SHELADIA ASSOCIATES INC,SECUNDERABAD vs. ADIT (INT TAXN)-2, HYDERABAD

Ground No.3 to 5 are regarding disallowance of business development and marketing expenditure u/s 40(a)(i) for want of TDS. The assessee claimed expenses of Rs.1,98,77,458/- towards Head Office business development expenses. The assessee is a branch office/PE of a foreign company located in USA. The assessee is engaged in the business of rendering professional consulting services in civil infrastructure to the Governments, PSUs, governmental organizations and is largely focused on construction of roads and highways. In the draft assessment order, the AO proposed disallowance of these expenses u/s 40(a)(i) of the Act on the ground that the assessee failed to deduct TDS u/s 195 of the Act. The assessee challenged the proposed disallowance before the DRP and also furnished some additional details and supporting evidence on which, the DRP called for a remand report from the AO. After considering the remand report, the DRP rejected the objections filed by the assessee and consequently, final assessment order was passed by the AO, making the disallowance of the business development expenses u/s 40(a)(i) of the Act.

Before the Tribunal, the Ld.AR of the assessee has submitted that the Head Office in USA from its pool of business development and marketing team has dedicated a designated team of members to take care of Indian business operations. The regular place of work of the team members is USA, which takes care of the company’s Indian business operations like, identifying eligible projects, bidding for projects, designing, directing, supervising and monitoring the project activity etc. Designated team takes care of Indian business operations from USA and not from India. The expenditure claimed by the assessee pertains to project-wise business development expenditure incurred in respect of the Head Office team members month wise cost allocation. During the year under consideration, the assessee reimbursed an amount of Rs.1,98,77,458/- to the Head Office for the services provided by the Head Office designated team for the operation of PE in India. Thus, the Ld.AR has submitted that these payments are in the nature of reimbursement, having no element of profit, and therefore, no question of deducting tax at source arises. Further, the Ld.AR has contended that the AO has treated these payments even for technical services, whereas as per the Indo- US DTAA, these payments does not fall under the category of fee for technical services as the services were not made available in India as per Article 12 of Indo-US DTAA. The Ld.AR has submitted that the assessee did not classify these expenses under Head Office expenses as general and administrative expenses, falling within the ambit of section 44C of the Act, but, these are reimbursement of cost incurred by the Head Office on the designated team is technical expenses incurred exclusively for Indian business operations, which are considered direct expenses of Branch/PE. Ld.AR has further submitted that in the preceding years i.e. A.Y.2020-21 and 2021-22, the AO considered these expenses as general administrative expenses, falling within the ambit of section 44C of the Act and disallowed the same while passing the assessment order. The assessee challenged the action of the AO and this Tribunal vide order dated 16.10.2024 for the A.Y.2020-21 remanded the matter to the record of the AO for proper verification and adjudication. For the year under consideration the AO has correctly held that the services are technical in nature both in the draft assessment order as well as in the remand report, but erroneously, made an observation that these technical services are made available to India PE office to secure and execute contract in India and such technical services are liable to tax in India. The Ld.AR has submitted that since the payment does not fall under the fee for technical services as per the Article 12 of Indo-US DTAA, therefore, the same is not chargeable to tax in India and consequently the disallowance made by the AO u/s 40(a)(i) is unjustified and liable to be deleted. She has also referred to the protocol of Indo-US DTAA, where, some illustrations of make available is given to clarify the term “make available” employed in the Article 12 of Indo-US DTAA. The Ld.AR has thus contended that the Head Office team is only rendering services and not making available any technical knowledge, experience, skill, know how, or process as contemplated in Article 12 of Indo-US DTAA and therefore, the payment in question does not fall in the ambit of fee for technical services as defined in Indo- US DTAA. In support of her contentions, she has relied upon the following decisions : (i) Bain & Company Inc. Vs. Deputy/ACIT, International Taxation [2023] 156 taxmann.com 401 (ii) Inter Continental Hotels Group (Asia Pacific)(Pte.) Ltd. Vs. ACIT [2021] 133 taxmann.com 99

On the other hand, the Ld.DR has submitted that all these contentions of the assessee have been duly considered by the DRP and also verified by the AO in the remand proceedings and therefore, the DRP found no substance or merit in the claim of the assessee that these payments are not subjected to TDS u/s 195 of the Act. He has further submitted that what is to be considered is the substance involved in these transactions of payment and services rendered by the Head Office and not the nomenclature under which the assessee has made these payments. He has relied upon the orders of the DRP and the AO.

We have considered the rival submissions as well as relevant material on record. The assessee has admitted this fact that the payment is made to the Head Office towards services provided by the dedicated team of Head Office in identifying and choosing projects, analysing technical feasibility, making technical presentation, price negotiation etc. apart from the supervising and monitoring the project activities in India. The assessee has also accepted that these services are technical in nature and to that extent accepted the AO’s finding that the services provided by the Head Office are technical in nature. The dispute before us is only whether the payment made by the assessee to the Head Office towards rendering these services falls in the term “fee for technical services” as per the definition u/s 9(1)(vii) of the Act as well as the definition provided in Article 12 of Indo-US DTAA. So far as the term “fee for technical services” provided in section 9(1)(vii) of the Act is concerned, the assessee has not disputed that the payment in question falls in the category of fee for technical services, which is an income in the hand of the US company arising in India. Even otherwise, as per explanation 1 and 2 of section 9(1)(vii) makes it clear that the fee for technical services means any consideration for rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel. The assessee has strongly raised upon the definition of FTS provided in Article 12 of Indo-US DTAA. For ready reference, Article 12 of Indo-US DTAA is reproduced as under :

Thus, if the payment is found to be in the nature of fee for technical services, then the same is liable to be taxed @15% of gross amount of the payment in case if the fee is paid by the Government of the contracting state and @20% in other cases for the duration of first 5 years and thereafter 15% of the gross amount of such fee. A similar corresponding provision is also made in the Act in section 44DA of the Act and therefore, the contention of the assessee that this payment does not involve any element of profit or mark up but, it is only the reimbursement of the expenses incurred by the Head Office towards providing the services would not hold good, when the payment itself is liable to be taxed at gross amount basis. The assessee has not produced any communication between the assessee PE and the Head Office to throw some light about the nature and scope of services rendered by the Head Office. However, what is undisputed from the record is that the Head Office has designated a dedicated team of members for providing services to the assessee, which includes identifying the eligible projects, bidding for projects, designing, directing, supervising, monitoring the project activity. There is no doubt that the services provided by the Head Office by the team of experts and technical personnel and therefore, the complete task of the business operations of the assessee PE, right from identifying the eligible projects, bidding for project, designing, directing, supervising and monitoring of the project activity are undertaken by the designated team. Thus, the decisions relied upon by the assessee cannot be directly applied to the facts of the present case, when it is not a case of service provided by the Head Office only for certifying or providing some consultancy service. But the services are undertaken by the Head Office team on wholesale basis and provided in India. It is not that the assessee has outsourced some of the activity to the Head Office, but the entire technical and skill work has been undertaken and carried out by the designated team, comprising of all technical and expertise of the field and even provided the managerial services also while monitoring and supervising the project activities. The issue before the Hon’ble Karnataka High Court in the case of CIT Vs. ABB Inc. (supra) was only for rendering the technical and consultancy service to an Indian company. The Hon’ble High Court has held in para 11 to 14 as under :

Therefore, in the said case, the Indian company approaching the foreign entity for risk evolution of the proposed project and prospective steps to be taken towards bidding process. The service of providing risk evolution of the project and prospective step towards bidding process was only in the nature of reviewing the proposed project of the Indian company by the US company. In the case in hand with limited material available before us and in the absence of the relevant communication if any, between the parties, we find that when the entire task of identifying, choosing projects, analysing technical feasibility, making technical presentation, price negotiations, monitoring, supervising of the projects are undisputedly technical services rendered by the US Head Office. Since these services were rendered in India therefore, falls in the terms of make available as per the Article 12 of Indo-US DTAA. It is not the case of seeking a review or evolution of the proposed projects but the entire services right from selecting the project to the bidding and completion of the projects are provided by the Head Office. The DRP has considered this issue in para 2.2.1 to 2.2.8 as under :

Thus, it is clear that the assessee was given another opportunity at the level of DRP to substantiate its claim that the payments do not fall in the ambit of section 195 for deduction of TDS and after considering the remand report, the DRP has passed the directions. So far as the order of this Tribunal for the A.Y.2020-21, we find that in the said assessment year, the AO made an addition by treating the payment u/s 44C, which was disputed by the assessee and claimed that the payment is not for general administrative, but it is for technical services and therefore, the Tribunal vide order dated 16.10.2024 in held as under :

In the result, appeal of the assessee is allowed for statistical purpose.”

Thus, the Tribunal remanded the matter to the record of the AO for proper verification of the facts regarding these payments and consequently, the said order of the Tribunal would not help the case of the assessee. Accordingly, in the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the AO passed in pursuance to the directions of the DRP.

In the result, appeal filed by the assessee is dismissed.