Electronics Corporation of India Limited, Hyderabad, Hyderabad V. Addl.CIT, Range-2, Hyderabad, Hyderabad

ITA 228/Hyd/2017

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9843 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB-B
• Assessment Year: 2010-2011
• Appeal Filed On: 12-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Depreciation; Double taxation relief; Permanent establishment; TDS
• Section: 90; 143(3); 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ B ‘ Bench, Hyderabad Before Shri R.K. Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member ITA No.228/Hyd/2017 Assessment Year: 2010-11 Electronics Corporation of India Limited, ECIL Post, Moulali, Hyderabad. PAN : AAACE4809L Vs. Commissioner of Income Tax, Circle 17(1), Hyderabad. (Appellant) (Respondent) Assessee by: Shri C.S. Subrahmanyam Revenue by: Shri YVST Sai – CIT-DR Date of hearing: 17.08.2022 Date of pronouncement: 06.09.2022 O R D E R Per Laliet Kumar, J.M. The appeal of the assessee for A.Y. 2010-11 arises from the order of Commissioner of Income Tax (Appeals) – 5, Hyderabad dated 29.11.2016 involving proceedings under section 143(3) of the Income Tax Act, 1961 (in short, “the Act”). 2 ITA No.228/Hyd/2017 2. The grounds raised by the assessee reads as under : “1. The order of the Learned Commissioner of Income Tax (Appeals) [CIT(A)] is against law, weight of evidence and probabilities of the case. 2. The order of the AO is erroneous on facts, weight of evidence and is against law. 3. The learned CIT (A) erred in upholding the disallowing an amount of Rs.2,99,87,096/- on the ground that the assessee failed to deduct tax U/s.195. 4. The CIT (A) erred in not appreciating the nature of the payments read with the relevant articles of DTAA / Sec.9 / Sec.195 and Sec.90(2) of the Income Tax Act to consider them as fee for Technical services subject to deduction of tax U/s.195. 5. The learned CIT(A) erred in upholding the disallowance of Rs.59,23,000/- being prior period expenses on the ground that the appellant had failed to demonstrate the nature of the expenditure and the year of its crystallization despite such facts having been presented to the learned AO. 6. The C1T(A) erred in upholding disallowance of Rs.5AOA04/- out of the provision made for security expenses solely on the base of actual expenditure subsequently incurred.” 3. The brief facts of the case are that assessee is a Central Public Sector undertaking under the control of Department of Atomic Energy (DAE) and is in the business of manufacture and sale of electronic goods and components. For A.Y. 2010-11, the assessee company filed the return of income declaring a total income of Rs.62,07,56,570/- and the assessment was completed u/s 143(3) of the Act determining the total income at Rs.68,88,29,370/- by making various additions / disallowances. 3 ITA No.228/Hyd/2017 4. Feeling aggrieved by the order of AO, assessee carried the matter before ld.CIT(A), who has partly allowed the appeal of assessee. 5. Feeling aggrieved with the order of ld.CIT(A), assessee is now in appeal before us. 6. Ground Nos. 1, 2, 6 are not pressed by the ld.AR for the assessee. Hence, the same are dismissed as not pressed. GROUND NOS. 3 AND 4 7. Before us, the ld.AR submitted that the lower authorities had disallowed the payments made by the assessee to various entities during the year under consideration, without deducting the TDS and therefore, the disallowances were made u/s 195 of the Act. 7.1. The ld.AR had submitted that the assessee had made the following payments : 1) Payment of Rs.2,31,24,998/- (USD 462499.75) to BAE System, USA for site testing charges. 2) Payment of Rs.26,09,609/- (CHF 59,991) to Syscom Instruments SA, Switzerland for factory acceptance test, final commissioning, training etc. 3) Payment of Rs.14,77,500/- (USD 29,550) to Grintek Eswation, South Africa for operation, maintenance and training charges. 4 ITA No.228/Hyd/2017 4) Payment of Rs.27,75,000/- (USD 55,500) to Grintek Eswation, South Africa for operation, maintenance and training charges. 8. The ld.AR for the assessee had submitted that though the assessee has not provided the details of the taxes that were deducted by the assessee and paid to the department pertaining to M/s. Gintek Eswation, South Africa with respect to payments of Rs. Rs.14,77,500/- and Rs.27,75,000/- before the Assessing Officer, however, the details were provided by the assessee before the ld.CIT(A). In the light of the above, he submitted that the matter might be remitted back to the file of Assessing Officer with the liberty to the assessee to cross-verify that the taxes were deducted and paid in accordance with the law. 9. On the other hand, the ld.DR had relied upon the orders passed by the lower authorities. 10. We have heard the rival contentions of the parties and perused the material available on record. Undoubtedly, the ld.CIT(A) in para 5.2 of his order had recorded that the assessee has deducted the tax at source and the same was credited to the Government account. However, despite noticing the above, he had disallowed the payment made by the assessee on the pretext that the assessee had not deducted the tax at source. In our view, the submission of the assessee that the assessee had deducted the tax at source and paid the same to the credit of the Central Government are required to be verified in respect of the two payments made to M/s. Gintek Eswation, South Africa, of Rs.14,77,500/- and Rs.27,75,000/-. 5 ITA No.228/Hyd/2017 11. In the light of the above, the matter is remanded back to the file of Assessing Officer for verification and grant relief if the assessee has deducted the tax at source and deposited the same with the Central Government with respect to M/s. Gintek Eswation, South Africa of Rs.14,77,500/- and Rs.27,75,000/-. 12. With respect to the payments made by the assessee to BAE Systems, USA for an amount of Rs.2,31,34,988/- for site testing charges, our attention was drawn to page 18 of the paper book, which is the purchase order issued by the assessee to BAE Systems and at Sl.No.1, it was mentioned as “T082059001 – Long Range Position and Velocity Tracking Doppler Radar System Model No.DRX41320 and at Sl.No.7, it was mentioned as “T082059108 – Training (1Lot) (Two weeks on site). On the basis of the above, it was submitted that the supply of equipment and the installation thereof were forming part and parcel of the single purchase order placed by the assessee. It was submitted that the assessee was required to pay 10% on the purchase order on successful completion of site and submission of the invoices, this 10% had come to the amount of Rs.2,31,24,988/- which was denied by the revenue authorities treating the said installation charges paid by the assessee as “Fee for technical services”. He had drawn our attention to para III on page 3 of the assessment order wherein the Assessing Officer had clearly mentioned, “therefore, there is technical service in India which clearly attracts TDS provisions.” As TDS is not done, the payment of USD 462499.75 is disallowed.” 6 ITA No.228/Hyd/2017 13. It was submitted by the ld.AR that the fee for technical services does not form the part of INDO USA DTAA and our attention was drawn to Clause 5 of Article 12 of the said Treaty which is to the following effect : “ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] : (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub- division or a public sector company ; and (b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 7 ITA No.228/Hyd/2017 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (d) for services for the personal use of the individual or individuals making the payments ; or 8 ITA No.228/Hyd/2017 (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 14. The ld.AR for the assessee has submitted that the payee was a resident of America and was, therefore, entitled to take beneficial provisions of the Double Taxation Avoidance Agreement by India with USA by virtue of section 90 of the Income Tax Act 1961. The nature of payment of (USD 4,624,999) was towards purchase of various equipment, installation, testing and training and shipping charges relating to such equipment. The purchase price of the equipment needs to be considered as the business profits of the payee. Similarly, the shipping charges are for the transportation of the equipment which needs to be considered business profits since the same was part of the cost price. The installation, site acceptance testing and training may be treated as fees for technical services. 15. The ld.AR has submitted that however, Paragraph 5(a) of Article 12 of the DTAA between India and USA states that 'Fees for included services' does not include amounts paid for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a). Paragraph 3(a) of Article 12 of the DTAA relates to payments for Royalties. In this case there was no such royalty. The above services are rendered by payee in connection with the purchase of equipment. The services were absolutely necessary so that the equipment could be used. And, the services were to be performed while supplying 9 ITA No.228/Hyd/2017 the equipment. Hence, these services were covered under the exception in 5(a) of Article 12 of the DTAA. Therefore, the entire contract needs to be categorized as business and the profits were to be considered under Article 7 of the DTAA as business profits. The payee, being resident of USA does not have any permanent establishment in India as per Article 4 of the DTAA. In the absence of such a permanent establishment in India, the business profits of USA resident were not taxable in India. Accordingly, no TDS u/s 195 was warranted. 16. In respect to the payment made to Syscom Instruments, Switzerland, the assessee had submitted before us during the course of argument, that the assessee was wrongly advised to take MFN clause, however, the same was not applicable, as no date was provided for applicability of MFN. Therefore, the assessee is not pressing the deletion of the disallowances made by the authorities with respect to the payment made by the assessee without deducting the TDS. In view of the submission made by the ld.AR for the assessee, we uphold the order passed by the Assessing Officer/ Ld.CIT(A)’s appeal with respect to the payment made by the assessee to M/s. Syscom Instruments, Switzerland, for an amount of Rs.26,09,609/-. 17. The ld.DR for the Revenue, had made elaborate suggestions with respect to payments made by the assessee to BAE Systems, USA for an amount of Rs.2,31,34,988/-. He has drawn our attention to the invoice dt.30.06.2019 on Page 20 of the 10 ITA No.228/Hyd/2017 Paper Book. It was submitted that a separate invoice for USD 462499 was raised by BAE Systems, the USA on the assessee for completion of the site acceptance test and completion of on-site training in India. It was submitted that the on-site training was done in India and besides that the site acceptance test was also done in India, therefore the situs of the payment was in India and the assessee was under obligation to deducted the TDS while making the payment. He had submitted that even if assessee entered into a composite contract then also, the assessee was under the obligation to deduct TDS. In support thereof, our attention was drawn to the decision of Hon’ble Madras High Court in the case of Ansaldo Energia SPA Vs. CIT (IT), Chennai vide Tax Case Appeal Nos.19 to 21 of 2016 dt.20.04.2016. He had also submitted that the work was also done and the technical services were made available in India. Therefore, also TDS was required to be deducted in terms of the decision in the case of Ansaldo Energia SPA (supra). 18. In rebuttal, the ld.AR for the assessee had submitted that as there is a specific provision available in INDO USA DTAA there was no occasion for the assessee to deduct the TDS at the source of the payments made by the assessee to BAE Systems, even for a composite contract. It was submitted that the installation of equipment was intrinsically connected with the Completion of the site Acceptance Test and Completion of On-site Training in India. 11 ITA No.228/Hyd/2017 19. We have heard the rival contentions of the parties and perused the material available on record. From the bare perusal of the DTAA, it is abundantly clear that DTAA agreement has not used the term ‘Fee for technical services’, as has been used in Section 9 of the Income Tax Act, 1961. Para 4 of the agreement defined ‘Fee for included services, however, Para 5(a) has provides the services which will not fall within the provision of fee ‘For included services’. Para 5(a) provides that the services which are ancillary and subsidiary and are inextricably and essentially linked to the sale of property would not fall within the purview of the ‘Fee for included services’. In the present case, as clear from the sale invoice that the total sale value of equipment including the charges paid for completion of the site acceptance test and completion of on-site training in India was USD 46,24,949. Whereas, the sale value component of “online services and completion of onsite acceptance test” was only meager amount of USD 46,24,949. From the nature of charges paid by the assessee to the BAE Systems, USA, it is clear that charges were essentially in the nature of the ancillary and subsidiary services as the main focus of agreement was only purchase and installation of Long Range Position and Velocity Tracking Doppler Radar System. In our view, the incidental services which were referred to in invoice cannot be independently or stand alone basis be provided to the assessee by BAE Systems, as the purchase and installation of such instrument is sine qua non. In our view, the services which can independently or on stand alone basis, be provided, coupled with the fulfillment of the other requirement of Para 4(b) of the DTAA would only attract the ‘Fee for included services.”. In the present case, testing and on-site training in India cannot be provided on its own, unless it is coupled with purchase of equipment and therefore, these services did not fall within the purview of “Fee for 12 ITA No.228/Hyd/2017 incidental services”. In the present case, the services, which are the subject matter of the dispute, do not fall under “Fee for incidental services”, hence, would not fall under Royalty and as such, not chargeable in India as per Clause 12 of DTAA, read with sections of Income Tax Act and therefore, the charges paid by the assessee to BAE Systems would not be subject to deduction of TDS. Thus, the action of lower authorities that the assessee was liable to deduct TDS while making the payment to BAE Systems is unsustainable and therefore, the same is dismissed. 20. Secondly, with respect to payment made to Syscom Instruments, Switzerland, the disallowance had been upheld being not pressed and thirdly with respect to payment made to Grintek Eswation, South Africa, the issue is remitted back to the file of Assessing Officer for verification whether taxes were deducted at source or not ? In the light of the above, ground nos. 3 and 4 are partly allowed for statistical purposes. 21. Ground No.5. In this regard, the ld.AR submitted that the profit and loss account of the company disclosed an amount of Rs.59,23,000/- under the head 'Prior Period Expenses’ and that the same is in the nature of sales reversals, expenditure on raw material, administrative expenses, depreciation and other receipts. The learned Assessing Officer concluded that the same is not incurred in the current year and accordingly disallowed the same. The learned Assessing Officer disallowed the amount of Rs.59,23,000/- disclosed as prior period 13 ITA No.228/Hyd/2017 expenses in the audited financials. Ld.AR further submitted that such practice of prior period expenses was common and was in accordance with the accepted principles of accountancy. It was also submitted that besides the prior period expenses, the assessee had also accounted for prior period income, which crystalized during the year under consideration. He relied upon the decision of Hyderabad bench of the Tribunal in the case of M/s Deccan Cements Limited vs. DCIT. Special Range-5, Hyderabad in ITA No.283/Hyd/1997 dated 31 st May, 2002 for the A.Y.2003-2004. In Paragraph 8 of the order, the Hon'ble Tribunal dealt with this issue and rendered a decision in favour of assessee, holding that prior period expenditure should be allowed. 22. Per contra, the ld.DR had submitted that the assessee is a Government PSU, and is subjected to audit by the CAG and therefore, should act as a model PSU and such kind of argument is not permitted to be raised by the assessee. 23. We have heard the rival contentions of the parties and perused the material available on record. Undoubtedly, during the year under consideration, the assessee has claimed prior period expenses and had also shown the prior period income during the year under consideration. Therefore, we rely upon the decision of the co-ordinate bench of the Tribunal in the case of Deccan Cement Vs. DCIT in ITA No.283/Hyd/1997 and allow the claim of the assessee. Undoubtedly, the assessee is a large organization and this kind of inadvertent pitfall, is bound to occur on account of the size and spread of the assessee. Since the assessee has shown not only the prior period expenses but also shown the prior period income, therefore, both are required to be 14 ITA No.228/Hyd/2017 considered for the purposes of computing the income of the assessee. In the light of the above, ground No.5 of the assessee is allowed. 24. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the Open Court on 06 th September, 2022. Sd/- Sd/- (RAMA KANTA PANDA) ACCOUNTANT MEMBER (LALIET KUMAR) JUDICIAL MEMBER Hyderabad, dated 06 th September, 2022. TYNM/sps Copy to: S.No Addresses 1 Electronics Corporation of India Limited, ECIL Post, Moulali, Hyderabad – 500 062. 2 Additional Commissioner of Income Tax, Range – 2, Hyderabad. 3 CIT(Appeals) – 5, Hyderabad. 4 PCIT-5, Hyderabad. 5 DR, ITAT Hyderabad Benches 6 Guard File By Order