JCIT, (OSD), CIR-2(2), KOLKATA, KOLKATA vs. M/S ONPROCESS TECHNOLOGY INDIA PVT. LTD., KOLKATA

We have heard rival contentions and perused the paper book comprising of 128 pages. We note that the assessee was granted registration by the Ministry of Communications & I. T, Department of Telecommunication, Telecom Enforcement Reserves & Monitoring Cell, Kolkata recognising the assessee to be other service provider (OSP) as per the guidelines annexed to the Registration Certificate, the expression OSP, inter alia, included activities of call centre, tele tracking system, bill payment etc. From the list of services rendered by the assessee and the list of employees of the assessee’s pay roll and their respective educational qualifications indicated that the assessee was performing functions of ‘Call Centre’. The assessee also furnished copies of few agreements with its customers and few sample copies of invoices to substantiate its contention that the assessee was primarily performing the task of tracking calls, tracing shipments, conducting follow ups and performing customer care activities. With reference to its documents, the Ld. AR submitted that the assessee primarily rendered BPO services to its foreign clients and the service fees were paid on the number of hours called by the employees on attending to the customer calls. The Ld. AR submitted that in order to procure new customers and also to service the existing customers in foreign countries, the assessee had engaged the services of companies incorporated in USA. Referring to the list of payments, the Ld. AR pointed out that more than 75% of the fees were paid to the wholly owned subsidiary M/s. BNKe solutions Inc. USA which was engaged in promoting sale of BPO services to clients based in USA. Drawing our attention to the agreement with the wholly owned subsidiary, the Ld. AR pointed out that the said agreement acknowledges that all rights, title and interest in the confidential information and IPRs vested in the assessee company in India which was the ‘entrepreneur’ and US subsidiary was described to be ‘service provider”, which we note from page 43 of the paper book. The said US subsidiary was to provide marketing and support service and to whom the IPRs belonging to the Indian Company were granted on 4 & 1241/Kol/2016 On Process Technoology India P. Ltd., AY- 2012-13 non-transferable and non-exclusion basis to enable it to grant BPO services of the Indian holding company i.e. the assessee. In consideration for rendering marketing and support services, the assessee paid arms length remuneration which was calculated @ actual cost plus mark up of 5%. The assessee had similar agreements with other service providers who were also being paid fees or remuneration either on fixed/monthly basis or performance based service fees for securing orders from the foreign customers. With reference to these documents, the Ld. AR submitted that the AO was unjustified in invoking the provisions of section 9(1)(i) read with section 5(2) of the Act merely because the BPO services were performed in India and the payments were made to foreign entitles by an Indian company. The Ld. AR submitted that the services by the foreign payees were rendered outside the Indian territory. Rather the services were entirely performed in USA for promoting the BPO services of the Indian assessee and to secure orders for its BPO business. According to ld. AR, the authorities below did not bring on record any tangible material which in any manner even suggested that the services were rendered in India or they had any territorial nexus with the India while rendering their services. The ld. AR particularly drew our attention to para 3.4 of the assessment order wherein the AO himself has observed as under: “The business of the assessee is controlled from India. Execution of any order regarding the business activity in India or abroad commences as well s terminates in India. Disbursement of any fund to any party including non-residents is controlled from the office based in India. In the instant case, though the payment was made to the non-residents who had rendered service to the parties outside India but execution of the order arises from India.”

In the light of the AO’s factual finding, the Ld. AR submitted that no income had accrued in India either in terms of section 5 or section 9(1)(i) of the Act and in that view of the matter the income of the payees were chargeable to tax which is to attract sec. 195 of the Act as erroneously held by the AO. The ld. AR further submitted that the order passed by the Ld. CIT(A) was full of contradictions and suffered from many factual infirmities because either he did not correctly understand the facts of the case or he collected the facts out of context leading to totally incorrect legal and factual affairs. The Ld. AR drew our attention to page 29 of the impugned order of the Ld. CIT(A) wherein he has recorded the following admitting that the assessee was rendering BPO services which did not involve rendering of any technical or software development service. He in his own words what has stated which is reproduced as under:

The Ld. AR further submitted that the material issue for decision was not whether the assessee was rendering BPO services or technical services to its foreign customers but the moot question for decision was whether the foreign entities to whom the assessee had made payments rendered any ‘technical’ services to the Indian assessee so as to requiring TDS u/s. 195 of the Act. Even in this regard, the Ld. AR pointed out that the Ld. CIT(A)’s recorded finding which was contrary to the facts on record. Drawing our attention to pages 27, 28 and 31 of the impugned order, he pointed out that the Ld. CIT(A) presumed that M/s. BNKe solutions Inc., USA was the holding company and the Indian assessee was its subsidiary which was using IPRs and other intangible belonging to foreign holding company and for which the payments were being made. Drawing our attention to the agreement between the parties the ld. AR pointed out that the actual fact was exactly opposite and the Indian assessee was holding company who owned the IPRs and other intangibles and the US subsidiary was granted limited right of use for promoting the sales and BPO services of the assessee amongst US based customers. According to the Ld. AR, since the facts of the case clearly established that the foreign subsidiary and other entities were rendering only the marketing and market support services and not any ‘technical’ services, no income chargeable to tax accrued to any of the foreign payees in India. He

On the other hand, the Ld. DR appearing on behalf of the revenue supported the order of the Ld. CIT(A). The Ld. DR submitted that the consultancy service was embedded in the marketing services described in the agreement between the assessee and the foreign companies and following the principle of ejusdem generis the marketing service was covered under the phrase ‘technical consultancy’ used in sec. 9(1)(vii) of the Act. The Ld. DR, therefore, claimed the payment made by the assessee was taxable under the provisions of the Act. The Ld. DR further submitted that the assessee being the payer cannot place reliance on the DTAA between India and USA and in this regard relied on decision rendered by the Bangalore Tribunal in the case of Vodafone South Ltd. 53 gtaxman.com 441. He further drew our attention to Article 24 – “Limitation and Benefits” of the DTAA between India and USA. Referring to the said article, the ld. DR submitted that since the assessee had not demonstrated before the lower authorities that the treaty benefits were indeed available to the payees, the assessee could not claim application of the beneficial clauses contained in Article 12 of the DTAA.

We have considered the submissions and the documents on record and the contentions put forth by both the parties and judicial precedence relied on. The documents and facts on record go on to prove that the assessee company operated Call Centre at Kolkata which only provided BPO service in the field of supply chain optimization customer management. These activities did not require the assessee to provide any technical knowhow or service to its customers. Moreover, in deciding the issue at hand, what are required to be ascertained is whether or not the foreign entities to which payments were made by the assessee had rendered any ‘technical’ services to the assessee and consequently whether or not such service had territorial nexus with India. From the list of payees, we note that 70% of the payments were made to the assessee’s wholly owned subsidiary M/s. BNKe solutions Inc., USA. From the agreement with the USA company,

The Ld. AR drew our attention to the fact that in the impugned order, the Ld. CIT(A) extensively referred to the decision of Mumbai bench of this Tribunal in the case of Foster Wheeler France SA Vs. Dy. Director of Income Tax 157 ITR 593. On a perusal of the said decision we note that not only the said decision was not applicable because the facts of the assessee’s case were much different. We also note that the Ld. CIT(A) had erroneously lifted portion of the said judgment and incorporated the same in his order as part of his finding for deciding the assessee’s case. In the case decided by the Tribunal admittedly the French company was engaged in the business of providing technical and engineering services to the Indian companies in India. The said French company in turn engaged the services of its US holding company M/s. Foster Wheeler, USA for reviewing the work and services performed by its employees for M/s. Reliance Petroleum Ltd. in India. On these facts, the issue arose whether the non-resident company while making payment to the US holding company was liable to withhold tax u/s. 195 of the Act. In the case before the Tribunal, Mumbai it was an admitted fact that US holding company was in fact making available to the non-resident company technology, know-how and service in connection with business carried on in India. However, in the present case, the Ld. CIT(A) did not bring on record any material which can in any manner prove that any of the foreign service providers rendered any technical service or made available any technological know-how to the assessee in India in connection with BPO business carried on in India. We also note that the Ld. CIT(A) in the impugned order erroneously found similarities of assessee’s case with the facts of the Foster Wheeler, France, USA, supra and we note at many places straight away lifted the facts and finding recorded in that decision, which have been pasted in the impugned order and this action of Ld. CIT(A) we do not understand, and cannot be countenanced.

From the impugned order of the Ld. CIT(A) , we note that he suo moto considered the taxability of the fees received by the foreign payees by way of ‘fees for technical services’ in term of taxing law provisions of sec. 9(1)(vii) as well as Article 12(4) of the DTAA between India and USA. We, however, find that even though at page 29 of the impugned order, the Ld. CIT(A) after conducting his Internet search of Bloomberg accepted the fact that the assessee was engaged in providing BPO service, yet in the later part of the order, the very same the Ld. CIT(A) changed the entire course and opined that the assessee was really engaged in the business of providing computer analytical packages. As discussed earlier, it appears that the Ld. CIT(A) wrongly inferred the assessee’s facts with the facts involved in the case of Cochin and Mumbai Tribunal in the case of US Technology Research Pvt. Ltd., supra and Foster Wheeler France SA (supra) respectively wherein the payers to foreign entities were involved in the business rendering engineering service, software development and in connection with which payments were made to foreign companies for availing their technical knowledge and technical services. Having regard to the facts in the respective cases, the Coordinate Benches at Cochin and Mumbai held that since the foreign companies made available to the Indian payers technical services, the payers had the liability to withhold tax u/s. 195 of the Act.

Article 12 (4) of the Indo USA DTAA deals with “fees for included services” and relevant articles reads as follows:

The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply.” A plain reading of 12(4) of DTAA makes it clear that only such technical and consultancy service are covered which is either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in article 12(3) or (b) ‘make available’ technical knowledge, experience, skill, know-how etc. We find that rendering of technical service cannot be equated with making available the technical service. Whereas for attracting sec. 9(1)(vii) ‘rendering’ of technical, managerial or consultancy services by itself is sufficient, the tax treaty between India and USA goes further and requires that rendering of services should further result to ‘make available’ technical knowledge, experience, skill etc. to the person utilizing services. The use of the expression ‘making available’ in the tax Treaty reference to the stage subsequent to the ‘making use of’ stage.

In the present case we have already set out the nature of services rendered by the foreign companies to the assessee. The scope of work as entailed in the agreements clearly goes on to show that the foreign entities were providing marketing and sale support services. Nothing is made available to assessee by the foreign entities as to whether or not giving marketing services can be considered to be ‘making available’ included services. Example no. 7 given in MOU between India and USA on the DTAA shows more light on the understanding of the subject which example is as follows:

This example set out in the MOU between India and USA governments makes it clear that consideration for consultancy services rendered cannot be treated as fees for included services under Article 12(4)(b). From a reading of the Article 12(4) and example set out in the annexure to the treaty, we note that the services which the foreign entities rendered to the assessee herein were in the field of marketing of assessee’s BPO services in foreign countries and it did not involve making available to the assessee any technical know-how, drawings, designs etc. with the help of which the assessee carried on its BPO business. As noted in the earlier paras the assessee was not engaged in the business of software analytical packages and, therefore, the Ld. CIT(A)’s extensive reliance on the decision of the coordinate bench of this Tribunal at Cochin and Mumbai in the case of US Technology Research Pvt. Ltd. ITA No. 222/Coch/2013 dated 27.09.2013 and Foster Wheeler France SA (supra) was clearly untenable and erroneous.

On the other hand, reliance placed by the Ld. AR on the decision of the Hon’ble Delhi high Court in the case of DIT Vs. Guy Carpenter & Co. Ltd. (2012) 346 ITR 504 (Del) and Hon’ble Karnataka High Court in the case of CIT Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar) appear more appropriate on the facts of the case. We also note that the Coordinate bench of this Tribunal at Kolkata in the case of ADIT Vs. Timken Co. in & 398/Kol/2010 dated 29.11.2017 considered the said Article 12(4) of the Indo-USA DTAA while deciding the issue of taxability of intra group service, inter alia, including managerial, marketing and coordination services. In the said case also the revenue had claimed that the services rendered by the US companies to its Indian subsidiary was liable to taxes in India under article 12(4) and, therefore, withholding of tax was considered necessary. In deciding the issue, the coordinate bench held that to fit into the terminology “fees for included services” the technical knowledge and skills etc. must

Before parting with this issue, we may also deal with the Ld. DR’s contention that the assessee, whose obligation was to deduct tax at source u/s. 195 of the Act cannot place reliance on the DTAA between India and USA. In support of this contention, the Ld. DR relied on the decision of this Tribunal in the case of Vodafone South (supra). We have carefully perused the said decision and found that the observations of the Tribunal were made in the context of dispute raised by the revenue that the payee was not tax resident of either countries and, therefore, benefits of the DTAA between India and UK could not be pressed into service by the payer which fact is clear from a plain reading of para 37 of the said decision. In the present case, however, no dispute was raised by any of the authorities below that the payees were not the tax resident of the USA and the benefits of DTAA between India and USA cannot, therefore, be available to the parties. In fact this is completely a new contention raised by the ld. DR without bringing any material on record to support such an averment. We are therefore of the view that the decision in the case of Vodafone South (supra) is factually not applicable and, therefore, is of no help to the new plea of the revenue before us.

In the course of the argument, the ld. DR also submitted that in view of Article 24 of the Indo-USA DTAA, the assessee could not have invoked the benefit of Tax Treaty. According to Ld. DR, the onus was on the assessee to prove that the foreign entities to which payments were made were eligible to claim benefit of the provision of the Tax Treaty and for that purpose it was for the assessee to prove that conditions prescribed in Article

For the reasons discussed in the foregoing, we are in agreement with the assessee that the payment of Rs.2,96,05,045/- made by the assessee to foreign entities towards marketing and sale support services were not chargeable to tax in India and in that view of the matter the assessee was right in law in not deducting any tax thereon under sec. 195 of the Act. Accordingly, we hold that the impugned disallowance of Rs.2,96,05,045/- made by the AO as well as confirmed by the Ld. CIT(A) u/s 40(a)(i) of the Act is unsustainable. Accordingly, it is directed to be deleted. This ground of appeal of assessee is allowed.

Briefly stated facts of the case are that the assessee being the employer had withheld the PF and ESI contributions payable by its employees from their salaries. As per sec. 36(1)(va) of the Act, employees contribution to PF & ESI withheld by the employer could not be allowed to be deducted if not paid on or before the due dates provided under the relevant laws governing PF & ESI. Before the AO, the assessee pleaded that the employees’ contribution to PF & ESI has been paid by the assessee on or before the due date of filing the return of income for the relevant assessment year u/s. 139(1) of the Act and, therefore, deduction claimed should be allowed as provided under the proviso to sec. 43B of the Act. The said plea was rejected by the AO for the reason that proviso to sec. 43B of the Act cannot be read into the provision of sec. 36(1)(va) of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who deleted the addition made by the AO holding that employees shares of contribution to PF & ESI should be allowed as deduction which is paid on or before the due date of filing the return of income u/s. 139(1) of the Act. Aggrieved, the Revenue is before us.

We have heard rival submissions and gone through the material available on record. We note that the Hon’ble Calcutta High Court has also taken the view that employee’s contribution to PF paid on or before the due date of filing of return of income u/s. 139(1) of the Act should be allowed as deduction. In this regard, the decision of Hon’ble Calcutta High Court in the case of M/s. Akzo Nobel India Ltd. Vs. CIT in of 2011 dated 14.06.2016 and in the case of CIT Vs. Vijayshree Ltd. of the Hon’ble Calcutta High Court in GA No. 2607 of 2011 dated 06.09.2011 was filed before us. In the order in the case of Vijayshree Ltd. (supra) the Hon’ble Calcutta High Court held as follows:

In view of the aforesaid decision of the Hon’ble Calcutta High court, we are of the view that deduction claimed should be allowed as the employee’s contribution to PF & ESI has been admittedly remitted on or before the due date for filing the return of income u/s. 139(1) of the Act. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and, we confirm the same and dismiss this ground of appeal of revenue.

Ground no. 3 is against the disallowance of loss of sale of fixed assets not added back in the computation of income. Briefly stated facts of the case are that the assessee had sold certain fixed assets during the year from which derived profit of Rs.2,72,482/- which was credited to the P&L Account under the head “other income”, and shown in Schedule 19 and loss of Rs.8,18,562/- which was debited to the P&L Account under the head “other expenses” at schedule no. 21. The assessee, therefore, added back the net sum of Rs.5,46,200/- (Rs.8,18,562 – Rs.2,72,482) in the computation of income. The assessee thus submitted before the AO that the entire loss of Rs.8,18,562/- had been added back to the total income. The AO, however, rejected the explanation of the assessee and held that the disallowance offered by the assessee was only at Rs.5,46,200/- as opposed to Rs.8,18,562/- and hence, short by Rs.2,72,482/-. Accordingly, the said sum was added back by the AO. Aggrieved, the assessee preferred appeal before the Ld. CIT(A) who found that the AO misperceived the separate accounting entries of the profit of Rs.2,72,482/- and loss of Rs.8,18,562/- derived by the assessee on sale of fixed assets in the P&L Account and the depiction of net addition of Rs.5,46,200/- in the computation of income. Therefore, the Ld. CIT(A) held the finding of AO to be factually erroneous and hence, deleted the impugned disallowance holding it to be a double addition. Aggrieved by the Ld. CIT(A)’s decision, the Revenue is before us.

We have heard rival submissions and gone through the facts and circumstances of the case. Sec. 35DD(1) reads as under:

In the result, the appeal of assessee is allowed and that of the revenue is dismissed.