THE WASTON WYATT INDIA P. LTD, MUMBAI V. ACIT RG 8(3), MUMBAI

ITA 3387/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54910 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 01-08-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 14-05-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Keywords: Business expenditure; Double taxation relief; Additional evidence; Permanent establishment; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI J.SUDHAKAR R EDDY (A.M) ITA NO.3387/MUM/08(A.Y. 2004-05) WATSON WYATT INDIA PVT. LTD. SOLITAIRE CORPORATE PARK, BLDG. NO.5, 1 ST FLOOR, ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI 400 093. PAN:AAACG 2955K (APPELLANT) VS. THE ACIT, RANGE 8(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) APPELLANT BY : SHRI GANESH RAJGOPALAN RESPONDENT BY : SHRI JITENDRA YADAV DATE OF HEARING : 08/08/2011 DATE OF PRONOUNCEMENT : 12/08 /2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 25/2/2008 OF CIT(A)XXIX, MUMBAI RELATING TO ASSESSMENT YEAR 2 004-05. GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS FOLLOWS: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) XXIX, MUMBAI HAS ERRED AND HAS FAILED TO CONSIDER OUR SUBMISSION S. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XXIX, MUMBAI H AS ERRED IN DISALLOWING: I. REGIONAL ALLOCATION EXPENSES RS. 14,80,590/- II. CHARGES TO WW PHILIPPINES TOWARDS REIMBURSEMENT OF SALARY COST RS.703,200/-, III. PROFESSIONAL CHARGES TO WW MALAYSIA RS. 494,379; AN D IV. INCOME TAX PROVISION W/OFF RS.49,172/- TOTALLING RS . 27,27,341/- THE LEARNED COMMISSIONER OF INCOME TAX APPEALS XXIX , HAS NOT TAKEN INTO CONSIDERATION FULLY OUR SUBMISSIONS IN WHICH W E HAVE RELIED ON ITA NO.3387/MUM/08(A.Y. 2004-05) 2 THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGR EEMENT WITH SINGAPORE, PHILIPPINES AND MALAYSIA. 2. THE ASSESSEE IS A COMPANY, WHICH IS ENGAGED IN T HE ACTIVITY OF PROVIDING CONSULTANCY SERVICES IN THE ARE OF HUMAN RESOURCE MANAGEMENT. WE SHALL FIRST TAKE UP FOR CONSIDERATION THE DISPUT E RAISED IN GROUND NO.1 TO 3 RAISED BY THE ASSESSEE. 3. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AO N OTICED THAT THE ASSESSE HAD PAID THE FOLLOWING SUMS TO NON-RESIDENT S. (A) REGIONAL ALLOCATION EXPENSES RS. 14,80,590/- (B) CHARGES PAID TO WW PHILIPPIANS RS. 7,03,200/- (C) PROFESSIONAL CHARGES PAID TO WW MALAYSIA RS. 4,94,379/-. ACCORDING TO THE AO THE ASSESSEE OUGHT TO HAVE DEDU CTED TAX AT SOURCE ON THE AFORESAID PAYMENTS MADE TO NON-RESIDENTS AND SI NCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE, IN TERMS OF SECTION 40( A)(I) OF THE ACT THE AFORESAID SUMS WHICH WERE CLAIMED AS DEDUCTION WHIL E COMPUTING TOTAL INCOME, CANNOT BE ALLOWED AS A DEDUCTION. THE ASSE SSEE HAD TAKEN A STAND THAT THE PAYMENT IN QUESTION WERE IN THE NATURE OF REIMBURSEMENT AND, THEREFORE, THERE IS NO ELEMENT OF INCOME EMBEDDED I N SUCH PAYMENTS AND, THEREFORE, THERE WAS NO QUESTION OF DEDUCTING TAX A T SOURCE ON SUCH PAYMENTS. THIS WAS NOT ACCEPTED BY THE AO AND THE AO INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT DISALLOWE D THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AFORESAID SUMS. 4. BEFORE CIT(A) THE ASSESSEE POINTED OUT IT WAS ON E OF THE ASSOCIATE COMPANIES IN THE ASIA PACIFIC REGION OF WATSON WYAT T WORLDWIDE. THE ASSESSEE POINTED THAT AS SUCH MEMBER IT HAD SIGNED ADMINISTRATIVE SERVICES AGREEMENT (COPY ENCLOSED) WITH WATSON WYATT & COMPA NY (UNITES STATES,) ITA NO.3387/MUM/08(A.Y. 2004-05) 3 WATSON WYATT HONGKONG LTD. (HONGKONG), WATSON WYATT K.K JAPAN, WATSON WYATT THAILAND LTD. (THAILAND), WATSON WYATT SINGAP ORE PTE LTD. (SINGAPORE), WATSON WYATT MALAYSIA SDN. BHD (MALAYS IA), WATSON WYATT CONSULTANCY LTD. (CHINA),WATSON WYATT NEW ZEALAND L TD. (NEW ZEALAND), WATSON WYATT PHILLIPPINES INC. (PHILPPINES) WATSON WYATT AUSTRALIA PTY. LTD. (AUSTRALIA) TAIWAN BRANCH OF WATSON WYATT & COMPANY (TIWAN BRANCH OF U.S CORPORATION) & KOREA BRANCH OF WATSON WYATT COM PANY LTD. (KOREA BRANCH OF CANADIAN CORPORATION) FOR SHARING REGIONA L ADMINISTRATIVE EXPENSES. THE ASSESSEE SUBMITTED THAT EACH OF THE ABOVE MENTIONED MEMBERS REALIZED THAT IT IS NOT POSSIBLE PRACTICALL Y AND ALSO BE COST EFFECTIVE TO MAINTAIN ON THEIR OWN CERTAIN ADMINISTRATIVE, MA NAGEMENT & OTHER SERVICES AT EACH COUNTRY. HENCE THE NEED TO HAVE C ERTAIN COMMON SERVICES & THE COSTS THEREOF TO BE SHARED BY THE MEMBER COMPAN IES DERIVING THE BENEFITS. EACH OF THE MEMBER COMPANIES OF ASIA PAC IFIC REGION HAVE AGREED TO SHARE CERTAIN COST RELATED TO THE REGION, ON A R EGIONAL BASIS AND TO SHARE THE COSTS AMONGST THE MEMBERS DERIVING THE BENEFIT OF THE SERVICES. THOSE MEMBERS NOT DERIVING A PARTICULAR SERVICE SHALL NOT BE CHARGED ANY COSTS. A COPY OF THE ADMINISTRATIVE SERVICE AGREEMENT WAS EN CLOSED FOR REFERENCE. AS PER ADMINISTRATIVE SERVICES AGREEMENT, THE COST IS ALLOCATED TO THE MEMBER COMPANIES DERIVING ANY BENEFIT/SERVICES FROM THE ME MBER COMPANIES PROVIDING THE SERVICES. THERE IS NO ELEMENT OF ANY INCOME/NOR ANY TRANSFER OF TECHNOLOGY. THE ASSESSEE POINTED OUT THAT AS WA TSON WYATT SINGAPORE IS THE REGIONAL OFFICE FOR WW ASIA PACIFIC REGION, IT WAS IN CHARGE OF THE ASIA PACIFIC SHARES SERVICE CENTRE BASED AT PHILIPPINES. THE ASIA PACIFIC SHARES SERVICE CENTRE RENDERED SERVICES TO ALL THE MEMBERS OF THE REGION WHO ARE PARTIES TO THE ADMINISTRATIVE SERVICE AGREEMENT. I NVOICES HAVE BEEN RAISED BY WW SINGAPORE THOUGH ITS ASIA PACIFIC SHARES SERV ICE CENTRE BASED AT PHILIPPINES. THE ASSESSEE THUS SUBMITTED THAT THE PAYMENTS TO BE MADE BY IT ARE TOWARDS REIMBURSEMENT OF ITS SHARES IN THE R EGIONAL ADMINISTRATIVE EXPENSES. REIMBURSEMENT OF EXPENSES ARE IN THE NAT URE WHERE THERE ARE NO ITA NO.3387/MUM/08(A.Y. 2004-05) 4 SERVICES RENDERED LIKE BOOKING OF AIR TICKETS, PAYM ENT OF MEMBERSHIP CHARGES ETC. ON BEHALF OF OTHER ASSOCIATE MEMBERS OF THE RE GION. REIMBURSEMENT OF EXPENSES DOES NOT CONSTITUTE INCOME UNDER THE DOMES TIC LAW. 5. ALTERNATIVELY THE ASSESSEE SUBMITTED THAT IN THE EVENT THESE PAYMENTS ARE LIKELY TO BE COVERED AND TAXED AS FEES FOR TEC HNICAL SERVICES UNDER THE DOMESTIC LAW, SUPPORT CAN BE DRAWN FROM THE TREATY IF IT IS REGARDED AS MORE FAVOURABLE THAN THE DOMESTIC LAW. THE TREATY TO AP PLY WOULD BE INDO- SINGAPORE TREATY AS THE SERVICES ARE PROVIDED BY WW SINGAPORE THROUGH THE ASIA PACIFIC SHARED SERVICE CENTRE AT PHILIPPINES. UNDER ARTICLE 12(4) OF THE SAID DTAA, ONLY THOSE SERVICES, WHICH ENABLE THE PE RSON ACQUIRING THE SERVICE TO APPLY THE TECHNOLOGY CONTAINED THEREIN, WILL GET COVERED. AS IT WOULD BE APPARENT FROM THE AGREEMENT, THE SERVICES RENDERED TO THE ASSESSEE WERE ONGOING ADMINISTRATION, FINANCE MANAG EMENT, OFFICE MANAGEMENT, ACCOUNTING, AUDIT AND MARKETING ASSISTA NCE AND THEREFORE THE ASSESSEE DID NOT MAKE PAYMENT FOR SUPPLY OF ANY KNO WLEDGE OR INFORMATION, BUT ONLY FOR SHARING CERTAIN COSTS RELATED TO THE R EGION. THE PAYMENT FOR THESE SERVICES CANNOT BE TREATED AS FEES FOR TECHNI CAL SERVICES AS PER PROVISIONS OF ARTICLE 12 OF DTAA. THESE SERVICES D O NOT RESULT IN MAKING AVAILABLE ANY TECHNICAL KNOWLEDGE EXPERIENCE SKILLS , KNOW-HOW OR PROCESS TO THE ASSESSEE AS HELD IN THE CASE OF NQA QUALITY SYS TEMS REGISTRAR LTD. VS. DY.CIT [2005] 2 SOT 249 (DELHI). 6. IT WAS ALSO SUBMITTED THAT THE INVOICES ARE RAIS ED THROUGH WATSON WYATT ASIA PACIFIC SHARES SERVICES CENTRE LOCATED A T PHILIPPINES, AND IF IT IS ASSUMED THAT THE PHILIPPINES COUNTRY IS THE RECIPIE NT OF THE AMOUNT, THEN WE SHALL BE ENTITLED TO RELY ON THE INDO-PHILIPPINES T AX TREATY FOR EXAMINING THE TAX IMPLICATIONS IN INDIA. 7. THE ASSESSEE POINTED OUT THAT THE PHILIPPINES CO MPANY HAS NO PERMANENT ESTABLISHMENT (PE) IN INDIA. HENCE, THE PHILIPPINES COMPANY ITA NO.3387/MUM/08(A.Y. 2004-05) 5 WOULD INCUR NO TAX LIABILITY IN INDIA. CORRESPONDI NGLY, THERE IS NO WITHHOLDING TAX OBLIGATION ON THE COMPANY BECAUSE: (A) UNLIKE MANY OTHER TREATIES THAT INDIA HAS SIGN ED WITH OTHER COUNTRIES, INDO-PHILIPPINES TREATY DID NOT HAVE ANY SPECIFIC ARTICLE DEALING WITH RECEIPTS IN THE NATURE OF FEES FOR TEC HNICAL SERVICES IN THE RELEVANT PREVIOUS YEAR 2003-04. (B) AS HELD IN THE FOLLOWING CASES, IN A CASE WHERE THE SERVICES FEES ARE RECEIVED IN THE ORDINARY COURSE OF BUSINESS BY A FO REIGN COMPANY, SERVICE FEES REMITTANCE WILL CONSTITUTE ORDINARY BU SINESS PROFIT IF THE TREATY DOES NOT HAVE AN ARTICLE DEVOTED TO FEES FOR TECHNICAL SERVICE: - CHRITIANY & NELSON COPEHAND VS. ITO(39 ITD 355) (BOM) - TEKNISKI [SERIDIRIAN BERHARD VS. CIT (255 ITR 5 51..559)] AS CONFIRMED IN THESE DECISIONS, IF SUCH FOREIGN CO MPANY DOES NOT HAVE PE IN INDIA, THE ORDINARY BUSINESS PROFIT AMOU NT WILL BE TAXABLE ONLY IN THE COUNTRY OF RESIDENCE. 8. AS FAR AS CHARGES PAID TO WW PHILIPPINES OF RS.7 ,03,200/- ARE CONCERNED, THE ASSESSEE POINTED OUT THAT IT WAS REI MBURSEMENT OF SALARY COST. THE ASSESSEE POINTED OUT THAT IT WAS IN NEED OF EXTRA HANDS, SO IT HAD TAKEN ASSISTANCE OF ITS ASSOCIATE COMPANY WATSON WY ATT PHILIPPINES, INC. THE ASSOCIATE COMPANY, WATSON WYATT PHILIPPINES, IN C. WOULD ASSIST THE ASSESSEE IN ITS WORK. THE ASSESSEE REIMBURSED THE ASSOCIATE COMPANY WW PHILIPPINES, THE SALARY COST OF ITS EMPLOYEES. THE ASSESSEE THEREFORE SUBMITTED THAT THERE WAS NO ELEMENT OF ANY INCOME H ENCE NO TAX HAS BEEN DEDUCTED. 9. ALTERNATIVELY, THE ASSESSEE SUBMITTED THAT IN T HE EVENT THESE PAYMENTS ARE LIKELY TO BE COVERED AND TAXED AS FEES FOR TEC HNICAL SERVICES UNDER THE DOMESTIC LAW, SUPPORT CAN BE DRAWN FROM THE TREATY IF IT IS REGARDED AS MORE FAVOURABLE THAN THE DOMESTIC LAW. THE ASSESSEE POI NTED OUT THAT THE TREATY TO APPLY WOULD BE INDO-PHILIPPINES TREATY. THE ASS ESSEE SUBMITTED THAT THE PHILIPPINES COMPANY HAS NO PERMANENT ESTABLISHMENT( PE) IN INDIA HENCE THE PHILIPPINES COMPANY WOULD INCUR NO TAX LIABILIT Y IN INDIA. ITA NO.3387/MUM/08(A.Y. 2004-05) 6 CORRESPONDINGLY, THERE IS NO WITHHOLDING TAX OBLIGA TION ON THE COMPANY BECAUSE: (C) UNLIKE MANY OTHER TREATIES THAT INDIA HAS SIGN ED WITH OTHER COUNTRIES, INDO-PHILIPPINES TREATY DID NOT HAVE ANY SPECIFIC ARTICLE DEALING WITH RECEIPTS IN THE NATURE OF FEES FOR TEC HNICAL SERVICES IN THE RELEVANT PREVIOUS YEAR 2003-04. (D) AS HELD IN THE FOLLOWING CASES, IN A CASE WHERE THE SERVICES FEES ARE RECEIVED IN THE ORDINARY COURSE OF BUSINESS BY A FO REIGN COMPANY, SERVICE FEES REMITTANCE WILL CONSTITUTE ORDINARY BU SINESS PROFIT IF THE TREATY DOES NOT HAVE AN ARTICLE DEVOTED TO FEES FOR TECHNICAL SERVICE: - CHRITIANY & NELSON COPEHAND VS. ITO(39 ITD 355) (BOM) - TEKNISKI [SERIDIRIAN BERHARD VS. CIT (255 ITR 5 51..559)] AS CONFIRMED IN THESE DECISIONS, IF SUCH FOREIGN CO MPANY DOES NOT HAVE PE IN INDIA, THE ORDINARY BUSINESS PROFIT AMOU NT WILL BE TAXABLE ONLY IN THE COUNTRY OF RESIDENCE I.E. PHILIPPINES. 10. AS FAR AS PROFESSIONAL CHARGES PROVIDED / PAID TO WW MALAYSIA RS.494,379/- IS CONCERNED, THE ASSESSEE SUBMITTED THAT IT WAS ENGAGED IN THE ACTIVITY OF PROVIDING CONSULTANCY SERVICES IN T HE AREA OF HUMAN RESOURCE MANAGEMENT SUCH AS; STRUCTURING PAY PACKAGES, PROVI DING COMPETENCY ROLE MODELS ETC. THE ADVICE THAT THE ASSESSEE PROVIDES THE CLIENT WOULD DEPEND ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WHICH A RE STUDIED BY THE ASSESSEE ON AN ASSIGNMENT BASIS. IN CONNECTION WIT H ONE SUCH ASSIGNMENT, THE ASSESSEE HAS TAKEN ASSISTANCE OF ITS ASSOCIATE COMPANY IN THE FORM OF DEPUTATION BY THE ASSOCIATE COMPANY OF ITS EXECUTIV ES WHO WILL BE ABLE TO HANDLE AND ASSIST THE ASSESSEE IN THE ASSIGNMENT. THE ASSESSEE WOULD THEN REIMBURSE TO THE PARENT COMPANY THE CONTRACTED FEES . THE ASSESSEE POINTED OUT THAT WATSON WYATT MALAYSIA, THE RECIPIENT COMPA NY, IS A RESIDENT OF MALAYSIA AND HENCE ENTITLED TO RELY ON THE INDO-MAL AYSIAN TAX TREATY FOR EXAMINING THE TAX IMPLICATIONS IN INDIA. THE MALAY SIAN COMPANY HAS NO PERMANENT ESTABLISHMENT (PE) IN INDIA. THE MALAYSI AN COMPANY WOULD RECEIVE REMUNERATION UNDER A CONTRACT, WHICH CAN BE REGARDED AS A CONTRACT FOR RENDITION OF SERVICES. IT IS NOT A CONTRACT U NDER WHICH ANY FORM OF ITA NO.3387/MUM/08(A.Y. 2004-05) 7 PROPERTY WHETHER TANGIBLE OR INTANGIBLE IS CONT EMPLATED TO BE ACQUIRED BY THE COMPANY. IT IS A CONTRACT UNDER WHICH THE MALA YSIAN COMPANY, THOUGH ITS PERSONNEL, WILL BE PERFORMING SERVICE, WHICH WI LL GET EXHAUSTED IN THE EXECUTION OF THE ASSIGNMENT. THE BUSINESS REQUIREM ENT AND SET OF EVERY CLIENT THE COMPANY IS INVARIABLY DIFFERENT, THERE I S NO QUESTION OF COPYING OR DUPLICATING THE OBSERVATION OR EFFORTS OF THE MALAY SIAN COMPANY WHILE HANDLING SOME OTHER ASSIGNMENT. ALSO THERE IS NO O BLIGATION ON THE MALAYSIAN COMPANY TO EDUCATE THE INDIAN COMPANY IN THE COURSE OF PERFORMANCE OF THEIR WORK. HENCE THE MALAYSIAN COM PANY WOULD INCUR NO TAX LIABILITY IN INDIA. CORRESPONDINGLY, THERE IS NO WITHHOLDING TAX OBLIGATION ON THE COMPANY BECAUSE: (C) UNLIKE MANY OTHER TREATIES THAT INDIA HAS SIG NED WITH OTHER COUNTRIES, INDO-MALAYSIAN TREATY DID NOT HAVE ANY S PECIFIC ARTICLE DEALING WITH RECEIPTS IN THE NATURE OF FEES FOR TEC HNICAL SERVICES IN THE RELEVANT PREVIOUS YEAR 2003-04. (D) AS HELD IN THE FOLLOWING CASES, IN A CASE WHERE THE SERVICES FEES ARE RECEIVED IN THE ORDINARY COURSE OF BUSINESS BY A FO REIGN COMPANY, SERVICE FEES REMITTANCE WILL CONSTITUTE ORDINARY BU SINESS PROFIT IF THE TREATY DOES NOT HAVE AN ARTICLE DEVOTED TO FEES FOR TECHNICAL SERVICE: - CHRITIANY & NELSON COPEHAND VS. ITO(39 ITD 355) (BOM) - TEKNISKI [SERIDIRIAN BERHARD VS. CIT (255 ITR 5 51..559)] AS CONFIRMED IN THESE DECISIONS, IF SUCH FOREIGN CO MPANY DOES NOT HAVE PE IN INDIA, THE ORDINARY BUSINESS PROFIT AMOU NT WILL BE TAXABLE ONLY IN THE COUNTRY OF RESIDENCE. HENCE THE REMITTANCE WOULD BEAR TAX ONLY IN MALAYSI A. THERE WOULD BE NO TAX IMPLICATIONS IN INDIA. 11. THE CIT(A) HOWEVER NOTICED THAT IN RESPECT OF AN IDENTICAL DISALLOWANCE OF REGIONAL ALLOCATION EXPENSES MADE IN THE CASE OF THE ASSESSEE FOR A.Y 2003-04 THE CIT(A) HAD UPHELD THE ACTION OF THE AO. IT IS SIGNIFICANT TO NOTICE THAT IN A.Y 2003-04 THE ASSESSEE HAD RAISED A PLEA THAT THE AMOUNT IN QUESTION WAS REIMBURSEMENT OF EXPENSES AND THE QUES TION WITH REGARD TO ITA NO.3387/MUM/08(A.Y. 2004-05) 8 APPLICABILITY OF THE DTAA WAS NEITHER RAISED BY THE ASSESSEE NOR CONSIDERED BY THE CIT(A). IT IS THUS CLEAR FROM THE ORDER OF THE CIT(A) THAT THE CIT(A) HAD NOT CONSIDERED THE ASSESSEES SUBMISSION WITH R EGARD TO THE NON- TAXABILITY OF THE REGIONAL ALLOCATION EXPENSES IN T HE HANDS OF THE RECIPIENT IN INDIA IN THE LIGHT OF THE PROVISIONS OF THE DTAA . 12. AS FAR THE PAYMENT OF WW PHILIPPINES AND PROFE SSIONAL CHARGES PAID TO WW MALAYSIA ARE CONCERNED THE CIT(A) APPLIED THE SAME REASONING AS WAS GIVEN FOR UPHOLDING THE DISALLOWANCE OF REGIONAL AL LOCATION EXPENSES AND UPHELD THE ORDER OF THE AO. 13. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE HAS RAISED GROUND NO.1 TO 3 BEFORE THE TRIBUNAL. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR AS THE PLEA OF THE ASSESSEE THAT THE REGIONAL ALLOCATION EXPENSES ARE IN THE NATURE OF REIMBURSEMENT EXPENSES WE FIND THAT THERE IS AN ADM INISTRATIVE SERVICE AGREEMENT DATED 1/7/1999 IN WHICH THE ASSOCIATE COM PANIES OF WATSON WYATT WORLDWIDE (WWW) LOCATED IN ASIA PACIFIC REG ION HAVE AGREED TO PROVIDE ACCOUNTING, ADMINISTRATIVE, FINANCIAL MANAG EMENT AND OTHER SIMILAR SERVICES FROM TIME TO TIME BETWEEN THEMSELVES. IT IS ALSO MENTIONED THAT ALL THE ASSOCIATE COMPANIES OF WWW IN THE ASIA PACIFIC REGION FEEL THAT IT WOULD BE COST EFFECTIVE TO OBTAIN AND MAINTAIN INFRASTRUC TURE ASSOCIATED WITH THE AFORESAID SERVICES ON A SEPARATE ENTITY BASIS AND T HAT THE PARTIES AGREED TO INCUR CERTAIN COST RELATED TO THE SERVICES REFERRED TO ABOVE ON A REGIONAL BASIS AN TO SHARE THE COST OF PROVIDING THE AFORESAID SER VICES AMONG THE PARTIES BENEFITING FROM THE SERVICES. IT IS ALSO PROVIDED THAT EACH OF THE PARTIES AGREED THAT IT WILL EITHER PROVIDE SERVICES OR RECE IVED SERVICE FROM THE OTHER PARTIES. IN OUR VIEW THE BASIS STRUCTURE OF THE AD MINISTRATIVE SERVICES AGREEMENT CONTEMPLATES RECEIPT OF SERVICES AND PAYM ENTS TO BE MADE IN CONNECTION WITH SUCH SERVICES. ADMITTEDLY IN THE C ASE OF THE ASSESSE, IT ITA NO.3387/MUM/08(A.Y. 2004-05) 9 RECEIVED THE BENEFIT OF SERVICES RENDERED BY THE AS SOCIATES OF WWW IN ASIA PACIFIC REGION AND MADE PAYMENTS FOR THE SAME. WE FAIL TO SEEN AS TO HOW THESE CAN BE TERMED AS REIMBURSEMENT OF EXPENSES, W E ARE OF THE VIEW THAT THE FINDINGS OF THE CIT(A) ON THIS ISSUE HAS TO BE UPHELD FOR THE REASONS GIVEN ABOVE. 15. AS FAR AS PLEA OF THE ASSESSEE THAT THE REGIONA L ALLOCATION EXPENSES CANNOT BE TAXED IN VIEW OF THE PROVISIONS OF THE DT AA WE FIND THAT THE ASSESSEE BEFORE US HAS FILED ADDITIONAL EVIDENCE. THE FOLLOWING ARE THE ADDITIONAL EVIDENCE SOUGHT TO BE FILED BEFORE US: 1. CERTIFICATE OF RESIDENCY DATED 8 TH MARCH, 2010 FOR WATSON WAYATT SHARED SERVICES CENTER ISSUED BY THE PHILIPPIANS BUREAU OF INTERNAL REVENUE. 2. CERTIFICATE OF REGISTRATION AND LICENCE FOR WAT SON WYATT SHARED SERVICES CENTER DATED JULY, 2000 ISSUED BY SECURITIES AND E XCHANGE COMMISSION. 3. CERTIFICATE OF RESIDENCY DATED 19 TH FEBRUARY, 2010 FOR WATSON WYATT PHILIPPINES INC. ISSUED BY PHILIPPINES BUREAU OF IN TERNAL REVENUE. 4. CERTIFICATE OF RESIDENCY DATED 17 TH MAY, 2006 FOR WATSON WYATT (MALAYSIA) SDN BHD ISSUED BY THE INLAND REVENUE BOARD , MALAYS IA. 16. AS WE HAVE ALREADY OBSERVED THAT THE CIT(A) DES PITE A PLEA RAISED BY THE ASSESSEE REGARDING NON-TAXABILITY OF THE PAYMEN T IN THE HANDS OF THE RECIPIENTS IN VIEW OF THE PROVISIONS OF THE DTAA, DID NOT EXAMINE THE ISSUE. WE ARE OF THE VIEW THAT THE ADDITIONAL EVIDENCE NOW SOUGHT TO BE FILED BY THE ASSESSEE ARE NECESSARY FOR ADJUDICATION OF THE ISSU E IN CONTROVERSY BEFORE THE TRIBUNAL AND WE, THEREFORE, ADMIT THE SAME AS ADDIT IONAL EVIDENCE. SINCE THIS WAS NOT EXAMINED BY THE REVENUE AUTHORITIES WE DEEM IT FIT AND PROPER ITA NO.3387/MUM/08(A.Y. 2004-05) 10 TO SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND REMAND THE ISSUE FOR FRESH CONSIDERATION BY THE AO. WE, HOWEVER, MAKE I T CLEAR THAT THE AUTHENTICITY OF THE ABOVE EVIDENCE WILL HAVE TO BE ESTABLISHED BY THE ASSESSEE IN A MANNER KNOWN TO LAW BEFORE THE AO. THE AO THE REAFTER SHALL CONSIDER THE ISSUE IN THE LIGHT OF THE PROVISIONS OF THE DTA A. IF AS PER THE PROVISIONS OF THE DTAA APPLICABLE THE PAYMENTS BY THE ASSESSEE TO THE NON-RESIDENT ARE NOT CHARGEABLE TO TAX IN THE HANDS OF THE NON-RESID ENTS IN INDIA THEN THE DISALLOWANCE CANNOT BE MADE UNDER SECTION 40(A)(I) OF THE ACT. FOR STATISTICAL PURPOSES GROUND NO.1 IS ALLOWED. 17. GROUND NO.2 & 3 ARE ALSO IDENTICAL AND THE REAS ONS GIVEN WHILE DECIDING GROUND NO.1 WILL EQUALLY APPLY TO THE GROU ND NO.2 & 3 ALSO. THE ORDER OF THE CIT(A) ON GROUND NO.2& 3 IS ALSO SET A SIDE AND THE ISSUES RAISED THEREIN ARE DIRECTED TO BE CONSIDERED BY THE AO AF RESH AS PER THE DIRECTIONS GIVEN WHILE DECIDING GROUND NO.1. THUS GROUND NO.1 TO 3 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FO LLOWS: IV.INCOME TAX PROVISION W/OFF RS.49,172/- TOTALLIN G RS. 27,27,341/- 19. THE FOURTH GROUND OF APPEAL RELATES TO INCOME T AX PROVISION WRITTEN OFF. THE CLAIM OF THE ASSESSEE WAS THAT THE SAME P ERTAINS TO TAX DEDUCTED AT SOURCE BY THE ASSESSEES CLIENTS BUT CERTIFICATE S NOT RECEIVED BY THEM OR CREDIT NOT RECEIVED FROM THE INCOME TAX DEPARTMENT. IT IS A SUM OF RS.29,750/-, WHICH PERTAINS TO A.Y 1998-99 AND RS. 19,421/- WHICH PERTAINS TO A.Y 1999-00. 20. THE ASSESSEE POINTED OUT THAT IN AY 98-99 IN R ETURN OF INCOME FILED, A TOTAL AMOUNT OF RS.105,684/- WAS CLAIMED AS TAX DED UCTED AT SOURCE. THEIR CLIENT M/S. MOTILAL OSWAL SECURITIES LTD. IN RESPEC T OF INCOME PERTAINING TO ITA NO.3387/MUM/08(A.Y. 2004-05) 11 A.Y 1998-99 HAD DEDUCTED AN ADDITIONAL AMOUNT OF RS . 6,650/-. HENCE THE TOTAL AMOUNT OF TDS FOR A.Y 1998-99 WAS RS.112,234/ -. THE GROSS AMOUNTS IN RELATION TO THESE TDS AMOUNTS HAVE BEEN DECLARED AS INCOME IN THE RELEVANT ASSESSMENT YEAR. THE ASSESSEE RECEIVED R EFUND OF RS. 82,584/-. IN SPITE OF FOLLOW-UP WITH THEIR CLIENT AND WITH THE I NCOME TAX DEPARTMENT THE BALANCE SUM OF RS. 29,750/- COULD NOT BE RECOVERED SINCE THE CERTIFICATES HAVE EITHER NOT BEEN RECEIVED FROM THE DEBTORS OR C REDIT RECEIVED FROM THE DEPARTMENT. SINCE THE AMOUNT IS LONG OVERDUE AND N OT RECOVERABLE, THE SAME IS IN THE NATURE OF BAD DEBTS AND HENCE IT HAS BEEN WRITTEN OFF. 21. IN AY 99-00, TDS CREDIT OF RS.19,421/- WAS NOT RECEIVED. THE ASSESSEE POINTED OUT THAT IN THE RETURN OF INCOME FILED FOR A.Y 1999-2000, A TOTAL AMOUNT OF RS. 168,017/- WAS CLAIMED AS TAX DEDUCTED AT SOURCE. THE GROSS AMOUNTS IN RELATION TO THESE TDS AMOUNTS HAVE BEEN DECLARED AS INCOME IN THE RELEVANT ASSESSMENT YEAR. OUT OF THIS TOTAL AM OUNT OF RS. 168,017/-, A TOTAL OF TDS CERTIFICATES SUBMITTED BY THE ASSESSEE WAS RS. 148,596/-. THE ASSESSEE RECEIVED A REFUND OF RS. 148,596/- IN RESP ECT OF CERTIFICATES SUBMITTED WITH THE INCOME TAX DEPARTMENT. THE BAL ANCE SUM OF RS. 19,421/- WAS NOT RECOVERABLE SINCE THE CERTIFICATE HAVE NOT BEEN RECEIVED FROM THE DEBTORS. SINCE THE AMOUNT IS LONG OVERDUE AND NOT RECOVERABLE, THE SAME IS IN THE NATURE OF BAD DEBTS AND HENCE IT HAS BEEN WRITTEN OFF. 22. THE AO AS WELL AS CIT(A) WERE OF THE VIEW THAT CLAIM OF THE ASSESSEE COULD NOT BE ALLOWED AS INCOME TAX PAYABLE CANNOT B E CONSIDERED AS A BUSINESS EXPENDITURE. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS RAISED GROUND NO.4 STATED ABOVE. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A RE OF THE VIEW THAT ADMITTEDLY THE AMOUNT IN QUESTION IS NOT INCOME TAX LIABILITY, WHICH IS CLAIMED AS DEDUCTION. THE AMOUNT OF TAX WHICH WAS DEDUCTED AT SOURCE BY ITA NO.3387/MUM/08(A.Y. 2004-05) 12 THE DEBTOR OF THE ASSESSEE HAD ALREADY BEEN ACCOUNT ED AS INCOME BY THE ASSESSEE. FOR THE REASONS BEYOND THE CONTROL OF TH E ASSESSEE THE ASSESSEE COULD NEITHER GET CREDIT FOR THE TAXES DEDUCTED AT SOURCE NOR COULD IT RECOVER THE AMOUNTS FROM ITS DEBTORS. THE ASSESSEE HAS ONL Y CLAIMED A DEDUCTION ON ACCOUNT OF BAD DEBTS THOUGH IN THE BOOKS IT HAS BEE N CLAIMED AS INCOME TAX DEDUCTION WRITTEN OFF. WE AGREE WITH THE SUBMISSIO NS OF THE ASSESSEE THAT THE TRUE NATURE OF THIS DEDUCTION CLAIMED IS IN THE NATURE OF BAD DEBTS AND SINCE IT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOU NTS THE ASSESSEE IS ENTITLED TO CLAIM THE DEDUCTION. WE HOLD ACCORDINGLY AND AL LOW GROUND NO.4 RAISED BY THE ASSESSEE. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 12 TH DAY OF AUGUST, 2011. SD/- SD/- (J.SUDHAKAR REDDY ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 12TH AUGUST.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RL BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3387/MUM/08(A.Y. 2004-05) 13 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 8/8/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 9/8/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER