HUSSAINI FAKHRUDIN NALWALA,MUMBAI vs. ASST CIT 23(), MUMBAI

IN THE INCOME-TAX APPELLATE TRIBUNAL “I” BENCH MUMBAI BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No. 1611/Mum/2017 (Assessment Year 2011-12) Shri Hussaini Fakhrudin ACIT-23(1), 113, 1st Floor, Matrumandir, Nalwalla, 501, Sagar Fortune, Water Field Road, Bandra (W), Tardeo, Grant Road (W), Mumbai-400050. Mumbai-400050. Vs. PAN: ADIPN6000G Appellant Respondent Appellant by : Shri Ratan Samal (AR) Respondent by : Shri S. Usmani (Sr. DR) Date of Hearing : 01.05.2019 Date of Pronouncement : 31.05.2019 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee under section 253 of Income-tax Act (‘Act’) is

directed against the order of ld. Commissioner of Income-tax (Appeals)-

32, Mumbai [hereinafter referred as ld. CIT(A)] dated 25.01.2017 for

Assessment Year 2011-12. The assessee has raised the following

grounds of appeal: 1. The learned First Appellate Authority erred in confirming the assessment order wherein the Ld. Assessing Authority erred in disallowing the claim of expenditure in the nature of commercial service charges amounting Rs. 1,01,84,508/- on the ground that TDS is not deducted and further, erred in disallowing the same u/s 40(a)(ia) under the Income Tax Act though appellant had claimed that no TDS is deductible on the said charges and further, erred in not appreciating the argument advanced which is supported with necessary evidences.

ITA No.1611/ Mum /2017-Shri Hussaini Fakhrudin

real estate marketing in domestic as well as in overseas market. The

assessee filed his return of income on 17.10.2012 declaring total income

at Rs. 1,10,48,259/-. The return of income was selected for scrutiny and

the assessment was completed under section 143(3) on 27.03.2015. The

Assessing Officer while passing the assessment order disallowed the

claim of expenditure in the nature of commercial service charges of Rs.

1,01,84,508/- Stern Real Estate (SRE) Dubai, holding that no TDS was

deducted and therefore disallowed under section 40(a)(ia). The assessing

officer also disallowed the commercial service charges of Rs.

1,01,84,508/- holding that income of foreign entity/ SRE arose and

accrued in India and the said income was chargeable to tax in India. The

assessee has paid commercial service charge to Non-resident; it was

incumbent on the assessee to deduct tax at sources under section 195 of

the Act. As no tax is deducted therefore, no deduction is allowable.

The assessing officer further held that in absence of specific clause of

fee for technical services (FTS) in India UAE Double Taxation

Avoidance Agreement (DTAA), the payment made for FTS is taxable

under domestic law (Income-tax Act) The Assessing Officer also 2

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disallowed the travelling expenses holding that the assessee has debited

the travelling expenses of his wife and son of Rs. 83,277/-. 3. On appeal before the ld. CIT(A), both the addition/disallowances were

upheld. Thus, further aggrieved by the order of ld. CIT(A), the assessee

has filed the present appeal before this Tribunal. 4. We have heard the submission of ld. Authorized Representative (AR) of

the assessee and ld. Department Representative (DR) for the revenue

and perused the material available on record. The ld. AR of the assessee

submits that assessee is a real estate agent and appointed a Sub-Agent in

Dubai and paid commission for procuring/arranging customers to invest

in real estate in India and claimed deduction of expenditure. The agent

of assessee in Dubai is independent non-resident, who has no permanent

establishment in India. The services provided by Non-resident Agent are

in the nature of technical services as prescribed under section 9(1)(vi) of

Income-tax Act. The NRI Agent is not liable to pay tax in India as he

has no permanent establishment. The income was not earned or arises in

India by said Agent. The expenditure is commercial in nature. The

details which were furnished to the Assessing Officer as well as ld.

CIT(A). The ld. AR of the assessee further submits that Article-5 of

India-UAE Double Taxation Avoidance Agreement (India-UAE DTAA)

Tax Treaty defines permanent establishment. The NRI Agent does not

fall within the ambit of Article-5 of the India-UAE DTAA. As per 3

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Article-7 of UAE Tax Treaty profit earned by an enterprise is subject to

tax in India, if he has a permanent establishment. Similarly Article-14

deals with independent personal services, tax in India will be applicable,

if it has a fixed base or if he stays exceed 183 days in a year. The ld. AR

of the assessee further explained that Article-22 deals with other income

and the same is subject to levy in UAE which is residuary in nature and

the tax is not payable in India. 5. The ld. AR of the assessee further submits that the Assessing Officer

relied upon the CBDT Circular No. 33 of 1982 and held that on lack of

specific article in Tax Treaty, fees for technical services, the benefit

cannot be granted by relying upon the decision of Madras Tribunal in

TVS Electronics Ltd. in ITA No. 811/MDS/2010. The ld. AR of the

assessee submits that the ratio of said decision is not applicable on the

facts of the present case. The decision in TVS Electronics Ltd. (supra) is

no more a good law as the same has been reversed by Hon’ble Madras

High Court in Bangkok Glass Industries Company Ltd. The Bangalore

Tribunal in ABBFZ (LLC) in ITA No188/Bang/2016 dated 28.10.2016

it was held that in absence of proviso in Tax Treaty to tax fees for

technical services, the same would be taxed as per Article-7 of Treaty

applicable for business profit and in absence of Permanent

Establishment, the income is not chargeable to tax in India.

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lower authorities. The ld. DR further submits that the services rendered

by independent agent namely Sternon Real Estate Dubai (SRED) cannot

fall under “Professional Services” as defined under Explanation to

section 194J, which covers services rendered by specific professional in

the field of legal, medical, engineering, architectural accountancy and

interior decoration. The nature of services prevailed over the

nomenclature. The services rendered are purely technical in nature.

Since the payment is made for the services in the nature of technical

services, the assessee was required to deduct TDS. Since the assessee

failed to deduct TDS. Therefore, the amount was rightly disallowed by

Assessing Officer and confirmed by ld. CIT(A). 7. We have considered the rival submission of the parties and have gone

through the orders of authorities below. We have also deliberated on

various case laws relied by lower authorities as well as by ld.

representative of the assessee. During the assessment, the Assessing

Officer noted that assessee entered into deals with various Indian

Builders and then booked the shop/flat on behalf of NRI in India and

abroad. The assessee incurred expenses on advertisement, business

promotion and travelling for promoting the product of builders. The

assessee also appointed Agent in India/foreign countries on commission

basis for exploring clients and for making collection from the client who 5

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have booked the flat or who have made booking. The assessee debited a

sum of Rs. 1,01,84,508/- on marketing expenses and claimed that

payments were made to SRE, Dubai. The assessee was asked to explain

the nature of services rendered and why TDS was not deducted. The

assessee filed his reply dated 11.03.2015. In the reply, the assessee

stated that he has paid commission on service charge of Rs.1,01,84,508/-

to SRE, Dubai who arranged overseas client and convinced them for

investing in India. Being an independent entity SRE, Dubai arranged

seminar to make aware about the property details in India. They

arranged monthly charges being built by them by way of commercial

services. So far as TDS is concerned, as per provision of Tax Treaty

between India-UAE, there is no specific services being defined in

agreement, hence, same is considered to be part of Article-7 (Business

Profit) based on this Article tax is payable by other contracting state and

no TDS is required to be deducted while making payment to vendor in

UAE, especially that SRE /vendor does not have any permanent

establishment in India. The assessee again vide reply dated 16.03.2015

explained the number of days of stay of the person in India for Financial

Year 2009-10, 2010-11 & 2011-12 and the amount paid during the

Assessment Year 2008-09 to 2012-13 which has been recorded by

Assessing Officer in para-5.3 of his order. The assessee further

explained that both the parties are unrelated and independent third 6

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parties. SRE, Dubai is merely a marketing agent for assessee. The

contention of assessee was not accepted by Assessing Officer. The

Assessing Officer concluded that assessee made the payment on account

of commercial services without deducting TDS under section 195.

Commercial services are deemed to arise and accrue in India as per

clause-(vii) of section 9(1) being fees for ‘technical services’. The so-

called commercial services are in the nature of ‘consultancy’,

management as well as technical in the field of business promotion,

marketing awareness, creation and pitching etc. The services provided

by UEA base entity has been utilized in India by assessee for his own

benefit and business. Therefore, the foreign UAE base entity has income

arising and accruing in India as per clause- (vii) of section 9(1) and

therefore, is liable to pay tax on the amount paid to NRI. It was further

concluded that for taxability of fees for technical services what is

relevant is the place where services utilized and not the place where

services are rendered. Thus, the income of foreign entity i.e. SRED,

Dubai arise and accrued in India and same is chargeable to tax in India.

Since the assessee paid to NRI a sum of Rs1,01,84,508/- without

deducting TDS. Therefore, the entire amount was disallowed under

section 40(a)(ia) of the Act. The ld. CIT(A) confirmed the action almost

on similar line. The ld CIT(A) further concluded that in absence of

specific clause of fee for technical services (FTS) in DTAA, the income 7

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will not automatically become business income by relying the decision

of Madras Tribunal in DCIT TVS Electronic(supra). We have noted

that the decision of Madras Tribunal in DCIT TVS Electronic(supra) has

been reverse by Hon’ble madras High Court in Bangkok Glass

Industries Co Ltd Vs ACIT (215 Taxman 116) wherein it was held that

in absence of provision in DTAA to tax fee for technical services, the

same would be taxed under Article of DTAA applicable for business

income and in absence of PE in India, the said income is not chargeable

in India 8. Similar view was taken by the coordinate bench of Bangalore Tribunal

in ABB FZ-LLC (supra) by following the decision of Bangkok Glass

Company (supra) and IBM India Pvt Ltd Vs DCIT (supra). therefore,

considering the above referred decisions, we are of the view that in

absence of provision in DTAA to tax the FTS the same would be taxed

as per provisions of Article 7 of the DTAA applicable for the profit of

business and in absence of PE in India, the receipt/ income is not

chargeable to tax in India. Therefore, there was no obligation on the part

of assessee to deduct tax at source under section 195 of the Act.

Consequently, there cannot be any disallowance under section 40(a)(i)

of the Act. Hence, ground No.1 of appeal is allowed. 9. Ground No. 2 relates to the disallowance of travelling expenses. The ld

AR for the assessee neither argued anything nor filed any written 8

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submissions nor any documentary evidences are filed to substantiate this

ground of appeal, thus, this ground is treated as not pressed. Perusal of

the order of the lower authorities reveals that the expenses disallowed by

the assessing officer only with regards to expenses incurred on the

travelling of wife and son of the assessee. In absence of any submissions

and the evidences that travelling expenses were incurred wholly and

exclusively for the purpose of business, the same is not allowable

deductions. In the result the ground No. 2 of the appeal is dismissed.

Order pronounced in the open court on 31/05/2019.

Sd/- Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 31.05.2019 SK Copy of the Order forwarded to : 1. Assessee 2. Respondent 3. The concerned CIT(A) 4. The concerned CIT 5. DR “I” Bench, ITAT, Mumbai 6. Guard File

BY ORDER,

Dy./Asst. Registrar ITAT, Mumbai