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2016 (7) TMI 580 - ITAT KOLKATA

2016 (7) TMI 580 - ITAT KOLKATA - TMI - TDS u/s 195 - whether the payments made by the assessee to its foreign subsidiaries would fall under the ambit of ‘fees for technical services’ as per the DTAA - PE in India - Held that:- We find that as per Article 7 of UK and Singapore Treaty, in the absence of PE in India, the business income also would not get taxed in India. Hence we hold that the payment made by the assessee to its subsidiaries is not chargeable to tax in India in the hands of the su .....

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we have no hesitation in directing the Learned AO to delete the disallowance made u/s 40(a)(i) of the Act in respect of payments made to foreign subsidiaries. - Decided in favour of assessee - Disallowance made u/s 14A - Held that:- We hold that the investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn any exempt income in the f .....

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in his order that the assessee had not provided even the basic details as to in whose name the membership is taken and who were the other persons visiting in the name of the Director and whether it was in the name of individual or corporate membership. We find that these facts are crucial for the purpose of deciding the issue. Hence we deem it fit and appropriate to set aside this issue to the file of the Learned AO to decide this issue afresh, in accordance with law, with a direction to the as .....

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06.02.2013 and 272/CIT(A)-VI/Circle-5/11-12/Kol dated 07.02.2013. Assessments were framed by Addl. CIT, Range-5, Kolkata u/s. 143(3) and 115WE(3) of the Income tax Act, 1961 (hereinafter referred to as the Act ) for AYs 2008-09 & 2009-10 vide his separate orders dated 09.12.2010 and 21.12.2011. As the issues involved in both the appeals are identical , they are taken up together and disposed of by this common order for the sake of convenience. 2. The first issue to be decided in this appeal .....

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10 also. The brief facts of this issue are that the assessee company is a stockbroker company. The assessee carries on business of brokerage on behalf of institutional clients. During the previous year relevant to the assessment year under consideration, the assessee had made payments to two of its wholly owned subsidiaries namely, M/s B&K Securities Ltd. (U.K.) and M/s. B&K Securities Pvt. Ltd. (Singapore). M/s B&K Securities Ltd (U.K.) is engaged in business of providing marketing .....

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reement was revised on 03.10.2007 w.e.f. 01.10.2007. As per the said agreement the assessee was to reimburse the cost incurred by the U.K. company and in addition was to pay a mark-up of 29% on cost for the marketing services provided by the U.K. company. M/s B&K Securities Pte Ltd (Singapore) is engaged in business, inter alia, of research and marketing services for securities/markets locally and overseas. B&K Singapore had provided various services, such as research and marketing servi .....

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o reimburse the cost incurred by the Singapore company and in addition was to pay a mark-up of 29% on cost for the marketing services provided by the Singapore company. 3.1. The details of payments made to B & K Securities Ltd, U.K. are as below:- M/s. Batlivala & Karani Securities (India) P. Ltd. DETAILS OF PAYMENTS MADE TO B&K SECURITIES LTD. U.K. ON ACCOUNT OF MARKETING SUPPORT SERVICES Sr. No. Period Nature of expenses Amount Remarks 1. 01.04.2007 to 30.09.2007 Lumpsum payment of .....

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was deducted and paid and there is no dispute on this payment. 3.2. The details of payments made to B & K Securities Ltd, Singapore are as below:- M/s. Batlivala & Karani Securities (India) P. Ltd. DETAILS OF PAYMENTS MADE TO B&K SECURITIES LTD. SINGAPORE ON ACCOUNT OF MARKETING SUPPORT SERVICES Sr. No. Period Nature of expenses Amount Remarks 1. 01.04.2007 to 30.09.2008 I) Reimbursement of actual expenses as per agreement dated 01.04.2007 1,59,18,988 i)No TDS was deducted from the .....

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on the service fee paid by the assessee to its subsidiaries but not deducted TDS on reimbursement of expenditure since it was not in the nature of income. The Assessing Officer was of the view that the assessee should have deducted TDS on the entire amount remitted to U.K and Singapore company since the payment made by assessee was on account of fees for technical services and hence taxable in the hands of nonresident. For holding that assessee ought to have deducted tax at source irrespective o .....

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lement accruing in the hands of non-resident. It was submitted that the assessee has deducted TDS on the mark up fee charged to its subsidiaries but has not deducted TDS on the reimbursement of expenses. It was submitted that the subsidiaries incur certain expenditure on behalf of the assessee which are reimbursed by the assessee at cost. It was submitted that such reimbursement does not give rise to income in the hands of the subsidiaries as a result no TDS is required to be deducted on the amo .....

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e income or profit of the deductee but only the amount of payment. Hence, he upheld the action of the Assessing Officer and confirmed the disallowance made u/s 40(a)(i) of the Act. 5. Aggrieved, the assessee is in appeal before us for the Asst Year 2008-09 on the following grounds:- I. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in affirming the disallowance of ₹ 2,17,79,771/- under section 40(a)(ia) of the Act as a result of wrongly applying the provisions .....

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aged in business, inter alia, of research and marketing services for securities/markets locally and overseas. B&K had provided various services, such as research and marketing services to the assessee. The services rendered by Singapore company were for expansion of assessee's business not only in Singapore but also in entire South East Asian countries. For this purpose a 'Business Services Agreement' was entered between the assessee and B&K on 01.04.2007 stipulating the term .....

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ny such jurisdictions. For the services rendered by Singapore company and which the assessee utilized for reinforcing its overall business operations, the service provider was to be paid service fees; and in addition granted reimbursement of the expenditure incurred. The relevant clauses from this writing for resolving the disputed issue are reproduced below for the sake of convenience :- REIMBURSEMENT OF EXPENSES AND SERVICE FEE 5.1 In consideration of the Business Services to be rendered by TH .....

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tive place of origin in Singapore. No part of the activities takes place in India nor the services they provide were utilized for carrying on the business in India. They wholly pertain to transactions with the institutional clients abroad. It is submitted that the Company explores the possibility of extending the assessee's sphere of operations by representing the assessee before the assessee and existing and potential institutional clients in Singapore. 7. Payments to U.K. Subsidiary The Le .....

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assessee was to pay lump sum amount of 18,000 pounds per month. The assessee deducted TDS while making the said payment hence, there is no dispute. As per the new agreement dated 03.10.2007 w.e.f. 01.10.2007, the assessee will reimburse the actual expenses incurred by the U.K. company and in addition will pay a service fee @ 29% for the services rendered by U.K. company. It is submitted that no TDS was deducted while making the payment for reimbursement of cost since it was reimbursement of act .....

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be. (b) As there is no permanent establishment of UK and Singapore Subsidiaries in India, payments made to them are not taxable in India under Article 7 of DTAA with UK and Singapore. (c) In any case, payments are not for fees for technical services as per the provisions of the IT Act. (d) Explanation to section 9(2) has been inserted retrospectively w.e.f. 1.6.1976 vide Finance Act, 2010 and hence, cannot be invoked for imposing TDS obligation in respect of payments already made in F.Y. 2007-0 .....

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ted in 327 ITR 456 (SC). (h) In any case, at the most, this is a case of short deduction and not non-deduction and hence, disallowance cannot be made u/s 40(a)(i) of the Act. 9. The Learned AR argued that the payments made to Subsidiaries do not fall within the definition of fees for technical services as per the provisions of the Act or the DTAA between India & Singapore vide Article 12(4) and India & UK treaty vide Article 13(4). He stated that as per India Singapore treaty, fees for t .....

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ake available technical knowledge, experience, skill know-how or processes, which enables the person acquiring the services to apply the technology contained therein: or (c) consist or the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the services to apply the technology contained therein. Similarly he argued that as per the India U.K. treaty, fees for technical services are defined as under:- Article 13 (4) 4 .....

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eived; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. He argued that with regard to Singapore Treaty, the payments made would admittedly not fall under Article 12(4)(a) and 12(4) (c ). Similarly in respect of U.K. Treaty, the paymen .....

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ent case, as is evident from the facts stated hereinabove, no technical services are being made available to the assessee by its foreign subsidiaries. As a result, even assuming without admitting that the payment is fees for technical services under the Act, the payments made by assessee to its subsidiary companies would not fall within the definition of fees for technical services under the DTAA since there is no technical knowledge made available to the assessee. Instead the subsidiary is only .....

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assessee, it will prevail over the provisions of the Income-tax Act. It was submitted that, in the present case, treaty between India and Singapore is more beneficial to the assessee and no additional tax liability arises under the shelter of treaty. In view of the above, it was submitted that the payments would not fall under the definition of fees for technical services as per DTAA and hence no tax is required to be deducted on the said payment. The Learned AR also made various arguments inde .....

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of the assessee in order to promote the business of the assessee in India should also be construed only as rendering of technical services and accordingly the consideration paid thereon is to be treated as fees for technical services. The assessee is not carrying on any trading activity in India. Accordingly he vehemently relied on the order of the lower authorities. 11. In defence, the Learned AR stated that the revenue had not disputed the contents of the supplementary agreement entered into .....

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r to fall within the ambit of fees for technical services as per the treaty. 12. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of copy of agreement with B&K Securities Ltd, UK (pages 1 to 6 of PB) ; copy of agreement with B&K Securities Pte ltd (Singapore) (pages 7 to 16 of PB) ; copy of computation of income of assessee (pages 19-21 of PB) ; copy of financial statements of the assessee (pages 2 .....

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of the UK Treaty defining the term fees for technical services , the consideration paid for rendering of managerial, technical or consultancy services would be covered under the said definition only if such services make available any technical knowledge, experience, knowhow, or processes. The nature of services rendered by the subsidiaries to the assessee were in respect of simple marketing services of introducing foreign institutional investors to invest in the capital markets in India so that .....

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DTAA between India and USA. In the Memorandum of understanding to the DTAA between India and USA, a description concerning fees for included services in Article 12 and paragraph 4 (in general) have been given. Examples of services intended to be covered within the definition of included services and those intended to be excluded have been given. The Memorandum explains how Paragraph 4(b) of Article-12 has to be understood. The Memorandum explains that Article 12(4)(b) refers to technical or cons .....

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that generally speaking, technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to m .....

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allurgical, and industrial engineering) ; 2. Architectural services ; and 3. Computer software development. Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas : 1. Bio-technical services ; 2. Food processing ; 3. Environmental and ecological services ; 4. Communication through satellite or otherwise ; 5. Energy conservation ; 6. Explorat .....

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with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.S. firm considered to be payments for included services ? Analysis : The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make avail .....

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ces. Although the U.S. company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plant or design. The U.S. company is merely performing a contract manufacturing service. Example 5 Facts : An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to tr .....

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performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer programme) which it has developed. Example 6 Facts : An Indian vegetable oil manufacturing company wants to produce a cholesterolfree oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulas wh .....

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It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services ? Analysis : The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, .....

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ervices even if they satisfy the tests of paragraph 4. Set forth below are examples of cases where fees would be included under paragraph 4, but are excluded because of the conditions of paragraph 5. 12.2.1. The Memorandum of understanding is a tool to understand as to what meaning was intended to be conveyed in the DTAA between countries. Since the wording of Article 12(4) and 13(4) of the treaty with Singapore and UK respectively and Article 12(4)(b) of the DTAA between India and US are identi .....

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th the DTAA with Finland towards this end. 12.2.2. The Mumbai Bench of the Tribunal in the case of Raymond Ltd. Vs. DCIT 86 ITD 791 (Mum) had to deal with a case of payment of commission by an Indian company to a non resident in connection with Public Issue of Global Depository Receipts (GDR) for services rendered outside India. The question before the Tribunal was whether the commission so paid can be said to be Fees for included services i.e., Fees for Technical Services under Article 13(4)(c) .....

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alifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skills etc. to the person utilizing the services. These words are which make available . The normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge etc. by himself in his business or for his .....

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ed which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience, skills etc. 12.3. Applying the definition of FTS in the Treaty to the facts of the present case in the light of the various decisions referred to above, it cannot be said that the rendering of services by the Singapore and UK Subsidiaries to the assessee made available to .....

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cal services as per the Treaty, it would be academic to look into the fact whether the said payment would be fees for technical services as per the provisions of the Income Tax Act. The applicability of TDS provisions thereon due to retrospective amendment in Explanation 2 to Section 9(1)(vii) of the Act by the Finance Act 2010 with effect from 1.6.1976 need not be gone into. We also feel that the aspect of applicability of TDS provisions on the reimbursement component also becomes irrelevant in .....

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even otherwise, attract the provisions of Sec.40(a)(i) of the Act. 12.5. Since the payment made by the assessee to its subsidiaries is not fees for technical services, then the same would be construed as only business income in the hands of the subsidiaries which would get taxed in India only in the event of existence of permanent establishment (PE) in India. We find that the Learned AO had categorically stated in more than one place in his order that the Singapore and UK subsidiaries do not hav .....

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amendment to the law as has been laid down by the Co-ordinate Bench decision of this Tribunal in the case of DCIT vs Subhotosh Majumder reported in (2016) 65 taxmann.com 42 (Kolkata -Trib.) dated 27.11.2015 wherein it was held that :- ■ The tax deductor is not expected to know how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospe .....

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earlier, such obligations can only be discharged in the light of the law as it stands that point of time. Section 40(a)(i) of the Act provides that inter alia, notwithstanding anything to the contrary in sections 30 to 38 of the Act, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession' on which tax is deductible at source under Chapter XVII-B and such .....

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o tax in India in the hands of the subsidiaries in India. The provisions of section 195(1) of the Act mandates a requirement that the income should be chargeable to tax in India to assume jurisdiction in India. In the instant case, it is proved beyond doubt that the subsidiaries do not have any income chargeable to tax in India and hence the decision rendered by the Hon ble Apex Court in the case of GE India Technology Centre P Ltd vs CIT reported in 327 ITR 456 (SC) supports the case of the ass .....

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ing of Hon ble Supreme Court decision in GE India Technology case on 9.9.2010. Hence we don t deem it fit and appropriate to discuss those case laws for the purpose of adjudication of this issue. 12.7. In view of the aforesaid findings , we have no hesitation in directing the Learned AO to delete the disallowance made u/s 40(a)(i) of the Act in respect of payments made to foreign subsidiaries. In view of the above conclusion, the other propositions advanced by the Learned AR before us are not ta .....

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s 1 & 2 raised by the assessee for the Asst Year 2009-10 are allowed. 14. The next issue to be decided in this appeal is as to whether the Learned CITA is justified in confirming the disallowance made u/s 14A of the Act in the facts and circumstances of the case. 14.1. Briefly stated facts are that during the previous year relevant to the assessment year under consideration, the assessee received exempt income of ₹ 1,68,786/- . The Assessing Officer made a disallowance u/s 14A r.w. Rul .....

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rred in applying Rule 8D while making disallowance u/s 14A of the Act. It was also submitted that the Assessing Officer has wrongly included the value of investment in mutual funds while making the said disallowance. The Ld. CIT(A), in principle upheld the action of the Assessing Officer but granted part relief to the assessee by excluding the value of investment in mutual funds while calculating average investments as per Rule 8D(iii). 14.2. The Learned AR argued that the majority of investment .....

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pose of investment is to gain controlling stake. In response to this, the Learned DR relied on the decision of Hon ble Calcutta High Court in the case of Dhanuka & Sons reported in (2011) 12 taxmann.com 227 (Cal HC). 15. We have heard the rival submissions. We hold that the investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn an .....

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at : However, we find that the calculation of disallowance under Rule 8D(iii) made by the Assessing Officer and upheld by Ld CIT(A) is not correct In view of the fact that Assessing Officer had included the value of total investments for calculation of disallowance whereas in our opinion the value of those investments should have been included which were made for the purpose of earning exempt income. The assessee had made significant investments in the shares of subsidiary companies which are de .....

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l findings as contained in the Kolkata Tribunal are reproduced below:- (iii) Further in Rule 8D(2)(ii), the words used in numerator B are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day of the previous year . The Assessing Officer was wrong in taking into consideration the investment of Rs. .103 crores made during the year which has not earned any dividend or .....

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investment is used to take care of cases where there is the issue of dividend striping. iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is ½ percentage of the numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Ru .....

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s, we held that value of strategic investments should be excluded for the purpose of disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance. As regards disallowance under Rule 8D(i) and 8D(ii) we have already held that no disallowance is warranted. We find that the Co-ordinate Bench of this Tribunal in the case of DCIT vs Selvel Advertising P Ltd repo .....

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