TMI Blog2019 (5) TMI 1882X X X X Extracts X X X X X X X X Extracts X X X X ..... ions from AEs/Affiliates and the specific clause to this effect has been mentioned in the agreement. It has also been informed to us that above principle of 50:50 Profit Split are a widely accepted pricing formula prevalent across the global freight-forwarding industry at large. We find that there is merit in the alternate plea of the Assessee is that since the above transactions are at arm s length for the aforesaid year, no further attribution can be made even if PE is established. TPO s order u/s 92CA (3) dated 26.10.2010, has been placed before us wherein no adverse inference was drawn in respect of the international transactions undertaken by the Assessee during the relevant year. It is now a settled principle that even if there is a business connection, no further income can be chargeable to tax in India on account of PE since the transaction between the Assessee and its AE has been found at arm s length. The payments made to non-resident are not on account of rendering any services in the nature of technical or professional services or fees for technical services or getting any income on account of royalty, albeit the nature of activities performed by the non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Law. 2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of ₹ 21,05,07,858/- made u/s 40 (a)(i) of the I T Act being the payment made to non resident associate enterprise. 2.1 The Ld. CIT (A) ignored the finding recorded by the A.O and the fact that the income in question accrued in India and is liable for TDS. 2.1 Whereas the Grounds of Appeal raised by the Assessee in its appeal are as under:- 1. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) (CIT (A)) on erroneous and insufficient grounds, has grossly erred in confirming an addition of ₹ 21,58,139 holding that the expenditure was not made in the course of business or on account of commercial expediency. 2. That the Ld. CIT(A) erred in confirming an addition of ₹ 21,58,139 made by the Ld. DCIT u/s 40(a)(i) of the Act, on erroneous and insufficient grounds and without offering any opportunity to the Appellant , erred in not appreciating that the expenditure was incurred for the purpose of business of the Appellant and was therefore, allowable in full. 3. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the consignment. The AEs are carrying on the business of freight forwarding services in their respective jurisdictions which are mirror reflection of the business activities carried on by the Assessee. As submitted by the Ld. Counsel, Sri Salil Kapoor, assessee provides outbound and inbound freight forwarding services, functions performed can be classified three types of services to its customers which has been explained in the following manner:- ORIGIN SERVICES I. These services are provided both in the case of Import as well as Export transactions. In the case of import into India, the origin services are provided by the AEs and in the case of exports out of India, the origin services are provided by the Assessee. II. In these services, the Assessee and the AE provide a mirror reflection of services in their respective countries/ territories. In effect, it means that the AE provides their part of the services in their Territory only and no part of the services are provided in Indian Territory. Similarly, the Assessee provides services in the Indian Territory only and no part of the services is provided by the Assessee in the overseas territory. III. That with res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly account for more than 90% of the remittance For example, in the above arrangement, the rates charged by the AE situated in Japan relating to the shipping activity say ₹ 120, out of which say ₹ 100 is paid to the air/shipping line for carrying out the shipping activity. The balance amount i.e. ₹ 20 is distributed equally between the AE and the Assessee as profit share. The addition of ₹ 21,05,07,858/- is predominantly covered under this service. DESTINATION SERVICES I. These services are being provided both in the case of Import as well as Export transactions. In the case of Export from India, the services are provided by the AE and, in the case of Imports into India, the services are provided by the Assessee. The Assessee and the AE, for these services, provide a mirror reflection of services in their respective countries/ territories. In effect, it means that the AE provides their part of the services in their territory only and no part of the services is provided for in the Indian Territory. Similarly, the Assessee provides services in the Indian Territory only and no part of the services is provided by the Assessee in the overseas territor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer however, took a view that the payments made to the overseas AEs were subject to TDS under Section 195 of the Act and accordingly made a disallowance u/s 40(a)(i) of the Act. The Assessing Officer took the view that nonresident associate enterprises have derived income through the presence of the assessee company which falls under the definition of business connection in India . The Assessee in response to query by Assessing Officer furnished its reply, the relevant extracts of which find mention in the assessment order and are also mentioned herein below- 5. During the course of assessment proceedings, vide order sheet entry dated 29.11.2010, the assessee company was asked to furnish details of payments to nonresidents and if, tax was deducted at source. In response vide written submission dated 08.12.2010, the assessee company has given details of payments made to non-resident associate enterprises for freight and forwarding services rendered by them amounting to ₹ 21,05,07,858/-. Vide order sheet entry dated 08.12.2010, the assessee company was asked to justify non deduction of tax at source on these payments. In response the assessee company vide writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d destination services would be provided by JAS Group of Companies and conversely, in the case of import transactions, the origin services would be provided by JAS Group of Companies and destination services would be provided by the Assessee Company. Basis the above facts, since the non-resident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no portion of their business profits earned by them exclusively for services rendered outside India can be brought to tax in India, either under Section 9(1) or otherwise or at all. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of Section 9(1)(i) of the Income Tax Act, 1961. It was submitted that a relation to be a business connection must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the nonresident. In the absence of a precise meaning of the term, determination of business connection has been the subject matter of litigation and a number of judicial precedents are available on the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee, the findings of the Assessing Officer in the assessment order as well as in the Remand report and also material placed on record. I have also pursued the case laws cited by the Assessing officer and the Assessee. It has not been established by the Assessing officer that there was any relationship between the Assessee and the non-resident associate enterprises and which part of activity was carried out by the above non-resident associate enterprises in India. In other words, the Assessing officer has not been able to establish that any part of the income was attributable to the operations carried out in India and there was any business connection of the non-resident associate enterprises in India. The perusal of the material placed on record reveals that(a) there was no business connection of the non- resident associate enterprises in India; (b) the Assessee was not an agent of the non- resident associate enterprises in India (c ) the non-resident associate enterprises do not exercise any control over the activities performed by the Assessee. 6.2 It is also observed that the AO has overlooked the expression 'any such sum chargeable under this act' and given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al No. 9 to 13 are treated as allowed. 11. Being aggrieved by aforementioned order, the Revenue is now in appeal before us. During the course of the arguments before us the Ld. CIT(DR) submitted that the Assessee has an agency agreement with JAS Forwarding Worldwide and operates as exclusive agent in India and referred to para 6, page 23 of CIT(A) order. It acts as an intermediary and would take responsibility for entire shipment including loading and unloading, transportation, insurance etc. Thus, it cannot be said that payees have no business connection in India. The Agency Agreement mentions the Assessee as an agent and the payee companies as Principal. It is evident as the Principal has been defined as JAS group of companies as listed in the attachment and the names appearing in the attachment are names of payee companies. Therefore, the said agency agreement has been signed between each of the payee company being Principal and the assessee as agent. The Ld. CIT (DR) relied on the detailed findings of the Assessing Officer and stated that all the essential features/conditions of business connection as mentioned and discussed in the assessment order, stand satisfied in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel submitted that:- i. The provisions of section 195 of the Act, lays down the conditions for deduction of tax from payments made to non-residents and mandates to withhold taxes only before making any payments chargeable as income under the provisions of the Act. Therefore, the concept of income or any sum chargeable to tax becomes important. ii. Where the payment is not chargeable under the Act and no tax is required to be deducted at source, the section does not get attracted and no disallowance can be made under this section. iii. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of G. E. India Technology Center India Pvt. Ltd Vs. CIT Anr [234 CTR 153 (SC)], wherein the Apex Court observed that disallowance u/s 40(a)(i) can be made when there 'is a liability to deduct tax, and is not deducted. Thus, the Hon ble Apex Court observed that sec 40(a)(i) ensures effective compliance of Sec 195 by disallowing the sum paid without withholding of tax. The Supreme Court have laid lot of emphasis on the phrase chargeable under the provisions of this Act while deciding the issue of tax deduction at source by a person making payment to a no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he word agency is not the determinative factor and the fact still remains that the AEs have no business connection and since the non-resident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no disallowance can be made for non-deduction of TDS. 15. We have heard the rival submissions, perused the relevant material referred to before us which includes the written submissions filed by both the parties and the paper book placed on record. During the course of hearing, the Bench had also asked for certain further documents, which have been placed on record by the Assessee and have been perused by us. From the facts and arguments discussed above, it can be clearly inferred that the Assessee and Associated Enterprises though being AEs, are operating on a principal to principal model and there is no Principal-Agent relationship between JAS India and its AEs/Affiliates. From the documentary evidences depicting negotiations, quotations, contracts and exchange of e-mail correspondence between JAS India and end-customers in India along with underlying invoices which have been placed on record pursuant to our dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elow: 4.2 The Principal shall pay the remuneration to the agents at the rates so agreed, in accordance to this agreement (Clause 5.2) 5.1. Payment of collect freight less Profit share will be settled as agreed mutually by both the parties 5.2. Profit share between the Principal and Agent shall be on a 50/50 basis and it shall be calculated only on the sea freight or airfreight, irrespective of whether freight is prepaid or collect 17. Thus, it can be seen that mere use of the word agency is not sufficient to conclude that the Assessee and the AEs do not operate on principal-to-principal basis and nomenclature is not the determinative factor. The above mentioned evidences filed clear show that JAS India has not been impelled by any instructions from AEs/Affiliates and the specific clause to this effect has been mentioned in the agreement. It has also been informed to us that above principle of 50:50 Profit Split are a widely accepted pricing formula prevalent across the global freight-forwarding industry at large. In support, the Ld. Counsel for the Assessee has placed reliance on recent ruling in case of Balmer Lawrie co. Ltd. [2016] 68 taxmann.com 384 (Kolk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance u/s 40(a)(i) of the Act, as the disallowance is mainly on account of non deduction of TDS which is applicable to outbound transactions when payment is being made outside India, attracting Section 195 of the Act. The subject matter of current disallowance u/s 40(a)(i) are the payments made outward cash remittances by JAS India to its overseas AEs/Affiliates. These payments are not governed by the Agency Agreement as such, albeit the universal 50/50 revenue sharing model is common to both inbound/ outbound transactions and perhaps this universal 50/50 revenue sharing model which is common, has led the Ld. CIT (DR) to raise this argument. The Ld. CIT (DR) relied on a ruling of the AAR (AAR No. 542 of 2001) in the case of ABC. However, it can be seen that the facts of the case before us are different. In the present case, JAS India invoices customers in the capacity of a Principal, and correspondingly deals with overseas AEs/Affiliates on a Principalto- Principal basis. Quite contrary to the terms of compensation (clause 2.12) as defined under the transportation agreement in case of ABC, it is JAS India who compensates the overseas AEs/Affiliate on an arm s length basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum chargeable under this Act under Section 195 of the Act states that sums payable to non-resident is not liable to deduct tax if such sum is not chargeable to tax. This view has been upheld by the Hon ble Delhi High Court in the case of Van Oord ACZ India (P) Ltd. vs CIT, 323 ITR 130; and by Hon ble Supreme Court ruling in the case GE India Technology Cent. (P) Ltd (2010); 327 ITR 456. The Hon ble Supreme Court has held that person paying interest or any other sum to non-resident is not liable to deduct tax if such sum is not chargeable to tax. Thus, in the absence of any business connection, there was no obligation on the Assessee to deduction tax u/s 195 of the Act and thus correspondingly no disallowance could be made u/s 40(a)(i) of the Act. 21. The payments made to non-resident are not on account of rendering any services in the nature of technical or professional services or fees for technical services or getting any income on account of royalty, albeit the nature of activities performed by the non-resident are purely business activities. The AEs are carrying on the business of freight forwarding services in their respective jurisdictions which are mirror reflection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent LLC. USA 199089 Reimbursement of netting charges JAS Worldwide Management LLC. USA 1012859 Reimbursement of management expenses JAS Jet Air Service SPA, Milan, Italy Italy 38797 Reimbursement of travelling cost JAS (UK) Ltd., London UK UK 8800 Reimbursement of travelling cost JAS Forwarding (USA) INC. USA 50507 Reimbursement of travelling cost JAS Forwarding GmBH, Frankfurt, Germany Germany 20224 Reimbursement of travelling cost JAS Forwarding (USA) INC. USA 755655 Reimbursement of NVOCC Insurance Expenses JAS Forwarding (USA) INC. USA 58428 Reimbursement of NVOCC Tariff Filing Expenses TOTAL 2158139 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted during the course of appellate proceedings are not sufficient for the claim of the assessee. It was further observed during the course of assessment that the assessee had reimbursed an amount of ₹ 21,05,07,858/- to its associate enterprises who, made payment of behalf of the assessee to foreign entities. In this issue also, the Assessing Officer held that the assessee did not follow the provisions of section 195(1) and made disallowance as per the provisions of section 40(a)(i) of the Act. The assessee during the course of assessment was asked to justify non deduction of tax at source of payments made to non residents. The assessee could not submit a satisfactory reply in support of its claim and disallowance was accordingly made. On this issue also the claim of the assessee needs to be rejected as the assessee did not discharge the onus comfort on it under section 195(1) of the Income Tax Act, 1961 which was mandatory. In view of the above, the claim of the assessee needs to be rejected and the additional evidence submitted during the course of appellate proceedings are not sufficient for the claim of the assessee. 25. The CIT (A) thereafter admitted the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that in respect of both the netting charges and management expenses, referred to above, the Assessee has not made available any technical knowledge, experience, skill, knowhow, or processes, or the alleged services does not consist of the development and transfer of a technical plan or technical design and mere rendering of services is not roped in unless the person utilizing the service is able to make use of the technical knowledge etc by himself in his business or for his own benefit and without recourse to the performer of the services in future. In our case, the services rendered are not left with the Assessee but it is a mere reimbursement of expenses incurred by non-residents on the activities performed by it. For all the said activities, netting centre at USA incurred some cost which they distributed amongst the netting participants, i.e. members of the Group Companies and accordingly the Assessee was required to reimburse its portion of the expenses. (iii) Reimbursement of Management Expenses amounting to ₹ 10,12,859:Jas Worldwide Management LLC, situated in Atlanta, USA perform administrative, business development activity for common interest of the JAS Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it does not fall within the domain of fees for technical services. Which is evident from his following observations:- It is the case of the A.O. that all the payments in question are fees for technical services paid to the non-resident associate enterprises. However, no finding has been made by him as to what was the nature of services-managerial, technical or consultancy, rendered by the non-resident associate enterprises to the assessee. On perusal of the material placed on record, I am of the considered opinion that the payments in question do not fall within the ambit of section 9(1)(vii) of the Act . 27. Thus, we find that Ld. CIT (A) himself has accepted that these reimbursements do not fall within the domain of fees for technical services. However, the Ld. CIT (A) held that the conditions u/s 37 have not been satisfied and disallowed this amount on account of commercial expediency. 28. Accordingly, before us the Ld. Counsel argued that the amount cross charged represented only reimbursement of expenses without any mark up i.e. actual cost incurred by the AEs of the Assessee on behalf of the Assessee outside India and reimbursement of expenses can never represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties and the paper book placed on record. We find that the nature of reimbursement is of such expenses which are purely in the nature of day-to-day expenses of the business activities of the Assessee. The copy of the invoices, ledger accounts etc. have been filed before us. We find that the nature of expenses includes server maintenance Cost, netting charges, management expenses, travelling cost, insurance expense etc., which are an integral part of running of a business and for undertaking day-to-day activities. The Ld. AO/CIT(A) have not doubted the genuineness of the expenses. In fact, even the nature of the expenses stands accepted. Thus, the domain of commercial expediency cannot be entered into. We find that this issue in principle is covered in the case of S.A. Builders (SC) (288 ITR 1) and is directly applicable on the facts of the present case as the evidences have already been filed by the Assessee and as stated above, the expenses being reimbursed are regular business expenses. Thus, the appeal filed by the Assessee succeeds. 31. Accordingly, the appeal of the Assessee is allowed whereas the appeal of the Revenue is dismissed. Order Pronounced in the open co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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