9911796707
TMI Blog2017 (4) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... nd made no adjustment in this regard. Thus, having accepted foreign entity as a tested party in the preceding year ,the Revenue cannot now take a different stand without pointing out any change in facts vis a vis the preceding year. Thus we hold that the action of the TPO, accepted by the Assessing Officer and Ld. CIT (Appeals), in rejecting the foreign entity in the controlled transaction i.e. IDS-A, as a tested party is wrong and is, therefore, set aside. We may add that with regard to the rejection of the foreign entity as the tested party, we have considered all the arguments raised before us and no other arguments were raised before us. The decision rendered by us is on the context of solely the arguments which were raised before us.- Decided in favour of assessee TDS u/s 195 - Disallowance made u/s. 40(a)(ia) - non deduction of TDS on commission, legal and professional charges, marketing and selling expenses and outsourcing and business development expenses - Held that:- In the present case are identical to that in the case of assessee for assessment year 2009-10, with the impugned disallowance of expenses having been made for the reason that the same were taxable in India si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 40a(iii) - Held that:- Going by the provisions of section 9(1)(ii), clearly and undisputedly the salary has not been earned in India. Having said so, the income of the non-residents on account of this salary is not deemed to have accrued or arisen in India and, therefore, was not chargeable to tax in India as salary. Thus, in such circumstances, section 192 was not applicable requiring the assessee to deduct tax at source on the said payment of salary and consequently, provisions of section 40(a)(iii) could also not be invoked to disallow the same. The contention of the Revenue all along we find, has been that section 40(a)(iii) is attracted because the payments have been made outside India to non-residents. The Revenue, we find, has picked up only one of the conditions enumerated u/s. 40(a)(iii) for making disallowance, choosing to completely ignore the basic condition required to be fulfilled, which is taxability of the said salary in India. Therefore, the disallowance, we hold, has been made on an incorrect interpretation of law. In view of the above, we hold that no disallowance u/s. 40(a)(iii) on account of non deduction of tax on salary paid outside India is warranted and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing adjustment amounting to ₹ 45,68,000/- made by the Assessing Officer and upheld by the Ld. CIT (Appeals). 3. Brief facts relating to the issue are that the assessee is engaged in the business of providing software solution and IT enabled service in the areas of litigation support, publishing and content management, engineering services and healthcare support services. During the impugned year, it entered into international transactions with its AEs and justified the arm's length price as under: Nature of International Transaction Amount(In Rupees Lacs) Most Appropriate Method Profit Level Indicator Tested Party's Operating Margin Comparables Operating Margin Availing of marketing support services from IDS-A 439.70 Transactional Net Margin Method ('TNMM') Operating Profit/Operating Cost ('OP/TC') 5.50% 10.03% Provision of IT/IT enabled Services to IDS-A for resale 336.67 TNMM Operating Profit/Sales ('OP/Sales') 1.50% 1.77% Availing of marketing support services from IDS-UK 16.21 TNMM OP/TC 5.75% 6.68% Reimbursement of expenses paid/received 3.82 Comparable Uncontrolled Price Method ('CUP') N.A Ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the tested party and also challenged the comparability analysis carried out by the TPO, objecting to the comparables selected by it. 6. The Ld. DR, on the other hand, supported the order of the TPO and Ld. CIT (Appeals) and stated that detailed valid reasons had been given for rejecting the foreign party as a tested party. The Ld. DR also supported the search and comparability analysis carried out by the TPO. 7. We have heard the contentions of both the parties and have gone through the orders of the authorities below as also the documents referred to before us during the course of arguments. Though we find that the order of the TPO was detailed leading to the aforesaid transfer pricing adjustment, we shall be confining ourselves only to the arguments raised by the Ld. counsel for the assessee and the Revenue ,both for and against the order passed by the Ld. CIT (Appeals). 8. The first contention raised before us by the Ld. counsel for the assessee is that the TP study of the assessee has been rejected for the reason that the foreign AE was taken as a tested party. Arguments both for and against the action of the TPO were made before us. The impugned transaction relates to IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayer and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables." 13.4 It emerges from the above guidelines that following factors play a major role in determining the choice of tested party:- 1. It should be a party for which the most reliable data for comparison is available. 2. It should be a party for which data in respect of comparable transactions is available. 3. It should be a party for which has the least complex functions 4. It should be a party for which does not own valuable intangible property or unique assets that distinguish it from comparables. 13.5 When the facts and circumstances of the case are tested on these factors following position emerges:- 1. In the show cause notice, assessee was asked to establish with evidence how the costs taken are without markup:- "Further, it has been stated that IDS Infotech has charged a markup on international transactions pertaining to provision of IT- Enabled services. However, no such segmental financials establishing the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign comparables is available. 10. Supporting the foreign AE as the tested party the Ld. counsel for the assessee took up the following arguments: (a) That the foreign AE was taken as a tested party in the preceding year also i.e. assessment year 2009-10 and arm's length price determined by the assessee was accepted by the TPO in is order passed for that year. The Ld. counsel for the assessee drew our attention to transfer pricing report for the preceding year, placed at Paper Book page No. 417 and the order of the Transfer Pricing Officer for the preceding year, i.e., assessment year 2009-10, placed at Paper Book page No. 133 in this regard. (b) The next contention raised by the assessee was that the foreign tested party i.e. IDS-A was the least complex amongst the parties to the transactions, the other party being the assessee itself. The Ld. counsel for the assessee stated that while the assessee was engaged in full-fledged product development and marketing/product selling covering a wide range of activities and other commercial or marketing intangibles and is the developer, owner and licensor of virtually all valuable intellectual property rights including proprietar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practicing Manual of transfer pricing for developing country, there is a broad consensus that the tested party should be one: (i) It is the least complex party to the controlled transaction. (ii) The party in respect of which most reliable data for comparability is available and; (iii) Which does not own valuable intangible or unique assets. 15. In the present case, we find that TPO has rejected foreign AE as the tested party for the reason that no reliable data in respect of foreign comparables was available. Thus as far as the foreign party being the least complex entity to the controlled transactions and not owning any valuable intangible or unique assets is concerned, there is no dispute that the foreign entity to the transactions i.e. IDS-A is the least complex and does not own any valuable intangible or unique assets. The only issue on which the acceptance or rejection of the foreign entity as a tested party rests is vis-à-vis availability of the appropriate foreign comparables. 16. The only reason with the TPO for holding so, which emerges from the above discussion and arguments made before us and on the basis of the facts which were brought to our notice for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee with the same. 11.5 Reverting back to the issue, the assessee submitted that in the transfer pricing documentation, it had provided the business profit of all 101 comparables selected by the assessee. 11.5.1 The DRP in its findings at para 11 had stated, among others, that in most cases the tested party will be the least complex of the controlled tax payers, and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. As GMDAT is not only a complex entity owning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available. 11.5.2 This view of the DRP has been denied by the learned Sr. Counsel during the course of hearing which has not been contradicted by the Revenue with any documentary evidence. 11.6 To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M&M should also be put to such a stringent comparability test. It was, further, argued that M&M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o facilitate the TPO to analyze the inter-company transactions in the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. It is ordered accordingly." 18. Further Kolkata Bench of the I.T.A.T. in the case of Development Consultants (supra) held that the tested party should be the least complex of the controlled transaction and should not own valuable intangible property or unique assets and a foreign entity in the controlled transactions could also be treated as a tested party. Thus clearly, there is no bar as such in treating the foreign entity in a controlled transaction as a tested party merely for the reason that the data of the comparable companies was not available. What is essential in this regard is that the data should be available in the public domain which the Revenue with all its resources can have access to and or the assessee has furnished all relevant data to the tax administration. 19. In the present case, we find that both the conditions are being fulfilled. On perusal of the transfer pricing study conducted by the assessee placed at Paper Book page Nos. 709 to 771, we find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conducted by it so as to finally arrive at the 11 comparable companies given business description of these companies also and also provided their profits and loss accounts to arrive at the PLI i.e. OP/OC. Thus, all relevant data had been provided by the assessee to the TPO also. The TPO, we find, besides giving a general statement which is also incorrect, that no description was given regarding activities in which the comparable companies were involved, pointed out no other anomaly was in the data of the comparable companies furnished by the assessee. Therefore, following the decisions of the I.T.A.T. as quoted above, we set aside the rejection of the foreign entity IDS-A as the tested party. 22. It is pertinent to point out that for determining the ALP of the international transactions relating to marketing services provided by IDS-A and IDS-UK also, we find, that the assessee had taken the foreign entities as the tested party. These were not rejected by the TPO. Clearly, therefore, there is inconsistency in the stand of the TPO rejecting the selection of foreign entity as a tested party for the purpose of IT enabled services while accepting the same for marketing support servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all to ₹ 2,84,52,914/-. 28. The assessee has raised the following grounds of appeal: 2. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the disallowance of ₹ 2,84,52,914/- made on account of non deduction of TDS on commission, legal and professional charges, marketing and selling expenses, out sourcing and business development expenses in as much as no TDS is required to be deducted and as such the order is illegal, arbitrary and unjustified. 3. That the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate that the provisions of Section 195 are not attracted in as much as payments were made to parties who are outside of India and have no permanent establishment in India and as such the order passed 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. 29. The brief facts relating to the case are that the assessee is the supplier of software related services and had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to be taxed in India. The Assessing Officer also stated that the assessee had not provided any evidence to prove that the services were rendered outside India. In view of this, he held that the assessee was liable to deduct tax on the aforesaid payments and having failed to do so, the provisions of section 40(a)(i) of the Act were attracted. He, therefore, made a disallowance of an amount of ₹ 2,84,52,914/-. 31. The matter was carried in appeal before the Ld. CIT (Appeals), where the assessee submitted that the said expenditure had been incurred for services rendered outside India to parties outside India, the said parties had no permanent establishment in India, nor any business connection in India and therefore the assessee stated that no TDS was required to be deducted on the aforesaid payments and, thus no disallowance was warranted on account of non-deduction of tax at source on the said payment as per the provisions of section 40(a)(ia) of the Act. The Ld. CIT (Appeals) after considering assessee's submission held that the source of income for the entities was the agreement with the assessee company and by virtue of the same, there was direct benefit to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the fact that these payments/expenses were made to foreign entities without deducting tax at source. In the said case also, the Assessing Officer had held the assessee liable to TDS on the said payments since he had observed that these payments constituted deemed incomes of the payees since the services rendered on account of the payments made were utilized in India, were not in connection with any business and profession carried outside India, were on account of agreement between the assessee which was an Indian company. The I.T.A.T. in the said case we find, deleted the disallowance made, by holding that the Assessing Officer nor the CIT (Appeals) given any finding whether the nature of income in the hands of the non-residents is that of income accrued in India or income deemed to have accrued in India. The Hon'ble I.T.A.T. also held that there is no finding on record by any of the lower authorities that non-resident payees had any business connection in India or even any permanent establishment in India. 35. The I.T.A.T. exhaustively dealt with the issue at hand and went through various pertinent sections involved. It first dealt with section 40(a)(ia), invoking whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia, the said incomes of the foreign entities could not be said to be taxable in India and in view of the same, the applicability of provisions of tax deduction at source u/s. 195 of the Act was not attracted and, therefore, no disallowance on account of non deducting tax at source should be made u/s. 40(a)(ia) of the Act. The relevant findings of the I.T.A.T. at paras 21 to 38 of the order are as follows: 21. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The facts as culled out by us from the perusal of the orders of the lower authorities 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 : Communication expenses Commission Legal & professional Marketing & selling Business Development Outsourcing B.V. Design Products, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 payments are of the nature, whereby the provisions of TDS are applicable, in the absence of which the disallowance is called for under section 40(a)(i) of the Act. (ii) With respect to payments made to IMCS, whether the Explanation to section 37(1) of the Act is applicable to the said payments. (iii) With respect to payment made to IMCS, whether the same is unreasonable in comparison to payment of same nature made to other entities. (iv) If the payments, as such, are not exigible to the provisions of TDS, whether these are in the nature of 'fees for technical services'. As such, the tax is to be deducted out of these payments. 25. The basic issue is whether the tax is to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson 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 force: " 27. The most important terms in this section are "chargeable under the provisions of this Act". From this, it is very clear that only if an amount is chargeable under the Income Tax Act, the liability to deduct tax on the payment of such amount arises. Charge of income tax is provided under section 4 of the Act, while scope of total income is provided in section 5 of the Act. The provisions of section 5 of the Act relating to scope of total income in respect of a non-resident are provided in sub-section (2) of said section, which read as under : "5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 confined to the purchase of goods in India for the purpose of export; [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;] [(d) in the case of a non-resident, being- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. v. CIT (2010) 327 ITR 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 payment does not have the element of the income, the payer cannot be made liable. The Hon'ble Supreme Court thus rejected the contention of the Department by holding that if the sum paid is not chargeable to tax, then no tax is required to be deducted. 31. From the reading of the A.O.'s order, we do not understand his case. Nowhere in the entire order he has given any finding as to whether the nature of income in the hands of the non resident is that of 'income accrued in India' or 'income deemed to have accrued' in India. He just kept on harping the fact that the ultimate beneficiary of the services is the assessee in India. Even the CIT (A) while adjudicating the issue could not give any appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 business purposes. (iii) Erecting a factory in India where raw produce purchased locally is worked into a firm suitable for sending abroad. (iv) Forming local company to sale products of non-resident parent company. (v) Having financial association between the resident and non-resident company. These activities have been culled out from the judgement by the CBDT itself in its circular No. 23 [F.NO. 7A/38/69-IT (A-11)], dated 23.07.1969. 33. In the present case, no finding has been brought on record by any of the lower authorities that non-resident entities have any such connection with India as illustrated above. All along the assessee has been maintaining that the non-resident entities to whom it has made the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out if there is any beneficial provision in the treaty to exempt the assessee from taxation or reduce the rigours 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 there is any provision under which the non-resident can be brought to tax. In other words, the treaty cannot be used as a taxing statute. The principle is that where the non-resident is taxable under the domestic law but there is a provision in the treaty to exempt the transaction or reduce the rigor of taxation to the benefit of the non-resident, the provisions of the treaty override the provisions of the domestic law. These fundamental principles are well-settled by the judgments of the Supreme Court in P.V.A.L. Kulandagan Chettiar (2008) 267 ITR 654 (SC) and Azadi Bachao Andalon (2003) 263 ITR 706 (SC). 38. On going through the relevant article provided in the DTAA, we observe that invariably in all the DTAAs to which we are concerned, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 backed by any legal provision. Incidentally, we would like to mention here that even if the Assessing Officer wants to assess the reasonableness of any payment made to any sister concern of the assessee, there is no doubt to the fact that the assessee has done detailed transfer pricing study in the relevant assessment year, which was subject to the reference under section 92CA(1) of the Act to the Transfer Pricing Officer and the Transfer Pricing Officer has suggested no adjustment with respect to the Arm's Length Price on the transaction between the assessee and its associate enterprises. 40. Now the question arises whether the payment made by the assessee can be held to be in the nature of 'fee for technical services'. There is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 finding that these payments are 'fees for technical services', nowhere from the order of the learned CIT (Appeals) we see any effort being made by him to come to such a conclusion. It is not to be forgotten that the learned CIT (Appeals) assumes coterminus powers with that the Assessing Officer. In fact, he enjoys the powers of enhancement also. Therefore, in case he had any apprehension as to the real nature of the payment, who stopped him to carry out further investigations in this regard? In the absence of any finding given by the Assessing Officer or the CIT (Appeals) in this regard, we are not inclined to examine the case of the assessee with a view whether the payments are 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 ..... the same were taxable in India since they were sourced from India on account of the agreement entered into with the assessee an Indian Company and also on account of the utilization of the services for the benefit of the assessee Indian Company. In the present case also we find that there is no finding of the lower authorities with regard to the fact that the income to the payees of the said expenses arose or was deemed to arise in India as per the provisions of section 9 of the Act. There is no finding regarding the existence of any business connection, as defined, under section 9(1) of the Act nor of any permanent establishment of the payees in India. Moreover in the present case also there is no finding that the payments in question were "fees for technical services". Therefore the decision laid down in the preceding year will squarely apply to the present case also, following which we delete the disallowance made u/s. 40(a)(ia) of the Act amounting to Rs. .2,84,52,914/-. 37. The grounds of appeal Nos. 2,3 & 4 raised by the assessee are, therefore, allowed. 38. Ground No. 5 raised by the assessee reads as under : 5. That the Ld. Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 255 and 258 in this regard. 43. The Ld. DR, on the other hand, relied upon the order of the lower authorities and further stated that even if the contention of the Ld. counsel for the assessee is accepted, the matter should be remanded back to the Assessing Officer to examine the issue in the light of the contentions made and thereafter re-work/re-determine the disallowance to be made u/s. 40(a)(ia) of the Act. 44. We have heard the contentions of both the parties. We find merit in the contentions of the Ld. counsel for the assessee that the rent had been paid to one person on behalf of various co-owners of the said property. The lease agreement placed at Paper Book page No. 242 is the lease deed entered into between the co-owners of the property SCO 142 to 145, Sector 34, Chandigarh and the assessee for leasing the said premises to the assessee. At page No. 2 of the said agreement, it has been specifically stated that the said agreement has been entered between the following parties: "R.S. Sandhu, M.s. Sandhu, advocate for self and as attorney of Shri Gurbrinder Kaur and Navdeep Kaur his daughters and as guardian of Amrita Kaur (Minor), Amar Singh Chahal, Surjit Kaur, Dal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent only. When they have received the same only on behalf of other co-owners the rent paid constitutes the income of all the co-owners and the same is to be apportioned among them as per the method prescribed, if any, in the lease agreement or in proportion of their co-ownership and thereafter only if the rental income in the case of any co-owners exceeds the prescribed limit for the purpose of deduction of tax u/s. 194-I of the Act, the tax is to be deducted at source. 48. In the light of the above, we, therefore, restore the matter back to the Assessing Officer to apportion the rental income in the hands of the co-owners as per legally permissible, determine the rental income attributable to each co-owner and thereafter apply the provisions of section 194(I) of the Act to the same as also the provisions of section 40(a)(ia) of the Act for non deduction of tax, if found in any case. This ground of appeal No. 5 of the assessee is, therefore, allowed for statistical purposes. 49. The ground No. 6 raised by the assessee reads as under : "6. That the Ld. Commissioner of Income Tax(Appeals) further erred in upholding the addition of ₹ 39,73,746/- for non deduction of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct tax at source, no disallowance on account of non-deduction of TDS could be made u/s. 40(a)(iii) of the Act. 55. The Ld. DR, on the other hand, supported the orders of the lower authorities and stated that the salary being paid outside India to non-residents, the same was taxable in India and thus liable to TDS and same having not been deducted, disallowance u/s. 40(a)(iii) had been rightly made. 56. We have considered the contentions of both the parties. The issue in the present ground is relates to invoking the provisions of section 40(a)(iii) of the Act, which deals with disallowance of payment which is chargeable under the head "salary" and is payable outside India or to a non-resident and on which tax has not been paid, nor deducted therefrom as per the provisions of Chapter-XVII-B of the Act. The undisputed and unchallenged facts relating to the present issue are that the salary amounting to ₹ 39,73,746/- was paid to two persons outside India as per the detail already reproduced above. The fact that the payment was in the nature of salary is not disputed, as also the fact that the said payment was made to non-residents and has been made outside India. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-section (1), and shall be subject to the provisions of this Chapter. 59. A perusal of the above section shows that for attracting the liability of tax deduction at source, the said income should be chargeable to tax under the said head. Even section 40(a)(iii) begins with any payment which is chargeable under the head "salaries" meaning thereby that the salary paid should be chargeable to tax as such in India. Chargeability to tax and the scope of total income is dealt with in sections 4 and 5 of the Act which have already been discussed above in ground Nos.2, 3 and 4 dealt with above by us. As per the said sections in the case of non-residents income which is either received or deemed to have been received in India or which accrues or arises or deemed to accrues or arises in India is chargeable to tax in India. In the present case, the salary undisputedly has been paid outside India and thus not received or deemed to have been received in India to be chargeable to tax in India. Therefore, it has to be seen whether the salary accrued or arose or deemed to have been arisen or accrued in India. Section 9(ii) of the Act deals with the situation or condition in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 40(a)(iii) on account of non deduction of tax on salary paid outside India is warranted and the disallowance made amounting to ₹ 39,73,746/- is directed to be deleted 61. In view of the above, ground No. 6 raised by the assessee is allowed. 62. Ground No. 7 raised by the assessee reads as under:- "7. That the Ld. CIT (A) has erred in law as well as on facts in upholding the addition of ₹ 25,02,206/- made by the Assessing officer whereby she disallowed the interest paid up by applying the provisions of section 36(1)(iii) which is allowable arbitrarily and unjustified." 63. The issue raised in the present ground relates to disallowance of interest made by invoking the provisions of section 36(1)(iii) of the Act. 64. Brief facts related to the issue are that during the course of assessment proceedings the Assessing officer noted that the assessee had debited financial charges of ₹ 93,51,000/- on secured loans which consisted of term loan from bank, car and packing credit. The Assessing officer observed that the assessee had substantially invested amount of ₹ 1,59,90,000/- in wholly owned subsidiaries of the appellant companies in U.S. and U.K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assessment year, disallowance of interest amounting to ₹ 16,59,106/- was made u/s. 36(1)(iii), being proportionate amount of interest paid on secured loans, on account of investment made in wholly owned subsidiaries of the assessee company in U.S. and U.K, amounting to of ₹ 1,66,23,000/-. The ITAT in the said case held that the investment had been made in the wholly owned subsidiaries of the assessee companies, the financial health of these concerns effect the financial health of the assessee companies also and therefore, the investment made in the subsidiaries companies are for commercially expedient purposes. The ITAT relied upon the decision of the Apex court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 in this regard. The ITAT held that since no fact had been brought on record by the lower authorities, that the amount used by the subsidiaries companies were for purposes other than business, the said investments were commercially expedient. The ITAT, therefore, held that no disallowance under the provisions of section 36(i)(iii) could, therefore, be made. Reliance was placed on the judgement of the Apex Court in the case of Hero Cycles (P.) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding 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.' 69. The facts in the present case, we find are identical to that in assessment year 2009-10, wherein, disallowance has been made on account of investment made by the assessee company in wholly owned subsidiary. Since the ITAT in the preceding year has held the said investment to be for business purposes, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the addition made by the Assessing Officer. 74. During the course of hearing before us, the Ld. counsel for the assessee reiterated the contentions made before the lower authorities and stated that receipt of ₹ 57,68,163/- had been duly accounted for in the books of the assessee having been received on account of sale of Catia V5 licence and shown in the ledger account of M/s. Aeromatrix Info Solutions Pvt. placed at Paper Book page 288, in the schedule of fixed assets placed at Paper Book page No. 385, in the ledger account of software purchased placed at Paper Book page No. 693 and in the ledger account of depreciation for the year placed at Paper Book page No. 695. The Ld. counsel for the assessee stated that all the above duly reflected the receipt of the said amount in the books of the assessee for the year and, therefore, there was no reason to make any disallowance of the same on account of not recording receipt of the same in the books of the assessee. 75. The Ld. DR, on the other hand, supported the orders of the lower authorities. 76. We have heard the contentions of both the parties. We find merit in the contention the Ld. counsel for the assessee. On perusal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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