INCOME TAX OFFICER,CORPORATE WARD-2(1), CHENNAI vs. M/S. ESHAKTI,COM PRIVATE LIMITED, CHENNAI

Aforesaid appeals by Revenue for Assessment Years (AY) 2014-15 & 2015-16 arise out of separate orders of first appellate authority. Facts as well as issues are stated to be identical in both the years. The appeal for AY 2014-15 arises out of the order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 23-03-2023 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 08-12-2016. The grounds taken by the revenue are as under: -

The Ld. CIT-DR advanced argument to submit that the money was paid to wholly owned subsidiary (WOS) without deduction of tax at source. The assessee exercised complete control over the payee. The ld. CIT-DR submitted that no evidence for rendering of services was furnished and Ld. CIT(A) has merely gone by ‘make available’ clause. The LD. AR controverted the arguments of revenue and supported impugned order. Our attention has been drawn to various supporting documents as placed on record. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. The assessee being resident corporate assessee is stated to be engaged in selling designer clothes. Proceedings before lower authorities 3. The impugned disallowance u/s 40(a)(i) stem from the fact that the assessee reimbursed professional charges of Rs.164.04 Lacs and advertisement expenses of Rs.349.19 Lacs to its wholly owned subsidiary (WOS) situated in USA. No tax at source (TDS) was deducted on the ground that the said entity had no permanent establishment (PE) in India and the provisions of Sec.195 would not apply. However, rejecting the same, Ld. AO disallowed the same u/s 40(a)(i).

During appellate proceedings, it transpired that the assessee run e- commerce website (eshakti.com) and sells apparels mainly to customers based in USA. In order to promote sales, the assessee has set up wholly owned subsidiary (WOS) in USA. The subsidiary would collect money from customers, take delivery of goods returned, refund the money and also advertise the products of the assessee besides operating as customer service center. The WOS did not carry out any other activity for any other party. The expenses so incurred were stated to be reimbursed by the assessee. The nature of reimbursements has been tabulated in para-4 of the impugned order. It was also submitted that WOS did not have HR set up in USA and it employed people on a contract for service basis. Therefore, the reimbursements were categorized as professional services. The assessee submitted that all the expenses were incurred by WOS outside India and all expenses were related to selling the assessee’s products outside India. There was no mark-up charged by the WOS. Hence, there was no requirement of TDS in such a case. In any case, WOS was resident in USA and such reimbursement would constitute business income for AE which would not be subject to tax in India in terms of Article 7 read with Article 5 of Double Taxation Avoidance Treaty between India and USA. Reliance was placed inter- alia, on the decision of Hon’ble Apex Court in GE India Technology Centre P. Ltd. vs. CIT (327 ITR 456) to support the submissions that the income should be chargeable to tax for applicability of Sec.195. Since the expenses were incurred outside India on reimbursement basis without any mark-up, there was no requirement of TDS and disallowance so made by Ld. AO would not be justified. In the alternative, it was submitted that the amounts paid were in the nature of selling expenses and incurred upside India which would not be fees for technical services and therefore, Sec. 195 would have no application. The assessee further submitted that WOS was resident in USA and it did not have any PE in India. The income so earned would be business income not subject to tax in India as per Indo-US Treaty.

The assessee’ submissions and evidences were subjected to remand proceedings wherein Ld. AO maintained the stand taken in assessment order. In the remand report, Ld. AO rendered finding in each of the head. The marketing services rendered by Ms. Carmella Heverin, Ms. Usha Perdoor, M/s Retail Support Services Inc., 5WPR, Criteo were held to be fees for technical services. The payment made to facebook as well as selling commission paid to Amazon was held to be advertisement services which would not attract TDS. Regarding other payments made to 5 entities, Ld. AO observed that there was no agreement or documentary evidences to prove that the services rendered by them were advertisement services. No evidence was submitted in support of payment made and the claim was not backed by bills / invoices. Similar observations were made with respect to few other payments. The assessee assailed the findings rendered by Ld. AO in the remand report.

Considering assessee’s submissions and the remand report, Ld. CIT(A) deleted the impugned disallowance by holding as under: - 11. I have carefully considered the AO's rationale for disallowance as gathered from the assessment order, the submission of the appellant, the contents of the remand report by the AO and the rejoinder to the same by the appellant. It is the contention of the AO that it is payment towards 'FTS' i.e., Fees for Technical Services to a US service provider and therefore it is liable to WHT under section 195. On the contrary, appellant denies the averments and maintains that it is only reimbursement. Irrespective of the case whether the payment to a NR service provider through the non- resident AE is on a cost-to-cost basis or on cost plus markup basis, the AO after having held the payments as FTS to a non-resident in USA, failed to interpret the relevant Article applicable for taxation of FTS and the conditions attached thereto as per lndo-USA DTAA. No case has been made out by the AO satisfying the prerequisite for 'make available' clause for taxing the income of the service provider in India that it is Fees for Technical services, while trying to hold the sum as chargeable to tax in India. It is also admitted that the non-resident has no permanent establishment. The reliance of the AO that the amendment to section 9 does not require the existence of PE and income is would still be deemed to accrue or arise in India does not overrule section 90(2) of the Act, as the provisions of the Act are subordinate to sovereign agreements entered into and therefore it cannot be given a go by where the right to tax is given to a contracting party to the exclusion of the other and the right to tax is subject to fulfilment of the make available clause. The tax jurisprudence on this issue as made out by the appellant as part of written submission has already been reproduced earlier and therefore, there is no need to make a repetition in this adjudication part once again. In the light of the above, the host of judicial precedents relied upon by the appellant and the interpretation of the provisions of the Act and the IndIa USA DTAA, guide me to hold that the disallowance made u/s 40 (a)(i) for not withholding tax is directed to be deleted and this ground is also allowed in favour of the appellant. In the result, the Appeal is Allowed.

Upon perusal of impugned order, it could be seen that ld. CIT(A) has merely gone by the fact that ‘make available’ clause was not satisfied. However, considering the nature of services as enumerated in the remand report, ‘make available’ clause may not be even applicable for most of the services. The claim of the assessee hinges on the fact that the services were not technical in nature and the same were reimbursed on cost-to-cost basis. However, sufficient evidences could not be adduced by the assessee, in this regard, during remand proceedings. Accordingly, the adjudication in the impugned order could not be upheld. The impugned order, to the extent, disallowance has been deleted, is set-aside. The issue is restored back to the file of Ld. CIT(A) for passing a speaking order afresh considering the nature of services in the light of evidences / documentary evidences furnished by the assessee. The assessee is directed to substantiate its claim. The appeal stand allowed for statistical purposes.

It is admitted position that the facts as well as issues in AY 2015-16 are quite identical. Therefore, our adjudication as in AY 2014-15 shall, mutatis mutandis, apply to this year also. 10. Both the appeals stand allowed for statistical purposes. Order pronounced on 03rd August, 2023.