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Income Tax Appellate Tribunal, KOLKATA BENCH ‘C’, KOLKATA
Before: Shri S. S. Godara, J.M. & Dr.A.L.Saini, A.M.)
ORDER Per Dr. A.L.Saini, A.M.:
The captioned appeal filed by the Revenue, pertaining to assessment year 2010-11, is directed against the order passed by the ld. Dispute Resolution Panel (DRP)/AO, Kolkata, dated 30-12-2014, for the assessment year 2010-11.
At the time of hearing none appeared on behalf of assessee in spite of issuance of notice for hearing more than one occasion and Ld. Departmental Representative(DR), was present for the appellant Revenue. In the absence of any appearance by the assessee, the appeal is being disposed of ex parte qua the assessee, after hearing Ld. DR for the Revenue on merits in terms of Rule 24 of the Income Tax Appellate, Tribunal, Rules, 1963.
The grievances raised by the Revenue are as follows: “That in the facts and circumstances and in law, ld. DRP erred in deleting proposed addition of Rs.1,40,00,00/- on account of Reimbursement Compensation expenses by treating compensation for contract of construction as technical service by misleading the explanation 2 to section 9(i)(vii).” M/s. Erhisanye Construction Group (I) Ltd 1
The brief facts qua the issue are that the Ld DRP/AO observed that assessee company has made payment of Rs. 1,40,00,000/- to Zhejiang Industry Equipment Installation Group Co. Ltd. as per agreement. However, the Assessee company has not made any payment directly to Zhejiang Industry Equipment Installation Group Co. Ltd. The Ershisanye Construction Group Co. Ltd has made payment of Rs. 1,40,00,000/- to Znejiang Industry Equipment Installation Group Co. Ltd and the Assessee has reimbursed Rs. 1,40,00,000/- to Ershisanye Construction Group Co Ltd, as per agreement of reimbursement of expenses between Ershisanye Construction Group Co. Ltd. and Ershisanye Construction Group India Pvt. Ltd dated 10.05.2009 read with agreement for compensation between Ershisanye Construction Group India Pvt Ltd, and Zhejiang Industry Equipment Installation Group Co. Ltd dated 26.08.2008.
The Assessee has submitted that the provisions of Section 90(2) of the Act read with Circular No. 333 dated, 2nd April 1982, give an option to a non-resident tax payer to apply the provisions of the Act or the provisions of the applicable Double Taxation Avoidance Agreement, whichever is more beneficial to the tax payer. Further Zhejiang Industry Equipment Installation Group Co. Ltd is not an Indian Company as defined in section 2(26) of the Act, and moreover the control and management of its affairs is wholly outside India. Accordingly, Zhejiang Industry Equipment Installation Group Co. Ltd is a non-resident in India. Further it was submitted followings: "It is an admitted position that no income has been received / deemed to be received by Zhejiang Industry Equipment Installation Group Co. Ltd in India. Furth it is humbly submitted, that no income has accrued/ arised or deemed to accrue/ arise in the hands of Zhejiang Industry Equipment Installation Group Co. Ltd in India. Section 9 of the Act, deals with Income deemed to accrue or arise in India. •Taxability as per section 9(1)(i) of the Act: As per Section 9(l)(i) of the Act, all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. M/s. Erhisanye Construction Group (I) Ltd 2
As per Explanation 2 to Section. 9(1)(i) of the Act, "business connection" has been defined in an inclusive manner. The Supreme Court in C.I. T v R. D. Aggarwal and Co. and another 56 ITR 20 (SC) has elucidated business connection as follows:
"The expression "business connection" undoubtedly means something more than "business". A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a 'relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non- resident must be determined upon the facts and circumstances of the case." However even if there is a business connection in India, if no operation of business are carried out in India, then the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. Reliance in this regard is placed on the following judgments: • CIT v Toshoku Ltd. 125 ITR 525 (SC) • Ishikawajma Harima Heavy Industries Ltd 288 ITR 408 (SC) It is pertinent to consider Explanation 1 to section 9(1)(i) that provides as under: "For the purposes of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;"
In the instant case, it is an admitted position that no operation has been carried out by Zhejiang Industry Equipment Installation Group Co. Ltd in India. The assessee has entered into agreement with Zhejiang Industry Equipment Installation Group Co. Ltd for carrying out erection works of Oxygen Plant and Power Plant project. However, the said contract could not be executed and the assessee terminated the said agreement vide agreement dated 26.08.2009. It is apparent from the agreement that no operation M/s. Erhisanye Construction Group (I) Ltd 3 was carried out by Zhejiang Industry Equipment Installation Group Co. Ltd, in India. Accordingly, there is no business connection of Zhejiang Industry Equipment Group Co. Ltd in India and is not liable to be taxed as per section 9(1)(i) of the Act. Further, it is submitted that the compensation received is capital receipt in the hands of Zhejiang Industry Installation Group Co. Ltd and not liable to be taxed in India. Reliance in this regard, is placed on the decision of [2011] 15 taxmann. Com 126(AAR-New Delhi) Upaid Systems Ltd In re* • Taxability as per section 9(1)(vii) of the Act: Further, it is submitted that the amount paid to Zhejiang Industry Equipment Installation Group Co. Ltd is not in the nature managerial, technical or consultancy services but is in the nature of contractual payment as admitted by the Ld. AO and hence not taxable as Fees for Technical Services as per section 9(1)(vii) of the Act. The assessee, reiterate and rely on the arguments made in Third Ground of Objection marked as Annexure-3. Further, fees for Technical Services has been defined as per the provisions of the Act, to include any consideration (including any lump sum consideration) for 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".
The assessee has entered into agreement with Zhejiang Industry Equipment Installation Group Co. Ltd for carrying out erection works of Oxygen Plant and Power Plant project. However, the said contract could not be executed and the assessee terminated the said agreement vide agreement dated 26.08.2009. The nature of principal contract being "erection works" will fall under the ambit of like project as per Explanation to section 9(l)(vii) of the Act. The compensation payment made to Zhejiang Industry Equipment Installation Group Co. Ltd in China is directly relating to construction project, (construction of steel plant in Parbatpur, Jharkhand) would fall outside the definition of Technical services in view of the exception carved out of Explanation 2 to Section 9(1)(vii) of the Act, and therefore is not taxable in the facts and circumstances of the case. • Taxability as per other clause of section 9(1) of the Act:
M/s. Erhisanye Construction Group (I) Ltd 4
Further, the compensation payable to Zhejiang Industry Equipment Installation Group Co. Ltd does not fall under any other clause of section 9 of the Act. Accordingly, the amount received by Zhejiang Industry Equipment Installation Group Co. Ltd is not liable to be taxed in India and the assessee is not liable to withhold tax as per section 195 of the Act and the said expenses of Rs 1,40,00,000/- is not disallowable as per section 40(a)(i) of the Act.
• Taxability as per the India-China DTAA: As per the India-China DTAA, we respectfully submit that since Zhejiang Industry Equipment Installation Group Co Ltd does not constitute PE in India in terms of Article 5 of Indie-China Treaty, the payments received by Zhejiang Industry Equipment Installation Group Co Ltd would not be chargeable to tax in India as per Article 7 of India-China Treaty. The assessee, reiterate and rely on the arguments made vide submission dated 21.02.2014. "
Therefore, it was submitted by the Assessee that under no other clause of the India- China DTAA, Zhejiang Industry Equipment Installation Group Co. Ltd is liable to be taxed in India. Accordingly, the amount received by Zhejiang Industry Equipment Installation Group Co. Ltd is not liable to be taxed in India and the assesse is not liable to withhold tax as per section 195 of the Act and the said expenses of Rs.1,40,00,000/- is not disallowable as per section 40(a)(ia) of the Act. However, the AO rejected the claim of the assessee and noted that assessee has made payment of Rs.1,40,00,000/- to M/s Zhejiang Industry Equipment Installation Group Co.Ltd and No TDS was made therefore he disallowed Rs.1,40,00,000/- U/s 40(a)(ia) of the Act.
Aggrieved by such order of the AO, passed u/s. 143(3)/r.w.s 144C(1) of the Act, the assessee filed its objection before the Hon’ble Disputes Resolution Panel (DRP), Kolkata, who has allowed the objection of the assessee. Aggrieved, by the order of Hon`ble DRP, the Revenue is in appeal before us. M/s. Erhisanye Construction Group (I) Ltd 5
The Ld. DR for the Revenue, before us, has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
We have heard ld DR for the Revenue and perused the material available on record. We note that during the relevant period, the Assessee has entered into agreement with Zhejiang Industry Equipment Installation Group Co. Ltd, vide agreement dated 26.08.2009 for compensation payment as per the terms and conditions mentioned therein. Further, the assessee has entered into agreement with its holding company i.e. Ershisanye Construction Group Co Ltd, vide agreement dated 10.05.2009 for reimbursement of expenses as per the terms and conditions mentioned therein. The Ershisanye Construction Group Co Ltd has made payment of Rs. 1,40,00,000/- to Zhejiang Industry Equipment Installation Group Co. Ltd and the Assessee has reimbursed Rs.1,40,00,000/- to Ershisanye Construction Group Co Ltd as per Agreement for reimbursement of expenses between Ershisanye Construction Group Co. Ltd. and Ershisanye Construction Group India Pvt. Ltd, dated 10.05.2009 read with agreement for compensation between Ershisanye Construction Group India Pvt. Ltd. and Zhejiang Industry Equipment Installation Group Co. Ltd, dated 26.08.2009. It is claimed that the payment has been made on cost to cost basis without any mark up and but the assessee has not deducted any withholding tax from such payment. AO vide order dated 21.03.2014 has held that no TDS was made on such payment. However, the payment is contractual in nature and since the assessee has failed to deduct tax on payment of Rs.1,40,00,000/- the same is disallowed u/s 40(a)(ia) of the I.T. Act. 1961.
8. We note that the A.O has not appreciated the fact that the payment in question in this case were pursuant to cancellation of contract with the foreign company and towards compensation payable by the Assessee by virtue of the Assessee's agreement dated 26.08.2009 with Zhejiang Industry Equipment Installation Group Co. Ltd. It is to be noted that such payments are excluded under explanation 2 to Section 9(1)(vii)i.e. the same was not “fees for technical services” but towards compensation for contract of construction. Therefore, considering this factual position explained above, we note that assessee is not M/s. Erhisanye Construction Group (I) Ltd 6 liable to deduct TDS under section 40(a) (ia) of the Act, hence we do not find any infirmity in the order passed by the ld DRP. That being so, we decline to interfere in the order passed by the ld DRP, his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.