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Income Tax Appellate Tribunal, ‘A’ BENCH: CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S.SUNDER SINGH
आदेश / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the Revenue against the Order dated 15.02.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in (Old ITA No.13-14/13-14/A-1) for the AY 2008- 09 and raised the following grounds:
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1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case. 2.1 The learned CIT(A) erred in directing the Assessing Officer to delete the disallowance of Rs.1,09,80,639/- and Rs.17,76,496/- made u/s.40(a)(i) respectively. 2.2 The learned CIT(A) failed to consider the fact that the assessee has deduct withholding taxes as per Act in the absence of specific Articles in the DTAA of the countries of Dubai, Hong Kong, Muscat, Pakistan, Switzerland and Taiwan. 2.3 The learned CIT(A) failed to appreciate that as per the provisions of Sec.90, the benefit of DTAA is available only if the specific Articles provide the benefit to the person rendered the services of Airfreight and such other related services and in the absence of the same, the assessee is liable to withhold tax u/s.195. 2.4 With regard to the payments made to Air Operators towards other reimbursement amounted to Rs.17,76,496/-, the learned CIT(A) failed to appreciate the decision of Authority for Advance Ruling in the case of Tata Timken Ltd (273 ITR 67) and Danfoss Industries PO Ltd (268 ITR 1) wherein it has held that the reimbursement of cost is subject to TDS. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.
2.0 In this case, the assessment was passed u/s.143(3) by an Order dated 31.12.2010, by making the disallowance u/s.40(a)(i) relating to the air freight and the reimbursement of expenses amounting to Rs.1,09,80,639/- and Rs.17,76,496/- respectively. Subsequently, the assessee filed the petition u/s.154 which was rejected by the AO. The issue travelled up to ITAT and ITAT also dismissed the appeal of the assessee. Subsequently, the assessee filed appeal before the CIT(A) on the issue which was sought for rectification u/s.154 in regular appeal with a petition for condition of delay. The Ld.CIT(A) condoned the delay and entertained the appeal of the assessee.
3.0 The first issue in this case is disallowance u/s.40(a)(i) in respect of the payments made to non-resident towards the air transport. The AO made the addition for lack of proof regarding non-existence of PE in India.
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According to the AO, the transaction is covered by Sec.9(1)(i) of IT Act and the assessee required to deduct the tax at source. Since the payment is taxable in the hands of the recipient and the assessee failed to deduct the tax at source u/s.195 of IT Act, the AO made the addition of Rs.1,09,80,639/-. The AO dealt with the issue in Para Nos.2 & 3 of the Assessment Order which is extracted as under:
The assessee has made overseas remittances of Rs.21.17 crores towards freight and related reimbursements and TDS was not deducted on it on the pretence that payment were made either to non-resident shipping companies or to the resident agents or to the representatives and does not come under the purview of withholding tax u/s.195 or contract u/s.194C by virtue of sec.172(1). It is acceptable that sec. 172 governs levy and recovery of tax from non-resident shipping companies and hence, TDS need not be deducted in respect of payments made to those shipping companies. However, on verification, it is seen that the freight and allied payments of Rs.21.17 crores was not payment to shipping companies in its entirety and a component worth Rs.9,85,47,395/- was paid towards air freight and other residuary payments and reimbursements which is outside the purview of sec.172. While only shipping companies are immunized by this section, air transport is outside its purview. The same was appraised to the Authorized Representative and from the books of accounts, the details of payment towards air freight were gathered.
Payment had been made substantially towards air freight and additional payments encompass fuel and security surcharge, terminal fees, transport fees, customs fees, FOB charges, insurance, risk surcharge, AWB fee, handling charges, Airport pick up charges, airline transfer fee and other reimbursements. The other reimbursements constitutes a value of Rs.17,76,496/-. The payments towards air freight were verified with regard to the country of residence of the recipients and found that out of 40 countries, 34 countries were covered under Article 7 of DTAA with those respective countries. However, in respect of the payments made to Air Transport Companies which are residents of Dubai, Hong Kong, Muscat, Pakistan, Switzerland and Taiwan, the same is not covered under DTAA as no such agreement exists between the Republic of India and those countries. The air freight and other reimbursements made with such countries with whom DTAA does not exist is Rs.1,09,80,639/-) The Authorized Representative had not brought on record that the said payment towards air freight was directly made to them or to any resident agent or representative in India. In the absence of the relevant proof regarding the non-existence of PE in India, the transaction is governed by Sec 9(1)(i) since the income has arisen directly through the business connection in India and the source of income is in India. Therefore, this sum of Rs.1,0980,639/- is disallowed u/s. 40(a)(i) and brought to taxation.
4.0 Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal holding that the payment is not covered u/s.9(1)(i) of IT Act and no TDS is ITA No.1181/Mds/2016 :- 4 -: attracted u/s.195 of IT Act. For ready reference, we extract the relevant part of the Ld.CIT(A)’s Order as under:
I have gone through the facts in issue, arguments advanced by the appellant and material on record The appellant admittedly is a third party logistics entity which rendered services of facilitating movement of goods for its clients established in India and outside India. In order to make available the services, it negotiated with handling agents both domestic as also in foreign country by way of negotiation for goods transported from foreign destination to India. The appellant negotiates the terms and conditions and coordinates with the foreign entity till the delivery of goods to the client and charges this towards “Freight” to its client. After realizing the freight charges it defrays the expenses to foreign handling agents on terms agreed upon.
The dispute in this assessment relates to the exigibility of tax in relation to the payment made by the appellant to the foreign entities for the services rendered in various foreign destinations. It is in this context that the exigibility of tax to the payment have to be examined as to whether the tax liability is triggered in terms of Sec.9(1)(i) r.w.s.5 of the Income Tax Act.
It is settled law when services are rendered by a non-resident who has no business connection or presence by way of permanent establishment in India, the income would be triggered in the country of residence where the services were rendered. The ratio in the context of commission agent laid down by the jurisdictional Court in the case of CIT v. Faizan Shoes P Ltd 367 ITR 155 applies mutatis mutandis.
Now coming to the facts of the case, during the period under consideration, the appellant engaged the services of 10 entities who are residents of Hongkong, Switzerland, Taiwan, Pakistan and Dubai. These entities who have rendered services admittedly have no presence in India by way of permanent establishment and no business connection in as much as that the services were rendered outside India. It would suffice to hold that the basic ingredient to trigger the operation of Sec.9(1)(i) are conspicuous in their absence in such services. It would therefore make no difference whether or not any of the entities are resident in the jurisdiction which has DTAA with India or not. Payment(s) made to them would not be exigible to tax unless and until a case has been made out that they are in the nature of the services within the meaning of Sec. 9(1)(vi) or 9(1)(vii) being “royalty” or “technical services”.
5.0 Appearing for the Revenue, the Ld.AR argued that there is no DTAA with the country of Dubai, Hongkong, Muscat, Pakistan, Switzerland and Taiwan and in the absence of specific articles in DTAA the assessee has to deduct the tax at source on the payments. As per Sec.90, the benefit is available only, if the DTAA provides specific articles to the person rendered the services of air freight and such other the related services. In the absence of the same, the assessee is liable to withhold the tax u/s.195
ITA No.1181/Mds/2016 :- 5 -: of income tax act. On the other hand the Ld.AR supported the orders of the Ld.CIT(A).
6.0 We heard the rival submissions and perused the material placed before us.
The AO disallowed the Air Freight made to the parties in countries with whom there is no DTAA for the reason that the assessee has not furnished the proof with regard to non-existence of permanent establishment in India and the transaction is governed by section.9(1)(i), since the income has arisen directly through the business connection in India and the source of income is in India. .
6.1 In the assessee’s case, the services are rendered outside India and there is a DTAA in respect of payments made to the parties located in Dubai, Muscat & Switzerland and there is no permanent establishment in India. In respect of payment made to Hongkong, Taiwan and Pakistan for taxing the payment u/s.9(1)(i) income is deemed to accrue and arise in India, if it accrues and arises directly through or from any business connection in India or any property in India or any asset or source of income in India or through transfer of capital asset in India. For ready reference, we extract the relevant provisions of Sec.9(i)(i) of IT Act as under:
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34(1) The following incomes shall be deemed35 to accrue or arise in India :— 36(i) all income accruing or arising, whether directly or indirectly37, through or from any business connection37 in India, or through or from any property37 in India, or through or from any asset or source of income in India, 38[* * *] or through the transfer of a capital asset situate in India.
6.2 Admittedly, these entities who have rendered the services have no permanent establishment or business connection in India Therefore, Ld.CIT(A) held that the income is not taxable as per Sec.9(1)(i) of IT Act and followed the decision of the Hon’ble jurisdictional High Court in the case of Faizen shoes 366 ITR 154. During the appeal hearing, the Ld.DR did not bring any evidence to prove that the entities who have rendered the services outside India or having Permanent Establishment in India or business connection in India to hold that the income is taxable u/s.9(1)(i) of IT Act. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the Revenue appeal on this ground is dismissed.
7.0 The next issue is the addition of Rs.17,76,496/- in respect of reimbursement of expenses. During the assessment proceedings, the AO found that the assessee had made the overseas payments and a sum of Rs.17,76,496/- towards the reimbursement expenses. The AO was of the view that in respect of the payments made to air operators which are resident of countries with whom DTAA subsists, payments towards freight and other allied charges are covered by Article 7 of DTAA and hence, these payments are outside the purview of withholding tax. However, in respect of other reimbursements amounting to Rs.17,76,496/-, the nature
ITA No.1181/Mds/2016 :- 7 -: of payment as per the details provided by the assessee, does not pertain to freight and associated expenditure. The AO was of the view that the payment of reimbursements could include technical charges or even interest which falls under the purview of taxation u/s.9(1) of IT Act, 1961 and could include the profit element and hence TDS need to be deducted.
Accordingly the amount of Rs.17,76,496/- was added to the taxable income of the assessee u/s.40(a)(i) of IT Act, 1961.
7.1 Aggrieved by the order of the AO the assessee preferred an appeal before the CIT(A) and the Ld.CIT(A) deleted the addition observing that the reimbursement will not attract the TDS. Aggrieved by the order of the Ld.CIT(A) the Revenue is in appeal before us.
7.2 Appearing for revenue The Ld.DR supported the orders of the AO and on other hand the Ld.AR argued that the other expenses amounting to Rs.17,76,496/- which is part & parcel of total freight payments remitted to foreign parties was disallowed by the AO without any basis. The AO himself has accepted in his original assessment order (refer Para No.4), that the Freight payments made to air operators are covered under Article-7 of DTAA and hence these payments are outside the purview of withholding of Tax. Having accepted this, the AO has wrongly disallowed the other expenses amounting to Rs.17,76,496/- on his own assumption that these payments could include technical charges, or even interest which falls under the purview of taxation u/s.9(1) of the IT Act 1962.
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The AO has failed to appreciate that the assessee has submitted a detailed breakup of the total freight payments country-wise and the same has been further classified into different sub headings like:
Freight Payments 2. Fuel & Security Charges 3. Terminal Fee 4. Customs Duty 5. Transport Pickup Charges 6. Airport Delivery Charges 7. FOB Charges 8. Insurance 9. Risk Surcharge There are so many minor expenses under each of the Invoices of the respective freight parties which could not be classified into the above headings & hence it was classified under the headings “Other Reimbursements”. The ld.A.R submited that just because it was classified under the head “Other Reimbursements” the nature of services cannot change.
Considering the above, the Ld.AR argued that the above payments are directly remitted to non-resident, which are not taxable as no parts of their income arises in India and also section 195 is not applicable in such payments.
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Ld AR further submitted that it is settled Law that the TDS in not applicable on reimbursements of expenses. The AR relied on the decision of the Calcutta High Court in the case of Dunlop Rubber Co Ltd (142 ITR 493) which held that expenses recouped by the receiver was part of the expenses incurred by them and it was held that the technical data and other research cost paid by Dunlop India to its overseas head office was a mere recoupment of expenditure and hence not taxable.
7.3 We heard the rival submissions and perused the material placed before us.
The AO accepted that the payment was towards reimbursement of expenses. The reimbursement of expenses does not include any profit element and reimbursable on actual expenditure basis. Sec.195 attracts only in the case of profits involved in the payment. The Ld.AR argued that the broad heads of freight payments is categorized in nine different subjects, which could not be included under the above classification as other reimbursement and the same were neither royalty nor management and technical services. The amounts are paid to the non-residents towards the recoupment of expenses incurred on behalf of the assessee.
The services were rendered outside India and the payment was made outside India and there was no permanent establishment in India or business connection in India. Therefore, the reasoning and finding given for air freight equally applies to the case of reimbursement of expenses.
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Consequently, no disallowance u/s.40(a)(i) is called for and we do not find any error in the order of the Ld.CIT(A) and the Revenue’s appeal is dismissed.
8.0 In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Open Court on June 08, 2017, at Chennai.