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2017 (4) TMI 1645 - AT - Income TaxTDS u/s 195 - disallowance u/s 40(a) - payments made to foreign entities - HELD THAT - In this case it was held that the expression professional services in article 14 of the Agreement for Avoidance of Double Taxation between Germany and India is wide enough to include services, if any, rendered by the applicant as an engineer and marketing consultancy services rendered by the applicant were in the nature of professional services falling u/s 14 of the Double Taxation Avoidance Agreement between India and the Federal Republic of Germany. The conditions mentioned in the said article were clearly satisfied, as there was no permanent establishment in India in the facts and circumstances of the case. The professional fees and fee for independent personal services receivable by the applicant were not taxable in India. Where an individual (who is not a salaried employee) renders independent, personal services in the foreign state, then such independent personal services are covered by Article-14 whereby they would only be taxable in the foreign state where the independent individual is resident. So in this case, the payee who an individual is rendering such professional or independent personal services is only taxable under Article-14 in Germany where he is resident. The payment has been made to foreign payee abroad for the services rendered outside India. Since income itself was not chargeable to tax in India, therefore, there was no liability of the assessee to deduct tax u/s 195(1) and hence section 40(a)(ia) is not applicable. The assessee thus get relief. Payment to Huntswood Marketing Ltd., London - The assessee submitted that this is a payment for consultancy charges towards Designing services provided to the assessee outside India The consultancy services involved were in relation to information concerning designs and patterns of readymade garments available in the foreign market. Managerial or consultancy or technical services referred under FTS involve provision of expert opinion based on individual technical or professional knowledge. Such services cannot be FTS either under the Act or under the DTAA because no technical or managerial or consultancy services were provided by the foreign payee. The nature of payment made to Huntswood Marketing Ltd. does not qualify to be exempted under the category of services under DTAA. In this case, the foreign payee is providing designing services which is nothing but technical services as defined under DTAA between India and UK. Thus, the addition has rightly been confirmed by the CIT(A). Accordingly, we find no infirmity in the order of learned CIT(A) who has passed a very reasoned order and accordingly all the grounds of the Revenue as well as the grounds raised in the cross objection by the assessee are dismissed. Disallowance of amount out of interest paid on account of notional interest on the said interest free advance given against purchase of guest house property - Actual interest being paid to banks on various business loans and limits is less than the rate of interest of 14.5% applied by the AO - HELD THAT - Two facts needed to be established by AO in the case of disallowance of interest on borrowed fund u/s. 36(1)(iii) against interest free advance given to sister concerns. First is the nexus between the borrowed funds and the commercial expediency. The schedule 1 2 of the relevant balance sheet shows reserves surplus, share capital that indicates availability of interest free funds. The assessee claims that advances were made from interest free funds. The facts of this case have to be considered in the light of the judgment of Bharti Televentures 2011 (1) TMI 326 - DELHI HIGH COURT the assessee was found to be having an adequate non- interest bearing fund by way of share capital and reserves. Even otherwise the advances were found to be made to the subsidiaries for business considerations which is nothing but commercial expediency of the assessee but being in the factually opposition reflected from the record of the assessee, the onus that laid on it stood discharged. It is defined that 'Commercial expediency' is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The assessee has explained the commercial need supported by documentary evidences. Unless AD brings some other facts to contradict the explanation and the documents submitted in support of such explanation, the same has to be treated as true. Comparison of interest paid to other directors on debentures and not charging interest on the advance given to other director is a business decision of the assessee. Such comparison does not indicate nexus between the borrowed fund and the interest free advance given to related parties. The need to establish the nexus is more important in the scenario when out of total interest expenses on borrowed fund Rs. 1,49,99,992/- an amount of Rs. 1,02,22,500/- is disallowed. The basic requirements of disallowances that is nexus between interest bearing fund and interest free advance and adequacy of interest free fund are not analysed by AO during assessment proceedings. The assessee explained before the AO that advance was given for some business purposes which did not materialize. Hence, the same has been received back during the subsequent year. Thus, in the absence of any finding, contrary to the explanation given by assessee, it cannot be held that the loan was not given for any business purpose. Assessee having adequate non-interest bearing fund it can be inferred that the loan given has no bearing on the interest expense claimed by assessee on the borrowed fund. CIT(A) has rightly deleted the disallowance and we find no infirmity in the order of learned CIT(A). Accordingly grounds of the Revenue are dismissed.
Issues Involved:
1. Deletion of disallowance under Section 40(a) for payments made to foreign entities. 2. Application of Finance Act 2010 and Section 9 of the Income-tax Act. 3. Interpretation of Article 12 of the DTAA between India and Germany. 4. Deletion of disallowance of interest payment for interest-free advance given to the daughter of the Managing Director. 5. Consideration of the case of CIT v. Abhishek Industries Ltd. regarding the nexus between interest-free funds and advances. Detailed Analysis: Issue 1: Deletion of Disallowance under Section 40(a) The Revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 7,27,532/- made by the AO under Section 40(a), arguing that the services rendered were managerial/technical services as per Explanation 2 of Section 9(1)(vii)(b) of the Income-tax Act. The AO had added back payments made to foreign entities for professional and consultancy services, asserting that these payments were subject to TDS under Section 195. However, the CIT(A) found that the services rendered by the foreign entities did not qualify as technical services under the DTAA and were business profits not taxable in India due to the absence of a permanent establishment. Issue 2: Application of Finance Act 2010 and Section 9 of the Income-tax Act The AO relied on the amended provisions of Section 9(2) of the Income-tax Act, which clarified that income from technical services deemed to accrue in India was taxable regardless of the non-resident's location or service rendering. The CIT(A) disagreed, noting that the services rendered outside India and payments made outside India were not taxable under the DTAA, as the foreign entities had no permanent establishment in India. Issue 3: Interpretation of Article 12 of the DTAA between India and Germany The Revenue argued that Article 12 of the DTAA with Germany mandated that consultancy charges paid to Martin Zaepfel, Germany, were taxable in India. The CIT(A) and the Tribunal found that the services rendered were not managerial or technical but were merely business support services, arranging business meetings, and thus not covered under FTS. The Tribunal upheld the CIT(A)'s decision, noting that the services did not involve any transfer of technology or technical know-how. Issue 4: Deletion of Disallowance of Interest Payment for Interest-Free Advance The AO disallowed interest payment of Rs. 1,02,22,500/- on the grounds that the assessee failed to prove commercial expediency for advancing interest-free loans to the daughter of the Managing Director. The CIT(A) deleted the disallowance, citing the Delhi High Court's judgment in Bharti Televentures, which emphasized the need to establish a direct nexus between borrowed funds and interest-free advances. The Tribunal found that the assessee had sufficient interest-free funds and that the advance was given for a business purpose, which did not materialize, and was refunded in the subsequent year. Issue 5: Consideration of CIT v. Abhishek Industries Ltd. The AO referenced the case of CIT v. Abhishek Industries Ltd., which held that the onus of establishing the nexus between interest-free funds and advances is on the assessee. The CIT(A) and the Tribunal found that the assessee had adequately demonstrated the availability of interest-free funds and commercial expediency, thus justifying the deletion of the disallowance. Conclusion: The Tribunal upheld the CIT(A)'s order, finding no infirmity in the deletion of disallowances under Section 40(a) and the interest payment disallowance. The Tribunal concluded that the payments made to foreign entities were not taxable in India under the DTAA, and the interest-free advance given to the daughter of the Managing Director was for a business purpose, supported by adequate interest-free funds. Consequently, both the Revenue's appeal and the assessee's cross-objection were dismissed.
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