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Facts
The Revenue appealed against the order of the CIT(A) which deleted the disallowance of segregation charges paid by the assessee. The Revenue argued that these charges were for technical services, requiring TDS deduction, while the assessee contended they were for routine rework and segregation.
Held
The Tribunal found that the activities of segregation and rework, as explained by the assessee, were routine and did not involve specialized technical skill. The AO had fundamentally misunderstood the processes carried out by third parties. The Tribunal concurred with the CIT(A)'s findings.
Key Issues
Whether segregation charges paid by the assessee for rework and segregation of automotive parts constitute 'fee for technical services' requiring TDS deduction.
Sections Cited
9(1)(vii), Article 5
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Income Tax Appellate Tribunal, DELHI BENCH “D”, DELHI
(A.Y.2020-21) Deputy Commissioner of Income Tax, Circle-19(1), R. No. 221, 2nd floor, CR Building, ...... अपीलाथ�/Appellant I.P Estate, New Delhi 110002 बनाम Vs. Roop Automotives Ltd., 19, Rozka MEO Industrial Area, Nuh, Haryana 122107 ..... �ितवादी/Respondent PAN: AAACR-0315-C अपीलाथ� �ारा/ Appellant by : Shri Vikram Singh Sharma, Sr. DR �ितवादी�ारा/Respondent by : Shri Ruchesh Sinha, Advocate सुनवाई क� ितिथ/ Date of hearing : 04/09/2025 घोषणा क� ितिथ/ Date of pronouncement : : 01/12/2025 आदेश/ORDER
PER VIKAS AWASTHY, JM:
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 29.02.2024, for Assessment Year 2020-21.
The appeal is time barred by 50 days. The revenue has filed an application citing reasons causing delay in filing of appeal. After perusal of the same, we are satisfied that delay in filing of appeal is not intentional, the delay has been caused (A.Y.2020-21) for the reasons stated in petition which appears to be bonafide. Thus, delay of 50 days in filing of appeal is condoned and appeal is admitted for decision on merits.
The Revenue in appeal has raised following grounds: “
1. Whether, on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in deleting the disallowance of Rs.4,81,03,713/- without appreciating that the segregation charges were established to be technical services as per explanation 2 of Section 9(1)(vii) of the Income Tax Act and the assessee was liable to deduct TDS on the same?"
2. Whether, on the facts and circumstances of the case and in law the Ld. CIT(A) was right in deleting the disallowance of Rs.21,74,568/- without appreciating that INEO SC was established to be PE while comparing the facts of the case with the Article 5 of the India-Poland DTAA was also compared with the facts of the case and the assessee was liable to deduct TDS on the same?"
4. Shri Vikram Singh Sharma, representing the department submits that the activities carried out by the overseas parties are not simplicitor segregation of the routine nature. The work involves inspection & sorting of the product followed by re-work on the product and also involves coordination and administration cost to ensure that the products are approved as per technical standards. The process of segregation is highly technical which involves specialized technical skill. The ld. DR referred to invoice to buttress his submissions. He pointed that in the invoice, description of services would show: - Sorting and rework; - Co-ordination; & - Administrative Cost. This shows that the overseas entities are not only repackaging the product but are performing multiple activities of specialized nature. Hence, the Assessing Officer (AO) has rightly held payment for segregation charges as Fee for Technical (A.Y.2020-21) Services (FTS). The ld. DR submitted that in AY 2018-19, similar addition was made by the AO.
5. Per contra, the ld. Counsel for the assessee referring to his written submissions filed before the CIT(A) submitted that the nature of rework and The work involves inspection of the product, segregation involve different steps which are to be done manually or using automatic equipment depending on the type and volume of the item to be sorted. The manual sorting involves human operators who individually inspect each item and sort them based on the predetermined criteria. Whereas, automatic sorting is with mechanical equipments such as conveyer systems, optical sensors, based on predetermined criteria. Automatic sorting is often used in high volume production environment. The technical specifications of any part cannot be modified or altered during the process of rework or sorting. Hence, there is no technical or specialized process involved for segregation, rework, etc. of the parts. The ld. Counsel placing reliance on the findings of the CIT(A) prayed for dismissing appeal of the Revenue. Controverting the argument of the ld. DR that similar disallowance was made in AY 2018-19, the ld. Counsel submits that the issue in AY 2018-19 was different. In AY 2018-19 the disallowance was made in respect of payment of commission, whereas, in the instant appeal the issue is with regard to segregation charges. The assessee has filed appeal against the assessment order for AY 2018-19 and the said appeal is pending before the CIT(A).
Both sides heard, orders of the authorities below examined. Before, we proceed to decide the issue it would be imperative to first understand the nature of work carried out by the third parties with respect to rework segregation, etc.
(A.Y.2020-21) The nature of rework segregation etc. for which segregation charges have been paid are explained by the assessee as under:- “a. In Automotive Industry, rework process involving sorting, segregation, rust removal, deburring are routine to rectify the defects in goods before final delivery to the customers.. The brief nature of operations is as under i. Sorting and segregation is the process of arranging or separating items or objects based on specific criteria, such as size, shape, color, weight, or other distinguishing characteristics. Sorting is typically done to organize, categorize, or separate items based on their properties or characteristics. Sorting can be done manually using tools such as trays, bins, or racks to physically separate items based on specific criteria. Automated sorting can involve the use of conveyor systems, sensors, or sorting machines, filters that utilize mechanical, optical, or other process to sort items based on predetermined criteria i.e. predefined specifications of the parts. ii. Removal of metal chips: This refers to the process of eliminating metal chips or shavings that are generated during machining or other metalworking operations. Metal chips are small pieces of metal that are typically created when cutting, grinding, milling, or drilling metal materials. Removing metal chips is important to prevent damage to machinery and ensure smooth manufacturing processes. iii. Rust removal is the process of eliminating rust, which is a form of corrosion that occurs on metal surfaces when exposed to oxygen and moisture. Rust can negatively affect the appearance, integrity, and performance of metal components. Rust removal techniques can include mechanical methods such as scraping, sanding, or wire brushing, as well as chemical methods using rust dissolvers or inhibitors. iv. Deburring is the process of removing burrs or rough edges from metal components after they have been machined, cut, or otherwise processed. Burrs are sharp or rough protrusions of metal that can occur during manufacturing processes and may affect the quality, safety, or functionality of metal parts. Deburring tools can include manual tools such as deburring knives, files, or abrasive pads, as well as power tools such as deburring machines or deburring brushes. These tools are used to remove burrs or rough edges from metal components and achieve smooth edges or surfaces. v. Threading rework in automotive parts refers to the process of correcting or repairing threaded features that do not meet the desired specifications or requirements. It involves making adjustments or modifications to the threads on a component through (A.Y.2020-21) mechanical process to bring them into compliance with the required specifications or to fix issues that may have occurred during the initial threading process. b. These processes can be done manually or using automated equipment, depending on the type and volume of items to be sorted. Manual sorting involves human operators who visually inspect each item and sort them based on the predetermined criteria. For example, in a warehouse or distribution center, workers may sort items based on their destination or final location for shipping. Automated sorting, on the other hand, involves the use of mechanical equipment, such as conveyor systems, optical sensors to sort items based on predetermined criteria. Automated sorting is often used in high-volume production environments, such as manufacturing facilities, where speed and accuracy are critical for efficient operations. c. That the technical specifications of any part cannot be modified, changed or altered during the process of rework involving any of the above defined processes. These works are generally in the nature of repairs of the parts manufactured with predefined specifications. d. It may be mentioned that Manual labour is very costly in other countries with less population unlike India where manual labour is cheap. That's why this job is done mechanically in foreign countries with less manual labour involvement. e. That instead of calling goods back to India and re-exporting them after rectification of these routine and basic defects, the appellant considered it feasible to take services from parties residing in the country where goods are exported. f. That the activities of segregation and rework which includes sorting, deburring and rust removal. Sorting entails checking for parts that inadvertently get mixed up in wrong boxes and segregating them in the correct boxes. Deburring requires removing metal chips, which are left on the parts by oversight. Rust removal entails use of solution to remove the moisture laden superficial rust from parts, which have been kept unused for more than 6 months are routine in nature. And for rectification of such defects, rework charges are incurred and instead of calling goods back to India and re-exporting them after rectification of these routine and basic defects, the Appellant like other exporters of automotive products considers it feasible to take services from parties residing in the country where goods are exported.”
A plain reading of the activities carried out by the third parties for rework and segregation would show that they do not require any specialized or high technical skill. The Revenue has not disputed the nature of activities carried out (A.Y.2020-21) for which segregation charges have been paid. We find that the AO has erred in fundamentally understanding process carried out by third parties for segregation & repackaging. Even in the invoices raised by the third parties for reworking and segregation, the work carried out by third parties is predominantly standardized performed either manually or mechanically on the basis of predetermined standards and does not involve any new scientific process. We concur with findings of the CIT(A) on this issue, hence, we uphold the impugned order.