TMI Blog2023 (1) TMI 1246X X X X Extracts X X X X X X X X Extracts X X X X ..... ble the technical knowledge, experience, skill, knowhow or process which enable the person acquiring the services to apply the technological contained therein. Services of managerial, technical or consultancy will be regarded as fees for technical services only if such services consists of the development and transfer of a technical plan or technical design but categorically exclude any service that does not make available and does not enable the person acquiring the service to apply the technologically contained thereon on its own. Similarly, the payment made to Rowan Williams Davies relating to wind micro climate engineering consultancy services, payment made to landscape architectural consultancy service to Sitetectonix Pte. Ltd. payment for marking consultancy services to Lodha Developer U.K. Ltd were also not taxable as fees for technical services, since, the services do not meet make available criteria. A.O has not brought any material on record to demonstrate that how the service provider has made available to the assessee any technical knowledge, skill etc. which can be applied by the assessee independently in future. Therefore, we do not find any reason to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground of appeal, therefore, ground of appeal of the revenue stand dismissed. Remittance for purchases in UAE - As per DTAA with UAE (Article 7), payment to an entity in UAE can be brought to tax in India only when such entity has a permanent establishment in India - HELD THAT:- AO has not brought any material on record to prove contrary, therefore we don t find any merit in this ground of appeal of the revenue. Accordingly, this ground of appeal stand dismissed. - ITA Nos. 497 to 500 & 784/Mum/2022, C.O. Nos. 73 to 75 & 85 /Mum/2022 - - - Dated:- 24-1-2023 - SHRI ABY T VARKEY, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER For the Appellant : Niraj Sheth For the Respondent : Soumendu Kumar Dash ORDER PER AMARJIT SINGH (AM): All these 5 appeals filed by the revenue and 4 Cross Objection filed by the assessee are directed against the different orders of ld. CIT(A)-57, Mumbai. Since, similar issues and identical facts are involved in these appeals except the variation in the amount, therefore for the sake of convenience all these 5 appeals are adjudicating together by taking ITA No.497/Mum/2022 as a lead case and its finding will be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovision of the Act r.w. the provisions of applicable Double Tax Avoidance Agreement (DTAA). Ground No. 1 2: Levy of demand u/s 201/201A of foreign payment towards architectural design consultancy services and other services: 4. During the year under consideration the assessee has made the following remittances to the foreign vendors: Sr. No. Name of Vendor Country of Residence Nature of service Amount of Remittance (INR) 1. Woha Designs Pte. Ltd. Singapore Architectural Design Consultancy Services. 9,24,82,928 2. Rowan Williams Davies Canada Wind and Microclimate Engineering Consultancy Services. 84,97,409 3. Sitetectonix Pte. Ltd. Singapore Landscape Architectural Consultancy services 24,64,004 4. Lodha Developers UK Ltd. UK Marketing Consultancy Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to architectural service, interior design etc. 5.1.1 The appellant has submitted documents like invoice, work order issued to the foreign vendor, Form 15CA, Form 15CB related to the foreign remittances. The assessee further submitted that from the nature of services provided by the non- resident entities and the terms and conditions under which it was provided, it is clear that whatever services were provided are project specific and cannot be used for any other project by the appellant. Further, vendor has developed the design based on information received from the owner as per work order. It is emphasized by the asssessee that while providing such services neither any technical knowledge, skill, etc is made available to the assessee for utilizing them in future independently nor any developed drawing or design have been provided to the appellant, which can be applied by the appellant independently. 5.1.2 Thus the assessee submitted that the services rendered by the vendor is not taxable under clause 12(4) of the tax treaty. 5.1.3 The service provided to the assessee can be broadly divided into two categories based on the DTAA with respective countries:- i. Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agerial/technical or consultancy services, technical knowledge experience, skill know how or processes is made available which enables the person acquiring such services to apply the technology contained therein It further provides, if the services consist of development and transfer of a technical plan or technical design, but excludes any services that does not enable the person acquiring the service to apply the technology contained therein would not qualify as FTS In the facts of the present appeal, the payments made and the nature of services rendered are as under:- Sr. No. Name of the party Country Amount (Rs. ) Nature of services 1. Arc Studio architecture + Urbanism Pte. Ltd. Singapore 2,85,35,269/- Architectural drawing/design in relation to BKC project. 2. Web Structure Pte. Ld. Singapore 68,57,342/- GFC drawing/design in relation to BKC project 3. RMR Engineers Pte. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en brought on record by him to back such conclusion Even, before us, learned departmental representative has not brought any material to demonstrate that conditions of Article 12(4) have been fulfilled in the facts of the present case. In view of the aforesaid we do not find any valid reasons to interfere was then of learned Commissioner (Appeals) Accordingly, we uphold the order of teamed Commissioner (Appeals) on the issue by dismissing ground raised. 5.2.2 On going through the order of A.O and assessee 's submission, it can be seen that the facts of the case are almost similar to the case mentioned above 5.2.3 Following the above judgment, it is held that income of the entities were not taxable in India. Therefore, the assessee was not required to deduct TDS on these payments. 8. During the course of appellate proceedings before us the ld. D.R has referred the order of the A.O and the analysis of the document made by the A.O in the assessment order. He submitted that there was close connection of the architectural design services providers with the assessee and the whole process was approved by the owner after specifying, the planning and architectural design ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gapore DTAA is reproduced as under: ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent. 4. The term fees for technical services as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: a. are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or b. make available technical knowledge, experience, skill, know-how or processes. which enables the person acquiring the services to apply the technology containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain fee - Assessing Officer held that fee paid to non-resident entities would qualify as FTS under section 9(1)(vii) and also under article 12(4) Terms of agreement showed that design, drawing, et,, would remain intellectual property of said entities and were intended for use solely with respect to project and it further restrained assessee from utilizing such intellectual property for any other project and while providing such services neither any technical knowledge, skill, etc., was made available to assessee for utilizing them in future, independently nor any developed drawing or design had been provided to assessee which could be applied by assessee independently Whether, on facts, conditions of article 12(4) of tax treaty were not fulfilled and, thus, said fee could not qualify as FTS- Held, yes [Paras 8-12] [In favour of assessee ] In the case of Gera Development (P) Ltd. Vs. DCIT as referred supra the ITAT Pune held that payments made by the assesse, India Company to US company for architectural design and drawings of different buildings and facilities could not be held as fees for technical services as mere passing of project specific architectural drawings an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee further submitted that it has also relied on No PE Declaration and Tax Residency certificate (CTR) provided by such parties to whom commission payment were made. Therefore, the subject payment cannot be attributed to tax, therefore, no tax was withheld u/s 195 of the Act. However, A.O has not agreed with the submission of the assesse. The A.O stated that all the payments made by the assessee as brokerage to foreign vendors shall fall under the ambit of Sec.5(2) as the income from such payments to foreign vendors has arose or deemed to have arise in India only as the source i.e the flats sold for which the brokerage was paid, lies in India only. The AO has also stated that the brokerage payment were for identifying the potential customers for the assessee and thus the nature of services provided by the agents were in the nature of consultancy fall under the definition of FTS u/s 9(1)(vii) of the Act. 16. Aggrieved, the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assesse. The relevant part of the decision of ld. CIT(A) is reproduced as under: 5.4 Brokerage 5.4.1 I have gone through the assessee 's submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisive factor. The nature transaction is required to be determined on the basis of the substance and not by the nomenclature. Therefore, merely because it was mentioned as consultancy charges in the agreement, the real substance of marketing the product cannot be ignored. The Id representative has also placed his reliance on the judgment of the Kerala High Court in the case of Joe Joseph Ors v KC Moideen reported in 1996 (1) KLJ 656 3. The Id representative further submitted that new sub sections (3) and (4) were inserted in section 201 with effect from 01-04-2010 According to the Id representative, sub sections (3) and (4) of section 201 which were inserted by Finance Act, 2009 with effect from 01-04-2010 cannot be applied retrospectively for the year under consideration According to the ld representative, the retrospective operation is not practical and possible. The ld representative placed his reliance on the Special Bench decision of the Delhi Bench of this Tribunal in New Skies Satellites NV vs ADIT, Intl Taxation Cir.2(1), New Delhi (2009) 121 ITDI (Del)(SB) According to the ld representative, the transaction in this case refers to payment of commission Section 195 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty The CIT(A) also has reproduced copy of the agreement on pages 24 and 25 of the impugned order. As rightly submitted by the ld DR the work of the foreign party is to identify the potential customer and file a report regarding the market strategy and developmental studies. Agreement does not enable the foreign party to market the product of the assessee in South East Asian countries. The foreign party only has to do survey and file a report so that the assessee could market their product after considering the report filed by the foreign party. Therefore, the payment made to M's Stratum Enterprises is only consultancy charges as found by the CIT(A). It is not a case of marketing the product in the foreign country. Therefore, this Tribunal is of the considered opinion that the CIT(A) has rightly confirmed the order of the assessing officer. 5.5 Analysis 5.5.1 On going to the judgement, it can be seen that the assessee has entered into the agreement with two foreign entities. 1. M/s. Stratum Resources 2. M/s Tionale Enterprises Pte Ltd 5.5.2 In the case of Tionale Enterprise Pte Ltd, the CIT(A) itself held that this entity was engaged as a marketing agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t doubted or disputed 3. The contention and question raised by the Revenue is that the commission income of Rs 33,36,068/ earned by ETUK had accrued in India or was deemed to accrued in India and, therefore, the respondent assessee was liable to deduct tax at source and as there was failure, the said expenditure should be disallowed under Section. 40(a)(ia) of the Act. The relevont portion of the assessment order reads:- There are express provisions of the IT Act that provide for taxation of any part of income that accrues or arises or deemed to accrue or arise in India. When one states accrual of income it is basically an absolute concept when both the situs and receipt of such income is within the territories of the country. However it such conditions are not met fully and completely, then the deeming concept comes into play. As per previous judicial pronouncement, it has been clearly established that income can be said to be received when it reaches the assessee but it can be to have accrued or arisen immediately when the right to receive the said income becomes vested in the assessee . By performing the functions as envisaged in the agreement, the ETUK has earned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on earned by ETUK has business connection with the respondent- assessee in India i.e. the source was situated wholly and completely within the territory of India. The second paragraph refers to business connection and principle of deemed accrual. 5. Thus, on one hand, it was held that the commission income paid to ETUK had accrued or arisen in India and the said ETUK had right to receive income in India, since the situs/origin is in India but it is also averred that ETUK had business connection with the respondent assessee in India. 6. Concept of deemed accrual of income is different from income accruing, arising or received in India. When income accrues, arises or is received in India by a non resident, it is taxable in India. Income which is deemed to accrue or arise in India under the Act is taxable in India even though such income has not actually accrued, arisen or received in India. 7. To appreciate the legal position, Section 52) of the Act is reproduced below:- Section 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India, (b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in Indio for the purpose of export; (c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India; (d) in the use of a 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 Indio, 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 operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a non resident company and did not have any permanent establishment in India. ETUK was not rendering any service or performing any activity in India itself. These facts are not and cannot be disputed. Explanation 2 has not been invoked or relied upon by the Revenue Factual matrix in respect of Explanation 2 has not been referred to or examined by the Assessing Officer and is not on record. 11 Commissioner of Income Tax (Appeals) relied upon two circulars issued by the Central Board of Direct Taxes being Circular No. 23 dated 23 July, 1969 and Circular No. 786 dated 7 February, 2000, reported in [2000] 241 ITR 132 (St.). The relevant portion of the said circulars, for the sake of convenience are quoted below:- Circular No.23 dated 23.07.1969 Foreign Agents of India Exports Where a foreign agents of India exporter operates in his own country and his commission is usually remitted directly to m/him and is therefore, not received by him or on his behalf in India. Such an agent is not liable to income tax in India on the commission Circular No.786 dated 07.02.2000 As clarified earlier in circular No.23 dated 23-7-1969 (see under section (5) where the nonresident agent operates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India as contemplated by cl. (o) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned the non-resident assessee s for services rendered outside India cannot, therefore, be deemed be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the department. 13. The aforesaid decision is a complete answer to the contention raised by the Revenue and as mentioned in the assessment order that commission income had accrued and arisen in India when credit entries were made in the books of the respondent assessee in favour of the ETUK and the said income towards commission was received in India. As noticed above, the stand of the Revenue is contrary to the two circulars issued by the CBDT in which it is clearly held that when a non-resident agent operates outside the country no part of his income arises in India, and since payment is remitted directly abroad, and merely because an entry in the books of accounts is made, it does not mean that the nonresident has received any payment in India. This fact alone does not establish business connection. In Circular No. 786 dated 7 February, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in Transmission Corporation of Andhra Pradesh vs. CIT, (1999) 239 ITR 587 (SC), operates and is applicable when the sum or payment is chargeable to tax under the provisions of the Act. In such cases, TDS has to be deducted on the gross amount of payment made and not merely on the taxable income included in the grass amount. The said decision would not apply in case payment is made but the said sum in entirety is not chargeable or exigible to tax under the provisions of the Act. The said distinction has been rightly understood by the first appellate authority and the ITAT and correctly applied by them. 16. It will be appropriate to refer to the following observations of the Supreme Court in the Commissioner of Income Tax, New Delhi Vs. Eli Lilly and Company (India) Private Ltd., (2009) 15 SCC 1, wherein it has been observed: 60. Under the 1961 Act, total income for the previous year is chargeable to tax under Section 4. Section 4(2) inter alia provides that in respect of income chargeable under Section 4(1), income tax shall be deducted of source where it is so deductible under any provision of the 1961 Act. Section 192(1) falls in the machinery provisions. It dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under Section 4(1), total income for the previous year is chargeable to tax. Section 4(2) inter alia provides that in respect of income chargeable under sub-section (1), income tax shall be deducted at source whether it is so deductible under any provision of the 1961 Act which inter alia brings in the TDS provisions contained in Chapter XVII 8 In fact, if a particular income falls outside Section 4(1) then TDS provisions cannot come in. 76. Under Section 5, all residents and non-residents are chargeable in respect of income which accrues or is deemed to accrue in India or is received in India. Non-residents who are not assessable in respect of income accruing and received abroad are rendered chargeable under Section 5(2)(b) in respect of income deemed by Section 9 to accrue in India (emphasis supplied) 17. After referring to Eli Lilly (supra) in GE India Technology Centre Private Limited (supra), it has been held: 17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in CIT v. Eli Lilly Co. (India) (P) Ltd the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the IT A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no error in the findings recorded by the Commissioner of Income Tax (Appeals) which have been in the impugned order by the ITAT. We do not find any merit in the present appeal and the same is dismissed. 5.5.10 In this judgment, the Hon'ble Delhi High Court has with the issue of deduction of tax on commission payment to a foreign party, and all the aspects related to this issue were analysed in detail by the Hon'ble High Court 5.5.11 Respectfully following the judgment of Hon'ble Delhi High Court, it is held that brokerage payment (which is similar to commission payment) cannot be taxed in Therefore, no TDS was deductible on these payments 5.5.12 This issue is therefore decided in favour of assesse. 17. During the course of appellate proceedings the ld. D.R has placed reliance on the finding of A.O and contended that payment made to the non-resident of brokerage is taxable. On the other hand the ld. Counsel has referred page no. 187 to 220 of the paper book and contended that assessee has made payment of brokerage to non-resident for rendering services outside India and the payments were made to them by the assessee in their bank accounts outside India, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act are attracted in the case of the assesse. Regarding applicability of provision of Sec.9(1)(vii) by way of treating the payment as fees for technical services the A.O has not proved that how such payment made in the context of make available clause. From the perusal of material on record it is observed that there is no element of technical knowledge, experience, skill knowhow or process in the rendering of brokerage services. No such technical knowledge etc. is made available to the assessee by such brokers. Therefore, we don t find any infirmity in the decision of ld. CIT(A) that the payment of brokerage by the assessee to the brokers is not taxable in India either pursuant to Sec. 9(1)(vii) or under the provisions of DTAA due to restrictive definition of FTS/FIS, therefore, the ground of appeal of revenue stand dismissed. Ground No. 4: Reimbursement of Expenses: 19. During the year under consideration the assessee had made remittance to foreign parties towards reimbursement of expenses. The detail of the payment are as under: Sr. No. Date of 15CB certificate Name of Vendor Country of Resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e service recipient were nothing but the expenses of the service provider in providing the services. Since expenses cannot be allowed while taxing the fees for included services, the amount of reimbursement also should be added with the fees for included services. 20. Aggrieved, the assessee filed the appeal before the ld. CIT(A). The ld. CIT(A) has deleted the addition made by the Assessing Officer. The relevant part of the decision of CIT(A) is reproduced as under: 7. Reimbursement of Expenses :- 5.7.1 In my opinion, reimbursement of expenses will take the same colour which the original transaction (to which it relate) had. In other words, if the reimbursement of expenses is related to FTS then it will take the colour of FTS. If the reimbursement of expenses is related to brokerage, then it will take the colour of brokerage. 5.7.2 It is therefore, held that taxability of reimbursement of expenses will depend on the taxability of the original transaction to which it relate. 5.7.3 As in the present appeal, I have held that FTS, brokerage and purchase is not taxable in India and no TDS were deductible, therefore, it is held that no TDS will be deductible on reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments received by assessee from its agents were in nature of reimbursement of expenses Assessing Officer did not accept said contention and held that amounts paid by agents to assessee was fees for technical services taxable in India under article 13(4) of DTAA - Tribunal opined that by setting up communication system in question assessee did not render any technical services and, thus, amount in question was not taxable as fee for technical services. High Court upheld order passed by Tribunal - Whether since communication system in question was an integral part of shipping business, which was allowed to be used by agents in order to enable them to discharge their role more effectively, it could not be treated as any technical services provided to agents Held, yes Whether, therefore, High Court rightly concluded that amount received by assessee from its agents could not be brought to tax as fee for technical services Held, yes [Para 12] [In favour of assessee ] The Hon ble Bombay High Court in the case of Director of Income Tax (International Taxation) Vs. Krupp Ltd. GMBH (2013) 40 taxmann.com 38 (Bombay) held that reimbursement of expenses for air tickets could not be treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound No. 1 2 of ITA No. 497/Mum/2022 therefore, applying the same findings mutatis mutandis, all the grounds of appeal of the revenue are dismissed. Ground No. 6: 30. As the facts and the issue involved in this ground is the same as supra ground No. 3 of ITA No. 497/Mum/2022 therefore, applying the same findings mutatis mutandis, this ground of appeal of the revenue is dismissed. Ground No. 7: 31. As the facts and the issue involved in this ground are the same as supra ground No. 4 of ITA No. 497/Mum/2022 therefore, applying the same findings mutatis mutandis, both these ground of appeal of the revenue are dismissed. Ground No. 8: 32. During the year under consideration the assessee made remittance of Rs. 30,464/- to Ideascape Marketing N. Communication F2C for purchases. As per DTAA with UAE (Article 7), payment to an entity in UAE can be brought to tax in India only when such entity has a permanent establishment in India. The AO has not brought any material on record to prove contrary, therefore we don t find any merit in this ground of appeal of the revenue. Accordingly, this ground of appeal stand dismissed. Cross Objections Nos. 73 to 75 85/M ..... X X X X Extracts X X X X X X X X Extracts X X X X
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