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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 ..... ted in Profit & Loss Account. The Assessing Officer observed that substantial investment amounting to Rs. 1,66,23,000/- was made in the wholly owned subsidiaries of the assessee company in US and UK. He also noted that the proportionate interest was disallowed in the assessment year 2004-05 also and no appeal was preferred by the assessee. In this year also, the Assessing Officer worked out the proportionate interest and a disallowance of Rs. 16,59,106/- was made to the income of the assessee. 4. Before the learned CIT (Appeals), the assessee submitted that the disallowance has been made on the ground that the assessee had taken term loan from Bank of India, which was invested abroad in various subsidiaries. It has not been appreciated that the subsidiaries of the assessee company were generating revenue for the assessee. Therefore, there was business exigency in giving such loan. Since the interest paid is revenue expenditure, it has rightly been claimed in the books of account. The subsidiaries rendered marketing support to the assessee company. After considering the submissions of the assessee, the learned CIT (Appeals) dismissed the ground placing reliance on the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. (supra). However, we are also inclined to accept the submissions made by the learned counsel for the assessee that the entities to whom the money has been given are wholly owned subsidiaries of the assessee company. Therefore, the financial health of these concerns matter to the financial health of the assessee company also. In our view, it can be said that the amount given to the wholly owned subsidiary companies are for commercial expediency. In this view, we would like to refer certain observations made by the Hon'ble Supreme Court in the case of S.A. Builders Limited Vs. CIT (2007) 288 ITR 1 (SC). In this case, while interpreting the meaning of the word 'commercial expediency', the Hon'ble Apex Court held as under : "32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed is illegal, arbitrary and unjustified. 4. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding that income of non resident has accrued and arisen in India which is contrary to the facts of the case and as such the order passed is illegal, arbitrary and unjustified. 5. That the Ld. Commissioner of Income Tax (Appeals) has further erred in holding that the commission payment to M/s I CMS for Agusta Project are illegal in nature and not allowable as per explanation to Section 37(1) of the Act which is contrary to the facts and as such the order passed is arbitrary and unjustified. 6. That the order of the Ld. Commissioner of Income Tax (Appeals) is erroneous, arbitrary, opposed to law and facts of the case ancl is, thus, untenable." 11. Briefly, the facts of the case are that the assessee is supplying software related services and in this connection has made payment of communication charges, commission charges, legal and professional charges, marketing & selling charges and business development charges. These payments were made to various entities abroad and some of which are associated concerns of the assessee company. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to parties who were outside India. It was stated that the provisions of section 195 of the Act would be applicable in conjunct with section 9 of the Act, which deal in income deemed to accrue or arise in India. The parties to whom the payments were made had no permanent establishment in India. Section 9 of the Act applies to an assessee irrespective of its residential status, nationality, domicile and place of business. Out of various categories of income which are deemed to accrue or arise in India, one of them is income from business connection in India. It was also submitted that based on these provisions, the assessee company was not liable to deduct TDS on these amounts as none of these parties had any permanent establishment in India and there was no business connection in India. It was also submitted that all these payments were made to the parties in the nations with which India has Double Taxation Avoidance Agreement (DTAA) and as per the terms of the respective DTAAs also, the income is not taxable in the hands of the recipient. Reliance was placed on a large number of cases. 14. After considering the submissions of the assessee, the learned CIT (Appeals) observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on these payments. He further referred to the judgment of the Hon'ble Supreme Court in the case of GVK Industries Ltd. Vs. ITO (2015) 332 ITR 130 to the proposition that the nature of service rendered by the non-residents would come within the ambit and sweep of expression 'consultancy service' and hence, tax should have been deducted at source as the amount paid as fee could be taxable under the head 'fee for technical service'. 15. With regard to the commission paid to IMCS for Augusta project, he observed that it was merely for introducing Augusta SPA, based in Italy in assisting and executing agreement with Augusta and the commission payment are not commensurate with the services rendered. In Augusta Westland helicopter deal, CBI has taken investigations and conducted search at the premises of the Director of the company and therefore, these payments are of illegal nature and not allowable as per Explanation to section 37(1) of the Act. In view of these, the learned CIT (Appeals) dismissed the ground raised by the assessee and held that in the absence of non-deduction of TDS under section 195 of the Act, these expenditure are not allowable to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT (Appeals) has held that the payments made by the assessee to its wholly owned subsidiaries in USA and UK and also to some other entities abroad partake the character of 'fees for technical services' (FTS). The taxability of FTS in the hands of nonresidents is covered under section 9(1)(vii) of the Act. The Explanation to section 9 of Finance Act, 2010 with retrospective effect from 1.6.1996 states that the income of a non-resident shall be deemed to accrue or arise in India under clause (vii) i.e. FTS and shall be included in the total income of the assessee whether or not the nonresident, his residence or place of business or business connection in India or non-resident has rendered service in India. In view of this legal position, he argued that the assessee was required to deduct tax at source on such payments as per the provisions of section 195 of the Act. Therefore, the provisions of section 40(a)(i) of the Act are clearly applicable to the present case. Detailed submissions were made by him with regard to the different payments made by the assessee and a copy of the written submissions was also filed on record. Summary of his arguments was that in the abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities as well as submissions oral and written filed by both the parties before us, are that the issue is with regard to the disallowance made by the Assessing Officer invoking the provisions of section 40(a)(i) of the Act, whereby on certain payments made to non-resident entities, the assessee failed to deduct tax at source. The impugned payments made to the respective non-resident entities are as follows : 22. Out of these non-resident entities, entities, namely IDS Infotech (UK Ltd.), IDS America (USA INC) and BV Designs, Netherland are the wholly owned subsidiaries of the assessee company. Apart from this, with regard to the payments made to IMCS, other issues have also been raised by the Assessing Officer. One is with regard to comparison of the payments made to this concern with the other concern and other is whether payment made to this concern is not to be allowed to the assessee in view of the provisions of Explanation 1 to section 37(1) of the Act. The learned CIT (Appeals) has though confirmed the finding given by the Assessing Officer. However, in some passing reference he also apprehended that these payments may be in the nature of 'fees for technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax is to be deducted while making these impugned payments. The Assessing Officer has invoked the provisions of section 40(a)(i) of the Act in this regard. The provisions of section 40(a)(i) of the Act to the extent relevant in the present case reads as under: "40(a)(i) Notwithstanding anything to the contrary in [sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession": (a) in the case of any assessee- [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200]: [Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2 - For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India." 28. From the bare perusal of the provisions of the above section, it is quite clear that a non-resident is chargeable to tax if it receives or deemed to receive any amount in India. The provisions emerging from the analysis are very clear that, when income accrues, arises or received in India, the same is taxable. Income which is deemed to accrue or arise in India is taxable in India, even if the same is not actually accrues, arises or receives in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual, firm or company through or from operations which are confined to the shooting of any cinematograph film in India;] [Explanation 2: For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 12 para 10.3, in later part of this paragraph, he states as under: "The payment are made by the appellant company and these are in the nature of marketing support services and selling expenditure for getting more and more business abroad. The services provided by the nonresident entities for promoting sales and legal/profession services are as per the terms of contract which is entered by these entities within the appellant company with the responsibility of the appellant company. Therefore the source of income for the entities abroad is the agreement with the appellant company and by virtue of these services there is a direct benefit to the appellant company and hence the payment made by the Indian company for services utilized is not in connection with business/profession carried out, outside of India. The business outside India is secured by the Indian company i.e. the appellant company. The source of income for the services rendered by the nonresident entities is in India as the Indian company gives directions for the work abroad. Therefore the income for the nonresident accrues and arise in India." Here also the CIT (A) is getting confused by the fact that the source of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their orders recorded any such finding though we must add that they have not even intended to make any investigation in this regard. However, we also observe that this stance has been consistently taken by the assessee before the lower authorities as well as before us and even the learned D.R. while arguing before us could not controvert the said submission of the assessee. In this manner, we do not hesitate to conclude that no services were rendered by non-residents in India. This conclusion of ours is also based on the proposition as laid down by the Delhi High Court in the case of CIT Vs. EON Technologies Pvt. Ltd. [2012] 343 ITR 366 (Delhi). 34. In view of this, we find that the provisions of tax deduction at source are not applicable to the impugned payments as the amounts received by the recipients are not in the nature of income deemed to accrue or arise in India in their hands. Therefore, provisions of section 40(a)(i) of the Act cannot be invoked. 35. Though the definition of the incomes deemed to accrue or arise in India is provided in section 9 of the Act, we should not forget that the provisions of the Act are subject to the treaty entered by the Central Government wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uated 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 payments are not chargeable to tax in India. In view of this also, even as per DTAA, the income being not exigible to tax in India in the hands of non-resident entity, the assessee is not required to deduct tax at source. Therefore, the provisions of section 40a)(i) of the Act cannot be invoked. 39. Now comes the second question, the Assessing Officer has apprehended in his order that the payment made by the assessee to IMCS is not in consonance with the commission paid to other concern. From the perusal of the order of the learned CIT (Appeals) though we observe that he has not given any finding in this regard, even the Assessing Officer in his order has not given any categorical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer. In his order running into 22 pages he has nowhere mentioned and even nowhere showed his suspicion as regards the payment being in the nature of 'fees for technical services' that is the reason why at the assessment stage, the assessee was never confronted by any query with respect to the payments being that of the nature of 'fees for technical services'. The contention of the learned D.R. before us was that the learned CIT (Appeals) has held these payments to be in the nature of 'fees for technical services'. We have very carefully perused the order of the learned CIT (Appeals). Only at two places in his order he has mentioned the term 'fees for technical services'. At page 13 he has stated as under: "The issue in hand is to decide whether the service rendered by the nonresident entities and the payment made by the appellant company established business connection in India and as per the source of these payments, these are in the nature of fees for technical services." 41. If we carefully analyze the above sentence, we can very easily infer that the learned CIT (Appeals) has not given any finding as to the nature of being 'fees for technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to the payments being 'fees for technical services', which the assessee failed to reply. It is also not a case where the assessee had not co-operated with the lower authorities in order to find out the real nature of the payments made to the non-residents. All the relevant agreements and invoices were filed before the lower authorities. In view of this, the assessee cannot be punished at this stage without there being any fault of his, specially in view of the fact that even at the time of hearing before us, the learned D.R. could not bring any material or evidence in support of his claimed that the impugned payments were in the nature of 'fees for technical services'. His only argument is that in the absence of the nature of services being rendered by non residents, coming out from the evidence filed by the assessee, the same should be presumed to be in the nature of 'fees for technical services'. No such presumption exists in the Income Tax Act. No such presumption can be raised without any backing material or evidence on record. The argument of the learned D.R. that even if the provisions of DTAA are applied, in the absence of any services coming out ..... X X X X Extracts X X X X X X X X Extracts X X X X
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