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TMI Blog2018 (5) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... the opinion that we are of the opinion the FAA was not the justified in confirming the addition - Decided in favour of the assessee. Assessee was not liable to deduct tax at source for the payment made to the Netherland entity and that provisions of section 40(a)(ia)of the Act were not applicable. Payment made by the assessee to Sri Lankan entity - Held that:- We find that before signing of the DTAA of 2014 there was no provisions in the Indo-Sri Lankan DTAA for charging FTS. The non-resident entity had no PE in India and professional fees was to taxed as per Article 14 of the treaty. Considering the facts of the matter, we hold that the FAA was not justified in upholding the order of the AO with regard to the payments made to Sri Lankan entity. - Decided in favour of the assessee. Addition on account of payment to retired partners - diversion of income by an overriding title - Held that:- FAA had taken note of the relevant clauses of the partnership deed, that he followed the judgments delivered in the case of C C Choksi (2008 (7) TMI 1055 - BOMBAY HIGH COURT), that in that matter the Hon’ble Court had, in the identical situation, held that the payment made to ex-partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ITA/5095/Mum/2011, AY. 2006 - 07: 3. During the course of hearing before us, the AR stated that assessee was not interested in pressing ground number four, considering the smallness of the tax effect. It deals with disallowance made u/s. 40(i)(a)of the Act for sponsorship fee paid to Deloitte Touche Tohmatsu, Switzerland( DTT SL). We dismiss the ground, as not pressed. 4. First Effective ground of appeal(Gs. AO. 1-3), raised by the assessee, is about confirming the disallowance of professional fees paid by it to Deloitte Touche, Singapore(DTS), Deloitte Touche, LLP USA(DTL US), Deloitte Touche Tohmatsu Ltd. , Ausralia(DTTL AUS)amounting to ₹ 22. 83 lakhs, ₹ 1. 56 lakhs, ₹ 1. 64 lakhs respectively. 4.a. During the assessment proceedings, the AO found that assessee had made payment outside India, under the head subscription fees of ₹ 36. 31 lakhs, that it had not deducted tax at source for such payment, that out payment made to DTT SL of ₹ 31. 33 lakhs it had made TDS for payment of ₹ 27. 23 lakhs, that for balance payment of ₹ 4. 10 lakhs tax was not deducted before making the payment, He directed it t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout access to the books of accounts, that Alok head a fixed place in India, that the payment was attributable to the activities carried out by Alok, that the payment was taxable in India, that the AO was justified in disallowing the amount. With regard to payment of two sums(Rs. 44, 841/-and ₹ 1. 54 lakhs), the FAA held that the said amounts had not fall within the purview of Article 12/14 of the DTAA, that the disputed payments could not be considered business income/profit, that the condition of existence of Permanent Establishment (PE)was not satisfied. Accordingly, she deleted the disallowance of the said two sums. 4.1. b. With regard to payments(Rs. 9. 83 lakhs)made by the assessee to DTL US, it was submitted before the FAA that payments were made on seven counts(Rs. 1. 56 lakhs +Rs. 1. 45 lakhs + ₹ 2. 93 lakhs +Rs. 62, 457/-+ ₹ 49, 966/-+ ₹ 2. 31 lakhs+Rs. 45, 051/-), that the USA entity had rendered professional services outside India, that no tax was deducted at source on the basis of the certificate obtained from a Chartered Accountant, that payment of professional fee was not liable to taxed in India in view of Article XV of the India-USA Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th of them did not have Permanent Establishment in India, that the FAA put negative onus on the assessee with regard to disallowance confirmed in the case of DTL US. He referred to page 140 of the PB and Article XII of the DTAA and stated that nothing was made available to the assessee, that no technical services were rendered by DTL US to the assessee. About DTS, he stated that the assessee had furnished all the necessary details during the assessment proceedings, that out of four bill two bills did not carry the names, that under the provisions of the Act the disputed payments were not taxable, that same were not taxable under the DTAA , that the services rendered were not exclusionary, He referred to Art. XII of the Taxtreaty and stated that burden was on the AO to prove that income was chargeable to tax under the DTAA. He relied upon the case of Motorala Inc. (95 ITD 269), delivered by the Special Bench of the Tribunal. The DR relied upon the orders of the departmental authorities. 4.3. We have heard the rival submissions and perused the material before us. We find that in case of DTT AUS, identical issue was deliberated upon and decided by theTribunal, while adjudicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier years. The AR and the DR had advanced the identical arguments before the Tribunal. We are reproducing the order of the Tribunal for the earlier years(supra)and it reads as under: 16. Now, we shall advert to the second issue of disallowance of payment of professional fees in respect of two parties under 40(a)(i)(a)(i); namely: (i) DTT (Deloitte Touche Tohmatsu) Canada of ₹ 2, 90, 000/-; and (ii) DTT (Deloitte Touche Tohmatsu) New Zealand of ₹ 1, 45, 290/- . Regarding payment to DTT Canada, it was submitted that, the assessee was appointed by Punjab Agro Industrial Corporation Ltd. , a Government of Punjab enterprise to carry out a study of the dairy sector and assist the Government in development of its business plan. In the process of providing the above services, the appellant availed services of DTT, Canada, who had rendered the professional services in respect of providing information of the global environment in the dairy sector in respect of the markets, competition, technology and regulations and other best practices followed by the global players. The entire services in relation to this job were performed outside India by the DTT and in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny finding as to how the payment of fees for professional services ‟ which has been paid to DTT Canada is taxable in India either in terms of the provisions of the Act or under any article of the DTAA. If the payment has been made to non-resident, then it has to be seen firstly, whether under the terms of DTAA such a fee or payment is taxable in India or not and if not, then whether it is taxable in terms of Income Tax Act. Without any finding qua the taxability of the payment, how disallowance u/s40(a)(i) can be made. The Ld. CIT(A) too without analyzing the factual aspect and ascertaining the nature of payment has simply came to a conclusion sans any finding by the AO that the impugned payment is taxable as fee for technical services ‟ . She simply referred to a decision of Tribunal and held that retrospective amendment which has been brought in section 9(1)(vii) by the Finance Act, 2010, whereby it has been clarified that, if the technical services have been rendered outside India then also same is taxable in India. Before coming to this conclusion, she has not given any finding whatsoever how such a payment of fees for rendering of professional services fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other independent activities of a similar character shall be taxable only in that State. However, in the following circumstances, such income may be taxed in the other Contracting State, that is to say (a) if he has or had a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or (b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant fiscal year; or (c) if the remuneration for the services in the other Contracting State is either derived from residents of that other Contracting State or is borne by a permanent establishment which a person not resident in that other Contracting State has in that other Contracting State and such remuneration exceeds two thousand five hundred Canadian dollars ($2, 500) or its equivalent in Indian Currency in the relevant fiscal year. 2. The term 'professional services' includes independent scientific, literary, artistic, educational or teaching activities as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purpose of Section 44AA or of this section. Clause (b) of the same Explanation defines fee for technical services as having the same meaning given in Explanation 2 to Section9(1)(vii). Separate definitions of professional services and technical services under the Act inter-alia indicates that the Statute makes clear distinction between these two terms. The term profession alludes to some kind of vocation or occupation which requires special, advanced education, knowledge or skill etc. A person professing any kind of profession requires extensive training and study and mastery of specialized knowledge. A professional person has to conduct himself within specified code of conduct or ethical conduct which is required from his field of profession like legal, medical, accountancy etc. In the case of rendering of technical services, the emphasis is more on giving services which are technical in nature and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment as fees for technical services without elaborating or elucidating the nature of payment. So far as the benefit under India-New Zealand DTAA, the payment of professional fee is not taxable under Article 14, which deals with Independent personal services . The language of Article 14 is similar to the language of India-Canada DTAA which has been reproduced hereinabove. Here also DTT New Zealand neither has any fixed base/ PE nor had any of its employees/professionals stayed in India for the period exceeding 183 days in any consecutive twelve months period. Accordingly, under the DTAA the professional fee paid to DTT is not taxable in India. However, Article 12(4) of India-New Zealand DTAA dealing with fees for technical services imbibes same definition as has been given under the Income Tax Act. Our finding given on the issue of FTS under Section 9 (1) (vii) will apply mutatis mutandis here also. Therefore, in view of our finding given therein, the said payment cannot be held to be taxable in India either under Section 9 (1) (vii) or under Section9(1)(i). Accordingly, disallowance made by the AO u/s 40(a) (i) is directed to be deleted. Considering the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was able to reconcile the entire alleged undisclosed professional fee. He referred to the amounts attributable to Encorn Win Farms (India) Ltd. (Rs. 19. 09 lakhs+28. 41 lakhs) and stated that that the payee vide its letter dtd. 29/2/12 had confirmed that the assessee had not issued any invoice, that no payment was made to the assessee towards professional fee. He also referred to the case of Sri Vallabh Lohia(ITA/4120/Mum/2011, dtd. 8/8/12) and stated that the assessee was following cash method of accounting and that all the receipts were by cheque. DR stated that matter should be sent to AO for further verification. 10.3. We have heard the rival submissions. We find that major amount under the head professional fee received is from Encorn Win Farms (India) Ltd. , that the payer had, in response to section 13(6)notice, admitted(Pg-53 of the PB)that it had not paid any amount to the assessee, that it also ascertained that no professional services were availed from the assessee. We find that the FAA had brushed aside such an important piece of evidence only on the ground that the figure was appearing in the AIR. Mistakes in the information in AIR is not uncommon. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that interest income has been received by the assessee from Rajvaibhav Enterprises (P)Ltd. Therefore, the said addition is not justified. Accordingly, we delete the addition of ₹ 2, 66, 916 by allowing ground Nos. 3 4 of appeal taken by the assessee. Following the above , we decide Ground No. 1 in favour of the assessee. 11. GOA. 3 is about confirming the disallowance u/s. 40(a)(ia) of the Act of ₹ 24. 04 lakhs in respect of professional fee paid. During the assessment proceeding, the AO found that the assesee had paid ₹ 5. 36 lakhs to DTS, that ₹ 8. 45 lakhs and ₹ 9. 15 lakhs were paid to DTLL US and Deloitte Tax LLP respectively, that it had also made payments to Deloitte Belastinga Dviseirs B. V. , Netherlands(Rs. 59, 008/-); SJMS Associates, Sri Lanka (Rs. 48, 145/-). The AO directed the assessee to explain as to why the payment made to above entities should not be disallowed for non deduction of tax at source. Relying upon the orders of the earlier AY. s, he made a disallowance of ₹ 24, 04, 395/-, invoking the provisions of section 40(a)(i) of the Act. 11.1 . During the appellate proceedings, the assessee made detailed su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, that it had made payment to its US entity in connection with Rediff, that assessee did not file necessary details in that regard, that it was not explained as to how the US entity carried out the audit work without access to the books of accounts, that services were availed in India, that it was taxable as per the provisions of section 9(1)(vii) of the Act. About the payment of ₹ 9. 15 lakhs to Deloitte tax LLP, USA, the FAA observed that the payments were made for rendering the professional services in the fields of research, that payments were made in connection with consultancy on transfer pricing analysis of Micro Inks Corpora - tion for the fiscal year ended on 31/03/2005, that the services were in the nature of consultancy services. He further observed that payment to Netherlands entity was made for services availed in connection with providing tax advice on Netherland tax laws, that the payment was in the nature of consultancy services and that same was covered by the provisions of section 9(1)(vii) of the Act as well as Article 15 (a) of the Tax-treaty, that Article 15 included consultancy services under the definition of fees for technical ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a in view of the tax treaties entered into between India and those countries. 11.2. a. With regard to payment to the Netherland entity, he argued that the non-resident entity had rendered professional services in connection with providing tax advice on Netherlands tax laws, that Article 12 of the Tax-treaty provided payment for royalties and fees for technical services, that sub-clause 5(a) of the Article covered the payment for services which were ancillary and subsidiary to the royalty payment, that Article 12(5)(b) covered those services which would make available technical knowledge, experience, skill, know-how, that Article 12 (5)(b) contained the condition regarding make available, that the Netherlands entity had not made available technical knowledge/experience/skill etc. , that the professional services rendered could not be categorised as FTS under Article 12 of the Tax-treaty that as per Article 14 of the DTAA professional fees received by the Netherlands entity was taxable in that country only. He referred to Pgs. 109 and 274-280 of the PB. 11.2. b. With regard to payment made to Sri Lankan entity, he stated that the Tax-treaty between India and Sri Lanka did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporated in them. The obligation to deduct tax at source is, however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. It is for this reason that the CBDT has clarified in Circular No. 728 dated October 31, 1995, that the tax deductor can take into consideration the effect of the DTAA in respect of payments of royalties and technical fees while deducting tax at source. The expression chargeable under the provisions of the Act in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted. Considering the above discussion, we hold that the assessee was not liable to deduct tax at source for the payment made to the Netherland entity and that provisions of section 40(a)(ia)of the Act were not applicable. 12.a. Now, we would like to take up the issue of payment made by the assessee to Sri Lankan entity. We find that before signing of the DTAA of 2014 there was no provisions in the Indo-Sri Lankan DTAA for charging FTS. The n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of hearing before the FAA, the assessee furnished the details in respect of names of the retired partners and spouse of deceased partner covered under Clause 10. m of the Partnership Deed along with the amounts paid to them. After considering the available material, the FAA stated that the assessee was obliged to pay the amount computed under clause 23 before distribution of the same under clause 28 of the partnership deed, that it was not an application of the income by the assessee-firm, that as per the legal obligation the income was diverted before it reached the assessee, that the assessee was in fact in the position of a collector of income on behalf of the persons to whom if was payable and was only paying the amount subsequently, that the payment to retired partners and wives of the deceased partners was made as per provisions of clause 10. m of the partnership deed, that the said payment had a prior and overriding charge on the receipts of the assessee -firm as per the provisions of clause 7. e. of the partnership deed. He further stated that it could not be said that it was a case of diversion of income by overriding title. Referring to the order of C. C. Chokshi C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the various clauses of the partnership deed, that during the assessment proceedings a copy of the deed was submitted, that he did not took cognigance of clauses 7 and 10 of the deed, that the deed clearly provided that the ex partners or the spouses of deceased partners would be paid part of the income of the assessee for the services rendered by them, that the FAA had taken note of the relevant clauses of the partnership deed, that he followed the judgments of the Hon ble jurisdictional High Court delivered in the case of C C Choksi(ITA 193 of 2008, dtd. 25. 07. 2008), that in that matter the Hon ble Court had, in the identical situation, held that the payment made to ex-partners or to the spouses of the deceased partners was not application of money, that the FAA had following the judgments had held that it was a case of diversion of income by an overriding title. In our opinion, the order of the FAA does not suffer from any legal or factual infirmity. So, confirming the same, we decide the effective ground of appeal against the AO. ITA/2221/Mum/2013, AY. 2008-09: 14. First Ground of appeal, filed by the assessee, is about confirming the addition of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t two entries, that he did not admit the additional evidence filed by it in the case of CRPIL and CEIL, that both the parties had categorically stated that there were mistakes in their books of accounts. In our opinion, the FAA was not justified in rejecting such a vital peiece of evidence, even if it was filed belatedly. It is said that technicalities and procedures should not get preference over the spirit of the Act i. e. to tax real income and to collect due taxes only. As a representative of the Sovereign, the FAA should ensure that only taxable income, and not hypothetical income, is taxed. He has discarded the relevant evidence on technical ground, so, we are remanding back the matter to the file of the AO for fresh adjudication, as it would be in the interest of justice. The AO would afford a reasonable opportunity of hearing to the assessee before deciding the taxability of the disputed sums. Ground no. 1 is partly allowed. 15. Second Ground of appeal, as per the AR, was infructuous. Threfore, we are not adjudicating the same. 16 . Next Ground of appeal deals with disallowance made u/s. 40(a)(i) of the Act amounting to ₹ 87. 85 lakhs paid under the head pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the professional fee paid to Puerto Rico entity, the FAA held that the services were utilised in India, that source of income was from India, that income was generated from Indian source, that the professional fee paid to its counterpart was taxable as per the provisions of the Act, that the AO was justified in making the disallowance. With regard to the payment made to Belgium entity, the FAA held that the AO was justified in making the disallowance, that the services were availed in India. 16.2. During the course of hearing before us, the AR submitted that issue of payments made to the USA entities stands decided by the order of the Tribunal for the earlier AY. s. About the payment made to Italian entity he stated that it was not FTS, that services rendered by the non-resident entity fell in the category of professional services, that even if it was FTS it was not taxable in India as the payment was as per the provisions of section 9(1)(vii)(b) of the Act, that the FAA himself had admitted that services were utilised outside India and that the source was also outside India. About payment made to Petro he stated that services rendered by the non-resident entity could not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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