Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. The present appeal filed by the revenue is directed against the order of learned CIT (A)- XVI, Delhi dated 31.01.2013 passed for the assessment year 2009-10. The revenue raised following grounds of appeal: “1. The Ld, CIT (A) has erred in law and on facts in deleting the addition made u/s 40(a)(i) of the I.T. Act amounting to Rs.3,78,73,836/-;
2. The Ld. CIT (A) has erred in law arid on facts in ignoring the fact that the assessee has computed its income based on I.T.Act, 1961 & not as per DTAA between USA and India. Therefore, all provisions of I.T.Act, 1961 shall apply.
3. The Ld, CIT (A) has erred in law and on facts in not considering the fact that the USA office being merely a branch office and provisions of India Act are fully applicable on it.
4. The Ld. CIT (A) has erred in law arid on facts by ignoring the fact that though the payments were made by the branch office out of the profits earned; these profits were directly or indirectly attributed to India office of the assessee. 5 The Ld. CIT (A) has erred in law arid on facts in failing to consider the fact that Sec.195 of the Act requires TDS to be deducted on all payments for any managerial, technical and consultancy fees, DCIT V Okaya Infocom Private Limited
6. The Ld CIT (A) has erred in law and on facts by ignoring the fact that the power of making agreements/contracts for the USA office is only with the Indian Office.”
Though revenue has taken six effective grounds of appeal
but they deal with single issue of disallowance of Rs 37873836/- being professional fees incurred by US branch of the assessee for non-deduction of tax at sources and hence disallowable u/s 40a(i) of The Income tax Act ( In short ‘The Act’).
3. The facts in brief of the case are that the assessee company is engaged in the business of development of computer software. The assessee filed e-return on 30.09.2009 declaring total income at NIL and book profit u/s 115JB at Rs. 1,03,86,544/-. The Assessing Officer noted that the assessee’s case is squarely covered under the provision of section 9 of the act and the payment made by the assessee company in foreign currency to NRs is deemed income chargeable under the provision of section 9(1)(vii). Since the assessee has failed to deduct TDS under the provision of section 195 on the income chargeable to tax in India, therefore, as per the provision of section 40(a)(i) the payment of Rs.3,78,73,836/- is being disallowed and added back to the income of the assessee. The Assessing Officer assessed the income of the assessee at Rs. 3,37,32,640/- .
4. Aggrieved with the order of the Assessing Officer assessee filed an appeal before the learned Commissioner of Income tax (Appeals), who observed in order that there is no dispute that the appellant is having its branch officer in USA, which was engaged in rendering software development, services in the USA. USA Branch has incurred expenses of Rs. 3,78,73,836/- in foreign currency. From scheduled ‘J’ of Audited financial statement, it is seen that Rs.3,75,62,852/- related to professional charges of USA branch office and not Rs.3,73,73,736/-/ Further, the sum of Rs.3.78 crores also includes a sum of Rs.59,384/- paid as professional charges to the auditor in USA for audit of US branch accounts. Therefore, a sum of Rs.3,76,22,236/- made by the US branch officer of the assessee for the services rendered by the US entities in USA including the sum of Rs. 59,384/- paid to the Auditor in USA for audit of branch of account in USA, cannot be taxed in India. Further, he observed that the assessee paid a sum of Rs. 2,51,500/- to professionals in India by Indian officer of the company on which tax of Rs. 21,642/- was deducted at source at per law and deposited to the Govt. account. Therefore, payment of Rs. 2,51,500/- by Indian Office being made after TDS of Rs. 21,642/- is also not liable for disallowance u/s 40(a)(i). Therefore, in view of the above, the learned Commissioner of Income tax (Appeals) deleted disallowance of Rs. 3,78,73,736/-.Aggrieved by the order revenue is in appeal before us.
5. Ld DR relied on the order of AO and vehemently submitted that as assessee has failed to deduct tax at sources the disallowance u/s 40a(i) of the Act is rightly made. He further DCIT V Okaya Infocom Private Limited 9 of the Act, income is deemed to accrue or arise in India and therefore is chargeable to tax and tax should have been deducted thereon. He further submitted that US branch is not a separate entity but is one unit of the assessee company and therefore there is no exemption to it from provisions of the Act related to tax deduction at source.
LD AR on the other hand submitted that assessee is an Indian company and it has one USA branch, which is carrying on independent business in USA and filing tax return in USA. RBI also approved branch of Assessee by its regulations prevalent at that time. Accounts of USA branch are consolidated in India for the purposes of payment of Indian taxes and complying with The Company laws. USA branch has paid the professional fees of Rs 37873386/- on which no tax is deductible as there was no requirement of tax deduction at sources. The amount is also borne out by the US branch of the assessee for earning income in USA. Therefore as the managerial fees is covered by exception u/s 9(1) (vii) (b) of the act and no tax is required to be deducted at source on this payments.
We have carefully considered the rival contentions. It is an admitted fact that assessee has a branch in US which is having an independent sources of income and which has borne the expenditure of Rs 37387386/-. CIT (A) has dealt with this issue as under :- “6.1 I carefully have considered the facts of the case, the finding of the A.O. as well as the submissions of the AR. Ground nos.2 & 3 of appeal are directed against disallowance of Rs.3,78,73,836/- made by the A.O. as per the provisions of sec 40(a)(i) for non deduction of TDS u/s 195. The appellant is engaged in the business of software development and is registered with STPI, Noida. Appellant filed Income Tax Return on 30.09.2009 declaring income of Rs. Nil under provisions of the Income Tax Act 1961 after adjustment of unabsorbed depreciation and B/F losses of earlier years. However, the book profit was declared u/s 115JB at Rs.1,03,86,5947-on which Income tax of Rs.11,76,802/- was paid by the assessee. The assessee has incurred certain expenditures from its US branch office. The A.O treated the expenditures of Rs.3,78,73,836/- of US Branch office as fee for technical services u/s 9(l)(vii) and disallowed the above expenditures as per the provisions of sec 40(a)(i) in view of non deduction of taxes under the provisions of section 195. 6.2 There is no dispute that the appellant is having its branch office in USA which was engaged in rendering software development services in the USA. The A.O. observed that the appellant has incurred expenses of Rs.3,78,73,836/- in foreign currency paid by the US branch office. From the details of professional software development charges paid which is also shown in schedule „J' of audited financial statement, it is seen that Rs.3,75,62,852/- relates to professional charges of USA branch office and not Rs.3,78,73,736/-. Further, the DCIT V Okaya Infocom Private Limited Rs.3.78 crores also includes a sum of Rs.59,384/- paid as professional charges to the auditor in USA for audit of US branch accounts. 6.3 The branch in USA files Income Tax return in USA. The Accounts of the branch offices in USA are audited in USA as per US laws and the income tax return for the branch is filed in USA and taxes as per US laws are paid in USA. The profits of the branch are incorporated in the Head Office profit and consolidated Income Tax return is filed in India for the company. Activity of the US branch is to deploy manpower to the US clients for onsite development of software in USA. For this purpose, it hires the services of Software professionals in USA. From the audit report and details of professional software development charges paid it is evident that the payments are received from the clients which is credited as the income of the branch and payments are made by the branch to the professionals /or US companies (US entities) making available the services of the professionals. Services were utilized by the clients of the US branch of the appellant for which the clients made payments to the US branch which was the source of income of the branch. The services were obtained by the US branch from the entities based in USA. The services were utilized in USA and the payments were made from USA by the US branch of appellant directly for professional services of qualified software professionals. 6.4 There is also no dispute that the payments of Rs.3,76,22,236/- [Rs.3,75,62,852 + Rs.59,384] made from US Branch to the US entities are neither salaries, nor interest nor royalty. The amounts are paid as fees for professional services of qualified software professionals. Therefore, in order to examine the issue whether the above payments of fees for professional services made by the US branch office of the appellant are liable to TDS u/s 195, it is necessary the 0ro visions of sec 195(1) and sec 9(l)(vii) of the l.T. Act. Provision of sec 195(1) says: 'Sec. 195 (1) : Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LQ] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force" From the above it is clear that sums specified in sec 195 payable to a non - resident shall be liable for TDS only if the same is 'chargeable under the provisions of this Act'. Therefore, TDS is not liable if any sum specified u/s 195 paid to a non-resident is not chargeable to tax DCIT V Okaya Infocom Private Limited Income Tax Act, 1961. Further provision of Sec 9(l)(vii) says: Sec 9. (1) The following incomes shall be deemed to accrue or arise in India :— (vii) income by way of fees for technical services payable by— (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India" From the above provision it is clear that income by way of fees for technical services payable by a person who is resident shall be deemed to accrue or arise in India, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of earning any income from any source outside India. Therefore, where the services are utilized in a business carried on outside India or where the services are utilized for the purpose of earning any income from any source outside India, the payments made for such services shall not deemed to accrue or arise in India. In the instant case the services of software professionals hired in USA were utilized in USA by the clients of the US branch of appellant. The payments are received in USA from the clients and are credited as income of the US branch. Payments are made by the branch directly from USA to the US entities for the services of qualified software professionals rendered in USA. The accounts of the branch are audited in USA as per US laws and income tax return are also filed by the US branch of the appellant in USA. Therefore, services of the US entities were utilized in the business of branch office of the appellant which is carried on in USA. The services of US entities were utilized by the US branch for the purpose of earning income from USA. The payments were made by the US branch of the appellant to the US entities in respect of services utilized in business carried on in USA and for the purpose of earning income from USA. Therefore, in view of the above provisions of sec 9(l)(vii), the income by way of fees paid by the US branch office to the US entities cannot, be deemed to accrue or arise in India. 6.5 The explanation below Sec 9(2) which the A.O. heavily relies on says:
DCIT V Okaya Infocom Private Limited "Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." From the above, it is clear that the provision of the explanation will have application only if the services are utilized in a business or profession carried on India or for earning income from any source in India. Since, in the instant case the services of US entities are utilized in business carried on in USA for earning income from USA, therefore, the explanation below Sec 9(2) lich the A.O. heavily relies on, is not applicable in the case of the appellant. 6.6 Further Article 7 of Indo - US Double Taxation Avoidance Agreement says: Article 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment." Even under the article 7 of Indo vs. DTAA if an enterprise of USA is carrying out its business activities in USA, then its business income will be taxed only in USA unless the enterprise is carrying on its business through a permanent establishment (PE) in India. In the instant case the services were rendered by US entities in USA. The services were not rendered by the US entities in India through a P.E in India. Therefore, such services are taxable only in USA and not in India. It is not the case of the A.O that services were rendered in India by the US entities through a P.E in India. On the other hand, as the branch office of the appellant in USA is a PE of the appellant in USA, therefore, the profits attributed to the PE (branch office) are taxable in USA and accordingly the Branch office of the appellant is filing income tax return in USA and taxes are paid in USA for that profit as per US laws. Further, the services of the US entities utilized in the business of appellant's PE carried on in USA shall be taxable only in USA and not in India.
DCIT V Okaya Infocom Private Limited 6.7 Reliance placed by the A.O. in the decision of Hon'ble ITAT, Mumbai in the case of M/s Linklaters LLP Vs. Income Tax Officer (supra) and Ashapura Minichem Ltd.vs. ADIT (supra) are also not applicable in the instant appeal. In the above cases the projects were located in India the assessee had earned fees in connection with these projects in India and so the source of fees were the projects in India and consequently it was held that provisions section 9(l)(vii) were attracted. However, the above decisions are not applicable in the instant case as the payments were made by the US branch of the appellant from USA in connection with the business being carried out in USA and not in connection with any project in India. 6.8 In view of the above, I am of the considered opinion that the payment of Rs.3,76,22,2367- made by the US branch office of the appellant for the services rendered by US entities in USA including the sum of Rs.59,384/- paid to the Auditor in USA for audit of branch accounts in USA, cannot be taxed in India. Therefore, there is no liability of TDS u/s 195(1) and as such no disallowance u/s 40(a)(i) is called for. The appellant also submitted that a sum of Rs.2,51,500/- was paid to professionals in India by Indian office of the company on which Tax of Rs.21,642/- was deducted at source as per law and deposited to the Govt. account. Therefore, payment of Rs.2,51,5007- by Indian office being made after TDS of Rs.21,642/- is also not liable for disallowance u/s 40(a)(i). Considering the above, the A.O. is not justified in disallowing the payment of Rs.3,78,73,7367- u/s 40(a)(i) of the I.T. Act. Therefore, appeal is allowed on ground nos. 2 & 3 of appeal.”
According to CIT (A) the expenses are in relation to foreign business of the assessee and are also borne by that business and paid in foreign country i.e. USA . Therefore it is not covered by the deeming provisions of section 9 (1) (vii) (b) of the Act. According to CIT (A), this income is not chargeable to tax in the hands of the non-resident recipient as it is not covered u/s 5 (2) of the act. As there is no income chargeable to tax in India according to section 5(2) rws 9(1) (vii) of the act, provisions of section 195 of the act does not apply to the assessee. Further as provision of section 195 do not apply on these payments provision of section 40a (i) is not applicable and therefore there cannot be any disallowance. He has also considered the provision of section 9 (1) (vii) (b) in right perspective holding that income from fees for technical services do not deemed to accrue or arise in India when they are incurred and borne by the foreign business of the assessee. In this case, the services have been utilized outside India by business carried on by the US branch of the assessee, which is assessed also under US Tax laws. Therefore no income deemed to accrue or arise in the hands of the recipient of such sum amounting to Rs 37873836/-. Hence there is