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M/s IDS Infotech Ltd. Versus The D.C.I.T., Circle 4 (1) , Chandigarh

2016 (6) TMI 98 - ITAT CHANDIGARH

Disallowance of interest paid up by applying the provisions of section 36(1)(iii) - Held that:- In the present case, there is no dispute about the fact that the amounts have been advanced to the wholly owned subsidiaries of the assessee company and there is no fact brought on record by any of the lower authorities that the amounts have been used by these subsidiary companies for any purpose other than their business purposes. In view of this, we are inclined to hold that the amounts given to sub .....

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d to be received in India. The second situation under which the receipt of non-resident is taxable is if the income accrues or arises or is deemed to accrue or arise in India. Undoubtedly, in the present case no income has accrued to the nonresident person in India. The dispute may be only with regard to the impugned amount being income 'deemed to accrue or arise in India'. Various instances of income considered to be deemed to accrue or arise in India to a non-resident are provided in section 9 .....

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the time of hearing before us. In view of this, the position emerges that the payment to a person who happens to be a resident of country with whom India has entered into DTAA and where the business profits are taxed only in the country and does not have a permanent establishment in India, the said payments are not chargeable to tax in India. In view of this also, even as per DTAA, the income being not exigible to tax in India in the hands of non-resident entity, the assessee is not required to .....

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ed D.R. could not bring any material or evidence in support of his claimed that the impugned payments were in the nature of 'fees for technical services'. His only argument is that in the absence of the nature of services being rendered by non residents, coming out from the evidence filed by the assessee, the same should be presumed to be in the nature of 'fees for technical services'. No such presumption exists in the Income Tax Act. No such presumption can be raised without any backing materia .....

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ve accrued to the non-resident entities, there is no liability on the assessee to deduct tax at source on such payment. Therefore, the provisions of section 40(a)(i) of the Act are not exigible in the present case. - Decided in favour of assessee

Allowability of payments made to IMCS as per provision of Explanation 1 to section 37(1) - Held that:- In this regard, no clear-cut finding of fact has been arrived at by any of the lower authorities as to what offence or an act prohibited by .....

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or not. The assessee should be given a proper opportunity of being heard in this regard. We would like to clarify here that the outcome of this ground will not effect our findings on other grounds of appeal, as the issue here is the allowability of expenditure while the other issues are disallowance of expenditure in view of the provision of section 40 (a)(i) of the Act. - Decided in favour of assessee for statistical purposes. - ITA No.52/Chd/2016 - Dated:- 24-5-2016 - SHRI BHAVNESH SAINI , JUD .....

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of ₹ 16,59,106/- made by the assessing officer whereby he disallowed the interest paid up by applying the provisions of section 36(1)(iii) which is illegal, arbitrary and unjustified." 3. Briefly, the facts of the case are that the assessee had debited financial charges of ₹ 98,48,000/-on secured loans. The secured loans consist of a term loan from bank, car loan and packing credit. Against these liabilities the assessee is paying interest which is debited in Profit & Loss A .....

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earned CIT (Appeals), the assessee submitted that the disallowance has been made on the ground that the assessee had taken term loan from Bank of India, which was invested abroad in various subsidiaries. It has not been appreciated that the subsidiaries of the assessee company were generating revenue for the assessee. Therefore, there was business exigency in giving such loan. Since the interest paid is revenue expenditure, it has rightly been claimed in the books of account. The subsidiaries re .....

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assessee is for extra commercial consideration. 5. Aggrieved by this, the assessee has come up in appeal before us and reiterated the submissions made before the learned CIT (Appeals). It was stated that the assessee company is engaged in the business of export of Information Technology Services and Software Development. The wholly owned subsidiaries of the assessee to whom the money has been advanced are providing market support to the assessee. Reliance was placed on the judgment of the Hon .....

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ank, has been claimed by the assessee in its Profit & Loss Account. Under these circumstances, a duty is cast on the assessee to establish that such interest bearing funds advanced to the wholly owned subsidiaries is for the purpose of business as provided under section 36(1)(iii) of the Act. The assessee had failed to establish any nexus between the borrowed funds to the application of these funds that the same are for the purpose of business. Reliance was placed on the judgment of the Hon& .....

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loan advances fulfills the criteria of commercial expediency. It is also the proposition laid down by the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. (supra). However, we are also inclined to accept the submissions made by the learned counsel for the assessee that the entities to whom the money has been given are wholly owned subsidiaries of the assessee company. Therefore, the financial health of these concerns matter to the financial health of the assessee company also. In ou .....

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est on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances .....

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company has a deep interest in its subsidiary and if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee is entitled to deduction of interest on the borrowed funds. In the present case, there is no dispute about the fact that the amounts have been advanced to the wholly owned subsidiaries of the assessee company and there is no fact brought on record by any of the lower authorities that the amounts have been .....

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raised by the assessee read as under : 2. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the disallowance of ₹ 5,31,28,742/- made on account of non deduction of TDS on commission , legal and professional charges, marketing and selling expenses, out sourcing and business development expenses in as much as no TDS is required to be deducted and as such the order is illegal, arbitrary and unjustified. 3. That the Ld. Commissioner of Income Tax (Appeals) has fa .....

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, arbitrary and unjustified. 5. That the Ld. Commissioner of Income Tax (Appeals) has further erred in holding that the commission payment to M/s I CMS for Agusta Project are illegal in nature and not allowable as per explanation to Section 37(1) of the Act which is contrary to the facts and as such the order passed is arbitrary and unjustified. 6. That the order of the Ld. Commissioner of Income Tax (Appeals) is erroneous, arbitrary, opposed to law and facts of the case ancl is, thus, untenable .....

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erved that the benefit of these services provided by non-resident entities by way of promoting sales and rendering legal and professional services, etc. are being utilized in India by the assessee company. The payment made by the assessee in respect of services utilized, is not in connection to any business or profession carried out outside India for the purpose of making any income from a source outside India. The source of income of the recipients of these payments is the agreement between the .....

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t 'the Act'), The Assessing Officer made disallowance of an amount of ₹ 5,31,28,742/-. 12. The Assessing Officer also noted that the commission has been paid at various rates to Steven International and IMCS. The commission to IMCS, Tunisia was paid @ 21.45% and Steven International @ 1.79%. He further observed that the commission to IMCS was for Augusta project and assessee is also involved in Augusta Westland helicopter deal, wherein CBI has taken investigation into the deal. The .....

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in view of the Explanation to section 37 of the Act. This amount is also included in the total disallowance made by the Assessing Officer amounting to ₹ 5,31,28,742/-. 13. Before the learned CIT (Appeals), the assessee submitted that these expenses were incurred for services rendered outside India and payments were made to parties who were outside India. It was stated that the provisions of section 195 of the Act would be applicable in conjunct with section 9 of the Act, which deal in inco .....

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ese amounts as none of these parties had any permanent establishment in India and there was no business connection in India. It was also submitted that all these payments were made to the parties in the nations with which India has Double Taxation Avoidance Agreement (DTAA) and as per the terms of the respective DTAAs also, the income is not taxable in the hands of the recipient. Reliance was placed on a large number of cases. 14. After considering the submissions of the assessee, the learned CI .....

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greement with the assessee company and by virtue of these services there is a direct benefit to the assessee company and hence the payment made by the Indian company for services utilized is not in connection with the business and profession carried out outside India. The business outside India is secured by the Indian company. The source of income for the services rendered by the non-resident entities is in India as the Indian company gives directions for the work abroad. Therefore, the income .....

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rvices. For the meaning of the term 'business connection', he relied on the judgment of the Hon'ble Supreme Court in the case of CIT Vs. R.D. Aggawal & Co. (1965) 56 ITR 20. With regard to the term 'fees for services', he placed reliance on the judgment of the Andhra Pradesh High Court in the case of Elkem Technology Vs. DCIT (2001) 250 ITR 164. After referring all these judgments, he observed that in the instant case, services were rendered abroad by non-resident entitie .....

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e Supreme Court in the case of GVK Industries Ltd. Vs. ITO (2015) 332 ITR 130 to the proposition that the nature of service rendered by the non-residents would come within the ambit and sweep of expression 'consultancy service' and hence, tax should have been deducted at source as the amount paid as fee could be taxable under the head 'fee for technical service'. 15. With regard to the commission paid to IMCS for Augusta project, he observed that it was merely for introducing Aug .....

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that in the absence of non-deduction of TDS under section 195 of the Act, these expenditure are not allowable to the assessee. 16. Aggrieved by this, the assessee has come up in appeal before us. The learned counsel for the assessee made elaborate submissions with regard to various contentions raised before the Assessing Officer as well as before the learned CIT (Appeals). Briefly, the summary of the submissions made by the learned counsel for the assessee was that the liability for deduction of .....

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that the income accrues at the place where services are performed. Since in the present case, the non-resident entities have performed services outside India, therefore, their income is not taxable in India. With respect to marketing, export service, business development outsource expenditure and communication expenses, it was stated that none of these activities are undertaken in India. The amount spent can neither be said to have accrued or arisen in India in the absence of any business conne .....

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essee to deduct tax at source on these payments does not arise. 18. With respect to the payment made to IMCS, it was stated that no search of CBI has taken place in the case of the assessee and no adverse finding in the form of any order etc. is there against the assessee. In view of these, it was stated that these payments are not in violation of any legal enactment. Therefore, these cannot be disallowed as per the provisions of section 37(1) of the Act. 19. The learned D.R. at the time of argu .....

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rue or arise in India under clause (vii) i.e. FTS and shall be included in the total income of the assessee whether or not the nonresident, his residence or place of business or business connection in India or non-resident has rendered service in India. In view of this legal position, he argued that the assessee was required to deduct tax at source on such payments as per the provisions of section 195 of the Act. Therefore, the provisions of section 40(a)(i) of the Act are clearly applicable to .....

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al services'. Reliance was placed on a number of judgments, whereby the activities were held to be in the nature of 'fees for technical services'. Without prejudice to this argument, it was also stated that even if we go to the respective DTAAs, in the absence of nature of services rendered coming out from the record it is to be presumed that the services were rendered to 'make available' some technical services to the assessee. These submissions were made with respect to the .....

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categorical finding characterizing the services rendered being in the nature of 'fees for technical services'. Therefore, the issue of 'fees for technical services' does not arise in the present case. Without prejudice, it was stated that even if assuming for argument sake that such services qualify as 'fees for technical services', it has to be seen whether these services will qualify as fees for included services as mentioned in Article-12 of India US DTAA. The extract .....

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nsidered the material available on record. The facts as culled out by us from the perusal of the orders of the lower authorities as well as submissions oral and written filed by both the parties before us, are that the issue is with regard to the disallowance made by the Assessing Officer invoking the provisions of section 40(a)(i) of the Act, whereby on certain payments made to non-resident entities, the assessee failed to deduct tax at source. The impugned payments made to the respective non-r .....

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llowed to the assessee in view of the provisions of Explanation 1 to section 37(1) of the Act. The learned CIT (Appeals) has though confirmed the finding given by the Assessing Officer. However, in some passing reference he also apprehended that these payments may be in the nature of 'fees for technical services'. 23. The learned counsel for the assessee made elaborate submissions with regard to the fact that these payments are not chargeable in the hands of the recipient. Therefore, no .....

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lso made submissions that for the conclusion that these payments were in the nature of 'fees for technical services', one has to go to the provisions of DTTA also. The learned D.R. on the issues raised by the Assessing Officer placed reliance on the order of the learned CIT (Appeals), while with regard to the issue of 'fees for technical services' raised by the learned CIT (Appeals), his submission was that in the absence of exact nature of services rendered by the assessee, comi .....

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are as follows : i) Whether the impugned payments are of the nature, whereby the provisions of TDS are applicable, in the absence of which the disallowance is called for under section 40(a)(i) of the Act. ii) With respect to payments made to IMCS, whether the Explanation to section 37(1) of the Act is applicable to the said payments. iii) With respect to payment made to IMCS, whether the same is unreasonable in comparison to payment of same nature made to other entities. iv) If the payments, as .....

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tanding anything to the contrary in [sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession": (a) in the case of any assessee- [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resi .....

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y of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.] Explanation : For the purposes of this sub-clause,- (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 26. .....

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nt made to a non-resident are provided in section 195 of the Act, which read as under : "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 on securities) 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 .....

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n 5 of the Act. The provisions of section 5 of the Act relating to scope of total income in respect of a non-resident are provided in sub-section (2) of said section, which read as under: "5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deeme .....

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o him shall not again be so included on the basis that it is received or deemed to be received by him in India." 28. From the bare perusal of the provisions of the above section, it is quite clear that a non-resident is chargeable to tax if it receives or deemed to receive any amount in India. The provisions emerging from the analysis are very clear that, when income accrues, arises or received in India, the same is taxable. Income which is deemed to accrue or arise in India is taxable in I .....

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ome 'deemed to accrue or arise in India'. Various instances of income considered to be deemed to accrue or arise in India to a non-resident are provided in section 9 of the Income Tax Act. For the purpose of adjudicating the issues arising in the present appeal, the relevant provisions are that of section 9(1)(i) of the Act, which read as under : "9 (1) The following incomes shall be deemed to accrue or arise in India- (i) all income accruing or arising, whether directly or indirect .....

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tributable to the operations carried out in India; (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export; [* * * *] [(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activit .....

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r from operations which are confined to the shooting of any cinematograph film in India;] [Explanation 2: For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident, (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident unless his activities are limited to the purchase of goods or merchandise for the non-reside .....

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gh a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereinafter in this proviso referred to as to the principal non-resident) or on behalf of such non-resident and other non-residents whic .....

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hose payments which are of the nature of sum chargeable under the provisions of the Act are exigible for provision of tax deduction at source. Here we are inclined to refer to the judgment of the Hon'ble Supreme Court in the case of G.E. India Technology Centre Pvt. Ltd. Vs. CIT (2010) 327 ITE 456 (SC), whereby it has been held that section 195 (1) of the Act uses the expression 'sum' chargeable under the provision of the Act and weightage is needed to be given to these words. Furthe .....

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1. From the reading of the A.O.'s order, we do not understand his case. Nowhere in the entire order he has given any finding as to whether the nature of income in the hands of the non-resident is that of 'income accrued in India' or 'income deemed to have accrued' in India. He just kept on harping the fact that the ultimate beneficiary of the services is the assessee in India. Even the CIT (A) while adjudicating the issue could not give any appropriate finding in this regard. .....

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llant company with the responsibility of the appellant company. Therefore the source of income for the entities abroad is the agreement with the appellant company and by virtue of these services there is a direct benefit to the appellant company and hence the payment made by the Indian company for services utilized is not in connection with business/profession carried out, outside of India. The business outside India is secured by the Indian company i.e. the appellant company. The source of inco .....

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on is where the services, in respect of which the payments have been made, were rendered. 32. As per the provisions of section 9(1) of the Act, the income is deemed to accrue or arise in India if it is directly or indirectly through or from any business connection in India. Further, the business connection has to be an activity of the non-resident in the taxable territory is India having intimate and near relation of a continuous nature of the business of the non-resident and attributed to the e .....

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reme Court in the case of R.D. Aggarwal (supra), which are as under : i) Maintain a branch office in India for purchase or sale of goods or transacting other business. ii) Appointing an agent in India for systematic and regular purchase of raw material or other commodities, or for sale of non-resident goods or for other business purposes. iii) Erecting a factory in India where raw produce purchased locally is worked into a firm suitable for sending abroad. iv) Forming local company to sale produ .....

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dent entities to whom it has made the payments do not have any business connection with India. The Assessing Officer as well as the learned CIT (Appeals) had nowhere in their orders recorded any such finding though we must add that they have not even intended to make any investigation in this regard. However, we also observe that this stance has been consistently taken by the assessee before the lower authorities as well as before us and even the learned D.R. while arguing before us could not co .....

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nature of income deemed to accrue or arise in India in their hands. Therefore, provisions of section 40(a)(i) of the Act cannot be invoked. 35. Though the definition of the incomes deemed to accrue or arise in India is provided in section 9 of the Act, we should not forget that the provisions of the Act are subject to the treaty entered by the Central Government with the Government of a country outside India in terms of the provisions of section 90 of the Act. Therefore, as in the present case p .....

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ies, in view of the fact that the provisions which are beneficial to the assessee are to be taken care while fastening tax liability. 37. The basic principle to be applied in such cases is that one has to first look at the domestic law to find out if the non-resident assessee is taxable thereunder. If it is taxable, only then one has to go into the treaty, if any, between India and the country to which the non-resident belongs, to, find out if there is any beneficial provision in the treaty to e .....

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e used as a taxing statute. The principle is that where the non-resident is taxable under the domestic law but there is a provision in the treaty to exempt the transaction or reduce the rigor of taxation to the benefit of the non-resident, the provisions of the treaty override the provisions of the domestic law. These fundamental principles are well-settled by the judgments of the Supreme Court in P.V.A.L. Kulandagan Chettiar (2008) 267 ITR 654 (SC) and Azadi Bachao Andalon (2003) 263 ITR 706 (S .....

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us. In view of this, the position emerges that the payment to a person who happens to be a resident of country with whom India has entered into DTAA and where the business profits are taxed only in the country and does not have a permanent establishment in India, the said payments are not chargeable to tax in India. In view of this also, even as per DTAA, the income being not exigible to tax in India in the hands of non-resident entity, the assessee is not required to deduct tax at source. There .....

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is not comparable to the commission payment made to Steven International. He has just tried to compare the services rendered by the Steven International involving the potential business segment, organizing meetings and liaison works with prospective clients, facilitation and redressal and settlement of disputes. Further referring to the services rendered by IMCS, he explained that these are concerned with the introduction and assistance in execution of an agreement and assisting in selling servi .....

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d from the Assessing Officer. We do not understand under what provisions the Assessing Officer is trying to make out the case that the payment made to IMCS are not commensurate with the work done by them. It is the prerogative of the businessman to run its business the way he wants. The Assessing Officer for the purpose of Income Tax Act cannot question the reasonableness of any such payment made by the assessee. Therefore, we do not find this allegation of the Assessing Officer backed by any le .....

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Length Price on the transaction between the assessee and its associate enterprises. 40. Now the question arises whether the payment made by the assessee can be held to be in the nature of 'fee for technical services'. There is no dispute with respect to the fact that the issue of 'fees technical services' was never raised by the Assessing Officer. In his order running into 22 pages he has nowhere mentioned and even nowhere showed his suspicion as regards the payment being in the .....

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is order he has mentioned the term 'fees for technical services'. At page 13 he has stated as under: "The issue in hand is to decide whether the service rendered by the nonresident entities and the payment made by the appellant company established business connection in India and as per the source of these payments, these are in the nature of fees for technical services." 41. If we carefully analyze the above sentence, we can very easily infer that the learned CIT (Appeals) has .....

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td. [2015] 371 ITR has held that the nature of service rendered by the non-resident would come within the ambit and seep of expression 'consultancy service' and hence tax should have been deducted at source as the amount paid as fee could be taxable under he head 'fees for technical services'" 43. From bare perusal of the above sentence one can very easily infer that the learned CIT (Appeals) here also has not given any finding, in fact here he is only referring to the judgm .....

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ment of the learned D.R. is accepted that the learned CIT (Appeals) has given a finding that these payments are 'fees for technical services', nowhere from the order of the learned CIT (Appeals) we see any effort being made by him to come to such a conclusion. It is not to be forgotten that the learned CIT (Appeals) assumes coterminus powers with that the Assessing Officer. In fact, he enjoys the powers of enhancement also. Therefore, in case he had any apprehension as to the real nature .....

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g 'fees for technical services', which the assessee failed to reply. It is also not a case where the assessee had not co-operated with the lower authorities in order to find out the real nature of the payments made to the non-residents. All the relevant agreements and invoices were filed before the lower authorities. In view of this, the assessee cannot be punished at this stage without there being any fault of his, specially in view of the fact that even at the time of hearing before us .....

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without any backing material or evidence on record. The argument of the learned D.R. that even if the provisions of DTAA are applied, in the absence of any services coming out from the evidences, it should be presumed that non-residents have 'made available' certain technical services to the assessee, is too farfetched. We are not inclined to entertain such a plea at this stage. In view of this also, we hold that the services rendered by the non-residents are not in the nature of technic .....

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