TMI Blog2013 (8) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... reward of the business carried out by the assessee is born by the assessee which itself shows that it is the assessee who is answerable to the customers and therefore the activity of purchase of space on website from the parent company is on principle to principle basis - Decided against Revenue. Nature of payment was made towards sharing of cost for a third party server platform and use of licence - Held that:- When the payment is not towards the cost of any services or supply by the parent company to the assessee but the payment is towards the use of server platform and licence belongs to the third party. Therefore, such payment relates to the use of server and licence of third party routed through its parent company. When the Assessing Officer has disallowed this payment for none withholding of tax by invoking the provision of Section 40(a)(i)(A) then we do not agree with the contention of the assessee that this is a new issue raised by the Ld. DR. This issue requires a proper verification of the real nature of payment and withholding of tax u/s 195. - Issue remmitted back - Decided against assessee - IT Appeal No. 7044 (Mum.) of 2011 - - - Dated:- 26-7-2013 - VIJAY PA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the various reasons recorded by the AO in para 9.3 of the assessment order briefly stated (i) One of the directors is common in both companies (ii) Both are engaged in similar kind of business activities (iii) The parent company's 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 Article 5(2)(k) of DTAA (viii) The assessee has almost all clientele based in India (ix) The certificate issued by the CA for remittance of expenses in foreign 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 for 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 explanation 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 Hon'ble Supreme Court in case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Arm's 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 remitted the amount being reimbursement of expenses. Thus, the Ld. DR has submitted 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 because the payment was ultimately made to the third party and the assessee as well as it's 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 the fact has been recorded by the CIT(A) that the reimbursement payment was made towards the cost of a third party server platform and therefore, it was a cost sharing arrangement. He has relied upon the decision of this Tribunal dated 18.5.2012 in case of ACIT v. 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 findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions of providing internet space for advertisement to its client then how it can be a transaction carried out by the assessee on behalf of 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 the parent company and not in the hand of the assessee. He has submitted 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 assessment year under consideration and therefore it cannot be said that the assessee is doing entire business or almost entire business through its 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 Article 5 of Indo-US DTAA because the assessee is not doing any business activity on behalf of its parent company. The transaction between the assessee and parent company are pure business transaction wherein the sale and purchase are at arm's length price. He has referred para 6 of Article 5 of the DTAA and submitted that merely a company resident of contracting State controls or is controlled by a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the business activity on behalf of other but the transactions are independent business transaction wherein the respective margins are recover from each other. Moreover, the transaction of payment towards purchase of space on foreign website by the assessee for its client in any case does not constitute a transaction carried out by the assessee on behalf of its parent company. The assessee is doing the business transaction on behalf of its client and offering the income earned from the said business transaction which has been accepted by the AO. Therefore 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. Even otherwise the common director and holding of the company by itself does not constitute either company as a Permanent Establishment of the other a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 falls 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 providing the service/goods to the clients of the other party therefore when none of the party is dealing with the clients of the other party then the activity between the assessee and the parent company are independent business 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 assessee is born by the assessee which itself shows that it is the assessee who is answerable to the customers and therefore the activity of purchase of space on website from the parent company is on principle to principle basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursement would not constitute 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 consequent 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 payment is towards the use of server platform and licence belongs to the third party. Therefore, such payment relates to the use of server and licence of third party routed through its parent company. When the Assessing Officer has disallowed this payment for none withholding of tax by invoking the provision of Section 40(a)(i)(A) then we do not agree with the contention 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 the 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 of this Tribunal in case of First Advantage Pvt. Ltd. (supra) wherein the Trib ..... 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