M/s IDS Infotech Ltd., Chandigarh V. DCIT, Chandigarh

ITA 130/CHANDI/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8259 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 25-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C P S RAO
• Keywords: Capital asset; Recovery proceedings; Depreciation; Transfer pricing; Double taxation relief; International transaction; Services rendered outside India; Deemed to accrue or arise in india; Proportionate interest; Permanent establishment; Wholly owned subsidiary; Non-deduction of tax; Commercial expediency; Revenue expenditure
• Section: 5(2); 37(1); 148; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.130/CHD/2016 (ASSESSMENT YEAR : 2010-11) M/S IDS INFOTECH LTD., VS. THE D.C.I.T., SCO 144-145, SECTOR 34-A, CIRCLE 4(1), CHANDIGARH. CHANDIGARH. PAN: AAACI4364E (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI TEJ MOHAN SINGH KRISHAN VRIND JAIN RESPONDENT BY : SHRI SUSHIL KUMAR, CIT DR & SHRI C.P.S. RAO, DR DATE OF HEARING : 14.12.2016 DATE OF PRONOUNCEMENT : 09.03.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-2, CHANDIGARH DATED 29.1.2016, RELATIN G TO ASSESSMENT YEAR 2010-11. 2. GROUND NO.1 RAISED BY THE ASSESSEE PERTAINS TO THE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.45,68,000/- MADE BY THE ASSESSING OFFICER AND UP HELD BY THE LD. CIT (APPEALS). 2 3. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SO FTWARE SOLUTION AND IT ENABLED SERVICE IN THE AREAS OF LIT IGATION SUPPORT, PUBLISHING AND CONTENT MANAGEMENT, ENGINEE RING SERVICES AND HEALTHCARE SUPPORT SERVICES. DURING T HE IMPUGNED YEAR, IT ENTERED INTO INTERNATIONAL TRANSA CTIONS WITH ITS AES AND JUSTIFIED THE ARMS LENGTH PRICE A S UNDER: NATURE OF INTERNATIONAL TRANSACTION AMOUNT(IN RUPEES LACS) MOST APPROPRIATE METHOD PROFIT LEVEL INDICATOR TESTED PARTYS OPERATING MARGIN COMPARABLES OPERATING MARGIN AVAILING OF MARKETING SUPPORT SERVICES FROM IDS-A 439.70 TRANSACTIONAL NET MARGIN METHOD (TNMM) OPERATING PROFIT/OPERATING COST (OP/TC) 5.50% 10.03% PROVISION OF IT/IT ENABLED SERVICES TO IDS- A FOR RESALE 336.67 TNMM OPERATING PROFIT/SALES (OP/SALES) 1.50% 1.77% AVAILING OF MARKETING SUPPORT SERVICES FROM IDS-UK 16.21 TNMM OP/TC 5.75% 6.68% REIMBURSEMENT OF EXPENSES PAID/RECEIVED 3.82 COMPARABLE UNCONTROLLED PRICE METHOD (CUP) N.A REFER PARA 5.4.1 REFER PARA 5.4.1 4. ON A REFERENCE FROM THE ASSESSING OFFICER THE TPO DETERMINED THE ARMS LENGTH PRICE OF THE INTERN ATIONAL TRANSACTIONS. WHILE THE ARMS LENGTH PRICE OF INTER NATIONAL TRANSACTIONS PERTAINING TO MARKET SUPPORT SERVICES FROM IDS-A AND IDS-UK AND REIMBURSEMENT OF EXPENSES PAID/RECEIVED TO/FROM IDS-A WAS ACCEPTED BY THE TPO , THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF IT/IT ENABLED SERVICES TO IDS-A FOR RESALE WAS SUBJECTED TO DETAILED ANALYSIS/ SCRUTINY. THE TPO FOUND THAT TH E ASSESSEE HAD DETERMINED THE ARMS LENGTH PRICE OF T HE SAID TRANSACTIONS BY APPLYING TNMM METHOD AS THE MOST 3 APPROPRIATE METHOD. HE FURTHER FOUND THAT THE OPER ATING PROFIT TO TOTAL COST (OP/TC) RATIO WAS TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN THE TNMM AND THE ASSOCIATE D ENTERPRISES I.E. THE FOREIGN ENTITY IDS-A WAS TAKEN AS THE TESTED PARTY. THE TPO REJECTED THE FOREIGN AE AS T HE TESTED PARTY AND TOOK THE ASSESSEE AS THE TESTED PA RTY INSTEAD. THEREAFTER AN INDEPENDENT SEARCH FOR COMPARABLES WAS CARRIED OUT, OP/OC ACCEPTED AS PLI AND EIGHT COMPARABLES DETERMINED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS RELATING TO IT ENABLED S ERVICES. THE OP/OC OF THE COMPARABLE COMPANIES WAS DETERMINE D AT 31.76% AND APPLYING THE SAME TO THE OPERATING CO ST INCURRED BY THE ASSESSEE IN PROVIDING THE IMPUGNED SERVICE TO THE AE, THE ARMS LENGTH PRICE OF THE SA ID TRANSACTION WAS DETERMINED AT RS.382.35 LACS AS AGA INST RS.336.67 LACS MADE BY THE ASSESSEE. THUS AN ADJUS TMENT OF RS.45,768,000/- WAS MADE TO THE TRANSFER PRICE R ELATING TO IT ENABLED SERVICES GIVEN TO THE AE OF THE ASSES SEE AND THE SAME WAS ADDED TO THE INCOME OF THE ASSESSEE. THE LD. CIT (APPEALS) UPHELD THE ARMS LENGTH PRICE DETERMINED BY THE TPO AND THE ADDITION MADE ON ACCO UNT OF THE SAME. 5. DURING THE COURSE OF HEARING BEFORE US, A NUMBER OF ARGUMENTS WERE RAISE BY THE LD. COUNSEL F OR THE ASSESSEE AGAINST THE IMPUGNED ADJUSTMENT MADE CHALLENGING THE SAME ON THE GROUND THAT IDENTICAL DETERMINATION OF ARMS LENGTH PRICE OF THE SAME 4 TRANSACTION I.E. IT ENABLED SERVICES IN THE PRECEDI NG YEAR HAD BEEN ACCEPTED BY THE TPO, THAT MERELY BECAUSE THE TESTED PARTY WAS A FOREIGN PARTY, IT COULD NOT BE T HE BASIS FOR REJECTING THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE. THE LD. COUNSEL FOR THE ASSESSEE ALSO JU STIFIED THE SELECTION OF THE FOREIGN PARTY AS THE TESTED PA RTY AND ALSO CHALLENGED THE COMPARABILITY ANALYSIS CARRIED OUT BY THE TPO, OBJECTING TO THE COMPARABLES SELECTED BY I T. 6. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE TPO AND LD. CIT (APPEALS) AND STATED T HAT DETAILED VALID REASONS HAD BEEN GIVEN FOR REJECTING THE FOREIGN PARTY AS A TESTED PARTY. THE LD. DR ALSO SUPPORTED THE SEARCH AND COMPARABILITY ANALYSIS CAR RIED OUT BY THE TPO. 7. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIES AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AS ALSO THE DOCUMENTS REFERRED TO BEFORE US DURING THE COURSE OF ARGUMENTS. THOUGH WE FIND THAT THE ORDER OF THE TPO WAS DETAILED LEADING TO THE A FORESAID TRANSFER PRICING ADJUSTMENT, WE SHALL BE CONFINING OURSELVES ONLY TO THE ARGUMENTS RAISED BY THE LD.C OUNSEL FOR THE ASSESSEE AND THE REVENUE ,BOTH FOR AND AGA INST THE ORDER PASSED BY THE LD. CIT (APPEALS). 8. THE FIRST CONTENTION RAISED BEFORE US BY THE LD . COUNSEL FOR THE ASSESSEE IS THAT THE TP STUDY OF TH E ASSESSEE HAS BEEN REJECTED FOR THE REASON THAT THE FOREIGN 5 AE WAS TAKEN AS A TESTED PARTY. ARGUMENTS BOTH FOR AND AGAINST THE ACTION OF THE TPO WERE MADE BEFORE US. THE IMPUGNED TRANSACTION RELATES TO IT ENABLED SERVICES ENTERED INTO WITH IDS-A AMOUNTING TO RS.336.67 LAC S. THE ASSESSEE HAD JUSTIFIED THE ARMS LENGTH PRICE O F THE SAID TRANSACTION BY APPLYING TNMM METHOD TAKING OP/ TC AS THE PLI AND THE ASSOCIATE ENTERPRISE(AE) I.E. ID S-A AS THE TESTED PARTY. ALL THESE FACTS ARE NOT DISPUTED . THE TPO REJECTED IDS-A AS A TESTED PARTY FOR THE REASON THAT THE TESTED PARTY SHOULD BE ONE WHO HAS THE LEAST CO MPLEX FUNCTIONS, WHICH DOES NOT OWN VALUABLE INTANGIBLES PROPERTY OR UNIQUE ASSETS DISTINGUISHING IT FROM IT S COMPARABLES AND IT SHOULD BE THE PARTY FOR WHICH MO ST RELIABLE DATA FOR COMPARABLES IS AVAILABLE AND IN R ESPECT OF WHICH COMPARABLE TRANSACTIONS ARE AVAILABLE. AS PE R THE TPO BY TAKING FOREIGN AE AS A TESTED PARTY, THE ASS ESSEE HAD TAKEN FOREIGN COMPARABLES, ABOUT WHICH VERY LIT TLE INFORMATION HAS BEEN PROVIDED AND, THEREFORE, SINCE NO RELIABLE DATA IN RESPECT OF FOREIGN COMPARABLES WAS AVAILABLE, THE AE OF THE ASSESSEE I.E. IDS-A WAS NO T A GOOD CHOICE FOR TESTED PARTY. THE TPO HAS AT PARA 13.2 TO 13.10 DISCUSSED THIS ISSUE AT LENGTH AND REJECTED T HE FOREIGN AE AS A TESTED PARTY BY STATING AS FOLLOWS: 13.2 THE OECD GUIDELINES SAY THAT THE CHOICE OF TRA NSFER PRICING METHOD AND OF THE TESTED PARTY ARE INTRINSICALLY LINKED. A S A GENERAL RULE THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED IN THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABL E COMPARABLE CAN BE FOUND. 6 13.3 THE ASSESSEE HAS QUOTED THE EXTRACT OF THE OEC D TRANSFER PRICING GUIDELINES FOR JUSTIFYING THE CHOICE OF ASS OCIATED ENTERPRISE AS THE TESTED PARTY:- '3. 43 THE ASSOCIATED ENTERPRISE TO WHICH TRANSACTIONAL NET MARGIN METHOD IS APPLIED SHOULD BE THE ENTERPRISE FOR WHICH RELIABLE DATE ON HE MOST CLOSELY COMPARABLE TRANSACTIONS CAN BE IDENTIFIED. THIS WILL OFTEN ENTAIL SELECTING THE ASSOCIATED ENTERPRISE THAT IS THE LEAST COMPLEX OF ENTERPRISES INVOLVED IN THE CONTROLLED TRANSACTION AND THAT DOES NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS.. THE US TREASURY REGULATIONS UNDER SECTION 1.482-5 H AS DEFINED TESTED PARTY AS BELOW: THE TESTED PARTY WILL BE THE PARTICIPANT IN THE C ONTROLLED TRANSACTION WHOLE OPERATING PROFIT ATTRIBUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFIED USING THE MOST RELIABL E DATA AND REQUIRING THE FEWEST AND MOST RELIABLE ADJUSTMENTS, AND FOR WHICH RELIABLE DATA REGARDING UNCONTROLLED COMPARABLES CA N BE LOCATED. CONSEQUENTLY, IN MOST CASES THE TESTED PARTY WILL B E THE LEAST COMPLEX OF THE CONTROLLED TAXPAYER AND WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUI SH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. 13.4 IT EMERGES FROM THE ABOVE GUIDELINES THAT FOLL OWING FACTORS PLAY A MAJOR ROLE IN DETERMINING THE CHOICE OF TESTED PART Y:- 1. IT SHOULD BE A PARTY FOR WHICH THE MOST RELIABLE DATA FOR COMPARISON IS AVAILABLE. 2. IT SHOULD BE A PARTY FOR WHICH DATA IN RESPECT O F COMPARABLE TRANSACTIONS IS AVAILABLE. 3. IT SHOULD BE A PARTY FOR WHICH HAS THE LEAST COM PLEX FUNCTIONS 4. IT SHOULD BE A PARTY FOR WHICH DOES NOT OWN VALU ABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUI SH IT FROM COMPARABLES. 7 13.5 WHEN THE FACTS AND CIRCUMSTANCES OF THE CASE A RE TESTED ON THESE FACTORS FOLLOWING POSITION EMERGES:- 1. IN THE SHOW CAUSE NOTICE, ASSESSEE WAS ASKED TO ESTABLISH WITH EVIDENCE HOW THE COSTS TAKEN ARE WITHOUT MARKUP:- FURTHER, IT HAS BEEN STATED THAT IDS INFOTECH HAS CHARGED A MARKUP ON INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF IT- ENABLED SERVICES. HOWEVER, NO SUCH SEGMENTAL FINANC IALS ESTABLISHING THE SAME HAVE BEEN GIVEN. COST SHEETS GIVEN ALSO DO NOT PROVIDE ANY EVIDENCE TO ESTABLISH THAT THE COST S TAKEN ARE WITHOUT ANY MARKUP. 13.6 IT IS SEEN THAT THE COMPARABLES GIVEN ARE FORE IGN COMPARABLES. VERY LITTLE INFORMATION IN RESPECT OF THE SAME HAS BEEN PROVIDED EXCEPT THEIR P&L ACCOUNTS. NO DESCRIPTION HAS BEEN GIVEN I N THE TP REPORT TO ESTABLISH WHETHER THE COMPARABLES ARE ALSO INVOLVED IN THE SAME ACTIVITY. HENCE, NO RELIABLE DATE IN RESPECT OF FOREIGN COMPA RABLES IS AVAILABLE. HENCE, ON THIS FACTOR, IDS-AMERICA IS NOT A GOOD CH OICE FOR TESTED PARTY. 13.7 IT SHOULD BE POINTED OUT TO THE ASSESSEE THAT THE ACCORDING TO DATABASE AVAILABLE TO THE INDIAN REVENUE ADMINISTRA TION, THE INFORMATION RELATED TO DOMESTIC COMPARABLES IS READILY AVAILABL E AND CAN BE EASILY PROCESSED. THE SAME CANNOT BE SAID TO BE TRUE FOR T HE FOREIGN COMPARABLES. EVEN IF THE DEPARTMENT STARTS TO LOOK FOR FOREIGN C OMPARABLES IT SHALL BE VERY DIFFICULT TO FIND COMPANIES IN THE SAME BUSINE SS SETUP AS THE ASSESSEE. ON A CAREFUL ANALYSIS OF THE INFORMATION PROVIDED B Y THE ASSESSEE IT HAS BEEN SEEN THAT IDS-AMERICA EMPLOYEES 4 PEOPLE TO CA RRY OUT SERVICES. IN LIGHT OF THIS INFORMATION IT IS VERY CLEAR THAT SEA RCH FOR COMPARABLES HAVING THE SAME EMPLOYEE BASE AS THE ASSOCIATED ENTERPRISE IS NOT AN EASY TASK. ALSO SUFFICIENT INFORMATION ON THE FINANCIALS OF TH E ASSOCIATED ENTERPRISE HAS NOT BEEN PROVIDED. SO ON GROUNDS OF THE DIFFICU LTY OF AVAILABILITY OF INFORMATION, THE ANALYSIS DONE BY THE ASSESSEE CANN OT BE VERIFIED. (EMPHASIS PROVIDED BY US) 13.8 THE MARGIN ACCEPTED BY THE DEPARTMENT ON PROVI SION OF IT-ENABLED SERVICES IS 25.98% AND THE SAME SHALL BE CONSIDERED IN THIS CASE. THE ASSESSEE EARNS ONLY A MARGIN OF 8.26% AND SUCH A TR ANSACTION CANNOT BE CALLED ARMS LENGTH FROM THE WIDELY ACCEPTED VIEW I N THE DEPARTMENT. 8 13.9 THEREFORE, IT IS CLEAR FROM ABOVE DISCUSSION T HAT IDS INFOTECH IS A BETTER CHOICE AS TESTED PARTY ON ALL THE FACTORS. H ENCE, THE TP STUDY PREPARED BY THE ASSESSEE TAKING IDS AMERICA AS THE TESTED PARTY SUFFERS FROM DEFECT AND ANALYSIS DONE IN THE SHOW CAUSE NOT ICE TAKING IDS INFOTECH IS A BETTER ANALYSIS ON SEVERAL ACCOUNTS. 13.10 SINCE THE ANALYSIS DONE BY THE ASSESSEE IS BA SED ON THE SELECTION OF IDS AMERICA, THE SAME HAS BEEN RIGHTLY REJECTED. 9. THUS THE ONLY REASON FOR REJECTING THE FOREIGN AE AS THE TESTED PARTY IS THAT NO RELIABLE DATA IN RES PECT OF FOREIGN COMPARABLES IS AVAILABLE. 10. SUPPORTING THE FOREIGN AE AS THE TESTED PARTY THE LD. COUNSEL FOR THE ASSESSEE TOOK UP THE FOLLOW ING ARGUMENTS: A) THAT THE FOREIGN AE WAS TAKEN AS A TESTED PARTY IN THE PRECEDING YEAR ALSO I.E. ASSESSMENT YEAR 200 9- 10 AND ARMS LENGTH PRICE DETERMINED BY THE ASSESSE E WAS ACCEPTED BY THE TPO IN IS ORDER PASSED FOR THAT YEAR. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO TRANSFER PRICING REPORT FOR THE PRECED ING YEAR, PLACED AT PAPER BOOK PAGE NO.417 AND THE ORDE R OF THE TRANSFER PRICING OFFICER FOR THE PRECEDING Y EAR I.E. ASSESSMENT YEAR 2009-10, PLACED AT PAPER BOOK PAGE NO.133 IN THIS REGARD. B) THE NEXT CONTENTION RAISED BY THE ASSESSEE WAS THAT THE FOREIGN TESTED PARTY I.E. IDS-A WAS THE LE AST COMPLEX AMONGST THE PARTIES TO THE TRANSACTIONS, TH E OTHER PARTY BEING THE ASSESSEE ITSELF. THE LD. 9 COUNSEL FOR THE ASSESSEE STATED THAT WHILE THE ASSESSEE WAS ENGAGED IN FULL-FLEDGED PRODUCT DEVELOPMENT AND MARKETING/PRODUCT SELLING COVERING A WIDE RANGE OF ACTIVITIES AND OTHER COMMERCIAL OR MARKETING INTANGIBLES AND IS THE DEVELOPER, OWNER AND LICENSOR OF VIRTUALLY ALL VALUABLE INTELLECTUAL PROPERTY RIGHTS INCLUDING PROPRIETARY PRODUCTS AND PROCESSES, WHEREAS IT BEARS ALL SIGNIFICANT BUSINES S AND ENTREPRENEURIAL RISKS, PRODUCT DEVELOPMENT, PERFORMANCE AND FINANCIAL RISKS AND DEVELOPS AND SELLS PRODUCTS AND SERVICES TO UNRELATED PARTIES ACROSS THE GLOBE, THE IDS-A, ON THE OTHER HAND, INDULGED ONLY IN THE ACTIVITY OF PROVIDING MARKETI NG SUPPORT SERVICES TO THE ASSESSEE FOR THE AMERICAN MARKET AND TOOK ONLY ROUTINE RISKS ASSOCIATED WITH UNDERTAKING SUCH ACTIVITIES WITHOUT OWNING ANY INTELLECTUAL PROPERTY. THUS, THE LD. COUNSEL FOR T HE ASSESSEE POINTED OUT THAT IDS-A WAS THE LEAST COMPLEX OF THE TWO ENTITIES IN THE TRANSACTIONS AND THUS WAS RIGHTLY TAKEN AS A TESTED PARTY. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE SUBMISSIONS MADE BEFORE THE TPO ALSO PLACED AT PAPER BOOK PAGE NOS.40 TO 45 VIDE THEIR LETTER DATE D 22.1.2015. C) THE LD. COUNSEL FOR THE ASSESSEE ALSO POINTED OUT THAT THE ENTIRE PROCESS OF SELECTING THE COMPARABLES IN RELATION TO THE FOREIGN TESTED PARTY 10 AND THE DATA BASE USED WAS DULY DISCLOSED IN TRANSF ER PRICING REPORT AND ALL INFORMATION PERTAINING TO TH E COMPARABLES WAS ALSO FURNISHED IN THE REPORT. 11. THUS, THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THERE WAS NO REASON FOR THE TPO TO R EJECT THE FOREIGN PARTY AS A TESTED PARTY. THE LD. COUNS EL FOR THE ASSESSEE FURTHER RELIED UPON FOLLOWING DECISION S OF THE TRIBUNAL IN THIS REGARD: 1) RANBAXY LABORATORIES LTD. VS. ADDL.CIT, (2008)299 ITR (AT) 175 (DEL). 2) GENERAL MOTORS INDIA PVT. LTD. VS. DCIT,(2013) 27 ITR (TRIB) 373 (AHD.) 3) DEVELOPMENT CONSULTANTS PVT. LTD. VS. DCIT,(2008) 115 TTJ 577 (KOL) 12. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE TPO AND STATED THAT VERY LITTLE INFORM ATION OF THE COMPARABLES WAS PROVIDED AND NO DESCRIPTION WAS GIVEN IN THE TP REPORT TO ESTABLISH WHETHER THE COMPARABLES WERE ALSO INVOLVED IN THE SAME ACTIVITY . THE LD. DR STATED THAT THERE WAS THUS NO RELIABLE DATA AVAILABLE IN RESPECT OF THE FOREIGN COMPARABLES AND HENCE THE SELECTION OF THE FOREIGN ENTITY AS A TESTED PAR TY HAD BEEN RIGHTLY REJECTED BY THE TPO. 13. WE HAVE HEARD BOTH THE PARTIES ON THIS ASPECT. THE ISSUE BEFORE US IS WHETHER THE FOREIGN ENTITY I N INTERNATIONAL TRANSACTIONS CAN BE SELECTED AS A TES TED PARTY FOR THE PURPOSE OF CARRYING OUT COMPARABILITY ANALYSIS. 11 14. BOTH THE PARTIES AGREE THAT AS PER THE OECD GUIDELINES, THE US TREASURY REGULATIONS AND THE UN PRACTICING MANUAL OF TRANSFER PRICING FOR DEVELOPIN G COUNTRY, THERE IS A BROAD CONSENSUS THAT THE TESTED PARTY SHOULD BE ONE: I) IT IS THE LEAST COMPLEX PARTY TO THE CONTROLLED TRANSACTION. II) THE PARTY IN RESPECT OF WHICH MOST RELIABLE DAT A FOR COMPARABILITY IS AVAILABLE AND; III) WHICH DOES NOT OWN VALUABLE INTANGIBLE OR UNIQUE ASSETS. 15. IN THE PRESENT CASE, WE FIND THAT TPO HAS REJECTED FOREIGN AE AS THE TESTED PARTY FOR THE RE ASON THAT NO RELIABLE DATA IN RESPECT OF FOREIGN COMPARA BLES WAS AVAILABLE. THUS AS FAR AS THE FOREIGN PARTY BEING THE LEAST COMPLEX ENTITY TO THE CONTROLLED TRANSACTIONS AND N OT OWNING ANY VALUABLE INTANGIBLE OR UNIQUE ASSETS IS CONCERNED, THERE IS NO DISPUTE THAT THE FOREIGN ENT ITY TO THE TRANSACTIONS I.E. IDS-A IS THE LEAST COMPLEX AN D DOES NOT OWN ANY VALUABLE INTANGIBLE OR UNIQUE ASSETS. THE ONLY ISSUE ON WHICH THE ACCEPTANCE OR REJECTION OF THE FOREIGN ENTITY AS A TESTED PARTY RESTS IS VIS--VIS AVAILABILITY OF THE APPROPRIATE FOREIGN COMPARABLES . 16. THE ONLY REASON WITH THE TPO FOR HOLDING SO , WHICH EMERGES FROM THE ABOVE DISCUSSION AND ARGUMEN TS MADE BEFORE US AND ON THE BASIS OF THE FACTS WHICH WERE 12 BROUGHT TO OUR NOTICE FOR REJECTION OF THE FOREIGN ENTITY AS THE TESTED PARTY, IS THAT THE DATA IN RESPECT OF CO MPARABLE TRANSACTIONS WAS NOT AVAILABLE. AT THIS JUNCTURE, WE WOULD LIKE TO POINT OUT THAT THE I.T.A.T. IN A NUMB ER OF DECISIONS, POINTED OUT BY THE LD.COUNSEL FOR THE AS SESSEE, HELD THAT IF AN ASSESSEE WISHES TO TAKE A FOREIGN E NTITY AS A TESTED PARTY, IT CAN DO SO PROVIDED A RELEVANT DA TA FOR COMPARISON IS EITHER AVAILABLE IN THE PUBLIC DOMAIN OR IS FURNISHED TO THE TAX DEPARTMENT/ADMINISTRATION. TH E DELHI BENCH OF THE I.T.A.T. IN THE CASE OF RANBAXY LABORATORIES LTD. (SUPRA) ,ON THIS ASPECT OF TAKING FOREIGN ENTITIES AS TESTED PARTIES HELD AS UNDER: THE TESTED PARTY, GENERALLY THE PARTICIPANT IN THE INTERNATIONAL TRANSACTION WHOSE TRANSFER PRICE/PROFI TABILITY ATTRIBUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFI ED USING THE MOST RELIABLE DATA AND REQUIRING THE FEWEST AND M OST RELIABLE ADJUSTMENTS AND FOR WHICH RELIABLE DATA REGAR DING UNCONTROLLED COMPARABLE COMPANIES CAN BE LOCATED, MAY B E A LOCAL OR FOREIGN ENTITY, I.E. ONE PARTY TO THE TRANSACTIO N, IF THE ASSESSEE WISHES TO TAKE A FOREIGN ASSOCIATED ENTERPR ISE AS A TESTED PARTY, THEN IT MUST ENSURE THAT IT IS SUCH AN E NTITY FOR WHICH THE RELEVANT DATA FOR COMPARISON IS AVAILABLE I N THE PUBLIC DOMAIN OR IT FURNISHED TO THE TAX ADMINISTRA TION. THE ASSESSEE IS NOT THEN ENTITLED TO TAKE A STAND THAT SU CH DATA CANNOT BE CALLED FOR OR INSISTED UPON FROM THE ASSESSEE. 17. THE AHMEDABAD BENCH OF THE I.T.A.T. IN THE CAS E OF GENERAL MOTORS INDIA PVT. LTD. (SUPRA) HELD THA T A FOREIGN ENTITY COULD ALSO BE TAKEN AS A TESTED PART Y FOR COMPARISON AND THE SAME SHOULD NOT BE REJECTED FOR THE REASON THAT DATA RELATING TO THE COMPARABLE COMPANI ES IS 13 NOT READILY AVAILABLE. THE I.T.A.T. IN THIS CASE H ELD THAT THE REVENUE CAN GET ALL RELEVANT PARTICULARS AVAILA BLE GLOBALLY BY USING LATEST TECHNOLOGY UNDER ITS THUMB OR EVEN COULD DIRECT THE ASSESSEE TO FURNISH THE SAME. THE RELEVANT FINDINGS OF THE I.T.A.T. IN THIS REGARD AT PARA 11.4 AND 11.6.5 ARE AS FOLLOWS: 11.4. CONSIDERING THE DIVERGENT VIEWS EXPRESSED BY VARIOUS TRIBUNALS (SUPRA) AND MAJORITY OF THEM WERE IN FAVOUR OF SELE CTING THE TESTED PARTY EITHER FROM LOCAL OR FOREIGN PARTY AND THE U NITED NATIONS PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES HAD OBSERVED THAT IT MAY BE THE LOCAL OR THE FOREIGN P ARTY, WE TEND TO AGREE WITH THE SAME. 11.5. REVERTING BACK TO THE ISSUE, THE ASSESSEE SUB MITTED THAT IN THE TRANSFER PRICING DOCUMENTATION, IT HAD PROVIDED THE BUSINESS PROFIT OF ALL 101 COMPARABLES SELECTED BY THE ASSESSEE. 11.5.1. THE DRP IN ITS FINDINGS AT PARA 11 HAD STAT ED, AMONG OTHERS, THAT IN MOST CASES THE TESTED PARTY WILL BE THE LEA ST COMPLEX OF THE CONTROLLED TAX PAYERS, AND WILL NOT OWN VALUABLE IN TANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL UN CONTROLLED COMPARABLES. AS GMDAT IS NOT ONLY A COMPLEX ENTITY O WNING VALUABLE INTANGIBLES, THE DATA FOR COMPARABILITY OF GMDAT OR THE COMPARABLE IS ALSO NOT AVAILABLE. 11.5.2. THIS VIEW OF THE DRP HAS BEEN DENIED BY THE LEARNED SR. COUNSEL DURING THE COURSE OF HEARING WHICH HAS NOT BEEN CONTRADICTED BY THE REVENUE WITH ANY DOCUMENTARY EVIDENCE. 11.6. TO SUM UP, IT WAS THE ARGUMENT OF THE ASSESSE E THAT IF STRINGENT COMPARABILITY ANALYSIS AS ADOPTED BY THE TPO WERE T O BE ADOPTED, AND THEN M&M SHOULD ALSO BE PUT TO SUCH A STRINGENT COMPA RABILITY TEST. IT WAS, FURTHER, ARGUED THAT M&M IS ALSO INVOLVED IN THE MANUFACTURE OF MULTI UTILITY VEHICLES, LIGHT COMMERCIAL VEHICLES A S WELL AS THREE WHEELERS APART FROM PASSENGER CARS. IT WAS, FURTHER , COUNTERED BY THE ASSESSEE IF FORCE MOTOR LIMITED WERE TO BE REJECTED ON THE BASIS OF DIFFERENT PROFIT PROFILE AND THEN M&M SHOULD ALSO BE AXED ON THE SAME LOGIC. WE FIND FORCE IN THE ABOVE ARGUMENT OF THE A SSESSEE. ACCORDING TO THE ASSESSEE, GMDAT IS ONLY ENGAGED IN MANUFACTUR ING AND SUPPLY OF CERTAIN COMPONENTS USED IN MANUFACTURING OF CARS ONLY. THIS HAS NOT BEEN DISPUTED BY THE REVENUE. 11.6.1. WE ARE IN DISAGREEMENT WITH THE REVENUES A RGUMENT THAT GMDAT SHOULD NOT BE SELECTED AS A TESTED PARTY AS THE COMPARABLE AS THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE D OESNT FALL WITHIN THE AMBIT OF TPOS JURISDICTION AND, THUS, HE CAN N EITHER CALL FOR ANY ADDITIONAL INFORMATION NOR SCRUTINIZE THEIR BOOKS O F ACCOUNTS. THE REVENUE CAN GET ALL THE RELEVANT PARTICULARS AROUND THE GLOBE BY USING THE LATEST TECHNOLOGY UNDER ITS THUMB OR DIRECT THE ASSESSEE TO FURNISH THE SAME. 11.6.2. AS RIGHTLY HIGHLIGHTED BY THE ASSESSEE, WE FIND INCONSISTENCY IN THE APPROACH OF THE TPO WITH REGARD TO THE ISSUE OF TESTED PARTY. ON THE ONE HAND, THE TPO AVERRED THAT THERE WAS NO REL IABLE DATA 14 AVAILABLE FOR BOTH GMDAT AND COMPARABLES; HOWEVER, O N THE OTHER HAND, HE HAD CONVENIENTLY TAKEN GMDAT AS THE TESTED PARTY WHILE MAKING ADJUSTMENT TO TRANSACTION RELATING TO PAYMEN T OF ROYALTY BY THE ASSESSEE TO GMDAT. THIS EXPOSES THE INCONSISTENC Y APPROACH OF THE TPO. 11.6.3. THE FINANCIAL STATEMENTS OF COMPARABLE COMP ANIES HAVE SINCE BEEN AUDITED BY THE INDEPENDENT AUDITORS AND, THUS, THERE CAN BE NO RESERVATION IN PLACING A RELIANCE ON THE SAME. 11.6.4. HOWEVER, THE LEARNED SR. COUNSEL SUBMITTED THAT SEGMENT FINANCIAL DATA FOR BENCHMARKING - A PART OF GMDATS BUSINESS - WAS MADE AVAILABLE TO THE TPO AND ALSO ON HIS REQUEST, THE FINANCIAL STATEMENTS OF GMDAT (AT COMPANY LEVEL) WAS FURNISHED TO THE TPO AND THE SAME IS NOT DISPUTED. THEREFORE, THERE SHOU LD BE NO GRIEVANCE ON THE PART OF THE REVENUE TO SAY THAT NO SUFFICIEN T DATA WAS MADE AVAILABLE. 11.6.5. TAKING ALL THE ABOVE FACTS AND CIRCUMSTANCE S OF THE ISSUE AS DISCUSSED IN THE FOREGOING PARAGRAPHS, IN CONSONANC E WITH THE CASE LAWS QUOTED (SUPRA) AND ALSO THE UNITED NATIONS PR ACTICAL MANUAL ON TRANSFER PRICING, WE DIRECT THE TPO TO ADOPT GMDAT A S THE TESTED PARTY FOR ANALYZING THE INTER-COMPANY TRANSACTIONS OF THE ASSESSEE FOR BOTH THE AYS UNDER CONSIDERATION. TO FACILITATE THE TPO TO ANALYZE THE INTER-COMPANY TRANSACTIONS IN THE CASE OF THE ASSES SEE BY SELECTING GMDAT AS TESTED PARTY AS DIRECTED ABOVE, THIS ISSU E IS RESTORED ON THE FILES OF THE TPO. IT IS ORDERED ACCORDINGLY. 18. FURTHER KOLKATA BENCH OF THE I.T.A.T. IN THE C ASE OF DEVELOPMENT CONSULTANCY (SUPRA) HELD THAT THE TE STED PARTY SHOULD BE THE LEAST COMPLEX OF THE CONTROLLED TRANSACTION AND SHOULD NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS AND A FOREIGN ENTITY IN T HE CONTROLLED TRANSACTIONS COULD ALSO BE TREATED AS A TESTED PARTY. THUS CLEARLY, THERE IS NO BAR AS SUCH IN TR EATING THE FOREIGN ENTITY IN A CONTROLLED TRANSACTION AS A TESTED PARTY MERELY FOR THE REASON THAT THE DATA OF THE COMPARABLE COMPANIES WAS NOT AVAILABLE. WHAT IS ESSENTIAL IN THIS REGARD IS THAT THE DATA SHOULD BE AVAILABLE IN THE PUBLIC DOMAIN WHICH THE REVENUE WI TH ALL ITS RESOURCES CAN HAVE ACCESS TO AND OR THE ASSESSE E HAS FURNISHED ALL RELEVANT DATA TO THE TAX ADMINISTRATI ON. 15 19. IN THE PRESENT CASE, WE FIND THAT BOTH THE CONDITIONS ARE BEING FULFILLED. ON PERUSAL OF THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE PLACED AT P APER BOOK PAGE NOS.709 TO 771, WE FIND THAT IT HAS BEEN CATEGORICALLY MENTIONED THEREIN THAT GLOBAL SYMPOSIUM, A SEARCH ENGINE COVERING FINANCIAL AND BUSINESS DATAS FOR COMPANIES OPERATING ACROSS THE GLOBE WAS USED AND IT HAS DATA FROM FOUR PUBLIC DATABASES/ SOURCES: I) STANDARD & POORS RESEARCH INSIGHT : COMPUSTAT NORTH AMERICAN DATA. II) STANDARD & POORS RESEARCH INSIGHT : COMPUSTAT GLOBAL DATA. III) PRIMARK DISCLOSURES SEC IV) PRIMARK DISCLOSURES WORLDSCOPE 20. IT WAS ALSO CATEGORICALLY MENTIONED THAT ALL T HE AFOREMENTIONED SOURCES OF DATA WERE AVAILABLE IN TH E PUBLIC DOMAIN. THE ASSESSEE IN THE TP REPORT HAD G IVEN DETAILS OF THE SEARCH CONDUCTED FOR UNCONTROLLED COMPARABLES AND THE DETERMINATION OF ARMS LENGTH P RICE, WHICH WAS ENCLOSED AT APPENDIX-F OF THE REPORT, PLA CED AT PAPER BOOK PAGE NO.758. THE REPORT STATED THAT THE INITIAL OBJECTIVE OF THE SEARCH OF COMPARABLE COMPA NIES WAS TO IDENTIFY SUCH COMPANIES WHICH PERFORMED ACTI VITIES COMPARABLE TO ACTIVITIES UNDERTAKEN BY IDS-A. HOWE VER, THIS SEARCH DID NOT RESULT IN ANY COMPARABLE COMPAN IES AND HENCE IT WAS BROADENED TO IDENTIFY COMPANIES IN US INVOLVED IN BROADLY FUNCTIONAL SIMILAR OPERATION TO IDS-A. THE ACTIVITY CODES SELECTED FOR IDENTIFYING THE COM PANIES, 16 QUANTITATIVE FILTERS APPLIED FOR ELIMINATING THOSE WHICH WERE NOT COMPARABLE AND QUALITATIVE REVIEW CONDUCTE D WAS OUTLINED AND FINALLY A LIST OF 11 COMPARABLE COMPAN IES WAS ARRIVED AT. THE BUSINESS DESCRIPTION OF THESE COMP ARABLE COMPANIES WAS PROVIDED IN THE TP REPORT AT PAPER BO OK PAGE NOS.767 TO 768. 21. CLEARLY, INFORMATION RELATING TO THE COMPARABL E COMPANIES WAS AVAILABLE IN THE PUBLIC DOMAIN AND IT WAS ALSO FURNISHED TO THE TPO. IN FACT, EVEN THE TPO H AS ADMITTED THAT THE PROFIT AND LOSS ACCOUNT OF THE COMPARABLES SELECTED BY THE ASSESSEE WAS ALSO PROVI DED. IT IS NOT THE CASE OF THE TPO THAT THE RESULTS WERE UN- AUDITED. FURTHER AS STATED ABOVE, BUSINESS DESCRIP TION OF THESE COMPANIES WAS ALSO PROVIDED. THEREFORE, WE F IND NO MERIT IN THE CONTENTION OF THE REVENUE THAT THE REL IABLE DATA IN RESPECT OF FOREIGN COMPANIES WAS NOT AVAILA BLE AS ADMITTEDLY IN THE PRESENT CASE, THE DATA WAS AVAILA BLE IN PUBLIC DOMAIN AND THE SOURCES WAS ALSO MADE KNOWN T O THE TPO. THE REVENUE WITH ALL RESOURCES AVAILABLE AT HAND COULD HAVE ACCESSED THE SAID SOURCES AND CONDU CTED COMPARABILITY ANALYSIS. BESIDES, WE FIND THAT THE ASSESSEE HAD GIVEN ENTIRE DETAIL OF THE SEARCH CONDUCTED BY IT SO AS TO FINALLY ARRIVE AT THE 11 COMPARABLE COMPANIES GI VEN BUSINESS DESCRIPTION OF THESE COMPANIES ALSO AND AL SO PROVIDED THEIR PROFITS AND LOSS ACCOUNTS TO ARRIVE AT THE PLI I.E. OP/ OC. THUS, ALL RELEVANT DATA HAD BEEN PROVIDED BY THE ASSESSEE TO THE TPO ALSO. THE TPO, WE 17 FIND, BESIDES GIVING A GENERAL STATEMENT WHICH IS A LSO INCORRECT, THAT NO DESCRIPTION WAS GIVEN REGARDING ACTIVITIES IN WHICH THE COMPARABLE COMPANIES WERE INVOLVED, POINTED OUT NO OTHER ANOMALY WAS IN THE D ATA OF THE COMPARABLE COMPANIES FURNISHED BY THE ASSESSEE. THEREFORE, FOLLOWING THE DECISIONS OF THE I.T.A.T. AS QUOTED ABOVE, WE SET ASIDE THE REJECTION OF THE FOREIGN EN TITY IDS- A AS THE TESTED PARTY. 22. IT IS PERTINENT TO POINT OUT THAT FOR DETERMIN ING THE ALP OF THE INTERNATIONAL TRANSACTIONS RELATING TO MARKETING SERVICES PROVIDED BY IDS-A AND IDS-UK ALS O ,WE FIND, THAT THE ASSESSEE HAD TAKEN THE FOREIGN ENTIT IES AS THE TESTED PARTY. THESE WERE NOT REJECTED BY THE TP O. CLEARLY, THEREFORE, THERE IS INCONSISTENCY IN THE S TAND OF THE TPO REJECTING THE SELECTION OF FOREIGN ENTITY A S A TESTED PARTY FOR THE PURPOSE OF IT ENABLED SERVICES WHILE ACCEPTING THE SAME FOR MARKETING SUPPORT SERVICES. FOR THIS REASON ALSO, THE REJECTION OF THE FOREIGN ENTI TIES AS A TESTED PARTY NEEDS TO BE SET ASIDE. 23. FURTHER AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, IN THE PRECEDING ASSESSMENT YEAR ALSO THE ASSESSEE HAD TAKEN IDS-A AS ITS TESTED PARTY, WHICH WAS DULY EXAMINED BY THE TPO. SUBMISSIONS IN THIS REGA RD WERE ALSO PLACED BEFORE THE TPO, PLACED BEFORE US A T PAPER BOOK PAGE NO.455-483. THE TPO IN THE PRECEDING YEA R HAD ACCEPTED THE SAME AND MADE NO ADJUSTMENT IN THI S REGARD. THUS, HAVING ACCEPTED FOREIGN ENTITY AS A TESTED 18 PARTY IN THE PRECEDING YEAR ,THE REVENUE CANNOT NOW TAKE A DIFFERENT STAND WITHOUT POINTING OUT ANY CHANGE I N FACTS VIS A VIS THE PRECEDING YEAR. 24. IN THE LIGHT OF THE ABOVE, WE HOLD THAT THE AC TION OF THE TPO, ACCEPTED BY THE ASSESSING OFFICER AND L D. CIT (APPEALS), IN REJECTING THE FOREIGN ENTITY IN THE C ONTROLLED TRANSACTION I.E. IDS-A, AS A TESTED PARTY IS WRONG AND IS, THEREFORE, SET ASIDE. WE MAY ADD THAT WITH REGARD TO THE REJECTION OF THE FOREIGN ENTITY AS THE TESTED PARTY , WE HAVE CONSIDERED ALL THE ARGUMENTS RAISED BEFORE US AND N O OTHER ARGUMENTS WERE RAISED BEFORE US. THE DECISIO N RENDERED BY US IS ON THE CONTEXT OF SOLELY THE ARGU MENTS WHICH WERE RAISED BEFORE US. 25. FURTHER SINCE WE HAVE UPHELD THE TREATMENT OF THE FOREIGN ENTITY AS A TESTED PARTY AND SINCE NO O THER ANOMALY WAS POINTED OUT IN THE ARMS LENGTH PRICE DETERMINED BY THE ASSESSEE BY TREATING FOREIGN ENTI TY AS A TESTED PARTY, THE ARMS LENGTH PRICE DETERMINED BY THE ASSESSEE IS TREATED AS CORRECT AND ADJUSTMENT MADE IN THIS REGARD BY THE TPO AMOUNTING TO RS.45,68,000/- IS DELETED. 26. THE OTHER ARGUMENTS RAISED BEFORE US RELATE TO SEARCH AND COMPARABILITY ANALYSIS CONDUCTED BY THE TPO AFTER REJECTING THE ASSESSEES TRANSFER PRICING REP ORT. SINCE WE HAVE ACCEPTED THE TP ANALYSIS CONDUCTED BY THE ASSESSEE, THERE IS NO REASON TO DEAL WITH OTHER ARG UMENTS 19 MADE BY BOTH THE PARTIES. GROUND NO.1 RAISED BY TH E ASSESSEE IS, THEREFORE, ALLOWED. 27. GROUND NO.2, 3 AND 4 RAISED BY THE ASSESSEE AR E CONNECTED AND ARE AGAINST THE ACTION OF THE LD. CIT (APPEALS) IN UPHOLDING THE DISALLOWANCE MADE U/S 40 (A)(IA) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) ON ACCOUNT OF NON DEDUCTION OF TDS ON COMMISSION, LEGAL AND PROFESSIONAL CHARGES, MARKETING AND SELLING EXPENSE S AND OUTSOURCING AND BUSINESS DEVELOPMENT EXPENSES AMOUNTING IN ALL TO RS.2,84,52,914/-. 28. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 2. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) H AS FURTHER ERRED IN UPHOLDING THE DISALLOWANCE OF RS.2,84,52,9 14/- MADE ON ACCOUNT OF NON DEDUCTION OF TDS ON COMMISSION , LEG AL AND PROFESSIONAL CHARGES, MARKETING AND SELLING EXPENSE S, OUT SOURCING AND BUSINESS DEVELOPMENT EXPENSES IN AS MU CH AS NO TDS IS REQUIRED TO BE DEDUCTED AND AS SUCH THE ORDER IS ILLEGAL, ARBITRARY AND UNJUSTIFIED. 3. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FAILED TO APPRECIATE THAT THE PROVISIONS OF SECTION 195 ARE N OT ATTRACTED IN AS MUCH AS PAYMENTS WERE MADE TO PARTIES WHO ARE OUTSI DE OF INDIA AND HAVE NO PERMANENT ESTABLISHMENT IN INDIA AND AS SUCH THE ORDER PASSED IS ILLEGAL, ARBITRARY AND UNJUSTIFIED. 4. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDING THAT INCOME OF NON RESIDENT HAS ACCRUED AND ARISEN IN INDIA WHICH IS C ONTRARY TO THE FACTS OF THE CASE AND AS SUCH THE ORDER PASSED IS I LLEGAL, ARBITRARY AND UNJUSTIFIED. 29. THE BRIEF FACTS RELATING TO THE CASE ARE THAT THE ASSESSEE IS THE SUPPLIER OF SOFTWARE RELATED SERVIC ES AND 20 HAD INCURRED EXPENSES ON ACCOUNT OF COMMISSION, LEG AL AND PROFESSIONAL CHARGES, OUTSOURCING EXPENSES, MAR KET SUPPORT FEES TO VARIOUS COMPANIES/ABROAD SOME OF WH ICH WERE ITS ASSOCIATED ENTERPRISES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD MADE PAYMENTS ON ACCOUNT OF ABOVE EXPENSES AMOUNTING IN ALL TO RS.2,84,52,914/- WITHO UT DEDUCTING TAX AT SOURCE. THE DETAILS OF THE EXPENS ES ARE AS FOLLOWS : NATURE OF EXPENDITURE NAME OF THE RECIPIENTS AMOUNT PAID TOTAL AMOUNT UNDER THIS HEAD WITHOUT TDS LEGAL & PROFESSIONAL CHARGES MERIT PARTNER 5,96,564/- 5,96,564/- V2N ACCOUNTANTS & ADVISEURS 1,84,705/- 1,84,705/- VAN MENS & WISSELINK 1,08,347/- 1,08,347/- VGDC 2,48,292/- 2,48,292/- OUTSOURCING EXPENSES DOULTON ASSOCIATES LIMITED 1,41,372/- 1,41,372/- IDS AMERICA INC 1,10,16,708/- 1,10,16,708/- MG HARTMAN HOLDING BV 2,68,668/- 2,68,668/- STRAND ENGINEERING & CONSULTING LIMITED 14,65,682/- 14,65,682/- TIM BARDEN LIMITED 16,93,202/- 16,93,202/- COMMISSION EXPENSES STEVEN INTERNATIONAL LIC 5,34,683/- 5,34,683/- ATALAN MAKINE MUHENDISLIK SAVUNMA HAVACILIK 3,49,948/- 3,49,948/- MARKETING & SELLING EXPENSES IDS AMERICA INC 1,01,98,422/- 1,01,98,422/- IDS INFOTECH (UK) LTD. 16,21,321/- 16,21,321/- TOTAL 2,84,52,914/- 2,84,52,914/- 21 30. ON BEING CONFRONTED WITH THE SAME, THE ASSESSE E SUBMITTED THAT NO TDS HAS BEEN DEDUCTED ON THE AFORESTATED PAYMENTS SINCE THE PAYEES HAD NO BUSINE SS CONNECTION IN INDIA, NOR ANY PERMANENT ESTABLISHME NT IN INDIA AND FURTHER BY REFERRING CBDT CIRCULAR NO.23 OF YEAR 1969 AND CIRCULAR NO.786 OF THE YEAR 2000, THE ASSE SSEE STATED THAT IT WAS NOT REQUIRED TO DEDUCT ANY TAX A T SOURCE ON THE ABOVE STATED PAYMENTS. THE ASSESSING OFFICE R REJECTED THE ASSESSEES CONTENTION STATING THAT U/S 195 TDS HAS TO BE DEDUCTED ON ALL REIMBURSEMENTS WHETHE R THE NON-RESIDENT HAD A RESIDENCE OR PLACE OF BUSINE SS IN INDIA OR BUSINESS CONNECTION OR ANY OTHER PERSONS I N ANY MANNER IN INDIA. THE ASSESSING OFFICER ALSO OBSERV ED THAT THE BENEFIT OF VARIOUS SERVICES PROVIDED BY THE ABO VE ENTITIES HAD BEEN UTILIZED IN INDIA, THAT THE AGREE MENT HAD BEEN ENTERED INTO WITH AN INDIAN COMPANY, THE CHARG ES WERE PAYABLE BY THE INDIAN COMPANY AND, THEREFORE, THE SOURCE OF INCOME OF THE ABOVE ENTITIES WAS INDIA AN D THE INCOME ACCRUED AND AROSE IN INDIA AND, THEREFORE, W AS LIABLE TO BE TAXED IN INDIA. THE ASSESSING OFFICER ALSO STATED THAT THE ASSESSEE HAD NOT PROVIDED ANY EVIDE NCE TO PROVE THAT THE SERVICES WERE RENDERED OUTSIDE INDIA . IN VIEW OF THIS, HE HELD THAT THE ASSESSEE WAS LIABLE TO DEDUCT TAX ON THE AFORESAID PAYMENTS AND HAVING FAI LED TO DO SO, THE PROVISIONS OF SECTION 40(A)(I) OF THE AC T WERE ATTRACTED. HE, THEREFORE, MADE A DISALLOWANCE OF A N AMOUNT OF RS.2,84,52,914/-. 22 31. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LD . CIT (APPEALS), WHERE THE ASSESSEE SUBMITTED THAT TH E SAID EXPENDITURE HAD BEEN INCURRED FOR SERVICES RENDERED OUTSIDE INDIA TO PARTIES OUTSIDE INDIA, THE SAID P ARTIES HAD NO PERMANENT ESTABLISHMENT IN INDIA, NOR ANY BUSINESS CONNECTION IN INDIA AND THEREFORE THE ASSE SSEE STATED THAT NO TDS WAS REQUIRED TO BE DEDUCTED ON T HE AFORESAID PAYMENTS AND, THUS NO DISALLOWANCE WAS WARRANTED ON ACCOUNT OF NON-DEDUCTION OF TAX AT SOU RCE ON THE SAID PAYMENT AS PER THE PROVISIONS OF SECTION 4 0(A)(IA) OF THE ACT. THE LD. CIT (APPEALS) AFTER CONSIDERIN G ASSESSEES SUBMISSION HELD THAT THE SOURCE OF INCOM E FOR THE ENTITIES WAS THE AGREEMENT WITH THE ASSESSEE COMPANY AND BY VIRTUE OF THE SAME, THERE WAS DIRECT BENEFIT TO THE ASSESSEE COMPANY. LD .CIT(A) HELD TH AT THE SOURCE OF INCOME, THEREFORE, FOR THE SERVICES RENDE RED BY THE NON-RESIDENT ENTITIES WAS IN INDIA, SINCE THE I NDIAN COMPANIES GAVE DIRECTIONS FOR THE WORK ABROAD AND THEREFORE, THE SAID INCOME OF THE NON-RESIDENT ACCR UED AND AROSE IN INDIA. LD. CIT (APPEALS) HELD THAT THE S ERVICES OF THE NON-RESIDENT ENTITIES WERE DIRECTLY UTILIZED BY THE ASSESSEE COMPANY IN INDIA TO BOOST ITS BUSINESS ABR OAD AND, THEREFORE, ALSO THE INCOME OF THE NON-RESIDENT S ACCRUED AND AROSE IN INDIA. THE LD. CIT (APPEALS) HELD THAT THE PROVISIONS OF SECTION 195 OF THE ACT WERE APPLICABLE ON THE PAYMENTS MADE BY THE ASSESSEE COM PANY TO THE NON-RESIDENTS AND UPHELD THE DISALLOWANCE MA DE BY THE ASSESSING OFFICER. 23 32. DURING THE COURSE OF HEARING BEFORE US, THE LD . COUNSEL FOR THE ASSESSEE POINTED OUT THAT IDENTICAL ISSUE HAD ARISEN IN THE PRECEDING YEAR ALSO IN ASSESSEES OWN CASE, WHICH HAD BEEN DECIDED IN ITS FAVOUR BY THE I .T.A.T., CHANDIGARH BENCH VIDE ITS ORDER IN ITA NO.52/CHD/20 16 DATED 24.5.2016. THE LD. DR FAIRLY CONCEDED THAT T HE ISSUE WAS IDENTICAL AND HENCE COVERED BY THE DECISI ON OF THE I.T.A.T., CHANDIGARH BENCH FOR THE PRECEDING YE AR BUT AT THE SAME TIME RELIED ON THE ORDER OF THE CIT(A) AND AO. 33. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIES, GONE THROUGH THE FACTS OF THE CASE AND ALS O THE ORDER OF THE I.T.A.T. FOR THE PRECEDING YEAR. THE UNDISPUTED FACTS EMERGING IN THE PRESENT CASE ARE T HAT ON ACCOUNT OF NON-DEDUCTION OF TAX AT SOURCE OF VARIOU S PAYMENTS MADE TO FOREIGN ENTITIES AS LISTED ABOVE, THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT AND MADE DISALLOWANCE OF THE S AME FOR THE REASON THAT THE SAID PAYMENTS MADE TO THE FOREI GN ENTITIES WERE TAXABLE IN INDIA SINCE THE SOURCE OF INCOME ACCRUED AND AROSE IN INDIA BY VIRTUE OF THE AGREEME NT ENTERED INTO WITH THE ASSESSEE, AN INDIAN COMPANY, AND ALSO ON ACCOUNT OF THE FACT THAT THE BENEFIT OF THE SERVICES RENDERED WERE UTILIZED IN INDIA. 34. WE HAVE ALSO GONE THROUGH THE ORDER OF THE I.T.A.T. IN THE CASE OF ASSESSEE FOR ASSESSMENT YE AR 2009- 10 IN ITA NO.52/CHD/2016 DATED 24.5.2016. WE FIND THAT IDENTICAL DISALLOWANCE OF COMMISSION, LEGAL AND 24 PROFESSIONAL, MARKETING AND SELLING, BUSINESS DEVELOPMENT, OUTSOURCING AND COMMUNICATION EXPENSES WAS MADE IN THAT YEAR ALSO AMOUNTING IN ALL TO RS.5,31,28,742/- ON ACCOUNT OF THE FACT THAT THESE PAYMENTS/EXPENSES WERE MADE TO FOREIGN ENTITIES WIT HOUT DEDUCTING TAX AT SOURCE. IN THE SAID CASE ALSO, TH E ASSESSING OFFICER HAD HELD THE ASSESSEE LIABLE TO T DS ON THE SAID PAYMENTS SINCE HE HAD OBSERVED THAT THESE PAYMENTS CONSTITUTED DEEMED INCOMES OF THE PAYEES S INCE THE SERVICES RENDERED ON ACCOUNT OF THE PAYMENTS MA DE WERE UTILIZED IN INDIA, WERE NOT IN CONNECTION WITH ANY BUSINESS AND PROFESSION CARRIED OUTSIDE INDIA, WERE ON ACCOUNT OF AGREEMENT BETWEEN THE ASSESSEE WHICH WAS AN INDIAN COMPANY. THE I.T.A.T. IN THE SAID CASE WE F IND, DELETED THE DISALLOWANCE MADE, BY HOLDING THAT THE ASSESSING OFFICER NOR THE CIT (APPEALS) GIVEN ANY F INDING WHETHER THE NATURE OF INCOME IN THE HANDS OF THE NO N- RESIDENTS IS THAT OF INCOME ACCRUED IN INDIA OR INC OME DEEMED TO HAVE ACCRUED IN INDIA. THE HON'BLE I.T.A .T. ALSO HELD THAT THERE IS NO FINDING ON RECORD BY ANY OF THE LOWER AUTHORITIES THAT NON-RESIDENT PAYEES HAD ANY BUSINESS CONNECTION IN INDIA OR EVEN ANY PERMANENT ESTABLISHMENT IN INDIA. 35. THE I.T.A.T. EXHAUSTIVELY DEALT WITH THE ISSUE AT HAND AND WENT THROUGH VARIOUS PERTINENT SECTIONS INVOLVED. IT FIRST DEALT WITH SECTION 40(A)(IA), I NVOKING WHICH DISALLOWANCE HAD BEEN MADE AND POINTED OUT TH AT 25 AS PER THE SAID SECTION, ONLY THOSE PAYMENTS MADE T O NON- RESIDENTS ON WHICH TAX IS REQUIRED TO BE DEDUCTED A S PROVIDED UNDER THE RELEVANT CHAPTER AND IF NOT DED UCTED, THE PROVISIONS OF THE SAID SECTION COULD BE INVOKED AND DISALLOWANCE MADE. THEREAFTER THE I.T.A.T. POINTED OUT THAT THE RELEVANT CHAPTER FOR DEDUCTION OF TAX AT S OURCE IS CHAPTER-XVII AND ANALYZED THE SAME AND POINTED OUT THAT AS PER THE RELEVANT SECTION CONCERNED IN THE PRESEN T CASE BEING SECTION 195 OF THE ACT, LIABILITY TO TAX ARIS ES ONLY IF AN AMOUNT IS CHARGEABLE UNDER THE INCOME TAX ACT. THE HON'BLE I.T.A.T. THEN WENT ON TO DEAL WITH SECTIONS 4 AND 5 OF THE ACT WHICH DEAL WITH THE CHARGE OF INCOME T AX AND THE SCOPE OF INCOME TAX. ANALYZING THE SAME THE I. T.A.T. HELD THAT THE NON-RESIDENT IS CHARGEABLE TO TAX ONL Y IF IT RECEIVES OR IS DEEMED TO HAVE RECEIVED ANY AMOUNT I N INDIA OR IS DEEMED TO ACCRUES OR ARISES IN INDIA. ADVERTING AT THIS POINT TO THE FACTS OF THE CASE, T HE I.T.A.T. HELD THAT IN THE PRESENT CASE IT IS NOT DI SPUTED THAT THE AMOUNT IS NEITHER RECEIVED IN INDIA, NOR D EEMED TO HAVE BEEN RECEIVED IN INDIA AND FURTHER POINTED OUT THAT THE DISPUTE IS ONLY WITH REGARD TO WHETHER THE AMOUNT IS DEEMED TO ACCRUE OR ARISES IN INDIA. THE REAFTER IT DEALT WITH THE RELEVANT PROVISIONS FOR THE PURPO SE OF ADJUDICATING THE ISSUE IN THE PRESENT CASE I.E. SEC TION 9( 1) OF THE ACT AND FURTHER DEALT WITH THE JUDGMENT O F THE HON'BLE APEX COURT IN THE CASE OF CIT VS. R.D. AGG AWAL & CO. (1965) 56 ITR 20 WHICH HAD ILLUSTRATED INSTANCE S OF NON-RESIDENTS HAVING BUSINESS CONNECTION IN INDIA. THE 26 I.T.A.T. THEREAFTER HELD THAT THE SAID DISALLOWANCE IN THE PRESENT CASE WAS UNWARRANTED, FIRSTLY FOR THE REAS ON THAT NO CASE HAS BEEN MADE BY THE LOWER AUTHORITIES AS T O WHETHER THE INCOME ACCRUED IN INDIA OR WAS DEEMED T O HAVE ACCRUED OR ARISEN IN INDIA. FURTHER THE I.T.A .T. HELD THAT NOTHING WAS BROUGHT ON RECORD BY THE LOWER AUTHORITIES TO SHOW THAT THERE WAS ANY BUSINESS CONNECTION OF THE FOREIGN ENTITIES IN INDIA AND THU S ESTABLISHING THAT THE INCOME WAS DEEMED TO ACCRUE O R ARISE IN INDIA. THE I.T.A.T. ALSO OBSERVED THAT TH ERE WAS ALSO NO FINDING OF ANY PERMANENT ESTABLISHMENT OF T HE SAID ENTITIES IN INDIA. IN VIEW OF THE SAME, THE I .T.A.T. HELD THAT IN THE ABSENCE OF ANY FINDING WITH REGARD TO THE INCOME HAVING DEEMED TO HAVE ACCRUED OR ARISEN IN I NDIA, THE SAID INCOMES OF THE FOREIGN ENTITIES COULD NOT BE SAID TO BE TAXABLE IN INDIA AND IN VIEW OF THE SAME, THE APPLICABILITY OF PROVISIONS OF TAX DEDUCTION AT SOU RCE U/S 195 OF THE ACT WAS NOT ATTRACTED AND, THEREFORE, NO DISALLOWANCE ON ACCOUNT OF NON DEDUCTING TAX AT SOU RCE SHOULD BE MADE U/S 40(A)(IA) OF THE ACT. THE RELEV ANT FINDINGS OF THE I.T.A.T. AT PARAS 21 TO 38 OF THE O RDER ARE AS FOLLOWS : 21. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. THE FACTS AS CULLED OUT BY US FROM THE PERUSAL OF T HE ORDERS OF THE LOWER AUTHORITIES AS WELL AS SUBMISSIONS ORA L AND WRITTEN FILED BY BOTH THE PARTIES BEFORE US, ARE TH AT THE ISSUE IS WITH REGARD TO THE DISALLOWANCE MADE BY TH E 27 ASSESSING OFFICER INVOKING THE PROVISIONS OF SECTIO N 40(A)(I) OF THE ACT, WHEREBY ON CERTAIN PAYMENTS MADE TO NON - RESIDENT ENTITIES, THE ASSESSEE FAILED TO DEDUCT TA X AT SOURCE. THE IMPUGNED PAYMENTS MADE TO THE RESPECTI VE NON-RESIDENT ENTITIES ARE AS FOLLOWS : COMMUNICATION EXPENSES COMMISSION LEGAL & PROFESSIONAL MARKETING & SELLING BUSINESS DEVELOPMENT OUTSOURCING B.V.DESIGN PRODUCTS, NETHERLAND 1,26,794 5,63,949 MOVATES, NETHERLAND 1,33,661 DILENBECH FINLEY, USA 28,06.949 STEVEN INTL. USA 9,57,088 7,95,603 1,80,054 VAN MEMM & WISSELINK, NETHERLAND 31,82,154 IDS INFOTECH, UK 21,29,762 IDS INFOTECH, USA 2,08,87,085 1,39,86,202 IMCS, TUNISIA 73,79,858 TOTAL 1,26,794 83,36,946 69,17,950 2,35,80,796 1,80,054 1,39,86,202 TOTAL- 5,31,28,742/= 22. OUT OF THESE NON-RESIDENT ENTITIES, ENTITIES, NAMELY IDS INFOTECH (UK LTD.), IDS AMERICA (USA INC ) AND BV DESIGNS, NETHERLAND ARE THE WHOLLY OWNED SUBSIDI ARIES OF THE ASSESSEE COMPANY. APART FROM THIS, WITH REG ARD TO THE PAYMENTS MADE TO IMCS, OTHER ISSUES HAVE ALSO B EEN RAISED BY THE ASSESSING OFFICER. ONE IS WITH REGAR D TO COMPARISON OF THE PAYMENTS MADE TO THIS CONCERN WIT H THE OTHER CONCERN AND OTHER IS WHETHER PAYMENT MADE TO THIS C ONCERN IS NOT TO BE ALLOWED TO THE ASSESSEE IN VIEW OF THE PROVIS IONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT. THE LEA RNED CIT (APPEALS) HAS THOUGH CONFIRMED THE FINDING GIVEN BY THE ASSESSING OFFICER. HOWEVER, IN SOME PASSING REFERE NCE HE 28 ALSO APPREHENDED THAT THESE PAYMENTS MAY BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. 23. THE LEARNED COUNSEL FOR THE ASSESSEE MADE ELABORATE SUBMISSIONS WITH REGARD TO THE FACT THAT THESE PAYMENTS ARE NOT CHARGEABLE IN THE HANDS OF THE REC IPIENT. THEREFORE, NO TAX IS DEDUCTIBLE ON THE SAME. THERE FORE, PROVISIONS OF SECTION ARE NOT APPLICABLE ON THE SAM E. SUBMISSIONS WERE MADE WITH REGARD TO ALTERNATIVE CONTENTIONS RAISED BY THE ASSESSING OFFICER IN RESP ECT OF PAYMENT TO IMCS. WITH RESPECT TO THE REFERENCE OF THE LEARNED CIT (APPEALS) ON THE PAYMENTS BEING IN THE NATURE OF FEES FOR TECHNICAL SERVICES. THE LEARNED COUN SEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT NO SUCH FINDING HA S ACTUALLY BEEN GIVEN BY THE LEARNED CIT (APPEALS). HOWEVER, HE ALSO MADE SUBMISSIONS THAT FOR THE CONC LUSION THAT THESE PAYMENTS WERE IN THE NATURE OF FEES FOR TECHNICAL SERVICES, ONE HAS TO GO TO THE PROVISION S OF DTTA ALSO. THE LEARNED D.R. ON THE ISSUES RAISED BY THE ASSESSING OFFICER PLACED RELIANCE ON THE ORDER OF T HE LEARNED CIT (APPEALS), WHILE WITH REGARD TO THE IS SUE OF FEES FOR TECHNICAL SERVICES RAISED BY THE LEARNED CIT (APPEALS), HIS SUBMISSION WAS THAT IN THE ABSENCE O F EXACT NATURE OF SERVICES RENDERED BY THE ASSESSEE, COMING OUT OF THE VARIOUS AGREEMENTS AND INVOICES, IT IS TO BE PR ESUMED THAT THE PAYMENTS ARE IN THE NATURE OF FEES FOR TE CHNICAL SERVICES. WITH RESPECT TO THE DTAA ALSO, HIS SUBM ISSION WAS THAT IN THE ABSENCE OF ANY SUCH NATURE COMING O UT OF RECORD, IT IS TO BE PRESUMED THAT THE SERVICES HAVE BEEN MADE AVAILABLE TO THE ASSESSEE. THEREFORE, THE S AME IS EXIGIBLE TO THE PROVISIONS OF TAX DEDUCTION AT SOUR CE. 24. NOW THE ISSUES FOR ADJUDICATION, COMING IN THI S BACKGROUND, BEFORE US ARE AS FOLLOWS : I) WHETHER THE IMPUGNED PAYMENTS ARE OF THE NATURE, WHEREBY THE PROVISIONS OF TDS ARE 29 APPLICABLE, IN THE ABSENCE OF WHICH THE DISALLOWANCE IS CALLED FOR UNDER SECTION 40(A)(I) OF THE ACT. II) WITH RESPECT TO PAYMENTS MADE TO IMCS, WHETHER THE EXPLANATION TO SECTION 37(1) OF THE ACT IS APPLICABLE TO THE SAID PAYMENTS. III) WITH RESPECT TO PAYMENT MADE TO IMCS, WHETHER THE SAME IS UNREASONABLE IN COMPARISON TO PAYMENT OF SAME NATURE MADE TO OTHER ENTITIES. IV) IF THE PAYMENTS, AS SUCH, ARE NOT EXIGIBLE TO THE PROVISIONS OF TDS, WHETHER THESE ARE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. AS SUCH, THE TAX IS TO BE DEDUCTED OUT OF THESE PAYMENTS. 25. THE BASIC ISSUE IS WHETHER THE TAX IS TO BE DEDUCTED WHILE MAKING THESE IMPUGNED PAYMENTS. TH E ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SEC TION 40(A)(I) OF THE ACT IN THIS REGARD. THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT TO THE EXTENT RELEVANT IN THE P RESENT CASE READS AS UNDER : 40(A)(I) NOTWITHSTANDING ANYTHING TO THE CONTRARY IN [SECTIONS 30 TO 38], THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION': (A) IN THE CASE OF ANY ASSESSEE [(I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISSU ED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938), ROYA LTY, 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, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B A ND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION, H AS NOT BEEN PAID [DURING THE PREVIOUS YEAR, OR IN THE SUBSE QUENT YEAR 30 BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SE CTION (1) OF SECTION 200]: [PROVIDED THAT WHERE IN RESPECT OF ANY SUCH SUM, TAX HAS BEEN DEDUCTED IN ANY SUBSEQUENT YEAR OR, HAS BEEN DEDUCTE D IN THE PREVIOUS YEAR BUT PAID IN ANY SUBSEQUENT YEAR A FTER THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) O F SECTION 200, SUCH SUM SHALL BE ALLOWED AS A DEDUCTION IN COMPUTI NG THE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH TAX H AS BEEN PAID.] EXPLANATION : FOR THE PURPOSES OF THIS SUB-CLAUSE, (A) 'ROYALTY' SHALL HAVE THE SAME MEANING AS IN EXPLAN ATION 2 TO CLAUSE (VI) OF SUB-SECTION (1) OF SECTION 9; (B) 'FEES FOR TECHNICAL SERVICES' SHALL HAVE THE SAME M EANING AS IN EXPLANATION 2 TO CLAUSE (VII) OF SUB-SECTION (1 ) OF SECTION 9; 26. THE MOST IMPORTANT TERMS IN THE PROVISIONS OF THIS SECTION ARE ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER-XVII, MEANING THEREBY THAT ONLY THOSE PAYME NTS MADE TO NON-RESIDENTS ON WHICH TAX IS REQUIRED TO B E DEDUCTED AS PROVIDED UNDER THE RELEVANT CHAPTER, TH E PROVISIONS OF THIS SECTION CAN BE INVOKED. CHAPTER -XVII DEALS WITH COLLECTION AND RECOVERY OF TAXES WHILE P ART-B OF THIS CHAPTER DEALS WITH TAX DEDUCTION AT SOURCE, TH E PROVISIONS RELATING TO TAX TO BE DEDUCTED OUT OF PA YMENT MADE TO A NON-RESIDENT ARE PROVIDED IN SECTION 195 OF THE ACT, WHICH READ AS UNDER : 195 (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT , NOT BEING A COMPANY, OR TO A FOREIGN COMPANY, ANY INT EREST (NOT BEING INTEREST ON SECURITIES) OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME C HARGEABLE 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 DRAF T OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME- TAX T HEREON AT THE RATES IN FORCE: 27. THE MOST IMPORTANT TERMS IN THIS SECTION ARE CHARGEABLE UNDER THE PROVISIONS OF THIS ACT. FR OM THIS, 31 IT IS VERY CLEAR THAT ONLY IF AN AMOUNT IS CHARGEAB LE UNDER THE INCOME TAX ACT, THE LIABILITY TO DEDUCT TAX ON THE PAYMENT OF SUCH AMOUNT ARISES. CHARGE OF INCOME TA X IS PROVIDED UNDER SECTION 4 OF THE ACT, WHILE SCOPE OF TOTAL INCOME IS PROVIDED IN SECTION 5 OF THE ACT. THE PR OVISIONS OF SECTION 5 OF THE ACT RELATING TO SCOPE OF TOTAL INCOME IN RESPECT OF A NON-RESIDENT ARE PROVIDED IN SUB-SECTI ON (2) OF SAID SECTION, WHICH READ AS UNDER : 5(2) SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTA L INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A NON- RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH- (A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF SUCH PERSON; OR (B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. EXPLANATION 1-INCOME ACCRUING OR ARISING OUTSIDE INDIA SHALL NOT BE DEEMED TO BE RECEIV ED IN INDIA WITHIN THE MEANING OF THIS SECTION BY REASON ON LY OF THE FACT THAT IT IS TAKEN INTO ACCOUNT IN A BALANCE SHEET PREPARED IN INDIA. EXPLANATION 2.- FOR THE REMOVAL OF DOUBTS, IT IS HEREB Y DECLARED THAT INCOME WHICH HAS BEEN INCLUDED IN THE TOTAL INCOME OF A PERSON ON THE BASIS THAT IT HAS ACCRUED OR ARISEN OR IS DEEMED TO HAVE ACCRUED OR ARISEN TO HIM SHALL NO T AGAIN BE SO INCLUDED ON THE BASIS THAT IT IS RECEIVED OR DE EMED TO BE RECEIVED BY HIM IN INDIA. 28. FROM THE BARE PERUSAL OF THE PROVISIONS OF THE ABOVE SECTION, IT IS QUITE CLEAR THAT A NON-RESIDEN T IS CHARGEABLE TO TAX IF IT RECEIVES OR DEEMED TO RECEI VE ANY AMOUNT IN INDIA. THE PROVISIONS EMERGING FROM THE ANALYSIS ARE VERY CLEAR THAT, WHEN INCOME ACCRUES, ARISES OR RECEIVED IN INDIA, THE SAME IS TAXABLE. INCOME W HICH IS DEEMED TO ACCRUE OR ARISE IN INDIA IS TAXABLE IN IN DIA, EVEN 32 IF THE SAME IS NOT ACTUALLY ACCRUES, ARISES OR RECE IVES IN INDIA. 29. IN THE PRESENT CASE, THIS IS NOT IN DISPUTE TH AT THE AMOUNT IS NOT RECEIVED OR DEEMED TO BE RECEIVED IN INDIA. THE SECOND SITUATION UNDER WHICH THE RECEIPT OF NON - RESIDENT IS TAXABLE IS IF THE INCOME ACCRUES OR ARI SES OR IS DEEMED TO ACCRUE OR ARISE IN INDIA. UNDOUBTEDLY, I N THE PRESENT CASE NO INCOME HAS ACCRUED TO THE NON-RESID ENT PERSON IN INDIA. THE DISPUTE MAY BE ONLY WITH REGA RD TO THE IMPUGNED AMOUNT BEING INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. VARIOUS INSTANCES OF INCOME CONSI DERED TO BE DEEMED TO ACCRUE OR ARISE IN INDIA TO A NON-RESI DENT ARE PROVIDED IN SECTION 9 OF THE INCOME TAX ACT. FOR T HE PURPOSE OF ADJUDICATING THE ISSUES ARISING IN THE P RESENT APPEAL, THE RELEVANT PROVISIONS ARE THAT OF SECTION 9(1)(I) OF THE ACT, WHICH READ AS UNDER : 9 (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA (I) ALL INCOME ACCRUING OR ARISING, WHETHER DIRECTLY O R INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR THROUGH OR FROM ANY PROPERTY IN INDIA, OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA, 135 [***] OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA; [EXPLANATION 1]: FOR THE PURPOSES OF THIS CLAUSE (A) IN THE CASE OF A BUSINESS OF WHICH ALL THE OPERATIONS ARE NOT CARRIED OUT IN INDIA, THE INCOME OF THE BUSINESS DEEM ED UNDER THIS CLAUSE TO ACCRUE OR ARISE IN INDIA SHALL BE ONLY SUCH PART OF THE INCOME AS IS REASONABLY ATTRIBUTABLE TO THE O PERATIONS CARRIED OUT IN INDIA; (B) IN THE CASE OF A NON-RESIDENT, NO INCOME SHALL BE DE EMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH OR FROM OPERA TIONS WHICH ARE CONFINED TO THE PURCHASE OF GOODS IN INDIA FOR THE PURPOSE OF EXPORT; [* * * *] [(C) IN THE CASE OF A NON-RESIDENT, BEING A PERSON ENG AGED IN THE BUSINESS OF RUNNING A NEWS AGENCY OR OF PUBLISHI NG NEWSPAPERS, MAGAZINES OR JOURNALS, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO HIM THROUGH OR FROM ACTIVITIES WHICH ARE CONFINED TO THE COLLECTION OF NE WS AND VIEWS IN INDIA FOR TRANSMISSION OUT OF INDIA;] 33 [(D) IN THE CASE OF A NON-RESIDENT, BEING (1) AN INDIVIDUAL WHO IS NOT A CITIZEN OF INDIA; OR (2) A FIRM WHICH DOES NOT HAVE ANY PARTNER WHO IS A CITIZEN OF INDIA OR WHO IS RESIDENT IN INDIA; OR (3) A COMPANY WHICH DOES NOT HAVE ANY SHAREHOLDER WHO IS A CITIZEN OF INDIA OR WHO IS RESIDENT IN INDIA, NO INCOME SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA TO SUCH INDIVIDUAL, FIRM OR COMPANY THROUGH OR FROM OPERATION S WHICH ARE CONFINED TO THE SHOOTING OF ANY CINEMATOGRAPH FI LM IN INDIA;] [EXPLANATION 2 : FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT 'BUSINESS CONNECTION' SHALL INCLUDE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A PERSON WHO, A CTING ON BEHALF OF THE NON-RESIDENT, (A) HAS AND HABITUALLY EXERCISES IN INDIA, AN AUTHORITY TO CONCLUDE CONTRACTS ON BEHALF OF THE NON-RESIDENT UNLES S HIS ACTIVITIES ARE LIMITED TO THE PURCHASE OF GOODS OR MER CHANDISE FOR THE NON-RESIDENT; OR (B) HAS NO SUCH AUTHORITY, BUT HABITUALLY MAINTAINS IN INDIA A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGULAR LY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THE NON-R ESIDENT; OR (C) HABITUALLY SECURES ORDERS IN INDIA, MAINLY OR WHOLLY FOR THE NON-RESIDENT OR FOR THAT NON-RESIDENT AND OTHER NON-RE SIDENTS CONTROLLING, CONTROLLED BY, OR SUBJECT TO THE SAME COMMO N CONTROL, AS THAT NON-RESIDENT: PROVIDED THAT SUCH BUSINESS CONNECTION SHALL NOT INCLU DE ANY BUSINESS ACTIVITY CARRIED OUT THROUGH A BROKER, GENER AL COMMISSION AGENT OR ANY OTHER AGENT HAVING AN INDEP ENDENT STATUS, IF SUCH BROKER, GENERAL COMMISSION AGENT OR AN Y OTHER AGENT HAVING AN INDEPENDENT STATUS IS ACTING IN THE ORDINARY COURSE OF HIS BUSINESS : PROVIDED FURTHER THAT WHERE SUCH BROKER, GENERAL COM MISSION AGENT OR ANY OTHER AGENT WORKS MAINLY OR WHOLLY ON B EHALF OF A NON-RESIDENT (HEREINAFTER IN THIS PROVISO REFERRED T O AS TO THE PRINCIPAL NON-RESIDENT) OR ON BEHALF OF SUCH NON-RESID ENT AND OTHER NON-RESIDENTS WHICH ARE CONTROLLED BY THE PRINCI PAL NON- RESIDENT OR HAVE A CONTROLLING INTEREST IN THE PRINCI PAL NON- RESIDENT OR ARE SUBJECT TO THE SAME COMMON CONTROL AS THE PRINCIPAL NON-RESIDENT, HE SHALL NOT BE DEEMED TO BE A BROKER, GENERAL COMMISSION AGENT OR AN AGENT OF AN INDEPENDE NT STATUS.] 30. WE ARE TO JUDGE FROM THE FACTS AND CIRCUMSTANC ES OF THE PRESENT CASE WHETHER THE IMPUGNED PAYMENTS ARE 34 DEEMED TO ACCRUE OR ARISE IN INDIA TO THE RESP ECTIVE RECIPIENTS, AS WE HAVE ALREADY MENTIONED THAT ONLY THOSE PAYMENTS WHICH ARE OF THE NATURE OF SUM CHARGEABLE UNDER THE PROVISIONS OF THE ACT ARE EXIGIBLE FOR PROVISIO N OF TAX DEDUCTION AT SOURCE. HERE WE ARE INCLINED TO REFER TO THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F G.E. INDIA TECHNOLOGY CENTRE PVT. LTD. VS. CIT (2010) 32 7 ITE 456 (SC), WHEREBY IT HAS BEEN HELD THAT SECTION 195 (1) OF THE ACT USES THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISION OF THE ACT AND WEIGHTAGE IS NEEDED TO BE GIVEN TO THESE WORDS. FURTHER, SECTION 195 USES THE WORD P AYER AND NOT THE WORD ASSESSEES. THE PAYER IS NOT AS SESSEE. THE PAYER BECOMES AN ASSESSEE IN DEFAULT ONLY WHEN HE FAILS TO FULFILL STATUTORY OBLIGATION UNDER SECTION 195(1) OF THE ACT. IF THE PAYMENT DOES NOT HAVE THE ELEMENT OF THE INCOME, THE PAYER CANNOT BE MADE LIABLE. THE HON'B LE SUPREME COURT THUS REJECTED THE CONTENTION OF THE DEPARTMENT BY HOLDING THAT IF THE SUM PAID IS NOT CHARGEABLE TO TAX, THEN NO TAX IS REQUIRED TO BE DE DUCTED. 31. FROM THE READING OF THE A.O.S ORDER, WE DO NO T UNDERSTAND HIS CASE. NOWHERE IN THE ENTIRE ORDER HE HAS GIVEN ANY FINDING AS TO WHETHER THE NATURE OF INCOM E IN THE HANDS OF THE NON RESIDENT IS THAT OF INCOME ACCRUE D IN INDIA OR INCOME DEEMED TO HAVE ACCRUED IN INDIA. HE JUST KEPT ON HARPING THE FACT THAT THE ULTIMATE BENEFICI ARY OF THE SERVICES IS THE ASSESSEE IN INDIA. EVEN THE CIT (A) WHILE ADJUDICATING THE ISSUE COULD NOT GIVE ANY APPROPRIA TE FINDING IN THIS REGARD. THE RELEVANT PORTION OF THE CIT(A)S FINDINGS ARE RECORDED AT PAGE 12 PARA 10.3, IN LATE R PART OF THIS PARAGRAPH, HE STATES AS UNDER: THE PAYMENT ARE MADE BY THE APPELLANT COMPANY AND THESE ARE IN THE NATURE OF MARKETING SUPPORT SERVICES AND SELLING EXPENDITURE FOR GETTING MORE AND MORE BUSINESS ABROAD. THE SERVICES PROVIDED BY THE NONRESIDENT 35 ENTITIES FOR PROMOTING SALES AND LEGAL/PROFESSION SERVICES ARE AS PER THE TERMS OF CONTRACT WHICH IS ENTERED BY THESE ENTITIES WITHIN THE APPELLANT COMPANY WITH THE RESPONSIBILITY OF THE APPELLANT COMPANY. THEREFORE THE SOURCE OF INCOME FOR THE ENTITIES ABROAD IS THE AGREEMENT WITH THE APPELLANT COMPANY AND BY VIRTUE OF THESE SERVICES THERE IS A DIRECT BENEFIT TO THE APPELLANT COMPANY AND HENCE THE PAYMENT MADE BY THE INDIAN COMPANY FOR SERVICES UTILIZED IS NOT IN CONNECTION WITH BUSINESS/PROFESSION CARRIED OUT, OUTSIDE OF INDIA. THE BUSINESS OUTSIDE INDIA IS SECURED BY THE INDIAN COMPANY I.E. THE APPELLANT COMPANY. THE SOURCE OF INCOME FOR THE SERVICES RENDERED BY THE NONRESIDENT ENTITIES IS IN INDIA AS THE INDIAN COMPANY GIVES DIRECTIONS FOR THE WORK ABROAD. THEREFORE THE INCOME FOR THE NON- RESIDENT ACCRUES AND ARISE IN INDIA. HERE ALSO THE CIT(A) IS GETTING CONFUSED BY THE FACT THAT THE SOURCE OF INCOME IS IN INDIA. THERE I S NO DOUBT THAT THE INDIAN COMPANY HAS MADE THE PAYMENT AND AL SO THE FACT THAT THE PAYMENTS HAVE BEEN MADE IN CONSIDERATION FOR SOME SERVICES RENDERED BY THE NO N RESIDENTS. HOWEVER THE MOOT QUESTION IS WH ERE THE SERVICES, IN RESPECT OF WHICH THE PAYMENTS HAVE BEE N MADE, WERE RENDERED. 32. AS PER THE PROVISIONS OF SECTION 9(1) OF THE A CT, THE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA IF IT IS DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA. FURTHER, THE BUSINESS CONNECT ION HAS TO BE AN ACTIVITY OF THE NON-RESIDENT IN THE TAXABL E TERRITORY IS INDIA HAVING INTIMATE AND NEAR RELATION OF A CON TINUOUS NATURE OF THE BUSINESS OF THE NON-RESIDENT AND ATTR IBUTED TO THE EARNING PROFITS BY THE NON-RESIDENT IN HIS BUSI NESS. WE SHOULD UNDERSTAND THAT ALL COMMERCIAL RELATIONS WI LL NOT 36 NECESSARILY CONSTITUTE BUSINESS CONNECTION UNLESS A COMMERCIAL CONNECTION IS REALLY AND INTIMATELY CONN ECTED WITH THE BUSINESS ACTIVITY OF NON-RESIDENT IN INDIA AND IS CONTRIBUTORY TO THE EARNING OF THE PROFITS IN THE S AID ACTIVITY OF THE NON-RESIDENT. SOME ILLUSTRATIVE I NSTANCES OF NON-RESIDENTS HAVING BUSINESS CONNECTION IN INDIA H AVE BEEN QUOTED IN THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF R.D. AGGARWAL (SUPRA, WHICH ARE AS UNDER : I) MAINTAIN A BRANCH OFFICE IN INDIA FOR PURCHASE OR SALE OF GOODS OR TRANSACTING OTHER BUSINESS. II) APPOINTING AN AGENT IN INDIA FOR SYSTEMATIC AND REGULAR PURCHASE OF RAW MATERIAL OR OTHER COMMODITIES, OR FOR SALE OF NON- RESIDENT GOODS OR FOR OTHER BUSINESS PURPOSES. III) ERECTING A FACTORY IN INDIA WHERE RAW PRODUCE PURCHASED LOCALLY IS WORKED INTO A FIRM SUITABLE FOR SENDING ABROAD. IV) FORMING LOCAL COMPANY TO SALE PRODUCTS OF NON-RESIDENT PARENT COMPANY. V) HAVING FINANCIAL ASSOCIATION BETWEEN THE RESIDENT AND NON-RESIDENT COMPANY. THESE ACTIVITIES HAVE BEEN CULLED OUT FROM THE JUDGEMENT BY THE CBDT ITSELF IN ITS CIRCULAR NO. 23 [F.NO. 7A/38/69-IT(A-11)], DATED 23.07.1069. 33. IN THE PRESENT CASE, NO FINDING HAS BEEN BROU GHT ON RECORD BY ANY OF THE LOWER AUTHORITIES THAT NON- RESIDENT ENTITIES HAVE ANY SUCH CONNECTION WITH INDIA AS ILL USTRATED ABOVE. ALL ALONG THE ASSESSEE HAS BEEN MAINTAININ G THAT THE NON-RESIDENT ENTITIES TO WHOM IT HAS MADE THE 37 PAYMENTS DO NOT HAVE ANY BUSINESS CONNECTION WITH I NDIA. THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT (A PPEALS) HAD NOWHERE IN THEIR ORDERS RECORDED ANY SUCH FINDI NG THOUGH WE MUST ADD THAT THEY HAVE NOT EVEN INTENDED TO MAKE ANY INVESTIGATION IN THIS REGARD. HOWEVER, WE ALSO OBSERVE THAT THIS STANCE HAS BEEN CONSISTENTLY TAKE N BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AS WELL AS BE FORE US AND EVEN THE LEARNED D.R. WHILE ARGUING BEFORE US C OULD NOT CONTROVERT THE SAID SUBMISSION OF THE ASSESSE E. IN THIS MANNER, WE DO NOT HESITATE TO CONCLUDE THAT NO SERVICES WERE RENDERED BY NON-RESIDENTS IN INDIA. THIS CONCLUSION OF OURS IS ALSO BASED ON THE PROPOSITION AS LAID DOWN BY THE DELHI HIGH COURT IN THE CASE OF CIT VS . EON TECHNOLOGIES PVT. LTD. (2012) 343 ITR 366 (DEL). 34. IN VIEW OF THIS, WE FIND THAT THE PROVISIONS O F TAX DEDUCTION AT SOURCE ARE NOT APPLICABLE TO THE IMPUG NED PAYMENTS AS THE AMOUNTS RECEIVED BY THE RECIPIENTS ARE NOT IN THE NATURE OF INCOME DEEMED TO ACCRUE OR ARISE I N INDIA IN THEIR HANDS. THEREFORE, PROVISIONS OF SECTION 4 0(A)(I) OF THE ACT CANNOT BE INVOKED. 35. THOUGH THE DEFINITION OF THE INCOMES DEEMED TO ACCRUE OR ARISE IN INDIA IS PROVIDED IN SECTION 9 O F THE ACT, WE SHOULD NOT FORGET THAT THE PROVISIONS OF THE ACT ARE SUBJECT TO THE TREATY ENTERED BY THE CENTRAL GOVERN MENT WITH THE GOVERNMENT OF A COUNTRY OUTSIDE INDIA IN T ERMS OF THE PROVISIONS OF SECTION 90 OF THE ACT. THEREFORE , AS IN THE PRESENT CASE PAYMENTS HAVE BEEN MADE TO THE RESIDEN TS OF THOSE COUNTRIES WITH WHOM INDIA HAS ENTERED INTO DT AA, THE PROVISIONS OF SECTIONS 5 AND 9 OF THE ACT SHALL BE SUBJECT TO THE AGREEMENT ENTERED INTO WITH SUCH COU NTRIES. 36. WITH REGARD TO THE FACT THAT ALL THESE ENTITIE S RELATE TO THE COUNTRIES WITH WHOM INDIA HAS DTAAS T HOUGH IN VIEW OF THE FINDING GIVEN BY US IN THE ABOVE P ARAGRAPH THAT THE AMOUNTS ARE NOT IN THE NATURE OF INCOME I N THE 38 HANDS OF THE RECIPIENTS, WE NEED NOT GO INTO THE RE SPECTIVE TREATIES, IN VIEW OF THE FACT THAT THE PROVISIONS W HICH ARE BENEFICIAL TO THE ASSESSEE ARE TO BE TAKEN CARE WHI LE FASTENING TAX LIABILITY. 37. THE BASIC PRINCIPLE TO BE APPLIED IN SUCH CASE S IS THAT ONE HAS TO FIRST LOOK AT THE DOMESTIC LAW TO F IND OUT IF THE NON-RESIDENT ASSESSEE IS TAXABLE THEREUNDER. IF IT IS TAXABLE, ONLY THEN ONE HAS TO GO INTO THE TREATY, I F ANY, BETWEEN INDIA AND THE COUNTRY TO WHICH THE NON RESI DENT BELONGS, TO, FIND OUT IF THERE IS ANY BENEFICIAL PR OVISION IN THE TREATY TO EXEMPT THE ASSESSEE FROM TAXATION OR REDUCE THE RIGOURS OF THE DOMESTIC LAW. IF THERE IS SUCH A PROVISION IN THE TREATY, THE ASSESSEE IS ENTITLED TO CLAIM TH AT IT SHOULD BE GIVEN THE BENEFIT OF THE TREATY PROVISION S. ON THE OTHER HAND, IF THE ASSESSEE IS NOT TAXABLE UNDER TH E DOMESTIC LAW ITSELF, THERE IS NO NEED TO LOOK INTO THE PROVISIONS OF THE DTAA, EVEN IF ONE EXISTS, TO FIND OUT IF THERE IS ANY PROVISION UNDER WHICH THE NON-RESIDENT CAN BE BROUGHT TO TAX. IN OTHER WORDS, THE TREATY CANNOT B E USED AS A TAXING STATUTE. THE PRINCIPLE IS THAT WHERE TH E NON- RESIDENT IS TAXABLE UNDER THE DOMESTIC LAW BUT THER E IS A PROVISION IN THE TREATY TO EXEMPT THE TRANSACTION O R REDUCE THE RIGOR OF TAXATION TO THE BENEFIT OF THE NON-RES IDENT, THE PROVISIONS OF THE TREATY OVERRIDE THE PROVISIONS OF THE DOMESTIC LAW. THESE FUNDAMENTAL PRINCIPLES ARE W ELL- SETTLED BY THE JUDGMENTS OF THE SUPREME COURT IN P. V.A.L. KULANDAGAN CHETTIAR (2008) 267 ITR 654 (SC) AND AZA DI BACHAO ANDALON (2003) 263 ITR 706 (SC). 38. ON GOING THROUGH THE RELEVANT ARTICLE PROVIDED IN THE DTAA, WE OBSERVE THAT INVARIABLY IN ALL THE DTA AS TO WHICH WE ARE CONCERNED, THE INCOME IS TAXABLE IN IN DIA ONLY IF THAT FOREIGN ENTITY CARRIES ON BUSINESS IN INDIA THROUGH A PERMANENT ESTABLISHMENT SITUATED IN INDIA . WE AGAIN OBSERVE THAT NO SUCH FINDING WITH REGARD TO E XISTENCE OF ANY PERMANENT ESTABLISHMENT IN INDIA HAS BEEN BR OUGHT 39 ON RECORD BY ANY OF THE LOWER AUTHORITIES OR EVEN B Y THE LEARNED D.R. AT THE TIME OF HEARING BEFORE US. IN VIEW OF THIS, THE POSITION EMERGES THAT THE PAYMENT TO A PE RSON WHO HAPPENS TO BE A RESIDENT OF COUNTRY WITH WHOM I NDIA HAS ENTERED INTO DTAA AND WHERE THE BUSINESS PROFIT S ARE TAXED ONLY IN THE COUNTRY AND DOES NOT HAVE A PERMA NENT ESTABLISHMENT IN INDIA, THE SAID PAYMENTS ARE NOT CHARGEABLE TO TAX IN INDIA. IN VIEW OF THIS ALSO, EVEN AS PER DTAA, THE INCOME BEING NOT EXIGIBLE TO TAX IN I NDIA IN THE HANDS OF NON-RESIDENT ENTITY, THE ASSESSEE IS N OT REQUIRED TO DEDUCT TAX AT SOURCE. THEREFORE, THE P ROVISIONS OF SECTION 40A)(I) OF THE ACT CANNOT BE INVOKED . 39. NOW COMES THE SECOND QUESTION, THE ASSESSING OFFICER HAS APPREHENDED IN HIS ORDER THAT THE PAYMENT MADE BY THE ASSESSEE TO IMCS IS NOT IN CONSONANCE W ITH THE COMMISSION PAID TO OTHER CONCERN. FROM THE PER USAL OF THE ORDER OF THE LEARNED CIT (APPEALS) THOUGH WE OB SERVE THAT HE HAS NOT GIVEN ANY FINDING IN THIS REGARD, E VEN THE ASSESSING OFFICER IN HIS ORDER HAS NOT GIVEN ANY CA TEGORICAL FINDING HOW THE PAYMENT MADE TO IMCS IS NOT COMPARA BLE TO THE COMMISSION PAYMENT MADE TO STEVEN INTERNATIO NAL. HE HAS JUST TRIED TO COMPARE THE SERVICES RENDERED BY THE STEVEN INTERNATIONAL INVOLVING THE POTENTIAL BUSINE SS SEGMENT, ORGANIZING MEETINGS AND LIAISON WORKS WITH PROSPECTIVE CLIENTS, FACILITATION AND REDRESSEL AND SETTLEMENT OF DISPUTES. FURTHER REFERRING TO THE S ERVICES RENDERED BY IMCS, HE EXPLAINED THAT THESE ARE CONCE RNED WITH THE INTRODUCTION AND ASSISTANCE IN EXECUTION O F AN AGREEMENT AND ASSISTING IN SELLING SERVICES AND FAC ILITATING RELATIONSHIP WITH AUGUSTA STAFF. IN THIS BACKGROU ND, HE STATED THAT THE SERVICES PROVIDED BY IMCS ARE NOT COMMENSURATE WITH THE COMMISSION. THEREFORE, THE SERVICES ARE NOT BEING RENDERED FOR THE PURPOSE OF BUSINESS AND PROFESSION. THERE IS NO DISPUTE WITH RESPECT T O THE FACT THAT BOTH IMCS AND STEVEN INTERNATIONAL ARE NO T RELATED PARTIES OF THE ASSESSEE COMPANY. ANALYSIS OF 40 PAYMENT MADE TO AN ENTITY WHICH IS NOT RELATED IN A NY WAY WITH THE ASSESSEE IS NOT AN EXERCISE EXPECTED FROM THE ASSESSING OFFICER. WE DO NOT UNDERSTAND UNDER WHAT PROVISIONS THE ASSESSING OFFICER IS TRYING TO MAKE OUT THE CASE THAT THE PAYMENT MADE TO IMCS ARE NOT COMMENSU RATE WITH THE WORK DONE BY THEM. IT IS THE PREROGATIVE OF THE BUSINESSMAN TO RUN ITS BUSINESS THE WAY HE WANTS. THE ASSESSING OFFICER FOR THE PURPOSE OF INCOME TAX ACT CANNOT QUESTION THE REASONABLENESS OF ANY SUCH PAYMENT MAD E BY THE ASSESSEE. THEREFORE, WE DO NOT FIND THIS ALLEG ATION OF THE ASSESSING OFFICER BACKED BY ANY LEGAL PROVISION . INCIDENTALLY, WE WOULD LIKE TO MENTION HERE THAT EV EN IF THE ASSESSING OFFICER WANTS TO ASSESS THE REASONABLENES S OF ANY PAYMENT MADE TO ANY SISTER CONCERN OF THE ASSES SEE, THERE IS NO DOUBT TO THE FACT THAT THE ASSESSEE HAS DONE DETAILED TRANSFER PRICING STUDY IN THE RELEVANT ASS ESSMENT YEAR, WHICH WAS SUBJECT TO THE REFERENCE UNDER SECT ION 92CA(1) OF THE ACT TO THE TRANSFER PRICING OFFICER AND THE TRANSFER PRICING OFFICER HAS SUGGESTED NO ADJUSTMEN T WITH RESPECT TO THE ARMS LENGTH PRICE ON THE TRANSACTIO N BETWEEN THE ASSESSEE AND ITS ASSOCIATE ENTERPRISES. 40. NOW THE QUESTION ARISES WHETHER THE PAYMENT MADE BY THE ASSESSEE CAN BE HELD TO BE IN THE NATUR E OF FEE FOR TECHNICAL SERVICES. THERE IS NO DISPUTE WITH RESPECT TO THE FACT THAT THE ISSUE OF FEES TECHNIC AL SERVICES WAS NEVER RAISED BY THE ASSESSING OFFICER. IN HIS ORDER RUNNING INTO 22 PAGES HE HAS NOWHERE MENTIONED AND EVEN NOWHERE SHOWED HIS SUSPICION AS REGARDS THE PAYMENT BEING IN THE NATURE OF FEES FOR TECHNICAL SERVICES THAT IS THE REASON WHY AT THE ASSESSMENT STAGE, THE ASSESSE E WAS NEVER CONFRONTED BY ANY QUERY WITH RESPECT TO THE PAYMENTS BEING THAT OF THE NATURE OF FEES FOR TECH NICAL SERVICES. THE CONTENTION OF THE LEARNED D.R. BEFO RE US WAS THAT THE LEARNED CIT (APPEALS) HAS HELD THESE PAYME NTS TO BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. WE HAVE VERY CAREFULLY PERUSED THE ORDER OF THE LEARNED CIT 41 (APPEALS). ONLY AT TWO PLACES IN HIS ORDER HE HAS MENTIONED THE TERM FEES FOR TECHNICAL SERVICES. AT PAGE 13 HE HAS STATED AS UNDER : THE ISSUE IN HAND IS TO DECIDE WHETHER THE SERVICE RENDERED BY THE NONRESIDENT ENTITIES AND THE PAYMENT MADE BY THE APPELLANT COMPANY ESTABLISHED BUSINESS CONNECTION IN INDIA AND AS PER THE SOURCE OF THESE PAYMENTS, THESE ARE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. 41. IF WE CAREFULLY ANALYZE THE ABOVE SENTENCE, WE CAN VERY EASILY INFER THAT THE LEARNED CIT (APPEALS ) HAS NOT GIVEN ANY FINDING AS TO THE NATURE OF BEING FEES F OR TECHNICAL SERVICES. THEREFORE, FROM HERE WE CANNOT CONCLUDE THAT THE LEARNED CIT (APPEALS) HAS GIVEN A POSITIVE FINDING THAT THE PAYMENTS IN QUESTION ARE FEES FOR TECHNICAL SERVICES. 42. ON LAST PAGE OF HIS ORDER AT THE CONCLUSION OF PARA (II), HE HAS AGAIN MENTIONED THE WORD FEES FO R TECHNICAL SERVICES, WHICH HE EXPRESSED IN FOLLOWIN G TERMS: THE HON'BLE SUPREME COURT IN THE CASE OF GVK INDUSTRIES LTD. (2015) 371 ITR HAS HELD THAT THE NATURE OF SERVICE RENDERED BY THE NON-RESIDENT WOULD COME WITHIN THE AMBIT AND SEEP OF EXPRESSION CONSULTANCY SERVICE AND HENCE TAX SHOULD HAVE BEEN DEDUCTED AT SOURCE AS THE AMOUNT PAID AS FEE COULD BE TAXABLE UNDER HE HEAD FEES FOR TECHNICAL SERVICES 43. FROM BARE PERUSAL OF THE ABOVE SENTENCE ONE CA N VERY EASILY INFER THAT THE LEARNED CIT (APPEALS) HE RE ALSO HAS NOT GIVEN ANY FINDING, IN FACT HERE HE IS ONLY REFERRING TO THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CAS E OF GVK INDUSTRIES LTD. (SUPRA). 42 44. IN VIEW OF THE ABOVE, WE SEE THAT THE LEARNED CIT (APPEALS) HAS NOT GIVEN ANY FINDING THAT THE PAYMEN TS IN QUESTION ARE FEES FOR TECHNICAL SERVICES IN NATUR E. WE UNDERSTAND THE LAW THAT IN CASE A PAYMENT IS HELD T O BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES, THE PL ACE OF RENDERING SERVICES BECOMES IRRELEVANT IN VIEW OF TH E PROVISIONS OF SECTION 9(1)(VII) OF THE ACT. HOWEV ER, EVEN IF THE ARGUMENT OF THE LEARNED D.R. IS ACCEPTED THAT T HE LEARNED CIT (APPEALS) HAS GIVEN A FINDING THAT THES E PAYMENTS ARE FEES FOR TECHNICAL SERVICES, NOWHERE FROM THE ORDER OF THE LEARNED CIT (APPEALS) WE SEE ANY E FFORT BEING MADE BY HIM TO COME TO SUCH A CONCLUSION. IT IS NOT TO BE FORGOTTEN THAT THE LEARNED CIT (APPEALS) ASSU MES COTERMINUS POWERS WITH THAT THE ASSESSING OFFICER. IN FACT, HE ENJOYS THE POWERS OF ENHANCEMENT ALSO. THEREFOR E, IN CASE HE HAD ANY APPREHENSION AS TO THE REAL NATURE OF THE PAYMENT, WHO STOPPED HIM TO CARRY OUT FURTHER INVESTIGATIONS IN THIS REGARD? IN THE ABSENCE OF ANY FINDING GIVEN BY THE ASSESSING OFFICER OR THE CIT ( APPEALS) IN THIS REGARD, WE ARE NOT INCLINED TO EXAMINE THE CASE OF THE ASSESSEE WITH A VIEW WHETHER THE PAYMENTS ARE I N THE NATURE OF FEES FOR TECHNICAL SERVICES OR NOT. IT IS NOT A CASE WHERE CERTAIN QUERIES WERE PUT EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED CIT (APPEALS) T O THE ASSESSEE WITH RESPECT TO THE PAYMENTS BEING FEES F OR TECHNICAL SERVICES, WHICH THE ASSESSEE FAILED TO R EPLY. IT IS ALSO NOT A CASE WHERE THE ASSESSEE HAD NOT CO-OP ERATED WITH THE LOWER AUTHORITIES IN ORDER TO FIND OUT TH E REAL NATURE OF THE PAYMENTS MADE TO THE NON-RESIDENTS. ALL THE RELEVANT AGREEMENTS AND INVOICES WERE FILED BEFORE THE LOWER AUTHORITIES. IN VIEW OF THIS, THE ASSESSEE CANNOT BE PUNISHED AT THIS STAGE WITHOUT THERE BEING ANY FAUL T OF HIS, SPECIALLY IN VIEW OF THE FACT THAT EVEN AT THE TIME OF HEARING BEFORE US, THE LEARNED D.R. COULD NOT BRING ANY MATERIAL OR EVIDENCE IN SUPPORT OF HIS CLAIMED THAT THE IMPUGNED PAYMENTS WERE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. HIS ONLY ARGUMENT IS THAT IN THE 43 ABSENCE OF THE NATURE OF SERVICES BEING RENDERED BY NON- RESIDENTS, COMING OUT FROM THE EVIDENCE FILED BY TH E ASSESSEE, THE SAME SHOULD BE PRESUMED TO BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. NO SUCH PRESUMPTI ON EXISTS IN THE INCOME TAX ACT. NO SUCH PRESUMPTION CAN BE RAISED WITHOUT ANY BACKING MATERIAL OR EVIDENCE ON RECORD. THE ARGUMENT OF THE LEARNED D.R. THAT EVEN IF THE PROVI SIONS OF DTAA ARE APPLIED, IN THE ABSENCE OF ANY SERVICES CO MING OUT FROM THE EVIDENCES, IT SHOULD BE PRESUMED THAT NON- RESIDENTS HAVE MADE AVAILABLE CERTAIN TECHNICAL S ERVICES TO THE ASSESSEE, IS TOO FARFETCHED. WE ARE NOT INC LINED TO ENTERTAIN SUCH A PLEA AT THIS STAGE. IN VIEW OF TH IS ALSO, WE HOLD THAT THE SERVICES RENDERED BY THE NON-RESID ENTS ARE NOT IN THE NATURE OF TECHNICAL SERVICES, NO INCOME DEEMED TO HAVE ACCRUED TO THE NON-RESIDENT ENTITIES, THERE IS NO LIABILITY ON THE ASSESSEE TO DEDUCT TAX AT SOURCE O N SUCH PAYMENT. THEREFORE, THE PROVISIONS OF SECTION 40(A )(I) OF THE ACT ARE NOT EXIGIBLE IN THE PRESENT CASE. 45. WE MAY CLARIFY THAT WE HAVE NOT DEALT WITH EAC H EXPENDITURE SPECIFICALLY, SINCE THE ISSUES INVOLVED IN ALL THESE EXPENSES WERE COMMON AND WE DID NOT FIND ANY INCLINATION TO DEAL EACH EXPENDITURE SEPARATELY. G ROUND NOOS.2, 3 AND 4 ARE ALLOWED. 36. AS WE HAVE ALREADY STATED ABOVE, THE FACTS IN THE PRESENT CASE ARE IDENTICAL TO THAT IN THE CASE OF ASSESSEE FOR ASSESSMENT YEAR 2009-10, WITH THE IMPUGNED DISALLOWANCE OF EXPENSES HAVING BEEN MADE FOR THE R EASON THAT THE SAME WERE TAXABLE IN INDIA SINCE THEY WERE SOURCED FROM INDIA ON ACCOUNT OF THE AGREEMENT ENTE RED INTO WITH THE ASSESSEE AN INDIAN COMPANY AND ALSO O N ACCOUNT OF THE UTILIZATION OF THE SERVICES FOR THE BENEFIT OF THE ASSESSEE INDIAN COMPANY. IN THE PRESENT CASE A LSO WE 44 FIND THAT THERE IS NO FINDING OF THE LOWER AUTHORIT IES WITH REGARD TO THE FACT THAT THE INCOME TO THE PAYEES OF THE SAID EXPENSES AROSE OR WAS DEEMED TO ARISE IN INDIA AS PER THE PROVISIONS OF SECTION 9 OF THE ACT. THERE IS NO FINDING REGARDING THE EXISTENCE OF ANY BUSINESS CONNECTION, AS DEFINED, UNDER SECTION 9(1) OF THE ACT NOR OF ANY PERMANENT ESTABLISHMENT OF THE PAYEES IN INDIA. MOR EOVER IN THE PRESENT CASE ALSO THERE IS NO FINDING THAT T HE PAYMENTS IN QUESTION WERE FEES FOR TECHNICAL SERVI CES. THEREFORE THE DECISION LAID DOWN IN THE PRECEDING Y EAR WILL SQUARELY APPLY TO THE PRESENT CASE ALSO, FOLLOWING WHICH WE DELETE THE DISALLOWANCE MADE U/S 40(A(IA) OF THE ACT AMOUNTING TO RS. .2,84,52,914/-. 37. THE GROUNDS OF APPEAL NO.2,3 & 4 RAISED BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 38. GROUND NO.5 RAISED BY THE ASSESSEE READS AS UNDER : 5. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) FURTHER ERRED IN UPHOLDING THE ADDITION OF RS.18,09,790/- FOR NON DEDUCTION OF TAX U/S 1941 APPLYING THE PROVISIONS OF SECTION 40A (IA) IN UTTER DISREGARD OF THE EXPLANATIONS RENDERED WHICH IS ARBITRARY AND UNJUSTIFIED. 39. IN THE SAID GROUND, THE ASSESSEE HAS CHALLENGE D THE ACTION OF THE LD. CIT (APPEALS) IN UPHOLDING TH E ADDITION MADE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) ON ACCOUNT OF NON DEDUCTION OF TDS ON REN T PAID AS PER THE PROVISIONS OF SECTION 194I OF THE ACT. 45 40. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD PAID RENT TO VARIOUS PARTIES ON WHICH TDS HAD NOT BEEN DEDUCTED. ON BEING CONFRONTED WITH TH E SAME, THE ASSESSEE SUBMITTED THAT THE RENT HAD BEEN PAID TO THE REPRESENTATIVES OF THE FAMILY AND IF THE SAM E WAS APPORTIONED AMONG THE FAMILY MEMBERS THE RENT RECEI VED BY EACH MEMBER WOULD BE BELOW THE LIMIT LAID DOWN U /S 194(I) FOR DEDUCTION OF TAX. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTION SINCE HE FOUND THAT THE A SSESSEE DID NOT PRODUCE ANY PROOF THAT THE PAYMENTS WERE BIFURCATED AND THE LIMIT SPECIFIED U/S 194(I) HAD N OT BEEN SURPASSED. HE, THEREFORE, DISALLOWED THE SAME BY IN VOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 41. DURING THE APPELLATE PROCEEDINGS THE ASSESSEE REITERATED THE CONTENTIONS MADE BEFORE THE ASSESSIN G OFFICER. THE LD. CIT (APPEALS) UPHELD THE DISALLOW ANCE MADE BY THE ASSESSING OFFICER BY HOLDING THAT THE ASSESSEE HAD NOT BEEN ABLE TO DEMONSTRATE THAT THE RENT PAID HAD BEEN APPORTIONED TO VARIOUS FAMILY MEMBERS . 42. DURING THE COURSE OF HEARING BEFORE US, THE LD . COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTIONS MADE BEFORE THE LOWER AUTHORITIES AND STATED THAT THE PR OPERTY WAS OWNED BY A NUMBER OF PERSONS WHILE RENT HAD BEE N PAID TO ONE PERSON WHO WAS SO AUTHORIZED TO RECEIVE THE RENT ON BEHALF OF OTHER CO-OWNERS VIDE LEASE AGREEM ENT ENTERED INTO BETWEEN THE OWNERS AND THE ASSESSEE. THE ASSESSEE, THEREFORE, STATED THAT THE AMOUNT OF RENT PAID 46 WAS NOT THE INCOME OF THE RECIPIENT ALONE BUT CONST ITUTED THAT OF THE CO-OWNERS ALSO BETWEEN WHOM IT SHOULD H AVE BEEN APPORTIONED AND THEN DETERMINED WHETHER THE LI MIT SPECIFIED U/S 194I OF THE ACT, FOR TAX DEDUCTION AT SOURCE OF RENT, WAS CROSSED IN THE CASE OF ANY PERSON. T HE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE COPY OF LEASE AGREEMENT FOR LETTING OUT OF THE PROPERTY PLA CED AT PAPER BOOK PAGE NO. 242, 255 AND 258 IN THIS REGARD . 43. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LOWER AUTHORITIES AND FURTHER STATED T HAT EVEN IF THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESS EE IS ACCEPTED, THE MATTER SHOULD BE REMANDED BACK TO THE ASSESSING OFFICER TO EXAMINE THE ISSUE IN THE LIGHT OF THE CONTENTIONS MADE AND THEREAFTER RE-WORK/RE-DETERMIN E THE DISALLOWANCE TO BE MADE U/S 40(A)(IA) OF THE ACT. 44. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIES. WE FIND MERIT IN THE CONTENTIONS OF THE L D. COUNSEL FOR THE ASSESSEE THAT THE RENT HAD BEEN PAI D TO ONE PERSON ON BEHALF OF VARIOUS CO-OWNERS OF THE SA ID PROPERTY. THE LEASE AGREEMENT PLACED AT PAPER BOOK PAGE NO.242 IS THE LEASE DEED ENTERED INTO BETWEEN THE C O- OWNERS OF THE PROPERTY SCO 142 TO 145, SECTOR 34, CHANDIGARH AND THE ASSESSEE FOR LEASING THE SAID PR EMISES TO THE ASSESSEE. AT PAGE NO.2 OF THE SAID AGREEME NT, IT HAS BEEN SPECIFICALLY STATED THAT THE SAID AGREEMEN T HAS BEEN ENTERED BETWEEN THE FOLLOWING PARTIES: 47 R.S.SANDHU, M.S. SANDHU, ADVOCATE FOR SELF AND AS ATTORNEY OF SHRI GURBRINDER KAUR AND NAVDEEP KAUR HIS DAUGHTERS AND AS GUARDIAN OF AMRITA KAUR (MINOR), AMAR SINGH CHAHAL, SURJIT KAUR, DALJIT KAUR, MANPREET SINGH AND HARPREE KAUR, BRIG. SWARAN SINGH (RETD.) FOR SELF AND ON BEHALF OF GURMEET KAUR, HIS WIFE, MAJOR C.S. LEHAL, HIS DAUGHTER KANWAL LEHAL AND DR.SERBMEET SINGH WHO ARE THE OWNERS AND LANDLORDS OF SCO 140 TO 145, SECTOR 34, (CITY CENTRE), CHANDIGARH. THIS PERSONS HEREINAFTER REFERRED TO AS THE LESSORS WHICH TERM INCLUDED THEIR HEIRS, EXECUTORS, ADMINISTRATORS, LEGAL REPRESENTATIVES, SUCCESORS AND ASSIGNEES. AND IDS INFOTECH L:IMITED (EARLIER NAME INDE DUTCH SYSTEMS (INDIA) LIMITED) HAVING ITS REGISTERED OFFICE AT SCO 144-145, SECTOR 34A, CHANDIGARH THROUGH ITS HEAD-COMMERCIAL, MR.SATISH GOEL, (DULY AUTHORIZED BY THE COMPANY BY A RESOLUTION ATTACHED HEREINAFTER TO BE CALLED THE LESSEE, WHICH TERM SHALL INCLUDE ITS HEIRS, EXECUTORS, ADMINISTRATORS, LEGAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS. 45. AT PARA 17 OF THE SAID LEASE AGREEMENT, IT IS STATED THAT THE RENTAL IN EACH MONTH WOULD BE PAID TO EACH OF THE PARTIES IN THE FOLLOWING MANNER: (I) 25% OF THE TOTAL I.E.RS.9500/- PER MONTH TO BRIG. SWARAN SINGH (RETD.) OR HIS NOMINEE, IF ANY, AT H.NO.282, SECTOR 10-A, CHANDIGARH. 48 (II) 37.5% OF THE TOTAL I.E. RS.14250/- PER MONTH TO SHRI M..S. SANDHU OR HIS NOMINEE, IF ANY, M.S. SANDHU, KOTHI 284/10A, CHANDIGARH. (III) BALANCE 37.5% OF THE TOTAL I.E. RS.14250/- PER MONTH TO SHRI A.S. CHAHAL OR MRS.SURJIT KAUR, HIS WIFE AT KOTHI NO.115/8-B, CHANDIGARH. WITNESS WHEREOF THE PARTIES REFERRED TO ABOVE SET THEIR HANDS ON THESE PRESENTS, ON THE DAY, MONTH AND THE YEAR MENTIONED AFORE. 46. FURTHER, THE LEASE DEED PLACED AT PAPER BOOK PAGE NO.255 ENTERED INTO BY THE ASSESSEE FOR TAKING SCO 148 TO 149, SECTOR 34 ON LEASE ALSO SHOWS THAT THER E WERE SEVERAL CO-OWNERS IN THE SAME. FURTHER AT PARA 21 OF THE SAID LEASE AGREEMENT AT PAPER BOOK PAGE NO.28, THE SAID LEASE AGREEMENT SPECIFICALLY STATES THAT ALL PAYMEN TS ARE TO BE MADE IN FAVOUR OF BRIG.N.S. SANDHU THOUGH THE RE ARE 15 OWNERS AND LANDLORDS OF THE SAID PROPERTY SPECIF ICALLY MENTIONED IN THE LEASE DEED AT PAPER BOOK PAGE NO.2 55. 47. IT IS EVIDENT FROM THE SAID LEASE DEEDS, WHICH WAS THERE EVEN BEFORE THE ASSESSING OFFICER, THAT T HERE ARE SEVERAL CO-OWNERS OF THE PROPERTIES WHICH HAVE BEEN TAKEN ON LEASE BY THE ASSESSEE AND RENT PAID THEREON. TH E INCOME IN SUCH CIRCUMSTANCES CANNOT, THEREFORE, BE SAID TO BE THE INCOME OF THE RECIPIENT OF THE RENT ONLY. WHEN THEY HAVE RECEIVED THE SAME ONLY ON BEHALF OF OTHER CO- OWNERS THE RENT PAID CONSTITUTES THE INCOME OF ALL THE CO- OWNERS AND THE SAME IS TO BE APPORTIONED AMONG THEM AS 49 PER THE METHOD PRESCRIBED, IF ANY, IN THE LEASE AGR EEMENT OR IN PROPORTION OF THEIR CO-OWNERSHIP AND THEREAFT ER ONLY IF THE RENTAL INCOME IN THE CASE OF ANY CO-OWNERS EXCEEDS THE PRESCRIBED LIMIT FOR THE PURPOSE OF DEDUCTION O F TAX U/S 194I OF THE ACT, THE TAX IS TO BE DEDUCTED AT S OURCE. 48. IN THE LIGHT OF THE ABOVE, WE, THEREFORE, REST ORE THE MATTER BACK TO THE ASSESSING OFFICER TO APPORTI ON THE RENTAL INCOME IN THE HANDS OF THE CO-OWNERS AS PER LEGALLY PERMISSIBLE, DETERMINE THE RENTAL INCOME ATTRIBUTAB LE TO EACH CO-OWNER AND THEREAFTER APPLY THE PROVISIONS O F SECTION 194(I) OF THE ACT TO THE SAME AS ALSO THE P ROVISIONS OF SECTION 40(A)(IA) OF THE ACT FOR NON DEDUCTION O F TAX, IF FOUND IN ANY CASE. THIS GROUND OF APPEAL NO.5 OF T HE ASSESSEE IS, THEREFORE, ALLOWED FOR STATISTICAL PUR POSES. 49. THE GROUND NO.6 RAISED BY THE ASSESSEE READS A S UNDER : 6. THAT THE LD. COMMISSIONER OF INCOME TAX(APPEALS ) FURTHER ERRED IN UPHOLDING THE ADDITION OF RS.39,73,746/- FO R NON DEDUCTION OF TAX ON SALARIES PAID OUTSIDE INDIA APP LYING THE PROVISIONS OF SECTION 40A(III) IN UTTER DISREGARD O F THE EXPLANATIONS RENDERED WHICH IS ARBITRARY AND UNJUSTIFI ED. 50. IN THE SAID GROUND, THE ASSESSEE HAS CHALLENGE D THE ACTION OF THE LD. CIT (APPEALS) IN UPHOLDING TH E DISALLOWANCE MADE OF RS.39,73,746/- BEING SALARIES PAID OUTSIDE INDIA, FOR NON-DEDUCTION OF TAX AT SOURCE O N THE SAME, BY INVOKING THE PROVISIONS OF SECTION 40(A)(I II) OF THE ACT. 50 51. BRIEF FACTS RELATING TO THE ISSUE ARE THAT DUR ING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE HAD MADE PAYMENT OF SALARIES TO THE FOLLOWING PERSONS OUTSIDE INDIA WITHOUT DEDUCTING T AX AT SOURCE : PARTICULAR AMOUNT (INR) SALARY PAID TO MARTIN 18,98,320/- SALARY PAID TO ROB 20,75,426/- TOTAL 39,73,746/- 52. ON BEING ASKED AS TO WHY DISALLOWANCE U/S 40(A)(III) NOT BE MADE ON THE SAME, THE ASSESSEE SU BMITTED THAT THE SERVICES WERE RENDERED OUTSIDE INDIA, THER EFORE, TDS PROVISIONS WERE NOT APPLICABLE ON THE SAME. TH E ASSESSING OFFICER REJECTED THE CONTENTION OF THE AS SESSEE BY STATING THAT THE PROVISIONS OF SECTION 40(A)(III ) OF THE ACT ARE APPLICABLE SINCE THE PAYMENTS HAVE BEEN MAD E OUTSIDE INDIA AND TO A NON-RESIDENT. 53. BEFORE THE LD. CIT (APPEALS), THE ASSESSEE REITERATED THAT THE SAID PAYMENTS OF SALARIES WERE MADE TO ITS EMPLOYEES OUTSIDE INDIA WHO WERE RESIDENTS OF NETHERLANDS ORIGIN AND HAD PERFORMED ENTIRE ACTIVIT IES OUTSIDE INDIA. THE ASSESSEE ALSO CONTENDED THAT TH E SAID SALARY WAS SUBJECT TO TAXATION BY NETHERLANDS ONLY, WHICH WAS ACCORDINGLY DEDUCTED AND DEPOSITED TO NETHERLAN DS GOVERNMENT AUTHORITIES. THE LD. CIT (APPEALS) AFTE R GOING THROUGH ASSESSEES SUBMISSIONS, HELD THAT THE ASSES SING OFFICER HAD RIGHTLY DISALLOWED THE SAID AMOUNT SINC E THE SALARY HAD BEEN PAID OUTSIDE INDIA TO NON-RESIDENTS AND 51 THE ASSESSEE HAD NOT DEMONSTRATED THAT THE TAX HAD BEEN DEDUCTED AND PAID IN NETHERLANDS. 54. DURING THE COURSE OF HEARING BEFORE US, THE LD . COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTIONS MADE BEFORE THE LOWER AUTHORITIES STATING THAT THE SAID SALARIES HAD BEEN PAID TO EMPLOYEES ON ACCOUNT OF SERVICES RENDERED OUTSIDE INDIA AND, THEREFORE, THE SALARY W AS NOT TAXABLE IN INDIA AND THUS THERE WAS NO REQUIREMENT TO DEDUCT TAX AT SOURCE ON THE SAME. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT FOR THE AFORESAID REASON, SINC E THERE WAS NO LIABILITY TO DEDUCT TAX AT SOURCE, NO DISALL OWANCE ON ACCOUNT OF NON-DEDUCTION OF TDS COULD BE MADE U/ S 40(A)(III) OF THE ACT. 55. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES AND STATED THAT THE SALARY BEING PAID OUTSIDE INDIA TO NON-RESIDENTS, THE SAME WAS TAXABLE IN INDIA AND THUS LIABLE TO TDS AND SAME HA VING NOT BEEN DEDUCTED, DISALLOWANCE U/S 40(A)(III) HAD BEEN RIGHTLY MADE. 56. WE HAVE CONSIDERED THE CONTENTIONS OF BOTH THE PARTIES. THE ISSUE IN THE PRESENT GROUND IS RELATE S TO INVOKING THE PROVISIONS OF SECTION 40(A)(III) OF TH E ACT, WHICH DEALS WITH DISALLOWANCE OF PAYMENT WHICH IS CHARGEABLE UNDER THE HEAD SALARY AND IS PAYABLE O UTSIDE INDIA OR TO A NON-RESIDENT AND ON WHICH TAX HAS NOT BEEN PAID, NOR DEDUCTED THEREFROM AS PER THE PROVISIONS OF 52 CHAPTER-XVII-B OF THE ACT. THE UNDISPUTED AND UNCHALLENGED FACTS RELATING TO THE PRESENT ISSUE AR E THAT THE SALARY AMOUNTING TO RS.39,73,746/- WAS PAID TO TWO PERSONS OUTSIDE INDIA AS PER THE DETAIL ALREADY REP RODUCED ABOVE. THE FACT THAT THE PAYMENT WAS IN THE NATURE OF SALARY IS NOT DISPUTED, AS ALSO THE FACT THAT THE S AID PAYMENT WAS MADE TO NON-RESIDENTS AND HAS BEEN MAD E OUTSIDE INDIA. THE ISSUE IN THIS GROUND RELATES TO DISALLOWANCE MADE U/S 40(A)(III) OF THE ACT. THE S AID SECTION IS BEING REPRODUCED HEREUNDER FOR A BETTER UNDERSTANDING: (III) ANY PAYMENT WHICH IS CHARGEABLE UNDER THE HEA D' SALARIES', IF IT IS PAYABLE OUTSIDE INDIA AND IF THE T AX HAS NOT BEEN PAID THEREON NOR DEDUCTED THEREFROM UNDER CHAP TER XVII- B; 57. AS PER THE SAID SECTION THE FOLLOWING CONDITIO NS NEED TO BE FULFILLED BEFORE MAKING ANY DISALLOWANCE UNDER THE SAME: I) THE PAYMENT SHOULD BE CHARGEABLE UNDER THE HEAD SALARIES. II) IT SHOULD BE PAYABLE OUTSIDE INDIA OR TO NON- RESIDENT. III) NO TAX IS DEDUCTED OR PAID THEREON. 58. THE FIRST BASIC CONDITION FOR INVOKING SECTION 40(A)(III) IS THAT THE PAYMENTS SHOULD BE CHARGEABL E UNDER THE HEAD SALARIES AND SECONDLY IT SHOULD BE PAYAB LE OUTSIDE INDIA TO NON-RESIDENTS. ALONGWITH SAME IS TO BE READ THE CONDITION THAT NO TAX HAS BEEN PAID THEREO N OR 53 DEDUCTED THEREFROM UNDER CHAPTER XVII-B. THE RELEVA NT PROVISIONS OF CHAPTER XVII-B DEALING WITH TAX DEDUC TION AT SOURCE ON SALARIES IS SECTION 192, WHICH READS AS U NDER: 192. SALARY.- (1) ANY PERSON RESPONSIBLE FOR PAYING ANY INCOME CHARGEABLE UNDER THE HEAD SALARIES SHALL, AT THE TIME OF PAYMENT, DEDUCT INCOME-TAX ON THE AMOUNT PAYABLE AT THE AVER AGE RATE OF INCOME- TAX OMPUTED ON THE BASIS OF THE RATES IN FORCE FOR THE FINANCIAL YEAR IN WHICH THE PAYMENT IS MADE, ON THE ESTIMATED INCOME OF THE ASSESSEE UNDER THIS HEAD FOR THAT FINANCIAL YEAR. (1A) WITHOUT PREJUDICE TO THE PROVISIONS CONTAINED IN SUB-SECTION (1), THE PERSON RESPONSIBLE FOR PAYING ANY INCOME IN THE NAT URE OF A PERQUISITE WHICH IS NOT PROVIDED FOR BY WAY OF MONETARY PAYMEN T, REFERRED TO IN CLAUSE (2) OF SECTION 17, MAY PAY, AT HIS OPTION, T AX ON THE WHOLE OR PART OF SUCH INCOME WITHOUT MAKING ANY DEDUCTION THEREFROM AT THE TIME WHEN SUCH TAX WAS OTHERWISE DEDUCTIBLE UNDER THE PROVISI ONS OF SUB-SECTION (1). (1B) FOR THE PURPOSE OF PAYING TAX UNDER SUB-SECTIO N (1A), TAX SHALL BE DETERMINED AT THE AVERAGE OF INCOME-TAX COMPUTED ON THE BASIS OF THE RATES IN FORCE FOR THE FINANCIAL YEAR, ON THE INCOM E CHARGEABLE UNDER THE HEAD SALARIES INCLUDING THE INCOME REFERRED TO IN SUB-SECTION (1A), AND THE TAX SO PAYABLE SHALL BE CONSTRUED AS IF IT WERE , A TAX DEDUCTIBLE AT SOURCE, FROM THE INCOME UNDER THE HEAD SALARIES A S PER THE PROVISIONS OF SUB-SECTION (1), AND SHALL BE SUBJECT TO THE PRO VISIONS OF THIS CHAPTER. 59. A PERUSAL OF THE ABOVE SECTION SHOWS THAT FOR ATTRACTING THE LIABILITY OF TAX DEDUCTION AT SOURCE , THE SAID INCOME SHOULD BE CHARGEABLE TO TAX UNDER THE SAID H EAD. EVEN SECTION 40(A)(III) BEGINS WITH ANY PAYMENT WHI CH IS CHARGEABLE UNDER THE HEAD SALARIES MEANING THEREB Y THAT THE SALARY PAID SHOULD BE CHARGEABLE TO TAX AS SUCH IN INDIA. CHARGEABILITY TO TAX AND THE SCOPE OF TOTAL INCOME IS DEALT WITH IN SECTIONS 4 AND 5 OF THE ACT WHICH HAVE ALREADY BEEN DISCUSSED ABOVE IN GROUND NOS.2, 3 AND 4 DEALT WITH ABOVE BY US. AS PER THE SAID SECTIONS I N THE CASE OF NON-RESIDENTS INCOME WHICH IS EITHER RECEI VED OR DEEMED TO HAVE BEEN RECEIVED IN INDIA OR WHICH ACC RUES OR ARISES OR DEEMED TO ACCRUES OR ARISES IN INDIA I S 54 CHARGEABLE TO TAX IN INDIA. IN THE PRESENT CASE, T HE SALARY UNDISPUTEDLY HAS BEEN PAID OUTSIDE INDIA AND THUS N OT RECEIVED OR DEEMED TO HAVE BEEN RECEIVED IN INDIA T O BE CHARGEABLE TO TAX IN INDIA. THEREFORE, IT HAS TO BE SEEN WHETHER THE SALARY ACCRUED OR AROSE OR DEEMED TO HA VE BEEN ARISEN OR ACCRUED IN INDIA. SECTION 9(II) OF THE ACT DEALS WITH THE SITUATION OR CONDITION IN WHICH SALA RY IS DEEMED TO ACCRUES OR ARISES IN INDIA. THE SAID SEC TION IS REPRODUCED HEREUNDER: 9. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE O R ARISE IN INDIA : (II) INCOME WHICH FALLS UNDER THE HEAD 'SALARIES', IF IT IS EARNED IN INDIA. [EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE INCOME OF THE NATURE REFERRED TO IN THIS CL AUSE PAYABLE FOR (A) SERVICE RENDERED IN INDIA; AND (B) THE REST PERIOD OR LEAVE PERIOD WHICH IS PRECEDED AND SUCCEEDED BY SERVICES RENDERED IN INDIA AND FORMS PA RT OF THE SERVICE CONTRACT OF EMPLOYMENT, SHALL BE REGARDED AS INCOME EARNED IN INDIA ;] 60. A BARE PERUSAL OF THE ABOVE WOULD REVEAL THAT SALARY IS DEEMED TO ACCRUE OR ARISE IN INDIA ONLY I F IT IS EARNED IN INDIA WHICH HAS BEEN EXPLAINED AS HAVING BEEN EARNED ON ACCOUNT OF SERVICES RENDERED IN INDIA. T HUS, ONLY IF SALARY IS PAID FOR SERVICES RENDERED IN IND IA IT WOULD BE TREATED AS HAVING BEEN EARNED IN INDIA. I N THE PRESENT CASE, WE FIND THAT IT HAS BEEN THE CONTENTI ON OF THE ASSESSEE ALL ALONG THAT THE SAID SALARY HAS NOT BEEN PAID FOR ANY SERVICE RENDERED IN INDIA AND HAS IN F ACT BEEN 55 PAID FOR SERVICES WHICH HAS BEEN RENDERED OUTSIDE I NDIA. THIS FACT HAS NOT BEEN CONTROVERTED EITHER BY THE ASSESSING OFFICER, CIT (APPEALS) OR EVEN THE LD. DR BEFORE US. THUS, GOING BY THE PROVISIONS OF SECTION 9(1)( II), CLEARLY AND UNDISPUTEDLY THE SALARY HAS NOT BEEN EA RNED IN INDIA. HAVING SAID SO, THE INCOME OF THE NON-RE SIDENTS ON ACCOUNT OF THIS SALARY IS NOT DEEMED TO HAVE ACC RUED OR ARISEN IN INDIA AND, THEREFORE, WAS NOT CHARGEABLE TO TAX IN INDIA AS SALARY. THUS, IN SUCH CIRCUMSTANCES, S ECTION 192 WAS NOT APPLICABLE REQUIRING THE ASSESSEE TO DE DUCT TAX AT SOURCE ON THE SAID PAYMENT OF SALARY AND CONSEQUENTLY, PROVISIONS OF SECTION 40(A)(III) COUL D ALSO NOT BE INVOKED TO DISALLOW THE SAME. THE CONTENTIO N OF THE REVENUE ALL ALONG WE FIND, HAS BEEN THAT SECTIO N 40(A)(III) IS ATTRACTED BECAUSE THE PAYMENTS HAVE B EEN MADE OUTSIDE INDIA TO NON-RESIDENTS. THE REVENUE, WE FIND, HAS PICKED UP ONLY ONE OF THE CONDITIONS ENUM ERATED U/S 40(A)(III) FOR MAKING DISALLOWANCE, CHOOSING TO COMPLETELY IGNORE THE BASIC CONDITION REQUIRED TO B E FULFILLED, WHICH IS TAXABILITY OF THE SAID SALARY I N INDIA. THEREFORE, THE DISALLOWANCE, WE HOLD, HAS BEEN MADE ON AN INCORRECT INTERPRETATION OF LAW. IN VIEW OF THE ABOVE, WE HOLD THAT NO DISALLOWANCE U/S 40(A)(III) ON ACCO UNT OF NON DEDUCTION OF TAX ON SALARY PAID OUTSIDE INDIA I S WARRANTED AND THE DISALLOWANCE MADE AMOUNTING TO RS . 39,73,746/- IS DIRECTED TO BE DELETED 56 61. IN VIEW OF THE ABOVE, GROUND NO.6 RAISED BY T HE ASSESSEE IS ALLOWED. 62. GROUND NO.7 RAISED BY THE ASSESSEE READS AS UNDER:- 7 . THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDING THE ADDITION OF RS.25,02,206/- MADE BY THE ASSESSING OFFICER WHEREBY SHE DISALLOWED THE INTEREST PAID UP BY APPLYING THE PROVISIONS OF SECTION 36(I)(III) WHICH IS ALLOWABLE ARBITRARILY AND UNJUSTIFIED. 63. THE ISSUE RAISED IN THE PRESENT GROUND RELATES TO DISALLOWANCE OF INTEREST MADE BY INVOKING THE PROVI SIONS OF SECTION 36(I)(III) OF THE ACT. 64. BRIEF FACTS RELATED TO THE ISSUE ARE THAT DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD DEBITED FINANCIAL CHAR GES OF RS.93,51,000/- ON SECURED LOANS WHICH CONSISTED OF TERM LOAN FROM BANK, CAR AND PACKING CREDIT. THE ASSESS ING OFFICER OBSERVED THAT THE ASSESSEE HAD SUBSTANTIALL Y INVESTED AMOUNT OF RS.1,59,90,000/- IN WHOLLY OWNED SUBSIDIARIES OF THE APPELLANT COMPANIES IN U.S. AND U.K. THE ASSESSING OFFICER FURTHER NOTED THAT IN ASSESSM ENT YEAR 2004-05, PROPORTIONATE INTEREST HAD BEEN DISAL LOWED AGAINST WHICH THE ASSESSEE HAD NOT PREFERRED AN APP EAL. IN VIEW OF THE AFORESAID FACTS THE ASSESSING OFFICE R MADE DISALLOWANCE U/S 36(I)(III) AND WORKED THE SAME AT RS. 57 28,42,206/-. FURTHER, HE REDUCED THE NOTIONAL INTE REST ALREADY DISALLOWED BY THE ASSESSEE U/S 36(1)(III) AMOUNTING TO RS.25,02,206/- AND ADDED BACK THE BALA NCE AMOUNT OF RS.3,40,000/- TO THE INCOME OF THE ASSESS EE. 65. BEFORE THE LD. CIT(A), THE ASSESSEE CONTENDED THAT THE SUBSIDIARY OF THE ASSESSEE COMPANY GENERAT ED REVENUE FOR THE ASSESSEE AND THEREFORE, THE INTERES T PAID WAS REVENUE EXPENDITURE AND HAD BEEN RIGHTLY CLAIME D IN THE BOOKS OF THE ASSESSEE. THE ASSESSEE ALSO STATED THAT THE SUBSIDIARY RENDERS MARKETING SUPPORT TO THE ASS ESSEE COMPANY. THE LD. CIT(A) AFTER GOING THROUGH THE ASSESSEES SUBMISSIONS HELD THAT THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRI ES LTD 286 ITR 1 HAS HELD THAT INTEREST U/S 36(1)(III) IS TO BE DISALLOWED IF THE AMOUNTS ARE INVESTED FOR NON- BUS INESS PURPOSES. IN THE PRESENT CASE, SINCE THE ASSESSEE HAS NOT PROVED THE NEXUS OF BORROWED FUNDS, THE AMOUNT INVE STED IN THE SUBSIDIARIES WAS FOR EXTRANEOUS CONSIDERATIO NS. FURTHER SINCE IDENTICAL DISALLOWANCE HAD BEEN MADE IN THE ASSESSMENT YEAR 2004-05 ALSO, WHICH HAD NOT BEEN CONTESTED BY THE ASSESSEE, LD. CIT(A) UPHELD THE OR DER OF THE ASSESSING OFFICER DISALLOWING INTEREST OF RS. 3,40,000/- U/S 36(1)(III) OF THE ACT. 66. DURING THE COURSE OF HEARING BEFORE US, LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FACT THAT IDENTICAL ISSUE HAD ARISEN IN ASSESSMENT YEAR 2009- 10 ALSO, WHICH HAD BEEN DECIDED IN FAVOUR OF THE AS SESSEE 58 BY THE ITAT CHANDIGARH BENCH IN ITS ORDER IN ITA NO . 52/CHD/2016 DATED 24.5.2016. COPY OF THE ORDER WAS PLACED BEFORE US. 67. THE LD. DR CONCEDED THAT ON IDENTICAL SET OF FACTS AND CIRCUMSTANCES, DISALLOWANCE MADE U/S 36(I )(III) HAD BEEN DELETED BY THE ITAT IN THE SAID ORDER. HE FURTHER RELIED ON THE ORDER OF THE CIT(A). 68. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIES, PERUSED THE ORDERS OF THE AUTHORITIES BELO W AND ALSO ORDER OF THE ITAT IN ITA NO. 52/CHD/2016 DATED 24.5.2016 RENDERED IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2009-10. ON GOING THROUGH THE SAME , WE FIND THAT IN THE SAID ASSESSMENT YEAR, DISALLOWANCE OF INTEREST AMOUNTING TO RS. 16,59,106/- WAS MADE U/S 36(1)(III), BEING PROPORTIONATE AMOUNT OF INTEREST PAID ON SECURED LOANS, ON ACCOUNT OF INVESTMENT MADE IN WHO LLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY IN U.S. AND U.K, AMOUNTING TO OF RS.1,66,23,000/-. THE ITAT IN THE SAID CASE HELD THAT THE INVESTMENT HAD BEEN MADE IN THE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANIES , THE FINANCIAL HEALTH OF THESE CONCERNS EFFECT THE FINAN CIAL HEALTH OF THE ASSESSEE COMPANIES ALSO AND THEREFORE , THE INVESTMENT MADE IN THE SUBSIDIARIES COMPANIES ARE F OR COMMERCIALLY EXPEDIENT PURPOSES. THE ITAT RELIED UP ON THE DECISION OF THE APEX COURT IN THE CASE OF S.A. BUILDERS VS. CIT (2007) 288 ITR 1 IN THIS REGARD. THE ITAT H ELD THAT SINCE NO FACT HAD BEEN BROUGHT ON RECORD BY TH E 59 LOWER AUTHORITIES, THAT THE AMOUNT USED BY THE SUBSIDIARIES COMPANIES WERE FOR PURPOSES OTHER THA N BUSINESS, THE SAID INVESTMENTS WERE COMMERCIALLY EXPEDIENT. THE ITAT, THEREFORE, HELD THAT NO DISAL LOWANCE UNDER THE PROVISIONS OF SECTION 36(I)(III) COULD, T HEREFORE, BE MADE. RELIANCE WAS PLACED ON THE JUDGEMENT OF T HE APEX COURT IN THE CASE OF HERO CYCLES (P) LTD (2015 ) 279 ITR 347 IN THIS REGARD. THE RELEVANT FINDINGS OF TH E ITAT AT PARA 7 & 8 OF THE ORDER ARE AS FOLLOWS:- 7. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. WE ARE IN TOTAL AGREEMENT WITH THE SUBMISSIONS MADE BY THE LEARNED D.R. THAT THE ASSESSEE HAS TO DEMONSTRATE THAT THE LOAN ADVANCES FULFILLS THE CRITERIA OF COMMERCIAL EXPEDIENCY. IT IS ALSO THE PROPOSITION LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES (P) LTD. (SUPRA). HOWEVER, WE ARE ALSO INCLINED TO ACCEPT THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ENTITIES TO WHOM THE MONEY HAS BEEN GIVEN ARE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY. THEREFORE, THE FINANCIAL HEALTH OF THESE CONCERNS MATTER TO THE FINANCIAL HEALTH OF THE ASSESSEE COMPANY ALSO. IN OUR VIEW, IT CAN BE SAID THAT THE AMOUNT GIVEN TO THE WHOLLY OWNED SUBSIDIARY COMPANIES ARE FOR COMMERCIAL EXPEDIENCY. IN THIS VIEW, WE WOULD LIKE TO REFER CERTAIN OBSERVATIONS MADE BY THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LIMITED VS. CIT (2007) 288 ITR 1 (SC). IN THIS CASE, WHILE INTERPRETING THE MEANING OF 60 THE WORD COMMERCIAL EXPEDIENCY, THE HON'BLE APEX COURT HELD AS UNDER : 32. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER-CONCERN . IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF TH E SISTER-CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNO T BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER-CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED T O DEDUCTION OF INTEREST ON ITS BORROWED LOANS. 8. IN VIEW OF THE ABOVE, WE OBSERVE THAT EVEN THE HON'BLE SUPREME COURT HAS ENDORSED THE VIEW THAT SINCE A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY AND IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE IS ENTITLED TO DEDUCTION OF INTEREST ON THE BORROWED FUNDS. IN THE PRESENT CASE, THERE IS NO DISPUTE ABOUT THE FACT THAT THE AMOUNTS HAVE BEEN ADVANCED TO THE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY AND THERE IS NO FACT BROUGHT ON RECORD BY ANY OF THE LOWER AUTHORITIES THAT THE AMOUNTS HAVE BEEN USED BY THESE SUBSIDIARY COMPANIES FOR ANY PURPOSE OTHER THAN 61 THEIR BUSINESS PURPOSES. IN VIEW OF THIS, WE ARE INCLINED TO HOLD THAT THE AMOUNTS GIVEN TO SUBSIDIARY COMPANIES WERE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THEREFORE, NO DISALLOWANCE INVOKING THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT CAN BE MADE IN THIS CASE. TH E GROUND NO.1 RAISED BY THE ASSESSEE IS ALLOWED. 69. THE FACTS IN THE PRESENT CASE, WE FIND ARE IDENTICAL TO THAT IN ASSESSMENT YEAR 2009-10, WHERE IN, DISALLOWANCE HAS BEEN MADE ON ACCOUNT OF INVESTMENT MADE BY THE ASSESSEE COMPANY IN WHOLLY OWNED SUBSIDIARY. SINCE THE ITAT IN THE PRECEDING YEAR HA S HELD THE SAID INVESTMENT TO BE FOR BUSINESS PURPOSES, BE ING COMMERCIALLY EXPEDIENT, FOLLOWING THE SAME, WE HOLD THE IDENTICAL INVESTMENT IN THE IMPUGNED YEAR ALSO TO B E COMMERCIAL EXPEDIENT FOR THE ASSESSEE COMPANY AND HAVING HELD SO, THERE CAN BE NO CASE FOR MAKING ANY DISALLOWANCE U/S 36(I)(III) ON ACCOUNT OF MAKING TH E AFORESAID INVESTMENT. IN VIEW OF THE SAME, THE DISALLOWANCE MADE U/S 36(I)(III) AMOUNTING TO RS. 3,40,000/- IS THEREFORE, DELETED AND THE ORDER OF T HE CIT(A) ON THIS GROUND IS THEREFORE, SET ASIDE. 70. GROUND NO.7 RAISED BY THE ASSESSEE THEREFORE, STANDS ALLOWED. 71. GROUND NO.8 RAISED BY THE ASSESSEE READS AS UNDER : 8. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FURTHER ERRED IN UPHOLDING THE ADDITION OF RS.57,68,1 63/- MADE OF ACCOUNT OF ALLEGED NON DECLARATION OF RECEIPT S ON 62 SALE OF ASSETS TO M/S AEROMATRIX INFO SOLUTIONS PRI VATE LIMITED WHICH IS CONTRARY TO THE FACTS AND AS SUCH THE ORDER PASSED IS ARBITRARY AND UNJUSTIFIED. 72. BRIEF FACTS RELATING TO THE CASE ARE THAT DURI NG THE YEAR THE ASSESSEE HAD SOLD IT ENTIRE BUSINESS A UGUST WESTLAND UNIT INCLUDING SOFTWARE LICENSES, EMPLOYEE S, ETC. TO M/S AEROMATRIX INFO SOLUTIONS PVT. FOR AN AMOUNT OF RS.2,75,79,928/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED THAT THE INCOME OF RS.2,18,11,765/- RECEIVED FROM M/S AEROMATRIX INFO SOLUTION PVT. LTD. HAD BEEN SHOWN UNDER THE HEAD I NCOME FROM OTHER SOURCES. THE ASSESSING OFFICER FOUND T HAT AS PER THE DETAILS, THE TOTAL AMOUNT RECEIVED OR RECEI VABLE BY THE ASSESSEE WAS RS.2,75,79,928/-. THEREFORE, THE B ALANCE RECEIPTS OF RS.57,68,163/- FOUND TO HAVE NOT BEEN DECLARED BY THE ASSESSEE WERE BROUGHT TO TAX SINCE THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNT ING. 73. DURING APPELLATE PROCEEDINGS, THE ASSESSEE SUBMITTED THAT THE BALANCE AMOUNT HAD ALSO BEEN ACCOUNTED FOR IN ITS BOOKS AND, THEREFORE, NO ADDIT ION WAS CALLED FOR. THE ASSESSEE SUBMITTED THAT THE AMOUNT RECEIVED BY IT FOR SELLING CATIA V5 LICENCE HAD BEE N ACCOUNTED FOR/ ADJUSTED AGAINST WRITTEN DOWN VALUE OF THE SAID ASSET AND SIMILARLY AN AMOUNT OF RS.70,443/- H AD BEEN ADJUSTED AGAINST ADVANCE MONEY GIVEN BY THE COMPANY TO ONE OF THE TRANSFEREE EMPLOYEE. THE LD. CIT (APPEALS) REJECTED THE ASSESSEES CONTENTION STATIN G THAT THE ASSESSEE HAD NOT SUBSTANTIATED THE SAME BY FILI NG 63 DETAILS OF BLOCK OF ASSET, WDV ETC. HE, THEREFORE, UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. 74. DURING THE COURSE OF HEARING BEFORE US, THE LD . COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTIONS MADE BEFORE THE LOWER AUTHORITIES AND STATED THAT RECEIP T OF RS.57,68,163/- HAD BEEN DULY ACCOUNTED FOR IN THE B OOKS OF THE ASSESSEE HAVING BEEN RECEIVED ON ACCOUNT OF SALE OF CATIA V5 LICENCE AND SHOWN IN THE LEDGER ACCOUNT OF M/S AEROMATRIX INFO SOLUTIONS PVT. PLACED AT PAPER BOOK PAGE 288, IN THE SCHEDULE OF FIXED ASSETS PLACED AT PAPE R BOOK PAGE NO.385, IN THE LEDGER ACCOUNT OF SOFTWARE PURC HASED PLACED AT PAPER BOOK PAGE NO.693 AND IN THE LEDGER ACCOUNT OF DEPRECIATION FOR THE YEAR PLACED AT PAPE R BOOK PAGE NO.695. THE LD. COUNSEL FOR THE ASSESSEE STAT ED THAT ALL THE ABOVE DULY REFLECTED THE RECEIPT OF THE SAI D AMOUNT IN THE BOOKS OF THE ASSESSEE FOR THE YEAR AND, THER EFORE, THERE WAS NO REASON TO MAKE ANY DISALLOWANCE OF THE SAME ON ACCOUNT OF NOT RECORDING RECEIPT OF THE SAME IN THE BOOKS OF THE ASSESSEE. 75. THE LD. DR, ON THE OTHER HAND,, SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 76. WE HAVE HEARD THE CONTENTIONS OF BOTH THE PARTIES. WE FIND MERIT IN THE CONTENTION THE LD. C OUNSEL FOR THE ASSESSEE. ON PERUSAL OF THE ABOVE DOCUMENT S PRODUCED BEFORE US, WE FIND THAT THE SALE OF CATIA V5 LICENCE OF M/S AEROMATRIX INFO SOLUTIONS PVT. HAS B EEN DULY REFLECTED IN THE LEDGER ACCOUNT OF M/S AEROMAT RIX 64 INFO SOLUTIONS PVT., THE SOFTWARE ACCOUNT, IN THE F IXED ASSET CHART SHOWN BY THE ASSESSEE AND DEPRECIATION ON ACCOUNT OF SALE OF THE SAID ASSET HAS BEEN ALSO DUL Y REVERSED IN THE LEDGER OF DEPRECIATION. ALL BOOKS OF ACCOUNT WERE PRODUCED BEFORE THE LOWER AUTHORITIES AND IT CAN, THEREFORE, BE SAFELY CONCLUDED THAT ALL MATERI AL WAS PLACED BEFORE THE LOWER AUTHORITIES TO SUBSTANTIATE ITS CLAIM. THE DISALLOWANCE HAVING BEEN MADE ON ACCOUN T OF THE FACT THAT THE ASSESSEE HAD NOT REFLECTED THE SA ID AMOUNT IN ITS BOOKS, THE SAME IS DIRECTED TO BE DEL ETED IN VIEW OF OUR ABOVE OBSERVATIONS IN THIS REGARD. THI S GROUND OF APPEAL NO.8 OF THE ASSESSEE IS, THEREFORE , ALLOWED. 77. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (BHAVNESH SAINI) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 9 TH MARCH, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH