TMI Blog2016 (3) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... vision 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 Consultant For The Revenue : Sh.P Dam Kanunjna, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. The present appeal filed by the revenue is directed against the order of learned CIT (A)-XVI, Delhi dated 31.01.2013 passed for the assessment year 2009-10. The revenue raised following grounds of appeal: 1. The Ld, CIT (A) has erred in law and on facts in deleting the addition made u/s 40(a)(i) of the I.T. Act amounting to ₹ 3,78,73,836/-; 2. The Ld. CIT (A) has erred in law arid on facts in ignoring 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffice and not ₹ 3,73,73,736/-/ Further, the sum of ₹ 3.78 crores also includes a sum of ₹ 59,384/- paid as professional charges to the auditor in USA for audit of US branch accounts. Therefore, a sum of ₹ 3,76,22,236/- made by the US branch officer of the assessee for the services rendered by the US entities 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 disallowance u/s 40(a)(i). Therefore, in view of the above, the learned Commissioner of Income tax (Appeals) deleted disallowance of ₹ 3,78,73,736/-.Aggrieved by the order revenue is in appeal before us. 5. Ld DR relied on the order of AO and vehemently submitted that as assessee has failed to deduct tax at sources the disallowance u/s 40a(i) of the Act is right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was engaged in rendering software development services in the USA. The A.O. observed that the appellant has incurred expenses of ₹ 3,78,73,836/- in foreign currency paid by the US branch office. From the details of professional software development charges paid which is also shown in schedule J' of audited financial statement, it is seen that ₹ 3,75,62,852/- relates to professional charges of USA branch office and not ₹ 3,78,73,736/-. Further, the sum of ₹ 3.78 crores 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not chargeable to tax under the provision of Income Tax Act, 1961. Further provision of Sec 9(l)(vii) says: Sec 9. (1) The following incomes shall be deemed to 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 on by such person in India or for the purposes of making or earning any income from any source in India From the above provision it is clear that income by way of fees for technical services payable by a person who is resident shall be deemed to accrue or arise in India, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of earning any income from any source outside India. Therefore, where the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further Article 7 of Indo - US Double Taxation Avoidance Agreement says: Article 7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through 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 by US entities in USA. The services were not rendered by the US entities in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nos. 2 3 of appeal. 8. According 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, provisions of section 195 of the act does not apply to the assessee. Further as provision of section 195 do not apply on these payments provision of section 40a (i) is not applicable and therefore there cannot be any disallowance. He has also considered the provision of section 9 (1) (vii) (b) in right perspective holding that income from fees for technical services do not deemed to accrue or arise in India when they are incurred and borne by the foreign business of the assessee. 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 deem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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