M/S.VA TECH WABAG LTD.,CHENNAI V. ACIT, CC-3(2), CHENNAI

ITA 2247/CHNY/2024

AI Insights

The case involves cross appeals by M/s. VA Tech Wabag Ltd and the Assistant Commissioner of Income Tax concerning disallowances related to warranty provisions and bad debts for the assessment years 2017-18, 2018-19, and 2020-21. The Tribunal examined whether the provisions made for warranties and the bad debts claimed were justifiably disallowed by the lower tax authorities. The Tribunal found that the warranty provisions were consistent with previous rulings and that the bad debts were rightly written off in the books, thus allowing the appeals of the assessee. The Tribunal also addressed the issue of TDS on payments made to a non-resident for services rendered outside India, concluding that no TDS was required as the income was not deemed to accrue in India.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 39313 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2018-2019
• Other Referred Cases: Rotork India Pvt Ltd vs. 314 ITR 62, TRF Limited vs. 323 ITR 397 SC, Ajappa Integrated Project Management Consultants P. Ltd. vs. 16 taxmann.com 269 (Chennai), Aqua Omega Services (P.) Ltd. vs. ACIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: P. VIJAIDEEPAN; IRS
• Assessee Lawyers: R. VIJAYARAGHAVAN
• Keywords: Set aside; Revenue expenditure; Business expenditure; Bad and doubtful debts; TDS; Deemed to accrue or arise in india; Double taxation relief; Non-deduction of tax; Residential status
• Section: 195; 48; 13; 191; 40(a)(ia); 9(1); 9(1); 9(1); 20

Judgement Text

" आयकर अपीलीय अिधकरण ‘ए’’’ Ɋायपीठ चेɄई मŐ। IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI माननीय ŵी मनु क ुमार िगįर, Ɋाियक सद˟ एवं माननीय ŵी जगदीश, लेखा सद˟ क े समƗ। BEFORE HON’BLE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND HON’BLE SHRI JAGADISH, ACCOUNTANT MEMBER आयकरअपील सं./ ITA Nos.2246, 2247 & 2248/Chny/2024 (िनधाŊरणवषŊ / Assessment Years: 2017-18, 2018-19 & 2020-2021) M/s. VA Tech Wabag Ltd, ‘Wabag House’’ No.17, 200 feet Redial Road, S. Kolathur (Near Kamakshi Hospital) Chennai 600 117 [PAN: AABCV 0225G] Vs. The Assistant Commissioner of Income Tax, Central Circle 3(2) Chennai. आयकरअपील सं./ ITA Nos.2256, 2257 & 2258/Chny/2024 (िनधाŊरणवषŊ / Assessment Years: 2017-18, 2018-19 & 2020-2021) The Assistant Commissioner of Income Tax, Central Circle 3(2) Chennai. vs M/s. VA Tech Wabag Ltd, ‘Wabag House’’ No.17, 200 feet Redial Road, S. Kolathur (Near Kamakshi Hospital) Chennai 600 117 (अपीलाथȸ/Appellant) (Ĥ×यथȸ/Respondent) Assessee by : Shri R. Vijayaraghavan, Advocate Department by : Shri. P. Vijaideepan, IRS, JCIT. सुनवाई कȧ तारȣख/Date of Hearing : 13.02.2025 घोषणा कȧ तारȣख /Date of Pronouncement : 24.02.2025 2 ITA No.2246,47,48,56,57,58/Chny/2024 आदेश / O R D E R MANU KUMAR GIRI (Judicial Member) These are cross appeals filed by the Assessee and the Revenue respectively for assessment years 2017-18, 2018-19 & 2020-21 against the separate orders of the Commissioner of Income Tax (Appeals) [‘CIT(A) in short] all dated 29.06.2024. First, we take up assessee appeal in ITA No.2246/Chny/2024 for assessment year 2017-2018 for adjudication:- 2. The sole grievance of the assessee in this appeal is with regard to ld. CIT(A) erred in disallowing Rs.6,15,07,670/- in respect of provision made for warranty expenses 3. Brief facts of the issue is that appellant is carrying out projects for water Treatment and Desalination. As soon a project is completed, even in the middle of the year, the company makes a provision for warranty for the project. During the balance period in the year, Appellant spends towards warranty expenditure, which is adjusted against the provision made on the completion of the project. The Balance amount is shown as the outstanding provision for warranty at the end of the year. For the assessment year under consideration assessee has made a gross provision of Rs.11,77,22,116/- out of which Rs.5,71,48,339/-was spent during the year. Balance Provision of Rs.6,15,07,670/-is claimed as provision for warranty. However, the Ld. 3 ITA No.2246,47,48,56,57,58/Chny/2024 Assessing Officer disallowed Rs.6,15,07,670/- on the reasoning that provision should be created on either scientific basis or reasonable provision based on past trends, and the same should be supported by proper calculation. Hence, the ld. Assessing Officer disallowed a sum of Rs.6,15,07,670/-. For AY 2018-19 the appellant provided gross provision of Rs.15,38,61,854/- out of which Rs.14,05,34,970/- utilized during year. The appellant claimed that net warranty of Rs.1,33,26,884/- is debited to profit and loss account was claimed as deduction. However, AO disallowed 50% of the net warranty claim as Rs. 66,63,440/-. Aggrieved, assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) confirmed the action of the ld. Assessing Officer. The assessee is in appeal before us. 4. At the outset, the ld. Counsel submitted that the same procedure was followed in the earlier years which were allowed by the Tribunal in ITA Nos 953/2015 and 807/2016 for AY 2010-11 and 2011-12 dated 31.8.2023 and in IT(TP)A Nos. 7,8,9/Chny/2021 for AY 2013-14, 2014- 15, 2015-16 and in ITA No.326/2021 for 2016-17 dated 16.10.2024. Hence, he pleaded the for the sake of judicial consistency, the orders of co-ordinate bench may kindly be followed in these years also. 5. Per contra, the ld.DR relied upon the orders of the lower authority. 4 ITA No.2246,47,48,56,57,58/Chny/2024 6. We heard the rival contention and perused the material on record. We found that the Co-ordinate Bench of the Tribunal in assessee’s own case for assessment years 2010-2011 and 2011-2012 dated 31.08.2023 in ITA No.953/Chny/2015 and ITA No.807/Chny/2016 has allowed the Balance Provision claimed as provision for warranty. ‘’4.0 Brief factual matrix of the case is that the assesse company is engaged in the business of processing of water and waste water treatment having overseas businesses also. It is engaged in business of design development, manufacture, sale, erection and commissioning of water treatment and sewerage plants on a turnkey basis. 5.0 The first issue that has been challenged by the revenue for AY2013-14, 2015-16 and 2016-17 is in respect of action of the Ld. CIT(A) in deleting the disallowance made by the Ld. AO in respect of provision for warranty. While adjudicating the matter AY-2013-14 is taken as lead year and the figures for that year are considered accordingly. 6.0 The Ld. Counsel for the assesse submitted that the assesse had made a claim for provision of warranty amounting to Rs.33.24 Crs. The net increase for provision in warranty during the previous years was noted at Rs.17.54 Lakhs. Before the Ld. AO the assesse had submitted that in its line of business of water treatment and sewerage plants on a turnkey basis it is required to give a warranty as per specific contracts executed with clients varying from 2 – 3 years in which it maintains the plant and attends to any repairs free of cost. Warranty commitments were integral part of the sale price. It was submitted that the warranty provisions need to be recognized because the appellant had present obligations as a result of past events. The Ld. AO relied upon Hon’ble Apex Court’s decision in the case of Rotork India Pvt Ltd 314 ITR 62 mandating that provision of warranty is a permitted expenditure only if based upon a scientific working. The Ld. AO did not concur with the assesse’s submissions and made addition of Rs.17,53,70,580/- . The Ld. Counsel further submitted that the Ld. First Appellate Authority deleted the addition after comprehensively examining the commercial viability for warranty expenses as well as relying upon a catena of decisions including one in the case of 314 ITR 62 Supra. Before us the Ld. Counsel for the assesse reiterated the submissions made before the Ld. CIT(A) viz vide ITA No.137 in assesse’s own case for AY-2012-13 the Ld. First Appellate Authority and also submitted that the DRP Chennai for AY2010-11 had held that provisions for warranty are allowable business expenditure. Additionally, the Ld. Counsel for the assesse invited our attention to the decision of Coordinate Bench of this tribunal in ITA No.953 / Chny / 2015 in assesse’s own case holding that the provision for royalty are an allowable business 5 ITA No.2246,47,48,56,57,58/Chny/2024 expenditure. The Ld. DR would like to make us believe in the merits of the addition made by the Ld. AO and submitted and that the decision of the CIT(A) is unwarranted. IT(TP)A No.7, 8, 9 & 7.0 We have heard rival submissions in the light of material available on records. We subscribe to the view that warranty is an integral part of a sale transaction. It primarily entails a quality assurance from a seller to the prospective buyer with a promise that in the event of any repair or after sales intervention the promised warranty obligations would step in. As regards creation of provisions for warranty the same are created because of inherent difficulty in objectively and precisely estimating as to how much warranty commitments would be invoked by buyers. Here comes the role of adopting a scientific and verified method for creating provisions as has been postulated in the decision of Hon’ble Apex Court in 314 ITR 62 Supra. Thus commercial expediency of allowing warranty including its scientifically calculated provisions is well recognized. We have also taken note of the decision of the Coordinate Bench of this Tribunal in ITA No.953 / Chny / 2015 in assesse’s own case holding as under:- “….. We have heard the rival contentions, perused the materials available on record. We noted the fact that the assessee is engaged in the business of design, develop, manufacture, sale, erection and commissioning of water treatment and sewerage plant. After completion of each and every project there will be a warranty period as per contract executed by the assessee with the client which may vary from two to three years. During this warranty period the assessee needs to maintain the plant and needs to replace the defective component at free of cost. The warranty became an integral part of the sale price and in other words the warranty stood attached to the sale price of the product. The Warranty provision had to be recognized because the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of the obligation. The assessee is being in the business of design, develop, execute, sale, erection and commissioning of water treatment and sewerage plant made a provision of warranty based scientific methods of accounting adopted by the assessee. This also depends upon historical trend and other related facts. The assessee has a contractual obligation to maintain the plant for a minimum period of two to three years depending upon the agreement and during this period the assessee has to freely replace the components if they became defective. This issue is settled by Hon'ble Supreme Court in the case of Rotok India Put. Ltd. (Supra), wherein it was held that warranty became an integral part of sale price, in other words, the warrant stood attached to the sale price of the product. Warranty provision had to be recognized because, the assessee had a present obligation as a result of past events resulting in an outflow of resources and a reliable estimate could be made of the amount of obligation. The value of contingent liability like warranty expenses, if properly 6 ITA No.2246,47,48,56,57,58/Chny/2024 ascertained and discounted on accrual basis, can be an item of deduction U/s.37 of the Act. Since the assessee estimated the warranty and made a provision on a scientific basis the assessee is eligible to claim as revenue expenditure. Furthermore, the assessee reverses any excess provision made in the earlier year(s) and hence, it is clear from this that there is no excess claim by the assessee with regard to warranty. Hence we find no infirmity in the claim of assessee and the same has rightly been allowed by DRP. We uphold the same. 20. Similar issue for provision for warranty is raised by assessee in its appeal in ITA No.807/CHNY/2016 for assessment year 2011-12 and the facts are exactly identical in this year also what was in assessment year 2010-11 in ITA No.953/CHNY/2015, taking a consistent view, we allow the provision for warranty in this year also. This issue of assessee's appeal is allowed….” 8.0 We have noted that the facts of the present case are identical to those in the above referred decision and no distinction has been made by the revenue. Therefore, in respectful compliance to the decision of Coordinate Bench of this Tribunal Supra, we hereby hold that the provisions for royalty are allowable business expenditure. Accordingly, we confirm the order of the Ld. CIT(A) in respect of deletion of addition of Rs.17,53,70,580/- on account of provision of warranty and dismiss the grounds of appeal raised by the revenue for AY-2013-14. 9.0 As regards ITA No. IT(TP)-9 / Chny/2021 for AY-2015-16 identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly the decision in AY-2013-14 Supra shall apply mutatis mutandis. In the result we dismiss the grounds of appeal raised by the revenue for AY-2015-16 also’. 7. We have noted that the facts of the present case are identical to those in the above referred orders of the Co-Ordinate Bench and no distinction has been made by the revenue. Therefore, in respectful following the orders of Coordinate Bench of this Tribunal Supra, we also hold that the provisions for royalty are allowable business expenditure. Accordingly, we delete the addition confirmed by the ld.CIT(A) in respect of deletion of addition of Rs.6,15,07,670/- on account of provision of warranty and allow the grounds of appeal raised by the assessee for AY-2017-18. 7 ITA No.2246,47,48,56,57,58/Chny/2024 8. As regards ITA No. IT No.2247/ Chny/2021 for AY-2018-19 identical grounds of appeal have been raised by the assessee. No changes, save variations in figures, in facts of the case have been reported. Accordingly the decision in AY-2017-18 Supra shall apply mutatis mutandis in this year also. In the result we allow the grounds of appeal raised by the assessee for AY-2018-19 also. 9. Next issue is with regard to Allowance of bad debts in ITA No.2256/Chny/2024 for AY 2017-18 (Revenue Appeal): The appellant claimed amount due from Indian Oil corporation amounting to Rs.13,02,094/- as bad debts stating that amounts are due from several years they are written off in books of company for the year. The amount totaling to Rs.13,02,094/- is withheld by IOL for failure to complete job in time, in case supply of products below agreed standards of quality, for not reaching agreed output etc by appellant and while finalizing assessment the AO has not allowed deduction of bad debts holding that dues from Govt agencies cannot be allowed as deduction. Before us, Assessee submitted that after 1.4.1989, provisions of section 36(1)(vii), dealing with deduction of bad debts written off has under gone a change. Thereafter, it is not necessary for an Assessee to establish that the debt has become bad for it to be allowed and section 36(1)(vii). It will be sufficient if the assessee rights of the debt in the books of account and claims it as a deduction. The Supreme Court in the case of TRF limited 323 ITR 397 SC, has 8 ITA No.2246,47,48,56,57,58/Chny/2024 explained the amendment to section 36(1) (vii). The CBDT has issued a circular number 12/2016 dated 30th may 2016 wherein they have clarified that claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act if it is written off as irrecoverable in the books of account of the Assessee for that previous year. That in such cases they have also instructed no appeals may henceforth be filed on this ground and appeal is already filed, if any, on this issue before various courts/ Tribunals may be withdrawn/not pressed upon. This will apply to write off of not only the entire debt but also if only a part of the debt is written off as irrecoverable. The ld. Counsel submitted that the co-ordinate bench in IT(TP)A Nos. 7,8,9/Chny/2021 for AY 2013-14, 2014-15, 2015-16 and in ITA No.326/2021 for 2016-17 dated 16.10.2024 has allowed the claim for bad debt. Hence, he pleaded that the amount written off by the Assessee as bad debts require to be allowed. 10. We have gone through the order of the co-ordinate bench of Tribunal in IT(TP)A Nos. 7,8,9/Chny/2021 for AY 2013-14, 2014-15, 2015-16 and in ITA No.326/2021 for 2016-17 dated 16.10.2024 which held as under: ‘’14.0 The next issue that has been raised by the revenue for AY-2014-15, 2015-16 and 2016-17 is in respect of action of the Ld. CIT(A) in deleting the disallowance made by the Ld. AO in respect of bad debts. The facts of all the three years have been reported to be identical, except for the fact that the government agencies are different, and hence for the purpose of this 9 ITA No.2246,47,48,56,57,58/Chny/2024 adjudication we take AY-2014-15 as the lead year. Conveying brief facts of the case, the Ld. Counsel for the assesse informed that during AY-2014-15 the assesse had claimed an amount of Rs. 25,84,686/- as deduction u/s 36(1)(vii) on account of bad debts. The impugned amount was in respect of write off of an amount due from M/s. IOC Limited (Panipat Refinery) a government body. The Ld. AO relying upon the decision of Hon’ble Jurisdictional High Court in the case of South India Surgical Company Limited, 287 ITR 62 and of Hon’ble Gujarat High Court in the case of Dhall Enterprises and Engineers 295 ITR 481 held that dues from government bodies cannot be allowed as bad debts. 15.0 The Ld. Counsel for the assesse submitted that the controversy surrounding claim of bad debts is settled by the ratio laid down by Hon’ble Apex Court in the case of M/s. TRF Limited and of Southern Technologies and that the impugned judgements are fully applicable in its case. The Ld. DR submitted that the decision taken by the Ld. AO placing reliance upon cited judgements in the assessment order is the correct interpretation in law. 16.0 We have heard rival submissions in the light of material available on records. The Ld. AO has made the impugned disallowance on the singular premise that the assesse has written off bad debts in respect of government agencies and because a government can never deemed to become insolvent, claim of bad debts cannot be allowed. Before the Ld. First Appellate Authority, the assesse had also taken a stand that in AY2009-10 his predecessor had allowed the claim of bad debts. The Ld. Counsel for the assesse also argued that the amounts claimed as bad debts were actually those which were deducted by the government agencies on account of performance-based evaluation and therefore the decision of Hon’ble Madras High Court and Gujarat High Court Supra is distinguished. We find force in the argument of the Ld. First Appellate Authority that it is not upto the Ld. AO to verify as to whether or not the debts have actually become bad. The law of bad debts prescribed u/s 36(1)(vii) clearly postulates that an amount which has been offered by a taxpayer as income in any preceding year and which has been claimed as bad debts in any succeeding years after passing of necessary entries into party’s account is to be allowed as bad debt in the year of its claim. Hon’ble Apex Court has also settled the controversy in the case of TRF Limited, wherein Hon’ble Apex Court has held that showing as income in earlier years and claiming as bad debts by passing appropriate entries in financial statements would suffice for allowance of claim. It has also been held that there is no need to establish recoverability of an amount for its allowance u/s 36(1)(vii). We also find that the Ld. CIT(A) has comprehensively analyzed the issue before adjudicating in favour of the assesse. Therefore, we feel that there is no case for any interference in his order at this stage. Accordingly, the order of the Ld. First Appellate Authority for AY-2014-15 is sustained and the ground of appeal raised by the revenue challenging the issue of bad debts is dismissed. 10 ITA No.2246,47,48,56,57,58/Chny/2024 17.0 As regards ITA No. IT(TP)-9 / Chny/2021 for AY-2015-16, ITA No. IT(TP)-326 / Chny/2021 for AY-2016-17 it is seen that identical grounds of appeal have been raised by the revenue. No changes, save variations in figures and names of government agencies, in facts of the case have been reported. Accordingly the decision in AY-2014-15 Supra shall apply mutatis mutandis. In the result ground of appeal of revenue for these assessment years are also dismissed’. 11. Therefore, in respectful following the orders of Coordinate Bench of this Tribunal Supra, we also note that the Hon’ble Apex Court has also settled the controversy in the case of TRF Limited, wherein Hon’ble Apex Court has held that showing as income in earlier years and claiming as bad debts by passing appropriate entries in financial statements would suffice for allowance of claim. It has also been held that there is no need to establish recoverability of an amount for its allowance u/s 36(1)(vii). We also find that the Ld. CIT(A) has comprehensively analyzed the issue before adjudicating in favour of the assesse. Therefore, we are of the considered view that there is no case for any interference is required in his order. Accordingly, the order of the Ld. First Appellate Authority for AY-2017-18 is upheld and the ground of appeal raised by the revenue challenging the issue of bad debts is dismissed. Accordingly, we affirm the deletion of addition by the ld.CIT(A) in respect of bad debts written off Rs.13.02.094/- for AY-2017-18. 12. As regards, ITA Nos. IT No.2257/ Chny/2024 for AY-2018-19 and ITA No.2258/Chny/2024 for AY 2020-21 (both revenue appeals), identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly, the decision in AY-2017-18 Supra shall apply mutatis mutandis in these years also. In result, we dismiss the grounds of appeal raised by the revenue for AY-2018-19 and AY 2020-21 also. 11 ITA No.2246,47,48,56,57,58/Chny/2024 13. Next issue in ITA No.2256/Chny/2024 for AY 2017-18 (Revenue Appeal) with regard to non-deduction of TDS from payment to Jafferji who resident of Sri Lanka: The AO has disallowed payment made to Jafferji od Rs.2,89,92,420/- who is resident of Sri Lanka for rendering marketing and technical services to appellant company in Sri Lanka for execution of projects in that company, for failure to deduct tax u/s 195 holding that payment made by appellant company amounts to “Fee for technical services”. 14. The assessee before us as well as before the ld.CIT(A) contended that payment made to Jafferji is ‘mere marketing fee’ which can’t be treated as Fee for technical service. Even if payment made to Jafferji is in nature of ‘Fee for technical service’, still the amount is not taxable in India in view of exclusion clause provided under section 9(1)(vii) of the Act. Further he contended that the services for AY 2017-18 was rendered by an individual and it is in the nature of Independent Personal services. The service provider has given a certificate that he had stayed in India only for a period of 30 days. Article 14 of India Srilanka DTAA which reads as under: \"Article 14 IN DEPENDENT PERSONAL SERVICES 1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable 12 ITA No.2246,47,48,56,57,58/Chny/2024 only in that State except in the following circumstances when such income may also be taxed in the other Contracting State: (a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State. 2. The term \"professional services\" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.\" As per this Article, payment to a Non-resident for providing Independent personal services, is taxable in India only if he has a fixed base in India or he stayed for more than 183 days in India. The Non Resident has given a certificate to that effect that conditions in Article are not attracted. Hence FTS paid to independent personal services outside India is not taxable in India and for this reason also the disallowance require to be deleted. 15. At the outset, the ld. Counsel for the assessee also pointed out that the issue of non-deduction of TDS on ‘Fees for technical services’ is already decided by the co-ordinate bench of Tribunal in favour of the assessee in ITA No.953/Chny/2015 and 807/Chny/2016 for AY 2010-11 and AY 2011-12 dated 31.08.2023. 13 ITA No.2246,47,48,56,57,58/Chny/2024 16. We find that the co-ordinate bench of Tribunal in ITA No.953/Chny/2015 and 807/Chny/2016 for AY 2010-11 and AY 2011-12 dated 31.08.2023 held as under: ‘’21. The next issue in this appeal of Revenue is as regards to the order of DRP allowing the claim of expenses incurred for engineering services rendered by third party outside India. For this, the Revenue has raised following Ground No.6.1: “The Hon’ble DRP failed to appreciate that the department has filed appeal before the Hon’ble High Court in the case of Ajappa Integrated Project management and that the disallowance of Rs. 2,96,49,439/- towards engineering charges by A.O is justified.” 22. The brief facts are that the assessee claimed to have made expenses on account of engineering services rendered by third parties outside India and made payment for an amount of Rs. 2,96,43,439/-. The assessee before A.O during the course of assessment proceedings explained that VA Tech Wabag Ltd., paid engineering charges of Rs. 2,96,49,439/- to VA Tech Wabag Gmbh Austria. These services are utilized for executing a project at Suralaya, Indonesia (Project No. P117) and Muscut (ProjectNo.P076). Since the projects are located outside India and the technical services rendered by VA Tech Wabag GmbH, Austria was utilized for making or earning any income from a source outside India, as per section 9(i)(vii) of the Act, the engineering charges paid is not an income earned in India and accordingly the assessee has not deducted any TDS on the same. According to A.O, the assessee has not deducted TDS u/s. 195 of the Act and hence, he disallowed the payments made on account of engineering services rendered by third parties outside India by holding the same as if for technical services and added back to the returned income of the assessee. Aggrieved, the assessee preferred objections before DRP. 23. The DRP accepted the objections of the assessee and reverse the finding of the A.O by observing in Para 3.3.2 and 3.3.3 as under: “3.3.2. We have considered the draft order of the Assessing Officer, the contentions of the assessee, etc. carefully. The assessee is into the business of erecting water treatment plants in several countries. For this purpose it has been availing technical (engineering) services from M/s. VA Tech Wabg GmbH, Austria, a non-resident company, which has no PE in India. All these services are availed and utilized in foreign countries for erecting the water treatment plants in respective countries. There are no disputes in these facts. Recently, a similar issue came up before the Chennai bench of ITAT for adjudication in the case of DOCIT U. Ajapa Integrated Project Management Consultants P. Ltd. In this 14 ITA No.2246,47,48,56,57,58/Chny/2024 case, the company paid consultancy fee to non-resident consultants for carrying out consultancy services in Nigeria. These consultants were used in business of the company abroad. The Hon'ble bench held that income of such non-residents could not be deemed to accrue or arise in India, and, therefore, section 9(1)(vii) (b) would not apply. The relevant portion of the decision is as under: DCIT V. Ajapa Integrated Project Management Consultants P Ltd [2011] 16 taxmann.com 269 (Chennai)/ (2012| 49 SOT 37 (Chennai)(URO) 16. We have perused the orders and heard the rival contentions. This issue is slightly different from the issue raised by the Revenue in its ground No.2. Here, the payments made by the assessee were to nonresidents Indian who were working abroad. Assessee had made no deduction of tax at source whatsoever. As per the assessee, they were working for its business carried on in Nigeria and hence, by virtue of Section 9(1) (vi)(b) of the Act, the fees payable to such nonresidents could not be considered as income accruing or arising to them in India. We find that that the ACIT in his directions under Section 144A of the Act,had stated as under: \"S 9(1)(vi)(b) itself provides the exception. If the Resident- assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Here, the assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria. Therefore, though assessee company has shown that the payments are Resolution Pane directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria leaves some ambiguity in determining whether the exception provided to the non-resident on utilization of services outside India would directly apply to the said non-resident consultants and Chennai whether the income accrue to them in India or abroad, as section 9(1)(vi)(b) is a deeming provision.\" [Emphasis supplied] 17. It is clear from the above that the payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee. Assessee being engaged in consultancy business, the fees paid to Such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. Therefore, clearly Section 9(1)(vi)(b) of the Act applied and the income earned by such non residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason to hold a 15 ITA No.2246,47,48,56,57,58/Chny/2024 bona fide belief that no part of the payment had any element of income which was chargeable to tax in India. When the assessee held such a bona fide belief, it is clearly covered by the decision of Hon'ble Apex Court in GE India Technology Cen. (P) Ltd. (supra) and decision of Special Bench of this Tribunal in Prasad Productions Ltd. (supra). This being so, assessee could not be put in a position where it can be visited with the rigours associated with non deduction of tax at source. It cannot be fastened with any liability associated with non-deduction of tax at source on such payments. In these circumstances, application of Section 40(a)(i) of the Act was not called for. ....\" Further, the Chennai “A\" bench of ITAT in the case of Aqua Omega Services (P.) Ltd. v. ACIT, held that fee for technical services paid to non-residents for providing underwater diving services in Saudi Arabia under a contract, is not liable for TDS. since the services of nonresidents, to whom technical fee was paid by assessee, were utilized for business carried on outside India for earning income from a source outside India. The relevant portion (Head-note) of the decision is as under: Aqua Omeqa Services (P.) Ltd. D. ACIT[2013] 31 taxmann.com 179 (Chennai-Trib.)/2013] 23 1TR(T) 191 (Chennai - Trib.) Head- note: Section 9, read with section 40(a)(i), of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India Fees for technical services - Assessment year 2008-09 - Assessee was in business of providing underwater diving services in Saudi Arabia undera contract and paid fees to non-resident divers there - Whether, since services of non-residents, to whom technical fee was paid by assessee, were utilized for business carried on outside India for earning income from a source outside India, no TDS liability would arise- Held, yes (Para 19) 3.3.3 The facts of the present assessee's case are exactly similar to the facts involved in the above two cases. Hence the above decisions of the ITAT are equally applicable to the facts of the instant assessee. Therefore, respectfully following the decision of the jurisdictional ITAT in the above referred two cases, we hold that the above technical (engineering) service payments to the non-residents for services rendered outside India, are not assessable to tax in India in the hands of the recipients and consequently the assessee is not under any obligation to deduct the TDS on the above technical (engineering) service payments u/s. 195 of the Act. Therefore, the provisions of section 40(a)(i) have no application in the pre sent case. Accordingly, the proposed disallowance of export technical (engineering) service payments of Rs.2,96,49,439/- for non-deduction of TDS u/s.40(a)(i) r.w.s. 195 of the Act, is not justified and deleted. The assessee succeeds in its objections in this regard.” 16 ITA No.2246,47,48,56,57,58/Chny/2024 Aggrieved, the Revenue is in appeal before the Tribunal. 24. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the assessee paid engineering charges to VA Tech Wabag GmbH, Austria for the purposes of engineering services which were utilized in providing water treatment plants for Indonesia and Muscat. Since, these projects are located outside India and technical services rendered by VA Tech Wabg GrnbH, Austria, was utilized for making or earning any income from a source outside India as per section 9(1)(vi), the engineering charges paid is not an income earned to India and accordingly it is not subject to withholding tax in India. The A.O made the disallowance of RS.2,96,49,439/ being technical and engineering charges paid to VA Tech Wabg GmbH, Austria on the presumption that no withholding tax has been deducted by the assessee. The A.O failed to understand that as per Section 9 (1) (vii) clause (b) of the Act, the income deemed to accrue or arise in India in respect of income by way of technical services payable by a person who is a resident, except where the fees are payable in respect of service utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. Since the technical services provided by VA Tech Wabg GmbH, Austria, were utilized for the purpose of making or earning any income from any source outside India, the technical charges paid by VA Tech India to VA Tech Wabg GmbH, Austria is not an income earned in India and the question of deduction of tax does not arise. The engineering/ technical services paid to VA Tech Wabg GmbH, Austria by VA Tech India were utilized by VA Tech India in respect of project executed by it at Indonesia and Muscat. Since the engineering services provided by VA Tech Wabg GmbH, Austria were utilized by VA Tech India at Indonesia and Muscat for the purpose of making or earning any income from a source outside India, it is not an income earned in India as per section 9(1)(vi) of the Act and hence the question of deduction of tax does not arise. The transmission Corporation of India case applies to those situations where any sum is paid to nonresident which is chargeable to tax U/s.4 of the Act. Since the technical fee paid to non-resident is not earned in India as per section 9(1)(vi) of the Act, it is not an income in the hands of the non-resident in India and the question of deduction of tax will not arise. The A.O’s contention that TDS needs to be deducted in respect of engineering fee paid to non-resident is not right since it is well settled law that, the deduction of tax arise only if the income is earned in India. Since the engineering/technical fee paid to foreign agent is not an income earned or accrue or arise in India, as per section 9(1)(vi) of the Act, the question of deduction of tax does not arise. Hence, we are of the view that DRP has rightly deleted the addition and we confirm the same. This issue of revenue’s appeal is dismissed. 17 ITA No.2246,47,48,56,57,58/Chny/2024 17. However, the co-ordinate bench of Tribunal in IT(TP)A No.7,8,9 and in ITA No.326/Chny/2021 for AY 2013-14, 2014-15, 2015-16 and AY 2016-17 dated 16.10.2024 held as under: 10.0 The next issue that has been raised by the revenue for AY-2013- 14, 2014-15, 2015-16 and 2016-17 is in respect of action of the Ld. CIT(A) in deleting the disallowance made by the Ld. AO in respect of consultant marketing fees(Overseas) made u/s 40(a)(ia). The facts of all the four years have been reported to be identical and hence for the purpose of this adjudication we take AY-13-14 as the lead year. Conveying brief facts of the case, the Ld. Counsel for the assesse informed that there was a survey u/s 133A on 27.07.2014 upon the assesse. It transpired therefrom that the assesse had paid consultancy fees to non-resident parities without TDS deduction u/s 40(a)(ia). Before the Ld. AO, the assesse pleaded that the impugned expenses did not warrant TDS deduction u/s 40(a)(ia) as the services were rendered outside India for assesse’s overseas projects and the parties are all stationed outside India with no local office etc. The assesse also gave details of services reportedly given by the said non-resident parties. The Ld. AO however rejected the contentions by relying upon explanation-2 to section 9(1)(vii) and treated the same as fee for technical services which mandated prior deduction of TDS. The Ld. AO particularly invoked the amendment of section -9 of the income tax act made by Finance “ Act -2010 which postulated that whether or not the non-resident is in India will be immaterial if the fees are paid for technical services, inter-alia, comprising managerial, technical or consultancy services. Ld. Counsel for the assesse informed that consequently the Ld. AO proceed to make an addition of Rs.7,98,23,850/-. He submitted that the Ld. First Appellate Authority has rightly deleted the addition on the premise that Ld. AO could not establish rendering of services in India as well as rejecting hypothesis of application of section-9(1) to the assesse’s case. Consequently the Ld.CIT(A) applying the ratio of this tribunal in ITA 2169, ITA 6148 as well as decision of DRP in assesse’s own case for AY-2010- 11 deleted the addition. During the course of present proceeding, the Ld. AR invited our attention to the decision of the Coordinate Bench of this Tribunal in ITA No.953 / Chny / 2015 in assesse’s own case for AY2010-11 whereby the issue has been restored back to the file of Ld. AO for readjudication of the matter after proper verification of facts of the case. The Ld. DR held the view that the addition made by the Ld. AO is based upon correct understanding of law. 11.0 We have heard rival submissions in the light of material available on records. The decision of the coordinate bench of this tribunal in assesse’s own case for AY-2010-11 vide ITA No.953 / Chny / 2015 has been found to be having a direct bearing on the impugned controversy and hence is being considered. In the said case Hon’ble coordinate bench has observed as under:- 18 ITA No.2246,47,48,56,57,58/Chny/2024 “….46. Before us also, the Ld. counsel for the assessee relied on the decision of Hon'ble Madras High Court in the case of CIT v. Faizan Shoes (P.) Ltd. [2014] 48 taxmann.com 48 (Mad.), wherein the Hon'ble High Court has considered that the services rendered by non-resident agent for completion of export commitment would not fall under the definition for fee for technical services. The Hon'ble Jurisdictional High Court observed in para 12 as under: \"12. In the light of the above said decisions and the finding rendered by us on the earlier issue that the services rendered by the nonresident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of \"fees for technical services\", we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above finding, the decision of the Supreme Court in Transmission Corpn. Of A.P Ltd's. case (supra), relied upon by the learned Standing Counsel for the Revenue is not applicable to the facts of the present case. We find no infirmity in the order of the Tribunal in confirming the order of the Commissioner of Income Tax (Appeals).\" 47. We noted that none of the authorities below have discussed the nature of marketing fee whether these are paid fee for technical services this needs to be examined. In case, these are not fee for technical services, the A.O cannot make disallowance. Hence, to examine this issue, the matter restore back to the file of A.O. This issue of assessee's appeal is allowed for statistical purposes…. 12.0 We have noted that the facts of the present case are identical to those in the above referred decision and no distinction has been made by the revenue. We have noted that no discussion has been made by the lower authorities as to whether the impugned marketing fees is in the nature of fee for technical services or not. Now, in the event these are not for technical services then the disallowance cannot be made by the Ld. AO. Therefore, in respectful compliance to the decision of Coordinate Bench of this Tribunal Supra, we direct the Ld. AO to re-examine the matter afresh as to whether the management fees is in the nature of fee for technical services or not and to thereafter conclude as per law. To the extent the order of lower authorities is set aside. Accordingly, the ground of appeal of revenue is allowed for statistical purposes. 13.0 As regards ITA No. IT(TP)-8 / Chny/2021 for AY-2014-15, ITA No. IT(TP)-9 / Chny/2021 for AY-2015-16, ITA No. IT(TP)-326 / Chny/2021 for AY-2016-17 it is seen that identical grounds of appeal have been raised by the revenue. No changes, save variations in figures, in facts of the case have been reported. Accordingly the decision in AY2013-14 Supra shall apply mutatis mutandis. In the result ground of appeal of revenue for these assessment years are also allowed for statistical purposes. 19 ITA No.2246,47,48,56,57,58/Chny/2024 18. We have gone through the order of the ld.CIT(A) and find that in the present AY 2017-18 there was sufficient discussion regarding the issue in question. Hence, respectfully following the order of the co-ordinate bench of Tribunal in ITA No. No.953/Chny/2015 and ITA No.807/Chny/2016 and also in the light of Article 14 of India Sri Lanka DTAA, we refrain from interfering in the impugned order of the ld. CIT(A). In result, we dismiss the grounds of the revenue on this issue. 19. Next issue of TDS Credit in ITA No.2248/Chny/2024 (Assessee’s Appeal): For the project carried out in Saudi Arabia, the remuneration received from the Client remitted the consideration for AY 2019-20 without TDS and the entire amount was offered for tax. For the current year the client has deducted tax for both the years and the Appellant had claimed deduction for the entire amount. AO and CIT(A) had declined to give credit for Rs. 5,11,92,058/- relying Rule 128 of the Income Tax Rules, 1962 which reads as “128. Foreign Tax Credit“. While, the appellant relying upon Article 23 of DTAA between Sri lanka and India has submitted that the Appellant had no control over the client and his deduction of tax. Hence, credit should be given in the year in which the tax has been withheld on the basis the Non Resident If the tax credit is not given for the year in which tax was withheld. The DTAA between Sri lanka and India regarding Tax credit reads as under: 20 ITA No.2246,47,48,56,57,58/Chny/2024 ‘’Article 23 METHODS FOR ELIMINATION OF DOUBLE TAXATION The laws in force in either of the Contracting States shall continue to govern the taxationof income in the respective Contracting States except when any provision to the contrary is made in this Agreemen:. When income is subject to tax in both Contracting States. relief from Double Taxation shall be given in accordance with the following paragraphs of this Article.2. In India: (a) Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Sri Lanka, India shall allow as a deduction from the tax on the income of that resident, an amount equal to the tax paid in Sri Lanka. Such deduction shall not, however, exceed that portion of the tax as computed before the deduction is given, which is attributable, as the case may be, to the income which may be taxed in Sri Lanka. DTAA permits deduction of tax paid in Sri Lanka against the income earned in Sri Lanka. The deduction shall be in the year in which the same was withheld as per DTAA. AO may be asked to consider the provisions of the DTAAA’. Alternatively, the AO may be directed to consider granting credit of the amount in AY 2019-20. Without prejudice, as this amount was not received, the same should be reduced from income. 20. We have heard the both parties and perused the record of the appeal. While dealing with this issue, the ld. CIT(A) categorically held that tax credit is to be allowed in the year in which income is offered to tax. It is not the case of the appellant that income pertaining to assessment year 2019-20 is offered during the year, hence as per Rule 128 credit for foreign tax pertaining to AY 2019-20 can’t be allowed during year. 21 ITA No.2246,47,48,56,57,58/Chny/2024 21. We find that the lower authorities have not find occasion to see the impact of the Article 23 of the DTAA between Sri lanka and India vis-à-vis Rule 128 of the Income Tax Rules, 1962. Hence, we set aside this issue of credit for Foreign TDS to the file of AO for reconsideration in the light of the Article 23 of the DTAA between Sri lanka and India vis-à-vis Rule 128 of the Income Tax Rules, 1962 or any other provisions of the Act. Hence, this appeal of assessee is allowed for statistical purposes. 22. In result, assessee’s appeal in ITA Nos.2246, 2247/Chny/2024 are allowed. Revenue’s appeal in ITA Nos.2256, 2257 and 2258/Chny/2024 are dismissed. Assessee’s appeal in ITA No.2248/Chny/2024 is allowed for statistical purpose. Order pronounced in open court on 24th day of February 2025 at Chennai Sd/- Sd/- (जगदीश) (JAGADISH) लेखा सद˟ / ACCOUNTANT MEMBER (मनु क ुमार िगįर) (MANU KUMAR GIRI) Ɋाियक सद˟ / JUDICIAL MEMBER चेɄई Chennai: िदनांक Dated :24-02-2025 KV आदेश कȧ ĤǓतͧलͪप अĒेͪषत /Copy to : 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3. आयकरआयुƅ/CIT, Chennai/Coimbatore/Madurai/Salem. 4. िवभागीयŮितिनिध/DR 5. गाडŊफाईल/GF "