Info Solutions Pvt. placed at Paper Book page 288, in the schedule of fixed assets placed at Paper Book page No.385, in the ledger account of software purchased placed at Paper Book page No.693 and in the ledger account of depreciation for the year placed at Paper Book page No.695. The Ld. counsel for the assessee stated that all the above duly reflected the receipt of the said amount in the books of the assessee for the year and, therefore, there was no reason to make any disallowance of the same on account of not recording receipt of the same in the books of the assessee.
75. The Ld. DR, on the other hand,, supported the orders of the lower authorities.
76. We have heard the contentions of both the parties. We find merit in the contention the Ld. counsel for the assessee. On perusal of the above documents produced before us, we find that the sale of Catia V5 licence of M/s Aeromatrix Info Solutions Pvt. has been duly reflected in the ledger account of M/s Aeromatrix 64 Info Solutions Pvt., the software account, in the fixed asset chart shown by the assessee and depreciation on account of sale of the said asset has been also duly reversed in the ledger of depreciation. All books of account were produced before the lower authorities and it can, therefore, be safely concluded that all material was placed before the lower authorities to substantiate its claim. The disallowance having been made on account of the fact that the assessee had not reflected the said amount in its books, the same is directed to be deleted in view of our above observations in this regard. This ground of appeal No.8 of the assessee is, therefore, allowed.
77. In the result appeal of the assessee is partly allowed.
Order pronounced in the open court.
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 9 t h March, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh