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TMI Blog2016 (6) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... xable is if the income accrues or arises or is deemed to accrue or arise in India. Undoubtedly, in the present case no income has accrued to the nonresident person in India. The dispute may be only with regard to the impugned amount being income 'deemed to accrue or arise in India'. Various instances of income considered to be deemed to accrue or arise in India to a non-resident are provided in section 9 of the Income Tax Act. On going through the relevant article provided in the DTAA, we observe that invariably in all the DTAAs to which we are concerned, the income is taxable in India only if that foreign entity carries on business in India through a permanent establishment situated in India. We again observe that no such finding with regard to existence of any permanent establishment in India has been brought on record by any of the lower authorities or even by the learned D.R. at the time of hearing before us. In view of this, the position emerges that the payment to a person who happens to be a resident of country with whom India has entered into DTAA and where the business profits are taxed only in the country and does not have a permanent establishment in India, the said p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no clear facts were stated in this regard. In view of all this, we find it proper to send this limited issue to the file of the Assessing Officer to give a clear finding as to whether the provisions of Explanation 1 to section 37(1) of the Act are applicable to the facts of the case or not. The assessee should be given a proper opportunity of being heard in this regard. We would like to clarify here that the outcome of this ground will not effect our findings on other grounds of appeal, as the issue here is the allowability of expenditure while the other issues are disallowance of expenditure in view of the provision of section 40 (a)(i) of the Act. - Decided in favour of assessee for statistical purposes. - ITA No.52/Chd/2016 - - - Dated:- 24-5-2016 - SHRI BHAVNESH SAINI , JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER For The Appellant : Shri Tej Mohan Singh For The Respondent : Shri Sushil Kumar , CIT DR The appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-2, Chandigarh dated 14.12.2015, relating to assessment year 2009-10. 2. The ground No.1 raised by the assessee reads as under : 1. That t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Development. The wholly owned subsidiaries of the assessee to whom the money has been advanced are providing market support to the assessee. Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. Vs. CIT 379 ITR 347 (SC) and that of Hon'ble Punjab Haryana High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT [2016] 381 ITR 107 and CIT Vs. Kapsons Associates (2016) 381 ITR 204 (P H). 6. The learned D.R. while arguing before us stated that since the interest bearing funds have been advanced to the wholly owned subsidiaries abroad and interest expenditure on account of such funds, which has been raised from the bank, has been claimed by the assessee in its Profit Loss Account. Under these circumstances, a duty is cast on the assessee to establish that such interest bearing funds advanced to the wholly owned subsidiaries is for the purpose of business as provided under section 36(1)(iii) of the Act. The assessee had failed to establish any nexus between the borrowed funds to the application of these funds that the same are for the purpose of business. Reliance was placed on the judgment of the Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observe that even the Hon'ble Supreme Court has endorsed the view that since a holding company has a deep interest in its subsidiary and if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee is entitled to deduction of interest on the borrowed funds. In the present case, there is no dispute about the fact that the amounts have been advanced to the wholly owned subsidiaries of the assessee company and there is no fact brought on record by any of the lower authorities that the amounts have been used by these subsidiary companies for any purpose other than their business purposes. In view of this, we are inclined to hold that the amounts given to subsidiary companies were on account of commercial expediency. Therefore, no disallowance invoking the provisions of section 36(1)(iii) of the Act can be made in this case. The ground No.1 raised by the assessee is allowed. 9. Since all other grounds are inter-connected, these are being dealt together with. 10. The ground Nos.2, 3, 4, 5 and 6 raised by the assessee read as under : 2. That the Ld. Commissioner of Income Tax (Appeals) has fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement between the assessee and the contract of the services with these entities abroad is entered into by the assessee company and, therefore, the responsibility under the terms of the contract is that of the assessee company and hence, the source of income for them is the place from where it emanates. In view of this, he held that these payments made to the non-residents are their deemed income in India on which no TDS is deducted. Invoking the provisions of section 40(a)(i) of the Income Tax Act, 1961 (in short 'the Act'), The Assessing Officer made disallowance of an amount of ₹ 5,31,28,742/-. 12. The Assessing Officer also noted that the commission has been paid at various rates to Steven International and IMCS. The commission to IMCS, Tunisia was paid @ 21.45% and Steven International @ 1.79%. He further observed that the commission to IMCS was for Augusta project and assessee is also involved in Augusta Westland helicopter deal, wherein CBI has taken investigation into the deal. The contract with IMCS says that it has merely referred Augusta SPA based in Italy and introduced and assisted in execution of an agreement and assisted in selling services and facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a direct benefit to the assessee company and hence the payment made by the Indian company for services utilized is not in connection with the business and profession carried out outside India. The business outside India is secured by the Indian company. The source of income for the services rendered by the non-resident entities is in India as the Indian company gives directions for the work abroad. Therefore, the income for the non-resident entities accrues and arises in India. He further distinguished the cases relied on by the assessee stating that these cases deal with the business connection wherein the services have been rendered outside India. He observed that the issue in hand is to decide whether the services rendered by non-resident entities and payment made by the assessee establishes business connection in India and as per the source of these payments, these are in the nature of fees for technical services. For the meaning of the term 'business connection', he relied on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. R.D. Aggawal Co. (1965) 56 ITR 20. With regard to the term 'fees for services', he placed reliance on the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. He further argued that all these payments are related to the business of the non-resident entities and as per section 9(1) of the Act, these incomes are not taxable if these entities have no business connection or permanent establishment in India. Reliance was placed on a number of judgments on this issue. He further stated that the income accrues at the place where services are performed. Since in the present case, the non-resident entities have performed services outside India, therefore, their income is not taxable in India. With respect to marketing, export service, business development outsource expenditure and communication expenses, it was stated that none of these activities are undertaken in India. The amount spent can neither be said to have accrued or arisen in India in the absence of any business connection in India. 17. Section 90 of the Act provides that where the Central Government has entered into an agreement with the Government of any country outside India for avoidance of double taxation, then in relation to an assessee belonging to such country, the provisions of Income Tax Act shall apply to the extent they are more beneficial to the assessee. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e absence of nature of services rendered coming out from the record it is to be presumed that the services were rendered to 'make available' some technical services to the assessee. These submissions were made with respect to the finding of the learned CIT (Appeals) that the payments made by the assessee to the non-residents are in the nature of 'fees for technical services' in the hands of such foreign entities. For other finding with regard to business connection or some payments made by the assessee being illegal in nature, he placed reliance on the order of the learned CIT (Appeals). 20. In the rejoinder, the learned counsel for the assessee vehemently argued that the learned CIT (Appeals) has not given any categorical finding characterizing the services rendered being in the nature of 'fees for technical services'. Therefore, the issue of 'fees for technical services' does not arise in the present case. Without prejudice, it was stated that even if assuming for argument sake that such services qualify as 'fees for technical services', it has to be seen whether these services will qualify as fees for included services as mentioned in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices'. The learned counsel for the assessee vehemently argued that no such finding has actually been given by the learned CIT (Appeals). However, he also made submissions that for the conclusion that these payments were in the nature of 'fees for technical services', one has to go to the provisions of DTTA also. The learned D.R. on the issues raised by the Assessing Officer placed reliance on the order of the learned CIT (Appeals), while with regard to the issue of 'fees for technical services' raised by the learned CIT (Appeals), his submission was that in the absence of exact nature of services rendered by the assessee, coming out of the various agreements and invoices, it is to be presumed that the payments are in the nature of 'fees for technical services'. With respect to the DTAA also, his submission was that in the absence of any such nature coming out of record, it is to be presumed that the services have been 'made available' to the assessee. Therefore, the same is exigible to the provisions of tax deduction at source. 24. Now the issues for adjudication, coming in this background, before us are as follows : i) Whether the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 26. The most important terms in the provisions of this section are 'on which tax is deductible at source' under Chapter-XVII, meaning thereby that only those payments made to non-residents on which tax is required to be deducted as provided under the relevant Chapter, the provisions of this section can be invoked. Chapter-XVII deals with collection and recovery of taxes while part-B of this Chapter deals with tax deduction at source, the provisions relating to tax to be deducted out of payment made to a non-resident are provided in section 195 of the Act, which read as under : 195(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries ]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed to accrue or arise in India'. Various instances of income considered to be deemed to accrue or arise in India to a non-resident are provided in section 9 of the Income Tax Act. For the purpose of adjudicating the issues arising in the present appeal, the relevant provisions are that of section 9(1)(i) of the Act, which read as under : 9 (1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, 135 [***] or through the transfer of a capital asset situate in India; [Explanation 1]: For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident or have a controlling interest in the principal nonresident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status.] 30. We are to judge from the facts and circumstances of the present case whether the impugned payments are deemed to accrue or arise in India to the respective recipients, as we have already mentioned that only those payments which are of the nature of sum chargeable under the provisions of the Act are exigible for provision of tax deduction at source. Here we are inclined to refer to the judgment of the Hon'ble Supreme Court in the case of G.E. India Technology Centre Pvt. Ltd. Vs. CIT (2010) 327 ITE 456 (SC), whereby it has been held that section 195 (1) of the Act uses the expression 'sum' chargeable under the provision of the Act and weightage is needed to be given to these words. Further, section 195 uses the word 'payer' and not the word 'assessees'. The payer is not assessee. The payer becomes an assessee in default only when he fails to fulfill statutory obligation under section 195(1) of the Act. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, the income is deemed to accrue or arise in India if it is directly or indirectly through or from any business connection in India. Further, the business connection has to be an activity of the non-resident in the taxable territory is India having intimate and near relation of a continuous nature of the business of the non-resident and attributed to the earning profits by the non-resident in his business. We should understand that all commercial relations will not necessarily constitute business connection unless a commercial connection is really and intimately connected with the business activity of nonresident in India and is contributory to the earning of the profits in the said activity of the non-resident. Some illustrative instances of non-residents having business connection in India have been quoted in the judgment of the Hon'ble Supreme Court in the case of R.D. Aggarwal (supra), which are as under : i) Maintain a branch office in India for purchase or sale of goods or transacting other business. ii) Appointing an agent in India for systematic and regular purchase of raw material or other commodities, or for sale of non-resident goods or for other busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... countries. 36. With regard to the fact that all these entities relate to the countries with whom India has DTAAs though in view of the finding given by us in the above paragraph that the amounts are not in the nature of income in the hands of the recipients, we need not go into the respective treaties, in view of the fact that the provisions which are beneficial to the assessee are to be taken care while fastening tax liability. 37. The basic principle to be applied in such cases is that one has to first look at the domestic law to find out if the non-resident assessee is taxable thereunder. If it is taxable, only then one has to go into the treaty, if any, between India and the country to which the non-resident belongs, to, find out if there is any beneficial provision in the treaty to exempt the assessee from taxation or reduce the rig ours of the domestic law. If there is such a provision in the treaty, the assessee is entitled to claim that it should be given the benefit of the treaty provisions. On the other hand, if the assessee is not taxable under the domestic law itself, there is no need to look into the provisions of the DTAA, even if one exists, to find out if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d settlement of disputes. Further referring to the services rendered by IMCS, he explained that these are concerned with the introduction and assistance in execution of an agreement and assisting in selling services and facilitating relationship with Augusta staff. In this background, he stated that the services provided by IMCS are not commensurate with the commission. Therefore, the services are not being rendered for the purpose of business and profession. There is no dispute with respect to the fact that both IMCS and Steven International are not related parties of the assessee company. Analysis of payment made to an entity which is not related in any way with the assessee is not an exercise expected from the Assessing Officer. We do not understand under what provisions the Assessing Officer is trying to make out the case that the payment made to IMCS are not commensurate with the work done by them. It is the prerogative of the businessman to run its business the way he wants. The Assessing Officer for the purpose of Income Tax Act cannot question the reasonableness of any such payment made by the assessee. Therefore, we do not find this allegation of the Assessing Officer back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces', which he expressed in following terms: The Hon'ble Supreme Court in the case of GVK Industries Ltd. [2015] 371 ITR has held that the nature of service rendered by the non-resident would come within the ambit and seep of expression 'consultancy service' and hence tax should have been deducted at source as the amount paid as fee could be taxable under he head 'fees for technical services' 43. From bare perusal of the above sentence one can very easily infer that the learned CIT (Appeals) here also has not given any finding, in fact here he is only referring to the judgment of Hon'ble Supreme Court in the case of GVK Industries Ltd. (supra). 44. In view of the above, we see that the learned CIT (Appeals) has not given any finding that the payments in question are 'fees for technical services' in nature. We understand the law that in case a payment is held to be in the nature of 'fees for technical services', the place of rendering services becomes irrelevant in view of the provisions of section 9(1)(vii) of the Act. However, even if the argument of the learned D.R. is accepted that the learned CIT (Appeals) has given a fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of technical services, no income deemed to have accrued to the non-resident entities, there is no liability on the assessee to deduct tax at source on such payment. Therefore, the provisions of section 40(a)(i) of the Act are not exigible in the present case. 45. We may clarify that we have not dealt with each expenditure specifically, since the issues involved in all these expenses were common and we did not find any inclination to deal each expenditure separately. Ground Noos.2, 3 and 4 are allowed. 46. The next question is with respect to payments made to IMCS amounting to ₹ 73,79,858/-, whether attract the provision of Explanation 1 to section 37(1) of the Act. In this regard, no clear-cut finding of fact has been arrived at by any of the lower authorities as to what offence or an act prohibited by law has been done by the assessee. Even the Assessing Officer has made just a cursory mention of some search from CBI being carried out at the directors' residence only. Even during the course of hearing before us, no clear facts were stated in this regard. In view of all this, we find it proper to send this limited issue to the file of the Assessing Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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