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TMI Blog2016 (7) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' was entered between the assessee and B K on 15.11.2006. As per the terms of the said agreement lump sum payment of 18,000 pounds per month was made by the assessee to the U.K. company. On the said payment, there is no dispute since TDS was deducted by the assessee while making the said payment. The representation agreement was revised on 03.10.2007 w.e.f. 01.10.2007. As per the said agreement the assessee was to reimburse the cost incurred by the U.K. company and in addition was to pay a mark-up of 29% on cost for the marketing services provided by the U.K. company. M/s B K Securities Pte Ltd (Singapore) is engaged in business, inter alia, of research and marketing services for securities/markets locally and overseas. B K Singapore had provided various services, such as research and marketing services to the appellant. The services rendered by B K were for expansion of assessee's business not only in Singapore but also in entire South East Asian countries. For this purpose a 'Business Services Agreement' was entered between the assessee and B K on 01.04.2007 stipulating the terms and conditions. It is submitted that the assessee has deducted TDS on payments mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ON ACCOUNT OF RESEARCH SERVICES Sr. No. Period Nature of expenses Amount Remarks 2 01.04.2007 to 31.08.2007 Payment made as per agreement dated 01.04.2007 46,19,765 There is no dispute on this payment 4. It was submitted before the Assessing Officer that the assessee had deducted TDS on the service fee paid by the assessee to its subsidiaries but not deducted TDS on reimbursement of expenditure since it was not in the nature of income. The Assessing Officer was of the view that the assessee should have deducted TDS on the entire amount remitted to U.K and Singapore company since the payment made by assessee was on account of fees for technical services and hence taxable in the hands of nonresident. For holding that assessee ought to have deducted tax at source irrespective of the fact whether the payment is taxable in the hands of non-resident in India, the Assessing Officer has relied upon the decision of Transmission Corporation of A.P Ltd. v. CIT [239 ITR 587 (SC)]. 4.1. Before the CIT(A), it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overseas. B K had provided various services, such as research and marketing services to the assessee. The services rendered by Singapore company were for expansion of assessee's business not only in Singapore but also in entire South East Asian countries. For this purpose a 'Business Services Agreement' was entered between the assessee and B K on 01.04.2007 stipulating the terms and conditions. The services to be rendered by Singapore company to the assessee, and which were in fact rendered about which there is no dispute forming part of Clause 4.1 of this Agreement, which reads as under: The provision of research/Marketing services in Singapore in a form that may be mutually agreed upon by the Parties from time to time in respect of the regional markets covering Singapore, Malaysia/ Thailand, Indonesia, Hong Kong and any other jurisdiction or a combination of any such jurisdictions. For the services rendered by Singapore company and which the assessee utilized for reinforcing its overall business operations, the service provider was to be paid service fees; and in addition granted reimbursement of the expenditure incurred. The relevant clauses from this writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing support services and not in the nature of fees for technical services as alleged by the lower authorities. The Learned AR made his arguments based on the following propositions:- (a) The payments are not for fees for technical services within the meaning of Article 13 / 12 of DTAA with UK and Singapore as the case may be. (b) As there is no permanent establishment of UK and Singapore Subsidiaries in India, payments made to them are not taxable in India under Article 7 of DTAA with UK and Singapore. (c) In any case, payments are not for fees for technical services as per the provisions of the IT Act. (d) Explanation to section 9(2) has been inserted retrospectively w.e.f. 1.6.1976 vide Finance Act, 2010 and hence, cannot be invoked for imposing TDS obligation in respect of payments already made in F.Y. 2007-08. (e) In any case, payment falls within the exception provided u/s 9(1)(vii)(b) of the Act as the same is made for earning income from a source outside India. (f) In any case, TDS provisions are not applicable to payments which are in the nature of reimbursement of expenses. (g) Since for all the above reasons, payments are not liable to tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. He argued that with regard to Singapore Treaty, the payments made would admittedly not fall under Article 12(4)(a) and 12(4) (c ). Similarly in respect of U.K. Treaty, the payments made would admittedly not fall under Article 13 (4)(a) and 13(4)(b). He argued that as could be seen from the above definition of fees for technical services that in order to fall under Article 12(4)(b) of Singapore Treaty and Article 13(4)(c ) of U.K. Treaty, any consideration paid for services of managerial, technical or consultancy services would be covered under the said definition only if such services make available any technical knowledge, experience, know how or processes. In the present case, as is evident from the facts stated hereinabove, no technical services are being made available to the assessee by its foreign subsidiaries. As a result, even assuming without admitting that the payment is fees for technical services under the Act, the payments made by assessee to its subsidiary companies would not fall within the definition of fees for technical se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumvent TDS provisions is to be rejected. He further argued that no technical services, if any, have been made available to the assessee and there was no transfer of technology by the subsidiaries to the assessee in India in order to fall within the ambit of fees for technical services as per the treaty. 12. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of copy of agreement with B K Securities Ltd, UK (pages 1 to 6 of PB) ; copy of agreement with B K Securities Pte ltd (Singapore) (pages 7 to 16 of PB) ; copy of computation of income of assessee (pages 19-21 of PB) ; copy of financial statements of the assessee (pages 22-24 of PB) ; relevant pages of the treaty with Singapore and UK (pages 45-51 of PB) and copies of various judgments relied upon in support of various contentions addressed by the Learned AR (pages 52 to 127 of PB) . 12.1. We find that the moot question to be decided in this appeal is as to 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. We find from the Article 12 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the service, within the meaning of paragraph 4( b ). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available . The Memorandum further explains with examples as to how Article 12(4)(b) has to be understood as follows: Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4( b ), include : 1. Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering) ; 2. Architectural services ; and 3. Computer software development. Under paragraph 4( b ), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas : 1. Bio-technical services ; 2. Food processing ; 3. Environmental and ecological services ; 4. Communication through satellite or otherwise ; 5. Energy conservation ; 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services ? Analysis : The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer programme) which it has developed. Example 6 Facts : An Indian vegetable oil manufacturing company wants to produce a cholesterolfree oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulas which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are the fees paid by the Indian company for included services ? Analysis : The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company. Example 7 Facts : The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. The question before the Tribunal was whether the commission so paid can be said to be Fees for included services i.e., Fees for Technical Services under Article 13(4)(c) of the Indo-UK DTAA which is the same as that of Article 12(4)(b) of the treaty between India and Singapore. After considering Article 12(4)(b) of the Indo-US DTAA (which are similar to Article 12(4) and 13(4) of the treaty between India and Singapore / UK (as the case may be)), and after referring to the Memorandum of understanding to the Indo-US DTAA, the Tribunal held as follows: Whereas section 9(1)(vii) of the Act stops with the rendering of technical services, the DTAA goes further and qualifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skills etc. to the person utilizing the services. These words are which make available . The normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge etc. by himself in his business or for his own benefit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t require any consideration, in view of the conclusion that the payment in question does not, even otherwise, attract the provisions of Sec.40(a)(i) of the Act. 12.5. Since the payment made by the assessee to its subsidiaries is not fees for technical services, then the same would be construed as only business income in the hands of the subsidiaries which would get taxed in India only in the event of existence of permanent establishment (PE) in India. We find that the Learned AO had categorically stated in more than one place in his order that the Singapore and UK subsidiaries do not have any PE in India. The retrospective amendment in this regard in Explanation 2 to section 195(1) of the Act with effect from 1.4.1962 was inserted by the Finance Act 2012. The obligation to deduct tax at source has to be complied only as per the law that it prevails on the date of payment. Admittedly the payment in question was made by the assessee to its Subsidiaries prior to the Finance Act 2012. It is not possible to fasten an obligation to deduct tax at source on the basis of a retrospective amendment to the law as has been laid down by the Co-ordinate Bench decision of this Tribunal in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports the case of the assessee. This decision has been rendered after duly considering the case law vehemently relied upon by the Learned AO on the decision of the Hon ble Apex Court in the case of Transmission Corporation of A.P. Ltd vs CIT reported in 239 ITR 587 (SC) vide para 10 of the judgement at pages 465 466. We are also in complete agreement with the arguments advanced by the Learned AR that the various case laws relied upon by the Learned CITA in his order vide paras 7 to 12 were rendered prior to rendering of Hon ble Supreme Court decision in GE India Technology case on 9.9.2010. Hence we don t deem it fit and appropriate to discuss those case laws for the purpose of adjudication of this issue. 12.7. In view of the aforesaid findings , 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. In view of the above conclusion, the other propositions advanced by the Learned AR before us are not taken up for consideration. Accordingly, the Ground Nos. 1 2 raised by the assessee for the Asst Year 2008-09 are allowed . 13. We find that the facts for the Asst Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, the Learned DR relied on the decision of Hon ble Calcutta High Court in the case of Dhanuka Sons reported in (2011) 12 taxmann.com 227 (Cal HC). 15. We have heard the rival submissions. 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. Reliance in this regard is placed on the decision of the co-ordinate bench of Delhi Tribunal in the case of Interglobe Enterprises Ltd vs DCIT reported in (2014) 40 CCH 0022 DelTrib in ITA No. 1362 1032 /Del/ 2013 , ITA No. 1580/Del/2013 dated 4.4.2014 for Asst Years 2008-09 2009-10 , wherein it was held that : However, we find that the calculation of disallowance under Rule 8D(iii) made by the Assessing Officer and upheld by Ld CIT(A) is not correct In view of the fact that Assessing Officer had included the value of total investments for calculation of disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with Rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A.Y.) (I.T.A. No.1331/Kol/2011 dated 29.7.2011. Following the above judicial precedents, we held that value of strategic investments should be excluded for the purpose of disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance. As regards disallowance under Rule 8D(i) and 8D(ii) we have already held that no disallowance is warranted. We find that the Co-ordinate Bench of this Tribunal in the case of DCIT vs Selvel Advertising P Ltd reported in (2015) 58 taxmann.com 196 (Kolkata Trib.) also had taken a similar view. Respectfully following the judicial precedents relied upon hereinabove, 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. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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