DCIT, NEW DELHI vs. M/S. MIRA EXIM LTD., NEW DELHI

CO No.256/Del/2014 Assessment year 2009-10 Mira Exim Ltd. Vs. DCIT, 523-24, World Trade Centre, Circle-6(1), Room Barakhamba Road, New No.413, Delhi. C.R. Building I.P. PAN: AAACM 2066M Estate, New Delhi. (Appellant) (Respondent) Revenue by : S/Shri H.K. Chaudhary CIT-DR and Rajesh Kumar, Sr.D.R, Assessee(s) by : Shri Anil Kumar Chopra, C.A. and Shri H.C. Garg, Adv. सुनवाई क� तार�ख/Date of Hearing : 12/04/2017 घोषणा क� तार�ख /Date of Pronouncement: 24/04/2017 ORDER PER B.P. JAIN, ACCOUNTANT MEMBER

This appeal of the Revenue arises from the order of learned CIT(A)-IX, New Delhi, vide order dated 7.10.2013 for the assessment year 2009-10.

1. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the disallowance of Rs. 7,27,532/- made by the A.O. u/s 40(a) without appreciating the fact that these services clearly come under the nature of "managerial/technical services" covered under the provisions of Explanation 2 of Section 9(1)(vii)(b) of the Income-tax Act?

2. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) failed to appreciate the fact that the Finance Act 2010 has inserted an explanation to the section 9 w.r.e.f. 01.06.1976, 1961, which has clarified that even if the non-resident has no business connection in India or has not rendered any service in India then also the payments received deemed to accrue or arise in India?

3. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) failed to appreciate that Article 12 of the DTAA of India with Germany clearly states that the services of these nature are taxable in India if they are chargeable to tax as per the laws of India?

4. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the disallowance of interest payment of 1,02,22,500/-, made by the A.O. on account of interest free advance given to the daughter of the Managing Director of assessee Company, by following the judgement of Hon'ble Delhi High Court in case of Bharti Televentures 331 ITR 502 without appreciating the fact that the assessee failed to prove any Commercial Expediency and failed to substantiate any business purpose of assessee for advancing these interest free loan/advance to its sister concern?

5.Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the disallowance of interest payment of 1,02,22,500/-, made by the A.D. on account of interest free advance given to that the daughter of the Managing Director of assessee Company, by not considering the case of CIT v. Abhishek Industries Ltd. 286 ITR 1 in which the Hon'ble Punjab and Haryana High Court has held that the onus of establishing the nexus between the interest free funds and advances is on the assessee and receipts from all sources go in a common kitty?

6. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law.

3. The Cross Objection of the assessee is reproduced herienbelow: “1. That the Ld. Commissioner of Income tax (Appeals) {Ld. CIT(A)} has erred in sustaining the disallowance uls 40(a)(i) amounting to Rs 12,49,474- being payment made to MIs Huntswood Marketing Limited, U.K for designing services by considering the same in the nature of Fee for Technical Services ('FTS'). The Ld. CIT(A) has failed to appreciate that the above services are in the nature of business income of the payee. Services were rendered outside India for which payments were made outside India and accordingly, as per the provisions of Article 7 of the Double Taxation Avoidance Aqreement between India and U.K, such charges are not taxable in India in the absence of any permanent establishment in India. Even otherwise also, the above services cannot be considered to be FTS under Article 13(5) of the DTAA with UK as no technology is involved in rendering such services and moreover no technical knowledge experience, skill or know-how was made available to the payer assessee.”

4. As regards grounds no.1, 2 and 3 of the Revenue and grounds in the cross objection, the brief facts of the case are as per the order of the AO at pages 3 to 6 are reproduced below: “During the course of assessment proceedings, the assessee furnished details in respect of payments in foreign currency vide reply dated 20.10.2011. From the same, it is seen that the assessee has made payments in foreign currency to following parties assigned under the head Legal & Professional expenses. However the details furnished reflect that payments are in respect of professional & legal services, consultancy services as well as designing services. The details are as below: Name of the Party Nature of transaction Amount(Rs.) Not known Professional fees 8552 Macera & J arzyna LLP Professional fee for legal services 72680 Canada Martin Zaepfel, Consultancy Charges 646300 Germany. Huntswood Consultancy charges for design 1249474 Marketing Ltd., London Services Total 19,77,006

The assessee was asked to explain whether tax has been deducted on the above payments. The assessee vide reply dated 20.10.2011 stated that the payments in foreign currency are towards services relating to services outside India and the payments have been made outside India. It was further stated that services involved being business profits of non-residents are taxable in their home countries and therefore TDS being not applicable thereon, no TDS has been deducted. In order to examine the nature of services rendered by these foreign parties, the assessee vide order sheet entry dated 23.12.2011 was required to give a detailed note on these services .and also asked to explain why the payments against them be not treated as fee for professional services and Fee for technical services on which tax should have been deducted. The assessee filed its reply dated 26.12.2011, which is reproduced below:- "Regarding legal and professional expenses in foreign currency, it is submitted that the expenses relate to professional and consultancy services received from professionals and consultants abroad in the course of their profession outside India. The services were received outside India in connection with export promotion and trade mark/patent matters. The services were rendered outside India. The same does not involve any fee for technical services. The payee has rendered the services in the course of their business and profession outside India and do not have any PE in India. As such no TDS is applicable. Payment of Rs.12.49 Lacs to Huntswood Marketing Ltd. debited under the head legal and professional charges relates to the fee for designing of products designed outside India in the course of their business outside India. The same do not involve transfer of any technology and hence is not FTS. The party does not have any PE in India. As such no TDS is applicable. The reply of the assessee has been examined. The contentions raised there in are not applicable. From the chart above it is seen that Rs.8,552/- on account of professional fees have been given to a party whose name and details have not been furnished. In the absence of the same the nature of services rendered cannot be examined. Hence the amount of Rs.8,552/- is added back to the income of the assessee for want of verification and for non deduction of tax. Regarding payment of Rs.72,680/- to M/s. Macera & Jarzyna LLP, Canada, the assessee has claimed that the same are in respect of professional fee for legal services. However the assessee has not given the details of professional services so rendered by the foreign party. The services have been rendered to a legal entity having the status of a 'company.' Article 14 of the Double Taxation Avoidance Agreement between India and Canada deals with 'Independent Personal Services' which says that professional services rendered by an individual or a firm will be taxed in Canada. However if such services are rendered by a 'Company', the payments against the same are liable to be taxed in India. Since the payment has been made to a company, assessee should have deducted tax on this payment u/s. 195 of the Act. Since the assessee has defaulted in deducting tax, the same is disallowed u/s 40(a)(ia) of the LT. Act. It is further seen that the assessee has paid consultancy charges of Rs.6,46,300/- to Martin Zaepfel, Germany. From the bill filed it is seen that the same have been paid as consultancy charges for arrangmg business for Mira Exim Ltd. Consultancy charges are squarely covered under the definition of 'technical services' in article 12 of the DT AA between India and Germany, and are also liable to be taxed under the DTAA. Accordingly, the same are added back u/s.40(a)(ia) of the Act for non-deduction of tax u/s. 195 of the Act. Further, the assessee has paid consultancy and designing charges of Rs.l2,49,474/- to Huntswood Marketing Ltd., London, for rendering consultancy charges towards the design services provided during the period. The relevant services are squarely covered under article 13 of the DT AA between India and United Kingdom and are to be taxed under the said DT AA. Since the assessee has defaulted in deducting tax u/s. 195 of the Act on these payments, Rs.12,49,474/- is being disallowed u/s 40(a)(ia) of the Act and added back to the income of the assessee . Lastly the assessee’s contentions that the services have been rendered outside India are of no help in view of the amended provisions of section 9(2) of the IT Act, wherein Explanation under sub-section 2 has been amended with retrospective effect from 01.06.1976. The relevant Explanation has clarified that the income of the non-resident from fee for technical services shall be deemed to accrue or arise in India whether or not the non-resident is residing in India or it has rendered services in India. In view of this amendment ‘fee for technical services’ are liable to be taxed in India as long as they are utilized in India. In view of the above, an addition of Rs.l9,77,006/- (8552+72680+64630.0+ 1249474) is being made for non-deduction of tax. . . (Addition ofRs.19,77,006/-)

Name of the Party Nature of transaction Amount (Rs.) Not known Professional fees 8,552/- Macera & Jarzyna Professional fee for legal 72,880/- LLP Canada services Martin Zaepfel, Consultancy Charges 6,46,300/- Germany Huntswood Marketing Consultancy charges for 12,49,474/- Ltd., London design services Total 19,77,006/- 6.1 The assessee was asked to explain whether tax has been deducted on the above payments. The assessee vide letter dated 20.10.2011 stated that the payments in foreign currency are towards services relating to services outside India and the payments have been made outside India. It was further stated that services involved being business profits of non-residents are taxable in their home countries and therefore TDS being not applicable thereon, no TDS has been deducted. The AO rejected the explanation of the assessee. On the basis of detailed discussion in the assessment order, the AO made the disallowances. For Rs.8,552/- the AO held that no names of the payee is given hence not allowable. Regarding payment to Macera & Jazyna LLP, Rs.72,680/-, the AO held that it is a company and as per DTAA (Double Taxation Avoidance Agreement) between India and Canada, professional fee paid for legal services to individual and firm is not taxable. In this case, payee is a company hence TDS should be made. On consultancy charges paid to Martin Zaefel, Germany, Rs.6,46,300/-, the AO held that such charges are included in ‘technical services’ as defined in DTTA between India and Germany which is taxable and TDS is applicable. Similarly, amount paid to Huntswood Marketing Ltd. is also covered under DTAA and TDS is applicable. Basically, AO has treated all the payments as FTS and hence TDS is applicable. The AO also mentioned S.9(2) of the Act.

6.2 As regard Rs.8,552/- paid to Abacus Management Solutions a professional consultancy firm at Mauritius for advice from Mauritius relating to wholly owned subsidiary, being business income of non- resident, as per DTAA, it is taxable in Mauritius not in India. Disallowance of Rs.72,680/- paid to M/s. Macera & Jarzyna has been made on the ground that the payee being a company Article 14 of the DTAA between India and Canada is not applicable and hence TDS was deductible. As borne out from the name of the nonresident payee, the payee is an LLP and not a company. The payee is a firm of barristers and solicitors which provide patent & trade mark services. The services being in respect of professional services from lawyers, article-14 of the DTAA with Canada will apply. The services were rendered outside India and the payments were also received outside India. Payee has no fixed place of business or PE in India. The payee is a LLP i.e. Limited Liability Partnership also called firm. The payee is not a company. Basis of disallowance by AO is that the payee is a company. As payee is not a company but a firm, as per A.O. herself, the payment is covered under Article 14 as Independent Personal Services in accordance with which they are only to be taxed in Canada. Even if the payments are considered under business profits (Article 7 of DTAA) , the subject payment is not liable to TDS as the payee has no PE in India. Erroneous disallowance has been made by wrongly invoking Section 195 and Section 40(a)(ia). _ 6.3 As regards payment of Rs.6,46,300/- to Martin Zaepfel, Germany, the assessee submitted that the marketing services involved cannot be FTS either under the Act or under the DTAA because no managerial or technical consultancy services were provided by the foreign payee. Services for arranging business meetings with importers outside India do not involve any management, technical or consultancy service which may be in the nature of FTS. It is evident that for a particular stream of income to be characterized as 'fees for technical services', it is necessary that some sort of 'managerial', 'technical' or 'consultancy' services should have been rendered in consideration. The terms 'managerial', 'technical' or 'consultancy' do not find definition in the Income-tax Act, 1961 and it is a settled law that they need to be interpreted based on their understanding in common parlance mentioned below: "Managerial: Management is the organization and coordination of the activities of a business in order to achieve defined objectives. It consists of functions creating corporate policies and organizing, planning, controlling and direction; an organization's resources. This is clearly not so in this case. Payee is pure independent consultant not involved in management of the company and with no powers to bind or direct the company." Technical: In the case of Skycell Communications Ltd. vs. DCIT (251 ITR 53 (Madras), the Hon'ble High Court has held that the popular meaning associated with the word 'technical' is 'involving or concerning applied and industrial science'.

Consultancy: consultancy is generally understood to mean advisory services Further, it may be fair to state that not all kind of advisory could qualify as technical services. For any consultancy to be treated as technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. The payee is not rendering any technical services but arranging only business meetings with foreign buyers."

For the interpretation given above, the assessee relied on the decision of Hon'ble Delhi Tribunal in the case of Adidas Sourcing Limited vs. ADIT (ITA No. 5300/DEL/2010).

6.4 The assessee further submitted that the services involved were rendered outside India in the course of business of the payee for which the payments were made outside India. No technology is involved in the said business support services and moreover no technical knowledge or knowhow was made available to the assessee. Services being rendered in the course of business of the payee in its home country are in the nature of business profit covered under Article 7 of the DTAA and there being no PE in India of the payee, the subject payments are not taxable in India. The payment involved relates to services provided by the payee for arranging business meetings outside India with foreign buyers with the assessee. The services towards arranging business meetings with foreign buyers are only marketing services like services provided by foreign agents for procuring export orders for which export commission or retainer is paid. The payments involved are purely business profits covered under Article-7 of the DTAA with Germany. The assessee placed reliance on judicial pronouncement as below :- "In the case of CIT vs. Toshoka Ltd. 125 ITR 525 (SC) and Spahi Projects P. Ltd., In re 315 ITR 374 (AAR) , it has been held that amount of commission earned by nonresident foreign payees for rendering service outside India in connection with procuring export orders could not be deemed to be income arising in India."

In the case of Cushman & Wakefield (2008) 305 ITR 208, it was held that there was no expertise or know-how which was made available to CWI by reason of rendering service of a managerial, technical or consultancy nature. Some sort of durability or permanency of result of rendering of services was envisaged. The referral fee paid by the Indian company was not "fee for technical services" under section 9(1)(vii) as well as Article 12(4)(b) of the DTAA. The assessee argued that the payment is made to an individual. Thus if not covered by Article 7 then without prejudice, payment is against independent personal service covered by Article 14 of DT AA with Germany in accordance with which income derived by an individual from independent activities is only liable for tax in Germany. Reliance is placed on the ruling of AAR in the case of Dieter Eberhard Gustav v. CIT, 235 ITR 0698 wherein the services rendered by the applicant as “an engineer by way of technical and marketing consultancy services were held to be covered under Article-14 of the DTAA between India and Germany. In this case it was held that the expression "professional services" in article 14 of the Agreement for Avoidance of Double Taxation between Germany and India is wide enough to include services, if any, rendered by the applicant as an engineer and marketing consultancy services rendered by the applicant were in the nature of professional services falling under article 14 of the Double Taxation Avoidance Agreement between India and the Federal Republic of Germany. The conditions mentioned in the said article were clearly satisfied, as there was no permanent establishment in India in the facts and circumstances of the case. The professional fees and fee for independent personal services receivable by the applicant were not taxable in India. Where an individual (who is not a salaried employee) renders independent, personal services in the foreign state, then such independent personal services are covered by Article-14 whereby they would only be taxable in the foreign state where the independent individual is resident. So in this case, the payee who an individual is rendering such professional or independent personal services is only taxable under Article-14 in Germany where he is resident. The payment has been made to foreign payee abroad for the services rendered outside India. Since income itself was not chargeable to tax in India, therefore, there was no liability of the assessee to deduct tax u/s 195(1) of the I.T. Act and hence section 40(a)(ia) is not applicable. The assessee thus get relief of Rs.7,27,532/- 6.5 On payment of Rs.12,49,474 to Huntswood Marketing Ltd., London the assessee submitted that this is a payment for consultancy charges towards Designing services provided to the assessee outside India The consultancy services involved were in relation to information concerning designs and patterns of readymade garments available in the foreign market. Managerial or consultancy or technical services referred under FTS involve provision of expert opinion based on individual technical or professional knowledge. Such services cannot be FTS either under the Act or under the DTAA because no technical or managerial or consultancy services were provided by the foreign payee. However, the nature of payment made to Huntswood Marketing Ltd. does not qualify to be exempted under the category of services under DTAA. In this case, the foreign payee is providing designing services which is nothing but technical services as defined under DTAA between India and UK. Thus, the addition of Rs.12,49,474/- has rightly been confirmed by the CIT(A).

7. Accordingly, we find no infirmity in the order of learned CIT(A) who has passed a very reasoned order and accordingly all the grounds of the Revenue as well as the grounds raised in the cross objection by the assessee are dismissed.

As regards ground no.4 and 5, the brief facts of the case are that the 8. year assessee company advanced to Mrs. Mira Rs.7,05,00,000/- Jain against the proposed purchase of property at C-11, Anand Niketan, New Delhi, owned by Mrs. Mira Jain for the purpose of guest house use of the company. In terms of the agreement to sell, the vendee was to make available the said property and also some other adjacent property after necessary alterations to be fit for use as guest house by the assessee company. The transaction did not materialize and the entire advance was refunded in the next financial year. Details of advance given and refund of advance in next year is placed on record. The A.O. disallowed the amount out of interest paid on account of notional interest on the said interest free advance given against purchase of guest house property. The notional interest has been worked out on the entire advance of Rs.7,05,00,000/- @14.5% for the whole year. The 14.5% rate of interest has been adopted being the rate of interest paid by the assessee on debenture advance received from the director. Actual interest being paid to banks on various business loans and limits is less than the rate of interest of 14.5% applied by the Assessing Officer.

"We note that the assessee was maintaining a bank account with mixed common fund in which all the deposits and withdrawals were made there was no specific instance noted by the AO in respect of any direct nexus between borrowed fund and the said advance made to the subsidiaries. The AO had made general observations without going into depth of the matter and without pointing out any specific instance where an interest bearing borrowed fund was advanced to the subsidiaries or establishing that the borrowings made by the appellant were not for business purpose. Both appellate authorities below were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee's own capital. At the relevant time, the assessee was found to be having an adequate non- interest bearing fund by way of share capital and reserves. Even otherwise the advances were found to be made to the subsidiaries for business considerations which is nothing but commercial expediency of the assessee but being in the factually opposition reflected from the record of the assessee, the onus that laid on it stood discharged. "

10.1 In the case of S.A. Builders Ltd. Vs. CIT (2007) 288 ITR 1 (SC) it is held that "The matrix of the case is that the assessee borrowed money from the bank and lent it to its sister concern free of interest. The Apex Court discussed the concept of commercial expediency which was hitherto not discussed in the lower forums including the High Court. Also held that the business expenditure may not have been incurred under any legal obligation, yet it is allowable if incurred on grounds of commercial expediency. " 10.2 It is defined that 'Commercial expediency' is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The assessee has explained the commercial need supported by documentary evidences. Unless AD brings some other facts to contradict the explanation and the documents submitted in support of such explanation, the same has to be treated as true. Comparison of interest paid to other directors on debentures and not charging interest on the advance given to other director is a business decision of the assessee. Such comparison does not indicate nexus between the borrowed fund and the interest free advance given to related parties. The need to establish the nexus is more important in the scenario when out of total interest expenses on borrowed fund Rs.1,49,99,992/- an amount of Rs.1,02,22,500/- is disallowed.

10.3 Following the decision referred above, the facts of the present case indicates that the basic requirements of disallowances that is nexus between interest bearing fund and interest free advance and adequacy of interest free fund are not analysed by Assessing Officer during assessment proceedings. The assessee explained before the AO that advance was given for some business purposes which did not materialize. Hence, the same has been received back during the subsequent year. Thus, in the absence of any finding, contrary to the explanation given by assessee, it cannot be held that the loan was not given for any business purpose. Particularly, in view of the fact that assessee having adequate non-interest bearing fund it can be inferred that the loan given has no bearing on the interest expense claimed by assessee on the borrowed fund. In the circumstances, the learned CIT(A) has rightly deleted the disallowance and we find no infirmity in the order of learned CIT(A). Accordingly grounds no.4 and 5 of the Revenue are dismissed.