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Income Tax Appellate Tribunal, DELHI
Before: SH. ANIL CHATURVEDI & SH. KUL BHARAT
Consolidated Appeals (4)
These four appeals filed by the Revenue are directed against the order dated 02.11.2017, 08.06.2018, 02.11.2017 & 31.12.2018 of the Commissioner of Income Tax (Appeals)-35, 4, 35 & 22, New Delhi relating to Assessment Years 2013-14, 2012- 13, 2014-15 & 2015-16 respectively.
At the outset, Learned AR submitted that the issue involved in all the appeals are identical except for the year and amounts involved and therefore the submissions made by him for one year would be applicable to the all years also. Ld DR did not controvert the aforesaid submissions of Ld AR. In view of the aforesaid submissions of the Counsel, we for the sake of convenience proceed to dispose of all the appeals by a consolidated order but for the sake of reference refer to the facts for A.Y. 2012-13 in ITA No.5812/Del/2018.
The relevant facts as culled from the material on records are as under :
4. Assessee is a company which is stated to be engaged in the business of providing executive search, consulting and related services. Assessee filed its revised return of income on 19.11.2012 declaring income of Rs.1,58,48,620/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 16.02.2016 determining the total income at Rs.5,86,12,440/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 08.06.2018 in Appeal No.25/17-18/CIT(A)-4 allowed the appeal of the assessee. Aggrieved by the order of CIT(A), Revenue is now in appeal and has raised the following grounds in ITA No.5812/Del/2018:
1. “Whether on the facts and in tire circumstances in the case and in law, the Learned CIT(A) has erred in deleting the addition of Rs.4,27,63,823/- made by the Assessing Officer ('AO') under the provisions of section 40(a)(ia) of the Income Tax Act, 1961 ('the Act') by holding that no TDS was deductible u/s 195 of the Act on the payments made by the assessee to the overseas group entities. 1.1 Whether the Ld CIT(A) has erred in holding that the payment made to the overseas entities for services rendered under the agreement s entered into with them are not in the nature of Fee for included Services ('FIS')/Fee for Technical Services ('FIS') under the relevant DTAAs and therefore, and not covered within the purview of section 195 of the Act, being payments not chargeable to tax in India. 1.2 Whether the Ld. CIT(A) has erred in holding that the services rendered under the Agreement do not satisfy the "make available" condition so as to quality as FIS/FTS under the relevant Articles of the respective DTAAs. 1.3 Without prejudice to the foregoing, whether the Ld. CIT(A), has erred in taking an unduly narrow and unrealistic view of the concept of "make available", not appreciating the fact that the condition of "making available" technical knowledge, skill, experience etc is satisfied where the services rendered by an entity result the recipient absorbing such knowledge, skill & experience in the course of availing the services. 1.4 The Ld. CIT(A) has erred in placing reliance on the decisions cited by the assessee without any discussion regarding the factual matrix involved in those cases and ignoring the ratio in the case of M/s US Technology Resources Pvt. Ltd. Vs. ACIT [ITA No. 222/Cochin/2013, ITAT Cochin] which is similar to the facts of the case under consideration.
2. Without prejudice to the above, whether on the facts and in the circumstances of the case, the Ld CIT(A) has erred in holding that he assessee company does not constitute the Permanent Establishment of the overseas entities and therefore, the payments under the Agreements, being in the nature of business income in the hands of the entities, are not chargeable to tax in India as such services have not been rendered in India through PE. 3. The appellant craves leave for reserving the right to amend, modify, add or forgo any ground(s) of appeal at any time before or during the hearing of the appeal.”
Similar Grounds raised in other years also are as under:
ITA No.1021/Del/2018 for A.Y. 2013-14:
1. “Whether on the facts and circumstances of the case in law, the Learned CIT(A) was correct in deleting the addition of Rs.1,93,17,377/- made by the AO under the provisions of section 40(a)(ia) of the Act.
2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing.”
ITA No.1022/Del/2018 for A.Y. 2014-15:
1. “Whether on the facts and circumstances of the case in law, the Learned CIT(A) has erred in ignoring the fact that the assessee has permanently establishment (PE) in India and the assessee is rendering services in India? 2. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in ignoring the fact that the income has accrued or arise in India and is liable to be taxed in India? 3. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) was correct in deleting the addition of Rs.3,02,13,410/- made by the AO under the provisions of Section 40(a)(i) of the IT Act for non deduction of tax on professional fee?
4. The appellant crave leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal
at any time before or at the time of hearing of appeal.
5. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing.”
ITA No.1022/Del/2018 for A.Y. 2015-16 :
“Whether on the facts and circumstances of the case in law, the Learned CIT(A) was correct in deleting the addition of Rs.3,05,85,865/- made by the AO under the provisions of section 40(a)(ia) of the Act.
2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of the hearing.”
6. Learned DR at the outset, submitted that though various grounds have been raised by Revenue in A.Y. 2012-13, but the sole issue for consideration is the deletion of additon made u/s 40(a)(ia) of the Act.
During the course of assessment proceedings, AO noticed that assessee had paid professional fees to its following overseas group entities aggregate to Rs.4,27,63,823/-: Sr. Company Name Amount No. 1. Heidrick and Struggles 89,76,900 International Inc., USA 2. Heidrick and Struggles Singapore 1,09,53,778 Pte. Ltd. 3. Heidrick and Struggles Australia 22,25,361 Ltd.
Heidrick and Struggles UK Limited 206,07,784 Total 427,63,823/-
AO noted that assessee meets the executive search needs of the clients who have requirements in India as well as for overseas expansions and it avails services of its overseas group entities for carrying out evaluation of the candidates and short listing of candidates and thereafter assessee takes a final decision in consultation with the client. He noted that overseas entities provides services to the assessee in India for which assessee had paid aggregating sum of Rs.427,63,823/- by way of professional fees. He of the view that the foreign entities were rendering services in India and income of the overseas entities of Heidrick & Struggles have arisen in India and was liable to be taxed in India only. He noted that assessee was liable to deduct tax but since assessee had not complied with the TDS provisions, the expenditure needs to be disallowed. The submissions made by the assessee was not found acceptable to AO. He therefore held that since assessee did not deduct TDS as per the provision of Section 195 of the Act, he by invoking the provision of Section 40(a)(ia) of the Act disallowed the expenditure of Rs.42,763,823/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A). CIT(A) vide detailed order decided the issue in favour of the assessee by observing as under: “Considering the discrepancy in the facts stated in the order, I have independently considered the facts of the case and the position of law.
In terms of the provisions of Section 9(1)(vii) of the Act read with Section 9(2) of the Act, an income which falls within the ambit of fees for technical services would be considered as income deemed to accrue or arise in India. Thus, if one reads Section 9(l)(vii) of the Act, with Section 9(2) read with Section 5 of the Act, if a transaction falls within the ambit of Fees For Technical Services, the same would be income deemed to accrue or arise in India and hence would be taxable in India even in the hands of the non- resident. Here, it is important to take note of the provisions of Section 195 of the Act, which provides that if any amount paid to a non- resident by a resident Indian is income and taxable in India, TDS has to be deducted on such income. Thus, if a transaction falls within the ambit of Fees For Technical Services, then any payment to be made to non-resident for such transaction would be taxable in India in terms of Section 9(2)(vii) read with Section 9(2) read with Section 5 of the Act and hence would be eligible for TDS deduction under Section 195 of the Act. Further Section 90/90A of the Act, provides the assessee to take the benefit of the Double Taxation Avoidance Agreement (DTAA) entered between India and other countries, if the provisions of the DTAA are beneficial to the assessee vis-a- vis the provisions of the Act. In other words, if in terms of the provisions of Section 9(l)(vii) of the Act read with Section 9(2) and Section 5 any income is Fees for Technical Services and taxable in India, but if the provisions of the relevant DTAA does not tax such transaction in India, then the same would not be exigible to tax India and hence provisions of Section 195 of the Act would not be applicable. Now, considering the facts of this case, it is important to determine whether the amount paid by the appellant company to its foreign group entities for rendition of service of candidate/ executive search, providing guidance on how to move ahead in a typical case, sharing relevant information basis their search, consulting and related services is 'Fees For Technical Services' or not. Fees for Technical Services is defined in Explanation 2 to Section 9(1)(vii) of the Act to mean "any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) ". Though the services provided by the overseas entities does not fall within the limb of managerial or technical, however, it surely is covered within the limb of consultancy. The Hon'ble Courts have time and again held that the word 'consultancy' is inextricably linked with the word 'technical' and hence only technical consultancy would form part of FTS. In this regard, Hon'ble Authority for Advance Ruling in the case of Intertek Testing Services India (P) Ltd., In re (2008) 307ITR 418 (AAR), held that the expression 'technical' should not be construed narrowly and hence, should not be confined to technology relating engineering, manufacturing or other applied sciences. It was held that professionalism and an element of expertise should be at the back of "technical services". Thus, in view of the above, since the overseas entities were rendering I professional and expert consultancy of searching of suitable candidates/ executives and also providing consultancy to the Indian company on novel and typical matters, the same without any iota of doubt requires professional expertise. Thus, the consultancy provided by the overseas companies to the Indian entity is well covered within the ambit of 'Fees For Technical Services' in terms of the provisions of Section 9(1)(vii) of the Act and hence taxable in India in terms of Section 9(2) read with Section 5 of the Act. Since the said income construe as Income the same is exigible to TDS in terms of Section 195 of the Act. The said position of law has also been accepted by the appellant as the appellant has already deducted TDS on the payments made for the services rendered by the companies situated in China, Thailand, Honk Kong and New Zealand. However, with regard to the payments made to entities situated in the country of US, UK, Singapore and Australia, the appellant has submitted that the transaction in consideration is not taxable in India in terms of the provisions of the DTAA of India with such countries. The appellant has invoked the beneficial provision of the DTAA in terms of Section 90 of the Act. The appellant submitted that in terms of Article 12(4) of the India -US DTAA the term 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy nature, if such services, inter alia, make available technical knowledge, experience skill, know how or process. The appellant submitted that the DTAA of India with the entities situated in UK, US, Singapore and Australia, have the 'make available' clause in the definition of FTS. Further, the appellant submitted that since the entities based out of Singapore, UK, US and Australia from whom the service and assistance has been taken, have not made available their professional expertise to the Indian entity the same do not fall within the ambit of FTS. All such entities have rendered the service but has not shared their expertise with the Indian entity so as to enable the Indian entity to independently apply the expertise of the foreign entitiesi without any assistance from them.
In Perfetti Van Melle Holding B.V, In re [2011] 16 taxmann.com 207/[2012] 204 Taxman 166 (AAR - New Delhi) ' Hon'ble Authority for Advance Ruling, held the view that "the expression 'make available' means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own". Hon'ble Mumbai Bench of Income Tax Appellate Tribunal in the case of Raymond Ltd. v. DCIT86 ITD 791 (Mumbai ITAT) has interpreted the term 'make available' and held that a mere rendering of the services is not reposed in as 'make available' unless the person utilizing the services is able to make use of the technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. It is also to be considered, that as per the definition of FTS under the India- US, India-Singapore. India-Australia and India-UK DTAA, if the technical services are not available to the Indian entity by the foreign service provider, then the same would not fall within the ambit/ meaning of FTS. Reliance is placed on the decision of the Hon'ble Chennai Bench of Income Tax Appellate Tribunal in the case of ACIT v. Tex
Tech International (P) Ltd. [2012] 27 taxmann.com 190 (Chennai), wherein the Hon'ble Bench while dealing with the India USA DTAA held that 'To be fees for technical services' within meaning of Article 12.4(b ) of Indo-US DTAA, it is necessary that the entity abroad makes available technical knowledge, skill, know-how or process to the assessee in India or otherwise, the services rendered by entity abroad should consist of development and transfer of technical plan or technical design." Further, Hon'ble Mumbai Bench of Income Tax Appellate Tribunal in the case of ACIT v. WSN Global Services (P) Ltd. [2011] 10 taxmann.com 254 (Mum), while dealing with the India-UK DTAA held that "The scope of events for technical services under article 12 of the Indo-U.K. Tax Treaty is confined to payment of any kind to any person in consideration for making available technical knowledge, etc. Generally speaking, technical services are treated as having been 'made available' when recipient of such technical services is enabled to perform such services without recourse to the service provider." I have read the relevant articles of the India-US DTAA (Article 12: Royalties and Fees for included Services); India-Singapore DTAA (Article 12: Royalties and Fees for Technical Services); India- Australia DTAA (Article 12 Royalties) and India- UK DTAA (Article 13: Royalties and Fees for Technical Services) according to which for the transaction to qualify as FTS/ Royalty, the service provider has to 'make available' the technical skill and knowledge. The wordings of the articles of India- US; India-UK and India-Singapore DTAA are similar however, the Article of India- Australia DTAA does not specifically define FTS. Instead India-Australia define Royalty which within its ambit includes fees for technical services with 'make available' clause. Here, in this case, industry specific expertise is provided to the Indian entity which is applied in the services rendered by the Indian entity to its customers. The India entity and its employees of the Indian entity are not trained with the expertise of foreign entities and did not get equipped to apply the expertise on their own without reference to the foreign entity service provider when the service agreement comes to an end. From the services rendered, it can be inferred that the entities situated in USA, UK, Australia and Singapore are not making available the technical knowledge and skills to the Indian entity. They are simply rendering their services and are being paid for the same by the Indian entity. Thus, it can be concluded that the foreign service providers situated in USA, UK, Australia and Singapore are not making available the technical skill and knowledge and hence the service cannot be termed as fees for technical services/ royalties in terms of the relevant provisions of DTAA of India with US, UK, Australia and Singapore. Having concluded as above, since, the transaction does not qualify as FTS/Royalty under the DTAA, in terms of the provisions of Section 90/90A of the Act, the beneficial provisions of DTAA would be applicable vis-a-vis the domestic provisions of the Act. In other words as the transaction is not an FTS under the DTAA the same will prevail, even if the transaction does qualify for FTS under the normal provisions of the Act. From the aforesaid discussion, it can be noted that the transactions of rendition of service in the instant case entered with the foreign entities is surely an FT5 as per the provisions of the Act/however, in terms of the relevant provisions of DTAA of India with Australia, Singapore/ UK and US, the said transaction would not be FTS as no technical skill is made available to the Indian entity by the foreign service providers. In this backdrop, I have also taken note of the decision of the Hon'ble Kolkata Bench in the case of Batlivala & Karani Securities (India) (P.) Ltd. v. DCIT [2016] 71 taxmann.com 142 (Kol-Trib), wherein, the Hon'ble Bench discussed the provisions of FTS in US, UK and Singapore DTAA with India. In view of the aforesaid discussion and findings, as the service rendered by the foreign entities is not Fees for technical services, as per the DTAA(s). no income is deemed to accrue or arise in India in terms of the provisions of Section 9(2) of the Act read with Section 9(2) of the Act. Therefore, the provisions of Section 195 of the Act are not applicable. As no TDS is required to be deducted, applicability of disallowance of expense in terms of Section 40(a)(ia) of the Act would not arise.
Since the payment made by the appellant to its group entities is not fees for technical services, then the same would be construed as only business income in the hands of the subsidiaries which would get taxed in India only in the event of existence of permanent establishment (PE) in India. The Assessing Officer in his company is working on the behalf of the M/s Heidrick and Struggles Inc., USA, Heidrick and Struggles Singapore Pte Ltd., Heudrick and Struggles Australia Ltd and Heidrick and Struggles UK Ltd, therefore it is a permanent establishment in India of its holding company. I am unable to appreciate such a hasty and unsubstantiated conclusion of the AO. Firstly, the AO should have known that whether the Indian entity i.e. the appellant is a permanent establishment of each of the foreign enterprise of UK, US, Singapore and Australia and this was to be tested separately qua each foreign enterprise. Further, just because the Indian company is a subsidiary of its foreign holding cannot be the reason of the Indian company being a permanent establishment of foreign holding company. Thus, in the absence of any concrete finding in respect of each of the foreign service provider entities, it is considered that no such entity has a permanent establishment in India.
As per article 7 of Australia, USA, UK and Singapore Treaty, in the absence of Permanent Establishment in India, the business income also would not get taxed in India. Hence the payment made by the appellant to the foreign entities is not chargeable to tax in India in the hands of such foreign entities in India. The provisions of section 195(1) mandate a requirement that the income should be chargeable to tax in India to assume jurisdiction in India. In the instant case, it is proved beyond doubt that the foreign entities do not have any income chargeable to tax in India. The appellant has also brought to my notice the decision of my fellow CIT(A) in appellant's own case on the same issue for the AY 2011-12, AY 2013-14 and AY 2014-15, wherein the CIT(A)-16 and CIT(A)-35 have decided the issue in favour of the appellant and deleted the disallowances made by the AO under Section 40(a)(i) of the Act. In view of the aforesaid findings, Assessing Officer is directed to delete the addition amounting to Rs.4,27,63,823/- arising out of disallowance made under section 40(a)(i) in respect of payments made to foreign entities. The grounds of appeal (2.1 to 2.5) are allowed.”
9. Aggrieved by the order of CIT(A), Revenue is now before us.
10. Before us, Learned DR supported the order of AO. Learned AR on the other hand reiterated the submissions made before the lower authorities and further submitted that issue related to disallowance on similar ground had come up for A.Y. 2011-12 in assessee’s own case wherein similar disallowance was made u/s 40(a)(ia) of the Act. He submitted that CIT(A) vide order dated 02.11.2017 had deleted the entire addition made by the AO and the order of the CIT(A) has been accepted by the Department as no further appeal has been preferred against the order of CIT(A). He further submitted that the facts of the case in the year under consideration for A.Y. 2012-13 to 2015-15 are on similar facts and by following the principal of consistency, appeal of the Department are liable to be dismissed. As far as the issues in A.Y. 2013-14 to 2015-16 is concerned, he submitted that in those years in additon to the parties to whom the payment were made in A.Y. 2012-13, payment also made to Heidrick & Struggles, Dubai which was also disallowed by AO u/s 40(a)(ia) of the Act for failure to deduct TDS. He submitted that as far as issue with respect to the tax despite in A.Y. 2013-14 is concerned, CIT(A) held in favour of the assessee by holding that in the absence of a specific clause on FTS and in the absence of a PE of Heidrick & Struggles Dubai in India in terms of India-UAE DTAA, there was no liability to deduct tax on such payments with respect to the payment to Heidrick & Struggles Dubai in A.Y. 2013-14, 2014-15 & 2015-16 are concerned, he submitted that aforesaid entities are incorporated in the UAE and being tax resident in UAE, they are governed by the India-UAE DTAA. He submitted that under the India-UAE DTAA, income of a tax resident in UAE can only be taxable in India if it falls within any of the provisions of the treaty. He submitted that since there is no clause for taxability of the services falling under “fee for technical services”, the payments made under the impugned transaction cannot be brought to tax under any other article of the India-UAE DTAA. He therefore submitted that the professional fee paid cannot be taxed as fees for technical services as alleged by the Ld. AO in the absence of such a specific provision in the India-UAE Tax DTAA. He thus supported the order of CIT(A).
We have heard the rival submissions and perused the materials available on record. The issue in the present appeal is with respect to the disallowance made u/s 40(a)(ia) of the Act on account of non-deduction of TDS. We find that CIT(A) by a well reasoned and detailed order with respect to the payment made to the entity situated in USA, UK, Singapore & Australia is concerned, has given a finding that those entities from whom the service and assistance has been taken, have not made available professional expertise to the Indian entity and therefore the same do not fall within the ambit of FTS. He further observed that the Indian entity and its employees were not trained with the expertise of foreign entities and the Indian entity did not get equipped to apply the expertise of the foreign entities on their own without any assistance from foreign entity service provider. He therefore concluded that the foreign service providers situated in USA, UK, Australia and Singapore were not making available the technical skill and knowledge to the Indian entity and therefore the fees paid by Indian entity cannot be termed as fees for technical services/royalties in terms of the relevant provisions of DTAA of India with USA, UK, Australia and Singapore. He has further held that since the transaction does not qualify as FTS/Royalty under the DTAA, therefore in terms of the provisions of Section 90/90A of the Act, the beneficial provisions of DTAA would be applicable vis-à-vis the domestic provisions of the Act. He thus held that service rendered by the foreign entities was not fees for Technical Services as per DTAA and therefore no income was deemed to accrue or arise in India in terms of the provisions of Section 90 r.w.s 9(2) of the Act and therefore the provisions of Section 195 of the Act were not applicable and therefore no TDS was required to be deducted by the assessee. CIT(A) has also noted that in assessee’s own case on the same issue for A.Y. 2011-12, 2013-14 & 2014-15, CIT(A) have deleted the additon made by AO and have thus decided the issue in assessee’s favour. Before us, no fallacy in the findings of CIT(A) has been pointed out by Revenue. In such a situation, we are of the view that no interference in the findings of CIT(A) is called for and thus the grounds of Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
As far as 1022/Del/2018 & 2387/Del/2019 for A.Ys. 2013-14, 2014-15 & 2015-16 are concerned, before us, both the parties have submitted that the issue raised in the appeal for A.Y. 2012-13 is identical to that of Assessment Years 2013-14, 2014-15 & 2015-16. We have hereinabove while deciding the appeal for A.Y. 2012-13 for the reasons stated have dismissed the appeal of the Revenue. We therefore for similar reasons also dismiss the appeals of the Revenue for A.Ys. 2013-14, 2014-15 & 2015-16. Thus the grounds of the Revenue are dismissed.