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Income Tax Appellate Tribunal, AHMEDABAD BENCH ‘D’, AHMEDABAD
Per Bench : These cross appeals are directed against learned CIT(A)’s order dated 6th 1. April 2015 in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the Assessment Year 2010-11.
& 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 2 of 9
We will first take up the appeal filed by the assessee.
In ground No. 1, the assessee has raised the following grievance:-
(a) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs. 15,43,768/- being expenditure incurred on pay-roll (man power) costs of one employee named John Manoharan, who was working in India for the appellant company’s business operations under the secondment, agreement, paid by way of reimbursement to its parent foreign company i.e. Burt, Hill Inc, USA. (b) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the impugned disallowance on the ground that no tax was deducted at source u/s. 192 or u/s. 195 of the Income tax Act in respect of pay-roll cost of Shri John Manoharan, without appreciating the fact that the pay-roll cost in the case of Shri John Manoharan was incurred by the parent company Burt Hill Inc, USA and the appellant has reimbursed the said expenditure and therefore there was no legal obligation to deduct tax at source u/s. 192 or 195 of the Income Tax Act read with provisions of Double Taxation Avoidance Treaty between India and U.S.A. in respect of such reimbursement.”
4. In a connected grievance raised by the Assessing Officer, by way of first ground of his appeal, the grievance raised is as follows:-
1. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.3,25,90,180/- being disallowance u/s 40(a)(i) of the Act made by the AO for non deduction of tax u/s 195 of the Act in respect of payments made to non resident companies.
The relevant material facts are like this. The assessee before us is a subsidiary of Burt Hill Inc USA. The assessee made payments aggregating to Rs.3,41,33,948/- to Burt Hill Inc USA in respect of employees seconded to the assessee. The Assessing Officer disallowed these amounts under section 40(i) for the short reason that the assessee did not deduct tax at source form these payments, as, in his opinion, required under section 195. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without complete success. Learned CIT(A) deleted the disallowance of Rs. 3,25,90,180/- on the basis that tax under section 192 was deducted from these payments, but confirmed the disallowance to the extent of Rs. 15,43,768/- as the assessee did not deduct tax at source either under section 192 or under section 195. None of the parties is satisfied. While the assessee is aggrieved of the disallowance of Rs. 15,43,768/- sustained by the CIT(A), the Assessing Officer is aggrieved of the relief of Rs.3,41,33,948/- granted by him. Both the parties are in appeal before us.
& 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 3 of 9
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
7. We find that these issues are squarely covered, in favour of the assessee, by a co-ordinate bench decision dated 28.03.2017 in assessee’s own case for the assessment year 2009-10 wherein it has been observed, inter alia, as follows:-
“3. So far as the first grievance of the assessee is concerned, we find that the issue is now covered, by our order of even date in assessee’s own case in respect of tax withholding demands under section 195 r.w.s 201, wherein we have, inter alia, observed as follows:
As we deal with these appeals, we consider it appropriate to reproduce, for ready reference, the related statutory provision set out in Section 195(1). This is as follows: Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force [Emphasis, by underlining, supplied by us] 5. Quite clearly, therefore, as long as a payment to non-resident entity is in the nature of payment consisting of income chargeable under the head ‘Income from Salaries’, the assessee does not have any tax withholding obligations under section 195. 6. There is no, and there cannot be any, dispute about the factual aspect that the payment made to Burt Hill Co Inc USA consists of income which is chargeable, and has been charged, to tax in India under the head ‘income from salaries’. There is also no dispute that the payments for all the four years before us are of the same nature, under the same agreement and of the same character. What was held to be income in the nature of salaries for the assessment years 2008-09, 2010-11 and 2011-12 cannot be of any different nature for the assessment year 2009-10 just because the assessee, rather than deducting tax at source under section 192, paid the advance taxes on behalf of the seconded employees in that particular assessment year. It is not the fact of tax deduction under section 192, but the nature of income embedded in related payments which is relevant for deciding whether or not section 195 will come into play. Of course, there are separate set of consequences for not discharging tax withholding obligations under section 192. However, the assessee has discharged these obligations and there are no pending issues about the same. Whether the seconded employees & 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 4 of 9
continue to be in employment of the foreign entities or not is wholly irrelevant for this purpose. What is relevant is that the income embedded in the payments in question is taxable in India under the head ‘Salaries’, and if that be so, there are no tax withholding obligations under section 195. That precisely is the undisputed position on the facts of this case- as duly accepted by the income tax authorities. The income embedded in the impugned payments being in the nature of income chargeable to tax under the head ‘income from salaries’, the assessee cannot be said to have any tax withholding obligations under section 195. For this short reason alone, we must hold that the impugned tax withholding demands, under section 201 r.w.s 195, are wholly devoid of any legally sustainable merits.
7. That is not, however, the only reason why the revenue must fail in its case.
A lot of emphasis has been placed on the fact that there was a service PE in the present case. Nothing, however, turns on the existence of the PE because admittedly whatever has been paid to Burt Hill Inc USA is, in turn, paid by Burt Hill Inc UA to its employees seconded to the assessee. There cannot be any profits, therefore, in the hands of the Service PE, and what is taxable in the hands of the PE under article 7(1) is not the gross receipt but the profits attributable to the PE. The existence of service PE, in the present case, will be wholly academic inasmuch as whatever is the aggregate of receipts said to be attributable to the PE, is exactly the same as aggregate of expenditure attributable to the PE. It is not the revenue’s case that any other receipts of the Burt Hill Inc USA, other than the receipts on account of reimbursements for salaries, or any other income could be attributed to the so called Service PE. The payments in question have not resulted in any income taxable in the hands of the assessee. Be that as it may, in any event, when undisputedly the payments are in the nature of the reimbursements, and, particularly when even the income embedded in these payments has already been brought to tax in India in the hands of ultimate beneficiaries- i.e. the seconded employees, there cannot be any tax withholding obligations under section 195. It is only elementary that the tax deduction source liability under Section 195 is a vicarious liability in the sense that it’s survival in the hands of tax-deductor is wholly dependent on existence of tax liability in the hands of recipient of income. When a payment made by, an Indian resident, to a non- resident, does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all. This scheme of the Act is implicit from the wordings of Section 195 (1) which refer to “ any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”)” When income embedded in a payment is not taxable under the Income Tax Act, 1961, the tax withholding liability does not get triggered at all. This is what Hon’ble Supreme Court has also held in the case of G E Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 456(SC)]. While holding so, Their Lordships have, inter alia, observed as follows:
……….The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at & 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 5 of 9 source only if the tax is assessable in India. If tax is not so assessable, there is no question of tax at source being deducted. [See: Vijay Ship Breaking Corporation and Others Vs. CIT 314 ITR 309]…….
9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in Section 195. For example, Section 194C casts an obligation to deduct tax at source in respect of “any sum paid to any resident”. Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act.
The decision to withheld tax from a credit or payment to a non- resident is not taken de horse the taxability of income embedded in the related payment. It is taken in the light of the tax liability of the non-resident in respect of the amount in question, and, if there were any doubts on this proposition, these doubts have now been set at rest by Their Lordships. As for the payments made by the assessee being in nature of the fees for technical services, this stand of the Assessing Officer is equally frivolous. There is not even an effort to show as to how any technical knowledge, skills, knowhow or processes etc are “made available” by these services inasmuch as these services can be performed by the assessee without any recourse to the service provider. Unless this condition, under make available clause under article 12(4)(b), is satisfied the fees for technical services cannot be brought to tax in India in the hands of entities fiscally domiciled in United States. It is even more elementary that once these payments cannot be brought to tax under the provisions of the India US DTAA, there cannot be any occasion to invoke Section 9(1)(vii) of the Act either because it cannot be more beneficial to the assessee- as is the condition precedent, under section 90(2), for invoking the same.
10. For the detailed reasons set out above, we are of the considered view that the demands raised on the assessee under section 201 r.w.s 195 are wholly devoid of any legally sustainable merits.
4. In view of the views so expressed by us, the assessee did not have any tax withholding obligations so far as these reimbursements are concerned. As the assessee did not have any tax withholding obligations, the very foundation of impugned disallowance under section 40(a)(i), which get & 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 6 of 9
triggered by the lapses in discharging such obligations, ceases to hold good in law. We, therefore, uphold the grievance of the assessee, and direct the Assessing Officer to delete the impugned disallowance.”
8. In view of the above discussions, we deem it fit and proper to delete the entire disallowance. The relief granted by the CIT(A) is thus further enhanced by Rs.15,43,768/-.
9. Ground No. 1 of the assessee’s appeal is thus allowed and ground no. 1 of the Assessing Officer’s appeal is thus dismissed.
10. In ground no. 2 the assessee appellant has raised the following grievance:-
“2. The learned CIT(A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs.13,07,938/- being reimbursement of expenditure incurred on payment of legal and professional fees by arbitrarily holding that the payments are in the nature of fees for technical and professional services falling in Section 9(1)(vii) of the I.T. Act.”
To adjudicate on this issue it is sufficient to take not of the fact that the assessee had made payments of Rs. 13,07,988/- on account of reimbursement of legal and professional fees. The Assessing Officer noted that tax has not been deducted from the said payments. The Assessing Officer was of the view that these amounts are taxable in India under section 9(i)(vii) of the Act. Accordingly, he proceeded to disallow the same under section 40(a)(i) on account of non-deduction at source. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) upheld the disallowance on the ground that the assessee ought to have deducted tax at source under section 194C or 194J, and since the assessee did not do so, the amounts were disallowable under section 40(a)(i). The assessee is not satisfied and is in further appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
It is only elementary that the provisions of section 194C and 194J are not applicable with respect to payments to non-residents. As long as, therefore, the income embedded in the payments made to non-residents is not exigible to tax in India, the tax withholding obligations do not come into play at all. That is what the scheme of section 195 is. Learned CIT(A), therefore, was completely in error in upholding the impugned disallowance by referring to the provisions of section 194C and 194J. The disallowance in question thus hinges on taxability of related income in India. Coming to this aspect of the matter, and having noted that it is not even the case of the assessee that any technical services are made available to the assessee inasmuch as the recipient is not enabled to perform these services on its own without & 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 7 of 9 recourse to the service provider, we find that this issue is also covered in favour of the assessee by a co-ordinate bench decision (supra) in assessee’s own case wherein it has been observed as follows:-
“9. The decision to withheld tax from a credit or payment to a non-resident is not taken de horse the taxability of income embedded in the related payment. It is taken in the light of the tax liability of the non-resident in respect of the amount in question, and, if there were any doubts on this proposition, these doubts have now been set at rest by Their Lordships. As for the payments made by the assessee being in nature of the fees for technical services, this stand of the Assessing Officer is equally frivolous. There is not even an effort to show as to how any technical knowledge, skills, knowhow or processes etc are “made available” by these services inasmuch as these services can be performed by the assessee without any recourse to the service provider. Unless this condition, under make available clause under article 12(4)(b), is satisfied the fees for technical services cannot be brought to tax in India in the hands of entities fiscally domiciled in United States. It is even more elementary that once these payments cannot be brought to tax under the provisions of the India US DTAA, there cannot be any occasion to invoke Section 9(1)(vii) of the Act either because it cannot be more beneficial to the assessee- as is the condition precedent, under section 90(2), for invoking the same.
For the detailed reasons set out above, we are of the considered view that the demands raised on the assessee under section 201 r.w.s 195 are wholly devoid of any legally sustainable merits.”
In view of the above discussions, and bearing in mind entirety of the case, we uphold the plea of the assessee on this point as well. When the income in question is not taxable in India, there is no question of tax withholding requirements under section 195 and the cause of action for disallowance under section 40(a)(i). The impugned disallowance is thus deleted.
Ground No. 2 is thus allowed.
In ground no. 3, the assessee has raised the following grievance:- “3. The learned CIT(A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs.13,48,461/- being reimbursement of expenditure incurred on payment of medical insurance premium in respect of the personnel placed at the disposal of the appellant company for its business operations, by the parent company.”
Learned representatives fairly agree that this issue is also covered in favour of the assessee by co-ordinate bench decision in assessee’s own case (supra) wherein it has been, inter alia, observed as follows:- & 2104/Ahd/2015 DCIT Vs. Burt Hill Design P Ltd & vice versa Assessment year: 2010-11 Page 8 of 9
“6. As regards the second issue, i.e. ground no. 3, there is no dispute that the insurance premium of Rs 12,77,927 has been paid for medical and other insurance of the employees of Burt Hill Inc USA who were on secondment to India and in accordance with statutory obligations of Burt Hill Inc USA. The Assessing Officer, however, disallowed the expenses on the ground that these persons were employees of Burt Hill Inc USA, and not the assessee. The Assessing Officer further noted that there is no evidence of business nexus between these expenses and the business of the assessee. These were also held to be personal expenses of the seconded employees. It was in the backdrop of these observations by the Assessing Officer that the impugned disallowance of Rs 12,77,927 was made. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Not satisfied, the assessee is in second appeal before us.
Having heard the rival contentions and having perused the material on record, we are inclined to uphold the grievance of the assessee, for the simple reason that the seconded employees, in respect of which the impugned insurance premium was paid, were not only de facto employees of the assessee at the relevant point of time, the assessee had the obligation, under secondment agreement, to bear these costs. The expenses so incurred are in the nature of employee benefits, though paid under secondment agreement, in respect of persons working for the assessee. It was in the furtherance of legitimate business interests of the assessee that these payments were made, and, therefore, the deduction was indeed admissible under section 37(1) of the Act. We uphold the grievance of the assessee. The Assessing Officer is, therefore, directed to grant deduction of the impugned amount of Rs.12,77,927.”
Respectfully following the view so taken by the co-ordinate Bench, we uphold the plea of the assessee and delete this impugned disallowance as well.
Ground No. 3 is thus allowed. 20. In the result, the appeal of the assessee is allowed. 21. We will now take up the appeal filed by the Assessing Officer. 22. Ground No. 1 of Assessing Officer, for the detailed reasons set out in paragraph 4, 5, 6, 7 and 8 above, is dismissed. 23. In ground no. 2, the Assessing Officer has raised the following grievance:-
“2. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.2,88,000/- u/s 40(a)(ia) of the Act made by the AO for non deduction of tax on reimbursement paid to the employee. ”
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This disallowance u/s. 40(a)(ia) was made by the Assessing Officer that the rent reimbursement was made to the Director without any tax deduction at source. In appeal, learned CIT(A) deleted the disallowance by holding that there was no TDS liability in respect of the same. The Assessing Officer is aggrieved and is in appeal before us.