Income Tax Appellate Tribunal - Delhi
Hns India Vsat Inc. vs Dy. Director Of Income-Tax (Delhi) on 13 May, 2005
Equivalent citations: [2005]95ITD157(DELHI)
ORDER
P.M. Jagtap, AM This appeal by the assessee is directed against the order of learned CIT (A)-XXIX, New Delhi dated 12-1-2004.
2. The assessee in the present case is a wholly owned subsidiary company of Hughes Network Systems, Hughes Electronic Company having its registered office in USA. It is engaged in the business of providing telecom related services including installation and site supervision. M/s. Hughes Telecom Co. was awarded contract for installation of telephony system in Mumbai. This job was sub-contracted by the said company to HNSIPL (Indian) who, in turn, gave the said job to the assessee. During the relevant period, installation was done by the assessee at 12 different sites in Mumbai. In its return of income filed for the year under consideration declaring a total income of Rs. 2,42,61,670, a net profit ratio of 39.3% was shown by the assessee. During the course of assessment proceedings, it was noticed by the assessing officer that the said rate of net profit was lower than the NP rate of 56.5% shown by the assessee while obtaining certificate under section 195/197. It was also noticed by the assessing officer that the assessee company has sub-contracted various jobs relating to installation to the contractors in US and payments were claimed to have been made to the said contractors in US against the sub-contracted work. Since no tax at source was deducted by the assessee from the payments made to the said contractors outside India as required by section 195, the assessing officer sought explanation of the assessee in this regard. In reply, it was submitted on behalf of the assessee that the subcontract work was carried out by the overseas sub-contractors outside the Indian territory primarily in the US and since the said sub-contractors had no business connection or territorial presence in India during the relevant period, they were not liable to tax in India in terms of section 5 read with section 9. It was thus contended that the provisions of section 195, therefore, were not applicable to the said payments and there was also no question of deducting tax at source from such payments. According to the assessing officer, the services of the sub-contractors were availed by the assessee for the purpose of job to be done in India and the basis of such sub-contracts being the Indian project, the payments made to the subcontractors were clearly attributable to the execution of project by the assessee in India. He also noted that in the profitability projection filed by the assessee while seeking authorizations under section 195, there was no provision made for the contractual expenses. He, therefore, sought clarification/ explanation from the assessee in these matters and in reply, the nature and scope of services provided by the sub-contractors was explained by the assessee. The assessing officer, however, observed that these services, having regard to the very nature and scope as explained by the assessee, did not fall within the scope of the contract /job executed by the assessee. He also found that travelling expenses of the sub-contractors in India were borne by the assessee and taking note of this fact as well as the nature of contractual amounts claimed to have been paid by the assessee to the sub-contractors to perform the jobs assigned, he held that tax at source was required to be deducted by the assessee from the payments made to the sub-contractors as per the provisions of section 195. An attempt was again made by the assessee to submit before the assessing officer that income of the concerned sub-contractors being not taxable in India, the provisions of section 195 were not applicable. It was also submitted that merely because there was failure on the part of the assessee to apply for certificate under section 195(2) from the assessing officer, the entire amount paid to the sub-contractors could not be disallowed by invoking section 40(a)(i). It was contended that the issue relating to applicability of the provisions of section 195 to the payments made to sub-contractors has to be examined independently at the assessment stage before invoking the provisions of section 40(a)(i). The assessing officer, however, found no merits in the submissions made on behalf of the assessee company and observing that the payments made by the assessee to the sub-contractors were clearly and unambiguously attributable to Indian operations, he held that the provisi6ns of section 195 were clearly applicable to the said payments and tax was required to be deducted by the assessee therefrom. The terms of contracts with the subcontractors also could not be filed/furnished by the assessee before the assessing officer. He therefore, disallowed the entire expenses claimed by the assessee on account of payment made to sub-contractors amounting to Rs. 58,72,144 keeping in view the provisions of section 40(a)(i) as well as his finding based on the nature and scope of services claimed to be provided by the sub-contractors to the assessee which according to him, did not fall, within the scope of assessee's contract. He also disallowed the expenses of Rs. 22,90,926 claimed to have been incurred by the assessee in connection with travelling of the sub-contractors.
3. Aggrieved by the order of the assessing officer, the assessee company preferred an appeal before the learned CIT (A) and the submissions made on its behalf before the assessing officer, by and large, were reiterated before the learned CIT (A). It was also submitted that the assessing officer has failed to appreciate that in terms of the contract entered between the assessee and HNSIPL, the assessee company was responsible, inter alia, for RF network configuration and testing, specifications, configuration document, installation plans and test plans and in terms of the said contract, it was free to sub-contract any part or whole of the contract. It was also submitted that in the absence of sufficient time given by the assessing officer, the terms of contract between the assessee and subcontractors could not be furnished/filed before him during the course of assessment proceedings. It was also submitted that the sub-contractors had no business presence in India during the relevant period and since there was no business connection in India within the meaning of the term as defined in section 9(1)(i), the provisions of section 195 were not attracted to the payments made to them. It was also submitted on behalf of the assessee before the learned CIT (A) that the supervisory services rendered by the concerned sub-contractors did not fall within the purview of 'fees for included services' in the absence of imparting of any technical knowledge, skills etc. by the sub-contractors and therefore, the provisions of section 40(a)(i) read with section 195 were not applicable to the payments made to the said sub-contractors. The learned CIT (A), however, found no merits in the submissions made on behalf of the assessee before him and proceeded to confirm the disallowances made by the assessing officer on account of payment to sub-contractors as well as travelling expenses incurred in connection with their travelling in India for the following reasons given in paragraph No. 2.5 of his impugned order:
"2.5 I have considered the submissions of the appellant and facts of the case carefully. In spite of giving sufficient time to the appellant at the appellate stage appellant has not been able to submit the agreement with the sub-contractors in spite of the fact that the appellant had asked further time vide its letter dated 25-11-2003 which was allowed to the appellant. Vide its submissions dated 17-12-2003 it has been admitted by the appellant these sub-contractors work on continuing basis and the terms and conditions are determined on the basis of global understanding. As a result, there are no separate agreements entered into with these sub-contractors for each and every project. Therefore, it is clear that the appellant has not been in a position to submit the copy of agreement between sub-contractors and also has not given the basis of amount paid to the contractors. The appellant has not given the basis of pre decided rates for various activities carried on through the sub-contractors. I have gone through the vouchers and nature of services rendered by the sub-contractors which are mainly in equipment installation. FSU installation and are absolutely technical in nature. It has also been admitted by the appellant that these services are being provided on a continuing basis and the duration of the project has been of about five years. These services have been provided by the foreign sub-contracts in India and for Indian project on continuing basis as admitted by the appellant. These services like installation have been rendered on Indian sites. There nature is technical. The employees of sub-contractor have travelled to India and the expenditure on their travelling has been claimed by the appellant separately. As the appellant has not given the copy of agreement with sub-contractor it is not in a position to justify that the travelling expenses were to borne by the appellant. Otherwise also the travelling expenses were of technical persons and these were part of payment of technical services. Therefore, once these sub-contractors had provided technical services to the appellant on a continuing basis the total amount paid by the appellant to these sub-contractors was in the nature of fees for technical services. Therefore, such services were chargeable to tax in India as the amount has been paid on continuing basis and the provisions of section 195 were clearly attracted. The appellant has failed without justifiable reasons to explain as to why no TDS was deductible on such payments. Therefore, as per section 40(a)(i) of the Income Tax Act if TDS has not been deducted the amount will not be allowable as deduction. Therefore, assessing officer was justified in disallowing the expenses which is hereby confirmed. Similarly, the travelling expenses which have been incurred by the appellant have not been substantiated by the appellant in the absence of any contract agreement and are also part of technical services on which TDS was to be deducted. Therefore, considering the facts and circumstances and legal position the disallowance of such expenses is also upheld. Accordingly, ground Nos. 1, 2, 3, 5, 6, 7 and 8 are dismissed."
Aggrieved by the aforesaid order of the learned CIT (A), the assessee company has preferred this appeal before the Tribunal challenging the disallowances made by the assessing officer on account of sub-contracting expenses as well as travelling expenses of the sub-contractors borne by it in Ground Nos. 1 and 2 respectively raised therein.
4. The learned counsel for the assessee submitted before us that installation work was done by the assessee company for Wireless Support Services ('WSS' in short), a Division of HNS India VSAT Inc. and the said job was carried out in India in the State of Maharashtra. He invited our attention to a copy of the contract entered by the assessee company with WSS and pointed out that the assessee company was entitled to subcontract any or all of the work to be performed under the said contract. He submitted that part of the work to be performed in pursuance to the said contract was got done by the assessee company through subcontractors and payment was also made for the services rendered by the sub-contractors. He submitted that the expenditure incurred by the assessee company on account of such payments thus was a business expenditure of the assessee company and the same was rightly claimed by it as deductible in computing the business income. He submitted that the assessing officer, however, disallowed the same by invoking the provisions of section 40(a)(i) read with section 195 since no tax at source was deducted by the assessee company from the payments made to the subcontractors. In this regard, he contended that the sub-contractors were not liable to tax in India for the various reasons explained by the assessee company before the authorities below and therefore, no tax was deductible from the payment made by it to the said sub-contractors as per the provisions of section 195. He submitted that the services rendered by the said sub-contractors to the assessee company were not covered in the definition of 'technical services' given in Double Tax Avoidance Agreement between India and US and on this count also, the payment made by the assessee to the concerned sub-contractors from US was not covered by the provisions of section 195. He contended that the assessing officer thus was not correct in disallowing the sub-contracting expenses claimed by the assessee by invoking the provisions of section 40(a)(i) and the learned CIT (A) was not justified in confirming the said disallowance. He submitted that the disallowance on this count was also made by the assessing officer giving a reason that the services claimed to have been rendered by the sub-contractors to the assessee company did not fall within the scope of job carried out by the assessee company in terms of contract with WSS. In this regard, his contention was that this basis allegedly adopted by the assessing officer was mainly for the reason that terms of contract with the sub-contractors were not furnished/filed by the assessee company. He submitted that no such written agreement with the sub-contractors was entered into by the assessee company and since there was no such legal requirement to execute a written contract, there was no reason for the assessing officer to disallow the sub-contracting expenses mainly for the reason that the terms of contracts were agreed orally. He submitted that the findings /observations recorded by the assessing officer as well as by the learned CIT (A) while holding the provisions of section 195 to be applicable to the payments made by the assessee company to the concerned sub-contractors were sufficient to show that the factum of services rendered by the said sub-contractors was accepted even by them and in these circumstances, there was no justification in disallowing the claim of the assessee for sub-contracting expenses by saying that the services rendered by the sub-contractors did not fall within the scope of job carried out by the assessee company in terms of contract with WSS. He, therefore, contended that both the basis adopted by the assessing officer for disallowing the claim of the assessee for sub-contracting expenses were not well-founded and the learned CIT (A) was not justified in confirming the disallowance made by the assessing officer on this count.
5. The learned DR, on the other hand, submitted that the claim of the assessee that income of the sub-contractors was not taxable in India was found to be unacceptable by the authorities below for the specific reasons given in their orders and in the absence of any supporting evidence to support and substantiate this claim of the assessee, there was nothing to establish that the income of the said contractors was not chargeable to tax in India. He contended that, in any case, it was not for the assessee to decide this issue relating to the taxability of income of the concerned subcontractors in India since the machinery for this purpose was provided in sub-section (2) of section 195 itself whereby concerned assessing officer could have been approached to decide this aspect. He contended that the chargeability of income of the concerned sub-contractors to tax in India was a separate issue and in the absence of any certificate obtained from the concerned assessing officer under section 195(2), it was obligatory on the part of the assessee to deduct tax at source from the payments made to the concerned sub-contractors. He contended that the assessee company having failed to deduct such tax as required by section 195, the expenses incurred on payment made to sub-contractors was liable to be disallowed as per the specific provisions contained in section 40(a)(i). He also pointed out that different stand was taken by the assessee before the authorities below in the matter of filing copy of terms of contract with the sub-contractors inasmuch as on the one hand, it was submitted before the learned CIT (A) that sufficient opportunity had not been afforded by the assessing officer to file the same whereas on the other hand, when the learned CIT (A) allowed such opportunity, the assessee company failed to produce the same even before the learned CIT (A). He, therefore, strongly supported the orders of the authorities below and specifically invited our attention to the findings recorded by the learned CIT (A) in paragraph No. 2.5 of his impugned order to justify the disallowance of assessee's claim for sub-contracting expenses as well as travelling expenses in question.
6. We have considered the rival submissions and also perused the relevant material on record to which our attention was drawn during the course of hearing. It is observed that the sub-contracting expenses amounting to Rs. 58,72,144 claimed by the assessee were disallowed by the assessing officer on two grounds. Firstly, he held that the services rendered by the concerned sub-contractors did not fall within the scope of terms of main contract/job completed by the assessee in India in terms of main contract with WSS. This conclusion of the assessing officer was mainly based on the assessee's failure to file/furnish the terms of the contract with the subcontractors. Even before the learned CIT (A), such terms could not be furnished/filed by the assessee despite sufficient opportunity. The learned CIT (A), however, proceeded to examine the nature of services rendered by the sub-contractors on the basis of vouchers and other supporting documents produced by the assessee and came to the conclusion that the services rendered by the sub-contractors being mainly in connection with equipment installation and FSU installation, were absolutely technical in nature. This finding given by the learned CIT (A) on the basis of examination of the relevant supporting document sufficiently establishes that the services were rendered by the concerned sub-contractors in connection with the work of execution of project by the assessee in India in terms of its main contract with WSS and the department having not preferred any appeal before the Tribunal disputing the same, the first basis given by the assessing officer for disallowing the claim of the assessee-company for sub-contracting expenses no more survives.
7. Secondly, the expenses claimed by the assessee on account of subcontracting expenses on account of payments made to sub-contractors were disallowed by the assessing officer by invoking the provisions of section 40(a)(i) since the assessee had failed to deduct tax at source from the payment so made to the sub-contractors as required by the provisions of section 195. In this regard, the contention of the assessee before the learned CIT (A) as well as before us is that the income of the subcontractors was not chargeable to tax in India and therefore, payments made to them were not hit by the provisions of section 195 requiring the assessee to deduct tax at source there from. In support of this contention, the first plea raised by the assessee is that the concerned sub-contractors had no business existence or connection in India nor did they have any permanent establishment in India and therefore, their income was not chargeable to tax in India in terms of section 9(1). However, as categorically observed by the learned CIT (A), the services were being rendered by the concerned sub-contractors to the assessee on a continuing basis in connection with the project duration of which was about five years and this position was even admitted on behalf of the assessee as specifically noted by the learned CIT (A) in his impugned order. It was also admitted on behalf of the assessee before the learned CIT (A) that the said services were provided by the concerned sub-contractors in India and some of such services like installation, etc., were actually rendered at the Indian sites. Moreover, the fact that the employees of the concerned subcontractors travelled to India during the relevant period further fortified the conclusion drawn by the learned CIT (A) that the services were rendered by the sub-contractors, actually in India as well. All these findings of fact recorded by the learned CIT (A) on the basis of examination of the relevant vouchers as well as the other supporting documents were sufficient to support and substantiate his conclusion that technical services were being provided by the concerned sub-contractors to the assessee in India on continuing basis and payment of fees made to them for such technical services was covered by the provisions of section 195 requiring the assessee to deduct tax at source. At the time of hearing before us, the learned counsel for the assessee has not been able to establish that the findings recorded by the learned CIT (A) to come to this conclusion are factually incorrect. Even the attempt made by him to plead that the services rendered by the sub-contractors were not the "technical services" as defined in the relevant DTAA, i.e., India-US Tax Treaty is not supported by any cogent evidence and the learned CIT (A) having arrived at a conclusion that the said services rendered by the sub-contractors were absolutely technical in nature on the examination of the relevant vouchers as well as other documentary evidence, we find no merit in this plea raised by the learned counsel for the assessee. Moreover, the fact that no application was made by the asscssee under sub-section (2) of section 195 to the assessing officer also goes against the assessee because as held by Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT(1999) 239 ITR 587, if no such application is filed, income-tax on the sum chargeable under the Income Tax Act, 1961 payable to a non-resident is required to be deducted and it is the statutory obligation of the person responsible for paying such sum to deduct tax thereon before making payment. As such, considering all the facts and circumstances of the case, we are of the view that there was nothing on record to conclusively establish that the income of the concerned sub-contractor was not chargeable to tax in India and that the payments made to them were not covered by the provisions of section 195(1). In that view of the matter, we hold that the assessee-company was under an obligation to deduct tax at source from the payments made to the sub-contractors in terms of section 195(1) and having failed to do so, the assessing officer was fully justified in disallowing the same by invoking the provisions of section 40(a)(i). As such considering all the facts of the case, we are of the view that there was no infirmity in the impugned order of the learned CIT (A) confirming the said disallowance made by the assessing officer and upholding the same, we dismiss ground No. 1 of the assessee's appeal.
8. As regards ground No. 2 relating to the disallowance made by the assessing officer and confirmed by the learned CIT (A) on account of travelling expenses of the sub-contractors amounting to Rs. 22,90,926, we find it difficult to agree with the view of the learned CIT (A) that the assessee company was required to deduct tax from the payment of such expenses being in the nature of fees for technical services as per section 195 and having failed to do so, the said expenditure was liable to be disallowed as per the provisions of section 40(a)(i). In our opinion, the payment made by the assessee to the concerned sub-contractors on account of travelling expenses was not covered by the provisions of section 195 for the simple reason that the amount so paid was on account of reimbursement of actual expenses incurred by the sub-contractors and the same, therefore, could not be treated as income of the concerned subcontractors much less income chargeable to tax in India so as to attract the provisions of section 195. However, it is observed that the disallowance on this count was made also for the reason that a copy of agreement with the sub-contractors could not be produced by the assessee before the authorities below to support and substantiate its contention that there was an obligation on its part to bear the travelling expenses incurred by the sub-contractors. Even before us, copy of such agreement has not been produced by the assessee and we, therefore, find it difficult to accept that the substantial expenses on the travelling of concerned sub-contractors were borne by the assessee-company without there being any agreement in writing casting such obligation on it. In these circumstances, we are of the view that the travelling expenses of the sub-contractors claimed to have been borne by the assessee company could not be allowed as deduction in computing its income from business. In that view of the matter, we uphold the disallowance made by the assessing officer and confirmed by the learned CIT (A) on this issue and dismiss Ground No. 2 of the assessee's appeal.
9. In the result, the appeal of the assessee is dismissed.