M/S. GOLDRATT CONSULTING LTD.,UK vs. ADIT, NEW DELHI

PER SUCHITRA KAMBLE, JM These appeals are filed by the assessee against the order dated 18/7/2011 &3/10/2011 passed by CIT(A)-XI, New Delhi and CIT(A)-XXIX, New Delhi for the Assessment Years 2006-07 & 2008-09 respectively.

] erred on facts and in law in passing the impugned appellate order dated July 18, 2011.

2. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in upholding the action of the Assessing Officer (“A.O”) in making an addition of Rs.17,687,327/- to the income of the Appellant by treating the reimbursements received from various customers as income by way of Fee for Technical Services (“FTS”). 2.1. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in not accepting the contention of the Appellant that the reimbursements received by the Appellant do not qualify as income under the Act being pure reimbursements that do not contain any mark up.

3. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in confirming the order of the A.O and upholding the addition of Rs.256,530/- being the amount received on account of introductory educational programs/workshops to the income of the Appellant by treating the same to be FTS under the India-UK Double Taxation Avoidance Agreement (“DTAA”). 3.1. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in not accepting the contention of the Appellant that such income was not in the nature of FTS because the implementation of such educational programs does not make available any knowledge or technology to the recipient.

4. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in upholding the order of the A.O for involving the proceedings u/s 201(1) and 201(1A) of the Act on account of failure to withhold taxes u/s 194J on the payments and reimbursements made to the sub-contractors by the Appellant. 4.1. That on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating that since the Appellant does not have any presence in India, the withholding tax provisions should not be applied to be appellant.

5. That on the facts and circumstances of the case and in law, the CIT(A) has erred in upholding the order of the A.O in charging of interest under the provisions of Section 234A and 234B of the Act.

Each of the ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.” 4. The grounds of appeal are as under:-

(I.T.A No. 1111/Del/2012 Assessment Year 2008-09)

“1. That on the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals)-XXIX [“CIT(A)”] erred on facts and in law in passing the impugned appellate order dated October 2, 2011.

2. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in upholding the action of the Assessing Officer (“A.O”) in making an addition of Rs.3,982,152/- to the income of the Appellant by treating the reimbursements received from various customers as income by way of Fee for Technical Service (“FTS”).

2.1. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in not accepting the contention of the Appellant that the reimbursements received by the Appellant do not quality as income under the Act being pure reimbursements that do not contain mark up.

3. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in upholding the order of the A.O in charging interest under the provisions of Section 234A of the Act.

3.1. That on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in upholding the order of the A.O in charging interest u/s 234B and 234C of the Act by not appreciating the fact that the entire income of the Appellant was subject to tax withholding and, therefore, interest under the said provisions was not leviable.

Each of the ground is independent and without prejudice to the other grounds of appeal preferred by the Appellant.

(A.Y 2006-07)

The assessee is a company incorporated in UK on 20/09/2002 and was engaged in the business of providing consulting services in the name and style viable vision which helps in organizational effectiveness viz decision making procedure. Increasing profitability etc. The assessee filed its return of income on 20/1/2007 declaring total income at Rs.24,68,50,612/-. The return was processed u/s 143(1) of the Act and thereafter the case was selected for scrutiny. The Assessment was completed on 23/12/2008 u/s 143(3) of the Act, computing total income at Rs.26,45,37,939/- as against returned income of Rs.24,68,50,612/- as declared by the assessee. The addition/disallowance inter-alia includes i) on a/c of reimbursement of expenses treated as fee received in US$ (Rs.1,70,72,274/-) ii) on a/c of reimbursement of expenses treated as fees received in INR (Rs.6,15,053/-). The total addition was of Rs.1,76,87,327/- the assessment resulted in a demand of Rs.35,80,500/-.

For A.Y. 2008-09 the assessee filed its return of income declaring income of Rs.11,86,37,994/-. The tax was paid at the rate of 15% of gross receipts as per the provisions of Indo-UK Double Taxation voidance Agreement (hereinafter referred to as “the treaty”) with regard to the agreement entered into before 1st June 2005. In respect of the agreement entered into after 1st June, 2005, the tax has been paid at the rate of 10% of gross receipts (along with surcharge and education cess) as per the provisions of the Act because the rate provided in the act was lower than the rate provided in the treaty. However, the assessee did not include an amount of Rs.39,82,152/- received by it as reimbursement of expenses incurred on travelling, boarding and lodging etc. from various customers while computing its gross receipts from fee from technical services. The CIT(A) dismissed the appeal of the assessee by holding that identical issue was involved in assessee’s own case for the A.Y. 2006-07 and thus upheld the order of the Assessing Officer. The CIT(A) also observed that the scheme of taxation of royalty/FTS under the treaty or the act was similar to that of computing profits and gains in the case of non-residents under Section 44B or 44BB, i.e. in both the cases, the income is taxed on presumptive basis and without allowing any deduction for any expense/allowances. Therefore, the principle laid down by judgments in cases of CIT Vs. RBF Reg. Coopn. 313 ITR as well as ACIT vs. Enron Global 128 TTJ 84 and CIT v. Halliburton Offshore Inc. 300 ITR 265 was applied by the CIT(A) in the present case.

“We have considered the nature of services rendered by the non-resident in an earlier part of this order. Such services commenced prior to the bringing out FCCB issue; and continued during the period when the issue was open for subscription and continued even after its closing. A meticulous look at the nature of such services taken note of above, clearly reveals that these are in the nature of technical, managerial or consultancy services. To be more specific the ‘management’ is aptly brought within the scope of “fees for technical services.” ‘Underwriting commission’ is basically consideration for assuring that if the Issue is not fully subscribed then the underwriters shall take up the unsubscribed portion of the shares and in return for such undertaking, the underwriting commission is paid at a specific percentage of the amount of the total issue. Underwriting commission is only for incurring the liability of subscribing to the unsubscribed portion left over by the general public. The services by the underwriter. The underwriting commission is de hors the rendering of any managerial, technical or consultancy services and hence cannot fall within the definition of fees for technical services u/s 9(1) (vii) last item is the reimbursement of expenses. The Assessing Officer has not disputed that the sum of rs.1.68 crores is in the nature of expenses reimbursed by the assessee to the lead managers. When a particular amount of expenditure is incurred and that sum is reimbursed as such, that cannot be considered as having any part of it in the nature of income. Any payment, in order to be brought within the scope of income by way of fees for technical services u/s 9(1) (vii), should be or have at least some element of income in it. Such payment should involve some compensation for the rendering of any services, which can be described as income in the hands of the recipient. In other words the component of income must be present in the total amount of fees paid for technical services to constitute as an item falling u/s ((1) (vii). Where the expenditure incurred is reimbursed as such without having any element of income in the hands of the recipient, it cannot assume the character of income deemed to accrue or arise in India. We therefore, hold that the amount of ‘Management commission’ in respect of FCCB issue amounting to Rs.1.62 crores and the ‘Selling commission’ of Rs.6.07 crores fall within the scope of income by way of fees for technical services in terms of Section 9(1) (vii). However, the other two amounts namely the ‘Underwriting commission’, at Rs. 2.43 crores and the ‘expense reimbursed’ at Rs. 1.68 crores are not income by way of fees for technical services.”

Order pronounced in the Open Court on 24th January, 2017.