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2016 (7) TMI 580 - AT - Income TaxTDS u/s 195 - whether the payments made by the assessee to its foreign subsidiaries would fall under the ambit of fees for technical services as per the DTAA - PE in India - Held that - We find that as per Article 7 of UK and Singapore Treaty, in the absence of PE in India, the business income also would not get taxed in India. Hence we hold that the payment made by the assessee to its subsidiaries is not chargeable to tax in India in the hands of the subsidiaries in India. The provisions of section 195(1) of the Act mandates a requirement that the income should be chargeable to tax in India to assume jurisdiction in India. In the instant case, it is proved beyond doubt that the subsidiaries do not have any income chargeable to tax in India and hence the decision rendered by the Hon ble Apex Court in the case of GE India Technology Centre P Ltd vs CIT reported in (2010 (9) TMI 7 - SUPREME COURT OF INDIA ) supports the case of the assessee. Thus we have no hesitation in directing the Learned AO to delete the disallowance made u/s 40(a)(i) of the Act in respect of payments made to foreign subsidiaries. - Decided in favour of assessee Disallowance made u/s 14A - Held that - We hold that the investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn any exempt income in the form of dividend but only for obtaining controlling interest in the said companies and to further the business interests of the assessee in the said company. Thus we hereby direct the Learned AO to recomputed the disallowance u/s 14A of the Act after eliminating the strategic investments made in subsidiaries and investments yielding taxable income. - Decided in favour of assessee for statistical purposes. Disallowance of club expenses - Held that - We find that the Learned CITA had observed in his order that the assessee had not provided even the basic details as to in whose name the membership is taken and who were the other persons visiting in the name of the Director and whether it was in the name of individual or corporate membership. We find that these facts are crucial for the purpose of deciding the issue. Hence we deem it fit and appropriate to set aside this issue to the file of the Learned AO to decide this issue afresh, in accordance with law, with a direction to the assessee to produce the necessary evidences in support of its claim. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Whether payments made by the assessee to its UK and Singapore subsidiaries fall within the ambit of 'Fees for Technical Services' and if so, whether disallowance under section 40(a)(i) of the Income Tax Act, 1961 could be made. 2. Whether the disallowance made under section 14A of the Act was justified. 3. Whether the disallowance of club expenses was justified. Issue-wise Detailed Analysis: 1. Payments to UK and Singapore Subsidiaries: The primary issue was whether payments made by the assessee to its UK and Singapore subsidiaries constituted 'Fees for Technical Services' (FTS) under the Double Taxation Avoidance Agreements (DTAAs) with the UK and Singapore, and consequently, whether disallowance under section 40(a)(i) of the Income Tax Act, 1961 was applicable. The assessee, a stockbroker company, made payments to its wholly-owned subsidiaries for marketing support and research services. The Assessing Officer (AO) contended that the payments were taxable as FTS and disallowed the expenses under section 40(a)(i) due to non-deduction of TDS. The CIT(A) upheld the AO's view, stating that TDS should be deducted on gross payments, not just on the income element. The Tribunal analyzed the DTAAs and concluded that the services rendered by the subsidiaries did not make available any technical knowledge, skill, or know-how to the assessee. The services were simple marketing support and research services, which did not fall under the definition of FTS as per the DTAAs. Consequently, the payments were not taxable in India in the absence of a Permanent Establishment (PE) of the subsidiaries in India. The Tribunal directed the AO to delete the disallowance made under section 40(a)(i). 2. Disallowance under Section 14A: The AO made a disallowance under section 14A read with Rule 8D, amounting to ?6,45,802, on the premise that the assessee must have incurred certain expenditure for earning exempt income. The CIT(A) upheld the disallowance but granted partial relief by excluding investments in mutual funds with taxable dividends. The Tribunal held that investments in subsidiary companies should be treated as strategic investments, made for acquiring controlling stakes and not for earning exempt income. Therefore, disallowance under section 14A should not apply to such investments. The Tribunal directed the AO to recompute the disallowance by excluding strategic investments in subsidiaries and investments yielding taxable income. 3. Disallowance of Club Expenses: The AO disallowed club expenses of ?1,36,500, treating them as personal expenses of the director. The CIT(A) upheld the disallowance due to lack of evidence regarding the nature of the expenses. The Tribunal noted that the assessee did not provide basic details regarding the membership and usage of the club facilities. The Tribunal set aside the issue to the AO for fresh adjudication, directing the assessee to produce necessary evidence to support its claim that the expenses were incurred for business purposes. Conclusion: The Tribunal allowed the appeals of the assessee for statistical purposes, directing the AO to delete the disallowance under section 40(a)(i) for payments to subsidiaries and to recompute the disallowance under section 14A by excluding strategic investments. The issue of club expenses was remanded to the AO for fresh consideration.
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