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TMI Blog2025 (5) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit & loss account amounting to Rs. 24,53,696/- being expenditure not directly related for the enhancement of business income should not be disallowed. In reply assessee submitted as follows; In this regard, it is respectfully submitted that such interest free ICDs to subsidiaries, also engaged in the business of hospitality and being in a financial losses were given in order to fund/support the business venture and strategic investments of the company: owning to our business interest held in such companies. Thus, it was fully based on commercial expediency and strategic nature of investment made earlier. In this regard, is placed on the decision of Supreme Court in the case of Hero Cycles Pvt. Ltd. vs. CIT, Ludhiana, 281 CTR 481, 236 Taxman 447 dated 05-11-2015 and S A Builders Ltd. vs. CIT, Chandigarh 288 ITR-1, 206 CTR 63 / dt. 14/12/2016. " 2.1. The Assessing Officer did not agree with the same for the reasons as stated in para 3.3 of his order and disallowed a sum of Rs. 24,36,140/- after allowing credit of Rs. 17,556/- being interest received. 3. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) after considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing hospitality services and is also holding strategic investments in subsidiary companies engaged in the same business of hospitality, i.e., running and operating hotels. FFC is niche concept-based luxury hospitality company specializing in the business of Forest Camps and is a wholly owned subsidiary of the appellant. The appellant's shareholding in the said company represented strategic / controlling interest therein. The appellant, being a veteran in the said field, had also entered into management agreements (Refer pages 45-55 of the paperbook) with subsidiary companies for rendering management consultancy services, in lieu of management fee. During the year under consideration, the appellant had earned management consultancy and service fee of Rs. 77,88,894 (Refer, page 15 of the paperbook) Thus, the appellant held deep business interest in the said companies: (i) by way of controlling interest and ii) interest by way of management agreement. The said companies were at a fledgling stage and required complete training as also managerial and financial support. Accordingly, since the appellant had deep financial interest in the said subsidiaries, it was incumbent o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facie shows that the subsidiary was in need of more funds during the year. Moreover, that in pursuance of the management agreement entered by the assessee with the associate concern, the assessee had earned consultancy and service fee of Rs. 77,88,894/-. Therefore, we do not agree with the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance of interest made by the Assessing Officer in respect of the loan given by the assessee company to M/s FFC. Accordingly, ground no.1 and 1.1 of the assessee are allowed. 8. Ground no.2 and 2.1 of the appeal is against the disallowance of retainership fees of Rs. 4,20,000/- u/s 40(a)(i) of the Act paid to Mr. Yusuf Ansari towards 'payment of retainership fees' for the alleged non-deduction of tax at source on the said payment. The assessee explained before the Assessing Officer that due tax was deducted in the said account but inadvertently the same was deposited with tax for AY 2013- 14 instead of AY 2012-13. The written submission of the assessee as mentioned in para 4.2 of the assessment order is reproduced as under:- 4.2. In response to the same, the assessee has filed a reply vide letter dated 31.12.2015 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the person who withholds it; The appellant, has further taken refuge in the 2nd proviso of Section 40(a)(ia) and claimed that as the payee has paid taxes on the said amount, the appellant company is deemed to have deducted tax on retainership fee paid to the payee. This argument of the appellant company has no legal locus standi has in such a case to substantiate such a claim, the deductor, in this case the appellant company was required to file a certificate from an Accountant under the first proviso to sub-section (1) of section 201 in Form 26A to DGIT(Systems) or the person so authorized by him as clearly laid down in Rule 31ACB of the Income Tax Rules. This has not been done by the appellant company. Accordingly, I hold that the AO has rightly made the disallowance on this account. The order of the AO on this account is upheld given the clear and unequivocal provisions of the Income Tax Act." 10. We have heard the rival contentions and perused the materials available on record. In this regard, the assessee filed a written submission submitting that the TDS of Rs. 42,000/- in respect of payment to Shri Yusuf Ansari, was already made and deposited on 06.08.2013 and submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & remittance related documents. c) Rosamond Freeman Attanvood. SPA Consultants Ms. Resamond Awood a Srilankan Resident is our SPA Consultant, Please note that her stay in India was less than 120 days during A. Y 2013-14 and as per DTAA the tax liability is not applicable on her in India as per 15CA & 15CB attached alongwith voucher, bill & remittances related documents (which is placed on record.)" 11.2. The above reply of the assessee was not accepted by the Assessing Officer on the ground that there is no specific provision under the Act for making a payment to a non-resident without deduction of TDS unless a no objection certificate is obtained from income tax authority under section 195(2) of the Act. The Assessing Officer further considered the above payment as "Fee for Technical Services" (in short 'FTS') and held that the same was liable for TDS u/s 40(a)(i) of the Act and in view of the failure of the assessee to do so, the Assessing Officer disallowed the above payments. 11.3. Aggrieved with the said order, the assessee preferred an appeal before the ld. CIT(A). The Ld. CIT(A) confirmed the order of the Assessing Officer and held that the payments were in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to render it "technical service". The Hon'ble Madras High Court in the case of Skyceli Communications Ltd. 251 ITR 53 (Mad) had an occasion to examine the definition of 'fee for technical services' in the context of payment of fees by a cellular/Mobile phone subscriber to the operator of the cellular/mobile phone facility." The High Court said: The meaning of the word "technical" as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art or craft or its techniques: technical terms (especially of a book or article) 2. requiring special knowledge to be understood: a technical report. 3. of involving, or concerned with applied and industrial sciences: an important technical achievement. 4. resulting from mechanical failure: a technical fault. 5. according to a strict application or interpretation of the law or the rules The scope of the term 'technical services' has been discussed in foregoing paras with reference to Article 13(4) of Indo-UK DTAA and Article 12(4) of Indo-US DTAA wherein it has been clearly held that any service which makes available technical knowledge, experience, skill know-how or processes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a company operating a tourist facility in Kenya and had undertaken a market research for the appellant and that payment made to the non-resident was not taxable in India under India-Kenya DTAA. The first question to be addressed is whether this market survey undertaken by the Kenya based company constitutes 'technical service'. The Madras High court as discussed supra has clearly held that a service rendered of such a nature will be technical service that will fall within the meaning of section 9(1)(vii). This has not been disputed by the appellant company. The appellant has simply submitted that no TDS was made as the payment made on account of the services rendered did not fall within the ambit of the Indo-kenya DTAA agreement. The DTAA was examined. There is no specific clause on such services rendered. The appellant has taken the support of Article 16 of the DTAA agreement. This was examined and reads as under: ARTICLE 16 INDEPENDENT PERSONAL SERVICES 1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable on in that State unless- (a) he has a fixed ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide India, were in lieu of obtaining technical services within the meaning of section 9(1)(vii) of the Act, which were deemed to accrue or arise in India and consequently were chargeable to tax in India; ii) consequently the appellant was obliged to withhold tax therefrom under section 195 of the Act; and iii) the appellant had failed to obtain certificate for lower/nil deduction of tax at source before making remittance without deducting tax at source. CIT(A) The CIT(A) upheld the said disallowance made by the assessing officer by holding that, the said payments constituted fee for technical services under section 9(1)(vii) of the Act. It was also held that the aforesaid services did not fall within the ambit of Article 14/16 of the DTAA's entered with Sri Lanka and Kenya dealing with 'Independent Personal Service' as the same covers only independent activity of physicians, lawyers, engineers, architect, dentists and accountants and the services rendered by non-resident parties are not covered under the said Article(s). Submission The aforesaid disallowances made in the aforesaid order is not based on correct appreciation of facts and legal position which des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the DTAA relating to FTS and the same could at best, be said to fall under the head "Business Profits". Since there is no fixed place/permanent establishment of the Appellant in India, the income arising to Rosamond Freeman-Attwood on account of the aforesaid payments is not taxable in India. In view of the aforesaid, the amount paid to the non-resident cannot, it is submitted, be brought to tax in India. Accordingly, there was no default on the part of the appellant in not deducting tax at source from such payments, so as to warrant any disallowance under section 40(a)(i) of the Act and, therefore, disallowance made under section 40(a)(i) of the Act calls for being deleted on this ground alone. B. Payments in the nature of "Independent Personal Service" ("IPS"); not liable to tax in India Without prejudice and in the alternate, in case of absence of any specific clause in Indo-Sri Lanka DTAA dealing with taxation of fees for technical services, Article dealing with "Independent personal services" can be applied In terms of Article 14 of Indo-Sri Lanka DTAA dealing with taxation of 'Independent Personal Services' ('IPS'), an income derived by a non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing decisions wherein the term 'professional services' contained in Article 14 was given a wide interpretation and services such as technical and marketing consultancy service, including consultancy services for improvement and upgradation of products manufactured by the assessee and even software development services, were held to fall within the ambit of "Independent personal services': - Dieter Eberhard Gustav Von Der Mark v. CIT: 102 TAXMAN 368 (AAR -New Delhi - Graphite India Ltd. v. DCIT: [2003] 86 ITD 384 (KOL- Trib.) - Susanto Purnamo v. ITO: [2016] 73 taxmann.com 108 (AhmdO Trib.) In view of the aforesaid, the services of Spa Consultancy and management services rendered by Rosamond Freeman- Attwood in relation to the hotels run by the appellant would fall within the ambit of professional services covered under Article 14 of the Indo - Sri Lanka DTAA, which cannot be brought to tax in India. Re ii): Payment made to Elephant Pepper Camp Ltd., Kenya: The appellant had, during the year under consideration, made payment of Rs. 5,61,700/- to Elephant Pepper Camp Ltd, Kenya for conducting marketing research for exploring opportunities in the hospitality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re would be no need to make application to the assessing officer to determine the rate at which tax needs to be deducted at source. [Refer GE India Technology Centre (P) Ltd. vs CIT: 327 ITR 456] In terms of the aforesaid decision of the Supreme Court, since for the reasons stated hereinabove, the appellant was fairly certain that the aforesaid payments in question were not liable to tax in India; it was not required to approach the assessing officer for certificate under section 195(2) of the Act. 13. We have heard both the parties and perused the materials available on record. We find that the Assessing Officer was of the view that payment of Rs. 9,65,000/- paid to Rosamond Freeman-Attwood, a resident of Srilanka and Rs. 5,61,700/- paid to M/s Elephant Pepper Camp Ltd. Kenya was on account of "Fees for Technical Services" and was covered under section 9(1)(vii) of the Act. Further, the Assessing Officer was also of the view that if the assessee was of the view that the said amount was not taxable in India and no deduction of tax was required in respect of the said payments, then the assessee was required to obtain certificate for no deduction or lower deduction of tax on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., Kenya will constitute 'technical services' within the meaning of section 9(1)(vii) of the Act. For these reasons, the Ld. CIT(A) confirmed the disallowance made by the Assessing Officer. 13.4. The above view of the Assessing Officer and the ld. CIT(A) has been carefully considered but not found to be acceptable. Explanation-2 of Article-9(1)(vii) reads as under:- Explanation 2.-For the purposes of this clause, "fees for technical services" means 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 not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries" (emphasis supplied) 13.5. In view of the submission of the assessee as reproduced in written submissions, the services rendered by Rosamond Freeman- Attwood and M/s Elephant Pepper Camp Ltd. will not fall under any of the above three categories being managerial, consultancy or technical. The said submission of the assessee is rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specifically covered by article 15(2), as evident from the opening words of this provision to the effect "the term 'professional services' includes (emphasis, by underlining, supplied by us)", the specific professions set out therein are only illustrative and not exhaustive. The emphasis is essentially on the nature of services, but then, as we have noted above, that test is satisfied on the facts of this case. While dealing with the scope of services which are covered by article 15, it is important to bear in mind the fact that there could indeed be overlapping effect of the scope of services covered by the other articles but as long as the services are rendered by an individual or group of individuals, generally rendition of such services is covered by article 15. The exclusion clause set out in article 12(5)(e) typically exemplifies this approach......................." (emphasis supplied) 13.7. In view of the above decision and discussion, we are of the considered view that rendering of services by Rosamond Freeman- Attwood during the material period will be covered by "Independent Personal Services" as it is similar to the nature of services mentioned therein. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent made to a non-resident irrespective of the fact that the amount was taxable in India or not is not acceptable. In this regard, the head note of the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. vs CIT (327 ITR 456) is reproduced as under:- Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to nonresident - Whether the moment a remittance is made to a non-resident, obligation to deduct tax at source does not arise; it arises only when such remittance is a sum chargeable under Act, i.e., chargeable under sections 4, 5 and 9 - Held, yes - Whether section 195(2) is not a mere provision to provide information to ITO(TDS) so that department can keep track of remittances being made to non-residents outside India; rather it gets attracted to cases where payment made is a composite payment in which certain proportion of payment has an element of 'income' chargeable to tax in India and payer seeks a determination of appropriate proportion of sum chargeable - Held, yes." 14.1. Therefore, in the above case, the Hon'ble Supreme Court has held that section 195(2) of the Act gets attracted to cases where paymen ..... 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