INCOME TAX OFFICER,CORPORATE WARD-2(1), CHENNAI V. M/S. ESHAKTI,COM PRIVATE LIMITED, CHENNAI

ITA 528/CHNY/2022

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The case involves appeals by the Revenue against the orders of the CIT(A) which had deleted disallowances made by the Assessing Officer (AO) under Section 40(a)(i) of the Income Tax Act. The disallowances were related to reimbursements made by the assessee, M/s.ESHAKTI.COM Pvt. Limited, to its wholly owned subsidiary in the USA for professional and advertisement services. The primary contention was whether these payments constituted 'Fees for Technical Services' (FTS) and thus were subject to TDS under Section 195. The CIT(A) had ruled in favor of the assessee, leading to the Revenue's appeal.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134260 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2023
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-07-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 19-06-2022
• Other Referred Cases: GE India Technology Centre P. Ltd. vs. CIT (327 ITR 456)
• Laws Referred To: Income Tax Act, 1961, Indo-US DTAA
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Double taxation relief; Permanent establishment; TDS
• Section: 37; 143(3); 195

Judgement Text

आयकर अपीलीय अिधकरण “बी” ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, CHENNAI माननीय ी महावीर िसंह, उपा ! एवं माननीय ी मनोज कुमार अ&वाल ,लेखा सद) के सम!। BEFORE HON’BLE SHRI MAHAVIR SINGH, VP AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपील सं./ ITA No.528/Chny/2022 (िनधा*रण वष* / As sessment Year: 2014-15) & आयकरअपील सं./ ITA No.529/Chny/2022 (िनधा*रण वष* / As sessment Year: 2015-16) ITO Corporate Ward-2(1) Chennai. बनाम/ V s. M/s.ESHAKTI.COM Pvt. Limited 54/444, Capital Building, 3 rd floor, Anna Salai, Chennai-600 018. थायीलेखासं./जीआइआरसं./PAN/GIR No. A AAC E - 6772 -C (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ कीओरसे/ Appellant by : Shri S.Senthil Kumaran (CIT)-Ld.DR थ कीओरसे/Respondent by : Shri V.Ravichandran (FCA)- Ld. AR सुनवाईकीतारीख/Date of Hearing : 10-07-2023 घोषणाकीतारीख /Date of Pronouncement : 03-08-2023 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeals by Revenue for Assessment Years (AY) 2014-15 & 2015-16 arise out of separate orders of first appellate authority. Facts as well as issues are stated to be identical in both the years. The appeal for AY 2014-15 arises out of the order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 23-03-2023 in the matter of an assessment framed by Ld. 2 ITA Nos.528 & 529/Chny/2022 Assessing Officer [AO] u/s. 143(3) of the Act on 08-12-2016. The grounds taken by the revenue are as under: - 1. Whether the order of Ld. CIT(A, NFAC, is bad both in law and on facts and circumstances of the case. 2. Whether on the facts and circumstances of the case, the Ld. CIT (A) had erred in deleting the disallowance of Rs.5,70,58,802/- without appreciating the fact that there is no separate agreement between the assessee company and its non-- resident US subsidiary for reimbursement of expenses? 3. Whether on the facts and circumstances of the case, the order of Ld. CIT (A) was perverse while holding that the assessee has not failed to comply with the provisions of Section 195 of the Act without appreciating the facts of the case in their proper perspective? 4. Whether on the facts and circumstances of the case, the order of Ld. CIT (A) was perverse in deleting the disallowance u/s. 40(a)(i) on the pretext that there was no 'make available' clause for taxing the income of the service provider, ignoring the act that there was no agreement at all in the first instance between the assessee and the service provider for making any payment at all? 5. Whether the order of Ld. CIT(A) was contrary to facts and bad in law for not properly appreciating the truth that the payments by the assessee company resulted in accrual or arising of income in the hands of the non-resident US subsidiary within the ambit of 'fee for technical services' under section 9(1)(vii) of the Income Tax Act, 1961? 6. Whether the order of Ld. CIT(A) was contrary to facts and bad in law for not properly appreciating the truth that the payments by the assessee company resulted in accrual or arising of income in the hands of the non-resident US subsidiary within the ambit of 'fee for included services' under Article 12 of the Indo-US DTAA?” As is evident, the revenue is aggrieved by deletion of disallowance as made by Ld. AO for want of TDS u/s 40(a)(i). 2. The Ld. CIT-DR advanced argument to submit that the money was paid to wholly owned subsidiary (WOS) without deduction of tax at source. The assessee exercised complete control over the payee. The ld. CIT-DR submitted that no evidence for rendering of services was furnished and Ld. CIT(A) has merely gone by ‘make available’ clause. The LD. AR controverted the arguments of revenue and supported impugned order. Our attention has been drawn to various supporting documents as placed on record. Having heard rival submissions and 3 ITA Nos.528 & 529/Chny/2022 upon perusal of case records, the appeal is disposed-off as under. The assessee being resident corporate assessee is stated to be engaged in selling designer clothes. Proceedings before lower authorities 3. The impugned disallowance u/s 40(a)(i) stem from the fact that the assessee reimbursed professional charges of Rs.164.04 Lacs and advertisement expenses of Rs.349.19 Lacs to its wholly owned subsidiary (WOS) situated in USA. No tax at source (TDS) was deducted on the ground that the said entity had no permanent establishment (PE) in India and the provisions of Sec.195 would not apply. However, rejecting the same, Ld. AO disallowed the same u/s 40(a)(i). 4. During appellate proceedings, it transpired that the assessee run e- commerce website (eshakti.com) and sells apparels mainly to customers based in USA. In order to promote sales, the assessee has set up wholly owned subsidiary (WOS) in USA. The subsidiary would collect money from customers, take delivery of goods returned, refund the money and also advertise the products of the assessee besides operating as customer service center. The WOS did not carry out any other activity for any other party. The expenses so incurred were stated to be reimbursed by the assessee. The nature of reimbursements has been tabulated in para-4 of the impugned order. It was also submitted that WOS did not have HR set up in USA and it employed people on a contract for service basis. Therefore, the reimbursements were categorized as professional services. The assessee submitted that all the expenses were incurred by WOS outside India and all expenses were related to selling the assessee’s products outside India. There was no mark-up charged by 4 ITA Nos.528 & 529/Chny/2022 the WOS. Hence, there was no requirement of TDS in such a case. In any case, WOS was resident in USA and such reimbursement would constitute business income for AE which would not be subject to tax in India in terms of Article 7 read with Article 5 of Double Taxation Avoidance Treaty between India and USA. Reliance was placed inter- alia, on the decision of Hon’ble Apex Court in GE India Technology Centre P. Ltd. vs. CIT (327 ITR 456) to support the submissions that the income should be chargeable to tax for applicability of Sec.195. Since the expenses were incurred outside India on reimbursement basis without any mark-up, there was no requirement of TDS and disallowance so made by Ld. AO would not be justified. In the alternative, it was submitted that the amounts paid were in the nature of selling expenses and incurred upside India which would not be fees for technical services and therefore, Sec. 195 would have no application. The assessee further submitted that WOS was resident in USA and it did not have any PE in India. The income so earned would be business income not subject to tax in India as per Indo-US Treaty. 5. The assessee’ submissions and evidences were subjected to remand proceedings wherein Ld. AO maintained the stand taken in assessment order. In the remand report, Ld. AO rendered finding in each of the head. The marketing services rendered by Ms. Carmella Heverin, Ms. Usha Perdoor, M/s Retail Support Services Inc., 5WPR, Criteo were held to be fees for technical services. The payment made to facebook as well as selling commission paid to Amazon was held to be advertisement services which would not attract TDS. Regarding other payments made 5 ITA Nos.528 & 529/Chny/2022 to 5 entities, Ld. AO observed that there was no agreement or documentary evidences to prove that the services rendered by them were advertisement services. No evidence was submitted in support of payment made and the claim was not backed by bills / invoices. Similar observations were made with respect to few other payments. The assessee assailed the findings rendered by Ld. AO in the remand report. 6. Considering assessee’s submissions and the remand report, Ld. CIT(A) deleted the impugned disallowance by holding as under: - 11. I have carefully considered the AO's rationale for disallowance as gathered from the assessment order, the submission of the appellant, the contents of the remand report by the AO and the rejoinder to the same by the appellant. It is the contention of the AO that it is payment towards 'FTS' i.e., Fees for Technical Services to a US service provider and therefore it is liable to WHT under section 195. On the contrary, appellant denies the averments and maintains that it is only reimbursement. Irrespective of the case whether the payment to a NR service provider through the non- resident AE is on a cost-to-cost basis or on cost plus markup basis, the AO after having held the payments as FTS to a non-resident in USA, failed to interpret the relevant Article applicable for taxation of FTS and the conditions attached thereto as per lndo-USA DTAA. No case has been made out by the AO satisfying the prerequisite for 'make available' clause for taxing the income of the service provider in India that it is Fees for Technical services, while trying to hold the sum as chargeable to tax in India. It is also admitted that the non-resident has no permanent establishment. The reliance of the AO that the amendment to section 9 does not require the existence of PE and income is would still be deemed to accrue or arise in India does not overrule section 90(2) of the Act, as the provisions of the Act are subordinate to sovereign agreements entered into and therefore it cannot be given a go by where the right to tax is given to a contracting party to the exclusion of the other and the right to tax is subject to fulfilment of the make available clause. The tax jurisprudence on this issue as made out by the appellant as part of written submission has already been reproduced earlier and therefore, there is no need to make a repetition in this adjudication part once again. In the light of the above, the host of judicial precedents relied upon by the appellant and the interpretation of the provisions of the Act and the IndIa USA DTAA, guide me to hold that the disallowance made u/s 40 (a)(i) for not withholding tax is directed to be deleted and this ground is also allowed in favour of the appellant. In the result, the Appeal is Allowed. Evidently, the Ld. CIT(A) has primarily gone by the fact that the requirement that technical services were ‘made available’ were not 6 ITA Nos.528 & 529/Chny/2022 satisfied. Accordingly, relying on India US DTAA, the impugned additions were deleted. Aggrieved, the revenue is in further appeal before us. Our findings and Adjudication 7. From the fact, it emerges that the assessee has reimbursed certain payments to its WOS which is situated in USA. The WOS is stated to have incurred cost on behalf of the assessee without any mark-up on cost-to-cost basis. These payments include marketing services rendered by two individuals. The assessee has not furnished any agreement or documentary evidences with respect to these two individuals. The Ld. AO has also rendered finding that the services rendered by these persons was technical in nature. M/s Retail Support Services is providing customer care services for which no agreement or documentary evidences could be furnished by the assessee to prove that the same was not technical in nature. The 5WPR is public relation agency in USA wherein the situation is similar. No bills could be adduced for this entity and Ld. AO observed that this expenditure needs to be disallowed u/s 37 also. The services rendered by Criteo have been held to be technical in nature. The assessee could not produce any agreement or documentary evidences with respect to 5 entities to prove that the services were purely advertisement services. No evidence was furnished in support of payment made by WOS. No evidences could be furnished with respect to the other entities also. Finally, Ld. AO observed that except for reimbursement of payment made to Facebook and Amazon, all the other expenses were indirect payment for FTS and disallowance u/s 40(a)(i) would be justified. Apparently, the assessee has controverted the remand report which has been extracted in the impugned order. 7 ITA Nos.528 & 529/Chny/2022 8. Upon perusal of impugned order, it could be seen that ld. CIT(A) has merely gone by the fact that ‘make available’ clause was not satisfied. However, considering the nature of services as enumerated in the remand report, ‘make available’ clause may not be even applicable for most of the services. The claim of the assessee hinges on the fact that the services were not technical in nature and the same were reimbursed on cost-to-cost basis. However, sufficient evidences could not be adduced by the assessee, in this regard, during remand proceedings. Accordingly, the adjudication in the impugned order could not be upheld. The impugned order, to the extent, disallowance has been deleted, is set-aside. The issue is restored back to the file of Ld. CIT(A) for passing a speaking order afresh considering the nature of services in the light of evidences / documentary evidences furnished by the assessee. The assessee is directed to substantiate its claim. The appeal stand allowed for statistical purposes. 9. It is admitted position that the facts as well as issues in AY 2015-16 are quite identical. Therefore, our adjudication as in AY 2014-15 shall, mutatis mutandis, apply to this year also. 10. Both the appeals stand allowed for statistical purposes. Order pronounced on 03 rd August, 2023. Sd/- Sd/- (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा45 / VICE PRESIDENT लेखा सद7 / ACCOUNTANT MEMBER चे9ई Chennai; िदनांक Dated : 03-08-2023 DS आदेशकीAितिलिपअ&ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. थ /Respondent 3. आयकरआयुA/CIT 4. िवभागीय ितिनिध/DR 5. गाडFफाईल/GF