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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI JASON P BOAZ
PER SHRI VIJAY PAL RAO, JM:
These cross appeals in IT(IT)A No.1251(B)/14 and IT(IT)A
No.1258(B)/14 and cross objection in C.O.No.29(B)/15 is by the assessee
are directed against the order dated 11-08-2014 of CIT(A)-IV, Bangalore
for the assessment year 2009-10.
The assessee is a 100% subsidiary of Carl Zeiss, AG Germany.
The Carl Zeiss group manufactures and sells optical products. The
assessee is engaged mainly as a front office for Carl Zeiss group in India.
The branch office in India facilitates the sale of Carl Zeiss group products
in India, apart from providing sales support to its products in India. The
assessee filed its return of income on 30-09-2009. During the course of
assessment proceedings, the AO noted that the assessee has claimed
Rs.1,12,51,602/- under the head cost of senior management pertaining to
activities of Carl Zeiss India Branch, the same has been reimbursed to the
3 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
head office as payment is being made from there which is as per the
agreement dated 16-09-2006 between had office and branch office. On
query, by the AO, the assessee submitted that during the financial year a
sum of Rs.15,69,598/- and Rs.21,76,060/- has been reimbursed to Carl
Zeiss, Singapore Pte Ltd. being the cost allocated based on the proportion
of work performed. Thus, it was submitted that the cost reimbursed by
the assessee is in the nature of reimbursement on actual basis without
any mark-up. The AO did not accept the contention of the assessee and
was of the view that the services provided by the head office through Mr.
Venkatechalam Raman Mr. Heather Lim and Mr.R. Muruganandam fall
under the category of fee for technical services (FTS). Thus, the AO held
that the remittance in truth and reality is consideration for technical
services disguised as reimbursement of expenses. Since the assessee did
not deduct tax at source, the said payment of Rs.1,12,51,602/- was
disallowed and added to the total income.
The AO further noted from the schedule-15annexed to the P&L
account that the assessee has claimed an amount of Rs.2,45,55,427/- as
advertisement and sales promotion expenses. The AO found that the
assessee was liable to deduct tax at source, as per the provisions of
respective sections as under;
4 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
Sl.No Description of the expenses Section under which Amount involved TDS ought to be deducted
1 Printing 194C 4,38,909
2 Reimbursement of expenses 194C 7,97,687
3 Sales promotion 194C 94,93,367
4 Stall charges 194C 3,25,000
5 Training charges 194J 6,87,200
Total 1,17,42,163
3.1 Thus, the AO made the addition in respect of the expenditure
disallowed on account of advertisement, sales promotion and
reimbursement to the head office as under;
Add: Expenditure disallowed a) Advt. & Sales Promotion expenses 1,17,42,163 b)Payment by Carl Zeiss Singapore i) Venkatachalam Raman 75,05,944 ii)Heather Lim 15,69,598 iii) R. Muruganandam 21,76,060 Total 1,21,51,601
The assessee challenged the action of the AO before the CIT(A)
and contended that reimbursement to head quarter is not FTS. The
assessee referred to the agreement under which the payment was made as
well as the provisions of DTAA between India and Mauritius. The
assessee has also pointed out that the payment was made and the
5 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
amount was remitted only after obtaining a certificate from the AO u/s
195(2). The CIT(A) accepted the contentions of the assessee sofar as the
payment in respect of Heather Lim of Rs.15,69,598/- and deleted the
addition made by the AO whereas the addition made by the AO in respect
of the payment on account of services rendered by Venkatachalam Raman
(MD) and Ramu Pillai Muruganandam, (IT Specialist) has been upheld by
the CIT(A) by holding that the payment was in the nature of FTS. As
regards disallowance u/s 40(a)(ia) in respect of advertisement and sales
promotion expenses, the CIT(A) deleted the said disallowance by holding
that none of the payment falls under the provisions of section 194C or
194J of the IT Act. Since a part of relief was given to the assessee,
therefore, both the revenue as well as assessee have challenged the
impugned order of the CIT(A) by filing cross appeals and cross objection.
The revenue has raised the following grounds;
“1. The ld.CIT(A) has erred in partly allowing the appeal of the assessee which is opposed to law, equity, facts and circumstances of the case.
The ld.CIT(A) erred in law by holding that the services rendered by Sri Heather Lim (Chief Officer HR and Quality) is of neither technical/consultancy nor managerial in nature.
3.The ld. CIT()A) erred in law by holding that services rendered by Sri Heather Lim (Chief Officer HR & Quality)
6 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
is of neither technical/consultancy or managerial in nature and is not liable to deduct TDS.
The ld.CIT(A) erred in not appreciating the reliance of the AO in the case of AT and S India(P)Ltd Vs CIT (2006) 287 ITR 421(AAR) as per which any consideration paid for rendering of a managerial technical or consultancy services which include provision of services of technical or other personnel, falls within the meaning of fee for technical services and hence attracts sec.9(1)(vii) of the IT Act.
The ld.CIT(A) erred in deleting the disallowance made u/s 40a(ia) of the IT Act by holding that the AO has not verified the agreements entered with the vendors, wherein the assessee did not submit any such agreements before the AO.
The ld.CIT(A) has not called for any remand report from the AO to examine the nature of payment as per agreements.
The appellant carves leave to add to and /or to alter, amend, modify the grounds herein above or produce further documents before or at the time of haring of this case”.
In the cross appeal the assessee has raised the following grounds;
“1.Order bad in law and on facts
The order passed by the DDIT under section 143(3) read with section 144C(3) of the IT Act and the ld.CIT(A) u/s 250 of the Act, on the issue of disallowance of payments of
7 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
Rs.9,682,004 to Carl Zeiss Singapore Pte.Ltd. (CZ Singapore) is bad in law and on facts.
Disallowance of payment of Rs.9,682,004 to CZ Singapore
2.1 The CIT(A) erred in confirming the disallowance made by the DDIT of Rs.9,682,004 in relation to payments by the Appellant to CZ Singapore pertaining to activities of the following employees of CZ Singapore;
Venkatachelam Raman and Ramupillai Muruganandam. 2.2 The CIT(A) erred in not holding that the payments to CZ Singapore were reimbursements on actual basis without any mark-up or other administrative charges.
2.3 The CIT(A) erred in holding that the employees of CZ Singapore had rendered managerial, technical and consultancy services to the appellant.
2.4 Without prejudice to the above, the DDIT/CIT(A) erred in disallowing the payments made by the appellant to CZ Singapore u/s 40(a)(i) of the Act, inspite of the fact that the appellant had obtained a nil withholding certificate u/s 195(2) of the Act for non-deduction of tax at source on payments to be made to CZ Singapore.
The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal.
8 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
The appellant submits that the above grounds are independent and without prejudice to one another.
Ground no.1 to 4 of revenue’s appeal and grounds raised in the
assessee’s appeal are in respect of the common issue of payment made by
the assessee under cost sharing arrangements and claimed as
reimbursement to the head office. As we have already stated in the facts
of the case that the assessee has made a total payment of
Rs.1,12,51,602/- being reimbursement of the expenditure in respect of
the services rendered by three persons namely Shri Venkatachelam
Raman,(MD) Shri Heather Lim (CO,HR & Quality and Shri Ramupillai
Muruganandam, (IT Specialist). The authorities below have confined their
finding on disallowance of the payment on question whether the said
payment was in the nature of FTS and therefore, the income in the hands
of the non-resident is taxable in India, as per the provisions of section
9(1)(vii) of the IT Act, as well as under the provision of DTAA between
India and Singapore. It is pertinent to note that the assessee has
remitted the amount in question to the non-resident after obtaining a
certificate from the AO u/s 195(2) dated 25-01-2009. The AO while
granting the certificate u/s 195(2) has duly recorded the fact that the
payment in question is in respect of availing the services of Carl Zeiss
Pte.Ltd. Singapore under the agreement dated 01-10-2006 for providing
certain managerial and human resources to India branch. The AO also
have noted the facts that the payment were in connection with the salaries
9 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
and other cost of managerial and HR officials charged to Indian branch
which includes the cost of MD, Chief Officer, HR & Quality, web.
administrator for IT application specialists. Thus, after considering the
submissions of the assesee that these services provided by non-resident
fromSingapore does not fall under the ambit of technical knowledge, skill,
know-how, expertise etc. as required by definition of FTS as per article-12
of Indo-Singapore DTAA, the AO allowed the assessee to make the
remittance in para-4 of the said certificate as under;
“4. The assessee’s submissions carefully and after the same the assessee hereby authorized to make remittance and SGD 340, 822 without deduction of TDS to M/s Carl Zeiss Pte Ltd. Singapore. This certificate is only provisional and is issued at the request of the assessee. The allowability of the above costs is subjected to verification at the time of regular assessment of M/s CarlZeiss India Pte.Ltd”.
7.1 Now the question arises whether after obtaining the certificate
u/s 195(2) the assessee can be held liable to deduction TDS and further,
penalize u/s 40a(i) of the Act for non-deduction of TDS. It is pertinent to
note that the provisions of sec.40(a) can be invoked only when there is a
failure on the part of the assessee to comply with the provisions of
Chapter-XVIIB. The payment in question was to a non-resident co. and
therefore, the provisions of deduction of TDS as provided u/s 195 are
10 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
relevant. Since the assessee has already made an application u/s 195(2)
of the Act for seeking permission from the concerned authority to remit
the said payment to the non-resident without deduction of tax at source
and the AO concerned has determined the tax deductable at source as nil
and allowed the assessee to remit the said amount without deduction of
TDS. Therefore, once the assessee has complied with the provisions of
sec.195 and obtained a certificate from the AO in accordance with the
requirement of sec.195(2) than, the assessee cannot be penalized by
invoking the provisions of sec.40a(i) of the Act. Accordingly, without
going into the issue of the nature of payment whether FTS or not we are of
the view that once assessee has complied with the provisions of sec.195
by obtaining the certificate u/s 195(2) then, no disallowance can be made
in respect of the said amount paid to the non-resident by invoking the
provision of sec.40a (i) of the Act. Hence, this issue is decided in favour of
the assessee and consequently, ground no.1 to 4 of the revenue’s appeal
are dismissed and the grounds raised in the assessee’s appeals are
allowed.
Ground nos.5 & 6 of the revenue’s appeal. The issue raised by
the revenue in these grounds is relating to the disallowance made u/s
40(a)(ia) of the Act was deleted by the CIT(A).
We have already reproduced the details of expenses under the
head advertisement and sales promotion expenses of Rs.1,17,42,163/-
11 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
which was disallowed by the AO for want of deduction of tax at source.
The AO has held that the expenses on account of printing,
reimbursement, sales promotion, stall charges are covered u/s 194C for
the purpose of TDS and the expenses on account of training charges are
covered u/s 194J of the Act. The CIT(A) deleted the
addition/disallowance made by the AO by holding that these payments
were not made for work contract executed by the recipients, but the AO
failed to establish that the payment was in relation to the work contract
executed in relation to advertisement, broadcasting, telecasting, carriage
of goods and passengers and catering, as required under section 194 C of
the Act. As regards the training charges the CIT(A) deleted the addition
on the similar reason that the AO has not examined the terms and
conditions of the agreement as to how the payment is covered u/s 194J of
the Act.
We have heard the learned DR as well as the learned AR and
considered the material on record.
10.1 The provisions of sections 40 a(ia) can be invoked in respect of
the amount paid by the assessee on account of a specific nature of
payment as provided under clause (ia) of sec.40a. For the sake of ready
reference, we quote clause-ia as under;
12 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
“ 40 Notwithstanding anything to the contrary in sec.30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “profits an gains of business or profession”. (a) in the case of any assessee;- (ia) any interest, commission or brokerage, (rent, royalty,) fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor or sub- contractor, being resident, for carrying out any work (including supply of labour for carrying out any work0 on which tax is deductible at source under Chapter- XVIIB and such tax has not been deducted or after deduction (has not been paid on or before the due date specified in sub-section (1) of section 139. Provided….. that where in respect of any such sum, tax has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid”.
Thus, it is clear that an amount which is claimed as an
expenditure can be disallowed by invoking the provisions of section
40a(ia), if the said amount is paid by the assessee on account of interest,
commission or brokerage, rent, royalty, fee for professional services, fee
for technical services to a resident or amount payable to contractors or
sub-contractors. In the case on hand, the AO has given the details of the
payment in para-6 as under;
13 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
Sl.No Description of the expenses Section under which Amount involved TDS ought to be deducted
1 Printing 194C 4,38,909
2 Reimbursement of expenses 194C 7,97,687
3 Sales promotion 194C 94,93,367
4 Stall charges 194C 3,25,000
5 Training charges 194J 6,87,200
Total 1,17,42,163
As it is manifest from the details that these payments were
made on account of printing, sales promotion, stall charges, training
charges etc. Though the payments may be under some agreements
between the authorities, but the same does not mean that the payment
was to a contractor of a sub-contractor for execution of the work contract
on behalf of the assessee. The requirement of deduction of tax at source
under chapter-XVIIB and as per sec.194C of the IT Act, the payment is for
getting the work done through the contractor or sub-contractor on behalf
of the assessee which means if the assessee is carrying out its business
activity and get its own work through the contractor or sub-contractor. In
the case on hand there is no allegation by the AO that the payment was
on account of the work executed under the work contract to contractor or
sub-contractor. The payment is made simply for printing, sales promotion,
stall charges and training charges which does not fall under the scope of
14 ITA No.1251 & 1258(B)/14 & CO No.29(B)/15
sec.194C or 194J. Accordingly, we do not find any error or illegality in
the order of the CIT(A) for this issue.
In the cross objection, the assessee has raised an alternative
plea in respect of disallowance made u/s 40(a)(ia). Since the issue in the
revenue’s appeal is decided in favour of the assessee therefore, the cross
objection filed by the assessee becomes infructuous.
In the result, the revenue’s appeal and cross objection of the
assessee are dismissed and the assessee’s appeal is allowed.
Pronounced in the open Court on the 24-07-2015.
Sd/- Sd/- (JASON P BOAZ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER D a t e d : 24-07-2015 Place: Bangalore am* Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order
AR, ITAT, Bangalore