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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI S. RIFAUR RAHMAN & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 28/06/2022, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 ("the Act"), pursuant to the directions dated 30/05/2022 issued by the learned Dispute Resolution Panel–1, Mumbai–1, [“learned DRP”], under section 144C(5) of the Act for the assessment year 2017–18.
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In this appeal, the assessee has raised the following grounds:–
“The grounds mentioned herein by the Appellant are without prejudice to each other: 1. On the facts and circumstances of the case and in law, the final assessment order ('Order') passed by the Deputy Commissioner of Income Tax, International Taxation, Circle 2(2X1), Mumbai, Maharashtra (the Ld. AO') and directions issued by the Dispute Resolution Panel-1, Mumbai, Maharashtra ('the Ld. Panel') are erroneous on facts and are bad in law. 2. The Ld. AO and Ld. Panel have grossly erred in fact and in law, by ignoring that when the payments made by the Appellant to the non-resident payees were not chargeable to tax in India in pursuant to Double Taxation Avoidance Agreement (DTAA') between India and other countries to which the payee belong, then no tax was required to be withheld under section 195 of the Act by the Appellant and consequently, no disallowance under section 40(a)(i) of the Act is to be made in the hands of the Appellant. 2.1 The Ld. AO and the Ld. Panel erred in not appreciating the nature of payments made by the Appellant before observing that the payments were prima facie chargeable to tax in India and accordingly tax was required to be withheld thereon under section 195 of the Act. 3. The Ld. AO and Ld. Panel have grossly erred in facts and in law, by holding that that the Appellant was required to make an application under section 195 of the Income-tax Act (the Act) before the Assessing Officer to determine the chargeability to tax of the sums paid by the Appellant, irrespective of the fact that entire sums were not chargeable to tax in India in the instant case. 4. The Ld. AO and Ld. Panel have grossly erred in facts and in law, in ignoring the submission and documentary evidence filed by the Appellant during the course of respective proceedings, providing basis for non-chargeability of the payments to tax in India. 5. The Ld. AO and Ld. Panel have erred in adjudicating on the nature of payments made by the Appellant and consequent taxability of such payments in the hands of the non-resident payees in India, i.e., how the payments under consideration are chargeable to tax in India so that tax withholding be required under section 195 of the Act. 5.1. The Ld. AO and Ld. DRP without any evidence or material on record to show that the sums paid by the Appellant were chargeable to tax in India in the hands of the non- resident payees erred in ignoring the Appellant's submission and the documentary evidence that the sum is not chargeable to tax in India in view of beneficial provisions of the DTAA between India and countries to which the payee belong. 6. The Ld. Ld. Panel basis own surmises and conjectures has grossly erred in adjudicating that payees have business connection in India.
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The Ld. Panel has grossly erred in adjudicating that the Appellant is under an obligation to undertake permanent establishment analysis considering the total business carried out by the non-resident in India, and not limited to the business with the Appellant, without taking into consideration the documents submitted by the Appellant in this regard. 8. The Ld. AO has grossly erred in placing reliance on tax audit report without application of own mind to independently analyse the payments in question and undertake independent analysis to determine whether the expenses qualify for disallowance or not. 9. The Ld. AO has grossly erred in not providing tax credits of entire pre-paid taxes in the nature of TDS, while computing the tax demand on the Appellant. 10. The Ld. AO has erred in computing interest under section 234C of the Act on the tax demand, without appreciating that the same is applicable on the returned income and not on the assessed income. The Appellant craves leave to add and/or alter, amend, modify or rescind the grounds hereinabove before or at the time of hearing before the Hon'ble ITAT.”
The issue arising in grounds no.1-8, raised in assessee’s appeal, is pertaining to the disallowance of payment made to non-residents under section 40(a)(i) of the Act.
The brief facts of the case as emanating from the record are: The assessee is a company incorporated in the USA and is also a tax resident of the USA. The assessee is engaged in the business of manufacturing and operating aircraft. The assessee established a project office in India on 10/12/2016. The project office of the assessee is engaged in the rendering of helicopter operations services to customers based in India. For the year under consideration, the assessee filed its return of income on 31/03/2018 declaring a total income of Rs.4,21,09,881. During the assessment proceedings, upon perusal of the Tax Audit Report, it was observed that the assessee has made payment on which tax has not been deducted at source. Accordingly, the assessee was asked to show cause as to why the amount of Rs.4,86,45,310
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being payments made to the non-residents be not disallowed under section 40(a)(i) of the Act. In response thereto, the assessee filed detailed submissions in respect of payment made to each of the entities and submitted that since the payment is not exigible to tax in India, therefore, the question of withholding taxes on the same under section 195 of the Act does not arise. The Assessing Officer (“AO”) vide draft assessment order dated 27/08/2021 passed under section 144C of the Act did not agree with the submissions of the assessee and held that if the assessee had considered that sum would not be taxable in India then it should have made an application to the AO to determine the appropriate proportion so chargeable/not chargeable and upon such determination tax should be deducted or not deducted. However, in this case, the assessee has not filed any such application. The AO also referred to the qualification in the Tax Audit Report. Accordingly, the AO disallowed an amount of Rs.4,86,45,310 under section 40(a)(i) of the Act and added the same to the total income of the assessee.
The assessee filed detailed objections before the learned DRP against the addition made by the AO. Vide directions dated 30/05/2022, issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee and held that the services provided by the non-residents were received and utilised by the assessee in connection with its business operations in India. The learned DRP further held that there is a direct nexus between the services provided/utilised in India and the payments made to the service providers. Therefore, the payment made by the assessee was chargeable to tax in India under the provisions of the Act. In conformity with
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the directions issued by the learned DRP, the AO passed the impugned final assessment order under section 143(3) r/w section 144C(13) of the Act. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee provided the details of services rendered by each of the non-residents during the assessment proceedings. By referring to the submission of the assessee, forming part of the draft assessment order, the learned AR submitted that the payment made to the non-residents in lieu of the services rendered by them is not chargeable to tax in India and therefore, no TDS was deducted under section 195 of the Act. The learned AR submitted that the obligation to deduct TDS under section 195 of the Act only arises when payment to the non-resident is chargeable under the provisions of the Act. Since the assessee believed that services are not taxable in India, therefore, no tax was deducted under section 195 of the Act while making payment to the non-residents.
On the contrary, the learned Departmental Representative (“learned DR”) vehemently relied upon the orders passed by the lower authorities.
We have considered the rival submissions and perused the material available on record. The assessee is an aircraft manufacturing and operating company. It is undisputed that the assessee is a tax resident of the USA. In India, the assessee electrical power line transmission crew are bringing power from Central Punjab to the far reaches of Jammu and Kashmir. To raise transmission lines over Himalayas’ Pir Panjal Range, and fly heights between
Erickson Incorporated ITA no.2133/Mum./2022
9000 to 12,000 feet, the S-64 Aircrane heavy-lift helicopter is required in order to access terrains that the vehicles could not. In order to efficiently conduct business in India, the assessee established the project office in India on 10/11/2016. During the year, the assessee made payments to the following non-resident third parties:-
Date of Amount of Name of Payee Payment Payment 06.01.2017 29,45,722 Garda World 10.01.2017 13,09,956 Garda World Oversight Securities Management & 10.11.2016 39,78,289 Consulting LLC 10.11.2016 1,99,13,700 Ocean 7 Project 10.11.2016 1,39,00,770 Garda World 15.11.2016 46,60,868 DHL Global Forwarding 24.01.2017 4,77,699 The Avectra Group 24.01.2017 14,58,306 Garda World 4,86,45,310
As per the assessee, these payments are not chargeable to tax in India and therefore no TDS under section 195 of the Act was deducted, despite the auditor’s qualification in the Tax Audit Report. During the assessment proceedings, the assessee submitted the following party-wise analysis of transactions:-
“Oversight Securities Management & Consulting LLC - the nature of services availed by the Indian PO are security consulting, monitoring and other related services. The party is a tax resident of USA and therefore eligible to claim the tax treaty benefits entered between India and USA u/s 90 of the Income-tax Act, 1961. The DTAA between India and US has a restricted scope for definition of FTS/FIS. Under the restricted scope, the Tax Treaties have a narrow scope of FTS by way of insertion of 'make available" restriction in the definition of FTS. For convenience sake, the definition as provided under Article 12 of India-USA DTAA is reproduced as under: Page | 6
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"For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." A plain reading of the above definition suggests that any consideration for services of a managerial, technical or consultancy nature partake the nature of FTS if, and only if, it falls within the ambit of conditions specified in this regard. The following are important parameters to be satisfied with respect to concept of "make available": The "make available" test is fulfilled if the service recipient is able to absorb the technical knowledge, know-how, processes and skill. Just because technical knowledge, experience is used by the service provider, the services need not qualify as fees for technical services / included services. Where the intention is to buy a product, then merely the fact that sophisticated know- how was used by service provider, will not be the lone factor to decide whether the "make available" test is fulfilled. The concept of "make available' has been deliberated in a plethora of cases' in India. Services are considered as 'made available' only if the person acquiring the service is enabled to apply the technology contained therein, without any recourse to the service provider. It has been clarified that merely because the person rendering services applied technical knowledge or skill for rendering the said services cannot be treated as 'included services', unless the person utilizing the service is able to make use of the technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. Accordingly, in order to qualify as FTS, the services rendered must remain with the person utilizing the services even after the rendition of the services has come to an end. As is evident from above, in order to qualify as 'make available', the services should be aimed at and result in transmitting technical knowledge, skills, etc., so that the recipient of service could derive an enduring benefit and utilise the knowledge or know-how in future on his own without the aid of the service provider. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future, without depending upon the provider.
Erickson Incorporated ITA no.2133/Mum./2022
Accordingly, the nature of services provided in the instant case viz. security consulting, monitoring and other related services is such that the provider of services cannot 'make available' the services rendered to the Indian PO. Accordingly, the services rendered would not qualify to fall under the purview of FTS/FIS under the India US DTAA and such income would not be taxable in India. Refer Annexure 2 for Form 10F and Annexure 3 for No PE declaration as provided by Oversight Securities Management & Consulting LLC GardaWorld Consulting Middle East Ltd - GardaWorld is a tax resident of UAE and the nature of services rendered to the Indian PO includes security and other related specialized services. UAE does not have FTS clause in its treaty with India. In the absence of a specific article in the treaty to deal with taxation of FTS, the tax treatment of the consideration for rendering technical services would be governed by article of the tax treaty dealing with taxation of 'Business profits. We also wish to highlight that in some judicial precedents, it has been categorically held that in the absence of an Article on 'fees for technical services' or in case an income is not taxable as FTS pursuant to beneficial provisions under the applicable DTAA, such would not be taxable under the article for 'other income'. Since GardaWorld is a tax resident of UAE and there is no PE or any office maintained or controlled in India to render such services, no income would be taxable in the hands of GardaWorld and no tax withholding is warranted in the instant case too. Ocean 7 Project - The Indian PO has imported a helicopter and related equipment through vessel, which are shipped by Erickson Air Crane Inc., US. The ocean 7 project has rendered logistics services to the Indian PO for its operations in Kashmir and accordingly, charged a transportation fee. We understand that Ocean 7 project is a tax resident of Denmark and does not have a permanent establishment. The India Denmark DTAA has a wider scope of FTS. Generally, under this category of Tax Treaties the term FTS is defined in a broad manner to mean payments of any kind received as a consideration for services of a managerial, technical or consultancy nature, including the provision of services by technical or other personnel. However, the logistics services as rendered above would not qualify to be the services in the nature of managerial, technical or consultancy and accordingly, no taxes are to be withheld on such payments. Refer Annexure 4 for TRC and Annexure 5 for no PE declaration as provided by Ocean 7 Project. In support of our understanding above, we have relied on the judgement of Mumbai Tribunal the case of UPS SCS (Asia) Ltd v. ADIT (IT), the extract of which is reproduced as below "Assessee, a foreign company incorporated under laws of Hong Kong, was engaged in business of provision of supply chain management, including provision of freight and forwarding and logistics services It entered into a Regional Transportation Services Agreement with 'M', an Indian company, for providing freight and logistics services to each other-As per terms of agreement, assessee rendered services in nature of freight and logistics services such as Page | 8
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transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services, outside India in respect of export consignments of 'M'.” The present appeal is concerned with the "International services provided by the assessee to 'M' outside India. These services comprise of transport, procurement, customs clearance, sorting, warehousing and pick up services on the cargo exported by 'M' on behalf of its customers. Having noted the nature of services provided by the assessee outside India, for which 'M' India made the payment, it is necessary to consider if these can be described as managerial or technical or consultancy services. Adverting to the facts of the instant case it is observed that the assessee performed freight and logistics services outside India in respect of consignments originating from India undertaken to be delivered by 'M' India. The role of the assessee in the entire transaction was to perform only the destination services outside India by unloading and loading of consignment, custom clearance and transportation to the ultimate customer. It is too much to categorize such restricted services as managerial services. There is nothing like giving any consultation worth the name. Rather such payment is wholly and exclusively for the execution in the shape of transport, procurement, customs clearance, delivery, warehousing and picking up services. That being the position, the payment in lieu of freight and logistics services cannot be ranked as consultancy services ………. use of computer, though indirect, remote and not necessary, cannot bring the payment for freight and logistics services within the purview of technical services. The essence of the consideration for the payment is rendering of services and not the use of computer. If incidentally computer is used at any stage, which is otherwise not necessary for rendering such services, the payment for freight and logistics will not partake of the character of fees of technical services" Since the facts in the present scenario is similar to the one discussed above, it can be inferred that the logistics services do not qualify as fees for technical services. Reliance is also placed on the following cases where the same view is taken by Indian courts for logistics services:
Rane (Madras) Ltd. V. DOT [2017] 80 taxmann.com 305 DIT (IT) v. Sun Microsystems India (P.) Ltd [2014] 48 taxmann.com 93 The Avectra Group, LLC - The company is providing risk evaluation and assessment services to Erickson Indian P0 for its operations in Kashmir. Assessments are made regarding business operations and travel, lodging to work site transportation, work and residential security, etc. The Avectra Group, LLC is a tax resident of USA and as also discussed above, India - USA DTAA nas a restricted scope for definition of FTS/FIS. The nature of services provided in the instant case is such that the provider of services cannot 'make available' the services rendered to the Indian P0. Accordingly, the services rendered would not qualify to fall under the purview of FTS/FIS under the India US DTAA Page | 9
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and such income would not be taxable in India in the absence of PE of The Avectra Group, LLC in India. DHL Global Forwarding - DHL is providing logistics services to the Indian P0 in respect of equipment for Helicopter. DHL is a tax resident of US and has no PE in India. Also, as discussed above, the logistics services would not qualify to be the services in the nature of managerial, technical or consultancy and accordingly, no taxes are to be withheld on such payments. Also, these services do not make available any technical knowledge, knowhow, etc.”
The AO disagreed with the submission of the assessee and held that if the assessee had considered that the sum would not be taxable in India, then it should have made an application for determination of the appropriate proportion so chargeable/not chargeable and upon such determination, tax should be deducted or not deducted under section 195 of the Act. However, the assessee has not done so. We find that while deciding the issue whether the moment there is a remittance to the non-resident abroad the obligation to deduct tax at source arises under section 195 of the Act, Hon’ble Supreme Court in GE India Technology Centre Private Ltd vs CIT, [2010] 327 ITR 456 (SC) held that the payer is bound to deduct tax at source only if the tax is assessable in India. The Hon’ble Supreme Court further held that section 195(2) of the Act provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable”, where a proportion of the sum so chargeable is liable to tax. Thus, the Hon’ble Supreme Court rejected the contention of the Department that section 195(2) of the Act is a provision to provide information to the Department of the remittances made to the non-residents. The Hon’ble Supreme Court further emphasised that section 195 of the Act has to be read in conformity with the charging provisions, i.e., section 4, 5 and 9, as the term used in section Page | 10
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195(1) is “sum chargeable under the provisions of the Act”. Therefore, it is now settled that for deduction of tax under section 195 of the Act, the sum is to be chargeable under the provisions of the Act. In view of the aforesaid, we find no merits in the findings of the AO that for the payment to be considered as not taxable in India, the assessee should have made an application to the AO for determination by general or special order.
In the aforesaid decision, the Hon’ble Supreme Court also emphasised that section 40(a)(i) of the Act ensures effective compliance of section 195 of the Act relating to tax deduction at source in respect of payments made outside India in respect of Royalties, Fees for Technical Services or other sums chargeable under the Act. The Hon’ble Supreme Court further held that under section 40(a)(i) of the Act if the AO finds that sums remitted outside India come within the definition of Royalty or Fees for Technical Services or other sums chargeable under the Act, then it would be open to the AO to disallow such claim for deduction. In the present case, from the perusal of the record, it is evident that the AO did not conduct any such enquiry. The learned DRP on the basis of receipt and utilisation of services in India held that the income accrues or arises through the business connection in India and therefore, chargeable under section 9 of the Act, however, did not analyse in detail the chargeability under the respective tax treaties. We find that neither the AO nor the learned DRP has analysed the detailed submissions of the assessee on the non-taxability of the payment in India on the basis of benefit under the respective tax treaties.
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Therefore, even though there is no merits in the finding of the AO that for a sum to be not taxable in India there should be an application by the assessee under section 195(2) of the Act for the determination of appropriate proportion so chargeable/not chargeable and the tax thereon, however, at the same time we are of the considered opinion that for disallowance under section 40(a)(i) of the Act the AO has to establish that the sums remitted outside India come within the purview of interest, Royalty, Fees for Technical Services or other sums chargeable under this Act, which exercise in the present case has not been undertaken by the any of the lower authorities. We find that in the aforesaid decision in GE India Technology Centre Private Ltd (supra), the Hon’ble Supreme Court remitted the case to the Hon’ble High Court for de novo consideration on merits and fresh adjudication on the issue of whether the amount paid give rise to any income taxable in India. Thus, in view of the aforesaid findings, we deem it appropriate to remand the matter to the file of the AO to decide whether the payment made by the assessee to the aforesaid non-resident entities is taxable in India. It is only thereafter the issue of deduction of tax at source under section 195 of the Act and disallowance under section 40(a)(i) of the Act arises. Accordingly, the impugned final assessment order is set aside. As a result, grounds no.1-8, raised in assessee’s appeal are allowed for statistical purposes.
Ground no.9, raised in assessee’s appeal is pertaining to short grant of credit of TDS. This issue is restored to the file of the AO with the direction to grant TDS credit, in accordance with the law, after conducting the necessary
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verification. As a result, ground no.9 raised in assessee’s appeal is allowed for statistical purposes.
Ground no.10, raised in assessee’s appeal, is pertaining to the levy of interest under section 234C of the Act, which is consequential in nature. Therefore, ground no.10 is allowed for statistical purposes.
In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 27/04/2023
Sd/- Sd/- S. RIFAUR RAHMAN SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 27/04/2023 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai