2021 (12) TMI 1077 - AT - Income Tax

Disallowance of expenditure reimbursed - reimbursement of expenses to a non-resident placed at Dubai and South Africa - Addition u/s 40(a)(i) - addition on account of diversion of income - HELD THAT - As reimbursement of expenses of both the entities were for carrying out market research for feasibility and expansion of market in neighboring countries particularly in Gulf and African region and day-to-day coordination in activities for the assessee, negotiation and procurement of orders, securing of materials, supply and distribution of materials to destination sites, logistic support and follow up and liaisoning for projects under execution etc. - as also undisputed fact that these firms were actually carrying out these activities as it has secured work order of more than ₹ 35 crores for the assessee. The copy of work orders were filed before the AO along with various documents and relied upon the correspondence which shows that the efforts were made for getting the new business there. Sans any adverse material, AO cannot question the wisdom and business expectancy in which wake of such evidences and record which has been duly appreciated and taken note of by the ld. CIT (A). The documents which have been referred to in the first appellate order, as incorporated above, clearly show that both the entities i.e. Dubai based and South Africa based has assisted in the business development as well as procurement of huge business orders which was in line with the assessee s business i.e. supply, installation, commissioning and maintenance of DG sets, power equipment and its spares/accessories. There is no adverse material on record to rebut the aforesaid documents as highlighted by the ld. CIT (A) above. Therefore, we do not find any reason to uphold the addition on the ground that there are no commercial activities. Accordingly, the finding of ld. CIT (A) is confirmed. Disallowance made u/s 40(a)(i) - AO held that the said payment of reimbursement of expenses is in the nature of fee for technical services - As noted by the ld. CIT (A), there is no FTS clause in the India UAE DTAA regarding fee of technical services and, therefore, there cannot be any question of withholding of tax. Accordingly, disallowance u/s 40(a)(i) cannot be made. The aforesaid finding of ld. CIT (A) is accordingly confirmed. Addition on account of diversion of income - We are unable to subscribe to the view taken by the AO that it is a paper entity and, therefore, there was diversion of profit. First of all, Chadha Projects JLT, Dubai is an independent entity incorporated under the laws of UAE and was carrying out various activities helping, assisting and getting contracts and procurements of orders for assessee firm and has also disclosed profits in its balance sheet of AED 7,92,674 including mark-up. If the non-resident entity has shown profit, then same cannot be added in the hands of the assessee company as income in India. Firstly, there is no evidence to prove that this was some kind of sham arrangement of profits along with markup and secondly, catena of documents and evidences were filed that the said entity is working there and for which mark-up of 10% of management fees is given, therefore, it cannot be held that all those documents are bogus or sham without any material information on record. Accordingly, findings of ld. CIT (A) on this score are also confirmed. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of reimbursement of expenses not backed by commercial expediency and non-deduction of TDS under section 40(a)(i).
2. Deletion of addition on account of diversion of income to a tax-free jurisdiction.
3. Deletion of addition by treating certain expenses as non-business expenditure.
4. Classification of reimbursement expenses as 'fee for management services' and applicability of TDS provisions.
5. Taxability of 'fee for technical/management services' payable by a resident in India.
6. Nature of support services provided by foreign entities and their taxability in India.
7. Alleged diversion of income and inflation of expenses by the assessee firm.

Detailed Analysis:

1. Deletion of Addition on Account of Reimbursement of Expenses:
The Revenue argued that the CIT(A) erred in deleting the addition of ?1,30,51,568/- made on account of reimbursement of expenses to Chadha Projects JLT, Dubai, which was not backed by commercial expediency and was disallowed under section 40(a)(i) due to non-deduction of TDS. The Assessing Officer (AO) found that the expenses claimed were not justified as commercially expedient and were paid without deducting TDS. However, the CIT(A) concluded that the expenses were indeed commercially expedient, supported by various documents, including service agreements and financial statements. The Tribunal upheld the CIT(A)'s findings, noting that the entities provided substantial business development services, securing significant work orders for the assessee.

2. Deletion of Addition on Account of Diversion of Income:
The AO added ?1,07,70,378/- to the assessee's income, alleging diversion of income to Chadha Projects JLT, Dubai, a tax-free jurisdiction. The AO claimed the entity was created to divert income and inflate expenses. The CIT(A) disagreed, stating that Chadha Projects JLT was an independent entity incorporated under UAE laws, performing legitimate business activities and earning profits. The Tribunal confirmed the CIT(A)'s view, emphasizing the lack of evidence to prove the arrangement was sham and noting the substantial business activities and profits disclosed by the Dubai entity.

3. Deletion of Addition by Treating Certain Expenses as Non-Business Expenditure:
The AO disallowed ?21,33,805/- paid to Chadha Power (SA) Pty. Ltd., South Africa, treating it as non-business expenditure and applying section 40(a)(i) for non-deduction of TDS. The CIT(A) found the expenses justified, supported by documents showing the South African entity's role in business development and coordination. The Tribunal upheld the CIT(A)'s decision, noting the substantial business activities and coordination efforts by the South African entity.

4. Classification of Reimbursement Expenses as 'Fee for Management Services':
The AO classified the reimbursement expenses as 'fee for management services' and applied section 40(a)(i) for non-deduction of TDS. The CIT(A) observed that the India-UAE DTAA did not have a specific clause for fee for technical services, thus Article 22 for other income would apply, making the income taxable only in the resident state (UAE). The Tribunal confirmed this view, stating that no TDS was required under the DTAA, and thus, disallowance under section 40(a)(i) was not applicable.

5. Taxability of 'Fee for Technical/Management Services':
The AO argued that the fee for technical/management services payable by a resident is taxable in India unless the business is carried outside India. The CIT(A) and Tribunal found that the services provided by the Dubai and South African entities were utilized outside India, and under the India-UAE DTAA, no tax was required to be withheld, thus making the disallowance under section 40(a)(i) inapplicable.

6. Nature of Support Services Provided by Foreign Entities:
The AO claimed that the support services provided by the Dubai and South African entities were in the nature of fee for technical services and taxable in India. The CIT(A) and Tribunal found substantial evidence of legitimate business activities and coordination efforts by these entities, supporting the commercial expediency of the expenses. The Tribunal upheld the CIT(A)'s findings, emphasizing the lack of adverse material to rebut the evidence provided by the assessee.

7. Alleged Diversion of Income and Inflation of Expenses:
The AO alleged that the Dubai entity was used to divert income and inflate expenses. The CIT(A) and Tribunal found no evidence to support this claim, noting the legitimate business activities and profits disclosed by the Dubai entity. The Tribunal confirmed the CIT(A)'s view, stating that the arrangement was not sham and the expenses were commercially expedient.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s findings on all issues. The Tribunal emphasized the substantial evidence provided by the assessee, supporting the commercial expediency of the expenses and the legitimate business activities of the foreign entities. The Tribunal also upheld the CIT(A)'s interpretation of the India-UAE DTAA, making the disallowance under section 40(a)(i) inapplicable.