INCOME TAX OFFICER (IT) 3 (2) (2) , MUMBAI vs. M/S. MACROTECH DEVELOPERS LTD (AS SUCESSOR OF LODHA DEVELOPERS LTD WHICH WAS BELLISSIMO CROWN BUILDMART PVT. LTD, MUMBAI

P a g e | 3 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd.

7. Whether, on the fact and circumstances of the case and in law, the Ld CIT(A) erred in treating the remittance made to various non resident entities for reimbursement of expenses as consultancy services when reimbursement were for services rendered by vendors whose services were in the nature of Fees for Technical Services. 8. on the fact and circumstances of the case and in law, the Ld CIT(A) erred in treating the remittance made to Lodha Developers UK Ltd towards reimbursement of expenses when the services provided are make available in nature and come in purview of Fees for Technical Services as per India UK DTAA.

9. The Appellant prays that the order of the ld CIT(A) on the above grounds) be set and that of the Assessing Officer be restored.

10. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

2. Fact in brief is that assesse is engaged in the business of land development and construction of real estate properties. The AO passed an order dated 27.04.2018 raising demand of Rs.82,81,595/- u/s 201(1) and interest of Rs.36,33,272/- u/s 201(1A) of the Act on account of not withholding tax u/s 195 of the Act pertaining to payment made under the following categories:- (i) Architectural Consultancy and payment for other services. (ii) Brokerage payment. (iii) reimbursement of expenses.

3. During the course of assessment the assesse submitted that such payments were not taxable in the hands of foreign recipients as per the provision of the Act r.w. the provisions of applicable Double Tax Avoidance Agreement (DTAA). Ground No. 1 & 5: Levy of demand u/s 201/201A on foreign payment towards architectural design consultancy services and other services: 4. During the year under consideration the assesse has made the following remittances to the foreign vendors:

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Sr. Name of Vendor Country of Nature of service Amount of No. Residence Remittance (INR) 1. Sitetectonix Pte. Ltd Singapore Landscape 1,07,94,421/- Architectural Consultancy services.

5. Ernest & Young LLP United Tax Advisory and 8,73,154/- Kingdom Consultancy services 6. N.R. Doshi and Partners UAE Notary and 13,99,270/- Transalation Fees paid to the consultant 7. Moody’s Investors Service Singapore Credit Rating Services 51,91,920/- Singapore PTe. LTd.

8. Visual Media Works Pte. Singapore 3D Modelling Services 1,89,443/- Ltd. Total 3,20,34,742/-

5. On query the assesse submitted the relevant details along with the nature of such consultancy services as under:

Sr. Name of Country of Nature of service Remarks No. Vendor Residence detailed in 1. Sitetectonix Singapore Sitetectonix has provided services in Landscape Pte. Ltd. relation to landscape layout for the and Project Lodha Casa Univis Phase 1 Architectural and 2, Thane. This inter-alia involves Consultancy designing and laying out the Services. landscape (i.e. providing interior designing services in relation to Such garden area or the open common services are spaces of the project) in ore to make not table as the project aesthetically beautiful and ‘Fees for appealing. Sitetectonix provides its Technical report detailing above mentioned Services’ specification. As a marketing strategy, since the every business would try to services do distinguish its product from other not meet projects available in the market by ‘make offering some unique features. available’ Similarly, the management of criteria. Company decided to bring international expertise in India to offer unique and different product to the customer. The services provided by Sitetectonicare so unique and project specific which cannot be performed by anybody and everybody unless such person is in possession of specific skill set and knowledge.

2. Hirsch/Bedner Singapore HBA had provided services in relation Interior Associates Pte. to interior designing services for the Designing Ltd. company’s sales office and smaple flat Fees for the in Dubai. This inter-alia includes Company’s

P a g e | 5 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. interior planning and designing, sales office colour schemes, furnishing selections, in Dubai. material and decorative specifications, indoor plants designing and Such recommend indoor planters for the services are project sales office and sample flat. not table as HBA provides its report detailing ‘Fees for above mentioned specification. As a Technical marketing strategy, every business Services’ would try to distinguish its project since the from other products available in the services do market by offering some unique not meet features. Similarly, the management ‘Make of Company decided to bring available’ international expertise in India to offer Criteria. unique and different product to the customers. The services provided by HBA Designs are so unique and project specific which cannot be performed by anybody and everybody unless such person is in possession of specific skill set and knowledge 3. Windtech Australia Windtech had provided wind climate Wind climate Consultant analysis services for the Washington Analysis Pty. Ltd. House project. This inter-alia includes Consultancy analyzing and testing the blow of the Service Such wind in the area where the project is services are being developed and the impact it has not taxable on the building. Windtech provides its under India- analysis and conclusion in the form of Autralia a report along with corrective DTAA in measures if required. The services absence of provided by windtech are so unique specific and project specific which cannot be provision performed by anybody and everybody dealing with unless such person is in possession of taxability of specific skill set and knowledge. ‘Fees for Technical Services’. The provisions of the DTAA being more beneficial, have been applied.

4. KPMG United United KPMG UK had provided tax and Tax Advisory Kingdom PLC Kingdom regulating advisory services to the and company for with respect o its Consultancy expansion of its business in the UK. Services. The Company was explain UK Real Estate market in the FY 2014-15 and Such for this purpose it has approached services are KPMG UK to provide tax and not taxable regulartory advisory services in as ‘Fees for relation to the prposed activities. The Technical services provided by KPMG UK Services’ aretechnical in nature and are with since the respect to the specific query asked by services do the Company. The advisory provided not meet by KPMG UK are technical in nature ‘make and cannot be performed by anybody available’ and everybody unless such person is criteria. in possession of tax and regulatory knowledge.

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6. N.R. Doshi UAE N.R. Doshi is a Company incorporated Notary and and Partners under law of the UAE and is holding Translation Tax Residnet Certificate of UAE. Fees paid to During the year under consideration, the N.R. Doshi has provided services to get consultant. documents translated in local language and arrange notary on the Such same. services are not taxable under India- UAE DTAA in absence of specific provision dealing with taxability of ‘Fees for Technical services’. The provisions of the DTAA being more beneficial, have been applied. 7. 7. Moody’s Singapore Moody’s is a company incorporated Credit Investors under law of Singapore and is holding Rating Service Tax Resident Certificate of Singapore. Services. Singapore Pte. During the year under consideration Such Ltd. Moody’s has provided Credit rating services are services to the Company. not taxable as ‘Fees for Technical Services’ since the services do not meet ‘make available’ criteria. 8. Visual Meida Singapore VMW had provided 3 D Modelling 3 D Works Pte. Services to the Company in relation to Modelling Ltd. its Washington House Project at Services. Altamount Road. This inter-alia involved 3D designing and modelling Such of the club level area and refuge area services are P a g e | 7 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. garden of the Project. These drawings not taxable and images are used by the Company as ‘Fees for for various advertisements. For Technical providing these services, VMW would Services’ need specific skillset, knowledge and since the experience to use computer inter face services do and develop 3D design /model basis not meet specifications provided by the ‘make Company available’ reiteria.

6. The assesse submitted that such services did not meet ‘make available’ criteria, therefore, the same were not taxable in India pursuant to beneficial provision of respective DTAA. However, the assessing officer after referring provision of Sec. 195(1), section 5 (2) and Section 9(1)(vii) and the document submitted by the assesse come to the conclusion that the payment to non-resident were taxable and assesse failed to deduct tax on such remittance, therefore he held that assesse was in default as per provision of Sec.201(1) of the Act and Sec. 201(1A) of the Act.

7. Aggrieved the assesse filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assesse. The ld. CIT(A) stated that the findings in this case are similar to the case of the assesse in Appeal No. CIT(A)-57, Mumbai /10040/2018-19 for A.Y. 2016-17. The relevant operating part of the decision of the ld. CIT(A) is reproduced as under: “5.1 Consultancy payment in relation to architectural service, interior design etc. 5.1.1 The appellant has submitted documents like invoice, work order issued to the foreign vendor, Form 15CA, Form 15CB related to the foreign remittances. The assessee further submitted that from the nature of services provided by the non- resident entities and the terms and conditions under which it was provided, it is clear that whatever services were provided are project specific and cannot be used for any other project by the appellant. Further, vendor has developed the design based on information received from the owner as per work order. It is emphasized by the asssessee that while providing such services neither any technical knowledge, skill, etc is made available to the assesse for utilizing them in future independently nor any developed drawing or design have been provided to the appellant, which can be applied by the appellant independently.

P a g e | 8 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. 5.1.2 Thus the assessee submitted that the services rendered by the vendor is not taxable under clause 12(4) of the tax treaty. 5.1.3 The service provided to the assessee can be broadly divided into two categories based on the DTAA with respective countries:- i. Cases wherein there is specific mention of FTS under the DTAA and wherein there is 'make available' criteria. ii. Cases wherein there is no mention of FTS under the DTAA. 5.1.4 In the present case, payment to Sr.No.5 which is an entity in UAE is covered in the second category. Whereas all other payments are related to first category wherein there is 'make available' clause. 5.2 Findings with respect to make available criteria countries. 5.2.1 I have gone through the submissions of assessee and AO's finding. The issue is covered by the decision of Hon'ble ITAT in the case of DCIT Vs Forum Homes Pvt. Ltd (2021) ITA 5804/Mum/2018 (Mumbai Tribunal). For ready reference the finding of Hon'ble ITAT is reproduced below: 8. We have considered rival submissions in the light of decisions relied upon and perused the materials on record Undisputedly, the assessee, at the relevant point of time was developing a residential project at BKC In connection with the development of such project the assessee had availed certain technical/consultancy services from three non- resident entities located in Singapore. For availing such services, the assessee has pav certain amount to the non-resident entities. The short issue arising for consideration before us is, whether the payment made by the non-resident entities can be termed as FTS under Article 12(4) of India Singapore Tax Treaty For better appreciation, Article 12(4) of the tax treaty is reproduced hereunder:- “4. The term fees for technical services as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary…… (b) make available technical knowledge, experience, skill, know- how or processes, which enables the person acquiring the services to apply the technology contained therein, or (c) consist of the development and transfer of a technical plan or technical design but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.”

9. A reading of Article 12(4) of the tax treaty would make it clear that payment made to a resident of one of the contracting state can be regarded as FTS, if, in course of providing managerial/technical or consultancy services, technical knowledge experience, skill know how or P a g e | 9 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. processes is made available which enables the person acquiring such services to apply the technology contained therein It further provides, if the services consist of development and transfer of a technical plan or technical design, but excludes any services that does not enable the person acquiring the service to apply the technology contained therein would not qualify as FTS In the facts of the present appeal, the payments made and the nature of services rendered are as under:- Sr. Name of the party Country Amount (Rs.) Nature of services No.

2. Web Structure Pte. Ld. Singapore 68,57,342/- GFC drawing/design in relation to BKC project 3. RMR Engineers Pte. Ltd. Singapore 12,24,464/- MEP drawing/design in relation to BKC project

.” 5.2.2 On going through the order of A.O and assessee's submission, it can be seen that the facts of the case are almost similar to the case mentioned above 5.2.3 Following the above judgment, it is held that income of the entities were not taxable in India. Therefore, the assessee was not required to deduct TDS on these payments.”

8. During the course of appellate proceedings before us the ld. D.R has referred the order of the A.O and the analysis of the document made by the A.O in the assessment order. He submitted that there was close connection of the architectural design services providers with the assesse and the whole process was approved by the owner after specifying, the planning and architectural design services. The ld. D.R supported the order of the assessing officer.

9. However, the ld. Counsel specifically referred Article 12 of the India & USA DTAA on the issue of payment of fees for technical services. In this regard he referred protocol between USA & India and referred paragraph 4(b) of the protocol that technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The use of a product which embodies technology shall not per se be considered to make the technology available. He also referred India of Article 12 of the India Singapore DTAA which exclude any service that does not enable the person to use the technology independently.

10. Heard both the sides and perused the material on record. During the year under consideration the assesse made remittances to Sitetectonix Pte. Ltd. Singapore for providing services relating to P a g e | 11 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. architectural design and laying out the landscape of the project in order to make the project aesthetically beautiful and appealing. The assesse submitted along with the supporting document that such services cannot be performed by anybody without making available technical knowledge skill etc. to apply these services independently in future.

It is clear from the clause c of the Article 12.4 of the treaty as supra that services of managerial, technical or consultancy will be regarded as fees for technical services only if such services consists of the development and transfer of a technical plan or technical design but categorically exclude any service that does not make available and does not enable the person acquiring the service to apply the technologically contained thereon on its own. On similar basis payment made to Hirsch/Bedner Associates Pte. Ltd. Singapore for interior designing services, Moody’s Investors Service Singapore Pte. Ltd. for credit rating services and Visual Media Works Pte. Ltd to develop 3D design services do not meet “make available” criteria. Similarly, the payment made to KPMG United Kingdom PLC relating to tax and regulatory advisory services for expansion of business of the assesse company in the UK, payment made to Earned and Young LLP for tax regulatory and advisory services for expansion of business in the UK were also not taxable as fees for technical services, since, the services do not meet ‘make available’ criteria. Since as per Article 13 of India U.K. DTAA payment for services rendered would fall P a g e | 13 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. within the ambit of FTS only if such services are in the nature of ‘make available’. Regarding payment made to Windtech Consultants Pvt. Ltd. Australia for providing Wind Climate analysis services for the Washington House Project it was explained that services provided were unique and project specific which cannot be performed without possession of specific skill and knowledge and such services were not taxable under India Australia DTAA. In respect of remittance made to party in UAE, the Ld. CIT(A) at para 5.3 of his order held that there is no specific provision with respect of fee for technical service. Therefore, payment would be covered by Article 22 of the DTAT with UAE as per which items of income which are not covered by other articles of DTAT shall be taxable in the state to which the receipt belongs unless it has a permanent establishment in India.

12. We have also perused the various judicial pronouncements referred by the ld. Counsel: “1. ITAT Mumbai in the case of Forum Homes (P) Ltd. [2021] 132 taxmann.com 223 2. ITAT Pune in the case of Gera Development (P) Ltd. [2016] 72 taxmann.com 238 3. ITAT Mumbai in the case of Buro Happold Limited [TS-76-ITAT-2019 (Mum)] 4. Hon’ble Karnataka High Court in the case of De Beers India Minerals (P) Ltd. [2012] 21 taxmann.com 214 5. ITAT Mumba in the case of SCA Hygiene Products AB [2021] 123 taxmann.com 152” In the case of Forum Homes (P) Ltd. [2021] 132 taxmann.com 223 the head note is reproduced as under: Section 9 of the Income-tax Act, 1961, read with article 12 of DTAA between India and Singapore Income Deemed to accrue or arise in India (Royalties/Fees for technical services Make available) - Assessment year 2015-16 Assessee- company was developing a residential project and had availed technical/consultancy services from three non-resident entities against certain P a g e | 14 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. fee - Assessing Officer held that fee paid to non-resident entities would qualify as FTS under section 9(1)(vii) and also under article 12(4) Terms of agreement showed that design, drawing, et,, would remain intellectual property of said entities and were intended for use solely with respect to project and it further restrained assessee from utilizing such intellectual property for any other project and while providing such services neither any technical knowledge, skill, etc., was made available to assessee for utilizing them in future, independently nor any developed drawing or design had been provided to assessee which could be applied by assessee independently Whether, on facts, conditions of article 12(4) of tax treaty were not fulfilled and, thus, said fee could not qualify as FTS- Held, yes [Paras 8-12] [In favour of assessee]”

In the case of Gera Development (P) Ltd. Vs. DCIT as referred supra the ITAT Pune held that payments made by the assesse, India Company to US company for architectural design and drawings of different buildings and facilities could not be held as fees for technical services as mere passing of project specific architectural drawings and design with measurements did not amount to ‘making available’ technical knowledge, know or process and, consequently no TDS was deductible from said payments. We have also considered the similar findings in the other judicial pronouncements as cited supra by the ld. Counsel.

13. In the light of the facts as discussed above in this order, the A.O has not brought any material on record to demonstrate that how the service provider has made available to the assesse any technical knowledge, skill etc. which can be applied by the assesse independently in future. Therefore, after taking into consideration, the provisions of DTAA and judicial pronouncement as discussed supra we do not find any reason to interfere in the findings of the Ld. CIT(A). Ground No. 6: Remittance made to various non-resident towards brokerage for sale of projects in India: 14. During the year under consideration the assesse has made certain remittances on account of brokerage to non-resident without deduction of tax. The detail of such payment are as under:

P a g e | 15 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. Sr. Name of Broker Remittance Country of Remarks detailed in No. Amount (INR) Residence 1. Yards & Acres 2,13,916 UAE Brokerage paid for sale Marketing Consultants of flat in Project Splendora.

2. Yards & Acres 5,49,655 UAE Brokerage paid for sale Marketing Consultants of flat in Project Lodha Aurum Grande.

3. Yards & Acres 30,000 UAE Brokerage paid for sale Marketing Consultants of flat in Project Splendora.

4. Lodha Global Limited 2,10,050 Mauritius Brokerage paid for sale of flat in various Project.

5. Lodha Global Limited 108,41,344 Mauritius Brokerage paid for sale of flat in various Project.

6. Lodha Global Limited 47,86,002 Mauritius Brokerage paid for sale of flat in various Project.

7. Square Yards 2,51,908 Hongkong Brokerage paid for sale Consulting of flat in Project Splendora. Total 1,68,82,875

15. On query the assesse explained that foreign parties were carrying out there business operations in the territory outside India in their respective countries and they do not have any business operations or any business in India. The commission was paid merely for referring customers to the company who have expressed interest in buying properties in the projects which were developed by the company in India. There was no technical knowledge or special skills which was required for providing such services nor the services were managerial in nature. Therefore, the such payment cannot be treated as FTS under the provisions of the Act. The assesse further submitted that it has also relied on ‘No PE Declaration’ and Tax Residency certificate (CTR) provided by such parties to whom commission payment were made. Therefore, the subject payment cannot be attributed to tax, therefore, no tax was withheld u/s 195 of the Act. However, A.O has not agreed with the submission of the assesse. The A.O stated that all the payments made by the assesse as brokerage to foreign vendors shall fall P a g e | 16 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. under the ambit of Sec.5(2) as the income from such payments to foreign vendors has arose or deemed to have arise in India only as the source i.e the flats sold for which the brokerage was paid, lies in India only. The AO has also stated that the brokerage payment were for identifying the potential customers for the assesse and thus the nature of services provided by the agents were in the nature of consultancy fall under the definition of FTS u/s 9(1)(vii) of the Act.

16. Aggrieved, the assesse filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assesse. The relevant part of the decision of ld. CIT(A) is reproduced as under: “5.4 Brokerage 5.4.1 I have gone through the assessee's submissions, AOs findings and other relevant facts. The A.O. treated the payment as FTS relying on the decision of ITAT Cochin Bench in the case of English Indian Clays Ltd vs. ACIT (IT) (2013) 39 taxmann.com 50. As per the A.O. it was held by the Hon'ble ITAT that payment to the foreign company for marketing survey and identifying potential customers for assessee's product were only consultancy services taxable in India. 5.4.2 I have gone through the judgements of Hon'ble Cochin ITAT. For ready reference, the relevant portions of Hon'ble ITAT's order is reproduced below:- English Indian Clays Ltd. (TS-527-ITAT-2013(COCH) The facts “the assessee engaged M/s Stratum Resources as marketing agent for South East Asian countries. M's Stratum Resources has to study the market situation in South East Asia for the product manufactured by the assessee and they have to market the product of the assessee in those countries. The has also entered into a similar agreement with Tionale Enterprises Pte Ltd Singapore. However, the CIT(A) found that Tionale Enterprises Pte Ltd is only a marketing agency, therefore, tax need not be deducted on the payments made to them. However, in respect of M's Stratum Resources, the CIT(A) found that it is consultancy charges, therefore, tax has to be deducted Accordingly, the CIT(A) confirmed the disallowance made by the assessing officer.” Assessee's arguments ”According to the Id representative. M's Stratum Resources was engaged only for purpose of marketing the assessee's product in South East Asian countries, therefore, the payment cannot be considered as consultancy charges. Hence, it is not taxable in India and consequently, the question of deduction of tax at source u's 195 of the Act does not arise. The ld representative has placed has P a g e | 17 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. reliance on the judgment of the Apex Court in V. Lakshmanan v. BR Mangalagiri & Ors [1995 Supp (2) SCC33] and submitted that the nomenclature or label given in the agreement cannot be a decisive factor. According to the ld representative, the substance of the agreement should be taken into consideration. Referring to another judgment of the Supreme Court in the case of Assam Small Scale Ind Dev Corp Ltd and JD Pharmaceuticals and Anr [2005 13 SCC [9] the ld representative submitted that the expression in the agreement cannot be a decisive factor. The nature transaction is required to be determined on the basis of the substance and not by the nomenclature. Therefore, merely because it was mentioned as consultancy charges in the agreement, the real substance of marketing the product cannot be ignored. The Id representative has also placed his reliance on the judgment of the Kerala High Court in the case of Joe Joseph & Ors v KC Moideen reported in 1996 (1) KLJ 656 3. The Id representative further submitted that new sub sections (3) and (4) were inserted in section 201 with effect from 01-04-2010 According to the Id representative, sub sections (3) and (4) of section 201 which were inserted by Finance Act, 2009 with effect from 01-04-2010 cannot be applied retrospectively for the year under consideration According to the ld representative, the retrospective operation is not practical and possible. The ld representative placed his reliance on the Special Bench decision of the Delhi Bench of this Tribunal in New Skies Satellites NV vs ADIT, Intl Taxation Cir.2(1), New Delhi (2009) 121 ITDI (Del)(SB) According to the ld representative, the transaction in this case refers to payment of commission Section 195 of the Act requires deduction of tax while making payment to non resident Indian According to the ld representative, in this case, the payment made to non resident Indian is not taxable, therefore, there is no question of any deduction of tax The ld representative further submitted that the entire amount payable to the non resident Indian has already been paid Therefore, the amendment to section 201 cannot fix the liability on the assessee to deduct tax.” Department's arguments “4 On the contrary, Shri KK John, the ld DR submitted that as per the agreement with M/s Stratum Resources, the foreign party has to take market survey and identify the potential customers and file a report to the assessee The payment is on every day basis 50% of the total payment depending upon the work of the foreign party has to be paid in advance Therefore it is not a case of marketing the product in foreign countries, but it is a case of doing marketing survey and the assessee is paying consultancy charges. The agreement nowhere states that the foreign party has to market the product of the assessee in South East Asian countries. In the absence of any enabling provision to enable the foreign party to market the assessee's product in foreign countries, the payment made by the foreign party cannot be construed as payment for marketing According to the Id DR, marketing survey and identifying the potential customers for the assessee's product are only consultancy services and therefore, the payment made to foreign party is taxable in India. Hence, the assessee is bound to deduct tax u's 195 of the Act Referring to the provisions of section 201(3) of the Act, the Id DR submitted that the assessing officer passed the imped order before 31- 03-2011. Proviso to section 20113) of the Ad enables assessing officer to pass order before 31-03-2011 in respect of financial year commencing on or before 04-2007 Therefore, the order passed by the assessing officer is within the period provided in section 201(3) of the Act. Therefore, there is no question of any impossibility as claimed by the assessee"

P a g e | 18 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. Hon"ble ITAT's findings “5. We have considered the rival submissions on either side and also perused the material available on record. We have also carefully gone through the copy of the agreement said to be entered into between the assessee and the foreign party The CIT(A) also has reproduced copy of the agreement on pages 24 and 25 of the impugned order. As rightly submitted by the ld DR the work of the foreign party is to identify the potential customer and file a report regarding the market strategy and developmental studies. Agreement does not enable the foreign party to market the product of the assessee in South East Asian countries. The foreign party only has to do survey and file a report so that the assessee could market their product after considering the report filed by the foreign party. Therefore, the payment made to M's Stratum Enterprises is only consultancy charges as found by the CIT(A). It is not a case of marketing the product in the foreign country. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the order of the assessing officer.” 5.5 Analysis 5.5.1 On going to the judgement, it can be seen that the assessee has entered into the agreement with two foreign entities.

1. M/s. Stratum Resources 2. M/s Tionale Enterprises Pte Ltd 5.5.2 In the case of Tionale Enterprise Pte Ltd, the CIT(A) itself held that this entity was engaged as a marketing agency and therefore no tax was deductable in this case. 5.5.3 Whereas in the case of Stratum Resources the CIT(A) found that the payment is for consultancy charges and therefore tax has to be deducted. 5.5.4 From the argument of learned D/R, it can be seen that payment to M/s. Stratum Resources was based on "everyday basis" This shows that the payment of M/s. Stratum Resources was not linked to sales but was based on the time consumed in market survey, identify the potential customer and file a report. 5.5.5 On the basis of these facts and after examining the agreement Hon ITAT came to the conclusion that the agreement does not enable the foreign party to market the product of assesse. The party was to conduct the survey and file a report to assessee. Therefore the Hon. ITAT held that payments made to Stratum Enterprises were consultancy charges. 5.5.6 The facts of the current case are entirely different from the case of English Indian Clays limited. As in the present case, the brokerage is directly related to sales have gone through the invoices and it was seen that brokerage in these cases was paid @ of 2% of sale consideration (invoices attached as Anx 1 & 2) 5.5.7 It can also be seen that even in the case of English Indian Clays Limited P a g e | 19 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. payment made to M/s. Tionale Enterprise Pte Ltd. for marketing agency were held to be not taxable and therefore it was held, by the CIT(A) itself, that no tax was deductible. 5.5.8 Considering the above, I am of the opinion that brokerage payment can at the best be equated with commission. 5.5.9 In this regard, I place my reliance on the judgment of Hon'ble Delhi High Court in the case of DCIT vs. EON Technology (P) Ltd (15 taxmann.com 391) 2011 (Delhi HC). For ready reference, the finding of Hon'ble Delhi High Court is reproduced below. “2. The respondent assessee EON Technology Pvt. Ltd is a private limited company engaged in business of development and export of software. During the relevant assessment year 2007-08, the assessee had paid commission of Rs.33,36,068/ to its parent/holding company EON Technologies, U.K., (ETUK, for short) on the sales and amounts realized on export contracts procured by ETUK for the respondent assessee. There is no dispute about the nature and on what account commission has been paid. The quantum etc. and the fact that ETUK was entitled to said payment is not doubted or disputed 3. The contention and question raised by the Revenue is that the commission income of Rs 33,36,068/ earned by ETUK had accrued in India or was deemed to accrued in India and, therefore, the respondent assessee was liable to deduct tax at source and as there was failure, the said expenditure should be disallowed under Section. 40(a)(ia) of the Act. The relevont portion of the assessment order reads:- "There are express provisions of the IT Act that provide for taxation of any part of income that accrues or arises or deemed to accrue or arise in India. When one states accrual of income it is basically an absolute concept when both the situs and receipt of such income is within the territories of the country. However it such conditions are not met fully and completely, then the deeming concept comes into play. As per previous judicial pronouncement, it has been clearly established that income can be said to be received when it reaches the assessee but it can be to have "accrued" or "arisen" immediately when the right to receive the said income becomes vested in the assessee. By performing the functions as envisaged in the agreement, the ETUK has earned the right to receive the income, thereby attracting the provisions of section 5 of the Act. It has further been stated vide various judicial pronouncement including in the case of CIT Vs. Punjab Tractors Cooperative Multipurpose Society Ltd that in the case of rendering of services, income would accrue at the time of such rendering of services. As per the agreement of ETUK is the sole selling and marketing agent for the assessee, which means ETUK is rendering the service of selling which has enabled him to earn the right to receive the income from ET India, ie the assessee. Since such receipts situs/origin in Indio, this portion of income liable to be taxed in India. It shall not out of place to mention that the place of accrual of income is the place where right to receive that income arises with the corresponding liability of the prayer to make the payment of the same there. The assessee's statement that since P a g e | 20 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. no operation/business are carried out in the taxable territories of India then the income accruing abroad through on any business connection in India cannot be deemed to accrue or arising in India, does not hold any water as the source of such income arising to ETUK is its business connection with the assessee company in India Le. the source is situate wholly and completely within territories of India. Another contention of the assessee regarding that that this commission payment is remitted directly to ETUK and is therefore not received in India is also not tenable since receipt and right to receive are two distinct concepts both of which cannot be used interchangeably Here the ETUK may not have received the amount in India but due to its business connection in Indio, ETUK has earned the right to receive this income "deemed to accrue" and thereby becoming liable to be taxed in India of the portion that accrues or arises in India." (emphasis supplied) 4. The reasoning of the Assessing Officer is confusing, laconic and not clear. In the first paragraph of the assessment order quoted above it has been held that the right to receive income by ETUK had situs or origin in India. It is stated that the place of accrual of income was in India as payment was made from India and, therefore, it is deemed to be received in India. In the first paragraph towards the end, the Assessing Officer has held that that the source of income by way of commission earned by ETUK has business connection with the respondent- assessee in India i.e. the source was situated wholly and completely within the territory of India. The second paragraph refers to business connection and principle of deemed accrual.

5. Thus, on one hand, it was held that the commission income paid to ETUK had accrued or arisen in India and the said ETUK had right to receive income in India, since the situs/origin is in India but it is also averred that ETUK had business connection with the respondent assessee in India.

It cannot be said that the making of the book entries in the books of the statutory agent amounted to receipt by the assessees who were non-residents as the amounts so credited in their favour were not at their disposal or control. It is not possible to hold that the non-resident assessees in this case either received or can be deemed to have received the sums in question when their accounts with the statutory agent were credited, since a credit balance, without more, only represents a debt and a mere book entry in the debtor's own books does not constitute payment which will secure discharge from the debt. They cannot, therefore, be charged to tax on the basis of receipt of income actual or constructive in the taxable territories during the relevant accounting period XXX In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the ossessees in India as contemplated by cl. (o) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned the non-resident assessees for services rendered outside India cannot, therefore, be deemed be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department.

18. Heard both the sides and perused the material on record. The assesse has made payment of brokerage to non-resident brokers for assistance on sale of flats to non-resident in the project developed by the assesse in India. The entire work by the broker was carried out outside India and the brokerage payment were made by the assesse in the bank account of foreign parties outside India. The brokers has not carried out any operation in India. Therefore, the AO has not proved that how the provisions of Sec. 5(2) and provisions of Sec.9(1)(i) of the Act are attracted in the case of the assesse. Regarding applicability of provision of Sec.9(1)(vii) by way of treating the payment as fees for technical services the A.O has not proved that how such payment made is in the context of ‘make available’ clause. From the perusal of material on record it is observed that there is no element of technical knowledge, experience, skill knowhow or process in the rendering of brokerage P a g e | 28 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. services. No such technical knowledge etc. is made available to the assesse by such brokers. Therefore, we don’t find any infirmity in the decision of ld. CIT(A) that the payment of brokerage by the assesse to the brokers is not taxable in India either pursuant to Sec. 9(1)(vii) or under the provisions of DTAA due to restrictive definition of FTS/FIS, therefore, the ground of appeal

of revenue stand dismissed. Ground No. 7 to 8: Reimbursement of Expenses:

19. During the year under consideration the assesse had made remittance to foreign parties towards reimbursement of expenses. The detail of the payment are as under: Sr. Date of Name of Country Remittance Purpose of Payment No. 15CB Vendor Amount (INR) certificate 1. 09.05.2014 Magnosoon USA 1,20,583 Reimbursement of travel Klemencic expenses Associates 2. 17.09.2014 G.A.C. Singapore 60,666 Reimbursement of travel Enterprises expenses 3. 24.02.2015 Fitch United 1,70,943 Reimbursement of travel Ratings Ltd. Kingdom expenses 4. 12.02.2015 Sitetectonix Singapore 1,41,756 Reimbursement of travel Pte. Ltd. and expenses.

GAC Enterprise had incurred travel and miscellaneous expenses of its employees visiting India for rendering services to the assesse. After referring the invoices the assesse submitted that it has reimbursed the expenses of cost to cost basis without any mark up. In respect of reimbursement of travel expenses to other vendors, the assesse submitted that they had incurred certain business related expenses on behalf of the assesse on cost to cost basis without any mark up. Assessee also explained that there was no component of income embedded on the reimbursement of expenses made by the assesse and provision of Sec. 195 of the Act is not applicable since no income arose to the non-resident out of reimbursement (being cost to cost basis)

P a g e | 29 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. without any markup and the same was not taxable in India. Therefore, the assesse was not required to withheld tax on the same. However, the A.O had not agreed with the submission of the assesse he was of the view that reimbursement made for the services were in the nature of FTS taxable both as per the act as well as DTAA. The AO also stated that the expenses met out by the service recipient were nothing but the expenses of the service provider in providing the services. Since expenses cannot be allowed while taxing the fees for included services, the amount of reimbursement also should be added with the fees for included services.

P a g e | 30 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd.

Section 9 of the Income-tax Act, 1961, read with article 13 of the DTAA between India and Denmark Income Deemed to accrue or arise in India (Royalties and fee for technical services) - Assessee was a foreign company engaged in shipping business and was a tax resident of Denmark Assessee had agents in India working for it, who booked cargo and acted as clearing agents for assessee-In order to help all its agents, across globe, assessee had set up and was maintaining a global telecommunication facility which was a vertically integrated communication system - According to assessee, it was merely a system of cost sharing and payments received by assessee from its agents were in nature of reimbursement of expenses Assessing Officer did not accept said contention and held that amounts paid by agents to assessee was fees for technical services taxable in India under article 13(4) of DTAA - Tribunal opined that by setting up communication system in question assessee did not render any technical services and, thus, amount in question was not taxable as fee for technical services. High Court upheld order passed by Tribunal - Whether since communication system in question was an integral part of shipping business, which was allowed to be used by agents in order to enable them to discharge their role more effectively, it could not be treated as any technical services provided to agents Held, yes Whether, therefore, High Court rightly concluded P a g e | 31 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. that amount received by assessee from its agents could not be brought to tax as fee for technical services Held, yes [Para 12] [In favour of assessee] The Hon’ble Bombay High Court in the case of Director of Income Tax (International Taxation) Vs. Krupp Ltd. GMBH (2013) 40 taxmann.com 38 (Bombay) held that reimbursement of expenses for air tickets could not be treated as part of taxable income of the assesse. The A.O had neither brought any relevant material on record to substantiate that reimbursement of expenses were in the nature FTS nor disproved the claim of the assesse based on back to back invoices that no profit element were embedded in the reimbursement of such expenses. In the light of the above facts and findings we don’t find any error in the decision of Ld. CIT(A) therefore, ground of appeal of the revenue stand dismissed. Ground No. 1 to 6: (Architectural and other Consultancy services)

23. As the facts and the issue involved in this ground are the same as supra ground No. 1 to 5 of therefore, applying the same findings mutatis mutandis, both ground of appeal of the revenue are dismissed.

Ground No. 7: (Remittance towards brokerage)

Ground No. 8: (Remittance of expenses) 25. As the facts and the issue involved in this ground are the same as supra ground No. 7 & 8 of therefore, applying P a g e | 32 4 Appeals ITO (IT)-3(2)(2) Vs. M/s Macrotech Developer Ltd. the same findings mutatis mutandis, both ground of appeal of the revenue are dismissed.