TMI Blog2021 (6) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... ia as well as accrues or arises or deemed to accrue or arise in India. Further, the provisions of section 9(1)(vii) are not attracted in the instant case as the assessee company has utilized the services of the non-resident service provider outside of India for the purposes of earning commission income from its customers/shipping companies outside of India. In other words, where the source of assessee s income for which the services are utilized is outside of India and the services are also rendered outside of India, the deeming provisions of section 9(1)(vii) are not attracted. Thus, the said amount paid to non-resident entity does not fall in the scope of total income of non-resident entity and consequently it is not chargeable to tax in India under the provisions of the Act. Even otherwise, the said income in the hands of non-resident has to be considered in the light of the provisions of DTAA between India and the Country of the nonresident, i.e UAE. In the absence of Permanent Establishment of the nonresident in India during the financial year relevant to impugned assessment year and any income attributable to such Permanent Establishment, such business income is not charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted. 2. On the facts and in the circumstances of the case and in law, ld. CIT(A) has grossly erred in confirming the action of ld. AO in making lump sum disallowance of ₹ 1,60,000/-out of various expenses debited to profit loss account, i.e. Vehicle, Diesel Petrol expenses, entertainment expenses, telephone and mobile expenses and travelling expenses, arbitrarily. 2.1. That, ld. CIT(A) has further erred in confirming the disallowance of ₹ 1,60,000/- merely on the basis of assumptions and presumptions, without in any manner pointing out any specific defect instance of expenses being excessively incurred/incurred for non business purposes. Appellant prays that all the expenses were incurred wholly and exclusively for the purposes of business and therefore disallowance so made deserves to be deleted. 2. Briefly, the facts of the case are that during the course of assessment proceedings, the Assessing officer observed that the assessee has claimed sales promotion expenses of ₹ 28,40,000/- in its profit loss account towards amount credited to M/s Trans Coral Shipping, FZE, Sharjah (UAE) without deduction of tax at source and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hasis on the fact that invoices raised by M/s trans coral shipping FZE are just declaring the amount of fees in relation with principals earning as per agreement and the Services provided by Trans Coral Shipping FZE are mentioned in details in contract which is already submitted to you, also the invoice amount is as per agreement. Apart from the above we have furnished contract agreement entered by the assessee with M/s Trans Coral Shipping FZE (UAE) is on record in which services are mentioned kindly take note from that document. 10% of total income earned by the assessee company is paid to trans coral shipping FZE as per cl no 6(A) of agreement which states that- agent will also get 10% (of total amount earned by principal) as incentive if total earning of the principal is more than ₹ 50 lac and as the total income of the principal is 66,90,497/- in subjected Financial year 10% i.e. ₹ 66,90,497/- is paid as incentive. Further we inform you that the assessee company only having business relation and no joint venture as M/s trans coral shipping fze is a UAE registered company and details of directors are submitted with you, Therefore the expenditure in no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0/- under section 40(a)(ia) of the Act. 5.3.2 It is important to note here that the Finance Act 2010 has inserted an explanation to the section 9(2) of the Act w.e.f 01/04/1976 which is given below: Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,- (i) the business or business connection in India; or (ii) the non-resident has rendered services in India. In view of the explanation inserted in the section 9(2) with regard to NRI, the income of the NRI on the amount paid to the by the appellant is deemed to accrue in India. I have further considered the following points; Fee for technical services(FTS) is defined in explanation 2 to section 9(1) (vii) of the Act to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ZE is representing assessee company in UAE shipping market, which are primarily in the nature of introducing to new client as well as obtaining business. For such services, assessee has paid ₹ 28,40,000/- to Trans Coral Shipping FZE, which have been debited to profit loss account under the head Sales Promotion Expenses . Ld. AO, vide order sheet entry dated 08.12.2015 raised query as to why the sum of ₹ 28,40,000/- should not be disallowed as per section 40(a)(i) as no tax has been deducted at source from such payment in terms of section 195. Detailed submission was filed by assessee explaining as to how the payment on account of Sales Promotion expenses of ₹ 28,40,000/- does not attract TDS provisions. During the course of assessment proceedings, Ld. AO asked the assessee about the applicability of the provisions of section 9(1)(vii)(b) and further stated that section 195 is also attracted in the case of assessee and CBDT Circular No.7/2009 dated 22.10.2009 is also applicable in the case as well. Assessee submitted that such payments were made for procuring the business outside India for which no technical services were required nor rendered and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of NRI falling under clause (v) (Interest), (vi) (Royalty) or (vii)(Fees for Technical Services) of section 9(1) shall be deemed to accrue or arise in India whether or not such non-resident has any business connection in India or has rendered services in India. Also, ld. CIT(A) has mentioned the meaning of Fees for Technical services and has concluded that AO has rightly made disallowance. With this background, following submission is made: Payment made by assessee is not subject to deduction of tax at source: In this regard, at the outset, it is submitted that a particular sum is subject to deduction of tax at source, only if the same is covered by any of the sections 192 to 196D. In the instant case, disallowance is made on allegation of non compliance of provisions of section 195. Section 195 is reproduced here for the sake of convenience: 195. [(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC)] [or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s chargeable to tax under the Act shall form the basis of such disallowance and shall be the same as determined by the Assessing Officer having jurisdiction for the purpose of sub-section (1) of section 195 of the Act as per Instruction No. 2/2014 dated 26.02.2014 of CBDT. Further, where determination of other sum chargeable has been made under sub-sections (2), (3) or (7) of section 195 of the Act, such a determination will form the basis of disallowance, if any, u/s 40(a)(i) of the Act. In light of the language of section 195 and above Circular, it is submitted that the assessee was not required to deduct tax at source at the time of making payment as the payments made by the assessee do not give rise to any sum chargeable to tax in India in the hands of recipient. Hon ble Supreme Court in the case of G. E. India technology Centre Pvt. Ltd. Vs CIT (2010) 327 ITR 456 has, categorically held that the tax deducted at source obligations u/s 195(1) of the Act arises, only if the payment is chargeable to tax in the hands of the non resident recipient. (Headnote reproduced) : Deduction of tax at source - Mere remittance to non-resident - Duty to deduct tax at source - Do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission to non resident agents for services rendered outside India, no tax is deductible as overseas agents operated in their own country and no part of their income had accrued in India. In support, reliance is placed on following decisions: M/s JLC Electromet Pvt. Ltd. Vs ACIT (ITA NO. 1494/JP/2018 and 23/JP/19 dated 04.09.2019). ACIT vs M B Engineering Ltd. (ITA No. 370/Ahd. /2018. dated 22.10.2019) DCIT vs Shamrock Pharmachemi Pvt. Ltd (ITA No. 862 863/Mum/2018) DCIT (International Taxation), Ahmedabad vs. Welspun Corporation Ltd. (2017) 77 taxmann.com 16. CIT vs Kikani Exports Pvt. Ltd. (2014) 369 ITR 96 (Mad) CIT vs. Model Exims (2014) 363 ITR 66 (All.) CIT vs. EON Technology P. Ltd. 343 ITR 366 (Del.) It is thus submitted that sum paid by assessee does not fall under any of the category mentioned above, and therefore is not taxable under 9(1)(vii). It is therefore submitted that there was no liability to deduct tax at source u/s 195 of the Income Tax Act. Now coming to Ld. CIT(A) observation that in view of amendment in explanation below section 9(2) by Finance Act, 2010 w.r.e.f. 01.06.76, the case of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tside India. The payments therefore fall within the purview of the exclusionary clause if Section 9(1)(vii)(b). Thus, even assuming that the payments for which maintenance repairs were in the nature of fees for technical services, it would not be chargeable to tax. In view of above, it is further submitted that any explanation introduced by legislation is for clarifying the main provisions contained in the said section, so the extent of ambiguity, if theme is same ambiguity. However meaning and intent of explanation cannot be extended or stretched to such a point so as to override the explicit language and meaning of the said section. Ld. CIT(A) had erred in extending / stretching the meaning of explanation below section 9(2) to the extent that it has entirely overridden the main provision of section 9(1)(vii)(b) and has further erred in seeking to nullify the exception provided in section 9(1)(vii)(b), in which case of assessee is fully covered in relation to services provided by non-resident. With regards to payment of ₹ 28,40,000/- being treated by AO as sharing of profit and not an expense, it is submitted that Ld.AO has not brought on record any single ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that is fair enough as a person would put extra effort if he is assured about additional incentives. It is thus submitted that such remarks of Ld. AO are solely with a view to make disallowance and have no basis. (iii) An Agency agreement between M/s Prime Oceanic and M/s Trans Coral FZE (UAE) which has been prepared is a mutual understanding of both company. The agreement was not registered by any government agency or authority, so it is not treated as authentic. The agreement is the mutual understanding for making business: In this regard, it is submitted that a written agreement between the parties is a mode to record their mutual understanding and registration thereof is not at all mandatory. However, parties to agreement may get it registered if they wish to and basically it helps them in the event of any disputes as they may enforce the other party to act as per terms of agreement. Your honours would appreciate that registration of an agreement/not does not impact its validity rather can at the most impact its enforceability. Further, no adverse comments whatsoever have been made by Ld.AO in respect of terms and conditions specified in the agreement, ld.AO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause to accrue or in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India, shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. In view of above, it was submitted that sales promotion expenses of ₹ 28,40,000/- deserve to be allowed and disallowance made deserve to be deleted. 7. Per contra, the ld DR relied on the findings of the lower authorities and as we have already taken note of the same, the same are not repeated for sake of brevity. It was further submitted that M/s Trans Coral Shipping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of this Article, interest on funds connected with the operation of ships in international traffic shall be regarded as profits derived from the operation of such ships and the provisions of Article 11 shall not apply in relation to such interest. 4. The provisions of paragraphs (1), (2 ) and (3) shall apply to profits from the participation in a pool, a joint business or an international operating agency. 10. So far as present case is concerned, it was submitted that Trans Coral Shipping FZE itself was not providing Transportation services to assessee and was rather introducing overseas clients to the assessee for shipping Transportation related activities. In other words, Trans Coral was acting as mediator for assessee, who provided its services outside India to the increase the client base outside India for shipping the goods through the vessels with whom the appellant had contracts and is earning income. However, without prejudice to above, even if it is presumed that Trans Coral was providing the transportation services to clients of assessee, then too, the same shall not attract tax liability in India in view of clause 1 of Article 8, which says that pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of Section 5(2) of the Act, the total income of nonresident includes all income from whatsoever source derived which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India during such year which has been further defined in terms of provisions of Section 9 of the Act. 14. In order to determine whether sum paid to M/s Trans Coral Shipping FZE is chargeable under the provisions of section 5 and section 9 of the Act, it is essential to examine the relationship between the two entities and the nature and characteristic of the amount so paid and credited to its account in the books of the assessee company. 15. In terms of agency agreement dated 11.02.2012 entered into between the two entities, it is noted that M/s Trans Coral Shipping FZE has been appointed as a sole service provider to promote the activities and services provided by the assessee company by contacting and reaching out to companies based in UAE. The services of the assessee company which shall be promoted by M/s Trans Coral Shipping FZE are in nature of ship brokerage, cargo brokerage, heavy lift brokerage, semi-submersible brokerage, tug broker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered outside of India, the deeming provisions of section 9(1)(vii) are not attracted as also held by the Hon ble Supreme Court in case of GVK Industries (supra) wherein it was held as under:- 22.The principal provision is Clause (b) of Section 9(1)(vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said Clause, it becomes clear that it lays down the principle what is basically known as the source rule , that is, income of the recipient to be charged for chargeable in the country where the source of payment is located, to clarify, where the payer is located. The Clause further mandates and requires that the services should be utilized in India. 17. Thus, the said amount paid to non-resident entity does not fall in the scope of total income of non-resident entity and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the appellant being a private limited company such disallowance for the personal use or for non business purposes cannot be made. Further during the course of assessment proceedings books of accounts were produced before Ld. AO who has not pointed out any specific defect and generalized the same by disallowing the expenses. The expenditures on vehicle, telephone, entertainment and travelling etc. were incurred wholly and exclusively for the purpose of business and under the business expediency and AO cannot walk into the shoe of the businessman to look into the necessity and purpose thus the expenditure being legitimate deserves to be allowed. 21. As regards to the disallowance out of depreciation on car for personal use, it was submitted that the depreciation is a statutory claim and no disallowance could be made for personal use. Further car was wholly and exclusively used for business purpose and no personal use was made by the assessee thus expenditure claimed on account of depreciation deserves to be allowed as claimed. 22. Per contra, the ld DR relied on the findings of the lower authorities. 23. We have heard the rival contentions and purus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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