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TMI Blog2016 (8) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee. TDS U/S 195 - Disallowance under section 40(a)(i) - Held that:- The requirements of tax deduction at source under section 195 do not come into play simply because an amount is being remitted abroad. The income embedded in such a payment must also be taxable in nature, and unless that is established, the tax deduction at source requirements do not come into play. Here is a case in which the payment is in the nature of reimbursement to a US resident, but even if we go by nature of expenses, recruitment fees, by the virtue of Article 12(4)(b) of India US tax treaty, is not taxable in the source country since it does “make available’ technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design”. Since the income embedded in the payment was not taxable in India under the treaty provisions, and since treaty provisions override the provisions of the Income Tax Act- unless the latter was beneficial to the assessee, the tax withholding requirements of Section 195 were not triggered on the facts of this case. Since the assessee did not have any tax withholding obligations, non-deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own right i.e. to develop business with other independent entities requiring such services. This is second year of assessee s operations in India. During this year, the assessee s AE (i.e. project office of the assessee group company in India) had services agreements with certain customers, such as National Highway Authority of India and MP Road Development Corporation Ltd. The AE undertaken five such major projects in association with the assessee as also in association with the independent enterprises. The business model adopted by the AE was is to be this. The customer opens a tender in the market and invites quotes from various service providers. The quotes for the services to be rendered are prepared by the AE, for their part of services, and the assessee, for its part of services- which are confined to the technical support services. Once these inputs are in place, a consolidated proposal is sent to the customer. It is in this background, according to the assessee, that there is no fixed overhead charged by the assessee and that the prices quoted by the assessee are as per their assessment of the market conditions. It is also stated that the quotes are issued on man mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to act as advisors and/or consulting engineers . The TPO further relied upon the transfer pricing study which is said to have inter alia stated that the assessee company was set up to support operations of Stanley USA in India and throughout Asia . A reference was also made to the Memorandum of Association which states that main object of the company is to act as advisors and/or consultants, consulting engineers for engineering, environmental, constructions and other infrastructure projects of all kinds . The TPO concluded that the assessee is a 100% subsidiary and has been set up in India to provide and act as consultant to parent Stanley Consultants US and it is nowhere stated in any contract or document that the assessee is acting as an independent entrepreneur which will be operating for the purpose of seeking independent business . He further noted that the segregation and treatment of certain expenses as administrative and nonoperational is not borne out of any agreement between the assessee and its AE, nor from the terms of Memorandum of Association and Articles of Association of the assessee and that this is also not borne out of functional analysis subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the nonproject expenses are incurred for such a purpose, the exclusion of whole of, or such significant part of, non-project expenses is fully justified. In case the assessee has to bear the expenses incurred by it, as an entrepreneur, for business development expenses, taking into account such business development expenses, for the purpose of computing operating profits from the business activity of providing these technical services in question, will make the assessee inherently incomparable. It is not even the case of the revenue that the assessee is a captive service provider forbidden from rendering such services to other entities. If that be the case, the idle capacity risk must also go to the AE, but then that is not the case here. It is also elementary that nobody can be expected to prove a negative. The TPO was, therefore, clearly in error in observing that the assessee could not prove that the expenses incurred by the assessee, under the head non-project expenses, were not incurred for the proposes of the project work. There is no, and cannot be any, straight jacket formula to segregate the costs, on a fixed ratio basis, between the project costs and non project costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entions, and having perused the material on record, we find that the disallowance is wholly uncalled for. The requirements of tax deduction at source under section 195 do not come into play simply because an amount is being remitted abroad. The income embedded in such a payment must also be taxable in nature, and unless that is established, the tax deduction at source requirements do not come into play. Here is a case in which the payment is in the nature of reimbursement to a US resident, but even if we go by nature of expenses, recruitment fees, by the virtue of Article 12(4)(b) of India US tax treaty, is not taxable in the source country since it does make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design . Since the income embedded in the payment was not taxable in India under the treaty provisions, and since treaty provisions override the provisions of the Income Tax Act- unless the latter was beneficial to the assessee, the tax withholding requirements of Section 195 were not triggered on the facts of this case. Since the assessee did not have any tax withholding obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X
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