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TMI Blog2017 (4) TMI 1645X X X X Extracts X X X X X X X X Extracts X X X X ..... by Article-14 whereby they would only be taxable in the foreign state where the independent individual is resident. So in this case, the payee who an individual is rendering such professional or independent personal services is only taxable under Article-14 in Germany where he is resident. The payment has been made to foreign payee abroad for the services rendered outside India. Since income itself was not chargeable to tax in India, therefore, there was no liability of the assessee to deduct tax u/s 195(1) and hence section 40(a)(ia) is not applicable. The assessee thus get relief. Payment to Huntswood Marketing Ltd., London - The assessee submitted that this is a payment for consultancy charges towards Designing services provided to the assessee outside India The consultancy services involved were in relation to information concerning designs and patterns of readymade garments available in the foreign market. Managerial or consultancy or technical services referred under FTS involve provision of expert opinion based on individual technical or professional knowledge. Such services cannot be FTS either under the Act or under the DTAA because no technical or managerial or consultanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest on the advance given to other director is a business decision of the assessee. Such comparison does not indicate nexus between the borrowed fund and the interest free advance given to related parties. The need to establish the nexus is more important in the scenario when out of total interest expenses on borrowed fund Rs. 1,49,99,992/- an amount of Rs. 1,02,22,500/- is disallowed. The basic requirements of disallowances that is nexus between interest bearing fund and interest free advance and adequacy of interest free fund are not analysed by AO during assessment proceedings. The assessee explained before the AO that advance was given for some business purposes which did not materialize. Hence, the same has been received back during the subsequent year. Thus, in the absence of any finding, contrary to the explanation given by assessee, it cannot be held that the loan was not given for any business purpose. Assessee having adequate non-interest bearing fund it can be inferred that the loan given has no bearing on the interest expense claimed by assessee on the borrowed fund. CIT(A) has rightly deleted the disallowance and we find no infirmity in the order of learned CIT(A). Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of 1,02,22,500/-, made by the A.D. on account of interest free advance given to that the daughter of the Managing Director of assessee Company, by not considering the case of CIT v. Abhishek Industries Ltd. 286 ITR 1 in which the Hon'ble Punjab and Haryana High Court has held that the onus of establishing the nexus between the interest free funds and advances is on the assessee and receipts from all sources go in a common kitty? 6. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law. 7. That the grounds of appeal are without prejudice to each other. 3. The Cross Objection of the assessee is reproduced hereinbelow: 1. That the Ld. Commissioner of Income tax (Appeals) {Ld. CIT(A)} has erred in sustaining the disallowance uls 40(a)(i) amounting to Rs 12,49,474- being payment made to MIs Huntswood Marketing Limited, U.K for designing services by considering the same in the nature of Fee for Technical Services ('FTS'). The Ld. CIT(A) has failed to appreciate that the above services are in the nature of business income of the payee. Services were rendered outside India for which payments were made outside India and accordingly, as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it is submitted that the expenses relate to professional and consultancy services received from professionals and consultants abroad in the course of their profession outside India. The services were received outside India in connection with export promotion and trade mark/patent matters. The services were rendered outside India. The same does not involve any fee for technical services. The payee has rendered the services in the course of their business and profession outside India and do not have any PE in India. As such no TDS is applicable. Payment of Rs. 12.49 Lacs to Huntswood Marketing Ltd. debited under the head legal and professional charges relates to the fee for designing of products designed outside India in the course of their business outside India. The same do not involve transfer of any technology and hence is not FTS. The party does not have any PE in India. As such no TDS is applicable. The reply of the assessee has been examined. The contentions raised there in are not applicable. From the chart above it is seen that Rs. 8,552/- on account of professional fees have been given to a party whose name and details have not been furnished. In the absence of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under sub-section 2 has been amended with retrospective effect from 01.06.1976. The relevant Explanation has clarified that the income of the non-resident from fee for technical services shall be deemed to accrue or arise in India whether or not the non-resident is residing in India or it has rendered services in India. In view of this amendment 'fee for technical services' are liable to be taxed in India as long as they are utilized in India. In view of the above, an addition of Rs. 19,77,006/- (8552+72680+64630.0+ 1249474) is being made for non-deduction of tax. . . (Addition of Rs. 19,77,006/-) 5. Learned CIT(A) in fact confirmed the additions of Rs. 12,49,474/- and deleted the additions of Rs. 7,27,532/- for the reasons recorded in his order. 6. We have heard the rival contentions and perused the facts of the case. The AO noted that during the course of assessment proceedings, the assessee furnished details in respect of payments in foreign currency vide reply dated 20.10.2011. From the same, it was observed that the assessee has made payments in foreign currency to following parties assigned under the head Legal Professional expenses. Name of the Party Nature of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. The services being in respect of professional services from lawyers, article-14 of the DTAA with Canada will apply. The services were rendered outside India and the payments were also received outside India. Payee has no fixed place of business or PE in India. The payee is a LLP i.e. Limited Liability Partnership also called firm. The payee is not a company. Basis of disallowance by AO is that the payee is a company. As payee is not a company but a firm, as per A.O. herself, the payment is covered under Article 14 as Independent Personal Services in accordance with which they are only to be taxed in Canada. Even if the payments are considered under business profits (Article 7 of DTAA) , the subject payment is not liable to TDS as the payee has no PE in India. Erroneous disallowance has been made by wrongly invoking Section 195 and Section 40(a)(ia). 6.3 As regards payment of Rs. 6,46,300/- to Martin Zaepfel, Germany, the assessee submitted that the marketing services involved cannot be FTS either under the Act or under the DTAA because no managerial or technical consultancy services were provided by the foreign payee. Services for arranging business meetings with importers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business of the payee in its home country are in the nature of business profit covered under Article 7 of the DTAA and there being no PE in India of the payee, the subject payments are not taxable in India. The payment involved relates to services provided by the payee for arranging business meetings outside India with foreign buyers with the assessee. The services towards arranging business meetings with foreign buyers are only marketing services like services provided by foreign agents for procuring export orders for which export commission or retainer is paid. The payments involved are purely business profits covered under Article-7 of the DTAA with Germany. The assessee placed reliance on judicial pronouncement as below :- In the case of CIT vs. Toshoka Ltd. 125 ITR 525 (SC) and Spahi Projects P. Ltd., In re 315 ITR 374 (AAR) , it has been held that amount of commission earned by non-resident foreign payees for rendering service outside India in connection with procuring export orders could not be deemed to be income arising in India. In the case of Cushman Wakefield (2008) 305 ITR 208, it was held that there was no expertise or know-how which was made available to CWI by re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(ia) is not applicable. The assessee thus get relief of Rs. 7,27,532/- 6.5 On payment of Rs. 12,49,474 to Huntswood Marketing Ltd., London the assessee submitted that this is a payment for consultancy charges towards Designing services provided to the assessee outside India The consultancy services involved were in relation to information concerning designs and patterns of readymade garments available in the foreign market. Managerial or consultancy or technical services referred under FTS involve provision of expert opinion based on individual technical or professional knowledge. Such services cannot be FTS either under the Act or under the DTAA because no technical or managerial or consultancy services were provided by the foreign payee. However, the nature of payment made to Huntswood Marketing Ltd. does not qualify to be exempted under the category of services under DTAA. In this case, the foreign payee is providing designing services which is nothing but technical services as defined under DTAA between India and UK. Thus, the addition of Rs. 12,49,474/- has rightly been confirmed by the CIT(A). 7. Accordingly, we find no infirmity in the order of learned CIT(A) who has passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 502 (Delhi) wherein the Court observed as under: We note that the assessee was maintaining a bank account with mixed common fund in which all the deposits and withdrawals were made there was no specific instance noted by the AO in respect of any direct nexus between borrowed fund and the said advance made to the subsidiaries. The AO had made general observations without going into depth of the matter and without pointing out any specific instance where an interest bearing borrowed fund was advanced to the subsidiaries or establishing that the borrowings made by the appellant were not for business purpose. Both appellate authorities below were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee's own capital. At the relevant time, the assessee was found to be having an adequate non- interest bearing fund by way of share capital and reserves. Even otherwise the advances were found to be made to the subsidiaries for business considerations which is nothing but commercial expediency of the assessee but being in the factual ..... X X X X Extracts X X X X X X X X Extracts X X X X
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