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2019 (5) TMI 1882 - AT - Income TaxTDS u/s 195 - addition u/s 40 (a)(i) being the payment made to non resident associate enterprise - Whether Income in question accrued in India and is liable for TDS? - HELD THAT - It can be clearly inferred that the Assessee and Associated Enterprises though being AEs, are operating on a principal to principal model and there is no Principal-Agent relationship between JAS India and its AEs/Affiliates. From the documentary evidences depicting negotiations, quotations, contracts and exchange of e-mail correspondence between JAS India and end-customers in India along with underlying invoices which have been placed on record pursuant to our directions, it is seen that the terms of contracts with clients distinctively specify the principal-to principal relationship between the parties. Mere use of the word agency is not sufficient to conclude that the Assessee and the AEs do not operate on principal-to-principal basis and nomenclature is not the determinative factor. The above mentioned evidences filed clear show that JAS India has not been impelled by any instructions from AEs/Affiliates and the specific clause to this effect has been mentioned in the agreement. It has also been informed to us that above principle of 50 50 Profit Split are a widely accepted pricing formula prevalent across the global freight-forwarding industry at large. We find that there is merit in the alternate plea of the Assessee is that since the above transactions are at arm s length for the aforesaid year, no further attribution can be made even if PE is established. TPO s order u/s 92CA (3) dated 26.10.2010, has been placed before us wherein no adverse inference was drawn in respect of the international transactions undertaken by the Assessee during the relevant year. It is now a settled principle that even if there is a business connection, no further income can be chargeable to tax in India on account of PE since the transaction between the Assessee and its AE has been found at arm s length. The payments made to non-resident are not on account of rendering any services in the nature of technical or professional services or fees for technical services or getting any income on account of royalty, albeit the nature of activities performed by the non-resident are purely business activities. The AEs are carrying on the business of freight forwarding services in their respective jurisdictions which are mirror reflection of the business activities carried on by the Assessee - As there is no business connection in India , therefore, we hold that the Assessee was not under an obligation to deduct tax u/s 195 of the Act. Correspondingly, no disallowance could be made u/s 40(a)(i) of the Act. Thus, we uphold the order of the CIT (A) and the appeal filed by the Revenue accordingly is dismissed. Reimbursement of expenses - Allowable business expenses or not? - HELD THAT - We find that the nature of reimbursement is of such expenses which are purely in the nature of day-to-day expenses of the business activities of the Assessee. The copy of the invoices, ledger accounts etc. have been filed before us. We find that the nature of expenses includes server maintenance Cost, netting charges, management expenses, travelling cost, insurance expense etc., which are an integral part of running of a business and for undertaking day-to-day activities. The Ld. AO/CIT(A) have not doubted the genuineness of the expenses. In fact, even the nature of the expenses stands accepted. Thus, the domain of commercial expediency cannot be entered into. We find that this issue in principle is covered in the case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT and is directly applicable on the facts of the present case as the evidences have already been filed by the Assessee and as stated above, the expenses being reimbursed are regular business expenses. Thus, the appeal filed by the Assessee succeeds.
Issues Involved:
1. Whether the Assessee was liable to deduct TDS on payments made to its Associated Enterprises (AEs) and the applicability of Section 40(a)(i) of the Income Tax Act. 2. The disallowance of expenditure amounting to ?21,58,139 by the Assessing Officer under Section 40(a)(i) and its confirmation by the CIT(A). Detailed Analysis: 1. TDS Liability on Payments to AEs and Applicability of Section 40(a)(i): The primary issue was whether the Assessee was liable to deduct TDS on payments made to its AEs, and whether the disallowance under Section 40(a)(i) made by the Assessing Officer was correct. - Business Model of the Assessee: The Assessee is engaged in international freight forwarding through air and ocean. The business model involves three types of services: Origin Services, Cross Border Freight, and Destination Services. The Assessee and its AEs provide a mirror reflection of services in their respective territories, and no part of the services is provided in the Indian Territory by the AEs. - Assessing Officer’s View: The Assessing Officer held that the payments made to the overseas AEs were subject to TDS under Section 195 of the Act, arguing that the non-resident AEs had a business connection in India through the Assessee. - CIT(A)’s Findings: The CIT(A) found that the Assessing Officer failed to establish any business connection of the non-resident AEs in India. The CIT(A) noted that the payments made were not chargeable to tax in India as the services were rendered outside India. The CIT(A) relied on the Supreme Court's judgment in GE India Technology Cent. (P.) Ltd. (327 ITR 456) which held that TDS is required only if the payment is chargeable to tax in India. - Tribunal’s Decision: The Tribunal upheld the CIT(A)’s order, stating that the Assessee and its AEs operate on a principal-to-principal basis and there is no principal-agent relationship. The Tribunal noted that the contracts and invoices clearly indicated a principal-to-principal relationship and that the AEs did not carry out any business operations in India. The Tribunal also referred to the Supreme Court’s judgments in Morgan Stanley (292 ITR 416) and Honda Motor Co. (301 CTR 601) to support the view that no further income can be attributed to the PE if the transactions are at arm’s length. The Tribunal dismissed the Revenue’s appeal. 2. Disallowance of Expenditure of ?21,58,139: The second issue was the disallowance of expenditure amounting to ?21,58,139 by the Assessing Officer under Section 40(a)(i) and its confirmation by the CIT(A). - Nature of Expenses: The expenses included server maintenance costs, netting charges, management expenses, traveling costs, NVOCC insurance expenses, and NVOCC tariff filing expenses. These were reimbursed by the Assessee to its AEs on a cost-to-cost basis. - CIT(A)’s Observations: The CIT(A) accepted that these reimbursements do not fall within the domain of fees for technical services. However, the CIT(A) disallowed the amount on the grounds of commercial expediency under Section 37. - Tribunal’s Decision: The Tribunal found that the nature of the expenses was integral to the day-to-day business activities of the Assessee. The Tribunal held that the reimbursement of expenses does not represent income and hence, the Assessee was not liable to deduct TDS before making the payments. The Tribunal referred to the Supreme Court’s judgment in S.A. Builders (288 ITR 1) and allowed the Assessee’s appeal, stating that the expenses were genuine and related to the business of the Assessee. Conclusion: The Tribunal dismissed the Revenue’s appeal regarding the TDS liability on payments made to AEs and upheld the CIT(A)’s order. The Tribunal allowed the Assessee’s appeal concerning the disallowance of ?21,58,139, holding that the expenses were genuine business expenses and not subject to TDS.
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