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2016 (3) TMI 89 - ITAT DELHI

2016 (3) TMI 89 - ITAT DELHI - TMI - TDS u/s 195 - Disallowance being professional fees incurred by US branch of the assessee - non-deduction of tax at sources - disallowance u/s 40a(i) - INDO US DTAA - Held that:- In this case, the services have been utilized outside India by business carried on by the US branch of the assessee, which is assessed also under US Tax laws. Therefore no income deemed to accrue or arise in the hands of the recipient of such sum. Hence there is no requirement of tax .....

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1961 as well as per DTAA. Ld. DR could not point out any infirmity in the order of CIT (A) where in CIT (A) has dealt elaborately various provision of the Income tax act and DTAA for holding that there is no withholding tax liability on assessee with respect to payment by US branch of the assessee - Decided in favour of assessee - ITA No. 2209/Del/2013 - Dated:- 22-1-2016 - SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Sh. S.C. Gupta, Tax Cons .....

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the fact that the assessee has computed its income based on I.T.Act, 1961 & not as per DTAA between USA and India. Therefore, all provisions of I.T.Act, 1961 shall apply. 3. The Ld, CIT (A) has erred in law and on facts in not considering the fact that the USA office being merely a branch office and provisions of India Act are fully applicable on it. 4. The Ld. CIT (A) has erred in law arid on facts by ignoring the fact that though the payments were made by the branch office out of the prof .....

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ective grounds of appeal but they deal with single issue of disallowance of ₹ 37873836/- being professional fees incurred by US branch of the assessee for non-deduction of tax at sources and hence disallowable u/s 40a(i) of The Income tax Act ( In short The Act ). 3. The facts in brief of the case are that the assessee company is engaged in the business of development of computer software. The assessee filed e-return on 30.09.2009 declaring total income at NIL and book profit u/s 115JB at .....

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disallowed and added back to the income of the assessee. The Assessing Officer assessed the income of the assessee at ₹ 3,37,32,640/- . 4. Aggrieved with the order of the Assessing Officer assessee filed an appeal before the learned Commissioner of Income tax (Appeals), who observed in order that there is no dispute that the appellant is having its branch officer in USA, which was engaged in rendering software development, services in the USA. USA Branch has incurred expenses of ₹ 3 .....

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s in USA including the sum of ₹ 59,384/- paid to the Auditor in USA for audit of branch of account in USA, cannot be taxed in India. Further, he observed that the assessee paid a sum of ₹ 2,51,500/- to professionals in India by Indian officer of the company on which tax of ₹ 21,642/- was deducted at source at per law and deposited to the Govt. account. Therefore, payment of ₹ 2,51,500/- by Indian Office being made after TDS of ₹ 21,642/- is also not liable for disal .....

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India and therefore is chargeable to tax and tax should have been deducted thereon. He further submitted that US branch is not a separate entity but is one unit of the assessee company and therefore there is no exemption to it from provisions of the Act related to tax deduction at source. 6. LD AR on the other hand submitted that assessee is an Indian company and it has one USA branch, which is carrying on independent business in USA and filing tax return in USA. RBI also approved branch of Ass .....

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e act and no tax is required to be deducted at source on this payments. 7. We have carefully considered the rival contentions. It is an admitted fact that assessee has a branch in US which is having an independent sources of income and which has borne the expenditure of ₹ 37387386/-. CIT (A) has dealt with this issue as under :- 6.1 I carefully have considered the facts of the case, the finding of the A.O. as well as the submissions of the AR. Ground nos.2 & 3 of appeal are directed ag .....

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47-on which Income tax of ₹ 11,76,802/- was paid by the assessee. The assessee has incurred certain expenditures from its US branch office. The A.O treated the expenditures of ₹ 3,78,73,836/- of US Branch office as fee for technical services u/s 9(l)(vii) and disallowed the above expenditures as per the provisions of sec 40(a)(i) in view of non deduction of taxes under the provisions of section 195. 6.2 There is no dispute that the appellant is having its branch office in USA which w .....

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also includes a sum of ₹ 59,384/- paid as professional charges to the auditor in USA for audit of US branch accounts. 6.3 The branch in USA files Income Tax return in USA. The Accounts of the branch offices in USA are audited in USA as per US laws and the income tax return for the branch is filed in USA and taxes as per US laws are paid in USA. The profits of the branch are incorporated in the Head Office profit and consolidated Income Tax return is filed in India for the company. Activity .....

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onals. Services were utilized by the clients of the US branch of the appellant for which the clients made payments to the US branch which was the source of income of the branch. The services were obtained by the US branch from the entities based in USA. The services were utilized in USA and the payments were made from USA by the US branch of appellant directly for professional services of qualified software professionals. 6.4 There is also no dispute that the payments of ₹ 3,76,22,236/- [R .....

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9;Sec. 195 (1) : Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LQ] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whi .....

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o accrue or arise in India :- (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried .....

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the services are utilized in a business carried on outside India or where the services are utilized for the purpose of earning any income from any source outside India, the payments made for such services shall not deemed to accrue or arise in India. In the instant case the services of software professionals hired in USA were utilized in USA by the clients of the US branch of appellant. The payments are received in USA from the clients and are credited as income of the US branch. Payments are m .....

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he payments were made by the US branch of the appellant to the US entities in respect of services utilized in business carried on in USA and for the purpose of earning income from USA. Therefore, in view of the above provisions of sec 9(l)(vii), the income by way of fees paid by the US branch office to the US entities cannot, be deemed to accrue or arise in India. 6.5 The explanation below Sec 9(2) which the A.O. heavily relies on says: "Explanation.-For the removal of doubts, it is hereby .....

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tion only if the services are utilized in a business or profession carried on India or for earning income from any source in India. Since, in the instant case the services of US entities are utilized in business carried on in USA for earning income from USA, therefore, the explanation below Sec 9(2) lich the A.O. heavily relies on, is not applicable in the case of the appellant. 6.6 Further Article 7 of Indo - US Double Taxation Avoidance Agreement says: Article 7 - Business profits - 1. The pro .....

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ugh that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment." Even under the article 7 of Indo vs. DTAA if an enterprise of USA is carrying out its business activities in USA, then its business income will be taxed only in USA unless the enterprise is carrying on its business through a permanent establishment (PE) in India. In the instant case the services were rendered b .....

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ppellant is filing income tax return in USA and taxes are paid in USA for that profit as per US laws. Further, the services of the US entities utilized in the business of appellant's PE carried on in USA shall be taxable only in USA and not in India. 6.7 Reliance placed by the A.O. in the decision of Hon'ble ITAT, Mumbai in the case of M/s Linklaters LLP Vs. Income Tax Officer (supra) and Ashapura Minichem Ltd.vs. ADIT (supra) are also not applicable in the instant appeal. In the above c .....

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f the above, I am of the considered opinion that the payment of ₹ 3,76,22,2367- made by the US branch office of the appellant for the services rendered by US entities in USA including the sum of ₹ 59,384/- paid to the Auditor in USA for audit of branch accounts in USA, cannot be taxed in India. Therefore, there is no liability of TDS u/s 195(1) and as such no disallowance u/s 40(a)(i) is called for. The appellant also submitted that a sum of ₹ 2,51,500/- was paid to professiona .....

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ding to CIT (A) the expenses are in relation to foreign business of the assessee and are also borne by that business and paid in foreign country i.e. USA . Therefore it is not covered by the deeming provisions of section 9 (1) (vii) (b) of the Act. According to CIT (A), this income is not chargeable to tax in the hands of the non-resident recipient as it is not covered u/s 5 (2) of the act. As there is no income chargeable to tax in India according to section 5(2) rws 9(1) (vii) of the act, prov .....

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