Appeal details
Counselvise Citation
[2013] 120 COUNSELVISE.COM (IT) 4043 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 9 month(s) 8 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-07-2013
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
L
Next Hearing Date
22-07-2013
Assessment Year
2008-2009
Appeal Filed On
18-10-2011
Judgement Text
, IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL L LL L BENCH, BENCH, BENCH, BENCH, MUMBAI MUMBAI MUMBAI MUMBAI , . , . , ! ! ! ! '# '# '# '# BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM & & & & SHRI SHRI SHRI SHRI D. K D. K D. K D. KARUNAKAR ARUNAKAR ARUNAKAR ARUNAKAR RAO RAO RAO RAO, ,, , AM AM AM AM ./ I.T.A. NO. I.T.A. NO. I.T.A. NO. I.T.A. NO. 7044/MUM/2011 7044/MUM/2011 7044/MUM/2011 7044/MUM/2011 ( $% $% $% $% & & & & / ASSESSMENT YEAR : 2008-09) ITO 9(2)(2), R. NO. 225, AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400020 % % % % / VS. M/S PUBMATIC INDIA PVT. LTD. (FORMERLY KNOWN AS KOMLI MEDIA PVT. LTD.) KUBER NIWAS, GROUND FLOOR, BUNGALOW NO. 2, MEERA BAUG ROAD, SANTACRUZ (W), MUMBAI-400054 #' ! ./ ( ./ PAN/GIR NO. : AADCK0024A ( ') / APPELLANT APPELLANT APPELLANT APPELLANT) .. ( *+') / RESPONDENT RESPONDENT RESPONDENT RESPONDENT) ') ') ') ') , , , , / APPELLANT BY : SHRI NARENDER KUMAR *+') *+') *+') *+') - -- - , , , , /RESPONDENT BY : SHRI NITESH JOSHI % % % % - -- - .! .! .! .! / DT. OF HEARING : 22 ND JULY 2013 /0& /0& /0& /0& - -- -.! .! .! .! / DT.OFPRONOUNCEMENT: 26 TH JULY 2013 ' 1 / O R D E R PER : , . . / VIJAY PAL RAO, JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 18.8.2011 OF COMMISSIONER OF INCOME TAX(APPEALS) FO R THE ASSESSMENT YEAR 2008-09. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN THIS APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCES OF PURCHASES OF ONLINE ADVERTISEMENT SPACE AMOUNTING OF ` 2,68,28,859/- WITHIN THE MEANING OF SECTION 40(A)(I)(A) OF THE ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOU NT OF THE ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 2 DISALLOWANCE OF THE REIMBURSEMENT OF EXPENDITURE AM OUNTING OF ` 24,94,631/- WITHIN THE MEANING OF SECTION 40(A)(I)( A) OF THE ACT. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVI DING SERVICES OF INTERNET ADVERTISING AND MARKETING SERVICES INCLUDI NG E-COMMERCE TRANSACTIONS AND PROVISION OF RELATED TECHNOLOGIES, SYSTEMS, CONSULTANCY, DEVICES, STRATEGIES, SOLUTIONS MEDIA, CHANNELS AND PRODUCTS IN THE NATIONAL AND GLOBAL DOMAINS. THE ASSESSEE HAS SHOWN PURCHASE S OF ONLINE ADVERTISEMENT SPACE OF ` 2,68,28,859/- AND REIMBURS EMENT OF EXPENSES FOR USE OF SOFTWARE LICENSE OF ` 24,94,631/- TO M/S KOMLI INC US WHICH IS THE HOLDING COMPANY OF THE ASSESSEE AND THEREFORE A N ASSOCIATED ENTERPRISES. THE ASSESSEE STATED BEFORE THE AO THAT THE PARENT COMPANY NAMELY, M/S KOMLI INC US DOES NOT HAVE A PERMANENT ESTABLISHMENT (PE) IN INDIA. THE REMITTANCE WAS TOWARDS THE INVOICES R AISED BY THE PARENT COMPANY WHICH WAS DOING INDEPENDENT BUSINESS. THE R EMITTANCE WAS TOWARDS THE BUSINESS INCOME OF PARENT COMPANY AND A S PER ARTICLE 7 OF INDO-US DTAA BUSINESS INCOME OF NON-RESIDENT COMPAN Y IS TAXABLE IN INDIA ONLY IF IT HAS A PE IN INDIA. THUS, IT WAS CO NTENDED BY THE ASSESSEE THAT IN THE ABSENCE OF PE IN INDIA THE BUSINESS INC OME OF PARENT COMPANY IS NOT TAXABLE IN INDIA AND THEREFORE, THERE WAS NO QUESTION OF WITHHOLDING OF TAX IN RESPECT OF REMITTANCE MADE BY THE ASSESSE E. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HAS HELD THAT THE ASSESSEE IS A PERMANENT ESTABLISHMENT OF ITS PARENT COMPANY M/S K OMLI INC US IN INDIA THROUGH WHICH THE PARENT COMPANY IS DOING ITS BUSIN ESS. THE AOS FINDING ARE BASED ON THE VARIOUS REASONS RECORDED BY THE AO IN PARA 9.3 OF THE ASSESSMENT ORDER BRIEFLY STATED (I) ONE OF THE DIRE CTORS IS COMMON IN BOTH ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 3 COMPANIES (II) BOTH ARE ENGAGED IN SIMILAR KIND OF BUSINESS ACTIVITIES (III) THE PARENT COMPANYS SHARE HOLDING IS MORE THAN 99% IN THE ASSESSEE COMPANY (IV) INCOME ACCRUED TO THE US COMPANY U/S 5 OF THE ACT (V) THE US COMPANY HAD A PE IN INDIA UNDER ARTICLE 7 DTAA ( VI) THE ASSESSEE ACTED AS A AGENCY PE FOR US COMPANY AS PER ARTICLE 5(4) OF DTAA (VII) THE ASSESSEE IS AN INSTALLATION PE IN INDIA UNDER ARTIC LE 5(2)(K) OF DTAA (VIII) THE ASSESSEE HAS ALMOST ALL CLIENTELE BASED IN INDI A (IX) THE CERTIFICATE ISSUED BY THE CA FOR REMITTANCE OF EXPENSES IN FORE IGN EXCHANGE WAS WITHOUT OBTAINING PRIOR APPROVAL U/S 195(2) (X) THE ASSESSEE IS A AGENCY PE AS THE PARENT COMPANY IS DEPENDENT ON ASSESSEE F OR TRADING OPERATIONS (XI) THE ASSESSEE HAS NOT FURNISHED ANY AGREEMENT WITH ITS AE (XII) RELIED UPON THE DECISION OF THIS TRIBUNAL IN CASE OF SET SINGAPORE 106 ITD 175 (XIII) PLACED RELIANCE ON THE AMENDED EXPLA NATION TO SECTION 9(2) OF THE I.T ACT (XIV) THE SOURCE OF INCOME OF THE US COMPANY LIES IN INDIA (XV) THE DECISIONS OF HONBLE SUPREME COURT IN CASE OF MORGAN STANELY IN VIEW OF THE AO WAS DISTINCTIONABLE. ACCORDINGLY, TH E AO TREATED THE ASSESSEE AS PE OF M/S KOMLI INC US AND HELD THAT TH E ASSESSEE WAS REQUIRED TO WITHHOLD THE TAX IN MAKING THE PAYMENT TO ITS AE AND CONSEQUENTLY THE EXPENDITURE CLAIM TOWARDS PURCHASE OF ONLINE SPACE OF ` 2,68,28,859/- AND REIMBURSEMENT EXPENSES FOR USE OF SOFTWARE LICENSE OF ` 24,94,631/- WAS DISALLOWED U/S 40(A) OF THE INCOM E TAX ACT. ON APPEAL, THE CIT(A) DELETED THE ADDITION BY HOLDING THAT THE ASSESSEE AND PARENT COMPANY ARE INDEPENDENT PARTY TRANSACTING ON ARMS LENGTH AND THEREFORE THE ASSESSEE DOES NOT CONSTITUTE PE TO M/ S KOMLI INC US. AS REGARDS THE REIMBURSEMENT OF EXPENSES FOR USE OF SO FTWARE LICENSE, APART ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 4 FROM HOLDING THAT THE ASSESSEE DOES NOT CONSTITUTE PE OF ITS PARENT COMPANY, THE LD. CIT(A) HELD THAT THE SAID PAYMENT WAS PURE REIMBURSEMENT AND WOULD NOT CONSTITUTE A REWARD OR COMPENSATION PAID FOR THE SERVICE RENDERED. ACCORDINGLY, THE CIT(A) H ELD THAT THERE WAS NO REQUIREMENT AS PER LAW TO DEDUCT TAX U/S 195 OF INC OME TAX ACT. 4. BEFORE US THE LD. DR HAS SUBMITTED THAT THE AO H AS MADE OUT VARIOUS ASPECTS IN SUPPORT OF ITS FINDING THAT THE ASSESSEE CONSTITUTES PE TO M/S KOMLI INC US. THEREFORE AS FAR AS THE GROUND NO. 1 OF THE REVENUES APPEAL IN RESPECT OF DISALLOWANCE OF EXPENDITURE TO WARDS PURCHASE OF ONLINE ADVERTISEMENT SPACE IS CONCERNED, THE ASSESS EE HAS NOT FURNISHED A COPY OF THE AGREEMENT WITH ITS AE DESPITE IT WAS SPECIFICALLY ASKED BY THE AO. HE HAS POINTED OUT THAT THE AO IN PARA 3.9( XI) AS POINTED OUT THAT THE ASSESSEES DENIAL OF HAVING ANY WRITTEN AGREEME NT WAS NOT FOUND CORRECT BECAUSE IN THE TRANSFER PRICING MEMORANDUM IT HAS BEEN SPECIFICALLY MENTIONED AND REFERRED IN PARA 3 OF PA GE NO. 16 THAT THE ASSESSEE IS HAVING AN ARRANGEMENT WITH ITS AE. THE LD. DR HAS SUBMITTED THAT IN THE ABSENCE OF THE COMPLETE FACTS REGARDING THE ARRANGEMENT BETWEEN THE ASSESSEE AND THE AE, THE ASSESSEE MAY B E DIRECTED TO FILE THE WRITTEN AGREEMENT FOR EXAMINATION AND VERIFICAT ION. HE HAS REFERRED ARTICLE 5 OF INDO-US, DTAA AND SUBMITTED THAT AS PE R PARAS 4 & 5 OF THE ARTICLE 5 THE ASSESSEE CONSTITUTES A PERMANENT ESTA BLISHMENT OF ITS AE BECAUSE THE ASSESSEE IS HABITUALLY DOING THE BUSINE SS ON BEHALF OF ITS AE. FURTHER THE ACTIVITY OF THE ASSESSEE ARE DEVOTED AL MOST WHOLLY ON BEHALF OF ITS AE AND TRANSACTION BETWEEN THE ASSESSEE AND THE AE ARE NOT MADE ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 5 UNDER ARMS LENGTH AS POINTED OUT BY THE ASSESSING OFFICER. HE HAS FURTHER SUBMITTED THAT THE ASSESSEE AND ITS AE ARE COMMONLY USING THE SERVER AND LICENCE FOR WHICH THE ASSESSEE HAS REMIT TED THE AMOUNT BEING REIMBURSEMENT OF EXPENSES. THUS, THE LD. DR HAS SUB MITTED ALL THESE FACTS AND CIRCUMSTANCES CLEARLY ESTABLISH THAT THE ASSESSEE CONSTITUTE PE TO ITS ASSOCIATED ENTERPRISES (AE). 5. AS REGARDS THE ISSUE RAISED IN GROUND NO. 2 THE LD. DR HAS SUBMITTED THAT WHEN THE PAYMENT WAS MADE FOR COMMON USE OF SOFTWARE LICENCE THEN IT CANNOT BE A PURE REIMBURSEMENT BECA USE THE PAYMENT WAS ULTIMATELY MADE TO THE THIRD PARTY AND THE ASSESSEE AS WELL AS ITS AE HAD SHARED THE COST FOR THIRD PARTY SERVER PLATFORM AS WELL AS LICENCE. HE HAS REFERRED PARA 5.3.1 OF CIT(A) AND SUBMITTED THAT TH E FACT HAS BEEN RECORDED BY THE CIT(A) THAT THE REIMBURSEMENT PAYME NT WAS MADE TOWARDS THE COST OF A THIRD PARTY SERVER PLATFORM A ND THEREFORE, IT WAS A COST SHARING ARRANGEMENT. HE HAS RELIED UPON THE DE CISION OF THIS TRIBUNAL DATED 18.5.2012 IN CASE OF ACIT VS FIRST ADVANTAGE PVT. LTD. IN ITA NO. 3029 & 3033/M/2010 AND SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL BY GIVING A FINDING THAT TH E ASSESSEE HAS ROUTED ITS PURCHASES THROUGH ITS AE AND SUCH ARRANGEMENT C ANNOT BE CALLED AS REIMBURSEMENT OF EXPENSES. 6. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THAT THE ASSESSEE HAS CATEGORICALLY STATED BEFORE THE AO THAT THERE IS NO WRITTEN AGREEMENT WITH ITS AE. HE HAS REFERRED THE LETTER DATED 23.11.2010 FILED BEFORE THE AO AND SUBMITTED THAT THE ASSESSEE HAS GIVEN A SPECIFIC RE PLY TO THE QUERY OF THE ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 6 AO THAT THERE IS NO WRITTEN AGREEMENT WITH THE PARE NT COMPANY. HE HAS FURTHER SUBMITTED THAT ARRANGEMENT BETWEEN THE ASSE SSEE AND THE PARENT COMPANY ARE PURE INDEPENDENT BUSINESS TRANSACTIONS. BOTH THE ASSESSEE AND THE PARENT COMPANY ARE ENGAGED IN THE SIMILAR B USINESS ACTIVITY PROVIDING SPACE FOR INTERNET ADVERTISEMENT TO ITS C LIENT AND WHEN A WEBSITE OWNED BY AN INDIAN ENTITY THE ASSESSEE WILL DIRECTLY GET IN TOUCH WITH THE CONCERNED INDEPENDENT WEBSITE OWNER TO BOO K APPROPRIATE ADVERTISEMENT SPACE ON THE SAID WEBSITE BUT IF THE CLIENTS DESIRE TO PLACE THEIR ADVERTISEMENT OVER A FOREIGN WEBSITE, IN SUCH CASE THE ASSESSEE WOULD GET IN TOUCH WITH ITS PARENT COMPANY IN US WH ICH IN TURN WOULD GET IN TOUCH WITH THE FOREIGN WEBSITE OWNER OR RELEVANT FOREIGN INTERMEDIARY TO BOOK ADVERTISEMENT SPACE. THEREAFTER THE PARENT COMPANY WOULD SELL THE SPACE ON THE FOREIGN WEBSITE TO THE ASSESSEE WH ICH IN TURN IS PROVIDED TO THE CLIENT. THE REVERSE PROCEDURE IS FOLLOWED, W HEN THE PARENT COMPANY INTENDS TO BOOK AN ADVERTISEMENT SPACE ON INDIAN WE BSITES FOR ITS OVERSEAS CLIENTS. HE HAS POINTED OUT THAT WHEN THE ASSESSEE PLACE ORDER TO ITS PARENT COMPANY THE PARENT COMPANY BOOKS SPAC E ON RELEVANT FOREIGN WEBSITE AND THEN SALES SPACE TO THE ASSESSE E AT COST PLUS 33.33%. THE ASSESSEE IN TURN SELLS THE SAID SPACE TO ITS IN DIAN CLIENT AT COST PLUS PROFIT, THUS ALL TRANSACTION ON PRINCIPLE TO PRINCI PLE BASIS. THE LD. AR HAS SUBMITTED THAT THE PARENT COMPANY HAS NO CUSTOMERS BASED IN INDIA AND ALL CUSTOMERS IN INDIA ARE OWNED BY THE ASSESSEE. T HE BUSINESS OF THE ASSESSEE IS DISTINCT AND SEPARATE FROM THE BUSINESS CARRIED OUT BY THE PARENT COMPANY. THE ASSESSEE CATERS TO INDIAN CLIEN TS WHEREAS THE PARENT COMPANY CATERS SOLELY OUTSIDE INDIA AND GENERALLY I N USA. THEREFORE, SUCH ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 7 AN ARRANGEMENT OF PURE BUSINESS TRANSACTIONS DOES N OT CONSTITUTE THE ASSESSEE AS A PE OF ITS PARENT COMPANY. THE LD. AR HAS FURTHER CONTENDED THAT WHEN THE ASSESSEE IS OFFERING INCOME ON THE TR ANSACTIONS OF PROVIDING INTERNET SPACE FOR ADVERTISEMENT TO ITS CLIENT THEN HOW IT CAN BE A TRANSACTION CARRIED OUT BY THE ASSESSEE ON BEHALF O F ITS PARENT COMPANY. IF THE ASSESSEE IS AGENCY PE THEN THE INCOME FROM THE BUSINESS CONDUCTED BY THE ASSESSEE HAS TO BE ASSESSED IN THE HAND OF T HE PARENT COMPANY AND NOT IN THE HAND OF THE ASSESSEE. HE HAS SUBMITT ED THAT THE REVENUE OF THE ASSESSEE IN THE TRANSACTIONS THROUGH ITS PARENT COMPANY IS 1.69% FOR THE ASSESSMENT YEAR 2007-08, 32.69% FOR THE ASSESSM ENT YEAR UNDER CONSIDERATION AND THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE IS DOING ENTIRE BUSINESS OR ALMOST ENTIRE BUSINESS THROUGH I TS AE/PARENT COMPANY. THE LD. AR HAS CONTENDED THAT THE ASSESSEE DOES NOT FALL UNDER ANY OF THE SITUATIONS AS MENTIONED IN PARAGRAPH 4 & 5 OF THE A RTICLE 5 OF INDO-US DTAA BECAUSE THE ASSESSEE IS NOT DOING ANY BUSINESS ACTIVITY ON BEHALF OF ITS PARENT COMPANY. THE TRANSACTION BETWEEN THE ASS ESSEE AND PARENT COMPANY ARE PURE BUSINESS TRANSACTION WHEREIN THE S ALE AND PURCHASE ARE AT ARMS LENGTH PRICE. HE HAS REFERRED PARA 6 OF AR TICLE 5 OF THE DTAA AND SUBMITTED THAT MERELY A COMPANY RESIDENT OF CONTRAC TING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS RESIDENT OF OTH ER CONTRACTING STATE SHALL NOT ITSELF CONSTITUTE EITHER COMPANY PERMANEN T ESTABLISHMENT OF THE OTHER. HE HAS RELIED UPON THE DECISION OF HONBLE S UPREME COURT IN CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. VS CIT 327 ITR 456 AND SUBMITTED THAT THE CERTIFICATE U/S 195(2) IS NOT REQUIRED WHE N THE AMOUNT IS NOT ASSESSABLE IN INDIA IN THE HAND OF THE RECIPIENT. ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 8 7. HE HAS FURTHER SUBMITTED THAT THE AO HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN CASE OF SET SINGAPORE (SUPRA) WHIC H HAS BEEN REVERSE BY THE HONBLE HIGH COURT IN 307 ITR 205. THE ASSESSEE AND ITS PARENT COMPANY ARE ACTED ON PRINCIPLE TO PRINCIPLE BASIS, THEREFORE, IN ABSENCE OF PE IN INDIA THE AMOUNT IS NOT CHARGEABLE TO TAX IN INDIA AND ACCORDINGLY THERE IS NO REQUIREMENT OF WITHHOLDING OF TAX FOR S UCH REMITTANCE. 8. AS REGARDS THE GROUND NO. 2 THE LD. AR HAS SUBMI TTED THE ASSESSING OFFICER HAS NOT GIVEN A FINDING THAT THE REMITTANCE IS NOT TOWARDS REIMBURSEMENT OF EXPENSES THEREFORE AT THIS STAGE T HE REVENUE CANNOT BRING A NEW ISSUE WHICH HAS NOT BEEN DECIDED BY THE AO. HE HAS FURTHER SUBMITTED THAT EVEN OTHERWISE THE PAYMENT TOWARDS R EIMBURSEMENT OF EXPENSES IS NOT TAXABLE IN INDIA IN THE HAND OF THE THIRD PARTY IN ABSENCE OF PE. 9. IN REBUTTAL/REJOINDER THE LD. DR HAS SUBMITTED T HAT THE AO HAS NOT ACCEPTED THE CLAIM OF THE ASSESSEE BECAUSE THE EXPE NDITURE HAS BEEN DISALLOWED THEREFORE IT IS NOT A NEW ISSUE BUT ONE OF THE ASPECTS OF THE SAME SUBJECT MATTER/ISSUE. IN SUPPORT OF HIS CONTEN TION, HE HAS RELIED UPON THE DECISION OF THIS TRIBUNAL IN CASE OF LINK LETTER PVT. (LLP) VS ITO (INTERNATIONAL TAXATION) 40 SOT 51/ 9 ITR 217 AS WE LL AS DECISION IN CASE OF AIRLINES ROTABLES LTD., UK VS JDIT (INTERNATIONAL TAXATION). HE HAS FURTHER SUBMITTED THAT THE PAYMENT HAS BEEN MADE FOR USE OF LICENCE THEREFORE THIS IS IN THE NATURE OF ROYALTY AND ARTICLE 5 OF T HE DTAA HAS NOT APPLICABLE. ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 9 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WEL L AS RELEVANT MATERIAL ON RECORD. AS REGARDS GROUND NO. 1 REGARDI NG THE TRANSACTION OF PURCHASE OF SPACE ON FOREIGN WEBSITE THROUGH ITS PA RENT COMPANY WE FIND THAT THE SAME IS A TRANSACTION OF PURCHASE OF SPACE BY THE ASSESSEE IN WHICH THE PARENT COMPANY FIRST BOOK THE SPACE ON TH E FOREIGN WEBSITE AND THEN SALE THE SAME TO THE ASSESSEE AT COST PLUS 33. 33% PROFIT. THIS ARRANGEMENT ITSELF SHOWS THAT NEITHER OF THE PARTY IS ACTING OR DOING THE BUSINESS ACTIVITY ON BEHALF OF OTHER BUT THE TRANSA CTIONS ARE INDEPENDENT BUSINESS TRANSACTION WHEREIN THE RESPECTIVE MARGINS ARE RECOVER FROM EACH OTHER. MOREOVER, THE TRANSACTION OF PAYMENT TO WARDS PURCHASE OF SPACE ON FOREIGN WEBSITE BY THE ASSESSEE FOR ITS CL IENT IN ANY CASE DOES NOT CONSTITUTE A TRANSACTION CARRIED OUT BY THE ASS ESSEE ON BEHALF OF ITS PARENT COMPANY. THE ASSESSEE IS DOING THE BUSINESS TRANSACTION ON BEHALF OF ITS CLIENT AND OFFERING THE INCOME EARNED FROM T HE SAID BUSINESS TRANSACTION WHICH HAS BEEN ACCEPTED BY THE AO. THER EFORE NOTHING HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER TO SHOW THAT THE TRANSACTION OF PURCHASE OF SPACE ON FOREIGN WEBSITE BY THE ASSESSEE FROM ITS PARENT COMPANY CONSTITUTES THE ASSESSEE AS PE. THE AO HAS REFERRED VARIOUS REASONS FOR TREATING THE ASSESSEE AS PE OF THE PARENT COMPANY. THE FIRST REASON IS THAT ONE OF DIRECTORS IS COMMON IN BOTH THE COMPANIES. IN OUR VIEW MERELY BECAUSE ONE OF THE DIRECTORS IS COMMON IN BOTH THE COMPANIES DOES NOT CONSTITUTE THE ASSESSEE AS PE. E VEN OTHERWISE THE COMMON DIRECTOR AND HOLDING OF THE COMPANY BY ITSEL F DOES NOT CONSTITUTE EITHER COMPANY AS A PERMANENT ESTABLISHMENT OF THE OTHER AS PER PARA 6 OF ARTICLE 5OF INDO-US DTAA WHICH READS AS UNDER: ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 10 6. THE FACT THAT A COMPANY WHICH IS A RESIDENT OF A CONTRACTING STATE CONTROLS OR IS CONTROLLED BY A COMPANY WHICH IS A RESIDENT OF THE OTHER CONTRACTING STATE, OR WHICH CARRIES ON BU SINESS IN THAT OTHER STATE (WHETHER THROUGH A PERMANENT ESTABLISHM ENT OR OTHERWISE), SHALL NOT OF ITSELF CONSTITUTE EITHER C OMPANY A PERMANENT ESTABLISHMENT OF THE OTHER. ARTICLE 6- INCOME FORM IMMOVABLE PROPERTY (REAL PRO PERTY). 1. INCOME DERIVED BY A RESIDENT OF A CONTRACTING STATE FROM IMMOVABLE PROPERTY (REAL PROPERTY), INCLUDING INCOM E FROM AGRICULTURE OR FORESTRY, SITUATED IN THE OTHER CONT RACTING STATE MAY BE TAXED IN THAT OTHER STATE. 11. THE SIMILARITY OF BUSINESS ACTIVITY ALSO DOES N OT INDICATE THAT THE ASSESSEE IS ACTING OR DOING BUSINESS ON BEHALF OF I TS PARENT COMPANY SO THAT IT CONSTITUTE AS A AGENCY PE OF THE PARENT COM PANY. DOING BUSINESS WITH EACH OTHER ALSO A BUSINESS ACTIVITY BETWEEN TW O ENTITIES AND THEREFORE THE TRANSACTION OF BUSINESS BETWEEN THE T WO ASSOCIATED ENTERPRISES DOES NOT FALL UNDER THE CATEGORY THAT O NE IS ACTING ON BEHALF OF THE OTHER. THE ASSESSING OFFICER HAS ALSO ACCEPTED THIS FACT THAT THE ASSESSEES ALL CLIENTS ARE BASED IN INDIA WHICH SUP PORTS THE CASE OF THE ASSESSEE. THE CLIENTS OF THE ASSESSEE DO NOT DEAL W ITH THE PARENT COMPANY AND THE BUSINESS BETWEEN THE ASSESSEE AND T HE PARENT COMPANY ARE INDEPENDENT TRANSACTIONS. THOUGH THE AO HAS GIV EN THE REASON THAT THE INCOME ACCRUED TO THE PARENT COMPANY IS U/S 5 O F INCOME TAX ACT, HOWEVER, THERE IS NOTHING ON RECORD THAT THE SAID I NCOME HAS BEEN ASSESSED IN THE HAND OF THE PARENT COMPANY. APART F ROM THIS WE FIND FROM THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE THA T THERE IS NO WRITTEN AGREEMENT BETWEEN THE ASSESSEE AND THE PARENT COMPA NY. THE AO HAS REFERRED THE TRANSFER PRICING STUDY WHEREIN AN ARRA NGEMENT BETWEEN THE ASSESSEE AND AE HAS BEEN MENTIONED BUT THAT DOES NO T MEAN THAT THE ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 11 ASSESSEE HAVING A WRITTEN AGREEMENT. FURTHER THE AR RANGEMENT IS ONLY REGARDING THE TRANSACTION OF BUSINESS BETWEEN THE A SSESSEE AND THE PARENT COMPANY IN RESPECT OF PURCHASE OF SPACE ON W EBSITE THROUGH EACH OTHER. WHEN THE TRANSACTIONS ARE CLAIMED TO HAVE TA KEN PLACE AT ARMS LENGTH PRICE THEN THERE IS NO QUESTION OF THE ASSES SEE DOING THE BUSINESS ACTIVITY ON BEHALF OF ITS PARENT COMPANY. FURTHER T HE ASSESSEES BUSINESS ACTIVITY DOES NOT FALL UNDER THE PARAGRAPH 4 & 5 OF ARTICLE 5 AS RELIED UPON BY THE LD. DR BECAUSE THE ASSESSEE IS NOT ACTING AS AN AGENT ON BEHALF OF ITS PARENT COMPANY BUT THE TRANSACTION BETWEEN THE ASSESSEE AND THE PARENT COMPANY ARE INDEPENDENT BUSINESS BETWEEN TWO PARTIES. THE AMENDED EXPLANATION TO SECTION 9(2) REFERRED BY THE AO IS NOT RELEVANT FOR THE PURPOSE OF THE REMITTANCE IN QUESTION WHICH FAL LS U/S 9(1) OF INCOME TAX ACT AND THEREFORE THE SAID AMENDED EXPLANATION WOULD NOT HELP THE CASE OF THE ASSESSING OFFICER. THERE IS NOTHING ON RECORD TO SHOW THAT EITHER THE ASSESSEE OR ITS PARENT COMPANY IS PROVID ING THE SERVICE/GOODS TO THE CLIENTS OF THE OTHER PARTY THEREFORE WHEN NO NE OF THE PARTY IS DEALING WITH THE CLIENTS OF THE OTHER PARTY THEN TH E ACTIVITY BETWEEN THE ASSESSEE AND THE PARENT COMPANY ARE INDEPENDENT BUS INESS ACTIVITIES. 12. WE ARE IN AGREEMENT WITH THE CONTENTION OF THE LD. AR THAT THE RISK AND REWARD OF THE BUSINESS CARRIED OUT BY THE ASSES SEE IS BORN BY THE ASSESSEE WHICH ITSELF SHOWS THAT IT IS THE ASSESSEE WHO IS ANSWERABLE TO THE CUSTOMERS AND THEREFORE THE ACTIVITY OF PURCHAS E OF SPACE ON WEBSITE FROM THE PARENT COMPANY IS ON PRINCIPLE TO PRINCIPL E BASIS. THE AO ALSO REFERRED THE ARTICLE 5(2)(K) OF THE DTAA BUT THE SA ME IS NOT RELEVANT FOR ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 12 THE BUSINESS ACTIVITY CARRIED OUT BY THE ASSESSEE A ND ITS AE AS THE SAID PARAGRAPH 2(K) OF THE ARTICLE 5 IS RELEVANT FOR THE BUILDING OR CONSTRUCTION OR INSTALMENT ACTIVITIES. THUS, THE CASE OF THE ASS ESSEE AS FAR AS THE REMITTANCE TOWARDS PURCHASE OF SPACE ON FOREIGN WEB SITE FALLS UNDER ARTICLE 7 AND IN THE ABSENCE OF THE PE OF THE PAREN T COMPANY THE PROFIT ELEMENT IN THE SAID AMOUNT IS NOT TAXABLE IN INDIA. THEREFORE, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. (SUPRA) THE ASSESSEE IS NOT REQUIR ED TO DEDUCT TAX AT SOURCE IN RESPECT OF SAID AMOUNT WHICH IS TRADING R ECEIPT IN THE HAND OF THE RECIPIENT. ACCORDINGLY, WE DO NOT FIND ANY REAS ON TO INTERFERE WITH THE ORDER OF THIS CIT(A) QUA THIS ISSUE. 13. AS REGARDS GROUND NO. 2 THERE IS NO DISPUTE THA T THE PAYMENT WAS MADE TOWARDS SHARING OF COST FOR A THIRD PARTY SERV ER PLATFORM AND USE OF LICENCE. THE CIT(A) HAS DECIDED THIS ISSUE BY TREAT ING THE PAYMENT AS PURE REIMBURSEMENT OF COST TO ITS PARENT COMPANY WITHOUT HAVING ANY ELEMENT OF PROFIT. HOWEVER, WE FIND THAT THE PAYMENT IS TOW ARDS COST OF SERVER AND USE OF LICENCE BELONGS TO THIRD PARTY. THE ISSUE OF THE ASSESSEE CONSTITUTES PE OF ITS PARENT COMPANY BECOMES IRRELEVANT FOR ADJ UDICATION OF THIS GROUND BECAUSE THE PAYMENT HAS MADE TO THIRD PARTY THROUGH AE. THE ALTERNATIVE FINDING OF THE CIT(A) IN PARA 5.3.1 IS AS UNDER: 5.3.1 WITHOUT PREJUDICE TO THE ABOVE, THE APPELLA NT HAD MERELY RE3IMBURSED TO KOMIL INC, THE COST FOR A THIRD PART Y SERVER PLATFORM WITHOUT ANY MARK UP, WHICH IS ESSENTIAL TO RUN THE AD-NETWORK BUSINESS. IT IS IN THE NATURE OF COST SHARING ARRAN GEMENT. IN THE RECENT DECISION OF HONBLE MUMBAI INCOME TAX APPELL ATE TRIBUNAL IN THE CASE OF EMERSON PROCESS MANAGEMENT INDIA PVT . LTD. VS ACIT WHEREIN IT HAS BEEN HELD THAT PAYMENT WAS MADE FOR SERVICES ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 13 RENDERED TO THE ASSESSEE, THE TDS PROVISIONS WOULD BE APPLICABLE ONLY WHEN THE PAYMENT WAS MADE TO A PERSON RENDERI NG SERVICES OR TO A PERSON WITH WHOM THE CONTRACT OF SERVICES WAS ENTERED INTO. SINCE THE PAYMENT WAS MADE UNDER COST SHARING ARRANGEMENT, IT WAS TOWARDS REIMBUR4SEMENT OF EXPEN SES AND NOT TOWARDS SERVICES AND SO NOT LIABLE FOR TDS. THE JUD GEMENT OF HONBLE DELHI HIGH COURT CITED BY THE APPELLANT ALS O SUPPORTS THIS PROPOSITION. PURE REIMBURSEMENT WOULD NOT CONSTITUT E A REWARD OR COMPENSATION PAID FOR THE SERVICE RENDERED. AS SUCH , THERE WAS NO REQUIREMENT AS PER LAW TO DEDUCT TAX U/S 195. THE C ONSEQUENT DISALLOWANCE U/S 40(A)(I)(A) IS NOT PROPER AND THE SAME IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 14. WHEN THE PAYMENT IS NOT TOWARDS THE COST OF ANY SERVICES OR SUPPLY BY THE PARENT COMPANY TO THE ASSESSEE BUT THE PAYME NT IS TOWARDS THE USE OF SERVER PLATFORM AND LICENCE BELONGS TO THE T HIRD PARTY. THEREFORE, SUCH PAYMENT RELATES TO THE USE OF SERVER AND LICEN CE OF THIRD PARTY ROUTED THROUGH ITS PARENT COMPANY. WHEN THE ASSESSING OFFI CER HAS DISALLOWED THIS PAYMENT FOR NONE WITHHOLDING OF TAX BY INVOKIN G THE PROVISION OF SECTION 40(A)(I)(A) THEN WE DO NOT AGREE WITH THE C ONTENTION OF THE ASSESSEE THAT THIS IS A NEW ISSUE RAISED BY THE LD. DR. THE ISSUE HAS BEEN VERY WELL CONSIDERED AND DECIDED BY THE CIT(A) IN T HE ABOVE MENTIONED PARAGRAPH. HENCE, WE FIND THAT THIS ISSUE REQUIRES A PROPER VERIFICATION OF THE REAL NATURE OF PAYMENT AND WITHHOLDING OF TAX U /S 195. THE LD. DR HAS RELIED UPON THE DECISION OF THE CO-ORDINATE BENCH O F THIS TRIBUNAL IN CASE OF FIRST ADVANTAGE PVT. LTD. (SUPRA) WHEREIN THE TR IBUNAL HAS HELD THAT THE PURCHASE ROUTED THROUGH AE CANNOT BE CALLED AS REIM BURSEMENT OF EXPENSES. A SIMILAR VIEW HAS BEEN TAKEN BY THE TRIB UNAL IN CASE OF SKOL BREWERIES LTD. VS ACIT 142 ITD 49 IN PARA 18. SINCE THE RELEVANT MATERIAL HAS NOT BEEN PRODUCED BEFORE US TO ADJUDICATE ISSUE , THEREFORE IN THE INTEREST OF JUSTICE WE REMIT THIS ISSUE TO THE RECO RD OF THE ASSESSING OFFICER ITA NO. 7044/M/2011 PUBMATIC INDIA PVT. LTD. 14 TO DECIDE IT AFRESH AS PER LAW AFTER GIVING AN APPR OPRIATE OPPORTUNITY OF HEARING TO THE ASSESSEE. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH DAY OF JULY 2013 ' 1 - /0& ! 2 3'%4 26 TH 0 - 5 SD/- SD/- ( . ) ! '# (D. KARUNAKAR RAO) ACCOUNTANT MEMBER ( ) $ '# (VIJAY PAL RAO) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 26 TH JULY 2013 SUBODH COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI
