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TMI Blog2021 (12) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of Rs. 1,07,70,378/- made on account of diversion of income belonging to the assessee firm to an entity incorporated in tax-free jurisdiction avoidance of tax. iii) On the facts and circumstances of the case, the Ld. C!T(A) erred in deleting the addition of Rs. 21,33,805/- made on account of by treating the same as non-business expenditure and also u/s 40(a)(i) and further erred in holding that the entire amount paid to Chadha power (SA) Pty. Ltd on account of reimbursement of expenses is not backed by commercial expediency. iv) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the reimbursement expenses can be reasonably attributed as 'fee for management services' and as per the provisions of section 40(a)(i) any amount paid to a non resident is not deductable as an expense if the requisite TDS under Chapter -XVIIB has not been deducted and paid. v) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that It is only if the business or profession is carried outside India, 'Fee for technical/management services' payable by a resident is not taxable in India. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which sales were 980,664 AED and management fee of Rs. 502,786 AED. Against this, revenue expenses have been shown at 526,718 AED, Finance cost of 1148 AED and net profit of 792,674 AED. The amount of management fees aggregating to 502,786 AED was in the form of reimbursement of expenses by Chadha Power, India to Chadha Projects JLT, Dubai with a 10% mark-up. After considering the assessee's detailed reply, the AO held that entire amount paid to Chadha Projects JLT, Dubai on account of reimbursement of expenses is not backed by commercial expediency and, therefore, needs to be disallowed. He further disallowed that said expenditure has to be examined from another dimension i.e. the amount is paid to a non-resident and, therefore, provisions of section 40(a)(i) is applicable because TDS is not deducted and paid. The observation of AO in this regard is as under:- " However, in the reply dated 23.03.2016 it is stated that the assessee firm was benefited by Chadha Projects JLT by securing a work order worth INR 14 crores by ZPC, another work order of Rs. 14 crores from Petrozim Line Pvt. Ltd. and a work order of Rs. 7 crores from Lesotho Electricity Company. Copies of the work orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5681- needs to be examined from another dimension i.e. deduction and deposit of withholding tax. As per the provisions of section 40(a)(i) any amount paid to a non-resident i.e. Chadha Projects JLT in the present case, is not deductable if the requisite TDS under Chapter-XVIIB has not been deducted and paid. In the present case, the so-called support services provided by Chadha Projects JL T to the assessee firm is in the nature of fee for technical services since the socalled work order procured by Dubai entity for the benefit of the assessee firm have been executed from India. Therefore, the support services so provided have been utilized in India and hence the income of Chadha Projects JL T for providing such services is taxable in India. Since no withholding tax has been deducted on such payment reimbursed to Chadha Projects JL T along with mark up of 10% the said expenditure needs to be disallowed as per the provisions of section 40(a)(i) of the I. T. Act, 1961 ..." 6. He has also disallowed similar expenses of Rs. 21,33,805/- paid by the assessee to Chadha Power (SA) Pte Ltd. wholly and exclusively incorporated in South Africa for similar reasons. 7. Ld. CIT (A) has discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of commercial expediency - their role in tendering and procurement of new business / contracts Comprehensive justification for setting up of these entities Further, the copies of the following documents were filed at the appellate stage as well as submitted to have filed them at the assessment stage - Note on activities of the Dubai entity vis-a-vis the appellant's business - negotiating and procuring orders Certificate of Registration of Dubai entity (dated 1610112012) - trading in power generation, transmission and distribution equipment - the appellant's primary line of business Support Service Agreement with Dubai entity (dated 8/03/2012) - compensation package - reimbursement of expenses with 10% markup Statement of detailed reimbursement of expenses of Dubai entity (A Y 2013-14) Documents and invoices - evidence of logistical support service by Dubai entity in procuring material for Zimbabwe Power Company (ZPC) - contract bagged by the appellant Contract ZPC 96112 for USD 879,150 with ZPC Ltd. - refurbishment of water pre-treatment plant at Hwange Power Station - coordination by Dubai entity Contract ZPC 10112 for USD 818,500 + USD 78 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred that the appellant's two subsidiaries set up in Dubai (UAE) and South Africa assisted it in its business development - coordination as well as follow up in procurement of business (orders / bidding for contracts) in Africa in line with the appellant's business - supply, installation, commissioning and maintenance of DG sets, power equipment and its spares / accessories (as already mentioned). However, in the impugned order, despite scrutinizing all the above submissions I documents, the aforementioned additions were made therein rejecting the appellant's contention of 'commercial expediency' - reimbursement of expenses with a 10% mark-up." 8. Thereafter, the ld. CIT (A) has referred to the principles laid down by Hon'ble Supreme Court in the case of SA Builders Ltd. reported in 288 ITR 1. As regards the applicability of section 40(a)(i), ld. CIT(A) observed that first of all, expenses claimed in computing the income chargeable under the head 'profits and gains of business or profession' towards royalty, fee for technical services or other sum chargeable under the Act which is payable outside India or in India to a nonresident on which TDS is applicable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it is observed that the reasons for the aforementioned disallowance is the inability of the appellant to substantiate its claim for reimbursement of expenses and that no TDS was made thereon u/s 40(a)(i). 5.3a It is gathered from the appellant's submissions at para 4 above that even in this case, similar disallowance of the appellant's claim of reimbursement of expenses along with 10% markup to M/s. Chadha Power SA (Pty.) Ltd. (South Africa) has been made as was made in respect of the appellant's claim towards M/s. Chadha Projects JL T (Dubai) on the reasoning that the appellant could not substantiate its claim at the assessment stage. Also, no TDS was made on the aforesaid payment made by it u/s 40(a)(i). 5.3b In the preceding sub-para from 5.1 through 5.1 d, this issue has been discussed in this order and thereafter the appellant's claim has been accepted. For the same reasons, this disallowance made in the impugned order (Rs. 21,33,805/-). Further, the appellant's contention, vide its submission filed at the appellate stage, that this disallowance is a part of the total disallowance (Rs. 1,30,51,568/-) made in the impugned order and hence, is duplica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. The said company has earned profits of 7,92,674 AED which included AED 63,961 as mark-up. He held that there is no evidence to prove that that the arrangement of reimbursement of expenses along with markup is sham and there is nothing on record from where any adverse inference could be drawn. Therefore, he has deleted the said addition made by the AO. 12. We have carefully considered the submissions and gone through the impugned order as well as material placed on record. Insofar as disallowance of reimbursement of expenses made to two non-resident entities i.e. Chadha Projects JLT, Dubai of Rs. 1,30,51,568/- and Rs. 21,33,805/-to Chadha Power (SA) Pty. Ltd., South Africa. The assessee's case has been that the said reimbursement of expenses of both the entities were for carrying out market research for feasibility and expansion of market in neighboring countries particularly in Gulf and African region and day-to-day coordination in activities for the assessee, negotiation and procurement of orders, securing of materials, supply and distribution of materials to destination sites, logistic support and follow up and liaisoning for projects under execution etc.. It is also und ..... X X X X Extracts X X X X X X X X Extracts X X X X
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