M/s. Hughes Systique India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1041/DEL/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81602 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 28-08-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 21-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH K V ERMA CIT DRS
• Assessee Lawyers: ABHSHEK AGARWAL
• Keywords: Depreciation; Transfer pricing; Double taxation relief; International transaction
• Section: 143(3); 10; 15; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SH. R. S. SYAL, AM AND SH. GEORGE GEORGE K. , JM ITA NO. 1041/DEL/2014 : ASSTT. YEAR : 2009-10 HUGHES SYSTIQUE INDIA PVT. LTD. 1, SHIVJI MARG, WESTEND GREENS, NATIONAL HIGHWAY NO. 8 NEW DELHI VS DEPUTY COMMISSIONER OF INCOME- TAX, CIRCLE-12(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AACCB6600N ASSESSEE BY : SH. AJAY VOHRA, SH. NEERAJ JAIN, SH. PUNEET CHUGH AND SH. ABHSHEK AGARWAL REVENUE BY : SH.PEEYUSH JAIN & YOGESH K. V ERMA, CIT DRS DATE OF HEARING : 28.8.2014 DATE OF PRONOUNCEMENT : 29.8.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER ON 21.1.2014 U/S 143(3) R.W. S 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2009-10. 2.1. THE FIRST ISSUE IS A CHALLENGE TO THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 8,56,01,801/- I N THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS INCORPORATED IN INDIA IN 2005 AND IS ENGAGED IN THE ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 2 BUSINESS OF DEVELOPMENT OF SYSTEMS AND APPLICATIONS SOFTWARE. IT IS A SUBSIDIARY OF HUGHES SYSTIQUE MAURITIES PVT. LTD. F OUR INTERNATIONAL TRANSACTIONS WERE REPORTED BY THE ASSESSEE, VIZ., R ECEIPTS ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES, PAYMENT ON ACCOUNT O F MARKETING SUPPORT SERVICES, PAYMENT FOR SERVICES AVAILED AND MISCELLANEOUS INCOME. THE TRANSFER PRICING OFFICER (TPO) ACCEPTED THE LAST TWO TRANSACTIONS AT ALP. FIRST INTERNATIONAL TRANSACTIO N OF RECEIPTS ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES AMOUNTED TO RS. 52 ,42,68,870/-. IN ITS TRANSFER PRICING STUDY REPORT, THE ASSESSEE BENCHMA RKED THIS TRANSACTION BY SELECTING COMPARABLE UNCONTROLLED PRICE (CUP) ME THOD AS THE MOST APPROPRIATE METHOD AND A CORROBORATIVE INTERNAL TRA NSACTIONAL NET MARGIN METHOD (TNMM). THE TPO OBSERVED THAT THE AS SESSEE PROVIDED SOFTWARE ENGINEERING SERVICES IN THE TELECOM SECTOR AND IT WAS AN ESSENTIAL SOFTWARE DEVELOPMENT CENTRE OF ITS US HOL DING COMPANY. FOLLOWING THE VIEW TAKEN BY HIM IN THE IMMEDIATELY PRECEDING YEAR, THE TPO HELD THAT THE USE OF CUP METHOD AS THE MOST APP ROPRIATE METHOD AND A CORROBORATIVE INTERNAL TNMM WERE NOT CAPABLE OF ACCEPTANCE. FOR REJECTING SUCH METHODS, HE OBSERVED THAT THE CUP ME THOD CAN BE USED ONLY IF THERE ARE POTENTIALS TO LEAD TO THE CORRECT RESULTS. THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ITS FOUR AES UNDER THIS SEGMENT. HE NOTICED THAT THE ASSESSEE SUPPLIED DETAILS OF TRANS ACTIONS WITH ONLY ONE OF SUCH FOUR ENTITIES, NAMELY, M/S HUGHES NETWORK SYST EMS INC. AND IT FAILED TO SUBMIT ANY DATA AS REGARDS THE TRANSACTIO NS WITH THE OTHER THREE ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 3 AES. IT WAS FURTHER NOTICED BY HIM THAT THE ASSESS EE TRIED TO DEMONSTRATE THAT THE PAYMENTS RECEIVED FROM M/S HUGHES NETWORK LTD. WAS MORE THAN WHAT THAT A.E CLAIMED TO HAVE PAID TO ITS UNRE LATED PARTIES FOR THE SAME WORK, BUT THE NATURE OF SERVICES PROVIDED BY THE UNRELATED PARTIES TO THE AE WERE NOT BROUGHT ON RECORD. IN VIEW OF TH ESE REASONS, THE TPO HELD THAT THE CUP METHOD COULD NOT BE APPLIED. AS R EGARDS THE APPLICATION OF INTERNAL TNMM, THE TPO NOTICED THAT THERE WERE NO SEPARATE ACCOUNTS MAINTAINED IN RESPECT OF TRANSACT IONS WITH AES AND NON-AES. IT WAS SEEN THAT THE ASSESSEE ALLOCATED C OST BETWEEN A.E. AND NON-A.E SEGMENTS IN SUCH A MANNER AS TO BOOST THE P ROFITABILITY OF THE A.E SEGMENT SO AS TO CLAIM THAT IT HAD EARNED MORE PROFIT FORM THE INTERNATIONAL TRANSACTIONS VIS--VIS THE TRANSACTIONS WITH NON-AES. HE, THEREFORE, REFUSED TO RELY ON THE SEGMENTAL RESULTS PROVIDED BY THE ASSESSEE FOR DOING AN INTERNAL TNMM ANALYSIS. THE TPO CARRIED OUT A FRESH SEARCH AND SELECTED CERTAIN COMPANIES AS COMP ARABLE FOR APPLYING EXTERNAL TNMM FOR BENCHMARKING THE ASSESSEES INTER NATIONAL TRANSACTIONS UNDER THIS SEGMENT. THE COMPANIES CHOS EN BY HIM AS COMPARABLE WERE CONFRONTED TO THE ASSESSEE. AFTER E NTERTAINING OBJECTIONS FROM THE ASSESSEE, HE SHORTLISTED SIXTEE N COMPANIES AS COMPARABLE. A LIST OF SUCH COMPANIES HAS BEEN DRAW N ON PAGE 46 OF THE TPOS ORDER. BY APPLYING THE PROFIT LEVEL INDICATO R (PLI) OF OPERATING PROFIT / OPERATING COSTS, THE TPO DETERMINED ARITHM ETIC MEAN OF SUCH PLI OF THE SIXTEEN COMPARABLE COMPANIES AT 21.17%. THIS PROFIT RATE WAS ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 4 APPLIED TO THE TOTAL OPERATING COSTS INCURRED BY TH E ASSESSEE UNDER THIS SEGMENT AT RS. 50.33 CRORE TO WORK OUT THE ALP AT R S. 60.98 CRORE. SINCE, THE ASSESSEE HAD RECEIVED ONLY A SUM OF RS. 52.42 CRORE, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT AMOUNTING TO R S. 8.56 CRORE. THE ASSESSEE FAILED TO CONVINCE THE DISPUTE RESOLUTION PANEL (DRP) ON ITS LINE OF REASONING. RESULTANTLY, THE A.O MADE AN ADD ITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT UNDER THIS SEGMENT FOR A SUM OF RS. 8.56 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDIT ION. 2.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS CLEAR FROM PARA 4.2 OF TH E TPOS ORDER THAT HE REJECTED THE APPLICATION OF CUP METHOD AS THE MOST APPROPRIATE METHOD AND A CORROBORATIVE INTERNAL TNMM BY RELYING ON TH E VIEW TAKEN BY HIM IN THE PRECEDING YEAR. IT IS NOTICED THAT HIS O RDER FOR SUCH EARLIER YEAR CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL. THE TRIBUNAL HAS PASSED A COMMON ORDER ON 5.7.2013 (IN ITA NOS. 5420/DEL/2011 AND 6057/DEL/2012) NOT ONLY FOR THE IMMEDIATELY PRECED ING ASSESSMENT YEAR 2008-09 BUT ALSO ASSESSMENT YEAR 2007-08. IT CAN B E SEEN THAT IN BOTH THE YEARS, THE ASSESSEE BENCHMARKED ITS INTERNATIO NAL TRANSACTIONS UNDER THE SOFTWARE DEVELOPMENT SERVICES SEGMENT BY APPL YING CUP METHOD AS THE MOST APPROPRIATE METHOD AND INTERNAL TNMM A S THE CORROBORATIVE METHOD, AS THE POSITION IS OBTAINING FOR THE INSTANT YEAR. THE TPO DISREGARDED THE BENCHMARKING ANALYSIS DONE BY THE ASSESSEE AND PROCEEDED TO DETERMINE ALP OF THE INTERNATIONAL TRANSACTIONS BY ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 5 APPLYING EXTERNAL TNMM. THE TRIBUNAL EXAMINED THE C ORRECTNESS OF THE TPOS APPROACH IN THE LIGHT OF DETAILED SUBMISSIONS ADVANCED ON BEHALF OF THE RIVAL PARITIES. VIDE PARA 14 OF ITS ORDER, T HE CO-ORDINATE BENCH ACCEPTED THE ASSESSEES CONTENTION THAT THE APPLICA BILITY OF INTERNAL CUP METHOD WAS NOT PROPERLY DEALT WITH BY THE DRP AND T PO. EVENTUALLY, THE TRIBUNAL RESTORED THE MATTER TO THE TPO WITH A DIRECTION : TO DECIDE THIS ISSUE AFRESH AFTER GIVING THE ASSESSEE AN OPPO RTUNITY OF BEING HEARD AND GIVE PROPER REASON IF THE CUP METHOD IS PROPOSE D TO BE NOT CONSIDERED . THE CRUX AND THE ADMITTED INFERENCE OF THE VIEW T AKEN BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIA TELY PRECEDING TWO ASSESSMENT YEARS IS THAT FIRSTLY, THE INTERNAL CUP SHOULD BE APPLIED AND IF, FOR ANY REASONS THE CUP METHOD CANNOT BE APPLIE D, THEN TNMM SHOULD BE RESORTED TO. THE LD. AR CONTENDED THAT TH E TPO IN HIS ORDER FOR THE ASSESSMENT YEAR 2010-11 HAS ACCEPTED THE AS SESSEES APPROACH OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDER T HIS SEGMENT IN THE FASHION SIMILAR TO WHAT HAS BEEN DONE FOR THE INSTA NT YEAR. IT WAS, THEREFORE, CONTENDED THAT THE ASSESSEES BENCHMARKI NG DONE IN THE TP STUDY REPORT FOR THE CURRENT YEAR BE ACCEPTED AS CO RRECT AND THE RESULTANT ADDITION BE DELETED. 2.3. IT IS APPARENT FROM THE ORDER PASSED BY TH E TPO FOR THE INSTANT YEAR THAT HE RELIED ON THE VIEW TAKEN BY HIM FOR TH E IMMEDIATELY PRECEDING ASSESSMENT YEAR. IT IS FURTHER NOTICEABLE THAT THE APPEALS FOR NOT ONLY THE IMMEDIATELY PRECEDING ASSESSMENT YEAR BUT ALSO A YEAR ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 6 EARLIER, HAVE BEEN DECIDED BY THE TRIBUNAL, IN WHI CH SPECIFIC DIRECTIONS HAVE BEEN GIVEN AS NOTED ABOVE. ON ONE HAND, WE HAV E THE BENEFIT OF AN ORDER PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, WHICH ALSO FORMS THE BAS IS FOR THE ADDITION MADE IN THE INSTANT YEAR, AND ON THE OTHER HAND, T HERE IS AN ORDER PASSED BY THE TPO CULMINATING INTO THE ASSESSMENT ORDER FO R A SUCCEEDING YEAR, WHOSE FACTS MAY BE DIFFERENT AND WHICH ITSELF MAY B E AMENABLE TO RECTIFICATION OR REASSESSMENT OR REVISION. THERE IS HARDLY ANY NEED TO ACCENTUATE THAT IN SUCH CIRCUMSTANCES, THE VIEW TAK EN BY THE TRIBUNAL IN ASSESSEES OWN CASE SHOULD PREVAIL OVER ANY OTHER T HING. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER T O THE FILE OF AO/TPO FOR FRESH DETERMINATION OF ALP UNDER THIS SEGMENT I N CONSONANCE WITH THE DIRECTIONS GIVEN BY THE TRIBUNAL FOR THE IMMEDI ATELY PRECEDING TWO ASSESSMENT YEARS. 2.4. AT THIS STAGE, WE CONSIDER IT IMPORTANT TO C LARIFY THAT THE CUP METHOD CAN BE USED ONLY IF THE PRODUCTS OR SERVICES OF THE ASSESSEE ARE COMPARABLE TO THOSE OF THE OTHER UNCONTROLLED TRANS ACTION. THUS, IT FOLLOWS THAT IT IS OF UTMOST IMPORTANCE TO FIRST PR ECISELY DETERMINE THE NATURE OF SERVICES OFFERED BY THE ASSESSEE TO ITS A ES IN ORDER TO MAKE AN EFFECTIVE COMPARISON WITH THE SERVICES RENDERED BY IT TO THE NON-AES. UNLESS THE NATURE OF SERVICES RENDERED BY THE ASSES SEE TO ITS AES AND NON-AES IS ACCURATELY ASCERTAINED, THERE CAN BE NO QUESTION OF MAKING A ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 7 MEANINGFUL COMPARISON. COMING BACK TO THE TPOS OR DER, IT IS OBSERVED THAT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WI TH FOUR OF ITS A.ES UNDER THIS SEGMENT. THE DETAILS OF TRANSACTIONS WIT H ONLY ONE A.E, NAMELY, HUGHES NETWORK SYSTEMS INC., WERE MADE AVA ILABLE TO THE TPO IN THE SHAPE OF AGREEMENT ETC. NO OTHER DETAILS OR COPIES OF THE AGREEMENTS FOR THE TRANSACTIONS WITH THE REMAINING THREE A.ES WERE PROVIDED TO THE TPO, ENABLING HIM TO CARRY OUT AN A NALYSIS OF THE FUNCTIONS PERFORMED BY THE ASSESSEE FOR MAKING A LO GICAL COMPARISON WITH THE UNCONTROLLED TRANSACTIONS UNDERTAKEN BY IT . AS, WHILE FOLLOWING THE TRIBUNAL ORDER FOR THE PRECEDING YEARS, WE ARE RESTORING THE MATTER TO THE FILE OF A.O. WITH A DIRECTION TO FIRST CONSIDER THE APPLICABILITY OF CUP METHOD, THE ASSESSEE IS DIRECTED TO PROVIDE ALL NEC ESSARY DETAILS TO THE TPO FACILITATING HIM TO MAKE A MEANINGFUL COMPARISO N OF THE SERVICES RENDERED BY IT TO THE AES AND NON-AES. SUCH DETAIL S OF THE TRANSACTIONS TO THE TPO MAY BE IN THE FORM OF AGREEMENTS WITH TH E REMAINING THREE A.ES AS WELL, COPIES OF INVOICES AND OTHER RELEVANT DETAILS, AS THE TPO MAY DEEM NECESSARY. ONLY IF THE CUP METHOD IS FOUN D TO BE INAPPLICABLE BY THE TPO DUE TO ONE REASON OR THE OT HER, INCLUDING NOT PROVIDING OF THE NECESSARY DETAILS OF THE INTERNATI ONAL TRANSACTIONS WITH THE OTHER THREE AES OR THE DETAILS OF SERVICES PROV IDED BY THE ASSESSEE TO NON-AES, THAT THE TPO WILL SWITCH OVER TO THE TNMM FOR BENCHMARKING INTERNATIONAL TRANSACTIONS UNDER THIS SEGMENT. IN T HE FINAL ANALYSIS, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMI T THE MATTER TO THE FILE ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 8 OF AO/TPO FOR A FRESH DETERMINATION OF THE ALP OF T HE INTERNATIONAL TRANSACTIONS UNDER THIS SEGMENT AS DISCUSSED ABOVE. 3.1. NEXT ISSUE RAISED THROUGH GROUND NO. 4 IS AGAI NST THE MAKING OF AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 9,13,17,896/- IN RESPECT OF INTERNATIONAL TRANSACTI ON IN THE NATURE OF MARKETING SUPPORT SERVICES. 3.2. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING TWO ASSESSMENT YEARS RESTORED THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF ALP UNDER THIS SEGMENT AS WELL. THE DIRECTIONS GIVEN BY THE TRIBUNAL, AS DISCUSSED ABOVE, WERE ADMITTEDLY COMMON TO BOTH THE SEGMENTS, NAMELY, SOF TWARE DEVELOPMENT SERVICES SEGMENT AND MARKETING SUPPORT SERVICES. THE VIEW CANVASSED BY THE TPO IN MAKING THE ADDITION FO R THE INSTANT YEAR UNDER THIS SEGMENT AGAIN TRACES ITS ORIGIN TO THE P RECEDING YEAR. WITHOUT GOING INTO THE FURTHER DETAILS AND RESPECTFULLY FOL LOWING THE PRECEDENT, WE ARE OF THE CONSIDERED OPINION THAT THE ENDS OF J USTICE WOULD MEET ADEQUATELY, IF THE IMPUGNED ORDER ON THIS SCORE IS ALSO SET ASIDE AND THE MATTER IS SENT BACK TO THE AO/TPO FOR A FRESH DETER MINATION OF THE ALP UNDER THIS SEGMENT IN CONSONANCE WITH THE DIRECTION S GIVEN BY THE TRIBUNAL. WE ORDER ACCORDINGLY. ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 9 4.1. GROUND NO. 5 IS AGAINST THE ADDITION OF RS . 18,98,367/- ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEPRECIATION ON COMPU TER UPS AND OTHER PERIPHERALS @ 60%, WHICH WAS REDUCED BY THE ASSESSI NG OFFICER TO 15%. 4.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSUE IS NO M ORE RES INTEGRA IN VIEW OF THE DIRECT DECISION OF THE HONBLE JURISDICTIONA L HIGH COURT IN THE CASE OF CIT VS BSES RAJDHANI POWERS LTD. (DELHI) AND A SPECIAL BENCH ORDER IN THE CASE OF DCIT VS DATACRAFT INDIA LTD. (2010) 133 TTJ (MUM) (SB) 377 . IN THESE DECISIONS, IT HAS BEEN HELD THAT UPS AND OTHER COMPUTER PERIPHERALS ARE ELIGIBLE FOR DEPRECIATION @ 60%. THE LD. AR CONTENDED THAT THE TRIBUNAL HAS ALSO TAKEN SIMILAR VIEW IN ASSESSEES OWN CASE FOR THE EARLIER YEARS. IN VIEW OF THE FORE GOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE DES ERVES TO SUCCEED ON THIS ISSUE. WE ORDER ACCORDINGLY. THIS GROUND IS AL LOWED. 5.1. THE LAST EFFECTIVE GROUND IS AGAINST THE ADDI TION OF RS. 19,81,010/- MADE U/S 40(A)(I) [ SIC. 40(A)(IA)] OF THE ACT. THE FACTUAL MATRIX OF THIS GROUND IS THAT THE ASSESSEE PAID MANAGEMENT FEES OF RS. 19,81,010/- TO M/S HUGHES SYSTIQUE CORPORATION. SINCE NO DEDUCTIO N OF TAX AT SOURCE WAS MADE BY THE ASSESSEE FROM SUCH PAYMENT TO THE F OREIGN AE, THE ASSESSING OFFICER CAME TO HOLD THAT THE DISALLOWANC E WAS CALLED FOR IN ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 10 TERMS OF SEC. 40(A)(I). THE VIEW TAKEN BY THE ASSES SING OFFICER WAS ECHOD BY THE DRP. THE ASSESSEE IS AGGRIEVED AGAINS T SUCH ADDITION. 5.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE AO HAS M ADE DISALLOWANCE U/S 40(A)(I) OF THE ACT, WHICH SECTION PROVIDES THAT NO TWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30 TO 38, THE AMOUNT OF ANY INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, WHICH IS PAYABLE - (A) OUTSIDE INDIA; OR (B) IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY OR TO A FOREIGN COMPANY- , SHALL NO T BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PRO FITS AND GAINS OF BUSINESS OR PROFESSION', IF, TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B ON IT AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCT ION, HAS NOT BEEN PAID DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB- SECTION (1) OF SECTION 139 OF THE ACT. THE ASSESSEE HAS MADE PAYMENT ITS AE, WHICH IS A PERSON OUTSIDE INDIA. MATERIAL PROVISION FOR DEDUC TION OF TAX AT SOURCE IN SUCH CASES IS CONTAINED IN SECTION 195, THE REL EVANT PART OF WHICH PROVIDES THAT ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, . ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT SHALL, AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT TH E TIME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAF T OR BY ANY OTHER MODE, ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 11 WHICHEVER IS EARLIER, SHALL DEDUCT INCOME-TAX THERE ON AT THE RATES IN FORCE. ON A CONJOINT READING OF THESE TWO PROVISIO NS AS ARE APPLICABLE TO THE PRESENT CASE, IT IS MANIFEST THAT IN ORDER TO M AKE A DISALLOWANCE BY INVOKING SECTION 40(A)(I), IT IS SINE QUA NON THAT APART FROM OTHER THINGS, THE AMOUNT WHICH IS PAID TO THE PERSON OUTSIDE INDI A SHOULD BE THE ONE ON WHICH TAX IS DEDUCTIBLE AT SOURCE AND SUCH TAX H AS NOT BEEN DEDUCTED OR NOT PAID AFTER DEDUCTION. THUS, IT CLEARLY EMER GES THAT UNLESS THE AMOUNT PAID BY THE ASSESSEE IN INDIA IS NOT CHARGEA BLE TO TAX IN THE HANDS OF THE RESIDENT OF OTHER COUNTRY, THERE CAN BE NO QUESTION OF INVOKING SECTION 195 AND CONSEQUENTLY SECTION 40(A)(I) OF TH E ACT. 5.3. NOW LET US EXAMINE WHETHER THE PROVISIONS OF SECTION 195 ARE ATTRACTED ON SUCH PAYMENT OR, IN OTHER WORDS, WHETH ER SUCH AMOUNT IS CHARGEABLE TO TAX IN THE HANDS OF THE FOREIGN AE. B EFORE REACHING ANY CONCLUSION IN THIS REGARD, IT IS PARAMOUNT TO NOTIC E THE NATURE OF SERVICES RENDERED BY THE FOREIGN AE, FOR WHICH THE ASSESSEE MADE THE SAID PAYMENT. IT IS OBSERVED FROM PARA 4.1 OF THE ASSESS MENT ORDER THAT THE ASSESSEE PAID THIS AMOUNT AS MANAGEMENT FEES TO ITS FOREIGN A.E. PARA 4.4 OF THE ASSESSMENT ORDER FURTHER ELABORATES THE FACT THAT THIS AMOUNT WAS PAID AS MANAGEMENT FEES. PAGE 398 OF THE PAP ER BOOK IS AN ADDENDUM TO THE MASTER AGREEMENT, PURSUANT TO WHICH , THE AMOUNT WAS PAID BY THE ASSESSEE. FOR THE SAKE OF READY REFERE NCE, ITS RELEVANT PART GIVEN IN ARTICLE 7.A.(III), IS REPRODUCED HERE AS UNDER : - ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 12 AS CONSIDERATION FOR THE PROVISION OF PAYROLL AND RELATED SERVICES BY HSC TO HSIPL FOR HSIPL SECONDED EMPLOYEES TO HSC , HSIPL WILL PAY HSC AT ACTUAL COST INCURRED BY HSC (SUPPOR TED BY INVOICES) PLUS 2.5% OF SUCH ACTUAL COST INCURRED. 5.4. THE FURTHER ELABORATION OF SUCH PAYROLL SERVI CES IS AVAILABLE IN ANNEXURE B(1) ON PAGE 400 OF THE PAPER BOOK, WHI CH READS AS UNDER :- FOR PROCESSING AND ARRANGING A WORK PERMIT FOR THE HSIPL SECONDED EMPLOYEES TO HSC TO BE BASED AT USA AND PE RFORMING SERVICES THERE FROM; FOR PROCESSING OF PAYROLL FOR THE HSIPL SECONDED EM PLOYEES TO HSC TO BE BASED AT USA AS PER USA LAWS; FOR CREDITING MONTHLY SALARIES THROUGH MONEY TRANSF ER TO THE HSIPL SECONDED EMPLOYEES BANK ACCOUNTS. FOR CREDITING ANY ADDITIONAL AMOUNT WHICH THE HSIPL SECONDED EMPLOYEES MAY RECEIVE FROM HSIPL AS ANY PERFORMANC E INCENTIVE THROUGH MONEY TRANSFER TO THE HSIPL SECONDED EMPLOY EES BANK ACCOUNTS. TO FULFILL THEIR OBLIGATIONS UNDER USA LAW, HSC MAY ISSUE AN EMPLOYMENT OFFER LETTER TO THE HSIPL SECONDED EMPLO YEE WITH SALARY DETAILS. 5.5. A BARE PERUSAL OF THE NATURE OF PAYROLL AND R ELATED SERVICES BRINGS OUT THAT THESE WERE RENDERED BY THE AE IN USA IN RE SPECT OF THE ASSESSEES EMPLOYEES SENT THERE ON SECONDMENT BASIS . THE SPECIFIC NATURE OF SUCH SERVICES AS SET OUT ABOVE, MAKES IT EVIDENT THAT THESE WERE FOR PROCESSING AND ARRANGING WORK PERMITS FOR THE ASSESSEES SECONDED EMPLOYEES; PROCESSING OF PAYROLL OF SUCH SECONDED EMPLOYEES; AND CREDITING OF MONTHLY SALARIES THROUGH MONEY TRANSFE R TO THE ACCOUNTS OF ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 13 THE SECONDED EMPLOYEES BANK ACCOUNTS ETC. FROM TH E ABOVE DISCUSSION, IT IS EVIDENT THAT THE ASSESSEE MADE PAYMENT TO ITS AE ON ACCOUNT OF MANAGERIAL SERVICES AS HAS ALSO BEEN ACKNOWLEDGED BY THE AO IN THE ASSESSMENT ORDER. 5.6. NOW THE QUESTION ARISES AS TO WHETHER ANY PAY MENT FOR SUCH MANAGERIAL SERVICES IS CHARGEABLE TO TAX IN INDIA I N THE HANDS OF THE FOREIGN AE. THE AO HAS CONSIDERED SUCH PAYMENT AS FEES FOR TECHNICAL SERVICES IN TERMS OF EXPLANATION 2 TO SEC. 9(1)(VI I) OF THE ACT. THIS DEFINITION DIVULGES THAT IT IS A CONSIDERATION FOR RENDERING OF MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES WITH SOME EXCLUSI ONS. SINCE THE ASSESSEE HAS PAID FOR PAYROLL SERVICES, WHICH ARE N OTHING BUT MANAGERIAL SERVICES, WE HOLD THAT THE AMOUNT IS COVERED WITHI N THE MEANING OF FEES FOR TECHNICAL SERVICES AS PER EXPL. 2 TO SEC TION 9(1)(VII) OF THE ACT. THE LD. AR WAS ALSO FAIR ENOUGH TO CONCEDE THIS POS ITION. 5.7. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE TH E PRESCRIPTION OF SECTION 90(2) OF THE ACT, THE RELEVANT PART OF WHICH READS AS UNDER : - 90. AGREEMENT WITH FOREIGN COUNTRIES. (1) . (2) WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO A N AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA UN DER SUB- SECTION (1) FOR GRANTING RELIEF OF TAX, OR AS THE C ASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THA T ASSESSEE. ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 14 5.8. ON GOING THROUGH THE MANDATE OF THE ABOVE PRO VISION, IT TRANSPIRES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO A DOUBLE TAXATION AVOIDANCE AGREEMENT WITH THE GOVERNMENT OF ANY OTHE R COUNTRY FOR GRANTING OF RELIEF IN RESPECT OF INCOME ON WHICH TA X IS PAYABLE BOTH IN INDIA AS WELL AS THE OTHER COUNTRY OR FOR THE PURPO SES OF AVOIDANCE OF DOUBLE TAXATION OF INCOME UNDER THIS ACT OR UNDER T HE CORRESPONDING LAW IN FORCE IN THAT OTHER COUNTRY, THEN THE ASSESSEE T O WHOM SUCH AGREEMENT APPLIES, SHALL BE ENTITLED TO BE GOVERNED BY THE P ROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) OR THE PROVISI ONS OF THE ACT, WHICHEVER COURSE IS MORE BENEFICIAL TO IT. 5.9. A PLAIN READING OF THE ABOVE PROVISION POINTS OUT TWO THINGS. FIRST THING IS THAT THERE SHOULD BE A DTAA ENTERED INTO BETWEEN TWO COUNTRIES `FOR GRANTING RELIEF OF TAX AND THE SECO ND THING IS THE DESCRIPTION OF THE NATURE OF RELIEF, BEING, `THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THA T ASSESSEE . ON A HARMONIOUS READING OF THE PROVISION IN ENTIRETY, IT FOLLOWS THAT WHEN A DTAA HAS BEEN ENTERED INTO BETWEEN INDIA AND ANOTHE R COUNTRY FOR GRANTING A RELIEF OF TAX, THEN THE PROVISIONS OF TH IS ACT OR THE DTAA, WHICHEVER ARE MORE BENEFICIAL TO THE ASSESSEE, SH ALL APPLY. ORDINARILY, AN ASSESSEE IS SUBJECTED TO TAX IN INDIA AS PER THE PROVISIONS OF THE ACT. IF, HOWEVER, THE PROVISIONS OF THE DTAA ARE APPLICA BLE AND FOUND TO BE MORE BENEFICIAL TO THE ASSESSEE VIS--VIS THE INDIAN TAX PROVISIONS, THEN ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 15 GOING BY SECTION 90(2), SUCH PROVISIONS OF THE DTAA SHALL OVERRIDE THE CORRESPONDING PROVISIONS OF THE ACT. TO STATE SIM PLY, IF A PARTICULAR INCOME FALLS UNDER THE INDIAN TAX NET, THE SAME SHA LL BE CHARGEABLE TO TAX IN THE HANDS OF THE ASSESSEE AS PER THE ACT, UNLESS IT IS SHOWN THAT THE PROVISIONS OF THE APPLICABLE DTAA PROVIDE FOR NON-T AXABILITY OF SUCH INCOME OR TAXABILITY AT A LOWER RATE. IN SUCH A SI TUATION, THE BENEFICIAL PROVISION AS CONTAINED IN THE DTAA SHALL PREVAIL OV ER THE PROVISION UNDER THE ACT. IT IS DISCERNIBLE THAT THE LEGISLAT URE HAS GIVEN AN OPTION TO THE ASSESSEE TO BE GOVERNED BY THE PROVISIONS, EITH ER OF THE ACT OR OF THE DTAA, WHICHEVER ARE MORE BENEFICIAL TO IT. THE CORO LLARY THAT FOLLOWS IS THAT ONE NEEDS TO FIRSTLY, EXAMINE AS TO WHETHER A PARTICULAR SUM IS CHARGEABLE TO TAX UNDER THE ACT OR NOT. IF IT IS CH ARGEABLE UNDER THE ACT, THEN IT NEEDS TO BE EXAMINED IF SUCH INCOME IS ALSO TAXABLE AS PER DTAA. IF THE INCOME IS EQUALLY CHARGEABLE TO TAX - BOTH UNDER THE INCOME-TAX ACT AS WELL AS DTAA- , THEN THE ASSESSEE CANNOT ESCAPE TAX ON IT. IF HOWEVER SUCH INCOME IS NOT CHARGEABLE TO TAX IN INDIA UNDER THE ACT, THEN THE MATTER ENDS THERE. THERE IS NO NEED T O CONSIDER THE PROVISIONS OF THE DTAA AS TO WHETHER ANY CHARGE IS ATTRACTED THERE ON SUCH INCOME. IF SUCH INCOME IS CHARGEABLE TO TAX IN INDIA UNDER THE ACT, BUT THE PROVISIONS OF DTAA EXEMPT IT, THEN AGAIN T HERE CAN BE NO QUESTION OF TAXABILITY OF SUCH SUM DUE TO THE MANDA TE OF SECTION 90(2) . THE ESSENCE IS THAT AN ASSESSEE, TO WHOM THE DTAA A PPLIES, HAS BEEN ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 16 GIVEN OPTION TO BE GOVERNED BY THE ACT OR THE DTAA, WHICHEVER IS MORE BENEFICIAL TO IT. 5.10. THE HONBLE SUPREME COURT IN CIT V. P.V.A.L.KULANDAGAN CHETTIAR (2004) 267 ITR 654 (SC) HAS HELD THAT WHERE THE TAX LIABILITY IS IMPOSED BY THE ACT, THE DTAA MAY BE RESORTED TO EIT HER FOR REDUCING THE TAX LIABILITY OR ALTOGETHER AVOIDING THE TAX LI ABILITY. SIMILAR VIEW HAS BEEN EXPRESSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN DDIT (IT) V. SAFMARINE CONTAINER LINES N.V. (2009) 120 ITD 71 (M UM.). IN VIEW OF THE ABOVE DISCUSSION, IT BECOMES PALPABLE THAT THE STATUTE BY MEANS OF SECTION 90(2) OF THE ACT, HAS ITSELF CONFERRED AN OPTION TO AN ASSESSEE TO BE RULED EITHER BY THE ACT OR THE DTAA, WHICHEVER I S MORE BENEFICIAL TO HIM. 5.11. COMING BACK TO THE FACTS OF THE CASE UNDER CONSIDERATION AND HAVING SEEN THAT CONSIDERATION FOR MANAGERIAL SERV ICES IS CHARGEABLE TO TAX IN INDIA AS PER EXPL.2 TO SECTION 9(1)(VII), LE T US EXAMINE IF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND USA (HEREINAFTER REFERRED TO AS THE DTAA) HELPS THE ASSESSEE, AS HAS BEEN CONTENDED. IN THIS REGARD, IT IS PERTINENT TO NOTE THAT WHEREAS SUB-SECTION (VII) OF SECTION 9(1) DEALS WITH FEES FOR TECHNICA L SERVICES UNDER THE ACT, ITS PARALLEL IS ARTICLE 12 OF THE DTAA WHIC H DEALS WITH FEES FOR ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 17 INCLUDED SERVICES, WHICH TERM HAS BEEN DEFINED IN PARA 4 OF ARTICLE 12 AS UNDER : - 4. FOR PURPOSES OF THIS ARTICLE, FEES FOR INCLUDE D SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONN EL) IF SUCH SERVICES : (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW- HOW, OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRA NSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. 5.12. IT IS AXIOMATIC THAT SUB-PARA (A) OF PARA 4 OF ARTICLE 12 HAS NO APPLICATION TO THE CASE AS THE NATURE OF SERVIC ES PROVIDED BY THE FOREIGN AE ARE ADMITTEDLY THOSE OF MANAGERIAL NATUR E AND ARE NOT ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJO YMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH ANY ROYALTY IS PA YABLE. 5.13. NOW COMING TO SUB-PARA (B) OF PARA 4 OF AR TICLE 12, IT CAN BE SEEN THAT THESE ARE TO MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW- HOW, OR PROCESSES, OR CONSIST OF THE D EVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. THE ABOVE SERVICES, ON A BROADER PERSPECTIVE, CAN BE DESIGNATED AS TECHN ICAL OR CONSULTANCY SERVICES. IN SHARP CONTRAST TO EXPLANATION 2 TO SEC . 9(1)(VII), THE MANAGERIAL SERVICES ARE ABSENT AS PER ARTICLE 12(4) OF THE DTAA. AS ADMITTEDLY, THE AO HAS CATEGORIZED THE NATURE OF SE RVICES PROVIDED BY ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 18 THE AE AS MANAGERIAL AND ON APPRECIATION OF THE D ETAILS OF THE NATURE OF SUCH SERVICES ABOVE, WE HAVE ALSO FOUND THEM TO BE OF MANAGERIAL NATURE, IT IS APPARENT THAT THESE ARE NOT COVERED W ITHIN THE AMBIT OF ARTICLE 12 OF THE DTAA. 5.14. THERE IS ANOTHER ASPECT OF THE MATTER. EVE N IF IT IS PRESUMED FOR THE SAKE OF AN ARGUMENT THAT THE AMOUNT PAID TO THE FOREIGN AE IS A CONSIDERATION FOR THE SERVICES AS REFERRED TO IN PA RA 4 OF ARTICLE 12, STILL IT CANNOT BE INCLUDED WITHIN THE AMBIT OF THIS ARTICLE . IT IS SO FOR THE REASON THAT IN ORDER TO ROPE ANY AMOUNT WITHIN THE PURVIEW OF FEES FOR INCLUDED SERVICES (FIS) AS PER ARTICLE 12(4)(B) OF THE DTAA , IT IS ESSENTIAL THAT THE PAYMENT SHOULD BE TO MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, OR CONSIS T OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIG N. ON THE CONTRARY, THERE IS NO SUCH REQUIREMENT OF MAKING AVAILABLE ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES IN SECTION 9(1)( VII) OF THE ACT. SIMPLE RENDITION OF SUCH SERVICES IS SUFFICIENT. SCOPE OF THE EXPRESSION MAKE AVAILABLE HAS BEEN DEALT WITH BY THE HONBLE KARNATAKA HIGH COURT IN CIT VS. DE BEERS INDIA MINERALS (P.) LTD. (2012) 3 46 ITR 467 (KARN), IN WHICH IT HAS BEEN HELD THAT IT MEANS PROVIDING T ECHNOLOGY TO THE PAYER SO THAT HE MAY INDEPENDENTLY USE IT IN FUTURE WITHO UT THE INVOLVEMENT OF SERVICE PROVIDER. IT WAS FURTHER NOTICED THAT UNLES S THE SERVICE PROVIDER MAKES AVAILABLE HIS TECHNICAL KNOWLEDGE, EXPERIENCE , SKILL, KNOW-HOW OR ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 19 PROCESS TO THE RECIPIENT OF THE TECHNICAL SERVICE, THE LIABILITY TO TAX IS NOT ATTRACTED. 5.15. COMING BACK TO THE FACTS OF THE EXTANT CA SE, IT IS CLEAR THAT THE FOREIGN AE RENDERED SERVICES IN USA, WHICH WERE CON SUMED THERE ITSELF. BY RENDERING SUCH SERVICES, NOTHING WAS MADE AVAILA BLE TO THE ASSESSEE FOR USE IN FUTURE. AS THE FOREIGN AE HAS NOT MADE A VAILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC. TO THE ASSESSEE F OR USE IN PRESENT OR IN FUTURE, IN OUR CONSIDERED OPINION, THE CONSIDERATI ON FOR SUCH SERVICES CANNOT BE BROUGHT WITHIN THE AMBIT OF MAKING AVAIL ABLE OF ANYTHING TO THE ASSESSEE, SO AS TO CONSIDERED AS FEES FOR INC LUDED SERVICES. 5.16. AS IT IS NOT THE CASE OF THE AO THAT EIT HER THE FOREIGN AE CARRIED ON BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISH MENT OR SUCH PAYMENT WAS ATTRIBUTABLE TO ANY PERMANENT ESTABLIS HMENT, OBVIOUSLY THE OPERATION OF ARTICLE 7, DEALING WITH BUSINESS PROFITS, HAS TO BE RULED OUT. ONCE THE AMOUNT DOES NOT FALL WITHIN T HE FOUR CORNERS OF ARTICLE 12 OF THE DTAA AND FURTHER ARTICLE 7 HAS NO APPLICATION FOR THE REASONS DISCUSSED, THE NATURAL COROLLARY WHICH FOL LOWS IS THAT THE AMOUNT IS NOT CHARGEABLE TO TAX IN THE HANDS OF THE FOREIGN AE AS PER THE DTAA. 5.17. WE HAVE NOTICED ABOVE THAT THE PROVISIONS OF THE DTAA OR THE ACT, WHICHEVER ARE MORE BENEFICIAL TO THE ASSESSEE, ARE TO BE APPLIED. ITA NO. 1041/DEL/2014 HUGHES SYSTIQUE IN DIA PVT. LTD. 20 ALBEIT THE AMOUNT IS CHARGEABLE TO TAX AS PER SECTI ON 9(1)(VII) OF THE ACT IN THE HANDS OF THE FOREIGN AE ON STANDALONE BASIS, BUT GOING BY ARTICLE 12(4) OF THE DTAA, IT IS CLEAR THAT THE PAYMENT CAN NOT BE CONSIDERED AS FEES FOR INCLUDED SERVICES SO AS TO BE CHARGED TO TAX IN THE HANDS OF FOREIGN A.E. ONCE THE AMOUNT IS NOT CHARGEABLE TO T AX IN INDIA AS PER ARTICLE 12 OF THE DTAA, THERE CAN BE NO QUESTION OF IMPOSING ANY LIABILITY ON THE PAYER ASSESSEE TO MAKE DEDUCTION O F TAX AT SOURCE. EX CONSEQUENTI , THE PROVISIONS OF SEC. 40(A)(I) CANNOT BE INVOK ED. THE IMPUGNED ORDER IS, THEREFORE, REVERSED TO THIS EXTE NT AND THE DISALLOWANCE MADE U/S 40(A)(I) IS DIRECTED TO BE DE LETED. THIS GROUND IS ALLOWED. 6. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29/8/2014. SD/- SD/- (GEORGE GEORGE K.) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 29/8/2014 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR