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TMI Blog2020 (11) TMI 901X X X X Extracts X X X X X X X X Extracts X X X X ..... as much as it was not appreciated that no payment is made from India to the employees of Head Office. 1.2. That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the addition of Rs. 73,17,1597- did not appreciated applicability of section -9(1)(ii), which limitedly taxes salary earned India. 1.3 That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the addition of Rs. 73,17,159/- did not appreciated that since no payment is made by assessee in India within the meaning of section-192, there can be no occasion to apply section- 40(a) (i)/ 40(a) (iii). 1.4 That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the disallowance of Rs. 73,17,159/- did not objectively considered non- discrimination article in India-Netherland's DTAA (Direct Taxation Avoidance Agreement), which immunizes the disallowance of salary expense because similar provision was not there u/s 40(a)(ia), which in the period under consideration excluded salary expenses. 1.5 That on the facts and in the circumstances of the case and I n law the Ld. CITA while sustaining the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services from India itself. Therefore, the salary paid to the employees would be taxable in India as it accrues or arises in India. Therefore, the assessee should have deducted TDS on salary as per provisions of section 40(a)(i) of the Act. Since the assessee failed to do so the AO disallowed the amount of Rs. 73,17,159/- claimed as salary expenses and added the same to the total income of the assessee. 5. Before the Ld. CIT(A) the assessee relying on various decisions submitted that the AO has applied incorrect provision of law for disallowing the salary expenses. Referring to various provisions of DTAA between India and Netherelands and relying on various decisions, it was argued that since salaries did not accrue or arise in India , the same was not chargeable to tax. 6. However the Ld. CIT(A) was also not satisfied with the arguments advanced by the assessee and upheld the action of the AO by observing as under :- FINDINGS "6.3. In terms of Article 15 of India-Netherlands DTAA, the taxation of dependent personnel services is governed as under: "DEPENDET PERSONAL SERVICES 1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other similar re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have contributed to the project, for which services were rendered in India through the PE of the appellant in the form of the project office. Further, since in terms of the above mentioned agreement, the appellant was to provide consultancy services for preparing and finalizing State transport policy and strategy through a consultative process,it is evident that even if some of the employees may have worked from Netherlands, the services by the appellant were rendered in India. The appellant does not get benefit of paragraph 2 of Article 15 as all were 3 conditions were not cumulative satisfied. In particular, the condition at paragraph 2(c) stating that the remuneration is not borne by a PE is not satisfied. In view of this, I -uphold the action of the AO of making disallowance u/s 40(a)(i) as such salary income was taxable in India and the appellant failed to deduct tax thereon. Accordingly, the Ground No. 1 is dismissed." 7. Aggrieved with such order of the Ld. CIT(A) assessee is in appeal before the Tribunal. 7.1 Ld. Counsel for the assessee strongly challenged the order of the CIT(A) in confirming the disallowance made by the AO on the ground that such salary which is charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilled. It was accordingly held that provision of Section 40(a) (i) would not apply for such non deduction of tax. He submitted that the above decision of the Hon'ble Delhi High Court is squarely applicable to the facts of the present case. Therefore disallowance made by the AO and sustained by the Ld. CIT(A) should be deleted. 10. Ld. DR on the other hand heavily relied on the order of the AO and Ld. CIT(A). Referring para 6.5 of the Ld. CITA() Ld. DR submitted that he has given a categorical finding that three of the employees have visited India for less than 183 days and have contributed to the project for which services were rendered in India through the PE of the assessee in the form of the project office. He has given a categorical finding that the assessee does not get benefit of paragraph 2 of Article 15 as all 3 conditions were not cumulatively satisfied. He has given a finding that the condition at paragraph 2(c) stating that the remuneration is not borne by the PE is not satisfied. He accordingly submitted that since the order of the Ld. CIT(A) is in accordance with law, therefore, should be upheld and the grounds raised by the assessee should be dismissed. 11. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , for the purposes of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso] Explanation - For the purposes of this sub- clause - (A) 'royalty' shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9: ............. (iii) any payment which is chargeable under the head " Salaries", if it is payable - (A) outside India: or (B) to a non-resident, and if the tax has not been paid thereon nor deducted therefrom under Chapter XVII-B]." 12. We find the assessee before the Ld. CIT(A) in its grounds of appeal has mentioned as under :- "Learned AO has erred in law in facts and has quoted incorrect section of law for disallowing this salary expense, he has quoted section 40(a)(i), which does not cover salary expense. To correct this, the relevant section is 40(a)(iii). Since assessee was eligible for charging the expenses against its income accrued/arose in India, it duly cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by virtue of Article 15 of the Double Taxation Avoidance Agreement (DTAA) between Indian and Netherlands?" 14.1. In that case the AO had made disallowance of Rs. 19,29,632/- being salary paid to non resident outside India i.e. Netherlands u/s 40(a)(iii) of the Act which the Ld. CIT(A) deleted on the ground that the provision of TDS would not be applicable when the basic requirement is not fulfilled i.e the sum paid should have been chargeable to tax in India in accordance with provision of section 40(a)(iii) of the Act read with section 5(2) and section 9(i)(iii). The revenue challenged the order of the Ld. CIT(A) before the Tribunal and the Tribunal allowed the appeal of the revenue holding that the provision of section 40(a)(i) and 40(a)(iii) are analogous and therefore the assessee was required to deduct tax at source. The contention of the assessee that if the payment of the salaries made outside India were not liable for taxation and the assessee was not liable to deduct tax at source and no disallowance could be made u/s 40(a)(iii) of the Act was rejected by the Tribunal. On further appeal by the assessee the Hon'ble Delhi High Court decided the issue in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in the instant case. The employees whom the salaries were paid were non-resident as per Section 6(1) (a) of the Act, as none of them were in India for a period of 182 days or more. The remuneration is also paid by an employer i.e. the respondent assessee who is not a resident of other State i.e. Netherlands. Further, there is no permanent establishment of the respondent assessee in Netherlands which had borne the remuneration. 16. In view of the above, provisions of Section 40 (a) (iii) of the Act were not applicable in the instant case. As per that Section certain amounts are not allowed as deductions in computing the income chargeable under the head "profits and gains of business or profession. Sub Clause (iii) of clause (a) of Section 40 includes those payments which are chargeable under the head "salaries‟ if the same is payable outside India and if the tax is payable thereon, there is no question of deducting tax therefrom under Chapter XVII-B. Chapter XVII relates to tax deduction at source. Those provision would be applicable only when the salary paid is chargeable to tax in India and the question of deduction of tax at source arises. The question as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel appearing for the appellant had referred to the judgment of Bombay High Court in the case of CIT Vs. Avtar Singh Wadhawan, 247 ITR 260. That was a case where the assessee had worked outside the India; he received salary outside India from an Indian employer namely Shipping Corporation of India, the Bombay High Court on these facts held that since the place where the services are rendered is relevant for determining chargeability of the tax, no tax would be payable on the salary received on the services rendered outside India. While laying down this principle, the court made following pertinent observation:- "On the other hand, Section 5(2) indicates the meaning of accrual of income. It states, inter alia, that the total income of any previous year of a non-resident shall include all income from whatever source derived which is received by him in India or which accrues to him in India. In other words, broadly, in the case of a resident Indian all income which accrue to him whether in or outside India is taxable whereas in the case of a non-resident only income which accrues to him in India or which is received by him in India is taxable. Therefore, consequently, in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source, on professional fees etc., ignored submissions and arguments of the appellant company. 2.1 That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the disallowance of Rs. 48,34,669/-did not appreciated that payment being reimbursement of technical expenses, in turn remitted to foreign professionals located outside India, paid outside India was exempt from taxation under Article of 14 of India- Netherlands DTAA. 2.2.That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the disallowance of Rs. 4 8,34,669/- did not appreciated that at the time when foreign professionals give their services u/s 195, payments made outside India were not included as clarified by apex court in Vodafone's case (341 ITR 1). 2.3 That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the disallowance of Rs. 48,34,669/- did not appreciated that unamended Article 12 (or Article 14) of India- Netherland's DTAA, only taxed services rendered in India. 2.4 That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the disallowance of Rs. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odafone International Holdings BV reported in 341 ITR 1 (SC) and the decision of the Bangalore Bench of the Tribunal in the case of ITO vs. Cepha Imaging Pvt. Ltd. (2009-TIOL-558-ITAT-BANG) was also relied upon. It was further submitted that in terms of Article 12, clause 5 such services cannot be held as technical or consultancy services since such services were ancillary and subsidiary to the application of enjoyment of any right property or information for which the payment was made. 19. However Ld. CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the action of the AO by observing as under :- "7.3 I have carefully considered the facts of the case in the light of submission made by the appellant and the applicable provisions of India-Netherlands DTAA. The appellant undisputedly provided consultancy services to PSRBDB in terms of the agreement dated 11.08.2009. In terms of the said agreement, the scope of the services rendered by the appellant is as under: "The consultants shall support and assist the Government in preparing and finalizing a State transport policy and strategy, and strategic investment plans through a consultative process, based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the States, carries on business in the other State, in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for technical services are effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply." 7.4 In the case of the appellant, it is evident that the appellant had a project office providing consultancy services to PSRBDB. Through that project office the appellant participated in the steering committee meeting of the project, consulted various stockholders, and which provided fixed base to its professional staff and professional consultants. The outcome of the consultancy services is to help the client in preparing and finalizing State transport policy and strategy based on the best international practices. Therefore, once the professional consultancy services were rendered to the client, the client shall be able to use such services for developing an integrated transport policy. In the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) For services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) For teaching in or by educational institutions; (d) For services for the personal use of the individual or individuals, making the payment ; or (e) To an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (independent Personal Services) of this Convention." 21. He submitted that the professional charges having paid to independent professionals for their engineering professional services and the payment has been made outside India by the Head Office and has been debited in the Profit and Loss Account of the assessee as attributed to Indian Head Office. He submitted that in view of clause 6 of Article 12 the same does not constitute fees for technical services and therefore, the assessee is not liable to deduct any tax on the same and the lower authorities have wrongly invoked the provision of section 40(a)(i) . Further Ld. CIT(A) has applied the provision of paragraph 5 and 7 of Article 12 but for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission that in view of clause 6 of Article 12 fee for technical services does not include amount paid to any individual for professional services as defined in Article 14. We find Article 14 of the India Netherlands DTAA read as under :- ARTICLE - 14 INDEPENDENT PERSONAL SERVICES 1. "Income derived by a resident of one of the States in respect of professional services or other activities of an independent character shall be taxable only in that State except in the following circumstances, when such income may also be taxed in the other State :- (a) If he has a fixed base regularly available to him in the other State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) If his stay in the other State is for a period or periods amounting to or exceeding in the aggregate 183 days in the fiscal year concerned ; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State. 2. The term 'professional services' includes especially independent scientific, literary, artistic, educational or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... came to India. It is categorically submitted that there is no fixed base or office or permanent establishment (PE) of the said UK LLP in India. Therefore, in the absence of a PE / fixed base of the recipient (i.e., M/s Grant Thornton UK LLP) in India and on account of the fact that no one from the said firm had even a single day stay in India, professional fees for rendering services in UK will be taxable only in UK and not in India." 3.4 The Ld. CIT(A) has further analysed the Article 15 of DTAA in respect of USA, Netherland, and France as under: "4.2.4 It must be appreciated that the explanation of the appellant that the impugned professional services were covered under the Article on "Independent Personal Services" of DTAAs with UK and other countries was rejected by the Assessing Officer on a flimsy ground that the said Article is applicable for professional fees paid to an individual only, whether in his own capacity or as a member of a partnership, and since the recipients of professional fees in this case are Limited Liability Partnership firms (LLPs), the said Article under the relevant DTAAs did not apply in this case. 4.2.5 Needless to point out that in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred to in the foregoing paras is also covered u/s 195 of the Income-tax Act, 1961..." 4.2.10 Therefore, it cannot be doubted that the impugned professional fees paid are squarely covered by the provisions of Article on "Independent Personal Services" of the said DTAAs. Furthermore, it has been held in Maharashtra State Electricity Board Vs. Deputy Commissioner of Income Tax (supra) that the provisions of Article 15 being specific provisions for professional services will override the relatively general provisions of Article 13 which apply to broader category of 'managerial, technical or consultancy services'. 4.2.11 In view of the above submissions, the impugned professional fees received by the foreign Grant Thornton LLPs from the appellant is not taxable in India as per Articles on "Independent Personal Services" of the relevant DTAAs with those countries and, therefore, the same is not liable to tax deduction at source in terms of section 195 of the Act, and accordingly no disallowance of the same can be made u/s 40(a)(i) at all. 3.5 The Ld. DR could not controvert the finding of the Ld. CIT(A) that the article on " independent personal services" is applicable on income d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Wakefiled (S) Pte., reported in (2008) 305 ITR 208; b) Sandvik Australia Pty. Ltd. Vs. DDIT (International Taxation),reported in (2013) 141 ITD 598 (Pune); c) CIT Vs. De Beers India Minerals Pvt. Ltd., reported in (2012) 346 ITR 467 (Karn.) d) ISRO Satellite Centre (ISAC), (2008) 307 ITR 59 (AAR) e) Intertek Testing Services India (P) Ltd., reported in Authority for Advance Rulings (2008) 307 ITR 418; f) BhartiAxa General Insurance Co. Ltd., reported in (2010) 326 ITR 477 (AAR); g) Cable & Wireless Networks India Pvt. Ltd., reported in (2009) 315 ITR 72; h) Invensys Systems Inc., reported in (2009) 317 ITR 438; i) Guy Carpenter & Co. Ltd. Vs. ADIT, reported in (2012) 18 ITR (Trib.) 414 (Del.) j) WNS North America Inc. Vs. ADIT (International Taxation), reported in (2013) 25 ITR (Trib.) 582 (Mum.); and k) Ernst & Young Pvt. Ltd., reported in (2010) 323 ITR 184 3.8 Before us, the Learned DR could not establish that any technical knowledge was made available in the process of providing services by the non-resident parties to the assessee. In absence of not making available, the technical knowledge to the assessee, in view of the Article 13 of the respective DTAAs, the payment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mely, Kniper outside India. b. That payment by one Dutch co. to another without involvement of local Project office is not taxable in India. c. That the payment was made by the Dutch co. to the appellant outside India. d. At no stage Indian Project office was involved in stated transaction i.e. Article 7 Para- 1 of India- Netherland's DTAA, do not allow making of subject addition. 3.1. That on the facts and in the circumstances of the case and in law the Ld. CITA while sustaining the addition of Rs. 12,00,414/- u/s 9(l)(vii) r/w Article 12 Paragraph 5, in paragraph 8.2 to 8.4, grossly erred in arbitrarily treating the services as FTS (Fess for Technical Services) within the limited purview of Article 12 of India-Netherland's DTAA, which requires make available criteria to be satisfied. 3.2. That on the, facts and in the circumstances of the case and in law the Ld. CITA while sustaining the addition of Rs. 12,00,414/- has conveniently ignored that there is force of attraction principle in Article-7, para-1 of India-Netherlands DTAA, even otherwise there is no business connection much less effective business connection in stated transaction in India within the meaning of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een considered and found unacceptable, 'as any amount received by the assessee for the services provided by the assessee is taxable in India, if the services provided by the assessee are being utilized for the business in India and it is an undisputed fact that the consultancy services provided by the assessee are being utilized by Kuiper CompagnonRuintelijke for its business activities as per the Joint Venture agreement for preparation of development plant for Rajasthan Dub region of Delhi-Mumbai industrial Corridor (DMIC). Therefore, within meaning of section 9{1)(i) of the Act, the assessee has business connection in India for this purpose also. Further, as it is the receipt in the hands of the assessee for the consultancy services provided by it directly to Kuipe r Compagnon Ruineiijke and not through its project office, the same are assessed to tax as Fee for Technical Services within meaning of section 9(1)(vii) of the Act. Further, the consultancy service provided to Kuiper Compagnon Ruintelijke by assessee's Head Office directly has been made available to Kuiper Compagnon Ruintelijke in view of the fact that such consultancy .service has been used by Kuiper Compagnon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to DMIC by the appellant from its PE in India. The appellant's plea that the payment was made to the appellant outside India is not relevant for this purpose. Further, the appellant's plea that the payment was made by one Dutch company to the appellant, the other Dutch company, is also irrelevant as both the companies, namely, Kuiper and the appellant were joint venture partners, for which the payer was DMIC an Indian company. In view of this, the proportionate share of consultancy income of Rs. 12,00,414/- received by the appellant is clearly taxable as FTS in the hands of the appellant company, as appellant had provided services in India to DMIC as a joint venture partner. Keeping in view the provisions of section 9(l)(vii) read with the provisions of Article 12(5) of India-Netherlands treaty, such receipt is taxable as FTS in India. 8.4 Further, keeping in view the provisions of paragraph 7 of Article 12, as such services are held to be provided through a fixed base, which was made available to it through the project office for PSRBDB project through which one of the professional staff Mr. Adnan Rahman had provided services, such services are taxed as business profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed the same at 10% . We find Ld. CIT(A) upheld the action of the AO which has already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that no project office was opened for this project and the assessee received payment from another Netherlands Company, namely, Kuiper outside India. It is also his argument that this income belongs to the joint venture having nothing to do with taxability of Indian P.O/ assessee company in India. However, a perusal of the order of CIT(A) shows that despite his asking to provide the details of key professional staff/consultants who had worked on the DMIC Project and to explain whether services were rendered from the existing project office for the PSRBDB and the manner in which the services were rendered to the DMRC Project and to furnish the breakup of expenses in the said project, the assessee failed to produce the same before the CIT(A). Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the CIT(A) with a direction to give one more opportunity to the assessee to file the above documents and to decide the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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