TMI Blog2017 (3) TMI 1755X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of the facts which were brought to our notice for rejection of the foreign entity as the tested party, is that the data in respect of comparable transactions was not available. At this juncture, we would like to point out that the I.T.A.T. in a number of decisions, pointed out by the Ld.Counsel for the assessee, held that if an assessee wishes to take a foreign entity as a tested party, it can do so provided a relevant data for comparison is either available in the public domain or is furnished to the tax department/administration. 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. 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses and outsourcing and business development expenses - HELD THAT:- 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 Company and also on account of the utilization of the services for the benefit of the assessee Indian Company. In the present case also we find that there is no finding of the lower authorities with regard to the fact that the income to the payees of the said expenses arose or was deemed to arise in India as per the provisions of section 9 of the Act. There is no finding regarding the existence of any business connection, as defined, under section 9(1) nor of any permanent establishment of the payees in India. Moreover in the present case also there is no finding that the payments in question were fees 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). Non deduction of tax u/s 194I - non deduction of TDS on rent paid - Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance made is directed to be deleted. Disallowance of interest made by invoking the provisions of section 36(i)(iii) - HELD THAT:- 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(i)(iii) on account of making the aforesaid investment. The disallowance made u/s 36(i)(iii) is therefore, deleted and the order of the CIT(A) on this ground is therefore, set aside. Addition of account of alleged non declaration of receipts on sale of assets to M/s Aeromatrix Info Solutions Private limited - HELD THAT:- 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.67 TNMM Operating Profit/Sales ( OP/Sales ) 1.50% 1.77% Availing of marketing support services from IDS-UK 16.21 TNMM OP/TC 5.75% 6.68% Reimbursement of expenses paid/received 3.82 Comparable Uncontrolled Price Method ( CUP ) N.A Refer para 5.4.1 Refer para 5.4.1 4. On a reference from the Assessing Officer the TPO determined the arm s length price of the international transactions. While the arm s length price of international transactions pertaining to market support services from IDS-A and IDS-UK and reimbursement of expenses paid/received to/from IDS-A was accepted by the TPO, the international transactions pertaining to provision of IT/IT enabled services to IDS-A for resale was subjected to detailed analysis/ scrutiny. The TPO found that the assessee had determined the arm s length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 confining ourselves only to the arguments raised by the Ld.counsel for the assessee and the Revenue ,both for and against the order passed by the Ld. CIT (Appeals). 8. The first contention raised before us by the Ld. counsel for the assessee is that the TP study of the assessee has been rejected for the reason that the foreign AE was taken as a tested party. Arguments both for and against the action of the TPO were made before us. The impugned transaction relates to IT enabled services entered into with IDS-A amounting to ₹ 336.67 lacs. The assessee had justified the arm s length price of the said transaction by applying TNMM method taking OP/TC as the PLI and the associate enterprise(AE) i.e. IDS-A as the tested party. All these facts are not disputed. The TPO rejected IDS-A as a tested party for the reason that the tested party should be one who has the least complex functions, which does not own valuable intangibles property or unique assets distinguishing it from its comparables and it should be the party for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 that distinguish it from comparables. 13.5 When the facts and circumstances of the case are tested on these factors following position emerges:- 1. In the show cause notice, assessee was asked to establish with evidence how the costs taken are without markup:- Further, it has been stated that IDS Infotech has charged a markup on international transactions pertaining to provision of ITEnabled services. However, no such segmental financials establishing the same have been given. Cost sheets given also do not provide any evidence to establish that the costs taken are without any markup. 13.6 It is seen that the comparables given are foreign comparables. Very little information in respect of the same has been provided except their P L accounts. No description has been given in the TP report to establish whether the comparables are also involved in the same activity. Hence, no reliable date in respect of foreign comparables is ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 that the foreign tested party i.e. IDS-A was the least complex amongst the parties to the transactions, the other party being the assessee itself. The Ld. counsel for the assessee stated that while the assessee was engaged in full-fledged product development and marketing/product selling covering a wide range of activities and other commercial or marketing intangibles and is the developer, owner and licensor of virtually all valuable intellectual property rights including proprietary products and processes, whereas it bears all significant business and entrepreneurial risks, product development, performance and financial risks and develops and sells products and services to unrelated parties across the globe, the IDS-A, on the other hand, indulged only in the activity of providing marketing support services to the assessee for the American market and took only routine risks associated with und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets. 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, there is no dispute that the foreign entity to the transactions i.e. IDS-A is the least complex and does not own any valuable intangible or unique assets. The only issue on which the acceptance or rejection of the foreign entity as a tested party rests is vis- -vis availability of the appropriate foreign comparables. 16. The only reason with the TPO for holding so , which emerges from the above discussion and arguments made before us and on the basis of the facts which were brought to our notice for rejection of the foreign entity as the tested party, is that the data in respect of comparable transactions was not available. At this juncture, we would like to point out that the I.T.A.T. in a number of decisions, pointed out by the Ld.Counsel for the assessee, held that if an assessee wishes to take a foreign entity as a teste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. Counsel during the course of hearing which has not been contradicted by the Revenue with any documentary evidence. 11.6. To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M M should also be put to such a stringent comparability test. It was, further, argued that M M is also involved in the manufacture of multi utility vehicles, light commercial vehicles as well as three wheelers apart from passenger cars. It was, further, countered by the assessee if Force Motor Limited were to be rejected on the basis of different profit profile and then M M should also be axed on the same logic. We find force in the above argument of the assessee. According to the assessee, GMDAT is only engaged in manufacturing and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultancy (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 merely for the reason that the data of the comparable companies was not available. What is essential in this regard is that the data should be available in the public domain which the Revenue with all its resources can have access to and or the assessee has furnished all relevant data to the tax administration. 19. In the present case, we find that both the conditions are being fulfilled. On perusal of the transfer pricing study conducted by the assessee placed at Paper Book page Nos.709 to 771, we find that it has been categorically mentioned therein that Global Symposium, a search engine covering financial and business datas for companies operating across the globe was used and it has data from four public databases/ sources: i) Standard Poor s Research Insight : Compustat North America ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entity IDSA as the tested party. 22. It is pertinent to point out that for determining the ALP of the international transactions relating to marketing services provided by IDS-A and IDS-UK also ,we find, that the assessee had taken the foreign entities as the tested party. These were not rejected by the TPO. Clearly, therefore, there is inconsistency in the stand of the TPO rejecting the selection of foreign entity as a tested party for the purpose of IT enabled services while accepting the same for marketing support services. For this reason also, the rejection of the foreign entities as a tested party needs to be set aside. 23. Further as pointed out by the Ld. counsel for the assessee, in the preceding assessment year also the assessee had taken IDS-A as its tested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 made to parties who are outside of India and have no permanent establishment in India and as such the order passed is illegal, arbitrary and unjustified. 4. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding that income of non resident has accrued and arisen in India which is contrary to the facts of the case and as such the order passed is illegal, arbitrary and unjustified. 29. The brief facts relating to the case are that the assessee is the supplier of software related services and had incurred expenses on account of commission, legal and professional charges, outsourcing expenses, market support fees to various companies/abroad some of which were its associated enterprises. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 also observed that the benefit of various services provided by the above entities had been utilized in India, that the agreement had been entered into with an Indian company, the charges were payable by the Indian company and, therefore, the source of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 gone through the order of the I.T.A.T. in the case of assessee for assessment year 200910 in ITA No.52/Chd/2016 dated 24.5.2016. We find that identical disallowance of commission, legal and professional, marketing and selling, business development, outsourcing and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Vs. R.D. Aggawal 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 foreign entities in India and thus establishing that the income was deemed to accrue or arise in India. The I.T.A.T. also observed that there was also no finding of any permanent establishment of the said entities in India. In view of the same, the I.T.A.T. held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21,29,762 2,08,87,085 1,80,054 1,39,86,202 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 comparison of the payments made to this concern with the other concern and other is whether payment made to this concern is not to be allowed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices . 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 payable,- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid [during the previous year, or in the subsequent year before the expiry of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (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 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appellant company and hence the payment made by the Indian company for services utilized is not in connection with business/profession carried out, outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 23[F.NO. 7A/38/69-IT(A-11)], dated 23.07.1069. 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 Vs. EON Technologies Pvt. Ltd. (2012) 343 ITR 366 (Del). 34. In view of this, we find that the provisions of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the treaty override the provisions of the domestic law. These fundamental principles are wellsettled 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 to tax in India in the hands of non-resident entity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 at two places in his order he has mentioned the term fees for technical services . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 claimed that the impugned payments were in the nature of fees for technical services . His only argument is that in the absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 No.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 1941 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 the same was apportioned among the family members the rent received by each member would be below the limit laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 include its heirs, executors, administrators, legal representatives, successors and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes to invoking the provisions of section 40(a)(iii) of the Act, which deals 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 4 and 5 of the Act which have already been discussed above in ground Nos.2, 3 and 4 dealt with above by us. As per the said 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer whereby she disallowed the interest paid up by applying the provisions of section 36(i)(iii) which is allowable arbitrarily and unjustified. 63. The issue raised in the present ground relates to disallowance of interest made by invoking the provisions of section 36(i)(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(i)(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 adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the financial health of these concerns effect the financial health of the assessee companies also and therefore, the investment made in the subsidiaries companies are for commercially expedient purposes. The ITAT relied upon the decision of the Apex court in the case of S.A. Builders Vs. CIT (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 (2015) 279 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 criteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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(i)(iii) on account of making the aforesaid investment. In view of the same, the disallowance made u/s 36(i)(iii) amounting to ₹ 3,40,000/- is therefore, deleted and the order of the CIT(A) on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons Pvt. placed at Paper Book page 288, in the schedule of fixed assets placed at Paper Book page No.385, in the ledger account of software purchased placed at Paper Book page No.693 and in the ledger account of depreciation 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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