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Income Tax Appellate Tribunal, DELHI BENCH: ‘A’ NEW DELHI
Before: SHRI O.P. KANT & SHRI KULDIP SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘A’ NEW DELHI
BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER [Through Video Conferencing]
ITA No.4001/Del/2017 Assessment Year: 2013-14
Sh. Amitabh Chaturvedi, Vs. ACIT, C-346, LGF, Defence Circle-63(1), Colony, New Delhi New Delhi PAN :AAPPC4891E (Appellant) (Respondent)
Appellant by Sh. K. Sampath, Adv. Sh. U. Raja Kumar, Adv. Respondent by Sh. Bhopal Singh, Sr.DR Date of hearing 05.08.2021 Date of pronouncement 21.09.2021 ORDER PER O.P. KANT, AM:
This appeal by the assessee is directed against order dated 03/04/2017 passed by the learned Commissioner of Income-tax (Appeals)-20, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2013-14 raising following grounds: On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in sustaining the following additions made by the Assessing Officer to the returned income:- (i) Rs.26,303/- on account of electricity and water expenses on estimate basis in spite of scrutiny, treating the same as personal expenditure;
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(ii) Rs.69,000/- on account of foreign travelling expenses; (iii) Rs.10,01,698/- on account of payments to the International Bar Association by wrongly invoking provisions of Section 40(a)(1a) of the Act. The order being arbitrary, misconceived, fallacious and unjust must be quashed with direction for relief. 2. Briefly stated facts of the case are that the assessee is an advocate by profession. The assessee filed return of income for the year under consideration on 29/09/2013, declaring total income of ₹ 1,28,82,248/-, which included income under the head ‘profit and gains from business or profession’, ‘income from house property’, ‘income from capital gain’, and ‘income from other sources’. The return of income filed by the assessee was selected for scrutiny assessment. The Assessing Officer completed scrutiny assessment under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) on 13/12/2015, after making certain additions/disallowances. On further appeal, the Learned CIT(A) allowed part relief to the assessee. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. Before us, the parties appeared through Video Conferencing facility and filed paper-book and other documents through email. 4. The ground No. (i) of the appeal relates to disallowance of electricity and water expenses, amounting to Rs.26,303/-. The assessee claimed entire electricity expenses of residence located at B-252 Greater Kailash, Delhi as expenses incurred wholly and exclusively for the purpose of profession, however, the Assessing Officer held that at maximum a room in the residence could have been claimed to be used for the purpose of the professional work and, accordingly, he allowed 10% of the electricity expenses of the
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residence towards professional expenses and balance 90% was disallowed. The Ld. CIT(A) following the decision of the Tribunal in the case of the assessee in earlier year sustained 50% of the disallowance and allowed relief for the balance amount. The finding of the Ld. CIT(A) is reproduced as under: “5.3 As per the submission of the appellant this issue is covered by the order of Hon’ble ITAT in appellant’s own case in ITA No. 4951/Del/2013 order dated 08.12.2014 in which the Hon’ble ITAT has restricted the identical disallowances made by the AO to 50% of the expenditure incurred. Respectfully, following the order of Hon’ble ITAT the disallowance made by AO under electricity and water expenses is restricted to 50% of the expenses claimed of Rs.293860/- and 52607/- on account of electricity and water expenses respectively which comes to Rs.1,73,233/- and the appellant will get relief accordingly.” 4.1 Before us, the Learned Counsel of the assessee relied on the submission made before the learned CIT(A). He also submitted that such ad-hoc disallowances are not permitted in law. On the contrary, the Learned DR relied on the order of the lower authorities. 4.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. In our opinion, Ld. CIT(A) has followed binding precedent in the case of the assessee itself and, therefore, we do not find any error in the order of the Ld. CIT(A) on the issue in dispute. Further, we find that assessee has failed to justify that entire electricity expenses of the residence were related to the profession work. In the facts and circumstances of the case, we uphold the finding of the Learned CIT(A) on the issue in dispute. The ground No. (i) of the appeal of the assessee is accordingly dismissed.
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The ground No. (ii) of the appeal relates to disallowance out of foreign travelling expenses. The assessee claimed total expenses of ₹ 2,37,711/- on account of foreign travelling expenses, however, submitted vouchers only of ₹ 170,000/-and, therefore, Assessing Officer made disallowance for the remaining amount of Rs. 67,000/- in view of lack of vouchers for those expenses. The Ld. CIT(A) also upheld the disallowance, observing as under: “6.3 The AO has made the disallowance of Rs. 67,000/- under this head since the appellant could not produce the voucher of such expenses. The appellant has submitted that all these payments were made through credit card and only some of the faded supporting bills were given which were not considered by the AO. The bills and vouchers were also submitted before me and it is found that the supporting bills of Rs.67,000/- are not legible. As per the submission of the appellant the expenses are incurred over a period of 21 days whereas IBA Annual Conference & Exhibition was held from 30th September to 5th OctoberT2Ul2 only. Hence, the period of stay of 21 days foreign visit cannot be held 'wholly and exclusively for the purpose of business. In this light, as the appellant has failed to give legible supporting evidence, the justification of expenses cannot be ascertained and disallowance of Rs.67,000/- made by the Assessing Officer is confirmed.” 5.1 Before us, the learned Counsel of the assessee relied on the submissions made before the Learned CIT(A), whereas the Learned DR relied on the finding of the lower authorities. 5.2 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that Learned CIT(A) has justified the disallowance mainly on two grounds. First, the assessee failed to submit legible copies of bills/vouchers for amount of expenses disallowed by the Assessing Officer. Secondly, according to her, period of stay of 21 days in foreign country was not justified for the purpose of profession as the IBA Annual Conference and Exhibition was
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only from 30th September to 5th October, 2012 (only for 6 days). The Learned Counsel of the assessee could not justify before us also the period of 21 days in foreign country for the purpose of professional work. In our opinion, the finding of the Learned CIT(A) on the issue in dispute is well reasoned and we do not find any error in the same. Accordingly, we uphold the same and dismiss the ground no. (ii) of the appeal of the assessee. 6. Grounds no. (iii) of the appeal of the assessee relates to disallowance of ₹ 10,01,698/- under section 40(a)(ia) of the Act for non-deduction of the tax at source on payment made to International Bar Association (IBA). 6.1 The facts in brief related to dispute are that Assessing Officer observed business promotion expenses of the assessee included amount of ₹ 10,01,698/- made to International Bar Association. According to the Assessing Officer, International Bar Association operates through other organizations across the world and the Bar Association of India being member organization of IBA, it can be treated as Permanent Establishment (PE) in India and, therefore, income would be deemed to accrue or arise in India in the hands of IBA. He further observed that as per section 9(1)(i) of the Act income is deemed to accrue or arise in India, if income is earned through or from any business connection in India, and therefore, income in the hands of the IBA is taxable in India. The Assessing Officer observed that no TDS was deducted on such payment and, therefore, according to him, said expenditure is disallowable u/s 40(a)(ia) of the Act. The Learned CIT(A) also upheld the disallowance justifying the reason cited by
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the Assessing Officer. The relevant finding of the Learned CIT(A) is reproduced as under: “8.3 The AO has made the addition of Rs. 10,01,698/- on account of business promotion expenses out of which Rs.10,01,698/- was made for overseas transaction. The AO has claimed that no TDS was deducted on this amount which was paid to International Bar Association. The submission of the appellant that International Bar Association does not have any business connection in India and the same payment is not taxable in India as per DTAA between' India and United Kingdom was not accepted by AO, as per the detailed discussion made in Para 8.1 Supra. The AO has treated that International Bar Association has permanent establishment (PE) in India through Bar Association of India and the income would be deemed to accrue or arise in India u/s 9 of the Act Finally, the AO has treated that the payment made to IBA is related to the business connection in India and as appellant has failed to deduct TDS on this payment the same is disallowed. During the course of appellant proceedings, the appellant has filed a written submission and claimed that IBA has neither PE in India nor any business connection in India. The appellant has further claimed that in terms of article 7 of DTAA between India and UK this payment is excluded from taxability in India. During the appellate proceedings, the appellant was asked to clarify the nature of payment of Rs.10,01,698/- made to International Bar Association, London, UK. In response, the appellant has explained that it was for sponsoring the Welcome Reception at the Royal Dublin Society (Dublin, Ireland), IBA Annual Conference & Exhibition, from 30.09.2012 to 05.10.2012. In support of the claim the appellant has submitted the invoice details, credit card payment sponsorship form filled up by the appellant, brochure of sponsorship and certificate of fiscal residents to pay corporation tax under United Kingdom. All the above evidences were analyzed and the claim of the appellant has been considered whether it is allowable under section 37(1) of the Act and whether it should be considered as 'wholly and exclusively' incurred for the purpose of earning profession. This addition has two limbs, firstly, whether this expenditure has been incurred in connection with profession of the appellant ‘wholly and exclusively' and if yes secondly whether the appellant has made default in deducting tax as per section 195 of the Act It appears the AO has not doubted the nature of payment and accepted this fact that such expenditure is incurred in relation to the professional income of the appellant In this light if it is accepted that the said expenditure is in relation to the business/profession of the appellant the claim of the appellant that it has no Permanent Establishment in India and | no business connection in India does not hold good. Such organization like International Bar Association always works through Bar Association always works through Bar Association at
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National/Regional level of any country. It is not the fact that any outsider who is not an advocate or not a member of Bar Association of India can make payment to International Bar Association and sponsor the dinner of the delegates. The stand of the appellant is contradictory in nature. On the one hand the expenditure of Rs.10,01,698/- has been incurred on the dinner of the delegates, and claimed that this is related to his professional income and on the other hand the appellant has failed to deduct TPS under 195 r/w sector 9 of the Act and claimed that there is no Permanent Establishment or business connection of IBA in India. If there is no Permanent Establishment or business connection in India, the appellant has also failed how hosting of dinner and payment of Rs.10,01,698/- is 'wholly and exclusively* related with the professional income of the appellant In this light, the submission of the appellant that the addition of Ri.10,01,698 should be deleted does not deserve merit as the AO has rightly held that IBA operate through organizations across the world and Bar Association of India can be treated as PE in India. Alternatively, I also hold that if it has no PE , in India, such expenditure cannot be allowed under section 37(1) of the Act and cannot be held 'wholly and exclusively* for the purpose of earning the professional income of the appellant, In this light, the addition of Rs.10,01,698/- is confirmed.”
6.2 Before us, the learned Counsel of the assessee opposed existence of Permanent Establishment of IBA in India held by the Assessing Officer and Ld. CIT(A). According to him, the non- resident entity, i.e., International Tax Bar Association is neither having any business connection in India, nor having any kind of Permanent Establishment in India. He submitted that lower authorities have not demonstrated how Indian Bar Association was permanent establishment for the purpose of International Tax Bar Association. 6.3 On the contrary, the learned DR relied on the order of the lower authorities. He further submitted that as per section 195(2) of the Act, if the assessee was of the view that such sum was not chargeable in the hands of the recipient (i.e. IBA), then the assessee should have made an application for non-deduction of
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tax at source alongwith evidences to show that said sum would not be chargeable in the hands of recipient. He submitted that onus was on the assessee to demonstrate that IBA was not having Permanent Establishment in India and such obligation has not been discharged by the assessee. He submitted that in such circumstances, the Assessing Officer is justified in holding existence of PE and sum being business income in the hands of IBA resulting in liabilities of the assessee to deduct tax at source on such payment in terms of 195 of the Act. 6.4 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The assessee has sponsored welcome reception at ‘Royal Dublin Society (Dublin-Ireland)’, International Bar Association conference and exhibition held from 30/09/2012 to 05/10/2012. The assessee also submitted before the lower authorities invoice details, credit card and payment, sponsorship form, brochure of sponsorship and certificate of fiscal resident to pay Corporation tax in the United Kingdom by the non-resident entity. She has confirmed the disallowance mainly on the ground that there was no permanent establishment in India and business connection India. 6.5 The section 195(1) has given responsibility of deducting tax at source on the person making payment to non-resident, if such sum is chargeable under the provisions of the Act. For ready reference, said provision is reproduced as under:
“Other sums.
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(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD 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:”
6.6 Further, section 195(2) has provided that, if payer considers that such sum is not chargeable in India in the hands of recipient (i.e. non-resident entity) then, the payer may make an application for non-deduction of tax as at source and then it will be decided whether how much of sum is chargeable in India. For ready reference, said provision is reproduced as under:
“195 (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application [in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.”
6.7 Thus, it is evident that if in view of the assessee this sum would not have been chargeable in India in the hands of IBA, the assessee should have followed the procedure laid down in Section 195(2) and filed evidence in support of the claim. The Assessing Officer of the assessee was not having any jurisdiction over the recipient and not in position to determine chargeability of sum in the hands of recipient. In the case of non-resident recipient, even if the sum is chargeable under section 9(1) as deemed income, the
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sum would not be chargeable, if not covered by the Double Tax Avoidance Agreement between India and country of Non-resident. The non-resident can avail the DTAA provisions if same are beneficial to him. In such circumstances, onus was on the assessee to demonstrate before the AO under Section 195(2) of the Act, whether IBA was having Permanent Establishment in India, because then only the business Income of IBA could be chargeable in India under UK India DTAA. 6.8 It is evident that the assessee has failed to invoke section 195(2) of the Act. But the Revenue has neither explained before us whether the assessee has been held as assessee-in-default for not deducting tax source u/s 201(1) and 201(1A) of the Act, nor whether the non-resident entity is brought to tax in India. The assessee has filed documents for the first time in assessment proceedings in support of its claim that no PE of non-resident entity exist in India. After verification of documents, the AO has held that income was liable to be taxed in the hands of non- resident under the Income Tax Act in view of business connection of non-resident in India as well as PE of non-resident in India under DTAA between UK and India. 6.9 In our opinion, under Article 5 of India UK DTAA, PE can be either a fixed place or agency PE or service PE. The relevant Article of DTAA is reproduced as under:
“ARTICLE 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
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The term "permanent establishment" shall include especially : (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) premises used as a sales outlet or for receiving or soliciting orders; (g) a warehouse in relation to a person providing store facilities for others; (h) a mine, an oil or gas well, quarry on other place of extraction of natural resources; (i) an installation or structure used for the exploration or exploitation of natural resources; (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale or machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; (k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve- month period; or (ii) services are performed within that State for an enterprise within the meaning of paragraph 1 of Article 10 (Associated enterprises) and continue for a period or periods aggregating more than 30 days within any twelve-month period: Provided that for the purposes of this paragraph an enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of, mineral oils in that State.
The term "permanent establishment" shall not be deemed to include: (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the
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enterprise solely for the purpose of storage or display; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; (d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade of business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this paragraph; (f) the maintenance of a fixed place of businesses solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of the paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
A person acting in a Contracting State for or on behalf of an enterprise of the other contracting State - other than an agent of an independent status to whom paragraph (5) of this Article applies, shall be deemed to be a permanent establishment of that enterprise in the first mentioned State if: (a) he has, and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or (b) he habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise for or on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and the enterprises controlling, controlled by, or subject to the same common control, as that enterprise.
An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise (or for the enterprise and other enterprises which are controlled by it or have a controlling interest in it or are subject to same common control) he shall not be considered to be an agent of an independent status for the purposes of this paragraph.
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The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
For the purposes of this Article the term "control", in relation to a company, means the ability to exercise control over the company's affairs by means of the direct or indirect holding of the greater part of the issued share capital or voting power in the company.”
6.10 Neither the Assessing Officer, nor the Ld. CIT(A) has specified which kind of PE exist in the case of non-resident entity or how the business connection of non-resident is established. Even if, we assume that lower authorities have thought of fixed place PE, then the authorities are required to establish that place of Indian Bar Association was under ‘control’ and at the ‘disposal’ of International Tax Bar Association and ‘core activity’ of International Tax Bar Association has been carried out from said place. No such finding of fact has been recorded by the lower authorities. Further, no evidence of any agency PE or service PE has been brought on record by the lower authorities. Alternatively, the learned CIT(A) has also confirmed the disallowance in terms of Section 37(1) of the Act on the ground that expenses were not incurred wholly and exclusively for the purpose of the profession of the assessee. The assessee has also not submitted any credible evidence before us to demonstrate that those expenses were incurred wholly and exclusively for the purpose of profession. 6.11 In the facts and circumstances of the case and in the interest of substantial justice, we feel it appropriate to restore this
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issue back to the file of the Assessing Officer for deciding afresh after providing adequate opportunity of being heard to the assessee. The ground No. (iii) is allowed for statistical purposes. 7. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 21st September, 2021
Sd/- Sd/- (KULDIP SINGH) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 21st September, 2021. RK/-(DTDC) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR
Asst. Registrar, ITAT, New Delhi