DCIT, CHENNAI vs. SUNDARAM CLAYTON LTD., CHENNAI

आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by Revenue and Cross Objections by assessee for Assessment Year (AY) 2008-09 arises out of the order of learned Commissioner of Income Tax (Appeals)-15, Chennai [CIT(A)] dated 17-

01-2017 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143 r.w.s. 147 of the Act on 23-03-2015. The grounds raised by the Revenue read as under: 1. The order of the Ld CIT(A) is contrary to law and facts of the case. 2 The Ld CIT(A) erred in directing the AO to delete the consultancy and marketing charges of Rs.7,27,024/- and legal and trade mark expenses of Rs.2,22,72,577/-. 2.1. The Ld CIT(A) failed to appreciate that the disallowance made u/s 40(a) (a) towards non deduction of tax at source on payment to non-resident towards legal and trade mark expenses. 2.2 The Ld CIT (A) erred in deleting the addition after holding that payment was not in the nature of fee for technical services. 2.3. The Ld CIT(A) erred in deleting the addition on the reason that since fee for technical services is not mentioned in Article 12, it has to be considered as business profits, ignoring Article 22 "other income" and Article 14 "independent personal services" Article 3(i) (e). 2.4 The Ld CIT(A) erred in directing the AO to delete the warehouse expenses for Rs.2,78,52,128/- 2.5 The Ld CIT(A) failed to appreciate that the latest amendment made under Explanation to section 9(2) with retrospective effect from 1.6.1976 onwards, in so far as payments covered under section 9(l)(v)(vi) / (vii) considered irrespective of services rendered in or outside India . 2.6 The Ld CIT(A) failed to appreciate that the nature of payment cannot be considered as business but will fall under sec 9(i) (vii) (b) read with Explanation 2 there under since amount paid for warehousing is fees payable in respect of services utilized in a business or profession carried by such person outside India or for the purposes of making or earning any income from any source outside India. 2.7) The Ld CIT(A) erred in directing the AO to work out the residential status of the recipient of Consultancy Services after getting all the necessary details from the assessee and arrive at the correct conclusion. 2.8) The Ld CIT(A) under the powers of Rule 46A of the income tax rules, ought to have given the assessing officer a reasonable opportunity to examine the material evidence before directing the AO to verify and simultaneously allowed the consultancy services for Rs. 5,11,732/-. 2.9 The Ld CIT(A) erred in directing the AO to delete the addition for payment of salary in foreign branch office of Rs.1,02,32,000/-. 3 The Ld CIT(A) failed to appreciate that section 160(1) r.w.s 163(1), the assessee company has to be considered as a representative assessee since the company is making payment to non-resident. As the amount has been debited to P&.L account, the source of payment is only in India. 3.1) The Ld CIT(A) failed to appreciate that section 9 of the IT Act 1961 is as under: 1) The following incomes shall be deemed to accrue or arise in India: i) .... ii)Income which falls under the head salaries , if it is earned in India

(Explanation: For the removal of doubts, it is hereby declared that the income in the nature referred to in this clause payable for (a) Service rendered in India (b) the rest period or leave period which is preceded and succeeded by the services rendered in India and forms part of the service contract of employment "- - shall be regarded as income earned in India. " - 3.2) The Ld CIT (A) failed to appreciate that the above issues arises vide RAP objection. As per Circular No.21/2015 which states as under "The above issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limit specified in para 3 circular no 21/2015 or there is no tax effect. para 8(c) Where RAP in the case has been accepted by the department." The grounds taken by the assessee in cross-objections read as under: 1. The Assessee had appealed to the Commissioner of Income tax (Appeals) against the disallowance of Rs.2,19,54,165 under the head "marketing and legal and trade mark expenses" but the CIT(A) had disallowed and deleted only Rs.2,19,54,156/- 2. The Commissioner of Income tax (Appeals) ought to have appreciated that even though the break up was given he has not dealt with the appeal against the disallowance of the balance amount of Rs.10,45,436/-. 3. The Respondent craves leave to file additional grounds at the time of hearing. As evident, the sole issue that arises for our consideration is disallowance u/s. 40(a)(i) of the Act for want of tax deduction at source (TDS) on consultancy / marketing expenses and legal and trade mark expenses as paid by the assessee to foreign entities during the year. 2. The Ld. Sr. DR justified the disallowance as made by the Ld. AO whereas Ld. AR relied on the decision of this Tribunal in M/s. TVS Electronics Ltd. vs. ACIT in ITA No.949/Chny/2017 dated 24-09-2021 to submit that even if the payments are to be considered as ‘fees for technical services’, no liability could be casted on assessee to deduct TDS by way of retrospective amendment to Sec.9(1)(vii). The copy of the order has been placed

- 4 - on record. Having heard rival submissions and after perusal of case records, the appeal and cross-objection is disposed-off as under. Assessment Proceedings 3.1 The assessee being resident corporate assessee is stated to be engaged in manufacturing of automotive components. During assessment proceedings, it transpired that the assessee made foreign remittances without deduction of TDS which would attract disallowance u/s. 40(a)(i) of the Act. The assessee paid marketing expenses of Rs.7.27 Lacs and Legal and trademark expenses for Rs.222.72 Lacs. 3.2 Rejecting assessee’s arguments, Ld. AO held that the aforesaid payments would fall under the category of ‘fees for technical services’ which would be covered u/s. 9(i)(vii)(b) of the Act. Accordingly, addition of Rs.229.99 Lacs was made in the hands of the assessee. 3.3 The assessee also paid consultancy and retainer-ship fees of Rs.5.11 Lacs without TDS to an individual Mr. Washio. Since the recipient stayed in India for more than 182 days, the Ld. AO held that income is deemed to have accrued in India and therefore, the same was similarly disallowed. 3.4 Similar disallowance u/s 40(a)(ia) was made by Ld. AO for payment of salary in assessee’s foreign branch office situated at USA. The assessee paid Rs.102.32 Lacs as staff salary working in foreign branch of the assessee. The assessee submitted that prescribed tax as required under US tax laws was deducted and applicable laws were complied with. However, Ld. AO held that the assessee was to be considered as representative assessee since

- 5 - the assessee was making payment to non-resident and the source of payment was in India. Accordingly, the amount was disallowed. Appellate Proceedings 4. Upon further appeal, the Ld. CIT(A) deleted the marketing charges as paid to White & Case LLP, Singapore for Rs.3.19 Lacs on the ground that as per Article 7 of applicable DTAA, tax would be required to be deducted as source only if the services are rendered from a permanent establishment (PE) in India which was not the case here. Accordingly, no TDS was required and impugned addition was deleted. Similar finding was rendered with respect to legal and trademark expenses at Rs.212.27 Lacs as paid to Tileke & Gibbins Intl. Ltd. Thailand. Regarding payment to Mr. Washio, it was held that no TDS would be required if the residential stay was less than 183 days. Accordingly, Ld. AO was directed to work out the correct residential status and re-adjudicate accordingly. The disallowance of Rs.102.32 Lacs was deleted on the ground that Ld. AO had not established that these payments were taxable in India as per the terms of DTAA. Aggrieved, the revenue is in further appeal before us. Our findings and Adjudication 5. We find that the impugned disallowance of Rs.229.99 Lacs has been made by Ld. AO by treating the same as ‘fees for technical services by invoking the provisions of Sec. 9(1)(vii). However, the liability of TDS has been fastened on the assessee by insertion of explanation to Sec. 9(1)(vii) by Finance Act, 2010 w.r.e.f. 01.06.1976. Therefore, the assessee could not be expected to deduct Tax at source on payment made to non-residents on the

basis of subsequent amendment to the law with retrospective effect from earlier date because the assessee cannot foresee the amendment and deduct TDS. Therefore, the disallowance made u/s 40(a)(i) would be unwarranted. This view has been taken by Chennai Tribunal in M/s TVS Electronics Limited vs. ACIT (ITA No.949/Chny/2017 dated 24.09.2021) wherein the bench held as under: - 7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, the DTAA between India and Mauritius does not cover fees for technical services. It is also an admitted fact that if two provisions are considered between DTAA and Indian Income Tax laws, then provisions more beneficial to the assessee should be considered. If you go by the said rule, then payment made by the assessee to a non-resident entity for services rendered outside India should be considered in light of DTAA between India and Mauritius. As we have already stated earlier, India-Mauritius DTAA does not cover FTS. Once FTS is not covered under DTAA, then by virtue of residual clause 22 of DTAA between India and Mauritius, said sum can be considered under Article 7 as business profits. Further, as per Article 22, where any item of income of a resident of a contracting state, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention, shall be taxable only in that Contracting State. If you go by Article 22, then if anything not expressly provided in this convention, then same cannot be taxed in India, even if said sum comes under the definition of FTS as per Indian Tax laws. Insofar as, taxation of impugned payment under Article 7 as business profits, we find that since non-resident does not have permanent establishment in India, same cannot be taxed as business profits. 8. Be that as it may. The issue before us is not taxability of payment made by the assessee to non-resident entity for services rendered outside India as fees for technical services or not in terms of section 9(1)(vii) of the Act. The issue before us is disallowance of sum paid to non-resident without TDS u/s 40(a)(i) of the Act. Admittedly, the AO has brought amended explanation 9(2) with retrospective effect from 1-4-1976 by the Finance Act, 2010 and held payment made by the assessee as FTS u/s 9(1)(vii) of the Act and further, for non TDS disallowed the same u/s 40(a)(i) of the Act. Therefore, to decide the issue, one has to understand the judgment of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, (supra. The Hon’ble Supreme court while deciding the issue of FTS has considered pre-amended provisions of section 9(1)(vii) and held that if any payment in the nature of FTS to be taxed in India, as per provisions of section 9(1)(vii) of the Act, then, both services rendered and services received to be in India. If services are rendered outside India, even such services are received in India then same cannot be brought to tax under Indian Income-Tax laws as per the judgment of Hon’ble Supreme Court in the case of Ishikawajma- Harima Heavy Industries Ltd., vs. DIT. Although, definition of FTS was amended by the Finance Act, 2010 with retrospective effect from 01.06.1976 but, the law

prevailing at the time of making payment by the assessee to the non-resident was on the basis of judgment of Hon’ble Supreme Court which clearly held that payment made to a non-resident for services rendered outside India cannot be brought to tax in India as fees for technical services in absence of place of business / permanent establishment in India. Since, there was clear law by the decision of Hon’ble Supreme Court, the assessee has made payment without deducting tax at source. Therefore, liability towards TDS cannot be fastened on the assessee on the basis of subsequent amendment to law with retrospective effect, because it was impossible on the part of assessee to deduct tax on income of non-resident because the assessee cannot foresee the amendment and deduct TDS on said payments. This view is supported by various decisions of Tribunal including decision of ITAT, Mumbai Bench in the case of Channel Guide India Ltd., vs. ACIT and the Ahmadabad Tribunal in the case of Sterling Abrasive Ltd., vs. ACIT and Agra Bench in the case of Metro & Metro vs. Addl.CIT, where the Tribunal by following the decision of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, held that at the relevant point of time, it was impossible on the part of the assessee to deduct tax at source on income of non-resident and thus, on that basis no disallowance can be made towards payment made to a non-resident u/s.40(a)(i) of the Act. 9. In this view of matter and considering facts and circumstances of this case, we are of the considered view that the ld.AO as well as the ld.CIT(A) were erred in disallowing payment made to a non-resident u/s.40(a)(i) of the Act for failure to deduct TDS u/s.195 of the Act. Hence, we direct the AO to delete addition made towards disallowance u/s.40(a)(i) of the Act.

Considering the same, we would hold that no such disallowance could have been made u/s 40(a)(ia). We also concur with the findings given by Ld. CIT(A) that in the absence of any PE in India, such payment could not be subject to tax in India. In the result, the revenue’s corresponding grounds stand dismissed. Regarding payment made to Mr. Washio, the directions given in the impugned order are quite apt and no interference is required in the same. We also concur with the findings rendered by Ld. CIT(A) qua disallowance of Rs.102.32 Lacs since the terms of DTAA would prevail over the provisions of Income Tax Act. The Ld. AO nowhere established that the impugned payments were taxable in India as per the provisions of DTAA. No arguments have been made by Ld. AR in the cross-objection due to smallness of the amount.

- 8 - 6. The appeal as well as cross-objection stand dismissed.

Order pronounced on 21st December, 2022.

Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा01 /VICE PRESIDENT लेखा सद9 / ACCOUNTANT MEMBER चे)ई / Chennai; िदनांक / Dated : 21-12-2022 EDN/- आदेश की Yितिलिप अ6ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF