DCIT LARGE TAX PAYER UNIT 1, CHENNAI vs. M/S SUNDARAM ASSET MANAGEMENT COMPANY LIMITED, CHENNAI

आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER:

These Eight appeals which are cross appeals for Assessment Years

(ay) 2011-12 to 2014-15 respectively, four appeals being filed by

assessee for ay: 2011-12 to 2014-15 , being ITA Nos.419-422/Chny/2018

and four appeals being filed by Revenue being ITA Nos. 465 to

468/Chny/2018 , are directed against common appellate order dated

30.11.2017 in ITA Nos.21/2014-15, 19/2015-16, 112 & 113/2016-

17/LTU(A)-17, passed by learned Commissioner of Income Tax (Appeals)-

17, Chennai (hereinafter called “the CIT(A)”), for ay’s : 2011-12 to 2014-

15, the appellate proceedings had arisen before learned CIT(A) from

separate assessments orders dated 24.03.2014, 31.03.2015, 26.12.2016

& 26.12.2016 respectively passed by learned Assessing Officer

(hereinafter called “the AO”) u/s.143(3) of the Income-tax Act, 1961

(hereinafter called “the Act”) for aforesaid ay’s: 2011-12 to 2014-15

respectively.

ay: 2013-14 and 2014-15 respectively are the appeals wherein the tax

effect is admittedly lower than Rs.50,00,000/- and both these appeals are

covered by CBDT Circular No. 17/2019 dated 08.08.2019 and hence

these two appeals filed by Revenue are not maintainable before the

tribunal due to low tax effect. The ld.CIT-DR fairly admitted that these

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two appeals filed by Revenue are not covered/hit by various exceptions as

applicable to aforesaid CBDT Circular and hence both these appeals may

be dismissed owing to low tax effect as these appeals are not

maintainable before the tribunal. The learned Counsel for the assessee

also submitted that both these appeals filed by Revenue for ay: 2013-14

and 2014-15 are covered by aforesaid CBDT circular and can be dismissed

owing to low tax effect. After hearing both the parties and perusing

material on record, we dismiss both these appeals filed by Revenue being

ITA No. 467 & 468/Chny/2018 for ay : 2013-14 and 2014-15 respectively

owing to low tax effect being covered by CBDT circular No. 17/2019 dated

08.08.2019. We order accordingly.

by Revenue for ay: 2013-14 and 2014-15 respectively are dismissed

owing to low tax effect. We order accordingly.

Nos.419/Chny/2018 filed by assessee & ITA No.465/Chny/2018 filed by

Revenue respectively.

Revenue in these two appeals are as under:

5.1 Assessee’s Appeal- Grounds in ITA No.419/Chny/2018 for ay:

2011-12:

“I. That the learned CIT(A) has erred in upholding the order of Deputy Commissioner of Income Tax, Large Tax Payer Unit-1, by upholding the disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 (“IT Act”) of Rs.26,61,071/- paid by the Appellant to M/s.BNP Paribas Investment Singapore Limited ('BNPP-IP').

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Without prejudice to the generality of the foregoing:

II. The Ld. CIT(A) has not passed a reasoned order and held that the said payment constitutes Fees for Technical Services (FTS) without pointing out as to (a) which element of which clause of Article 12(3) of the India Singapore Treaty applies to the facts of the case and (b) as to how does it so apply to the facts.

III. The Ld. CIT(A) has erred in imagining (a) that some was being provided by M/s. BNPP-IP, while factually no information was provided to the Appellant, (b) that this supposed information was in the nature of 'commercial information' which is secret and not available in open market and (c) that provision of such information constituted 'predominant nature' of the contract while the consideration paid by the Appellant to M/s.BNPP-IP was only a placement fee paid for distribution of units of Funds formulated by the Appellant which exclusively defines the nature of the contract.”

5.2 Revenues’ Appeal- Grounds in ITA No.465/Chny/2018 for

ay:2011-12:

“1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case.

2.1 The ld. CIT(A) has erred in deleting the disallowance made u/s 14A r.w. rule 8D ignoring the fact that the assessee had not incurred any expenditure for earning dividend income.

2.2 The ld. CIT(A) relied upon the decision of the ITAT in assessee's own case for A.Y.2008-09 in ITA.No.1774/Mds/2012 dated 19.07.2013. The above decision of the ITAT was not accepted by the department and appeal to the High Court has been filed with regard to the deletion of disallowance made u/s.14A of the Act.

3.1 The ld. CIT(A) has erred in deleting the disallowance of payment made to Fund Quest u/s.40(a)(ia) of the Act stating that the said payment was not in the nature of royalty falling within the ambit of provisions of section 9(1)(vi) of the Act.

3.2 The ld. CIT(A) relied on the decision of the ITAT in assessee's own for A.Y. 2008-09 in ITA.No.1774/Mds/2012 dated 19.07.2013. The above decision of the ITAT was not accepted by the department and appeal to the High Court has been filed against the deletion of disallowance of payment made to Fund Quest.

4.1 The ld. CIT(A) has erred in deleting the disallowance of expenses in the nature of repairs / improvements made to lease hold rented premises treating it as revenue in nature.

4.2 The ld. CIT(A) has failed to appreciate the judgement of The Hon'ble Supreme Court in Ballimal Naval Kishore and Anr. v CIT in 224 ITR 414 and the Hon'ble Calcutta High Court in the case of M/s.Humayun Properties Ltd 44 1TR 73, held that renovation to make halls more attractive and comfortable by way of replacement of furniture, sanitary fittings, electrical installation, etc., are only capital expenditure.

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Management Company for Mutual Funds. The assessee is aggrieved by

addition made by AO which were later confirmed by Ld.CIT(A) to the tune

of Rs.37,61,716/- representing an amount paid by assessee to M/s.BNP

Paribas Investment Singapore Ltd., Singapore The AO observed during

course of assessment proceedings conducted u/s 143(3) read with Section

143(2) of the 1961 Act that the assessee has made payment of

Rs.37,61,716/- for the purposes of investment management (Marketing

Fees) to a non-resident( M/s.BNP Paribas Investment Singapore Ltd.),

without deduction of income-tax at source u/s.195 of the 1961 Act. The

assessee claimed that these payments accrued outside India and the Non-

resident does not have any permanent establishment(PE) in India and

hence the amount is not taxable in India in the hands of M/s.BNP Paribas

Investment Singapore Ltd., Singapore . The AO after considering

contentions of the assessee was of the view that this amount was paid by

assessee as managerial fee. The AO was of the view that as per Section

9(1)(vii) of the 1961 Act , any payment made for the purposes of

rendering managerial services outside India shall be considered only as

payments made for fees for technical services. The AO referred to

Explanation 2 to Section 9(1)(vii) of the 1961 Act which , inter-alia,

stipulated that fees for technical services means any consideration for the

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rendering of any managerial, technical or consultancy services. The AO

observed that these are payments made for technical services and

keeping in view explanation to Sec.9(1)(vii) of the 1961 Act as introduced

by the Finance Act, 2010 with retrospective effect from 01.06.1976 which

stipulated that these payments shall be taxable only in India irrespective

of the place where the services are rendered . The aforesaid explanation

provided as under:

"[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]"

Thus, the AO brought the aforesaid payments made by assessee to

BNP Paribas Investment Singapore Limited, Singapore without deduction

of income tax at source to tax keeping in view provisions of Sec.40(a)(i)

of the 1961 Act read with Section 195 of the 1961 Act, vide assessment

order dated 24.03.2014 passed by the AO u/s 143(3) of the 1961 Act.

143(3) of the 1961 Act, the assessee filed first appeal before Ld.CIT(A)

who was pleased to uphold disallowance made by the AO by holding that

these are payments made by assessee to BNP Paribas Investment

Singapore Limited, Singapore towards fee for technical services as

contained in Sec.9(1)(vii) read in conjunction with explanations to that

Section and the said services are utilized in India for the business carried

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on by the assessee, the same were held by learned CIT(A) to be taxable in

India and since the assessee made payments to BNP Paribas Investment

Singapore Limited, Singapore without deduction of income-tax at source,

the said payments were also disallowed by learned CIT(A) keeping in view

provisions of Section 40(a)(i) of the 1961 Act read with Section 195 of the

1961 Act . The Ld.CIT(A) dismissed the appeal of the assessee on this

ground vide appellate order dated 30.11.2017 by holding as hereunder:

“6.3 I have considered the findings of the AO and the written submissions made by the AR. In short, the appellant contends that the services rendered by BNP Paribas are not in the nature of technical services since no technical knowledge, skill or knowhow was 'made available' to them. Relying on the case of Intertek Testing Services India Pvt. Ltd. In Re (307 ITR 418) (AAR), the appellant contends that managerial services essentially involve controlling, directing or administering a business which is not the case with BNP.

6.4 As per the Distribution Agreement between the appellant company and BNP Paribas Investment Partners Singapore Ltd. (BNPP IP Singapore), the appellant appointed BNPP IP, Singapore to distribute Units of the Fund, floated by the appellant-company apart from providing services related thereto as set out in the Agreement. The distribution of the Units, and Documentation activity undertaken by BNPP IP Singapore in this regard is as follows:

a. Appointment of Distributor: BNPP IP Singapore is hereby appointed as distributor of the Funds and accepts to distribute, on a non-exclusive basis, the classes and categories of shares or units (collectively, "Units"), as the case may be, of those sub-funds of the Fund listed in the Annexes hereto, provided always that such distribution shall be executed in accordance with all applicable laws and regulations, the terms of the Relevant Documents.

It is acknowledged that pursuant to this Agreement, BNPP IP Singapore's distribution of the Fund may be performed directly or indirectly by way of commercializing foreign domiciled collective investment schemes that invest as feeders into the Fund.

b. Issue of Units: Sundaram hereby agrees to procure, in accordance with the terms of the Prospectus and Trust Deed, or Articles as the case may be, the issuance of the Units to BNPP IP Singapore's clients to the extent that the distribution is effected in accordance with the terms of the Relevant Documents and hereof and subscriptions for Units are effected in accordance with the Relevant Documents.

BNPP IP Singapore may use all legally available means, including electronic media (e.g. Internet, website, email) in order to distribute the Units in accordance with this Agreement.

a. Statutory Reports: Sundaram shall provide or make available to BNPP IP Singapore the prospectus, any simplified Prospectus (as applicable), periodic financial reports, notices convening unit holders' meetings and any other material meant for unit holders, as soon as such documents become available. BNPP IP Singapore shall provide or

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make available such documentation to its clients in accordance with the requirements of local law and regulation.

b. Internal Information: Sundaram may make available to BNPP IP Singapore materials and information regarding the Fund, which are for use by distributors of the Fund only.

Any such materials or information, which are denoted as being for internal use only, shall be strictly for the internal use of BNPP IP Singapore and shall not be forwarded, copied or otherwise distributed in any form to clients of BNPP IP Singapore. BNPP IP Singapore undertakes to ensure that security measures are in place in order to protect such information and access thereto.

c. Marketing documentation: Sundaram may make available to BNPP IP Singapore standard marketing documentation ("marketing materials") of the fund, BNPP IP, Singapore shall ensure compliance with applicable laws, rules and regulations (including without limitation those restricting public offering of securities and funds) with respect to its distribution of any such documentation to its clients, and shall accept full and sole responsibility for any liability which may arise pursuant to a breach of this Clause. BNPP IP, Singapore may not alter, modify, waive or change in anyway whatsoever, the terms or conditions under which Sundaram offers Units for subscription, shall not alter, amend or quality the marketing materials in any way without the prior written consent of Sundaram and shall not market or distribute Units on the basis of any literature other than the latest editions of the marketing materials supplied by Sundaram.

6.5 The Agreement also consists of the following covenants:

e. No Agency: Nothing contained in this Agreement is intended to create a relationship of employee and employer, or agent and principal between BNPP IP Singapore and Sundaram and the Fund. BNPP IP Singapore shall be an independent contractor as to Sundaram and the Fund, and shall not be authorized in any way to bind or represent Sundaram or the Fund as an agent thereof.

f. Compliance: BNPP IP Singapore shall ensure that Units of the Fund are only marketed and sold in jurisdictions and to such of its clients in compliance with all applicable laws and regulations, including (but not limited to) regulations in any relevant jurisdiction relating to the marketing and selling of the Units by way of public offers and private placements, the terms of this Agreement and the Relevant Document, BNPP IP Singapore acknowledges the restrictions on sales in countries where the Fund is not authorized for public sale, such as the United States, and agrees to comply with such restrictions. BNPP IP Singapore shall not sell or offer to sell any Units in the United States, its territories or possessions, or remit any Fund related documentation to a "US Person", as such term is defined in Regulation S of the United States Securities Act of 1933, as amended, except in connection with transactions exempt from registration under the Securities Act of 1993. Any failure to comply with these restrictions may constitute a violation of the US Securities Laws. Moreover, in the event of subscriptions made by or on behalf of politically exposed persons, BNPP IP Singapore will ensure that due diligence on such clients (including but not limited to for the prevention of corruption) in line with applicable law and regulation has been duly effected. BNPP IP, Singapore has procedures in place to ensure compliance with the aforementioned.

6.6 As seen from the Distribution Agreement, BNP IP Singapore is appointed to distribute various classes and categories of Units to its clients and may use all legal means, including electronic media (for example, internet, website, email) in order to distribute the Units as per the Agreement. The appellant was also required to make available the materials and information strictly for the use of BNP IP Singapore apart from other documentation which could be made available to BNP IP Singapore. The appellant was also required to make available the marketing materials to BNP IP Singapore.

6.7 According to the Distribution Agreement, there is neither a relationship of an employer & employee nor that of an agent & principal between BNP IP Singapore and the appellant.

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BNP IP Singapore was bound to ensure that Units of the funds floated by the appellant are marketed and sold by way of public offers and private placements apart from its clients in their jurisdiction. Last but not least, BNP IP Singapore appoints sub-distributors, who will distribute the Units, as brokers, banks, insurance companies, etc.

6.8 Clause 3 & 4 of Article 12 of the India-Singapore Double Taxation Avoidance Agreement (DTAA) reads as under:

(a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information;

(b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or

(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or

(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.

6.9 From a perusal of Article 12(4)(a) of the India-Singapore Double Taxation Avoidance Agreement (DTAA), it is seen that 'fees for technical services' as used in that Article means any services of managerial, technical or consultancy in nature if such services are ancillary and subsidiary to the items for which payment as per Article 3 of the DTAA is made. Article 3 dealing with Royalties includes payments made as a consideration for the use of or right to use of any information concerning industrial, commercial or scientific experience.

6.10 In the present age of technology, it is an undisputed fact that services, information, consultancy, management, etc. can be provided with modes like video conference, internet, remote monitoring, e-mail, etc. It is also an undisputed fact that there has been a sharing of information between the appellant and the non-resident entity, BNP IP Singapore. The activities rendered by BNP IP Singapore were in the form of sharing or permitting the use of special knowledge, expertise and experience it has in commercializing foreign domiciled collective incentive schemes such as those floated by the appellant. The purpose of marketing of the Funds and affording market access to the appellant by the non-resident was to enable the appellant-company to commercially exploit the same. The activities undertaken and the information provided by the non-resident was totally commercial in nature and the dominant character of the Distribution Agreement was for Sharing secret and confidential information with no access whatsoever to outsiders. The nature of information provided was such that it included special features such as exclusive access to the clients of BNP IP Singapore, which were not available in the open market.

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6.11 Therefore, the moot question for consideration in the instant case is whether the activities undertaken by BNP IP Singapore involve 'commercial information or not' and if it was held to be so, then the impugned payment would be covered under sub-paragraph (a) of Article 12(4) of the DTAA. The word 'commercial information' has not been defined in the treaty and, therefore, it has to be interpreted as it is understood in general sense. In general, the term 'information' means the act or process of informing, communication or reception of knowledge and any information which has got a commercial value for the user can be termed as 'commercial information', For the purpose of determining the taxability of such transaction, the nature of transaction should be analyzed and considered in totality having regard to facts and circumstances of each case.

6.12 The suitability Clause of the Distribution Agreement make it abundantly clear what exactly are the services rendered by BNP IP Singapore to appellant. The Clause reads as under:

i. Suitability : BNPP IP Singapore confirms that it has put in place and implements client suitability policies and procedures in accordance with applicable law, regulation and market practice to ensure, among other things, that:

(i) BNPP IP Singapore's individual investment advisers are properly trained to know its clients and understand the investment product they recommend to such clients;

(ii) Any advice given by BNPP IP Singapore regarding investments in any sub-fund of the Fund is reasonably suitable for its clients, by matching the risk return profile of the sub- fund with relevant information on the client (such as education level, source of income or employment history, net-worth, financial market knowledge, investment experience, investment objectives and risk tolerance level);

(iii) All relevant material information is provided to BNPP IP Singapore's clients to help them make informed investment decisions;

(iv) Any representations made and information provided to BNPP IP Singapore's clients are accurate and not misleading.

6.13 It is seen from the above that BNP IP Singapore advisers are trained to analyze the investment product offered by the appellant. They are in a position to advise the non- resident clients on the risk-return profile of the schemes floated by the appellant-company so that they can make informed decisions. In the light of the above/ I find no merit in the argument of the appellant that the services rendered by them are not technical services at all. The information obtained from BNP IP Singapore was commercial information because it was required in raising funds — a core activity of the appellant — from the international markets. It indicates certain assurance on the part of BNP IP Singapore to the potential investors and thus facilitates the marketing/resource mobilization exercise of the appellant- company. It also enables the appellant to access international market through the services rendered by BNP IP Singapore.

6.14 Clause (vii) of Sec 9(1) of the Income Tax Act reads as under:

(vii) income by way of fees for technical services payable by—

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:

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Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.

Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date If the agreement is made in accordance with proposals approved by the Central Government before that date.

Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

6.15 In the case on hand, the recipients of the fees for technical services rendered services outside India. Nevertheless, the relevant Explanation below; Section 9(2) reads as follows:

Explanation.— for the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,---

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.

6.16 Therefore, as far as section 9(1)(vii)(b) is concerned, Fees for Technical Services shall be considered as the income of a non-resident irrespective of residence place of business or place of rendering of services. The exceptions carved out apply to a situation where Fees for Technical Services is payable for services utilised for business or profession carried out by a resident payer outside India or for the purpose of making or earning of income by a resident payer from a source outside India. However, the clause clearly mandates that services utilised in India are liable to taxation as fees for technical fees,

6.17 The legislative intent behind the above Explanation enacted by the Finance Act, 2010, with retrospective from 1.6.1976 has been explained as under:

Section 9 provides for situations where income is deemed to accrue or arise in India. 'Vide Finance Act, 1976, a source rule was provided in section 9 through, insertion of clauses (v), (vi) and (vii) in sub-section (1] for income by way of interest, royalty or fees for technical services, respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India. This was the settled position of law till 2007.

However, the Hon'ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007) [288 ITR 408] held that despite the deeming fiction in section 9, for any such income to be taxable in India, there, must be sufficient territorial nexus between such income and the territory of India It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India, Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of section 9 with retrospective effect from 1st June, 1976 vide Finance Act, 2007. The

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Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (2) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.

However, the Karnataka High Court, in a recent judgement, in the case of Jindal Thermal Power Company Ltd, vs DCTT [TDS] has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under section 9. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgement in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) remains untouched and unaffected by the Explanation.

In order to remove any doubt about the legislative intent of the aforesaid source rule, it is proposed to substitute the existing Explanation with a new Explanation to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not, (a) the non-resident has a residence or place of business or business connection in India; or (b) the non-resident has rendered services in India,

6.18 Therefore, the Explanation in its present form was enacted to reaffirm the idea that the situs of rendering service in India is not relevant as long as the services are utilized in India.

6.19 The concept of source rule has been eloquently explained by the Hon'ble Supreme Court of India in the case of GVK Industries Ltd v. Income Tax Officer (371 ITR 453)(SC) as follows:

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residence of the recipient. It is well settled that the source based taxation is accepted and applied in international taxation law.

6.20 Coming to the instant case, it is evident that fees for technical services have been paid to non-resident, and, it is also seen that the payment made would be covered under the expression "Fees for Technical Services" as contained in section 9(1)(vii)(b) read in conjunction with the Explanation there under. Since the fees for technical services paid by the appellant was in respect of services utilized in a business carried on in India, the fees payable is subject to tax as per the provisions of Sec.9(1)(vii)(b). Accordingly, I find that there is territorial nexus with India, as far as the services rendered by the non-residents to the business of the appellant is concerned.

6.21 The Hon'ble Supreme Court of India, in the case of Transmission Corporation of Andhra Pradesh Ltd. Vs CIT (SC)(239 ITR 587) declared that any person making payments to a non-resident would be liable to deduct tax when the payment so made is chargeable to tax under the Income Tax Act, 1961.

6.22 In view of the above, the disallowance made for non-deduction of tax on technical services u/s.40(a)(ia) by the Assessing Officer is sustained in respect of the assessment years under consideration. The appellant fails on this ground.”

CIT(A), the assessee has now filed an appeal before the tribunal . The

contentions are raised by learned counsel for the assessee that the

assessee has made payments to M/s.BNP Paribas Investment Singapore

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Ltd., Singapore as distribution fee for arranging subscription for the units .

Reference was drawn to the DTAA entered into between India and

Singapore. It was submitted that the said DTAA has a clause that

technical know how is be made available to be covered under the Fee for

Technical Services(FTS) and since in the instant case , technical know how

was not made available to the assessee and the same cannot be utilized

by the assessee after contracts are completed . It was submitted that the

units/investment products offered by assessee are simply distributed by

said BNP Paribas Investment Singapore Ltd., Singapore , no additions are

warranted in the hands of the assessee as the said income of BNP Paribas

Investment Singapore Limited, Singapore is not taxable in India and

hence there was no requirement on the part of the assessee to deduct

income-tax at source (TDS) while making aforesaid payment . Our

attention was drawn to para 6.8 of the appellate order passed by learned

CIT(A).

8.2. The Ld.CIT-DR on the other hand drew our attention to para No.6.5

of the Ld.CIT(A) appellate order. He drew our attention to clause (e) of

the distribution agreement. It was submitted that this clause was brought

to circumvent the law. It was submitted that BNP Paribas has rendered

managerial services to the assessee. It was submitted that these are

Technical Services rendered by BNP Paribas, Singapore to assessee. He

drew our attention to the AAR ruling in Reference in the case of M/s.

Intertek Testing Services India (P.) Ltd., reported in (2008)175 Taxmann

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375 (AAR) and submitted that these are investment information which

was given by M/s.BNP Paribas Investment Singapore Ltd., to the assessee

and income-tax has to be deducted at source by assessee before remitting

payment to BNP Paribas. He drew our attention to para 6.9 , 6.13 , 6.19

and 6.20 of the appellate order passed by Ld.CIT(A) and submitted that in

view of the decision in the case of M/s.Transmission Corporation of A.P Ltd

v. CIT reported in (1999) 239 ITR 587 (SC) when the payment are made

to non-resident, the assessee ought to have deducted income-tax at

source before remitting payment to BNP Paribas. The learned CIT-DR

submitted that while distributing investment products of the assessee,

BNP Paribas is rendering services as it has technical expertise in mobilizing

funds and hence these are technical services.

8.3. The learned counsel for the assessee submitted in rejoinder that

additions had been made under the head ‘Fee for Technical Services’ and

the payments were not in the nature of Royalty. It was submitted that

these services did not make available any technical knowledge or know-

how to the assessee and as per Singapore DTAA , it is required that the

technical know-how should be made available which could be applied to

come within the ambit of deduction of income-tax at source. It was

submitted that arrangement between assessee and BNP Paribas is on

principal to principal basis. Attention was drawn to India-Singapore DTAA.

It was submitted even if there is an principal to agency relations between

assessee and BNP Paribas, it would not made any difference as even then,

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 16 -:

the assessee was not liable to deduct income-tax at source before

remitting payment to BNP Paribas.

record including cited case laws. We have observed that assessee is

an Asset Management Company for Mutual Funds. The assessee

made payments through remittance sent abroad in foreign currency

to M/s BNP Paribas Investment Singapore Limited, Singapore to the

tune of ` 37,61,716/- for the purposes of investment management

(Marketing Fees) to a non resident without deducting income-tax at

source u/s 195 of the 1961 Act. The said fee was paid for

distribution of assessee’s units of Mutual Funds or shares abroad by

said BNP Paribas, Singapore. The said BNP Paribas Investment

Singapore Limited, Singapore admittedly did not had any PE in India

or fixed place of business during the year under consideration. It is

also admitted position that said BNP Paribas, Singapore rendered

aforesaid services from abroad. The assessee has admittedly sent

payments abroad by remittances in foreign currency and no part of

the payments are made by assessee in India or to any person in

India on behalf of BNP Paribas, Singapore. We have observed that

as per DTAA entered into between India and Singapore, the fees for

technical services can be brought to tax in India under Article 12 ,

clause 4 of India-Singapore DTAA , if technical know how is made

available which enables person acquiring the said technical know

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 17 -:

how or technical knowledge to apply the technology contained

therein , while we have observed that in the instant case BNP

Paribas , Singapore did not made available any technical knowledge

, know how , experience, skill or processes to the assessee which

could enable the assessee to apply technology contained therein

rather the fee is paid towards services rendered by BNP Paribas,

Singapore for distribution of funds being units or shares on behalf

of the assessee. The aforesaid payments made by the assessee in

our considered view did not fall within the ambit of Article 3 and 4 of

Indo-Singapore DTAA and thus cannot be categorized as Royalty

payments or fees for technical services. These are payments made

for managerial services rendered by BNP Paribas, Singapore to

assessee for distribution of units of Mutual Fund and no technical

know how or knowledge is made available to the assessee by the

said BNP Paribas, Singapore which could enable assessee to apply

the said technical know how contained therein. Moreover, the

services were rendered abroad by payee and payments were also

made by assessee by remitting payment abroad in foreign currency.

Keeping in view aforesaid provisions/clauses as are contained in

India-Singapore DTAA, these payments cannot be held to be taxable

in India and consequently assessee was not required to deduct

income-tax at source u/s 195 of the 1961 Act while remitting

payment abroad to said BNP Paribas, Singapore. It is well

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 18 -:

established principle in tax-matters that taxing statute provisions

under domestic law or treaty provisions whichever are beneficial to

the assessee shall be applicable. The treaty provision in the instant

case contains make available clause, while BNP Paribas did not

made available any technical know how or knowledge to the

assessee which could enable assessee to apply technical knowledge

contained therein. The decision of Hon’ble Karnataka High Court in

the case of CIT v. De Beers India Minerals Private Limited reported

in (2012) 21 taxmann.com 214(Kar.) is relevant. Thus, under these

circumstances, we order deletion of the additions made by the AO

which stood later confirmed by learned CIT(A) to the tune of

payment of ` 37,61,716/- made by the assessee through remittance

abroad in foreign currency to BNP Paribas, Singapore. Under these

circumstances, we are inclined to delete aforesaid additions to the

tune of ` 37,61,716/- made by the AO by invoking provisions of

Section 40(a)(i) of the 1961 Act read with Section 195 of the 1961

Act which stood later confirmed by learned CIT(A). In our considered

view, if the said payments are not taxable in India in the hands of

the Non-resident recipient , then provisions of Section 195 shall

have no applicability. It is relevant to refer to the decision’s of

Hon’ble Madras High Court in the case of Evolv Clothing Company

Private Limited v. ACIT reported in (2018) 407 ITR 72(Mad.) and in

the case of CIT v. Farida Leather Company in Tax Case Appeal No.

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 19 -:

484 of 2015 . It is also relevant to refer to the decision’s of Hon’ble

Gujarat High Court in the case of PCIT v. Ferromatic Milacron India

Private Limited (2018) 99 taxmann.com 154(Guj.) and in the case of

PCIT v. Nova Technoplast Private Limited (2018) 94 taxmann.com

322( Guj.). The assessee succeeds on this ground in its appeal filed

with tribunal . We order accordingly.

9 In Revenue’s appeal, it is aggrieved by deletion made by learned CIT(A)

of additions/disallowances earlier made by AO by invoking provisions of

Section14A of the 1961 Act read with Rule 8D of the Income-tax Rules,

1962. The assessee had earned dividend income from mutual funds to

the tune of Rs.92,63,481/- which was claimed as an exempt income

u/s.10 of the Act. The assessee did not made any disallowance of

expenses incurred in relation to earning of the above dividend income

which was claimed as an exempt income. The assessee submitted that no

expenditure was incurred in relation to earning of dividend income which

was claimed as an exempt income and hence no disallowance of

expenditure are warranted u/s 14A of the 1961 Act. The AO held that

assessee has invested substantial amounts in the Mutual Funds which

were held as Long Term Investments, the total value of which as on

31.03.2010 was Rs.13.75 crores which increased during the year to

Rs.14.81 crores as on 31.03.2011. The AO observed that assessee was

engaged in substantial purchase and sale of current investments viz.

Mutual Funds. The AO observed that total investments as on 31.03.2010

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 20 -: was ` 25.58 crores which stood at Rs.21.31 crores as on 31.03.2011. The

AO observed that assessee is actively engaged in the field of investment in

shares and Mutual Funds . The AO observed that total assets of the

assessee as on 31.03.2011 was Rs.65.02 Crs. The assessee has also

contended before AO that out of total investments of ` 21.30 crores held

by assessee as on 31.03.2011, no dividend was received on investments

to the tune of ` 17.50 crores and hence such investments should not be

considered for computing disallowance u/s 14A read with Rule 8D of the

1962 Rules. The AO rejected the contentions of the assessee that no

expenses were incurred by the assessee for earning of an exempt income.

The AO observed that part of administrative overhead and expenses on

salary , travel etc. for top management executives who are involved in

investment portfolio are to be disallowed. The AO also observed that all

investments , income from which does not or shall not form part of the

total income shall be considered for disallowance u/s. 14A of the 1961 Act

read with Rule 8D of the 1962 Rules. The AO also referred to CBDT

circular no. 5 / 2014 dated 11.02.2014. The AO applied Rule 8D of the

Income-tax Rules, 1962 and made disallowance u/s.14A r.w.r.8D(2)(iii) of

the 1962 Rules wherein the amount of Rs.11,72,157/- was disallowed

under normal computation of income and similar disallowance was also

made while computing book profits u/s.115JB , as per clause (f) to Section

115JB of the 1961 Act.

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 21 -:

Act, the assessee filed first appeal before learned CIT(A) who was pleased

to delete disallowance of expenses made u/s.14A read with Rule 8D of the

1962 Rules for computing book profits u/s 115JB of the 1961 Act by

following Special Bench decision of Delhi-tribunal in the case of M/s. Vireet

Investment Pvt. Ltd. 165 ITD 27(Del-trib. SB). So far as additions made

u/s 14A of the 1961 Act read with Rule 8D of the 1962 Rules for

computing income are concerned, the Ld.CIT(A) deleted the additions vide

appellate order dated 30.11.2017 by holding as under:

“4.3 I have considered the findings of the AO and the written submissions made by the AR. The very same issue was considered vide order in ITA No. 39/2014-15 /LTU(A)-17 dated 02.11.2017 for the A.Y. 2008-09. Hence, the AO is directed to follow the directions given by the Hon'ble ITAT and re-compute the disallowance made u/s.14A after due verification and in accordance with law in respect of the assessment years under consideration, It goes without saying that an opportunity of being heard should be given to the appellant before any such disallowance is made. This ground of appeal is allowed for statistical purposes”. 11. Aggrieved by an appellate order dated 30.11.2017 passed by learned

CIT(A), the Revenue is in appeal before the Tribunal . The Ld.CIT-DR fairly

submitted that tribunal has passed an order in ITA No.1774/Mds/2012

dated 19.07.2013 for ay: 2008-09. However, now law has progressed

and keeping in view decision in the case of M/s.Maxopp Investment Ltd v.

CIT (supra), the purposes for which shares/units in Mutual Funds are held

are irrelevant and disallowance of expenditure incurred in relation to

earning of an exempt income is to be made keeping in view provisions of

Section 14A of the 1961 Act.

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 22 -:

short term capital gains are subject to Income-tax and hence all such

investment in which short term capital gains arose should be excluded

while computing disallowance of expenses u/s 14A of the 1961 Act. The

assessee was confronted by the Bench with decision of Hon’ble Supreme

Court in the case of M/s. Maxopp Investment Ltd v. CIT (2018) 402 ITR

640(SC).

on record including cited case laws We have observed that assessee is an

asset management company for mutual fund. The assessee has

investments in mutual fund and other investments, the assessee has

received dividend income from mutual fund to the tune of Rs.92,63,481/-

which was clamed as an exempt income u/s.10 of the 1961 Act. The

assessee has claimed that he has not incurred any expenditure in relation

to earning of an exempt income. However, AO has invoked provisions of

Sec.14A r.w.r. 8D(2)(iii) of the 1962 Rules to make total disallowance of

Rs.11,72,157/- @ 0.5% of the average investments. The investment

made by assessee as on 31.03.2010 was Rs.25.58 Crs. whereas it was

Rs.21.30 Crs. as on 31.03.2011. The assessee has claimed that short

term investments cannot be considered for the purpose of making

disallowance u/s.14A of the 1961 Act owing to fact that short term capital

gains earned on these investments had suffered taxation. We are not in

agreement with assessee so far as this contention is concerned and reject

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 23 -:

this contention of the assessee keeping in view decision of Hon’ble

Supreme Court in the case of Maxopp Investment Limited(supra) wherein

it was held that dominant purpose of making investment has no relevance

while computing disallowance of expenditure incurred in relation to

earning of an exempt income. However, the assessee also claimed that

only those investment which actually yielded dividend income which was

claimed as an exempt income should be considered for the purpose of

making disallowance of expenditure u/s 14A of the 1961 Act. We are in

agreement with this contentions of the assessee keeping in view decision

of Special Bench of Delhi Tribunal in the case of M/s. Vireet Investment

Pvt. Ltd.(supra) that only those investments which actually yielded

exempt income during the year under consideration should be considered

for making disallowance u/s 14A of the 1961 Act, and hence we are

restoring this issue to file of the AO with direction to compute disallowance

u/s.14A r.w.r.8D(2)(iii) by taking into account only those investments

which actually yielded dividend income during the year under

consideration, keeping in view ratio of decision of Special Bench of Delhi

tribunal in the case of Vireet Investment(supra). Thus, with these

observations, we set aside this matter back to the file of the AO for re-

determination of disallowance of expenditure incurred in relation to

earning of an exempt income u/s.14A of the 1961 Act. This ground in

Revenue’s appeal is allowed for statistical purposes. We order accordingly.

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 24 -:

learned CIT(A) by deleting the disallowance of payments of ` 15,51,269/-

towards sub-advisory fee made to Fund Quest u/s.40(a)(i) of the Act. It

was observed by the AO that assessee had made payment in foreign

currency to M/s.Fund Quest towards of sub-advisory fees . The assessee

submitted before AO that services were rendered outside India hence

same will not fall under the purview of Section 195 of the 1961 Act as per

CBDT circular number 786. The assessee also relied upon Indo- French

DTAA and submitted before AO that since no technical knowledge was

made available to the assessee and hence aforesaid income is not

chargeable to income-tax in India which is a pre-requisite for taxing ‘the

fee for the technical services’ and hence no income-tax was deducted at

source while making remittance in foreign currency to above party.

14.2 The AO observed that said M/s.Fund Quest has rendered following

services vide Article III of the agreement entered into by assessee with

said Fund Quest:

"The Investment Advisor shall give advice, extend assistance, render services and furnish information, data and reports in respect of the Account to the Manager or to such other entity as the Manager may direct, in the manner, form and when required by them in connection with the investment activities of the Manager in respect of the Account.

The activities of the Investment Advisor as referred to in the foregoing Section may, without limitation, include:

a. providing research reports, macro and micro economic analysis and other financial advisory services;

b. recognise sources for value creation;

c. advising on investigation, structuring, monitoring of Portfolio Securities as the case may be;

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 25 -:

d. assist in formulation and evaluation of strategies for investment and disinvestment including providing analysis and investigations of potential dispositions of Portfolio Securities,

e. undertake due diligence of investment opportunities and submit reports and recommendations;

f. advising on the timing, consideration, terms, mode and manner of investments and/or divestments;

g. furnishing other commercial/proprietary information to the Manager with regard to the investment and / or divestment opportunities;

h. any other advisory services as may be desired by the Manager relating to the management of the Account and as agreed between the Parties from time to time."

ii) It can be very clearly seen from the above facts that the assessee availed the above mentioned advisory services from M/s.Fund Quest, which has been in turn utilized by the assessee for its investments purpose in abroad in order to get the maximum return from the investment with less market risk. It is further notable that the M/s.Fund Quest did elaborate market research on the investments portfolio and it developed the data for investing in the market with less risk and to get maximum return from the same. Thus, the data base developed by M/s.Fund Quest is clearly a value added product prepared on the basis of enormous experience of the above non-resident in the field of the investment portfolio. Therefore, fees paid by the assessee company to M/s.Fund Quest for providing the above commercial information shall be considered as royalty both as per the provisions of section 9(1)(vi) of the Income-tax Act and also as per the Articles of Indo French DTAA. For better clarity, the relevant part of the DTAA is reproduced as under:

"ARTICLE 13 - Royalties and fees for technical services and payments for the use of equipment - 1. Royalties, fees for technical services and payments for the use of equipment arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

[2. However, such royalties, fees and payments may also be taxed in the Contracting State, in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 10 per cent of the gross amount of such royalties, fees and payments.]

14.3 The AO relied upon the decision of Mumbai-tribunal in the case of

M/s Essar Oil Limited v. JCIT (2005) 4 SOT 161.The AO observed that

data base developed by M/s.Fund Quest has been furnished to the

assessee located in India and the same has been utilized by assessee to

get maximum profits on investments made abroad. Thus, the AO was of

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 26 -:

the view that the data base developed by M/s Fund Quest was made

available by it to assessee . The AO referred to Article III of the

agreement which stipulated as under:

“ 3.4 The Investment Advisor will make available to the Manager the use of its name and its logo in any documentation previously approved by the Investment Advisor which the Manager produces in respect of the advice contemplated herein.” 14.4 Thus , the AO held that the assessee made payments for receipt of technical knowledge. The AO observed that the data base developed by Fund Quest was given to the assessee who is located in India and these were not services rendered by Non Resident outside India nor as outright purchase of the above data base , since the data base received cannot be shared with any body nor sold to the third person by the assessee as per Article VII of the agreement entered by the assessee with M/s Fund Quest. The AO observed that CBDT circular no. 786/2000 relied upon by the assessee is not applicable in the instant case. The AO relied upon decision of Hon’ble AAR Ruling in the case of Steffen Robertson and Kirsten Consulting Engineers and Scientists v. CIT (1998) 230 ITR 206 wherein it was held that what is crucial for bringing to tax said fee for technical know how is place where the said services are utilized and not the place where the services were rendered.The learned AO was also of the view that explanation to Section 9(1)(vii) inserted by Finance Act, 2010 with retrospective effect from 01.06.1976 clearly states that the above payments for the purposes of Royalty or Fees for Technical Services shall be taxable in India irrespective of PE of the Non Resident and irrespective of the place in which the services was rendered, which read as under:

"[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 27 -:

(ii) the non-resident has rendered services in India.]"

14.5 Thus, the AO disallowed the aforesaid payment made by assessee vide foreign remittance of ` 15,51,269/- to Fund Quest , France without deducting of Income-tax at source which stood added by the AO to the income of the assessee as per provisions of Section 40(a)(i) read with section 195 of the 1961 Act,vide assessment order dated 24.03.2014 passed by the AO u/s 143(3) of the 1961 Act

15 The assessee being aggrieved by an assessment framed by the AO filed

first appeal before the Ld.CIT(A), who was pleased to allow appeal of the

assessee by following decision of the tribunal in assessee’s own case in

ITA No.1774/Mds/2012 dated 19.07.2013 for ay: 2008-09, wherein it was

held by the Ld.CIT(A) as under:

“…….5.1 The AO found that the appellant made payments towards sub-advisory fees to Fund Quest, France, for services rendered abroad. The appellant submitted that Fund Quest compiles the research data which is publicly available and transmits the information in the form of investment reports to the appellant. However, the AO held that the payments are in the nature of 'royalty' which is deemed to accrue or arise in India as defined in Explanation (2) of Sec.9(1)(vi) and as such liable to tax in India. Hence, the AO disallowed the payments made to Fund Quest u/s.40(a)(ia) of the Act on the ground of non-deduction of tax at source u/s.195 of the Act.

5.2 The appellant submitted that this issue was decided in favour of the appellant in its own case by the Hon'ble ITAT vide order in ITA No. l774/Mds/2012 dated 19.07.2013 for the A.Y. 2008-09 which is as follows:

Extracted from ITAT’s order dated 19.07.2013

“iii. The third ground in the appeal relates to dis-allowance u/s. 40(a)(ia). The assessee is into investment business. The assessee has entered into an agreement with M/s. Fund Quest (France) on 13-07-2007, to provide investment advice for the investments to be carried outside India. M/s. Fund Quest has been providing advisory services. For the services rendered, the assessee paid fee in accordance with mutual agreement. In the course of providing advisory services, M/s. Fund Quest is providing certain data of the companies which facilitates the assessee to make investment decisions. The information provided to the assessee by Fund Quest in the form of database is published information which is available in public domain. M/s. Fund Quest has merely compiled the information and transmitted the same to assessee. The authorities below termed the payments made by the assessee to M/s. Fund Quest for the services and data provided as ‘Royalty’.

We are of the considered opinion that such payments cannot be termed as ‘Royalty’ as defined under the provisions of the Act. The term ‘Royalty’ has been defined in

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 28 -:

Explanation (2) to Section-9, Sub-section-1, Clause-(vi) which is re-produced here in below:

Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and](v).

Thus, a perusal of the term of ‘Royalty’ as defined in the Act shows that it does not include any information provided in the course of advisory services. We do not agree with the findings of the CIT(Appeals) on the issue. Since, payments made to M/s. Fund Quest are not in the nature of ‘Royalty’ and the services were rendered abroad, no part of income had accrued or arisen in India. The assessee is not liable to deduct tax at source on the payments so made. The findings of the CIT(Appeals) on this issue are set aside and this ground of appeal of the assessee is allowed.

5.3 I have considered the findings of the AO and the written submissions made by the AR. Respectfully following the above decision of the Hon'ble ITAT, the AO is directed to delete the disallowance made u/s.40(a)(ia) of the payment made to Fund Quest. The appellant succeeds on this ground for the assessment years under consideration.”

before the Tribunal. The Ld.CIT-DR relied on the assessment order

passed by the AO and submitted that the said order passed by tribunal in

ITA No. 1774/Mds/2012 dated 19.07.2013 for ay: 2008-09 is not accepted

by Revenue and appeal has been filed with Hon’ble Madras High Court.

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 29 -:

Our attention was drawn to page 13-15 of the PB wherein the order of the

tribunal in ITA No. 1774/Mds/2012 is placed. The ld.Counsel for the

assessee, on the other hand, submitted before the tribunal that the issue

is squarely covered by decision of the tribunal.

record included cited case laws. We have observed that the assessee has

remitted abroad an amount of ` 15,51,269/- in foreign currency to M/s

Fund Quest, France towards sub-advisory fees without deducting income-

tax at source u/s 195 of the 1961 Act which led AO to make additions in

the hands of the assessee by invoking provisions of Section 40(a)(i) of the

1961 Act by holding that the said payments were made towards Royalty .

The learned CIT(A) was pleased to delete the additions by following ITAT,

Chennai Benches, decision in assessee’s own case for ay: 2008-09 in ITA

No. 1774/Mds/2012 dated 19.07.2013. The learned CIT-DR has brought to

the notice of the Bench that an appeal against aforesaid appellate order

passed by ITAT was filed by Revenue before Hon’ble Madras High Court

u/s 260-A of the 1961 Act which is pending for disposal before Hon’ble

Madras High Court. The learned counsel did not controvert the present

status of appeal filed by Revenue with Hon’ble Madras High Court which is

stated to be pending for disposal. The Chennai Tribunal in aforesaid order

in assessee’s own case for ay: 2008-09, held as under:

“iii. The third ground in the appeal relates to dis-allowance u/s. 40(a)(ia). The assessee is into investment business. The assessee has entered into an agreement with M/s. Fund Quest (France) on 13-07-2007, to provide investment advice for the

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 30 -:

investments to be carried outside India. M/s. Fund Quest has been providing advisory services. For the services rendered, the assessee paid fee in accordance with mutual agreement. In the course of providing advisory services, M/s. Fund Quest is providing certain data of the companies which facilitates the assessee to make investment decisions. The information provided to the assessee by Fund Quest in the form of database is published information which is available in public domain. M/s. Fund Quest has merely compiled the information and transmitted the same to assessee. The authorities below termed the payments made by the assessee to M/s. Fund Quest for the services and data provided as ‘Royalty’.

We are of the considered opinion that such payments cannot be termed as ‘Royalty’ as defined under the provisions of the Act. The term ‘Royalty’ has been defined in Explanation (2) to Section-9, Sub-section-1, Clause-(vi) which is re-produced here in below:

Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and](v).

Thus, a perusal of the term of ‘Royalty’ as defined in the Act shows that it does not include any information provided in the course of advisory services. We do not agree with the findings of the CIT(Appeals) on the issue. Since, payments made to M/s. Fund Quest are not in the nature of ‘Royalty’ and the services were rendered abroad, no part of income had accrued or arisen in India. The assessee is not liable to deduct tax at source on the payments so made. The findings of the CIT(Appeals) on this issue are set aside and this ground of appeal of the assessee is allowed.”

As is reproduced above tribunal order in assessee’s own case for ay:

2008-09, we have observed that issues concerning payments made by

assessee by remitting abroad in foreign currency to the same party Fund

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 31 -:

Quest, France was decided by Chennai- tribunal in assessee’s own case for

ay: 2008-09 in ITA No. 1774/Mds/2012 by holding in favour of the

assessee as reproduced above and Respectfully following aforesaid

decision of the ITAT, Chennai Benches, we dismiss this ground raised by

Revenue . While dismissing this ground raised by Revenue, we are guided

by principles of judicial discipline and principles of consistency in taxing-

statute as laid down by Hon’ble Supreme Court in the case of Radha

Soami Satsang v. Satsang (1992) 193 ITR 321(SC). We order

accordingly.

learned CIT(A) IN deleting the disallowance of expenses made by the AO

w.r.t. to expenses incurred by assessee in the nature of repairs and

improvement made to leasehold building not owned by assessee which

was used for office premises , to the tune of ` 43,63,256/- which were

claimed by assessee as revenue expenditure in the return of income filed

with Revenue. The AO had observed that these expenses were on account

of improvement of rented building used as office premises. The assessee

claimed that these expenses were incurred in the lease hold premises

which are neither in the nature of current repairs nor in the nature of

capital expenditure . The assessee claimed that these expenses are

allowable as revenue expenses u/s 37 of the 1961 Act and cannot be

capitalized .

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 32 -:

exclusively towards interior decoration, extension and renovation of the

office premises leading to improvements in rented buildings and treated

the same as capital in nature. The AO referred to amended provisions of

Section 32 and 30 of the 1961 Act, wherein expenditure incurred on lease

hold premises not owned by tax-payer towards construction of structure

or doing of any work in or in relation to renovation or improvement is

considered to be capital expenditure and depreciation will be allowed

accordingly. The AO observed that this amendment was effective from ay:

1988-89 and thus decision of Hon’ble Supreme Court in the case of CIT v.

Madras Auto Services Private Limited 233 ITR 468 relied upon by assessee

shall not be relevant as the same deals with pre-amended law. The AO

observed that above expenditure incurred by the assessee is not for

purposes of current repairs but to get a new advantage by way of interior

decoration, extension and renovation of office premises. Thus, as per AO

the above expenditure is capital in nature as it will lead to benefit of

enduring nature to the assessee . The AO relied upon decision of Hon’ble

Delhi High Court in the case of Bigjos India Limited v. CIT reported in 293

ITR 170(Del.). Thus, the AO held that these expenses incurred for interior

decoration , extension and renovation of the office premises provides

assessee with enduring benefit and hence these expenses cannot be

allowed as Revenue expense which are to be capitalized and depreciation

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 33 -:

u/s 32 of the 1961 Act is to be allowed , vide assessment order dated

24.03.2014 passed by the AO u/s 143(3) of the 1961 Act.

1961 Act, the assessee filed first appeal with ld.CIT(A) who was pleased

to allow the appeal of the assessee vide appellate order dated 30.11.2017

by following the decision of the tribunal in the assessee’s own case in ITA

No.1774/Mds/2012 dated 19.07.2013 for ay: 2008-09, wherein it was

held by learned CIT(A) as under:

“7.3 The appellant submitted that this issue was decided in favour of the appellant in its own case by the Hon'ble ITAT vide order in ITA No.1774/Mds/2012 dated 19.07.2013 for the A.Y. 2008-09 which is as follows:

Extracted from ITAT’s order dated 19.07.2013

iv. The fourth ground of appeal of the assessee relates to repairs of lease-hold premises. The assessee has placed on record at Page No. 42 of the Paper Book, the nature of work carried out by the assessee in the leased office premises. The assessee has claimed the expenditure on civil work which includes demolition, painting, flooring and partition etc., amounting to Rs.2,06,61,216/- as revenue expenditure. The authorities below have held the same to be capital expenditure. The assessee has taken office building on lease for the period of three years with an option to extend with the consent of both parties. An Explanation 1 to Section 32(1) clearly spells out that where the business or proFESSION of the assessee is carried on in a building not owned by him, in respect of which the assessee holds a lease or other rights of occupancy, any capital expenditure is incurred by the assessee for the purpose of the business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement to the building, then the provisions of this clause shall apply as if the said structure or work is building owned by the assessee. However, the aforesaid provisions are applicable where new asset has come into existence. The assessee in support of his contentions has relied on the order of the co-ordinate bench of the Tribunal in the case of M/s. Sundaram BNP Paribas Asset Management Company Ltd., Vs. ACIT (supra), the Tribunal in the aforesaid order has held as under:

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 34 -:

grant the assessee the claim of revenue expenditure in regard to the said expenditure. Consequently, the depreciation as allowed by the Assessing Officer on the said expenditure which has been capitalized would stand reversed.

Whether the expenditure incurred on renovation of a building is capital or revenue, is a question of fact. The same has to be decided on the facts of each case. We find that the facts of the case of the assessee are similar to the one adjudicated by the Tribunal mentioned above. The civil work relates to the interior decoration and creation of the office atmosphere. Respectfully following the decision of the co- ordinate bench of the Tribunal, this ground of appeal of the assessee is allowed and the expenditure incurred by the assessee in modifying the interiors of a building into office are held to be revenue in nature.

7.4 I have considered the findings of the AO and the written submissions made by the AR. Respectfully following the above decision of the Hon'ble ITAT, the AO is directed to treat the expenditure as revenue in nature since the facts related to this issue remain the same. The appellant succeeds on this ground.”

an appeal with the tribunal. The Ld.CIT-DR submitted that the issue is

decided by the tribunal in assessee’s own case for ay:2008-09 in

assessee’s favour and the Revenue is in appeal before Hon’ble Madras

High Court. This position was not controverted by learned counsel for the

assessee. The ld. counsel for the assessee submitted that the amount

spent towards painting ,interior decoration, etc., is towards current repairs

and is revenue in nature. The learned counsel for the assessee prayed that

relief be granted to the assessee.

record including cited case laws. We have observed that assessee has

incurred expenditure on repairs and renovation of office premises which

was taken on lease by the assessee and was not owned by assessee. The

AO has come to conclusion that these are expenses incurred for interior

decoration, extension and renovation of the office premises leading to

enduring benefit to the assessee , while the assessee is claiming it to be

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 35 -:

revenue in nature . These are factual issues depending upon nature of

expenses incurred and whether these expense had brought benefit of

enduring nature to the assessee. Each year is a separate unit and the

facts may vary from year to year. The learned CIT(A) followed the

decision of tribunal for earlier year viz. ay: 2008-09. We have observed

that detailed investigation of each of these expenses were not done by

authorities below to arrive at decision whether benefit of enduring nature

was derived by assessee by incurring these expenses .We are inclined to

restore this issue back to file of the AO to look into nature of each of these

expenses and then to arrive at decision whether these expenses are to be

capitalized or to be held to be revenue in nature, after considering the

amended provisions of Section 30 and 32 of the 1961 Act. The decision of

Hon’ble Madras High Court in the case of CIT v. ETA Travel Agency Private

Limited reported in (2019) 109 taxmann.com 66(Madras) , CIT v.

Viswams reported in (2019) 105 taxmann.com 289(Madras) and decision

of Hon’ble Bombay High Court in the case of RPG Enterprises Limited v.

DCIT reported in (2016) 386 ITR 401(Bom.) are relevant. The assessee is

directed to provide details of each of these expenses incurred by it to

enable authorities to arrive at decisions whether the expenses were

incurred on capital field or were revenue in nature. Needless to say that

the AO shall provide with proper and effective opportunity of heard to the

assessee in accordance with principles of natural justice in accordance

with law in the denovo set aside assessment proceedings.This ground of

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 36 -:

appeal filed by Revenue is allowed for statistical purposes. We order

accordingly.

payment made towards commission and brokerage to mutual fund

distributors without deduction of income-tax at source u/s 194J of the

1961 Act . It is claimed that this issue is covered by decision of tribunal in

favour of the assessee in assessee’s own case in ITA No. 1774/Mds/2012

for ay: 2008-09 , vide appellate order dated 19.07.2013, wherein

Ld.CIT(A) vide appellate order dated 30.11.2017 has held as under:

“Issue No.5: Disallowance u/s.194J of Commission & Brokerage paid : 2011-12 & 2012-13;

8.1 The appellant had made commission payments to mutual fund distributors for promotion and marketing of the mutual fund schemes of Sundaram Mutual Fund and as it is payments made in respect of securities which has been specifically excluded from the purview of Sec.194H of the Act. However, the AO had disallowed the same as being in the nature of fees for "professional or technical services' u/s.194J of the Act and made disallowance u/s.40(a)(ia) of the Act,

8.2 The appellant submitted that this issue was decided in favour of the appellant in its own case by the Hon'ble ITAT vide order in ITA No.1774/Mds/2012 dated 19.07.2013 for the A.Y. 2008-09 which is as follows:

Extracted from iTATs order dated 19.07.2013:

vii. The seventh ground of appeal relates to payments made to mutual fund distributors amounting to Rs.16,41,14,706/- disallowed u/s.40(a)(ia). The assessee had not deducted tax at source on the payment of the brokerage/commission paid to the mutual fund distributors on the ground that commission and brokerage does not include any payment made directly or indirectly on securities.

The Revenue has termed the payments made to the brokers as Fees for Professional & Technical Services and held that the assessee was liable to deduct tax under the provisions of Section 194J.

The provisions regarding deduction of tax at source on commission and brokerage are contained in Section 194H of the Act. The relevant extract of the section is reproduced herein below:

194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income 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 rate of [ten] per cent:

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 37 -:

The terms commission and brokerage and securities are defined in Explanation to Section 194H. the same are extracted herein under:

Explanation –

i) “commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities”;

ii) xxxxxxxxxxxxxxxxxxxx

(iii) the expression "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) ;

(iv) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]

Section 2(h) of the Securities Contracts (Regulation) Act, 1956 defines securities as :

“2(h) “securities” include—

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ie) xxxxxx”

From the perusal of aforesaid provisions of Section 194H and the definition of ‘Securities’ as defined under Securities Contract Regulation Act, it is clearly evident that securities include Mutual Funds and the provisions of Section 194H excludes commission or brokerage paid on securities.

The authorities below have held that the assessee should have deducted tax on commission/brokerage u/s. 194J of the Act as the services rendered by the brokers are professional and/or technical services. ‘Professional Services’ are defined in Explanation(a) to Section 194J as under:

Explanation.—

(a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

A perusal of the above definition makes it abundantly clear that services rendered by Mutual Fund brokers do not fall within the term ‘Professional Services’. The services of

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 38 -:

Mutual Fund brokers cannot be termed as technical services as well, as the brokers do not require any special qualification in the field of law, engineering, accountancy or technical consultancy. Even an ordinary graduate from humanities group can be a broker. The brokers do not provide any technical know-how either, thus services rendered by them cannot be termed as technical services.

We do not concur with the findings of CIT(Appeals) on the issue for the aforesaid reasons. Accordingly, this ground of appeal of the assessee is allowed.

8.3 I have considered the findings of the AO and the written submissions made by the AR. Respectfully following the above decision of the Hon'ble ITAT, the AO is directed to delete the addition made u/s 40(a)(ia) on account of payments made to mutual fund distributors for the assessment years under consideration, The appellant succeeds on this ground for the A.Ys. 2011-12~& 2012-13.” Both the rival parties have agreed before the Bench that this issue

is squarely covered by decision of the tribunal in assessee’s own case in

ITA No.1774/Mds/2012 dated 19.07.2013 for ay: 2008-09. However, it

was submitted by Ld.CIT-DR that Revenue has not accepted the aforesaid

decision of the tribunal and appeal is filed by Revenue before Hon’ble

Madras High Court. This position could not be controverted by learned

counsel for the assessee. Thus, after considering the entire material on

record, we decide this issue in favour of the assessee by following the

decision of the tribunal in assessee’s own case in ITA No.1774/Mds/2012

dated 19.07.2013 for ay: 2008-09 by confirming the appellate order

passed by learned CIT(A) and dismiss this ground raised by Revenue .

While dismissing this ground raised by Revenue, we are guided by

principles of judicial discipline and principles of consistency in taxing-

statute as laid down by Hon’ble Supreme Court in the case of Radha

Soami Satsang v. Satsang (1992) 193 ITR 321(SC). We order

accordingly. The Revenue fails on this ground. We order accordingly.

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 39 -:

against deletion of disallowance of expenses u/s 14A of the 1961 Act read

with Rule 8D of the Income-tax Rules, 1962, while computing book profits

u/s 115JB of the 1961 Act. This issue is now settled by Special Bench of

Delhi-tribunal in the case of ACIT v. M/s.Vireet Investment Pvt. Ltd.

(2017) 82 taxmann.com 415(Del-trib.)(SB) , wherein Special Bench held

that disallowance of expenditure incurred in relation to earning of an

exempt income is to be made without resorting to provision of Section 14A

of the 1961 Act read with Rule 8D of the 1962 Rule. Thus, this issue needs

to be set aside and restored to the file of the AO to compute book profits

u/s.115JB after making disallowance of expenditure incurred in relation to

earning of an exempt income by following the decision of the Special

Bench in the case of M/s.Vireet Investment Pvt. Ltd.(supra). This ground

of appeal raised by Revenue is allowed for statistical purposes. We order

accordingly.

419/Chny/2018) and the Revenue’s appeal for ay: 2011-12(ITA No.

465/Chny/2018) are partly allowed as indicated above.

2012-13 to 2014-15 and our aforesaid decision for ay: 2011-12 shall

apply mutatis mutandis to appeal filed by assessee for ay: 2012-13 to

2014-15 respectively . Thus appeals filed by Assessee for ay: 2012-13 to

ITA Nos.419-422/Chny/2018 & ITA Nos.465-468/Chny/2018 :- 40 -: 2014-15 in ITA no. 420-422/Chny/2018 are partly allowed as indicated

above. On the other hand Revenue’s appeal in ITA no. 467-

468/chny/2018 for ay: 2013-14 and 2014-15 are dismissed owing to low

tax effect as detailed above in preceding para’s of this order, while

Revenue’s appeal for ay: 2012-13 in ITA no. 466/Chny/2018 is partly

allowed as similar issues are involved in Revenue’s appeal for ay : 2012-

13 as were there in ay: 2011-12 and our decision in Revenue’s appeal in

ay: 2011-12 shall apply mutatis mutandis to Revenue’s appeal in ay:

2012-13 . We order accordingly.

Order pronounced on the 03rd October, 2019, in Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (र�मत कोचर) (N.R.S. GANESAN) (RAMIT KOCHAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, �दनांक/Dated:03rd October, 2019. TLN

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�त/CIT 2. ��यथ�/Respondent 5. �वभागीय ��त�न�ध/CIT-DR 3. आयकर आयु�त (अपील)/CIT(A) 6. गाड� फाईल/GF