TMI Blog2017 (4) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... year ,the Revenue cannot now take a different stand without pointing out any change in facts vis a vis the preceding year. Thus we hold that the action of the TPO, accepted by the Assessing Officer and Ld. CIT (Appeals), in rejecting the foreign entity in the controlled transaction i.e. IDS-A, as a tested party is wrong and is, therefore, set aside. We may add that with regard to the rejection of the foreign entity as the tested party, we have considered all the arguments raised before us and no other arguments were raised before us. The decision rendered by us is on the context of solely the arguments which were raised before us.- Decided in favour of assessee TDS u/s 195 - Disallowance made u/s. 40(a)(ia) - non deduction of TDS on commission, legal and professional charges, marketing and selling expenses and outsourcing and business development expenses - Held that:- In the present case are identical to that in the case of assessee for assessment year 2009-10, with the impugned disallowance of expenses having been made for the reason that the same were taxable in India since they were sourced from India on account of the agreement entered into with the assessee an Indian Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he salary has not been earned in India. Having said so, the income of the non-residents on account of this salary is not deemed to have accrued or arisen in India and, therefore, was not chargeable to tax in India as salary. Thus, in such circumstances, section 192 was not applicable requiring the assessee to deduct tax at source on the said payment of salary and consequently, provisions of section 40(a)(iii) could also not be invoked to disallow the same. The contention of the Revenue all along we find, has been that section 40(a)(iii) is attracted because the payments have been made outside India to non-residents. The Revenue, we find, has picked up only one of the conditions enumerated u/s. 40(a)(iii) for making disallowance, choosing to completely ignore the basic condition required to be fulfilled, which is taxability of the said salary in India. Therefore, the disallowance, we hold, has been made on an incorrect interpretation of law. In view of the above, we hold that no disallowance u/s. 40(a)(iii) on account of non deduction of tax on salary paid outside India is warranted and the disallowance made is directed to be deleted - Decided in favour of assessee Disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment amounting to ₹ 45,68,000/- made by the Assessing Officer and upheld by the Ld. CIT (Appeals). 3. Brief facts relating to the issue are that the assessee is engaged in the business of providing software solution and IT enabled service in the areas of litigation support, publishing and content management, engineering services and healthcare support services. During the impugned year, it entered into international transactions with its AEs and justified the arm's length price as under: Nature of International Transaction Amount(In Rupees Lacs) Most Appropriate Method Profit Level Indicator Tested Party's Operating Margin Comparables Operating Margin Availing of marketing support services from IDS-A 439.70 Transactional Net Margin Method ('TNMM') Operating Profit/Operating Cost ('OP/TC') 5.50% 10.03% Provision of IT/IT enabled Services to IDS-A for resale 336.67 TNMM Operating Profit/Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee against the impugned adjustment made challenging the same on the ground that identical determination of arm's length price of the same transaction i.e. IT enabled services in the preceding year had been accepted by the TPO, that merely because the tested party was a foreign party, it could not be the basis for rejecting the transfer pricing study conducted by the assessee. The Ld. counsel for the assessee also justified the selection of the foreign party as the tested party and also challenged the comparability analysis carried out by the TPO, objecting to the comparables selected by it. 6. The Ld. DR, on the other hand, supported the order of the TPO and Ld. CIT (Appeals) and stated that detailed valid reasons had been given for rejecting the foreign party as a tested party. The Ld. DR also supported the search and comparability analysis carried out by the TPO. 7. We have heard the contentions of both the parties and have gone through the orders of the authorities below as also the documents referred to before us during the course of arguments. Though we find that the order of the TPO was detailed leading to the aforesaid transfer pricing adjustment, we shall be confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and that does not own valuable intangible property or unique assets...... The US Treasury Regulations under section 1.482-5 has defined tested party as below: .... the tested party will be the participant in the controlled transaction whole operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the tested party will be the least complex of the controlled taxpayer and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. 13.4 It emerges from the above guidelines that following factors play a major role in determining the choice of tested party:- 1. It should be a party for which the most reliable data for comparison is available. 2. It should be a party for which data in respect of comparable transactions is available. 3. It should be a party for which has the least complex functions 4. It should be a party for which does not own valuable intangible property or unique assets tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party on all the factors. Hence, the TP study prepared by the assessee taking IDS America as the tested party suffers from defect and analysis done in the show cause notice taking IDS Infotech is a better analysis on several accounts. 13.10 Since the analysis done by the assessee is based on the selection of IDS America, the same has been rightly rejected.' 9. Thus the only reason for rejecting the foreign AE as the tested party is that no reliable data in respect of foreign comparables is available. 10. Supporting the foreign AE as the tested party the Ld. counsel for the assessee took up the following arguments: (a) That the foreign AE was taken as a tested party in the preceding year also i.e. assessment year 2009-10 and arm's length price determined by the assessee was accepted by the TPO in is order passed for that year. The Ld. counsel for the assessee drew our attention to transfer pricing report for the preceding year, placed at Paper Book page No. 417 and the order of the Transfer Pricing Officer for the preceding year, i.e., assessment year 2009-10, placed at Paper Book page No. 133 in this regard. (b) The next contention raised by the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was thus no reliable data available in respect of the foreign comparables and hence the selection of the foreign entity as a tested party had been rightly rejected by the TPO. 13. We have heard both the parties on this aspect. The issue before us is whether the foreign entity in international transactions can be selected as a tested party for the purpose of carrying out comparability analysis. 14. Both the parties agree that as per the OECD guidelines, the US Treasury Regulations and the UN practicing Manual of transfer pricing for developing country, there is a broad consensus that the tested party should be one: (i) It is the least complex party to the controlled transaction. (ii) The party in respect of which most reliable data for comparability is available and; (iii) Which does not own valuable intangible or unique assets. 15. In the present case, we find that TPO has rejected foreign AE as the tested party for the reason that no reliable data in respect of foreign comparables was available. Thus as far as the foreign party being the least complex entity to the controlled transactions and not owning any valuable intangible or unique assets is concerned, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the assessee to furnish the same. The relevant findings of the I.T.A.T. in this regard at paras 11.4 and 11.6.5 are as follows: 11.4. Considering the divergent views expressed by various Tribunals (supra) and majority of them were in favour of selecting the 'tested party' either from local or foreign party and the United Nation's Practical Manual on transfer pricing for developing countries had observed that 'It may be the local or the foreign party', we tend to agree with the same. 11.5 Reverting back to the issue, the assessee submitted that in the transfer pricing documentation, it had provided the business profit of all 101 comparables selected by the assessee. 11.5.1 The DRP in its findings at para 11 had stated, among others, that in most cases the tested party will be the least complex of the controlled tax payers, and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. As GMDAT is not only a complex entity owning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available. 11.5.2 This view of the DRP has been denied by the learned Sr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. Therefore, there should be no grievance on the part of the Revenue to say that no sufficient data was made available. 11.6.5 Taking all the above facts and circumstances of the issue as discussed in the foregoing paragraphs, in consonance with the case laws quoted (supra) and also the United Nation's Practical Manual on transfer pricing, we direct the TPO to adopt GMDAT as the 'tested party' for analyzing the inter-company transactions of the assessee for both the AYs under consideration. To facilitate the TPO to analyze the inter-company transactions in the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. It is ordered accordingly. 18. Further Kolkata Bench of the I.T.A.T. in the case of Development Consultants (supra) held that the tested party should be the least complex of the controlled transaction and should not own valuable intangible property or unique assets and a foreign entity in the controlled transactions could also be treated as a tested party. Thus clearly, there is no bar as such in treating the foreign entity in a controlled transaction as a tested party mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated above, business description of these companies was also provided. Therefore, we find no merit in the contention of the Revenue that the reliable data in respect of foreign companies was not available as admittedly in the present case, the data was available in public domain and the sources was also made known to the TPO. The Revenue with all resources available at hand could have accessed the said sources and conducted comparability analysis. Besides, we find that the assessee had given entire detail of the search conducted by it so as to finally arrive at the 11 comparable companies given business description of these companies also and also provided their profits and loss accounts to arrive at the PLI i.e. OP/OC. Thus, all relevant data had been provided by the assessee to the TPO also. The TPO, we find, besides giving a general statement which is also incorrect, that no description was given regarding activities in which the comparable companies were involved, pointed out no other anomaly was in the data of the comparable companies furnished by the assessee. Therefore, following the decisions of the I.T.A.T. as quoted above, we set aside the rejection of the foreign entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there is no reason to deal with other arguments made by both the parties. Ground No. 1 raised by the assessee is, therefore, allowed. 27. Ground Nos. 2, 3 and 4 raised by the assessee are connected and are against the action of the Ld. CIT (Appeals) in upholding the disallowance made u/s. 40(a)(ia) of the Income Tax Act, 1961 (in short 'the Act') on account of non deduction of TDS on commission, legal and professional charges, marketing and selling expenses and outsourcing and business development expenses amounting in all to ₹ 2,84,52,914/-. 28. The assessee has raised the following grounds of appeal: 2. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the disallowance of ₹ 2,84,52,914/- 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 failed to appreciate that the provisions of Section 195 are not attracted in as much as payments were m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Atalan Makine Muhendislik Savunma Havacilik 3,49,948/- 3,49,948/- Marketing selling expenses IDs America INC 1,01,98,422/- 1,01,98,422/- IDS Infotech (UK) Ltd. 16,21,321/- 16,21,321/- Total 2,84,52,914/- 2,84,52,914/- 30. On being confronted with the same, the assessee submitted that no TDS has been deducted on the aforestated payments since the payees had no business connection in India, nor any permanent establishment in India and further by referring CBDT Circular No. 23 of year 1969 and Circular No. 786 of the year 2000, the assessee stated that it was not required to deduct any tax at source on the above stated payments. The Assessing Officer rejected the assessee's contention stating that u/s. 195 TDS has to be deducted on all reimbursements whether the non-resident had a residence or place of business in India or business connection or any other persons in any manner in India. The Assessing Officer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had arisen in the preceding year also in assessee's own case, which had been decided in its favour by the I.T.A.T., Chandigarh Bench vide its order in IDS Infotech Ltd. v. Dy. CIT2016 (6) TMI 98 - ITAT CHANDIGARH. The Ld. DR fairly conceded that the issue was identical and hence covered by the decision of the I.T.A.T., Chandigarh Bench for the preceding year but at the same time relied on the order of the CIT (A) and AO. 33. We have heard the contentions of both the parties, gone through the facts of the case and also the order of the I.T.A.T. for the preceding year. The undisputed facts emerging in the present case are that on account of non-deduction of tax at source of various payments made to foreign entities as listed above, the Assessing Officer invoked the provisions of section 40(a)(ia) of the Act and made disallowance of the same for the reason that the said payments made to the foreign entities were taxable in India since the source of income accrued and arose in India by virtue of the agreement entered into with the assessee, an Indian company, and also on account of the fact that the benefit of the services rendered were utilized in India. 34. We have also go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to tax only if it receives or is deemed to have received any amount in India or is deemed to accrues or arises in India. Adverting at this point to the facts of the case, the I.T.A.T. held that in the present case it is not disputed that the amount is neither received in India, nor deemed to have been received in India and further pointed out that the dispute is only with regard to whether the amount is deemed to accrue or arises in India. Thereafter it dealt with the relevant provisions for the purpose of adjudicating the issue in the present case i.e. section 9(1) of the Act and further dealt with the judgment of the Hon'ble Apex Court in the case of CIT v. R.D. Aggarwal Co. [1965] 56 ITR 20 which had illustrated instances of non-residents having business connection in India. The I.T.A.T. thereafter held that the said disallowance in the present case was unwarranted, Firstly for the reason that no case has been made by the lower authorities as to whether the income accrued in India or was deemed to have accrued or arisen in India. Further the I.T.A.T. held that nothing was brought on record by the lower authorities to show that there was any business connection of the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,82,154 IDS Infotech, UK 21,29,762 IDS Infotech, USA 2,08,87,085 1,39,86,202 IMCS, Tunisia 73,79,858 TOTAL 1,26,794 83,36,946 69,17,950 2,35,80,796 1,80,054 1,39,86,202 TOTAL 5,31,28,742/- 22. Out of these non-resident entities, entities, namely IDS Infotech (UK Ltd.), IDS America (USA INC) and BV Designs, Netherland are the wholly owned subsidiaries of the assessee company. Apart from this, with regard to the payments made to IMCS, other issues have also been raised by the Assessing Officer. One is with regard to com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 such, are not exigible to the provisions of TDS, whether these are in the nature of 'fees for technical services'. As such, the tax is to be deducted out of these payments. 25. The basic issue is whether the tax is to be deducted while making these impugned payments. The Assessing Officer has invoked the provisions of section 40(a)(i) of the Act in this regard. The provisions of section 40(a)(i) of the Act to the extent relevant in the present case reads as under : 40(a)(i) Notwithstanding 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 payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such amount arises. Charge of income tax is provided under section 4 of the Act, while scope of total income is provided in section 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 deemed to accrue or arise to him in India during such year. Explanation 1-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;] [(d) in the case of a non-resident, being- (1) an individual who is not a citizen of India; or (2) a firm which does not have any partner who is a citizen of India or who is resident in India; or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India, no income shall be deemed to accrue or arise in India to such individual, firm or company through or 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-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;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. The relevant portion of the CIT (A)'s findings are recorded at page 12 para 10.3, in later part of this paragraph, he states as under: The payment are made by the appellant company and these are in the nature of marketing support services and selling expenditure for getting more and more business abroad. The services provided by the nonresident entities for promoting sales and legal/profession services are as per the terms of contract which is entered by these entities within the appellant 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 appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. These activities have been culled out from the judgement by the CBDT itself in its circular No. 23 [F.NO. 7A/38/69-IT (A-11)], dated 23.07.1969. 33. In the present case, no finding has been brought on record by any of the lower authorities that non-resident entities have any such connection with India as illustrated above. All along the assessee has been maintaining that the non-resident 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 controvert the said submission of the assessee. In this manner, we do not hesitate to conclude that no services were rendered by non-residents in India. This conclusion of ours is also based on the proposition as laid down by the Delhi High Court in the case of CIT v. EON Technologies Pvt. Ltd. (2012) 34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (SC). 38. On going through the relevant article provided in the DTAA, we observe that invariably in all the DTAAs to which we are concerned, the income is taxable in India only if that foreign entity carries on business in India through a permanent establishment situated in India. We again observe that no such finding with regard to existence of any permanent establishment in India has been brought on record by any of the lower authorities or even by the learned D.R. at 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant assessment year, which was subject to the reference under section 92CA(1) of the Act to the Transfer Pricing Officer and the Transfer Pricing Officer has suggested no adjustment with respect to the Arm's 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 nature of 'fees for technical services' that is the reason why at the assessment stage, the assessee was never confronted by any query with respect to the payments being that of the nature of 'fees for technical services'. The contention of the learned D.R. before us was that the learned CIT (Appeals) has held these payments to be in the nature of 'fees for technical services'. We have very carefully perused the order of the learned CIT (Appeals). Only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In fact, he enjoys the powers of enhancement also. Therefore, in case he had any apprehension as to the real nature of the payment, who stopped him to carry out further investigations in this regard? In the absence of any finding given by the Assessing Officer or the CIT (Appeals) in this regard, we are not inclined to examine the case of the assessee with a view whether the payments are in the nature of 'fees for technical services' or not. It is not a case where certain queries were put either by the Assessing Officer or by the learned CIT (Appeals) to the assessee with respect to the payments being '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, the learned D.R. could not bring any material or evidence in support of his claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees for technical services . Therefore the decision laid down in the preceding year will squarely apply to the present case also, following which we delete the disallowance made u/s. 40(a)(ia) of the Act amounting to Rs. .2,84,52,914/-. 37. The grounds of appeal Nos. 2,3 4 raised by the assessee are, therefore, allowed. 38. Ground No. 5 raised by the assessee reads as under : 5. That the Ld. Commissioner of Income Tax (Appeals) further erred in upholding the addition of ₹ 18,09,790/- for non deduction of tax u/s. 194-I applying the provisions of Section 40a(ia) in utter disregard of the explanations rendered which is arbitrary and unjustified. 39. In the said ground, the assessee has challenged the action of the Ld. CIT (Appeals) in upholding the addition made by invoking the provisions of section 40(a)(ia) on account of non deduction of TDS on rent paid as per the provisions of section 194I of the Act. 40. Brief facts relating to the issue are that the assessee had paid rent to various parties on which TDS had not been deducted. On being confronted with the same, the assessee submitted that the rent had been paid to the representatives of the family and if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the property SCO 142 to 145, Sector 34, Chandigarh and the assessee for leasing the said premises to the assessee. At page No. 2 of the said agreement, it has been specifically stated that the said agreement has been entered between the following parties: R.S. Sandhu, M.s. Sandhu, advocate for self and as attorney of Shri Gurbrinder Kaur and Navdeep Kaur his daughters and as guardian of Amrita Kaur (Minor), Amar Singh Chahal, Surjit Kaur, Daljit Kaur, Manpreet Singh and Harpree Kaur, Brig. Swaran Singh (Retd.) for self and on behalf of Gurmeet Kaur, his wife, Major C.S. Lehal, his daughter Kanwal Lehal and Dr. Serbmeet Singh who are the owners and landlords of SCO 140 to 145, Sector 34, (City Centre), Chandigarh. This persons hereinafter referred to as the lessors which term included their heirs, executors, administrators, legal representatives, succesors and assignees. AND Ids Infotech L:imited (Earlier name Inde Dutch systems (India) Limited) having its registered office at SCO 144-145, Sector 34A, Chandigarh through its Head-Commercial, Mr. Satish Goel, (duly authorized by the Company by a resolution attached hereinafter to be called the lessee', which term shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 194(I) of the Act to the same as also the provisions of section 40(a)(ia) of the Act for non deduction of tax, if found in any case. This ground of appeal No. 5 of the assessee is, therefore, allowed for statistical purposes. 49. The ground No. 6 raised by the assessee reads as under : 6. That the Ld. Commissioner of Income Tax(Appeals) further erred in upholding the addition of ₹ 39,73,746/- for non deduction of tax on salaries paid outside India applying the provisions of Section 40a(iii) in utter disregard of the explanations rendered which is arbitrary and unjustified. 50. In the said ground, the assessee has challenged the action of the Ld. CIT (Appeals) in upholding the disallowance made of ₹ 39,73,746/- being salaries paid outside India, for non-deduction of tax at source on the same, by invoking the provisions of section 40(a)(iii) of the Act. 51. Brief facts relating to the issue are that during assessment proceedings the Assessing Officer noticed that the assessee had made payment of salaries to the following persons outside India without deducting tax at source : Particular Amount (INR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals with disallowance of payment which is chargeable under the head salary and is payable outside India or to a non-resident and on which tax has not been paid, nor deducted therefrom as per the provisions of Chapter-XVII-B of the Act. The undisputed and unchallenged facts relating to the present issue are that the salary amounting to ₹ 39,73,746/- was paid to two persons outside India as per the detail already reproduced above. The fact that the payment was in the nature of salary is not disputed, as also the fact that the said payment was made to non-residents and has been made outside India. The issue in this ground relates to disallowance made u/s. 40(a)(iii) of the Act. The said section is being reproduced hereunder for a better understanding: '(iii) any payment which is chargeable under the head Salaries , if it is payable outside India and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B;' 57. As per the said section the following conditions need to be fulfilled before making any disallowance under the same: (i) The payment should be chargeable under the head Salaries . (ii) It should be payable outside India o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections in the case of non-residents income which is either received or deemed to have been received in India or which accrues or arises or deemed to accrues or arises in India is chargeable to tax in India. In the present case, the salary undisputedly has been paid outside India and thus not received or deemed to have been received in India to be chargeable to tax in India. Therefore, it has to be seen whether the salary accrued or arose or deemed to have been arisen or accrued in India. Section 9(ii) of the Act deals with the situation or condition in which salary is deemed to accrues or arises in India. The said section is reproduced hereunder: 9. (1) The following incomes shall be deemed to accrue or arise in India :- (ii) income which falls under the head Salaries , if it is earned in India. [Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India ;] 60. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und relates to disallowance of interest made by invoking the provisions of section 36(1)(iii) of the Act. 64. Brief facts related to the issue are that during the course of assessment proceedings the Assessing officer noted that the assessee had debited financial charges of ₹ 93,51,000/- on secured loans which consisted of term loan from bank, car and packing credit. The Assessing officer observed that the assessee had substantially invested amount of ₹ 1,59,90,000/- in wholly owned subsidiaries of the appellant companies in U.S. and U.K. The Assessing officer further noted that in assessment year 2004-05, proportionate interest had been disallowed against which the assessee had not preferred an appeal. In view of the aforesaid facts the Assessing officer made disallowance u/s. 36(1)(iii) and worked the same at ₹ 28,42,206/-. Further, he reduced the notional interest already disallowed by the assessee u/s. 36(1)(iii) amounting to ₹ 25,02,206/- and added back the balance amount of ₹ 3,40,000/- to the income of the assessee. 65. Before the Ld. CIT (A), the assessee contended that the subsidiary of the assessee company generated revenue for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ITAT relied upon the decision of the Apex court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 in this regard. The ITAT held that since no fact had been brought on record by the lower authorities, that the amount used by the subsidiaries companies were for purposes other than business, the said investments were commercially expedient. The ITAT, therefore, held that no disallowance under the provisions of section 36(i)(iii) could, therefore, be made. Reliance was placed on the judgement of the Apex Court in the case of Hero Cycles (P.) Ltd. v. CIT [2015] 379 ITR 347 in this regard. The relevant findings of the ITAT at para 7 8 of the order are as follows:- 7. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. We are in total agreement with the submissions made by the learned D.R. that the assessee has to demonstrate that the 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 submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the amounts given to subsidiary companies were on account of commercial expediency. Therefore, no disallowance invoking the provisions of section 36(1)(iii) of the Act can be made in this case. The ground No. 1 raised by the assessee is allowed.' 69. The facts in the present case, we find are identical to that in assessment year 2009-10, wherein, disallowance has been made on account of investment made by the assessee company in wholly owned subsidiary. Since the ITAT in the preceding year has held the said investment to be for business purposes, being commercially expedient, following the same, we hold the identical investment in the impugned year also to be commercial expedient for the assessee company and having held so, there can be no case for making any disallowance u/s. 36(1)(iii) on account of making the aforesaid investment. In view of the same, the disallowance made u/s. 36(1)(iii) amounting to ₹ 3,40,000/- is therefore, deleted and the order of the CIT (A) on this ground is therefore, set aside. 70. Ground No. 7 raised by the assessee therefore, stands allowed. 71. Ground No. 8 raised by the assessee reads as under : 8. That the Ld. Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for the year placed at Paper Book page No. 695. The Ld. counsel for the assessee stated that all the above duly reflected the receipt of the said amount in the books of the assessee for the year and, therefore, there was no reason to make any disallowance of the same on account of not recording receipt of the same in the books of the assessee. 75. The Ld. DR, on the other hand, supported the orders of the lower authorities. 76. We have heard the contentions of both the parties. We find merit in the contention the Ld. counsel for the assessee. On perusal of the above documents produced before us, we find that the sale of Catia V5 licence of M/s. Aeromatrix Info Solutions Pvt. has been duly reflected in the ledger account of M/s. Aeromatrix Info Solutions Pvt., the software account, in the fixed asset chart shown by the assessee and depreciation on account of sale of the said asset has been also duly reversed in the ledger of depreciation. All books of account were produced before the lower authorities and it can, therefore, be safely concluded that all material was placed before the lower authorities to substantiate its claim. The disallowance having been made on account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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