ITP PUBLISHING INDIA PVT LTD,MUMBAI vs. ACIT 12 (2)(2), MUMBAI

Brief facts of the case are that the assessee is a company in the business of magazine publishing and event management. The return of income was filed on 29-11-2013 declaring NIL income under the normal provisions of the act and Rs. 61, 91,743/- as book profit u/s.. 115JB of the act. Case was selected under CASS and was assessed u/s. 143(3) during the assessment proceedings AO made disallowance u/s. 40(a)(ib) of the act amounting to Rs. 1,65,31,810/- and disallowed Rs. 20,63,697/- as disallowance of provisions under the normal provisions of the act. Whereas added back disallowance of provisions amounting to Rs 20,63,697 to the book-profit also under section 115JB of the act.

Vide para-14 of the assessment order it is observed that assessee itself accepted the disallowance of provision amounting to Rs. 20,63,697/- and for disallowance u/s. 40(a)(ib) he preferred an appeal before the Ld. CIT(A)-20 Mumbai. In his order u/s. 250 dated 27-03-2019 Ld. CIT (A) also sustained the order passed by the AO u/s. 143(3). Being aggrieved with this order assessee preferred the present appeal before the ITAT. 4. We have gone through the order of AO, order of Ld. CIT(A) and submissions of the assessee along with case laws relied upon. We have gone through the general and administrative service agreement vide page no. 1-11 of the paper- book, page no. 38 of the paper-book (part of form no.3CEB) i.e. part of report from chartered accountant to be furnished u/s. 92E relating to international transactions wherein it has been confirmed that payment under consideration is reimbursement of actual expenses and allocated expenses to parent company. We further rely on para 5.3.6 vides page no. 7 of the Ld. CIT (A) order reproduced herein below: “5.3.6 In the assessment order, the AO has observed from the invoices raised by ITP Holdings Inc., Dubai that the services were provided by ITP BVI to the appellant can be broadly divided into (a) Accounts, (b) Management accounting, (c) Human resource services, (d) information technology services (e) Production services (design) & (f) Production services (co-ordination). The AO held that those services provided by ITP BVI were in the nature of managerial, technical and consultancy services. The contention of the AO in this regard for each of the above categories of services, are tabulated below: Category of service Contention of the AO These services include (i) preparation of pay These are services rendered roll, bonus statements, paperwork relating to for enabling the appellant to Freelancers and temporary staff etc. entering run and manage its business. invoices, petty cash items, preparation of cheques for vendors (iii) pursuing debtors for collection, checking of booked orders Management accounting: The monthly report made by These services include creating budgets, cost ITP BVI for Board of Directors allocation, managing internal control, sales of the appellant company is forecasting and profit planning. A report is clearly in the nature of made on the 10th of every month and advice or consultation given submitted to the Board of Directors to the appellant for the purpose of appellant's business Human resource services HR services provided by the These services provided by the HR team ITP BVI for effectively provides vacancy form approval for new managing the leaves, replacement roles, occasional recruitment employees, contracts, it visas advertising, screening of applications, and other human resource provision of contract of employment and aspects of the business of associated a paperwork, occasional flight the appellant. These are booking for new starters, provision of managerial services for contractual information for new starters to running and managing the finance, and annual/other leave record business of the appellant keeping on CRM, leaving entry onto CRM Visa provision for visitors to Dubai from Mumbai office, HR advice regarding employment relations issues Information Technology services; The information technology These services include IT infrastructure services provided to the provisioning and support services, CRM and appellant require expertise a Navigation software supporting their in technology and providing business processes, custom application the client such technical development, provision of digital production expertise. They are provided services e.g. email blasts, banner by experts in software and management and provision of web server information technology, e.g., infrastructure for running their websites. engineers. IT infrastructure provisioning is an extremely technical service to be carried out by Network engineers. Similarly CRM and Navigation Services require technical domain expertise. Other services are also in the nature of technical services since specialized technical skills and knowledge are required to provide them Production services (design). Creating the page layout for These services include creating page layout the magazine require for ITP India Magazine supplements and for knowledge of specialised events related designs. software on which such designs are made at therefore they are technical service. Production services (coordination) These service amount to these services include all tasks right from management of the business sourcing bookings from clients to ensuring of the appellant and that the magazine is delivered on time therefore they are managerial in nature” 5.3.7 The AO has also observed in 11.3 of the ass 15CA dated 20.12.2012, the services were classified para 11.4 of the assessment order, without prejudice to her findings above, the AO has also noted that appellant had itself submitted such services through experts (employees/freelancers for technical services as per section 9 also includes technical and other personnel. Therefore, the appellant's contention, the payments to ITP BVI par fees.”

In addition to above we have gone through articles - 5,6 and 7 of general and administrative service agreement between assessee and its parent company and the same is reproduced herein below: “Article 5-REMUNERATION AND INVOICING PROGRESS 5.3 TTP GROUP's remuneration The nature, diversity, frequency and volume of the services provided under this agreement, the number of personnel involved in the provision thereof, and the Intangible nature of many of the services provisioned hereunder make It Impossible to contemplate invoicing for the services rendered on a time spent or case-by-case basis. The Parties in seeking a practical basis on which to charge have concluded that the RECIPIEN T's budgeted full time headcount is the most sound Indicator of volume of services consumed under this agreement from time to time bearing a solid correlation to the size and growth of the business and therefore the resource demanded.

The summary of recitals of agreement between assessee and its parent company as tabulated by the AO and Ld. CIT (A) confirms that these are the only services provided by their parent company.This fact is not under challenge. The document can’t be relied upon partially, revenue is accepting the types of services rendered by the parent company then they can’t read the same in isolation. The same agreement over which revenue is relying also confirms that all these services are in the nature of support category and that is to without any cost-plus markup. We have gone through the provisions of sec. 5 and 9 of the act.

Revenue is failed to establish clearly that under which category of income as defined in sec 5 and 9, transaction falls.It is further observed that being an international transaction no reference to TPO (transfer pricing officer) was made this fact further strengthens the contention of the assessee that transaction under consideration did not have any element of mark-up/profits. Sec. 195 relating to TDS for the payments outside India applicable only in the cases where an element of income is involved. This essential element of income to the parent company is not establish by the AO while applying sec. 195 and sec 40(a)(ib). it is further observed that revenue is not able to establish any element of income involved in this transaction of reimbursement by assessee to the parent company. We have gone through the case laws relied upon by the revenue and assessee both and we found that the judicial pronouncement relied upon by the assessee are relevant and applicable to the facts of the case and we concur with those judicial pronouncement of honourable apex court ,high court and benches of ITAT as under:  CIT Vs Kotak Securities Ltd (2016) 239 taxman 139 (S.C)  CIT Vs Bharti Cellular Ltd (2011) 330 ITR 239 (S.C)  UPS-SCS (Asia) Ltd Vs Addl.Director of Income Tax (2012) 31 CCH 132 (Mum. –Trib.)  PCIT, (TDS-2), Mum. Vs national Health and Education Society (2019) 103 Taxman .com 286(Bomb).  Ashapura Minichem Ltd Vs ADIT (Int. Tax) (2010) 131 TTJ (Mum) 291 8. There is nothing special, exclusive or customised service that is rendered by the parent company. 'Technical services' like 'Managerial and Consultancy service' would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would, therefore, stand out in distinction to the former. Thus, it can be noticed that the payment made to the assessee in question 9. is not a consideration for managerial or technical or consultancy services and that being the position, it cannot fall within the ambit of section 9(1)(vii). Section 4 provides that the income tax shall be charged on the total income of any assessee of the previous year for any assessment year at the rates in accordance with and subject to the provisions of this Act. Scope of total income of any person has been enshrined in section 5. The assessee in question is a non-resident company. Section 5(2) mandates that the total income of a non-resident includes the income from whatever source derived which is received or is deemed to be received in India; or accrues or arises or is deemed to accrue or arise in India. The only possibility of the receipt by the assessee in the present facts and circumstances qualifying for inclusion in the total income, can be under section 9. It has been observed that section 9(1)(vii) is not applicable. Now it is necessary to examine the prescription of section 9(1)(i) which deals with the income accruing or arising from any business connection in India. It provides that where an income accrues or arises whether directly or indirectly through or from any business connection in India etc., it shall be deemed to accrue or arise in India. Explanation 1(a) states that in the case of a business of which all operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. This Explanation makes it prominent that only that part of the income from business operations can be said to be accruing or arising in India, as is relatable to the carrying on of operations in India. In other words, if a non-resident earns any income from India by means of operations carried on outside India, that will not fall within the scope of section 9(1)(i). Even Explanation below section 9(2), as relied on by the revenue, requiring inclusion of income in the total income of the non-resident whether or not the non-resident has a residence or place of business or business-connection in India or the non-resident has rendered services in India, is applicable only in respect of clauses (v) to (vii). Clause (i) of section 9 has not been included by the legislature within the ambit of this Explanation. It shows that unless a non-resident earns income from business operations carried out in India, such income cannot be deemed as accruing or arising in India. Reverting to the facts of the instant case, it is crystal clear that the assessee rendered "International services" outside India which required the payment in question. If this is the position, which has not even been disputed by the revenue, then there can be no question of roping such income within the ken of section 9(1)(i). It is, therefore, patent that the payment remitted by the assessee neither falls under section 9(1)(i) nor under section 9(1)(vii). Since the income cannot be described as deemed to accrue or arise in India and there is no doubt about such income having not been received or deemed to be received or accruing or arising in India, the taxability of such income fails. Therefore, the impugned order has to be set aside and it has to be held that the amount in question cannot be charged to tax.

In the light of above facts, it can be reasonably concluded that payments remitted by the assessee to its parent company do not attract the provisions of sec 5 and sec 9.Even if it is assumed for the time being that assessee’s remittances falls in sec. 9 still revenue is not able to establish the basic condition of sec 195 i.e. income element. In view of this payments made by assessee without TDS will not attract disallowance u/s. 40(a) (ib) r.w.s.195 and 9. Consequent to this Ground no. 1 raised by the assessee is allowed.

As substantive ground no.1 had already been decided in favour of assessee, Ground No. 2 now became academic and ground no. 3 and 4 are consequential in nature hence, no adjudication is required.

In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 13th day of January, 2023.