Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding
  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2024 (12) TMI 696

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... HELD THAT:- We agree with the contention of the assessee that HCLT has a computational requirement of the deeming fiction under Explanation 2 to section 10AA to treat the entire amount of sale proceeds received from the foreign clients as export turnover as it raises a single consolidated invoice. The contention that HCLT treats the payments made to its AEs as expense and claims deduction u/s 10AA on net profit basis, has not been controverted by DR. DR has also not controverted the key assertion of the assessee that no deduction under section 10AA of the Act has been effectively claimed by HCLT in respect of payment received from end customers on behalf of the Appellants notwithstanding that such receipts were considered as part of 'export turnover of HCLT. DR could not controvert the fact that the TPO in the case of HCLT has not invoked sub-section (9) of section 10AA read with sub section (10) of section 80IA of the Act, while computing the deduction. The assessee, therefore, in our considered opinion succeed in rebutting the ld DR objections on this count. We again agree with the submission of the assessee that the facts in the case of Hariharan Subramaniam [ 2020 (11) TMI .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... MEMBER:- The above captioned seven separate appeals by different but connected assessees are preferred against separate assessment orders passed by the Assessing Officer u/s 147 r.w.s 144C(13) of the Income tax Act, 1961 [the Act, for short] pertaining to different Assessment Years. 2. Since the underlying facts are common in the appeals of the assessee, they were heard together and are disposed of by this common order for the sake of convenience and brevity. 3. The grounds of appeal taken by the assessee are as under: 1. That on the facts and circumstances of the case and in law, assessment order passed under section 147 read with section 144C(13) of the Income-tax Act, 1961 ( the Act ) for assessment year 2017-18 assessing the total income of the Appellant at Rs. 16,75,04,559 is without jurisdiction, illegal, void ab initio and therefore, liable to be quashed. General 2. That the assessing officer erred on facts and in law in assessing the total income of Appellant at Rs. 16,75,04,559 instead of Rs. 16,64,703, being the alleged amount of income escaped assessment in the case of the amalgamated company ie., Axon Solutions Singapore Pte Limited. 3. Reassessment proceedings initiate .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ng reassessment proceedings culminating in the impugned reassessment order despite the same being time barred on account of conditions prescribed in section 149(1)(b) of the Act not being met, viz., income escaping assessment not being more than Rs. 50 lakhs. 3.8 That the final assessment order is without jurisdiction, void ab initio and bad in law inasmuch as the reassessment proceedings have been initiated and final assessment order has been passed in contravention of the procedure prescribed under section 151A of the Act. RECEIPTS OF THE APPELLANT FROM HCLT NOT TAXABLE IN INDIA 4. Issue squarely covered in favour of the Appellant by binding decision of the Tribunal 41 That, at the outset, the assessing officer erred on facts and in law in not following the binding decision of the Delhi bench of the Tribunal rendered on identical facts in the Appellant's own case, wherein it was conclusively held that payments made by HCLT to its non-resident group entities, for onshore work performed by the latter, are not taxable in India under the provisions of the Act. 5 HCL group entities operate as a consortium; services not rendered by one entity to another 5.1 That the DRP/assessing o .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... rovided in section 9(1)(vii)(b) of the Act, considering that the amount received for onsite services rendered by the Appellant in foreign jurisdiction(s), were: a. for services utilised in a business or profession (of providing onsite services by HCL Technologies Ltd) carried on outside India, and/or; b. for the purposes of making or earning income from a source outside India (by providing onsite services). 7. Payments not chargeable to tax under the Double Taxation Avoidance Agreement ( DTAA ) 7.1 Without prejudice and law the in the alternate, that on the facts and circumstances of the case and in DRP/assessing officer erred in not holding that the amount received by the Appellant, for onsite services was not liable to tax in India, in terms of the applicable DTAA as such services did not make available any technical knowledge, skill or experience or consist of the transfer of any technical plan or design to HCLT. 7.2 Further without prejudice, that on the facts and circumstances of the case and in law, the DRP/ assessing officer erred in holding that 'make available' clause does not apply in respect of development and transfer of technical plan or design. 8. Statements n .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... he three vertical, the software development and related ITeS alone constitutes 95% of the assessee's business. 8. The principle issue that requires adjudication is whether the receipts from HCLT by the assessee, one of the foreign AEs, on account of software, Engineering and Infrastructure service provided by the assessee, is taxable in India. 9. The assessee has contended that such income of the assessee is not chargeable to tax in India and this contention is based on the following three premises. i) First, the HCLT and other affiliates perform services to overseas customers of HCL group (in this case Deutsche Bank) like a consortium and therefore, payment received by the assessee from HCLT was not for services rendered by the assessee to the HCLT, but rather was in the nature of payment under a revenue sharing arrangement. ii) Second, the amount received by the assessee were in respect of services performed by the assessee outside India and delivered directly to the overseas customers for utilization in their business carried on outside India and therefore, did not accrue or arise in India so as to be chargeable to tax in India in terms of section 9(1)(vii) of the Act and mo .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... nate bench has passed a consolidated order allowing the appeals of the assessee for the A.Y 2012-13. However, additional evidences filed by the department as well as case laws have not been considered by the Bench. 15. We have heard the rival submissions and have carefully perused the relevant material on record. We find force in the arguments of the ld. counsel for the assessee that the issue of taxability of receipts from HCLT in the hands of the assessee is covered in favour of the assessee by the decision of the co-ordinate bench in assessee s own case for A.Y 2012-13 [supra]. We will deal with various issues raised by the AO and the decision of the coordinate bench vide order dated20.12.2023 (supra)on each of the issues. We find that on the taxability of the receipts of foreign AEs from HCLT, the coordinate Bench has concluded that the same is not taxable in India. 16. The coordinate bench of ITAT (supra) adjudicated that the HCL group entities operate as independent contractors and the services are not rendered by one entity to another but rather it is a case of revenue sharing arrangement, as under: 15. From the perusal of the Master Service Agreement wherein certain relevan .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... rforms services outside India in connection with contracts entered into by HCLT with foreign customers, no service or deliverable is provided by the assessee to HCLT and work is directly performed onsite at the foreign customer's location or nearshore delivery centers. In other words, the assessee does not provide any services to HCLT and the services are rendered by the assessee directly to the customers located outside India, i.e., no part of the services rendered by the assessee are transferred to India. Thus, as per the business model, the on-site services are entirely performed by the assessee from outside India and delivered for ultimate consumption or utilization by foreign clients in their business outside India. Accordingly, we appreciate the arguments of the ld. AR that the overall responsibility with HCLT is only to facilitate common linkage between HCLT, HCL group entities and customers and that the fact that HCLT is the facilitator or single contact point for the end customer does not lead to the conclusion that services are being provided by the assessee to HCLT ; that such arrangement is entirely meant for administrative convenience of the end customers, so as to .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... oth manner. 23.1. In view of the above, we find the allegation leveled by the ld. AO in his order that services were rendered by assessee to HCLT is in direct contravention to the findings recorded by the ld. DRP. Needless to mention that the observations of the ld. DRP are binding on the ld. AO as per section 144C(10) of the Act. 17. The ITAT (supra) decided the receipts from HCLT are not taxable u/s 9(1)(vii) of the Act due to exclusion contained in subclause (b), in favour of assessee as follows: 24. We further find that if the contention of the ld. AO i.e., the amount paid to the assessee by HCLT is to be considered towards the onsite software services provided by HCLT in the course of carrying on its business of onsite services were to be accepted, such business of providing onsite services would be considered as outsourced by HCLT to the assessee. Such business of providing onsite services is carried on outside India, in as much as such onsite services are performed outside India and is also delivered directly to the customers outside India. HCLT as a corollary would be considered as having availed the services of the assessee outside India in respect of and for the purpose o .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... stomers or at the customer's server located abroad, which is not disputed before us. The requirement analysis and application design documents prepared by the onsite team are stored in client's environment itself and can be accessed by the HCLT offshore team only upon client granting permission or access. The mere fact that the assessee is engaged in understanding the requirements of the customers and passes on the requirement plan to respective development teams for designing and coding the software module does not, per se, constitute an interdependent function of the HCL group. Rather, it has to be understood in a holistic manner that these are well coordinated activities, meant to support the entire group in delivering quality products and services to the ultimate customers. All the software development work is generally divided between onsite and offsite team based on discussion with customers. The respective onsite and offsite engineers work directly with the customer's engineers and managers. The entire development environment is customer owned. On the basis of the discussions with the customer's project manager, the software work is broken into different modu .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... t the contentions of the assessee herein. From the aforesaid statements, it emerges that the offshore project lead or project manager of HCLT manages his offshore team in India, whereas the assessee s project lead manages his team independently, which executes work from the overseas locations directly on the customer's server. Both the project managers/ leads only coordinate with each other on need basis; that each team of HCLT and the assessee develops the particular modules as assigned to them; that the delivery team of the assessee reports to the delivery manager who sits in the foreign country and the delivery team of HCLT reports to the delivery manager who sits in India; that both onsite and offsite personnel of the assessee and HCLT respectively are responsible for writing the code; that the offshore teams of HCLT work directly with customer managers or through project managers in India and the onsite team engineers belonging to the assessee company work directly with foreign customer's managers; that in majority of the projects, the entire development environment is owned by foreign customer; that the code and test scripts are worked on from foreign customers' s .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ew of first limb of the exception carved out in clause b of section 9(1)(vii) of the Act. Before the Hon'ble Bench it was submitted that the decision in the case of Chander Mohan Lall is per incuriam of the decision of the Hon'ble Kolkata Bench of the Tribunal Asstt. CIT VS Subhatosh Majumdar [2020] 120 taxmann.com 242 (Kolkata-Trib.) as well as decision of the Hon'ble D Bench of the Tribunal In the case of Hariharan Subhramanium, Hariharan Subhramanium Vs Ast. CIT [2020] 121 taxmann.com 189 (Delhi-Trib.). The Hon'ble Bench has not considered the decisions of Hon'ble D-Bench New Delhi and Hon'ble Kolkata Bench of the Tribunal cited by the revenue which are contrary to the decision of the Hon'ble Tribunal D Bench in Chander Mohan Lall. Thus the decision of Hon'ble Bench is preincuriam in the cases cited before it. 3. Thus the decision dated 20-12-2023 passed by the Hon'ble Bench is sub-silentio as well as per-incuriam and looses it's binding precedence . 21. The issues raised by the Revenue was rebutted by the ld AR as follows: Contention No.1 of Ld. CIT DR HCL Technologies Ltd ( HCLT ) claims deduction under section 10AA of the Income- tax Ac .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ted invoice was raised by HCLT on the end customers located outside India, the entire amount of sale proceeds received from the foreign end customers (including those for onsite services rendered directly by the Appellants, i.e., the Associated Enterprise(s) ( AEs ) of HCLT to foreign customers outside India) was liable to be treated as forming part of the export turnover , by virtue of deeming fiction under Explanation 2 to section 10AA of the Act, which provides that profits and gains derived from onsite development of computer software outside India shall be deemed to be profits and gains derived from export of computer software outside India, while computing the amount of deduction allowable thereunder. It is worth mentioning that payments collected by HCLT and passed on to the Appellants for onsite services rendered by the Appellants to the foreign customers were determined on an arm's length basis and the same has also been duly accepted as such by the TPO in the case of HCLT and the same has not been disputed by invoking sub-section (9) of section 10AA read with sub section (10) of section 801A of the Act, while computing the deduction. All such payments which HCLT colle .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... m and sub-silentio. Rebuttal to Contention No.2 of Ld. CIT DR The Ld. CIT DR, it is respectfully submitted, is wholly incorrect in submitting that this Hon'ble Tribunal in order dated 20.12.2023 passed in the cases of the Appellants/ foreign AEs of HCLT has reached the conclusion that payments by HCLT to the foreign AEs, were for the purpose of making or earning income from a source outside India, by solely relying on the decision of this Hon'ble Tribunal in the case of Chandar Mohan Lall vs ACIT: [2022] 134 taxmann.com 292 (Del Trib.) and by not considering the decision of this Hon'ble Tribunal in the case of Hariharan Subramaniam vs ACIT: [2020] 121 taxmann.com 189 (Del Trib.) and decision of the Kolkata bench of the Hon'ble Tribunal in the case of ACIT vs Subhatosh Majumdar: [2020] 185 ITD 716 (Kol Trib.). Copy of decision of this Hon'ble Tribunal in the case of Chandar Mohan Lall (supra) is enclosed herewith as Annexure 2. In the case of Chander Mohan Lal (supra) before this Hon'ble Tribunal, it is a fact that Indian/Overseas clients engaged the assessee for availing certain services. In turn, the assessee engaged foreign attorneys to perform certain ser .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ndition of technical services would not be taxable in India under section 9(1)(vii)(b) of the Act, in a case where the services are not utilized in India by the payer of such fees. In other words, the Hon'ble Bombay High Court held that even though the requirement of rendition of services in India is no longer relevant after the aforesaid retrospective amendment, the condition of utilization of services (by the payer) in India is still required to be fulfilled for taxability of receipts of the non-resident in India. Thus, the submission of the Ld. CIT DR that the decision dated 20.12.2023 passed by this Hon'ble Tribunal in the case of the Appellants and other group entities is per incuriam is grossly incorrect. Notwithstanding the above, reliance is placed on the recent decision dated 03.07.2024 passed by the Hon'ble Delhi High Court in the case of International Management Group (UK) Ltd vs CIT: [2024] 164 taxmann.com 225 (Del), wherein the assessee was engaged by the BCCI for advisory and managerial service for establishment, commercialization and operation of the IPL. With regard to the taxability of the consideration received by the assessee from BCCI for rendering s .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... or technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India. 5.2 From the above, it is now clear that the provisions of the Income Tax Act have been amended to include income in the hands of non-resident on accrual basis in India u/s 9(1)(v)/(vi)/(vii) whether or not the non-resident has a residence or place of business or business connection in India or the non-resident has in India. The issue has to be decided in the context of the law as applicable. 5.3 The Ld. ARs have also referred to provisions of clause (b) of section 9(1)(vii). According to the said sections, Royalty/FTS payable by a resident are deemed to accrue or arise in India where the royalty/fee is payable to a non-resident except where these are payable in respect of any right, property or information used or services utilized for the purposes of a business of profession carried on by such p .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... rendered by IMG in connection with those two events were clearly utilized outside India and were availed of for the purposes of earning income from a source outside India. The geographical shift meant that the services rendered by IMG were utilized outside India and were integral to earning income from sources outside India. The Tribunal clearly glossed over the significance of this relocation and which had fundamentally altered the context in which IMG's services were availed. The Tribunal thus clearly erred in failing to appreciate the significance of the event itself having shifted out of India and the services thus coming to be utilized in the nations noticed above and the same being indelibly connected to the earning of income from a source outside India. (emphasis supplied) Without prejudice, both the judgments quoted by Ld. CIT DR should be read in the context of the peculiar facts of each case where, in sharp contrast with the facts of the Appellants, the services of the assessee were admittedly engaged solely by the Indian clients for their Indian businesses. In the said case laws, the Hon'ble Delhi and Kolkata Benches of the Tribunal held that the source of income .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ontention of the assessee that HCLT has a computational requirement of the deeming fiction under Explanation 2 to section 10AA to treat the entire amount of sale proceeds received from the foreign clients as export turnover as it raises a single consolidated invoice. Further, the contention that HCLT treats the payments made to its AEs as expense and claims deduction u/s 10AA on net profit basis, has not been controverted by the ld DR. The ld DR has also not controverted the key assertion of the assessee that no deduction under section 10AA of the Act has been effectively claimed by HCLT in respect of payment received from end customers on behalf of the Appellants notwithstanding that such receipts were considered as part of 'export turnover of HCLT. Furthermore, the ld DR could not controvert the fact that the TPO in the case of HCLT has not invoked sub-section (9) of section 10AA read with sub section (10) of section 801A of the Act, while computing the deduction. The assessee, therefore, in our considered opinion succeed in rebutting the ld DR objections on this count. 23. With respect to the contention that the ITAT decision dated 20.12.2023 is per incuriam and sub-silentio .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates