TMI Blog2018 (10) TMI 1168X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business of the PE would be in accordance with provisions subject to the limitation of the taxation laws of that State. Similar phraseology has been used in India UAE DTAA after the protocol. Once in a treaty no such restriction has been provided for applying the limitation of the domestic taxation laws, then such limitation given under the Indian Income Tax cannot be imported in such an Article. If the expenditure has been incurred on the payment of salary or reimbursement of salary of the employees, then same has to be allowed while computing the profit and loss of the PE in full and without any restriction of deductibility as per the provision of Income Tax Act. No infirmity in the order of the Ld. CIT(A) that restriction in allowing the expenditure invoking provision of section 40(a)(i) of the Income Tax Act cannot be read Indo Mauritius DTAA and accordingly, disallowance by invoking the provision of section 40(a)(i) cannot be made. Hence disallowance of salary paid to the employees has rightly been deleted by the Ld. CIT(A). Consequently ground No. 1 as raised by the revenue is dismissed. Operating contract expenditure with the payment made to the non resident - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TDS on salary paid to employee(s) and that section 40(a)(i) has no application, ignoring the convention in Treaty Interpretation that in absence of a specific provision, domestic law of contracting State would apply. 2. Whether on the facts and circumstances of the case, the CIT(A) has erred in deleting the addition of ₹ 3,33,018610 by holding that in the absence of any restrictive clause in Article 7 of Indo- Mauritius DTTA no disallowance could be made for non deduction of TDS out of operating Contract expenses and that section 40(a)(i) has no application, ignoring the convention in Treaty interpretation that in absence of a specific provision, domestic law of contracting state would apply. 3. Whether on the facts and circumstances of the case, teh CIT(A) has erred in deleting the additions by holding that in the absence of any restrictive clause in Article 7 of Indo-Mauritius DTTA no disallowance could be made for non deduction of TDS and that section 40(a)(i) has no application, ignoring that most Commentaries on Model tax Conventions sate that since modern commerce organizes itself in an infinite variety of ways, it would be quite impossible within the narrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to U.S. $ 11,63,758; Secondly, travel and entertainment expenses US $ 14,02,271/-; Lastly, operating contract expenses amounting to US $ 10,65,516/-. The AO on the employee cost noted that the assessee could not furnish the details of names and address of the employees, duration of the stay of each employee in India and whether TDS has been deducted on salary paid to the said employees. Only the names and amount paid was submitted. In absence of details like whether TDS was deducted on the payment of salary or whether these employees were filed their income tax in India or not, AO held that the entire employee cost cannot be allowed and after invoking the provision of section 40(a)(i), he disallowed the sums amounting to ₹ 4,57,82,240/- (USD 1163,758 @ conversion rate of 39.34). 3. Similarly, with regard to cost relating to travel and entertainment, the AO noted that the assessee was requested to produce the vouchers and bills of expenditure incurred ProjectWise as it was claimed by the assessee that such expenditure has been incurred in as many as 21 projects. However, as noted by him the assessee could only submit copy of ledger account and vouchers and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses and accordingly, the expenditure is to be allowed when the same has been incurred for the purpose of the business of PE and no restriction has been provided in the Article and thus, no disallowance could be made on the ground that no deduction of tax at source from salary paid to such employees and provision of section 40(a)(i) cannot be invoked. 6. With regard to disallowance of travel and entertainment cost, Ld. CIT(A) held that during the course of the assessment proceedings the assessee had submitted the expenses reimbursement claim forms with all supporting documents like name of the employee, details of the Indian project for which the expenses have been incurred, amount incurred and other relevant information. The assessee has also submitted the copy of ledger account with all the supporting documents for verification before the AO including the ProjectWise break up for expenses. He held that the stand taken by the AO that assessee has failed to substantiate its claim is not tenable at all in wake of evidences filed before him. Once these details were submitted it was the onus of the AO to rebut the same and without pointing out any error or omission in the details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges 42 to 48 wherein expenditure details in relation to the various projects which were submitted before the AO. The main reasoning for disallowing the expenditure towards the salary by the AO was that, firstly, the persons receiving the salary have not filed their income tax return in India; and secondly, TDS has not been deducted on such payments. In this regard it was also brought on record that employees have spent only portion of their time and efforts of the activities and only such portion of the salary was claimed as expenditure for the purpose of determining the profits in India. The basis for disallowing is invoking of section 40(a)(i) which under the terms of article 7 (3) of India and Mauritius DTAA could not have been made, specifically when there is no provision for restriction of the allowing of expenditure as per domestic law. He also relied upon the judgment of ITAT Mumbai Bench in the case of M/s State Bank of Mauritius Limited vs. DDIT in ITA No. 2254/Mum/2005 order dated 3.10.2012. The Tribunal held that there is no restriction on the allowability of expenses subject to the limitations of the taxation laws of India in Article 7 (3) of India Mauritius DTAA. In so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54,238 53 15% 8. Soumitra Sen 47,569 0 0% 9. Rex Bigler 56,424 43 12% 10. Lynn Berry 24,949 13 4% 11. Neeraj Nityanand 51,230 107 29% 12. Other Employees 267,822 Total 1,163,758 Average 17% 10. Ld. AO has made the disallowance after invoking the provision of section 40(a)(i) on the ground that no TDS has been deducted on the salary paid to the employees. First of all, from the perusal of the letter filed before the AO dated 20th February, 2001 (copy placed at page 49 of the paper book alongwith the enclosures thereto), we find that assessee has given duration of the stay of each employee in India and vide earlier letter dated 13t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited in ITA No. 2254/Mum/2005, wherein the Tribunal has threadbare analysed article 7 (3) of Indo Mauritius DTAA and the phraseology used in other treaties wherein limitation of taxation in the contracting state has been specifically provided. Thus, we do not find any infirmity in the order of the Ld. CIT(A) that restriction in allowing the expenditure invoking provision of section 40(a)(i) of the Income Tax Act cannot be read Indo Mauritius DTAA and accordingly, disallowance by invoking the provision of section 40(a)(i) cannot be made. Hence disallowance of salary paid to the employees has rightly been deleted by the Ld. CIT(A). Consequently ground No. 1 as raised by the revenue is dismissed. 12. In so far as the deletion of operating contract expenditure with the payment made to the non resident on the ground that TDS has not been deducted and therefore same are to be disallowed u/s 40(a)(i), we find that, firstly, nowhere it has been brought on record that the payment made to these non-residents were income in the hands of such non-residents which is to be taxed in terms of section 195(2); secondly, the provision of section 40(a)(i) cannot be invoked while allowing the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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