HUSSAINI FAKHRUDIN NALWALA, MUMBAI V. ASST CIT 23(), MUMBAI

ITA 1611/MUM/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 1723 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 08-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S USMANI
• Keywords: Business income; Double taxation relief; Permanent establishment; TDS
• Section: 143(3); 40(a)(ia); 195

Judgement Text

1 IN THE INCOME-TAX APPELLATE TRIBUNAL I BENCH MUMB AI BEFORE SHRI G.S. PANNU, VICE- PRESIDENT AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO. 1611/MUM/2017 (ASSESSMENT YEAR 2011-12 ) SHRI HUSSAINI FAKHRUDIN NALWALLA, 501, SAGAR FORTUNE, WATER FIELD ROAD, BANDRA (W), MUMBAI- 400050. PAN: ADIPN6000G VS. ACIT-23(1), 113, 1 ST FLOOR, MATRUMANDIR, TARDEO, GRANT ROAD (W) , MUMBAI-400050. APPELLANT RESPONDE NT APPELLANT BY : SHRI RATAN SAMAL (AR) RESPONDENT BY : SHRI S. USMANI (SR. DR) DATE OF HEARING : 01.05.2019 DATE OF PRONOUNCEMEN T : 31.05.2019 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. THIS APPEAL BY ASSESSEE UNDER SECTION 253 OF INCOME -TAX ACT (ACT) IS DIRECTED AGAINST THE ORDER OF LD. COMMISSIONER OF I NCOME-TAX (APPEALS)- 32, MUMBAI [HEREINAFTER REFERRED AS LD. CIT(A)] DAT ED 25.01.2017 FOR ASSESSMENT YEAR 2011-12. THE ASSESSEE HAS RAISED TH E FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED FIRST APPELLATE AUTHORITY ERRED IN CONF IRMING THE ASSESSMENT ORDER WHEREIN THE LD. ASSESSING AUTHORIT Y ERRED IN DISALLOWING THE CLAIM OF EXPENDITURE IN THE NATURE OF COMMERCIAL SERVICE CHARGES AMOUNTING RS. 1,01,84,508/- ON THE GROUND T HAT TDS IS NOT DEDUCTED AND FURTHER, ERRED IN DISALLOWING THE SAME U/S 40(A)(IA) UNDER THE INCOME TAX ACT THOUGH APPELLANT HAD CLAIMED THA T NO TDS IS DEDUCTIBLE ON THE SAID CHARGES AND FURTHER, ERRED I N NOT APPRECIATING THE ARGUMENT ADVANCED WHICH IS SUPPORTED WITH NECESSARY EVIDENCES. ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 2 2. THE LEARNED FIRST APPELLATE AUTHORITY ERRED IN CONF IRMING THE ASSESSMENT ORDER WHEREIN THE LD. ASSESSING AUTHORIT Y ERRED IN DISALLOWING TRAVELLING EXPENSES AMOUNTING TO RS. 83 ,277/- ON ADHOC BASIS, EVEN THOUGH APPELLANT HAS SUBMITTED SUPPORTI NG EVIDENCES IN SUPPORT OF SUCH CLAIM. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS EN GAGED IN THE BUSINESS OF REAL ESTATE MARKETING IN DOMESTIC AS WELL AS IN OVE RSEAS MARKET. THE ASSESSEE FILED HIS RETURN OF INCOME ON 17.10.2012 D ECLARING TOTAL INCOME AT RS. 1,10,48,259/-. THE RETURN OF INCOME WAS SELE CTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) O N 27.03.2015. THE ASSESSING OFFICER WHILE PASSING THE ASSESSMENT ORDE R DISALLOWED THE CLAIM OF EXPENDITURE IN THE NATURE OF COMMERCIAL SE RVICE CHARGES OF RS. 1,01,84,508/- STERN REAL ESTATE (SRE) DUBAI, HOLDI NG THAT NO TDS WAS DEDUCTED AND THEREFORE DISALLOWED UNDER SECTION 40( A)(IA). THE ASSESSING OFFICER ALSO DISALLOWED THE COMMERCIAL SERVICE CHAR GES OF RS. 1,01,84,508/- HOLDING THAT INCOME OF FOREIGN ENTITY / SRE AROSE AND ACCRUED IN INDIA AND THE SAID INCOME WAS CHARGEABLE TO TAX IN INDIA. THE ASSESSEE HAS PAID COMMERCIAL SERVICE CHARGE TO NON- RESIDENT; IT WAS INCUMBENT ON THE ASSESSEE TO DEDUCT TAX AT SOURCES UNDER SECTION 195 OF THE ACT. AS NO TAX IS DEDUCTED THEREFORE, NO DEDUCT ION IS ALLOWABLE. THE ASSESSING OFFICER FURTHER HELD THAT IN ABSENCE OF SPECIFIC CLAUSE OF FEE FOR TECHNICAL SERVICES (FTS) IN INDIA UAE DOUBL E TAXATION AVOIDANCE AGREEMENT (DTAA), THE PAYMENT MADE FOR FT S IS TAXABLE UNDER DOMESTIC LAW (INCOME-TAX ACT) THE ASSESSI NG OFFICER ALSO ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 3 DISALLOWED THE TRAVELLING EXPENSES HOLDING THAT THE ASSESSEE HAS DEBITED THE TRAVELLING EXPENSES OF HIS WIFE AND SON OF RS. 83,277/-. 3. ON APPEAL BEFORE THE LD. CIT(A), BOTH THE ADDITION/ DISALLOWANCES WERE UPHELD. THUS, FURTHER AGGRIEVED BY THE ORDER OF LD. CIT(A), THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE THIS TRIBUNAL. 4. WE HAVE HEARD THE SUBMISSION OF LD. AUTHORIZED REPR ESENTATIVE (AR) OF THE ASSESSEE AND LD. DEPARTMENT REPRESENTATIVE (DR) FOR THE REVENUE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE L D. AR OF THE ASSESSEE SUBMITS THAT ASSESSEE IS A REAL ESTATE AGENT AND AP POINTED A SUB-AGENT IN DUBAI AND PAID COMMISSION FOR PROCURING/ARRANGING C USTOMERS TO INVEST IN REAL ESTATE IN INDIA AND CLAIMED DEDUCTION OF EX PENDITURE. THE AGENT OF ASSESSEE IN DUBAI IS INDEPENDENT NON-RESIDENT, W HO HAS NO PERMANENT ESTABLISHMENT IN INDIA. THE SERVICES PROVIDED BY NO N-RESIDENT AGENT ARE IN THE NATURE OF TECHNICAL SERVICES AS PRESCRIBED U NDER SECTION 9(1)(VI) OF INCOME-TAX ACT. THE NRI AGENT IS NOT LIABLE TO PAY TAX IN INDIA AS HE HAS NO PERMANENT ESTABLISHMENT. THE INCOME WAS NOT EARNED OR ARISES IN INDIA BY SAID AGENT. THE EXPENDITURE IS COMMERCIAL IN NATURE. THE DETAILS WHICH WERE FURNISHED TO THE ASSESSING OFFIC ER AS WELL AS LD. CIT(A). THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT ARTICLE-5 OF INDIA-UAE DOUBLE TAXATION AVOIDANCE AGREEMENT (INDI A-UAE DTAA) TAX TREATY DEFINES PERMANENT ESTABLISHMENT. THE NRI AGENT DOES NOT FALL WITHIN THE AMBIT OF ARTICLE-5 OF THE INDIA-UAE DTAA. AS PER ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 4 ARTICLE-7 OF UAE TAX TREATY PROFIT EARNED BY AN ENT ERPRISE IS SUBJECT TO TAX IN INDIA, IF HE HAS A PERMANENT ESTABLISHMENT. SIMILARLY ARTICLE-14 DEALS WITH INDEPENDENT PERSONAL SERVICES, TAX IN IN DIA WILL BE APPLICABLE, IF IT HAS A FIXED BASE OR IF HE STAYS EXCEED 183 DA YS IN A YEAR. THE LD. AR OF THE ASSESSEE FURTHER EXPLAINED THAT ARTICLE-22 D EALS WITH OTHER INCOME AND THE SAME IS SUBJECT TO LEVY IN UAE WHICH IS RES IDUARY IN NATURE AND THE TAX IS NOT PAYABLE IN INDIA. 5. THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT THE ASSESSING OFFICER RELIED UPON THE CBDT CIRCULAR NO. 33 OF 1982 AND HE LD THAT ON LACK OF SPECIFIC ARTICLE IN TAX TREATY, FEES FOR TECHNICAL SERVICES, THE BENEFIT CANNOT BE GRANTED BY RELYING UPON THE DECISION OF M ADRAS TRIBUNAL IN TVS ELECTRONICS LTD. IN ITA NO. 811/MDS/2010. THE L D. AR OF THE ASSESSEE SUBMITS THAT THE RATIO OF SAID DECISION IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. THE DECISION IN TVS ELEC TRONICS LTD. (SUPRA) IS NO MORE A GOOD LAW AS THE SAME HAS BEEN REVERSED BY HONBLE MADRAS HIGH COURT IN BANGKOK GLASS INDUSTRIES COMPANY LTD. THE BANGALORE TRIBUNAL IN ABBFZ (LLC) IN ITA NO188/BANG/2016 DATE D 28.10.2016 IT WAS HELD THAT IN ABSENCE OF PROVISO IN TAX TREAT Y TO TAX FEES FOR TECHNICAL SERVICES, THE SAME WOULD BE TAXED AS PER ARTICLE-7 OF TREATY APPLICABLE FOR BUSINESS PROFIT AND IN ABSENCE OF PE RMANENT ESTABLISHMENT, THE INCOME IS NOT CHARGEABLE TO TAX IN INDIA. ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 5 6. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPO RTED THE ORDER OF LOWER AUTHORITIES. THE LD. DR FURTHER SUBMITS THAT THE SERVICES RENDERED BY INDEPENDENT AGENT NAMELY STERNON REAL ESTATE DUB AI (SRED) CANNOT FALL UNDER PROFESSIONAL SERVICES AS DEFINED UNDER EXPLANATION TO SECTION 194J, WHICH COVERS SERVICES RENDERED BY SPE CIFIC PROFESSIONAL IN THE FIELD OF LEGAL, MEDICAL, ENGINEERING, ARCHITECT URAL ACCOUNTANCY AND INTERIOR DECORATION. THE NATURE OF SERVICES PREVAIL ED OVER THE NOMENCLATURE. THE SERVICES RENDERED ARE PURELY TECH NICAL IN NATURE. SINCE THE PAYMENT IS MADE FOR THE SERVICES IN THE N ATURE OF TECHNICAL SERVICES, THE ASSESSEE WAS REQUIRED TO DEDUCT TDS. SINCE THE ASSESSEE FAILED TO DEDUCT TDS. THEREFORE, THE AMOUNT WAS RIG HTLY DISALLOWED BY ASSESSING OFFICER AND CONFIRMED BY LD. CIT(A). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE HAVE AL SO DELIBERATED ON VARIOUS CASE LAWS RELIED BY LOWER AUTHORITIES AS WE LL AS BY LD. REPRESENTATIVE OF THE ASSESSEE. DURING THE ASSESSME NT, THE ASSESSING OFFICER NOTED THAT ASSESSEE ENTERED INTO DEALS WITH VARIOUS INDIAN BUILDERS AND THEN BOOKED THE SHOP/FLAT ON BEHALF OF NRI IN INDIA AND ABROAD. THE ASSESSEE INCURRED EXPENSES ON ADVERTISE MENT, BUSINESS PROMOTION AND TRAVELLING FOR PROMOTING THE PRODUCT OF BUILDERS. THE ASSESSEE ALSO APPOINTED AGENT IN INDIA/FOREIGN COUN TRIES ON COMMISSION BASIS FOR EXPLORING CLIENTS AND FOR MAKING COLLECTI ON FROM THE CLIENT WHO ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 6 HAVE BOOKED THE FLAT OR WHO HAVE MADE BOOKING. THE ASSESSEE DEBITED A SUM OF RS. 1,01,84,508/- ON MARKETING EXPENSES AND CLAIMED THAT PAYMENTS WERE MADE TO SRE, DUBAI. THE ASSESSEE WAS ASKED TO EXPLAIN THE NATURE OF SERVICES RENDERED AND WHY TDS WAS NOT DEDUCTED. THE ASSESSEE FILED HIS REPLY DATED 11.03.2015. IN THE R EPLY, THE ASSESSEE STATED THAT HE HAS PAID COMMISSION ON SERVICE CHARG E OF RS.1,01,84,508/- TO SRE, DUBAI WHO ARRANGED OVERSEAS CLIENT AND CONV INCED THEM FOR INVESTING IN INDIA. BEING AN INDEPENDENT ENTITY SRE , DUBAI ARRANGED SEMINAR TO MAKE AWARE ABOUT THE PROPERTY DETAILS IN INDIA. THEY ARRANGED MONTHLY CHARGES BEING BUILT BY THEM BY WAY OF COMMERCIAL SERVICES. SO FAR AS TDS IS CONCERNED, AS PER PROVIS ION OF TAX TREATY BETWEEN INDIA-UAE, THERE IS NO SPECIFIC SERVICES BE ING DEFINED IN AGREEMENT, HENCE, SAME IS CONSIDERED TO BE PART OF ARTICLE-7 (BUSINESS PROFIT) BASED ON THIS ARTICLE TAX IS PAYABLE BY OTH ER CONTRACTING STATE AND NO TDS IS REQUIRED TO BE DEDUCTED WHILE MAKING PAYM ENT TO VENDOR IN UAE, ESPECIALLY THAT SRE /VENDOR DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA. THE ASSESSEE AGAIN VIDE REP LY DATED 16.03.2015 EXPLAINED THE NUMBER OF DAYS OF STAY OF THE PERSON IN INDIA FOR FINANCIAL YEAR 2009-10, 2010-11 & 2011-12 AND THE AMOUNT PAID DURING THE ASSESSMENT YEAR 2008-09 TO 2012-13 WHICH HAS BEEN R ECORDED BY ASSESSING OFFICER IN PARA-5.3 OF HIS ORDER. THE ASS ESSEE FURTHER EXPLAINED THAT BOTH THE PARTIES ARE UNRELATED AND I NDEPENDENT THIRD ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 7 PARTIES. SRE, DUBAI IS MERELY A MARKETING AGENT FOR ASSESSEE. THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY ASSESSIN G OFFICER. THE ASSESSING OFFICER CONCLUDED THAT ASSESSEE MADE THE PAYMENT ON ACCOUNT OF COMMERCIAL SERVICES WITHOUT DEDUCTING TDS UNDER SECTION 195. COMMERCIAL SERVICES ARE DEEMED TO ARISE AND ACCRUE IN INDIA AS PER CLAUSE-(VII) OF SECTION 9(1) BEING FEES FOR TECHNI CAL SERVICES. THE SO- CALLED COMMERCIAL SERVICES ARE IN THE NATURE OF CO NSULTANCY, MANAGEMENT AS WELL AS TECHNICAL IN THE FIELD OF BUS INESS PROMOTION, MARKETING AWARENESS, CREATION AND PITCHING ETC. THE SERVICES PROVIDED BY UEA BASE ENTITY HAS BEEN UTILIZED IN INDIA BY AS SESSEE FOR HIS OWN BENEFIT AND BUSINESS. THEREFORE, THE FOREIGN UAE BA SE ENTITY HAS INCOME ARISING AND ACCRUING IN INDIA AS PER CLAUSE- (VII) OF SECTION 9(1) AND THEREFORE, IS LIABLE TO PAY TAX ON THE AMOUNT PAID TO NRI. IT WAS FURTHER CONCLUDED THAT FOR TAXABILITY OF FEES FOR TECHNICAL SERVICES WHAT IS RELEVANT IS THE PLACE WHERE SERVICES UTILIZED AND N OT THE PLACE WHERE SERVICES ARE RENDERED. THUS, THE INCOME OF FOREIGN ENTITY I.E. SRED, DUBAI ARISE AND ACCRUED IN INDIA AND SAME IS CHARGE ABLE TO TAX IN INDIA. SINCE THE ASSESSEE PAID TO NRI A SUM OF RS1,01,84,5 08/- WITHOUT DEDUCTING TDS. THEREFORE, THE ENTIRE AMOUNT WAS DIS ALLOWED UNDER SECTION 40(A)(IA) OF THE ACT. THE LD. CIT(A) CONFIR MED THE ACTION ALMOST ON SIMILAR LINE. THE LD CIT(A) FURTHER CONCLUDED TH AT IN ABSENCE OF SPECIFIC CLAUSE OF FEE FOR TECHNICAL SERVICES (FTS) IN DTAA, THE INCOME ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 8 WILL NOT AUTOMATICALLY BECOME BUSINESS INCOME BY RE LYING THE DECISION OF MADRAS TRIBUNAL IN DCIT TVS ELECTRONIC(SUPRA). WE HAVE NOTED THAT THE DECISION OF MADRAS TRIBUNAL IN DCIT TVS EL ECTRONIC(SUPRA) HAS BEEN REVERSE BY HONBLE MADRAS HIGH COURT IN BANGKO K GLASS INDUSTRIES CO LTD VS ACIT (215 TAXMAN 116) WHEREIN IT WAS HELD THAT IN ABSENCE OF PROVISION IN DTAA TO TAX FEE FOR TECH NICAL SERVICES, THE SAME WOULD BE TAXED UNDER ARTICLE OF DTAA APPLICAB LE FOR BUSINESS INCOME AND IN ABSENCE OF PE IN INDIA, THE SAID INCO ME IS NOT CHARGEABLE IN INDIA 8. SIMILAR VIEW WAS TAKEN BY THE COORDINATE BENCH OF B ANGALORE TRIBUNAL IN ABB FZ-LLC (SUPRA) BY FOLLOWING THE DECISION OF BANGKOK GLASS COMPANY (SUPRA) AND IBM INDIA PVT LTD VS DCIT (SUPR A). THEREFORE, CONSIDERING THE ABOVE REFERRED DECISIONS, WE ARE OF THE VIEW THAT IN ABSENCE OF PROVISION IN DTAA TO TAX THE FTS THE SAM E WOULD BE TAXED AS PER PROVISIONS OF ARTICLE 7 OF THE DTAA APPLICAB LE FOR THE PROFIT OF BUSINESS AND IN ABSENCE OF PE IN INDIA, THE RECEIPT / INCOME IS NOT CHARGEABLE TO TAX IN INDIA. THEREFORE, THERE WAS NO OBLIGATION ON THE PART OF ASSESSEE TO DEDUCT TAX AT SOURCE UNDER SECTION 1 95 OF THE ACT. CONSEQUENTLY, THERE CANNOT BE ANY DISALLOWANCE UNDE R SECTION 40(A)(I) OF THE ACT. HENCE, GROUND NO.1 OF APPEAL IS ALLOWE D. 9. GROUND NO. 2 RELATES TO THE DISALLOWANCE OF TRAVELL ING EXPENSES. THE LD AR FOR THE ASSESSEE NEITHER ARGUED ANYTHING NOR FIL ED ANY WRITTEN ITA NO.1611/ MUM /2 017-SHRI HUSSAINI FAKHRUDIN 9 SUBMISSIONS NOR ANY DOCUMENTARY EVIDENCES ARE FILED TO SUBSTANTIATE THIS GROUND OF APPEAL, THUS, THIS GROUND IS TREATED AS N OT PRESSED. PERUSAL OF THE ORDER OF THE LOWER AUTHORITIES REVEALS THAT THE EXPENSES DISALLOWED BY THE ASSESSING OFFICER ONLY WITH REGARDS TO EXPENSES INCURRED ON THE TRAVELLING OF WIFE AND SON OF THE ASSESSEE. IN ABSE NCE OF ANY SUBMISSIONS AND THE EVIDENCES THAT TRAVELLING EXPENSES WERE INC URRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THE SAME I S NOT ALLOWABLE DEDUCTIONS. IN THE RESULT THE GROUND NO. 2 OF THE APPEAL IS DISMISSED. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/05/ 2019. SD/- SD /- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER MUMBAI, DATE: 31.05.2019 SK COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR I BENCH, ITAT, MUMBAI 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI