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Income Tax Appellate Tribunal, DELHI BENCH G”, NEW DELHI
Before: SHRI H.S. SIDHU & SHRI N.K. BILLAIYA
Department by : Sh. Surinder Kumar, CIT(DR) (Int. Tax.). Assessee by : None ORDER PER H.S. SIDHU, JM :
These appeals by the Revenue are directed against the common Order of theLd. Commissioner of Income Tax (Appeals-XII), New Delhi dated 30.5.2007 pertaining to Assessment Years 2003-04 & 2004-05.
Since the issues involved in these appeals are common and identical, except the difference in the figure of addition, hence, the same are being disposed of by this common order for the sake of convenience, by dealing with assessment year 2003-04.
The ground raised in assessment year 2003-04 read as under:-
1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law and in facts in deleting the addition of Rs. 2,30,23,433/- made
by the AO u/s. 40(a)(i) of the Income Tax Act.
The ground raised in assessment year 2004-05 read as under:-
On the facts and in the circumstances of the case, the Ld. CIT(A) erred in law and in facts in deleting the addition of Rs. 1,39,36,863/- made
by the AO u/s. 40(a)(i) of the Income Tax Act.
The brief facts of the case are that the assessee has filed the return of income declaring a NIL income (after reducing b/f loss) on 27.11.2003.
However, the assessee has paid tax under provision of section 115JB at a total book profit of Rs. 1284350/-. The return was processed u/s. 143(1) of the Act on 15.12.2003. Subsequently, the previous AO, after recording his reasons for belief that the income has escaped assessment issued a notice u/s. 148 of the Act dated 8.8.2005 upon the assessee company which was duly served. In response to notice u/s. 148 of the Act, the assessee has not filed the return. In response to subsequent notices issued, the A.R. of the assessee attended the proceedings from time to time. During the year, the assessee has debited a sum of Rs. 2,30,24,433/- under the head Fee Sylvan and claimed the amount as deduction. AO noticed that no TDS u/s. 195 of the Act was deducted on this payment. During the course of assessment, the assessee was asked 2 to justify the claim in light of section 40a(i) of the Income Tax Act, 1961 wherein it is provided that no deduction is allowable in respect of payment made to a foreign company in which tax has not been deducted. In response to the above, the assessee vide its letter dated 6.11.2006 has submitted its rely. After considering the reply, the AO observed that Section 40(a)(i) of the Act clearly stipulates that any sum paid or payable outside India or such amount is paid in India to a non-resident or to foreign company, on which TDS has not been deducted u/s. 195 of the Income Tax Act, the same is not deductible in computing the income under the head “Profits and gains from business or profession”.
Therefore, the payment of fee amounting to Rs. 2,30,24,433/- made to M/s Sylvan does not qualify for deduction. Accordingly, he disallowed Rs. 2,30,24,433/- u/s. 40(a)(i) of the Act and added the same in the income of the assessee and made the assessment on income under the normal provision at Rs. 2,23,11,601/- u/s. 143(3)/147 of the Act vide order dated 26.12.2006. Aggrieved with the assessment order dated 26.12.2006, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 30.5.2007 has partly allowed the appeal of the assessee by deleting the addition of Rs. 2,30,24,433/-. Against the impugned order, the Revenue is in appeal before us.
Ld. DR relied upon the order of the AO and reiterated the contentions raised in the grounds of appeal. He filed the copy of letter dated 3.4.2018 issued by the Ld. CIT, Circle 3(2), Hyderabad stating therein that he was requested to get served the notice upon the assessee 3 issued by the ITAT, G Bench, New Delhi and acknowledgement slip may be filed with the Asstt. Registrary, ITAT, New Delhi. It was informed that all efforts have been made to serve the notice upon the assessee but of no avail. As a last recourse, notice was served by the affixture at Flat No. 601 & 602, 1-8-271 & 272, Ashooka Bhoopal Chambers, 6th floor, SP Road, Secundarabad-03 enclosing therewith the copy of Panchnama. In this regard, Ld. CIT(DR), reiterated the contentions raised in the aforesaid letter dated 3.4.2018 and stated that assessee is not interested to prosecute the appeals, hence, the appeals may be decided exparte. Ld. CIT(A) on the merits of the case, has relied upon the decision of the Hon’ble High Court of Karnataka in the case of CIT (Intt.) Taxation) vs. Samsung Electronics Co. Ltd. (2011) 16 taxman.com 141 (Kar.) and requested to follow the same in the present case, as the facts of this case are identical to the present case.
None appeared on behalf of the assessee despite the notices issued by the Registry through RPAD at the address available and also through the Department by way of Post as well as affixture, but of no avail.
Keeping in view the facts and circumstances of the present case and the issue involved in the present Appeal, we are of the view that no useful purpose would be served to issue notice again and again to the assessee, therefore, we are deciding the present appeal exparte qua assessee, after hearing the Ld. DR and perusing the records.
We have heard Ld. CIT(DR) and perused the records especially the impugned order. We find that Ld. CIT(A) has discussed the issue in dispute elaborately at page no. 6 to 10 vide para no. 17 to 18. For the sake of convenience, we are reproducing herewith the aforesaid findings of the Ld. CIT(A) as under:-
“17. I have minutely considered the submission of the A/R and facts of the case and also the ratio of decision cited by him to support and reinforce his contentions. I have also duly perused the observations of the AO in the impugned order to arrive at the conclusion in this regard for invoking the provisions of section 40(a)(i) of the Act.
17.1 It would be pertinent to discuss in brief the factual position and background of the case. As submitted and also noted by the AO, the assessee company which is engaged in the business of software and high end training was also engaged by M/s Sylvan Learning Systems, Netherlands, as authorized Prometric training Centre (APTC) to furnish/provide testing centre facilties and certification services at various locations in India as per agreement entered by the appellant and M/s Sylvan duly signed on 04/10/1999 & 18/10/1999 by the two, respectively. As per the said agreement, the main, features of which has been highlighted by the AO in the order from s/no I to XIV ( page 4&5), both the assessee company and M/S Sylvan have certain obligations/functions to perform or not to perform. The major obligations/functions of the assessee company are confined to providing certain facilities at different locations selected/allocated by M/S Sylvan and collection of the examination/testing fees us prescribed/fixed by Sylvan from each individual student/candidate and remit the same to Sylvan within 7(seven) days of invoice after deducting the amount due to it. The appellant (APTC) has no authority to recruit candidates for taking tests at the centre. It also has no power to select or relocate the testing centres without Sylvan's approval. The appellant provides the hardware and the other facilities while the software for taking the test the student is provided by Sylvan.
17.2 As described above, the appellant collects the prescribed fee and after deducting the amount due to it as specified, remits the balance to M/s Sylvan. The appellant has contended that the aforesaid remittance represents fees collected by it on behalf of Sylvan from student'), who use the software and not fee for technical services paid to Sylvan for its services in India tor the assessee company. The NO has, however, rejected the contention raised by the appellant and concluded that M/s Sylvan had business connection in India, it had a permanent establishment and further that the appellant is liable to tax as-agent of Sylvan u/s 163 of the I.T. Act. In view of the matter. The A/O has held that services rendered by Sylvan to various clients in India through its business connection and hence, the appellant was bound to deduct tax at source u/s 195 of the Act. He has further held that, in so far as tax was not deducted at source, the aforesaid payment is not eligible for deduction in terms of section 40(a)(i) and added back the same as the appellant’s income. This conclusion of the AO has been vehemently contested by the appellant. It was therefore submitted that the sums of Rs.2,30,24,431/- & Rs. 1,39,46,863/- for both A.Y. 2003-04 @ 2004-05 respectively being the amount collected from the students using the software for taking the Prometric test provided by Sylvan and due to it, does not constitute payment of fee for technical services or royalty panel, consequently, not liable to tax in India in the hands of M/s Sylvan. The appellant has further submitted that in view of the non-discrimination clause contained ill the DTAA between India and Netherlands, section 40(a)(i) cannot be invoked in the instant case and accordingly, disallowances of the said amounts in computing the appellant’s incomes for the years under consideration me totally unjustified. Similar issue of disallowance u/s 40(a)(i) on account of payment /remittance to nor-resident by Indian company has been dealt with by the Hon’ble Jurisdictional Delhi Tribunal ‘D’ Branch in the case of Herbalife International India (P0 Ltd. vs. ACIT in AY 2001-02 reported in (2006) 103 TTJ (Del) 78. It has been stated that the provision of section 40(a)(i) as it existed prior to its amendment by Finance Act, 2003 w.e.f 1.4.2004 provided for disallowance of payment made to non-resident only where tax is not deducted at source on such payment at source. A similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus a non-resident left with a choice of dealing with a resident or a non resident in business would opt to deal with a resident rather than a non-resident owing to the provisions of Section 40(a)(i). To this extent the non-resident is discriminated. The provisions of DTAA between; India and the other country in the agreement seek to provide against such discrimination and that deduction should he allowed on the same condition as if the payment is made to a resident. The non-discrimination clause in the DTAA neutralize the rigour of the provisions of Section 40(a)(i). By virtue of provisions or Section 90(2) the law which is beneficial to me assessee to whom the DTAA applies should be followed. In view of the non- discrimination clause, the pre-amended provisions of Section 40(a)(i) cannot be invoked to disallow the claims for deduction of payment to a non resident company. In my yew, this view and decision of the Hon'ble Delhi Tribrr.al will be squarely applicable to the facts involved in the case of the present appellant company. The decision of the Jurisdictional Tribunal/High Court on identical fact/issue is binding on all authorities below. Therefore, the amounts remitted to Sylvan 8 being not forming part of the appellant's income cannot be included in its total income.
17.3 Article 24(i) of DTAA with Netherlands provides for non-discrimination treatment, as- "Nationals of one of the states shall not be subjected in the other state to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of other state in the same circumstances are or may be subjected. These provisions shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both the states.” Article 24(2) provides that, “Except where the provisions of para 3 of Art. 7 apply the taxation on a permanent establishment (PE) which an enterprise of one of the States has in other State shall not be less favourably levied in that other state than the taxation levied on enterprise of that other state carrying on the same activities.”
11.4 Similarly, Art. 5 defines 'PE' means a fixed place of through which the business of the enterprise is wholly or partly carried on. The term ‘PE’ includes especially:
- a place of management; - a branch; - an office; - a factory; 9 - a workshop; - a mine, an oil or gas oil, a quarry - a warehouse; - a premises used as a sale outlet etc.
Article 5.6 specifies an enterprise of one of the States shall not be deemed to have a PE in the other State merely because it carries on business in that other State through a broker, a general commissioned agent or any other agent of an independent status, provided, such persons are acting in the ordinary course of their business. However, when the activities of such agent are devoted wholly or almost wholly on behalf of that en enterprise, he will not be considered as an agent of an independent status it if is shown that the transactions between the agent and the enterprise were not made under arm’s length conditions. Art. 5.7 also stipulates that the fact that a company which is a resident of one of the States controls or is controlled by a company which is a resident of the other state, or which carries on business in that other state (where through a PE or otherwise), shall not of itself constitute either company a PE of the other.
17.5 In view of the above outlined conditions and facts stated, it cannot be said that M/s Sylvan, Netherlands is having a PE in India so as to be liable to tax in terms of the provisions of Section 5(2)/9(1)(i) of the IT Act 1961 and also in view of the non-discrimination clause of the DTA.A between India and Netherlands. M/s Sylvan maintains no fixed place of business ill India in the form of place of management, office, a branch, workshop, sales outlet etc... it has also not engaged or employed any permanent or regular staff in India for carrying on its business in the country. It has allocated testing centres at various locations in India and provided software facilities where prometric test are conducted for students on paymen of the prescribed fees.
17.6 In view of the aforesaid given conditions, it can also not be held that the assessee company is acting as a dependent agent of M/S Sylvan as its business activities are not devoted wholly or not even almost wholly on behalf of MIS Sylvan. It is acting both as agent of an independent status and as also acting in the ordinary course of business. This has been clearly borne out by the write up/note on its activities filed as discussed earlier and also by the limited functions it has to perform on behalf of Sylvan, as per terms of the agreement. So far as its obligations towards Sylvan as per agreement, the same are restricted to providing hardware and other facilities at different sites/locations as decided by Sylvan. The assessee has also to collect fees from the student as prescribed by Sylvan. After defraying its dues, the balance amount has to be remitted/sent to Sylvan. This specified and limited role as performed by the assessee company on behalf of sylvan does not necessarily make it as dependent agent of Sylvan. The assessee company is in the business of IT consulting & solutions both onsite and offshore. Through its education segment/centres, it conducts courses on Oracle, IBM. Lotus and Sun Microsysterns. It also has development centres at Delhi and Hyderabad and education centres at 6(six) places in India. It also has three 'wholly owned subsidiaries at Singapore, UK and USA which focus on IT consulting and solutions. It is also equipped with highly qualified and competent persons in software solutions and consultancy and also in the education area. In the result, the assessee company has earned substantial revenue income in terms of crores in its business activities including exports. In view of above, I am of the view that the assessee company is an independent Sylvan, acting independently in the normal course of its business activities and therefore not assessable in terms of Section 162(1) of the I.T. Act, 1961. Similarly, since M/s Sylvan, Netherlands cannot be held as having PE in India, the remittances of testing fees to it by the assessee company collected from the candidates are not liable to tax in view of the DTAA entered into between India and Netherlands and consequently, no TDS u/s. 195 of the Act is required to be made by the assessee on such remittances. Besides, the testing / exam fees collected by the assessee company from the students undertaking the prometric test, at the rates prescribed by Sylvan and remitted to it cannot partake the character of technical fee or royalty paid on the appellant 12 company. Therefore, I am of the opinion that the fees remitted to Syklvan cannot be treated as the assessee’s income by invoking the provisions of section on 40(a)(i) of the I.T. Act, 1961. I am also of the view that, the assessee company being a resident company in India is liable to tax only on the income earned by it in India in the course of its business / profession activities. Furthermore, the observation of the AO in the middle paragraph of page no. 9 that as per the scheme of the agreement Sylvan was absolved from payment of tax and instead it cast an obligation on the assessee to make the payment of tax on behalf of Sylvan did not hold good as the same is not borne out by facts narrated above and the DTAA between the two countries.
17.7 In CIT Toshoku Ltd. 125 ITR 525 (SC)/CIT vs. Fried Krupp Industries 198 ITR 27 (Madras) it was held that if no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India u/s. 991) of the Act. Similarly, in the case of CIT vs. Premier Tyres Ltd. 134 ITR 17 (Bom) it was laid down that a person who is himself liable to pay income tad on a payment made to a non-resident as an agent of that non resident cannot be saddled with the statutory duty to deduct tax at source u/s. 195 before making the payment to the non resident. In CIT vs. Ftertilizer and Chemicals (Travancore)
Ltd. 86 ITR (Kerala) 40, it was laid down that where the question of failure to deduct tax at source u/s. 195(1) is to be decided, the basic question to be considered is whether the foreign collaborator rendered any service in India in terms of the agreement on the basis of which it could be said that a portion out of the payments made to it is income that accrued to such collaborator in India. Also, in the cited case CIT vs. Cooper Engg. Ltd. 68 ITR 457 (Bom) (Supra) it was enunciated and pronounced that unless the payment of interest is such that the interest is chargeable under the Act, the liability upon the person to deduct tax at source is not there, and the amount cannot be added back for failure to deduct tax at source.
17.8 In view of the above stated facts and judicial pronouncements/ decisions on identical facts and issues, I find the disallowance u/s additions of Rs. 2,30,24,433/- and Rs. 1,39,46,863/- for the two assessment years under consideration by invoking Section 40(a)(i) are not based on sustainable material ground and positive finding on record and according the same are directed to be deleted. The AO is directed accordingly as above.
In the result, the two appeals are partly allowed as indicated above.”
After perusing the aforesaid finding of the Ld. CIT(A) and the case laws discussed by the Ld. CIT(A), we are of the considered view that there is no infirmity in the finding of the Ld. CIT(A) and therefore, the same does not require any interference on our part. As far as case law cited by the Ld. CIT(DR) is concerned, the same on distinguished facts.
However, even if two views are possible/available, as per the decision from Hon’ble Apex Court in the case of Vegetable Products (88 ITR 192)
(SC), the view, which favors the assessee has to be followed. In view of above, we affirm the finding of the Ld. CIT(A) in both the appeals and reject the grounds raised by the Revenue in both the appeals.
In the result, both the Appeals filed by the Revenue stand dismissed.