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

ITA 52/CHANDI/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9950 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 29-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Recovery proceedings; Transfer pricing; Residential status; Double taxation relief; Opportunity of being heard; Deemed to accrue or arise in india; Proportionate interest; Retrospective amendment; Permanent establishment; Commercial expediency; Revenue expenditure
• Section: 5(2); 37(1); 37; 12; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.52/CHD/2016 (ASSESSMENT YEAR : 2009-10) M/S IDS INFOTECH LTD., VS. THE D.C.I.T., SCO 144-145, SECTOR 34-A, CIRCLE 4(1), CHANDIGARH. CHANDIGARH. PAN: AAAC14364E APPELLANT BY : SHRI TEJ MOHAN SINGH RESPONDENT BY : SHRI SUSHIL KUMAR, CIT DR DATE OF HEARING : 13.04.2016 DATE OF PRONOUNCEMENT : 24.05.2016 O R D E R PER RANO JAIN, A.M . : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-2, CHANDIGARH DATED 14.12.2015, RELATING TO ASSESSMENT YEAR 2009-10. 2. THE GROUND NO.1 RAISED BY THE ASSESSEE READS AS UNDER : 1. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDING THE ADDITION OF RS.16,59,106/- MADE BY THE ASSESSING OFFICER WHEREBY HE DISALLOWED THE INTEREST PAID UP BY 2 APPLYING THE PROVISIONS OF SECTION 36(1)(III) WHICH I S ILLEGAL, ARBITRARY AND UNJUSTIFIED. 3. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD DEBITED FINANCIAL CHARGES OF RS.98,48, 000/- ON SECURED LOANS. THE SECURED LOANS CONSIST OF A T ERM LOAN FROM BANK, CAR LOAN AND PACKING CREDIT. AGAIN ST THESE LIABILITIES THE ASSESSEE IS PAYING INTEREST W HICH IS DEBITED IN PROFIT & LOSS ACCOUNT. THE ASSESSING OF FICER OBSERVED THAT SUBSTANTIAL INVESTMENT AMOUNTING TO RS.1,66,23,000/- WAS MADE IN THE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY IN US AND UK. HE ALSO NOTED THAT THE PROPORTIONATE INTEREST WAS DISA LLOWED IN THE ASSESSMENT YEAR 2004-05 ALSO AND NO APPEAL W AS PREFERRED BY THE ASSESSEE. IN THIS YEAR ALSO, THE ASSESSING OFFICER WORKED OUT THE PROPORTIONATE INTEREST AND A DISALLOWANCE OF RS.16,59,106/- WAS MADE TO THE INCO ME OF THE ASSESSEE. 4. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE HAS BEEN MADE ON TH E GROUND THAT THE ASSESSEE HAD TAKEN TERM LOAN FROM B ANK OF INDIA, WHICH WAS INVESTED ABROAD IN VARIOUS SUBSIDIARIES. IT HAS NOT BEEN APPRECIATED THAT THE SUBSIDIARIES OF THE ASSESSEE COMPANY WERE GENERATIN G REVENUE FOR THE ASSESSEE. THEREFORE, THERE WAS BUS INESS EXIGENCY IN GIVING SUCH LOAN. SINCE THE INTEREST P AID IS REVENUE EXPENDITURE, IT HAS RIGHTLY BEEN CLAIMED IN THE BOOKS OF ACCOUNT. THE SUBSIDIARIES RENDERED MARKET ING 3 SUPPORT TO THE ASSESSEE COMPANY. AFTER CONSIDERIN G THE SUBMISSIONS OF THE ASSESSEE, THE LEARNED CIT (APPEA LS) DISMISSED THE GROUND PLACING RELIANCE ON THE ORDER OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. [2006] 286 ITR 1 (P&H) . HE STATED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THE NEXUS OF BORROWED FUND TO THE APPLICATION OF THESE FUNDS. IN THIS VIEW, IT WAS HELD THAT THE AMOUNT INVESTED IN THE SUBSIDIARIES OF THE ASSESSEE IS FOR EXTRA COMMERCIA L CONSIDERATION. 5. AGGRIEVED BY THIS, THE ASSESSEE HAS COME UP IN APPEAL BEFORE US AND REITERATED THE SUBMISSIONS MAD E BEFORE THE LEARNED CIT (APPEALS). IT WAS STATED TH AT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EXPO RT OF INFORMATION TECHNOLOGY SERVICES AND SOFTWARE DEVELOPMENT. THE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE TO WHOM THE MONEY HAS BEEN ADVANCED ARE PROVIDING MARKET SUPPORT TO THE ASSESSEE. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES (P) LTD. VS. CIT 379 ITR 3 47 (SC) AND THAT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS. CIT [2016 ] 381 ITR 107 AND CIT VS. KAPSONS ASSOCIATES (2016) 381 ITR 204 (P&H). 6. THE LEARNED D.R. WHILE ARGUING BEFORE US STATED THAT SINCE THE INTEREST BEARING FUNDS HAVE BEEN ADV ANCED TO THE WHOLLY OWNED SUBSIDIARIES ABROAD AND INTERES T 4 EXPENDITURE ON ACCOUNT OF SUCH FUNDS, WHICH HAS BEE N RAISED FROM THE BANK, HAS BEEN CLAIMED BY THE ASSES SEE IN ITS PROFIT & LOSS ACCOUNT. UNDER THESE CIRCUMSTAN CES, A DUTY IS CAST ON THE ASSESSEE TO ESTABLISH THAT SUCH INTEREST BEARING FUNDS ADVANCED TO THE WHOLLY OWNED SUBSIDIARIES IS FOR THE PURPOSE OF BUSINESS AS PROV IDED UNDER SECTION 36(1)(III) OF THE ACT. THE ASSESSEE HAD FAILED TO ESTABLISH ANY NEXUS BETWEEN THE BORROWED FUNDS TO THE APPLICATION OF THESE FUNDS THAT THE SAME ARE FOR THE PURPOSE OF BUSINESS. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F HERO CYCLES (P) LTD. (SUPRA) FOR THE PROPOSITION TH AT THE ASSESSEE HAS TO DEMONSTRATE WITH THE FACTS AND FIGU RES THAT THE LOANS ADVANCED FULFILL THE CRITERIA OF COM MERCIAL EXPEDIENCY. 7. 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. WE ARE IN TOTAL AGREEMENT WITH THE SUBMISSIONS MADE BY THE LEARNED D.R. THAT THE ASSESSEE HAS TO DEMONSTRA TE THAT THE LOAN ADVANCES FULFILLS THE CRITERIA OF COM MERCIAL 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 T HE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASS ESSEE THAT THE ENTITIES TO WHOM THE MONEY HAS BEEN GIVEN ARE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY. 5 THEREFORE, THE FINANCIAL HEALTH OF THESE CONCERNS M ATTER TO THE FINANCIAL HEALTH OF THE ASSESSEE COMPANY ALSO. IN OUR VIEW, IT CAN BE SAID THAT THE AMOUNT GIVEN TO THE W HOLLY OWNED SUBSIDIARY COMPANIES ARE FOR COMMERCIAL EXPEDIENCY. IN THIS VIEW, WE WOULD LIKE TO REFER C ERTAIN OBSERVATIONS MADE BY THE HON'BLE SUPREME COURT IN T HE CASE OF S.A. BUILDERS LIMITED VS. CIT (2007) 288 I TR 1 (SC). IN THIS CASE, WHILE INTERPRETING THE MEANING OF THE WORD COMMERCIAL EXPEDIENCY, THE HON'BLE APEX COUR T HELD AS UNDER : 32. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION TH AT 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 THE SISTER-CONCERN UTILIZE THE AMOUN T ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVI OUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A ME ASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER-CONCERN FOR COMMERCIAL EXPEDIENC Y IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERA TED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COM PANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF TH E HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PUR POSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTIT LED TO 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 SI NCE A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIA RY AND IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR 6 SOME BUSINESS PURPOSES, THE ASSESSEE IS ENTITLED TO DEDUCTION OF INTEREST ON THE BORROWED FUNDS. IN TH E PRESENT CASE, THERE IS NO DISPUTE ABOUT THE FACT TH AT THE AMOUNTS HAVE BEEN ADVANCED TO THE WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE COMPANY AND THERE IS N O FACT BROUGHT ON RECORD BY ANY OF THE LOWER AUTHORITIES T HAT THE AMOUNTS HAVE BEEN USED BY THESE SUBSIDIARY COMPANIE S FOR ANY PURPOSE OTHER THAN THEIR BUSINESS PURPOSES. IN VIEW OF THIS, WE ARE INCLINED TO HOLD THAT THE AMOU NTS GIVEN TO SUBSIDIARY COMPANIES WERE ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THEREFORE, NO DISALLOWANCE INVOKING THE PROVISIONS OF SECTION 36(1)(III) OF TH E ACT CAN BE MADE IN THIS CASE. THE GROUND NO.1 RAISED BY TH E ASSESSEE IS ALLOWED. 9. SINCE ALL OTHER GROUNDS ARE INTER-CONNECTED, THESE ARE BEING DEALT TOGETHER WITH. 10. THE GROUND NOS.2, 3, 4, 5 AND 6 RAISED BY THE ASSESSEE READ AS UNDER : 2. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS FURTHER ERRED IN UPHOLDING THE DISALLOWANCE OF RS.5,31,28,742/- MADE ON ACCOUNT OF NON DEDUCTION OF TDS ON COMMISSION , LEGAL AND PROFESSIONAL CHARGES, MARKETING AND SELLING EXPENSES, OUT SOURCING AND BUSINESS DEVELOPMENT EXPENSES IN AS MUCH AS NO TDS IS REQUIRED TO BE DEDUCTED AND AS SUCH THE ORDER IS ILLEGAL, ARBITRARY AND UNJUSTIFIED. 7 3. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) H AS FAILED TO APPRECIATE THAT THE PROVISIONS OF SECTION 195 ARE NOT ATTRACTED IN AS MUCH AS PAYMENTS WERE MADE TO PARTIES WHO ARE OUT SIDE 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 AN D ARISEN IN INDIA WHICH IS CONTRARY TO THE FACTS OF THE CASE AND AS SUCH THE ORDER PASSED IS I LLEGAL, ARBITRARY AND UNJUSTIFIED. 5. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS FURTHER ERRED IN HOLDING THAT THE COMMISSION PAYMENT TO M/S I CMS FOR AGUSTA PROJECT ARE ILLEGAL IN NATURE AND NOT ALLOWABLE AS PER EXPLANATION TO SECTION 37(1) OF THE ACT WHICH IS CONTRARY TO THE FACTS AND AS SUCH THE ORDER PASSED IS ARBITRARY AND UNJUSTIFIED. 6. THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IS ERRONEOUS, ARBITRARY, OPPOSED TO LAW AND FACTS OF THE CASE ANCL IS, THUS, UNTENABLE. 11. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS SUPPLYING SOFTWARE RELATED SERVICES AND IN THIS CONNECTION HAS MADE PAYMENT OF COMMUNICATION CHARGE S, COMMISSION CHARGES, LEGAL AND PROFESSIONAL CHARGES, MARKETING & SELLING CHARGES AND BUSINESS DEVELOPMEN T CHARGES. THESE PAYMENTS WERE MADE TO VARIOUS ENT ITIES ABROAD AND SOME OF WHICH ARE ASSOCIATED CONCERNS OF THE ASSESSEE COMPANY. IT WAS ALSO NOTED BY THE ASSESSI NG 8 OFFICER THAT NO TDS WAS DEDUCTED ON THESE PAYMENTS. HE OBSERVED THAT THE BENEFIT OF THESE SERVICES PROVIDE D BY NON-RESIDENT ENTITIES BY WAY OF PROMOTING SALES AN D RENDERING LEGAL AND PROFESSIONAL SERVICES, ETC. ARE BEING UTILIZED IN INDIA BY THE ASSESSEE COMPANY. THE PAY MENT MADE BY THE ASSESSEE IN RESPECT OF SERVICES UTILIZE D, IS NOT IN CONNECTION TO ANY BUSINESS OR PROFESSION CARRIED OUT OUTSIDE INDIA FOR THE PURPOSE OF MAKING ANY INCOME FROM A SOURCE OUTSIDE INDIA. THE SOURCE OF INCOME OF THE RECIPIENTS OF THESE PAYMENTS IS THE AGREEMENT BETWE EN THE ASSESSEE AND THE CONTRACT OF THE SERVICES WITH THES E ENTITIES ABROAD IS ENTERED INTO BY THE ASSESSEE COM PANY AND, THEREFORE, THE RESPONSIBILITY UNDER THE TERMS OF THE CONTRACT IS THAT OF THE ASSESSEE COMPANY AND HENCE, THE SOURCE OF INCOME FOR THEM IS THE PLACE FROM WHERE I T EMANATES. IN VIEW OF THIS, HE HELD THAT THESE PAYM ENTS MADE TO THE NON-RESIDENTS ARE THEIR DEEMED INCOME I N INDIA ON WHICH NO TDS IS DEDUCTED. INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE INCOME TAX AC T, 1961 (IN SHORT THE ACT), THE ASSESSING OFFICER MADE DISALLOWANCE OF AN AMOUNT OF RS.5,31,28,742/-. 12. THE ASSESSING OFFICER ALSO NOTED THAT THE COMMISSION HAS BEEN PAID AT VARIOUS RATES TO STEVEN INTERNATIONAL AND IMCS. THE COMMISSION TO IMCS, TUNISIA WAS PAID @ 21.45% AND STEVEN INTERNATIONAL @ 1.79%. HE FURTHER OBSERVED THAT THE COMMISSION TO IMCS WAS FOR AUGUSTA PROJECT AND ASSESSEE IS ALSO INVOLV ED IN 9 AUGUSTA WESTLAND HELICOPTER DEAL, WHEREIN CBI HAS T AKEN INVESTIGATION INTO THE DEAL. THE CONTRACT WITH IMCS SAYS THAT IT HAS MERELY REFERRED AUGUSTA SPA BASED IN IT ALY AND INTRODUCED AND ASSISTED IN EXECUTION OF AN AGREEMEN T AND ASSISTED IN SELLING SERVICES AND FACILITATING RELAT IONSHIP WITH AUGUSTA. THEREFORE, SERVICES PROVIDED BY IMCS WERE NOT COMMENSURATE WITH THE COMMISSION PAID AND SERVI CES ARE NOT DEEMED TO BE INCURRED FOR THE PURPOSE OF BU SINESS. IN THIS WAY ALSO, THE ASSESSING OFFICER DISALLOWED THE COMMISSION PAYMENT TO STEVEN INTERNATIONAL AND IMCS OF RS.83,36,948/- IN VIEW OF THE EXPLANATION TO SECTIO N 37 OF THE ACT. THIS AMOUNT IS ALSO INCLUDED IN THE TOTAL DISALLOWANCE MADE BY THE ASSESSING OFFICER AMOUNTIN G TO RS.5,31,28,742/-. 13. BEFORE THE LEARNED CIT (APPEALS), THE ASSESSEE SUBMITTED THAT THESE EXPENSES WERE INCURRED FOR SER VICES RENDERED OUTSIDE INDIA AND PAYMENTS WERE MADE TO PA RTIES WHO WERE OUTSIDE INDIA. IT WAS STATED THAT THE PRO VISIONS OF SECTION 195 OF THE ACT WOULD BE APPLICABLE IN CO NJUNCT WITH SECTION 9 OF THE ACT, WHICH DEAL IN INCOME DEE MED TO ACCRUE OR ARISE IN INDIA. THE PARTIES TO WHOM THE PAYMENTS WERE MADE HAD NO PERMANENT ESTABLISHMENT I N INDIA. SECTION 9 OF THE ACT APPLIES TO AN ASSESSEE IRRESPECTIVE OF ITS RESIDENTIAL STATUS, NATIONALITY , DOMICILE AND PLACE OF BUSINESS. OUT OF VARIOUS CATEGORIES O F INCOME WHICH ARE DEEMED TO ACCRUE OR ARISE IN INDIA , ONE OF THEM IS INCOME FROM BUSINESS CONNECTION IN INDIA . IT 10 WAS ALSO SUBMITTED THAT BASED ON THESE PROVISIONS, THE ASSESSEE COMPANY WAS NOT LIABLE TO DEDUCT TDS ON TH ESE AMOUNTS AS NONE OF THESE PARTIES HAD ANY PERMANENT ESTABLISHMENT IN INDIA AND THERE WAS NO BUSINESS CONNECTION IN INDIA. IT WAS ALSO SUBMITTED THAT A LL THESE PAYMENTS WERE MADE TO THE PARTIES IN THE NATIONS WI TH WHICH INDIA HAS DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) AND AS PER THE TERMS OF THE RESPECTIVE DTAAS ALSO, THE INCOME IS NOT TAXABLE IN THE HANDS OF THE RECIP IENT. RELIANCE WAS PLACED ON A LARGE NUMBER OF CASES. 14. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LEARNED CIT (APPEALS) OBSERVED THAT T HE PAYMENTS MADE BY THE ASSESSEE ARE IN THE NATURE OF MARKETING SUPPORT SERVICES AND SELLING EXPENDITURE FOR GETTING MORE AND MORE BUSINESS ABROAD. THE SERVICE S PROVIDED BY NON-RESIDENT ENTITIES FOR PROMOTING SAL ES AND LEGAL AND PROFESSION SERVICES ARE AS PER THE TERMS OF CONTRACT WHICH IS ENTERED BY THESE ENTITIES WITH TH E ASSESSEE AND THE PAYMENT OF THESE AMOUNTS WERE THE RESPONSIBILITY OF THE ASSESSEE. THEREFORE, THE SOU RCE OF INCOME FOR THE ENTITIES ABROAD IS THE AGREEMENT WIT H THE ASSESSEE COMPANY AND BY VIRTUE OF THESE SERVICES TH ERE IS A DIRECT BENEFIT TO THE ASSESSEE COMPANY AND HENCE THE PAYMENT MADE BY THE INDIAN COMPANY FOR SERVICES UTI LIZED IS NOT IN CONNECTION WITH THE BUSINESS AND PROFESSI ON CARRIED OUT OUTSIDE INDIA. THE BUSINESS OUTSIDE IN DIA IS SECURED BY THE INDIAN COMPANY. THE SOURCE OF INCOM E FOR 11 THE SERVICES RENDERED BY THE NON-RESIDENT ENTITIES IS IN INDIA AS THE INDIAN COMPANY GIVES DIRECTIONS FOR TH E WORK ABROAD. THEREFORE, THE INCOME FOR THE NON-RESIDENT ENTITIES ACCRUES AND ARISES IN INDIA. HE FURTHER DISTINGUISHED THE CASES RELIED ON BY THE ASSESSEE S TATING THAT THESE CASES DEAL WITH THE BUSINESS CONNECTION WHEREIN THE SERVICES HAVE BEEN RENDERED OUTSIDE IND IA. HE OBSERVED THAT THE ISSUE IN HAND IS TO DECIDE WHE THER THE SERVICES RENDERED BY NON-RESIDENT ENTITIES AND PAYMENT MADE BY THE ASSESSEE ESTABLISHES BUSINESS CONNECTION IN INDIA AND AS PER THE SOURCE OF THESE PAYMENTS, THESE ARE IN THE NATURE OF FEES FOR TECHN ICAL SERVICES. FOR THE MEANING OF THE TERM BUSINESS CONNECTION, HE RELIED ON THE JUDGMENT OF THE HON'B LE SUPREME COURT IN THE CASE OF CIT VS. R.D. AGGAWAL & CO. (1965) 56 ITR 20. WITH REGARD TO THE TERM FEES F OR SERVICES, HE PLACED RELIANCE ON THE JUDGMENT OF TH E ANDHRA PRADESH HIGH COURT IN THE CASE OF ELKEM TECHNOLOGY VS. DCIT (2001) 250 ITR 164. AFTER REFE RRING ALL THESE JUDGMENTS, HE OBSERVED THAT IN THE INSTAN T CASE, SERVICES WERE RENDERED ABROAD BY NON-RESIDENT ENTIT IES UNDER THE AGREEMENT WITH THE ASSESSEE IN INDIA AND THE PARTIES TO WHOM THE BUSINESS WAS SOLD, THE RESPONSI BILITY WAS OF THE INDIAN COMPANY. THEREFORE, THESE SERVIC ES OF NON-RESIDENT ENTITIES WERE DIRECTLY UTILIZED BY THE ASSESSEE IN INDIA TO BOOST ITS BUSINESS ABROAD AND HENCE, TH E INCOME OF NON-RESIDENTS HAVE ACCRUED OR ARISE IN IN DIA. IN VIEW OF THESE, HE HELD THAT THE PROVISIONS OF SE CTION 195 12 OF THE ACT ARE APPLICABLE ON THESE PAYMENTS. HE F URTHER REFERRED TO THE JUDGMENT OF THE HON'BLE SUPREME COU RT IN THE CASE OF GVK INDUSTRIES LTD. VS. ITO (2015) 332 ITR 130 TO THE PROPOSITION THAT THE NATURE OF SERVICE R ENDERED BY THE NON-RESIDENTS WOULD COME WITHIN THE AMBIT AN D SWEEP OF EXPRESSION CONSULTANCY SERVICE AND HENCE , TAX SHOULD HAVE BEEN DEDUCTED AT SOURCE AS THE AMOUNT P AID AS FEE COULD BE TAXABLE UNDER THE HEAD FEE FOR TEC HNICAL SERVICE. 15. WITH REGARD TO THE COMMISSION PAID TO IMCS FOR AUGUSTA PROJECT, HE OBSERVED THAT IT WAS MERELY FOR INTRODUCING AUGUSTA SPA, BASED IN ITALY IN ASSISTIN G AND EXECUTING AGREEMENT WITH AUGUSTA AND THE COMMISSION PAYMENT ARE NOT COMMENSURATE WITH THE SERVICES RENDERED. IN AUGUSTA WESTLAND HELICOPTER DEAL, CBI HAS TAKEN INVESTIGATIONS AND CONDUCTED SEARCH AT THE PR EMISES OF THE DIRECTOR OF THE COMPANY AND THEREFORE, THESE PAYMENTS ARE OF ILLEGAL NATURE AND NOT ALLOWABLE AS PER EXPLANATION TO SECTION 37(1) OF THE ACT. IN VIEW OF THESE, THE LEARNED CIT (APPEALS) DISMISSED THE GROUND RAIS ED BY THE ASSESSEE AND HELD THAT IN THE ABSENCE OF NON- DEDUCTION OF TDS UNDER SECTION 195 OF THE ACT, THES E EXPENDITURE ARE NOT ALLOWABLE TO THE ASSESSEE. 16. AGGRIEVED BY THIS, THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. THE LEARNED COUNSEL FOR THE ASSE SSEE MADE ELABORATE SUBMISSIONS WITH REGARD TO VARIOUS CONTENTIONS RAISED BEFORE THE ASSESSING OFFICER AS WELL AS 13 BEFORE THE LEARNED CIT (APPEALS). BRIEFLY, THE SUM MARY OF THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE LIABILITY FOR DEDUCTION OF TA X ARISES ON SUCH PAYMENTS ONLY IF NON-RESIDENT IS LIABLE TO TAXES IN INDIA. FOR THIS, THE PROVISIONS OF SECTION 195 AND SECTION 9 OF THE ACT WERE BROUGHT TO OUR ATTENTION. HE FUR THER ARGUED THAT ALL THESE PAYMENTS ARE RELATED TO THE B USINESS OF THE NON-RESIDENT ENTITIES AND AS PER SECTION 9(1 ) OF THE ACT, THESE INCOMES ARE NOT TAXABLE IF THESE ENTITIE S HAVE NO BUSINESS CONNECTION OR PERMANENT ESTABLISHMENT I N INDIA. RELIANCE WAS PLACED ON A NUMBER OF JUDGMENT S ON THIS ISSUE. HE FURTHER STATED THAT THE INCOME ACCR UES AT THE PLACE WHERE SERVICES ARE PERFORMED. SINCE IN T HE PRESENT CASE, THE NON-RESIDENT ENTITIES HAVE PERFOR MED SERVICES OUTSIDE INDIA, THEREFORE, THEIR INCOME IS NOT TAXABLE IN INDIA. WITH RESPECT TO MARKETING, EXPOR T SERVICE, BUSINESS DEVELOPMENT OUTSOURCE EXPENDITURE AND COMMUNICATION EXPENSES, IT WAS STATED THAT NONE OF THESE ACTIVITIES ARE UNDERTAKEN IN INDIA. THE AMOUNT SPE NT CAN NEITHER BE SAID TO HAVE ACCRUED OR ARISEN IN INDIA IN THE ABSENCE OF ANY BUSINESS CONNECTION IN INDIA. 17. SECTION 90 OF THE ACT PROVIDES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WI TH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA FOR AVO IDANCE OF DOUBLE TAXATION, THEN IN RELATION TO AN ASSESSEE BELONGING TO SUCH COUNTRY, THE PROVISIONS OF INCOME TAX ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFIC IAL TO THE 14 ASSESSEE. IN VIEW OF THE FACT THAT EVEN AS PER THE PROVISIONS OF RESPECTIVE DTAAS THESE AMOUNTS CANNOT BE TAXED IN INDIA, THEREFORE LIABILITY OF THE ASSESSEE TO DEDUCT TAX AT SOURCE ON THESE PAYMENTS DOES NOT ARISE. 18. WITH RESPECT TO THE PAYMENT MADE TO IMCS, IT WAS STATED THAT NO SEARCH OF CBI HAS TAKEN PLACE IN THE CASE OF THE ASSESSEE AND NO ADVERSE FINDING IN THE FORM OF ANY ORDER ETC. IS THERE AGAINST THE ASSESSEE. IN V IEW OF THESE, IT WAS STATED THAT THESE PAYMENTS ARE NOT IN VIOLATION OF ANY LEGAL ENACTMENT. THEREFORE, THESE CANNOT BE DISALLOWED AS PER THE PROVISIONS OF SECTION 37(1 ) OF THE ACT. 19. THE LEARNED D.R. AT THE TIME OF ARGUMENTS, STATED THAT THE LEARNED CIT (APPEALS) HAS HELD THAT THE PAYMENTS MADE BY THE ASSESSEE TO ITS WHOLLY OWNED SUBSIDIARIES IN USA AND UK AND ALSO TO SOME OTHER ENTITIES ABROAD PARTAKE THE CHARACTER OF FEES FOR TECHNICAL SERVICES (FTS). THE TAXABILITY OF FTS IN THE HAND S OF NON- RESIDENTS IS COVERED UNDER SECTION 9(1)(VII) OF THE ACT. THE EXPLANATION TO SECTION 9 OF FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FROM 1.6.1996 STATES THAT THE INCOME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARIS E IN INDIA UNDER CLAUSE (VII) I.E. FTS AND SHALL BE INCL UDED IN THE TOTAL INCOME OF THE ASSESSEE WHETHER OR NOT THE NON- RESIDENT, HIS RESIDENCE OR PLACE OF BUSINESS OR BUS INESS CONNECTION IN INDIA OR NON-RESIDENT HAS RENDERED SE RVICE IN INDIA. IN VIEW OF THIS LEGAL POSITION, HE ARGUE D THAT THE 15 ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE ON SU CH PAYMENTS AS PER THE PROVISIONS OF SECTION 195 OF TH E ACT. THEREFORE, THE PROVISIONS OF SECTION 40(A)(I) OF TH E ACT ARE CLEARLY APPLICABLE TO THE PRESENT CASE. DETAILED SUBMISSIONS WERE MADE BY HIM WITH REGARD TO THE DIF FERENT PAYMENTS MADE BY THE ASSESSEE AND A COPY OF THE WRI TTEN SUBMISSIONS WAS ALSO FILED ON RECORD. SUMMARY OF H IS ARGUMENTS WAS THAT IN THE ABSENCE OF NATURE OF SERV ICES BEING RENDERED BY THE NON-RESIDENT ENTITIES, BEING COMING OUT OF THE AGREEMENTS WITH THOSE CONCERNS OR INVOIC ES RAISED BY THESE CONCERNS, IN THE ABSENCE OF AGREEME NT, IT SHOULD BE PRESUMED THAT THE SERVICES WERE OF THE NA TURE OF FEES FOR TECHNICAL SERVICES. RELIANCE WAS PLA CED ON A NUMBER OF JUDGMENTS, WHEREBY THE ACTIVITIES WERE HE LD TO BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES. WITHOUT PREJUDICE TO THIS ARGUMENT, IT WAS ALSO STATED THAT EVEN IF WE GO TO THE RESPECTIVE DTAAS, IN THE ABSENCE OF NA TURE OF SERVICES RENDERED COMING OUT FROM THE RECORD IT IS TO BE PRESUMED THAT THE SERVICES WERE RENDERED TO MAKE AVAILABLE SOME TECHNICAL SERVICES TO THE ASSESSEE. THESE SUBMISSIONS WERE MADE WITH RESPECT TO THE FINDING O F THE LEARNED CIT (APPEALS) THAT THE PAYMENTS MADE BY THE ASSESSEE TO THE NON-RESIDENTS ARE IN THE NATURE OF FEES FOR TECHNICAL SERVICES IN THE HANDS OF SUCH FOREIGN EN TITIES. FOR OTHER FINDING WITH REGARD TO BUSINESS CONNECTIO N OR SOME PAYMENTS MADE BY THE ASSESSEE BEING ILLEGAL IN NATURE, HE PLACED RELIANCE ON THE ORDER OF THE LEAR NED CIT (APPEALS). 16 20. IN THE REJOINDER, THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THE LEARNED CIT (AP PEALS) HAS NOT GIVEN ANY CATEGORICAL FINDING CHARACTERIZIN G THE SERVICES RENDERED BEING IN THE NATURE OF FEES FOR TECHNICAL SERVICES. THEREFORE, THE ISSUE OF FEES FOR TECHN ICAL SERVICES DOES NOT ARISE IN THE PRESENT CASE. WITH OUT PREJUDICE, IT WAS STATED THAT EVEN IF ASSUMING FOR ARGUMENT SAKE THAT SUCH SERVICES QUALIFY AS FEES F OR TECHNICAL SERVICES, IT HAS TO BE SEEN WHETHER THES E SERVICES WILL QUALIFY AS FEES FOR INCLUDED SERVICES AS MENTIONED IN ARTICLE-12 OF INDIA US DTAA. THE EXTR ACT OF THIS ARTICLE OF THE TREATY WAS PLACED ON RECORD. IT WAS FURTHER EMPHASIZED THAT THE PERUSAL OF ARTICLE-12 O F THE INDIA US DTAA SHOWS THAT THE FEES FOR TECHNICAL SE RVICES CLAUSE UNDER DTAA WOULD BE SAID TO BE SATISFIED ONL Y IF THE KNOWLEDGE, SKILL, ETC. IS MADE AVAILABLE TO T HE SERVICE RECIPIENT. RELIANCE WAS PLACED ON A NUMBER OF JUDG MENTS IN THIS REGARD. 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 SUBMISSI ONS ORAL AND WRITTEN FILED BY BOTH THE PARTIES BEFORE US, AR E THAT THE ISSUE IS WITH REGARD TO THE DISALLOWANCE MADE B Y THE ASSESSING OFFICER INVOKING THE PROVISIONS OF SECTIO N 40(A)(I) OF THE ACT, WHEREBY ON CERTAIN PAYMENTS MA DE TO 17 NON-RESIDENT ENTITIES, THE ASSESSEE FAILED TO DEDUC T TAX 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 PR OVISIONS OF EXPLANATION 1 TO SECTION 37(1) OF THE ACT. THE LEA RNED CIT 18 (APPEALS) HAS THOUGH CONFIRMED THE FINDING GIVEN BY THE ASSESSING OFFICER. HOWEVER, IN SOME PASSING REFERE NCE HE 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 FINDIN G HAS ACTUALLY BEEN GIVEN BY THE LEARNED CIT (APPEALS). HOWEVER, HE ALSO MADE SUBMISSIONS THAT FOR THE CONCLUSION THAT THESE PAYMENTS WERE IN THE NATURE O F FEES FOR TECHNICAL SERVICES, ONE HAS TO GO TO THE PROVI SIONS OF DTTA ALSO. THE LEARNED D.R. ON THE ISSUES RAISED B Y 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 19 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 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 20 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 PRESENT 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 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 SOU RCE UNDER CHAPTER-XVII, MEANING THEREBY THAT ONLY THOSE PAYMENTS MADE TO NON-RESIDENTS ON WHICH TAX IS REQU IRED 21 TO BE DEDUCTED AS PROVIDED UNDER THE RELEVANT CHAPT ER, THE PROVISIONS OF THIS SECTION CAN BE INVOKED. CHA PTER- XVII DEALS WITH COLLECTION AND RECOVERY OF TAXES WH ILE PART-B OF THIS CHAPTER DEALS WITH TAX DEDUCTION AT SOURCE, THE PROVISIONS RELATING TO TAX TO BE DEDUCTED OUT O F PAYMENT MADE TO A NON-RESIDENT ARE PROVIDED IN SECT ION 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, 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- 22 (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 ARIS E 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 IF THE SAME IS NOT ACTUALLY ACCRUES, ARISES OR RECEIVES IN INDIA. 29. IN THE PRESENT CASE, THIS IS NOT IN DISPUTE T HAT THE AMOUNT IS NOT RECEIVED OR DEEMED TO BE RECEIVED IN INDIA. THE SECOND SITUATION UNDER WHICH THE RECEIP T OF NON-RESIDENT IS TAXABLE IS IF THE INCOME ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE IN INDIA. UNDOUBTE DLY, IN 23 THE PRESENT CASE NO INCOME HAS ACCRUED TO THE NON- RESIDENT PERSON IN INDIA. THE DISPUTE MAY BE ONLY WITH REGARD TO THE IMPUGNED AMOUNT BEING INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. VARIOUS INSTANCES OF IN COME CONSIDERED TO BE DEEMED TO ACCRUE OR ARISE IN INDIA TO A NON-RESIDENT ARE PROVIDED IN SECTION 9 OF THE INCOM E TAX ACT. FOR THE PURPOSE OF ADJUDICATING THE ISSUES AR ISING IN THE PRESENT APPEAL, THE RELEVANT PROVISIONS ARE THA T 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;] [(D) IN THE CASE OF A NON-RESIDENT, BEING (1) AN INDIVIDUAL WHO IS NOT A CITIZEN OF INDIA; OR 24 (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 B ROKER, GENERAL COMMISSION AGENT OR AN AGENT OF AN INDEPENDE NT STATUS.] 30. WE ARE TO JUDGE FROM THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE WHETHER THE IMPU GNED PAYMENTS ARE DEEMED TO ACCRUE OR ARISE IN INDI A TO THE 25 RESPECTIVE 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 EXIG IBLE FOR PROVISION OF TAX DEDUCTION AT SOURCE. HERE WE ARE INCLINED TO REFER TO THE JUDGMENT OF THE HON'BLE SUPREME COU RT IN THE CASE OF G.E. INDIA TECHNOLOGY CENTRE PVT. LTD. VS. CIT (2010) 327 ITE 456 (SC), WHEREBY IT HAS BEEN HELD T HAT SECTION 195 (1) OF THE ACT USES THE EXPRESSION SUM CHARGEABLE UNDER THE PROVISION OF THE ACT AND WEIGH TAGE IS NEEDED TO BE GIVEN TO THESE WORDS. FURTHER, SECTIO N 195 USES THE WORD PAYER AND NOT THE WORD ASSESSEES. THE PAYER IS NOT ASSESSEE. THE PAYER BECOMES AN ASSESS EE IN DEFAULT ONLY WHEN HE FAILS TO FULFILL STATUTORY OBL IGATION UNDER SECTION 195(1) OF THE ACT. IF THE PAYMENT DO ES NOT HAVE THE ELEMENT OF THE INCOME, THE PAYER CANNOT BE MADE LIABLE. THE HON'BLE SUPREME COURT THUS REJECTED TH E CONTENTION OF THE DEPARTMENT BY HOLDING THAT IF THE SUM PAID IS NOT CHARGEABLE TO TAX, THEN NO TAX IS REQUI RED TO BE DEDUCTED. 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 AC CRUED IN INDIA OR INCOME DEEMED TO HAVE ACCRUED IN IND IA.HE JUST KEPT ON HARPING THE FACT THAT THE ULTIMATE BEN EFICIARY OF THE SERVICES IS THE ASSESSEE IN INDIA. EVEN T HE CIT(A) 26 WHILE ADJUDICATING THE ISSUE COULD NOT GIVE ANY APPROPRIATE FINDING IN THIS REGARD. THE RELEVANT PO RTION OF THE CIT(A)S FINDINGS ARE RECORDED AT PAGE 12 PARA 10.3, IN LATER 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 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 ALSO 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 27 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 TA XABLE TERRITORY IS INDIA HAVING INTIMATE AND NEAR RELATIO N OF A CONTINUOUS NATURE OF THE BUSINESS OF THE NON-RESIDE NT AND ATTRIBUTED TO THE EARNING PROFITS BY THE NON-RESIDE NT IN HIS BUSINESS. WE SHOULD UNDERSTAND THAT ALL COMME RCIAL RELATIONS WILL NOT NECESSARILY CONSTITUTE BUSINESS CONNECTION UNLESS A COMMERCIAL CONNECTION IS REALLY AND INTIMATELY CONNECTED WITH THE BUSINESS ACTIVITY OF NON- RESIDENT IN INDIA AND IS CONTRIBUTORY TO THE EARNIN G OF THE PROFITS IN THE SAID ACTIVITY OF THE NON-RESIDENT. SOME ILLUSTRATIVE INSTANCES OF NON-RESIDENTS HAVING BUSI NESS CONNECTION IN INDIA HAVE BEEN QUOTED IN THE JUDGMEN T OF THE HON'BLE SUPREME COURT IN THE CASE OF R.D. AGGA RWAL (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- 28 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 IND IA AS ILLUSTRATED ABOVE. ALL ALONG THE ASSESSEE HAS BEE N MAINTAINING THAT THE NON-RESIDENT ENTITIES TO WHOM IT HAS MADE THE PAYMENTS DO NOT HAVE ANY BUSINESS CONNECTI ON WITH INDIA. THE ASSESSING OFFICER AS WELL AS THE L EARNED CIT (APPEALS) HAD NOWHERE IN THEIR ORDERS RECORDED ANY SUCH FINDING 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 TAKEN BY THE ASSESSEE BEFORE THE LOWER AUTHORITIES AS WELL AS BEFORE US AND EVEN THE LEARN ED D.R. WHILE ARGUING BEFORE US COULD NOT CONTROVERT THE SA ID SUBMISSION OF THE ASSESSEE. IN THIS MANNER, W E DO NOT 29 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 ARI SE IN INDIA IN THEIR HANDS. THEREFORE, PROVISIONS OF SEC TION 40(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. THEREF ORE, AS IN THE PRESENT CASE PAYMENTS HAVE BEEN MADE TO THE RESIDENTS OF THOSE COUNTRIES WITH WHOM INDIA HAS EN TERED INTO DTAA, THE PROVISIONS OF SECTIONS 5 AND 9 OF TH E ACT SHALL BE SUBJECT TO THE AGREEMENT ENTERED INTO WITH SUCH COUNTRIES. 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 30 THAT THE AMOUNTS ARE NOT IN THE NATURE OF INCOME I N THE 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 T O FIND OUT IF THE NON-RESIDENT ASSESSEE IS TAXABLE THEREUN DER. IF IT IS TAXABLE, ONLY THEN ONE HAS TO GO INTO THE TRE ATY, IF ANY, BETWEEN INDIA AND THE COUNTRY TO WHICH THE NON RESIDENT BELONGS, TO, FIND OUT IF THERE IS ANY BENE FICIAL PROVISION 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 THAT IT SHOULD BE GIVEN THE BENEFIT OF THE TREATY PROVISIONS. ON THE OTHER HAND, IF THE ASSESSEE IS N OT TAXABLE UNDER THE DOMESTIC LAW ITSELF, THERE IS NO NEED TO LOOK INTO THE PROVISIONS OF THE DTAA, EVEN IF ONE E XISTS, TO FIND OUT IF THERE IS ANY PROVISION UNDER WHICH THE NON- RESIDENT CAN BE BROUGHT TO TAX. IN OTHER WORDS, THE TREATY CANNOT BE USED AS A TAXING STATUTE. THE PRINCIPLE I S THAT WHERE THE NON-RESIDENT IS TAXABLE UNDER THE DOMESTI C LAW BUT THERE IS A PROVISION IN THE TREATY TO EXEMPT TH E TRANSACTION OR REDUCE THE RIGOR OF TAXATION TO THE BENEFIT OF THE NON-RESIDENT, THE PROVISIONS OF THE TREATY O VERRIDE THE PROVISIONS OF THE DOMESTIC LAW. THESE FUNDA MENTAL 31 PRINCIPLES ARE WELL-SETTLED BY THE JUDGMENTS OF THE SUPREME COURT IN P.V.A.L. KULANDAGAN CHETTIAR (2008 ) 267 ITR 654 (SC) AND AZADI BACHAO ANDALON (2003) 26 3 ITR 706 (SC). 38. ON GOING THROUGH THE RELEVANT ARTICLE PROVIDED IN THE DTAA, WE OBSERVE THAT INVARIABLY IN ALL THE DTAAS TO WHICH WE ARE CONCERNED, THE INCOME IS TAXABLE IN INDIA 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 EXISTENCE OF ANY PERMANENT ESTABLISHMENT IN INDIA H AS BEEN BROUGHT ON RECORD BY ANY OF THE LOWER AUTHORIT IES OR EVEN BY THE LEARNED D.R. AT THE TIME OF HEARING BEF ORE US. IN VIEW OF THIS, THE POSITION EMERGES THAT THE PAYM ENT TO A PERSON WHO HAPPENS TO BE A RESIDENT OF COUNTRY WITH WHOM INDIA HAS ENTERED INTO DTAA AND WHERE THE BUSI NESS PROFITS ARE TAXED ONLY IN THE COUNTRY AND DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA, THE SAID PAYMENTS ARE NOT CHARGEABLE TO TAX IN INDIA. IN VIEW OF THIS AL SO, EVEN AS PER DTAA, THE INCOME BEING NOT EXIGIBLE TO TAX I N INDIA IN THE HANDS OF NON-RESIDENT ENTITY, THE ASSESSEE I S NOT REQUIRED TO DEDUCT TAX AT SOURCE. THEREFORE, THE PROVISIONS 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 32 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 OBSERVE THAT HE HAS NOT GIVEN ANY FINDING IN THIS R EGARD, EVEN THE ASSESSING OFFICER IN HIS ORDER HAS NOT GIV EN ANY CATEGORICAL FINDING HOW THE PAYMENT MADE TO IMCS IS NOT COMPARABLE TO THE COMMISSION PAYMENT MADE TO STEVEN INTERNATIONAL. HE HAS JUST TRIED TO COMPARE THE SE RVICES RENDERED BY THE STEVEN INTERNATIONAL INVOLVING THE POTENTIAL BUSINESS SEGMENT, ORGANIZING MEETINGS AND LIAISON WORKS WITH PROSPECTIVE CLIENTS, FACILITATIO N AND REDRESSEL AND SETTLEMENT OF DISPUTES. FURTHER REFE RRING TO THE SERVICES RENDERED BY IMCS, HE EXPLAINED THAT TH ESE ARE CONCERNED WITH THE INTRODUCTION AND ASSISTANCE IN EXECUTION OF AN AGREEMENT AND ASSISTING IN SELLING SERVICES AND FACILITATING RELATIONSHIP WITH AUGUSTA STAFF. IN THIS BACKGROUND, HE STATED THAT THE SERVICES PROVIDED BY IMCS ARE NOT COMMENSURATE WITH THE COMMISSION. THEREFOR E, THE SERVICES ARE NOT BEING RENDERED FOR THE PURPOSE OF BUSINESS AND PROFESSION. THERE IS NO DISPUTE WITH RESPECT TO THE FACT THAT BOTH IMCS AND STEVEN INTERNATIONAL ARE NOT RELATED PARTIES OF THE ASSESSEE COMPANY. ANALY SIS OF 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 33 CASE THAT THE PAYMENT MADE TO IMCS ARE NOT COMMENSURATE 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 PURPOS E OF INCOME TAX ACT CANNOT QUESTION THE REASONABLENESS O F ANY SUCH PAYMENT MADE BY THE ASSESSEE. THEREFORE, WE D O NOT FIND THIS ALLEGATION OF THE ASSESSING OFFICER BACKE D BY ANY LEGAL PROVISION. INCIDENTALLY, WE WOULD LIKE TO ME NTION HERE THAT EVEN IF THE ASSESSING OFFICER WANTS TO AS SESS THE REASONABLENESS OF ANY PAYMENT MADE TO ANY SISTER CO NCERN OF THE ASSESSEE, THERE IS NO DOUBT TO THE FACT THAT THE ASSESSEE HAS DONE DETAILED TRANSFER PRICING STUDY I N THE RELEVANT ASSESSMENT YEAR, WHICH WAS SUBJECT TO THE REFERENCE UNDER SECTION 92CA(1) OF THE ACT TO THE T RANSFER PRICING OFFICER AND THE TRANSFER PRICING OFFICER HA S SUGGESTED NO ADJUSTMENT WITH RESPECT TO THE ARMS L ENGTH PRICE ON THE TRANSACTION BETWEEN THE ASSESSEE AND I TS 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 MENTIONE D AND EVEN NOWHERE SHOWED HIS SUSPICION AS REGARDS TH E PAYMENT BEING IN THE NATURE OF FEES FOR TECHNICAL SERVICES 34 THAT IS THE REASON WHY AT THE ASSESSMENT STAGE, THE ASSESSEE WAS NEVER CONFRONTED BY ANY QUERY WITH RES PECT TO THE PAYMENTS BEING THAT OF THE NATURE OF FEES F OR TECHNICAL SERVICES. THE CONTENTION OF THE LEARNED D.R. BEFORE US WAS THAT THE LEARNED CIT (APPEALS) HAS HE LD THESE PAYMENTS TO BE IN THE NATURE OF FEES FOR TEC HNICAL SERVICES. WE HAVE VERY CAREFULLY PERUSED THE ORDE R OF THE LEARNED CIT (APPEALS). ONLY AT TWO PLACES IN HIS O RDER 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 FE ES FOR 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: 35 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). 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 36 FACT, HE ENJOYS THE POWERS OF ENHANCEMENT ALSO. THEREFORE, IN CASE HE HAD ANY APPREHENSION AS TO TH E REAL NATURE OF THE PAYMENT, WHO STOPPED HIM TO CARRY OUT FURTHER INVESTIGATIONS IN THIS REGARD? IN THE ABS ENCE OF ANY FINDING GIVEN BY THE ASSESSING OFFICER OR THE C IT (APPEALS) IN THIS REGARD, WE ARE NOT INCLINED TO EX AMINE THE CASE OF THE ASSESSEE WITH A VIEW WHETHER THE PA YMENTS ARE IN 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 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 PRESUMPTION EXISTS IN THE INCOME TAX ACT. NO SUCH 37 PRESUMPTION CAN BE RAISED WITHOUT ANY BACKING MATER IAL OR EVIDENCE ON RECORD. THE ARGUMENT OF THE LEARNED D.R. THAT EVEN IF THE PROVISIONS OF DTAA ARE APPLIED, IN THE ABSENCE OF ANY SERVICES COMING OUT FROM THE EVIDENC ES, IT SHOULD BE PRESUMED THAT NON-RESIDENTS HAVE MADE AVAILABLE CERTAIN TECHNICAL SERVICES TO THE ASSESS EE, IS TOO FARFETCHED. WE ARE NOT INCLINED TO ENTERTAIN SUCH A PLEA AT THIS STAGE. IN VIEW OF THIS ALSO, WE HOLD THAT THE SERVICES RENDERED BY THE NON-RESIDENTS ARE NOT IN T HE NATURE OF TECHNICAL SERVICES, NO INCOME DEEMED TO H AVE ACCRUED TO THE NON-RESIDENT ENTITIES, THERE IS NO L IABILITY ON THE ASSESSEE TO DEDUCT TAX AT SOURCE ON SUCH PAY MENT. THEREFORE, THE PROVISIONS OF SECTION 40(A)(I) OF TH E 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. 46. THE NEXT QUESTION IS WITH RESPECT TO PAYMENTS MADE TO IMCS AMOUNTING TO RS.73,79,858/-, WHETHER ATTRACT THE PROVISION OF EXPLANATION 1 TO SECTION 3 7(1) OF THE ACT. IN THIS REGARD, NO CLEAR-CUT FINDING OF F ACT HAS BEEN ARRIVED AT BY ANY OF THE LOWER AUTHORITIES AS TO WHAT OFFENCE OR AN ACT PROHIBITED BY LAW HAS BEEN DONE B Y THE ASSESSEE. EVEN THE ASSESSING OFFICER HAS MADE JUST A CURSORY MENTION OF SOME SEARCH FROM CBI BEING CARRI ED 38 OUT AT THE DIRECTORS RESIDENCE ONLY. EVEN DURIN G THE COURSE OF HEARING BEFORE US, NO CLEAR FACTS WERE ST ATED IN THIS REGARD. IN VIEW OF ALL THIS, WE FIND IT PROPE R TO SEND THIS LIMITED ISSUE TO THE FILE OF THE ASSESSING OFF ICER TO GIVE A CLEAR FINDING AS TO WHETHER THE PROVISIONS O F EXPLANATION 1 TO SECTION 37(1) OF THE ACT ARE APPLI CABLE TO THE FACTS OF THE CASE OR NOT. THE ASSESSEE SHOULD BE GIVEN A PROPER OPPORTUNITY OF BEING HEARD IN THIS REGARD. WE WOULD LIKE TO CLARIFY HERE THAT THE OUTCOME OF THIS GROUND WILL NOT EFFECT OUR FINDINGS ON OTHER GROUNDS OF AP PEAL, AS THE ISSUE HERE IS THE ALLOWABILITY OF EXPENDITURE W HILE THE OTHER ISSUES ARE DISALLOWANCE OF EXPENDITURE IN VIE W OF THE PROVISION OF SECTION 40 (A)(I) OF THE ACT. GROUND NO.5 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSES. 47. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF MAY, 2016. SD/- SD/- (BHAVNESH SAINI) (RANO JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 24 TH MAY, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE D R. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 39 3.