ACIT Vs Chadha Power (ITAT Delhi)
Insofar as disallowance of reimbursement of expenses made to two non-resident entities i.e. Chadha Projects JLT, Dubai of Rs.1,30,51,568/- and Rs.21,33,805/-to Chadha Power (SA) Pty. Ltd., South Africa. The assessee’s case has been that the said reimbursement of expenses of both the entities were for carrying out market research for feasibility and expansion of market in neighboring countries particularly in Gulf and African region and day-to-day coordination in activities for the assessee, negotiation and procurement of orders, securing of materials, supply and distribution of materials to destination sites, logistic support and follow up and liaisoning for projects under execution etc.. It is also undisputed fact that these firms were actually carrying out these activities as it has secured work order of more than Rs. 35 crores for the assessee. The copy of work orders were filed before the AO along with various documents and relied upon the correspondence which shows that the efforts were made for getting the new business there. Sans any adverse material, AO cannot question the wisdom and business expectancy in which wake of such evidences and record which has been duly appreciated and taken note of by the ld. CIT (A). The documents which have been referred to in the first appellate order, as incorporated above, clearly show that both the entities i.e. Dubai based and South Africa based has assisted in the business development as well as procurement of huge business orders which was in line with the assessee’s business i.e. supply, installation, commissioning and maintenance of DG sets, power equipment and its spares/accessories. There is no adverse material on record to rebut the aforesaid documents as highlighted by the ld. CIT (A) above. Therefore, we do not find any reason to uphold the addition on the ground that there are no commercial activities. Accordingly, the finding of ld. CIT (A) is confirmed.
FULL TEXT OF THE ORDER OF ITAT DELHI
Aforesaid appeal has been filed by the assessee against the impugned order dated 22.11.2017 passed by the ld. CIT (Appeals)-10, New Delhi for the quantum of assessment passed under section 143(3) of the Income-tax Act, 1961 (for short ‘the Act’) for the assessment year 2013-14.
2. In the grounds of appeal, the Revenue has raised the following grounds :-
“i) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 1,30,51,568/- made on account of reimbursement of expenses which is not backed by commercial expediency and at the same time cannot be allow as per the provision of section 40(a)(ia) as on the same TDS has not been deducted.
ii) On the facts and circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs.1,07,70,378/- made on account of diversion of income belonging to the assessee firm to an entity incorporated in tax-free jurisdiction avoidance of tax.
iii) On the facts and circumstances of the case, the Ld. C!T(A) erred in deleting the addition of Rs.21,33,805/- made on account of by treating the same as non-business expenditure and also u/s 40(a)(i) and further erred in holding that the entire amount paid to Chadha power (SA) Pty. Ltd on account of reimbursement of expenses is not backed by commercial expediency.
iv) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the reimbursement expenses can be reasonably attributed as ‘fee for management services’ and as per the provisions of section 40(a)(i) any amount paid to a non resident is not deductable as an expense if the requisite TDS under Chapter -XVIIB has not been deducted and paid.
v) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that It is only if the business or profession is carried outside India, ‘Fee for technical/management services’ payable by a resident is not taxable in India.
vi) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the so-called support services provided by Chadha Projects JL T to the assessee is in the nature of fee for technical services since the so-called work order procured by Dubai entity for the benefit of the assessee firm have been executed from India and hence taxable in India.
vii) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that there were only two employees of Dubai entity, one of which is already a partner in assessee firm and hence diverting the income of assessee firm but also inflating the expenses of the assessee firm in the garb of support services where no such services were required from the angle of commercial expediency.”
3. In nutshell, in the grounds of appeal, the Revenue has challenged the deletion of addition made u/s 40(a)(i) for reimbursement of expenses to a non-resident placed at Dubai and South Africa; and the addition of Rs.1,07,70,378/- on account of diversion of income.
4. Facts in brief are that the assessee is a partnership firm engaged in the business of supply, installation, commissioning and maintenance of DG sets, power equipments and its spare parts and accessories. AO noted that the assessee has claimed expenses aggregating to Rs.1,30,51,568/- on account of reimbursement of expenses towards business development which were paid to Chadha Projects JLT Dubai. In response to show-cause notice, the assessee contended as under :-
“1.1 Chadha Power in order to develop a base in Dubai incorporated a wholly owned subsidiary in the form of Chadha Projects JLT to act as representative/ liaison officer for Chadha Power.
1.2 The said entity in Dubai was incorporated in order to:-
(a) carry out market research for feasibility and expansion of market in neighbouring countries particularly in gulf and African region.
(b) day to day co-ordination in activities for Chadha Power India in i) negotiation and procurement of orders ii) securing of materials iii) supply & distribution of materials to destination sites iv) logistics support v) follow up and liaisoning for projects under execution etc.”
5. AO further noted that in the balance sheet of Chadha Projects JLT, Dubai for the year ending 31.12.2012, revealed that the said entity earned gross income of 1,483,450 AED, out of which sales were 980,664 AED and management fee of Rs.502,786 AED. Against this, revenue expenses have been shown at 526,718 AED, Finance cost of 1148 AED and net profit of 792,674 AED. The amount of management fees aggregating to 502,786 AED was in the form of reimbursement of expenses by Chadha Power, India to Chadha Projects JLT, Dubai with a 10% mark-up. After considering the assessee’s detailed reply, the AO held that entire amount paid to Chadha Projects JLT, Dubai on account of reimbursement of expenses is not backed by commercial expediency and, therefore, needs to be disallowed. He further disallowed that said expenditure has to be examined from another dimension i.e. the amount is paid to a non-resident and, therefore, provisions of section 40(a)(i) is applicable because TDS is not deducted and paid. The observation of AO in this regard is as under:-
“ However, in the reply dated 23.03.2016 it is stated that the assessee firm was benefited by Chadha Projects JLT by securing a work order worth INR 14 crores by ZPC, another work order of Rs. 14 crores from Petrozim Line Pvt. Ltd. and a work order of Rs. 7 crores from Lesotho Electricity Company. Copies of the work orders have been filed along with the reply and in addition to the same documents have been filed which comprises of related correspondence reflecting the efforts of Mr. Pradeep Chadha for getting new business. Further, it has been stated in the reply that the efforts made by Mr. Pradeep Chadha and his team resulted in procurement of the above work orders. Pertinently, there is no other activity which benefited the assessee firm viz. Logistics support, supply, and distribution of material, market research for feasibility and expansion etc. Although, much stress has been made on the efforts of the Dubai team, however, facts placed on records reveal that apart from Mr. Pradeep Chadha and his daughter, there was no employee in Chadha Power JL T for execution of any work. Therefore, this is a simple case wherein an entity has been introduced in the form of Chadha Power JL T for not only diverting the income of assessee firm but also inflating the expenses of the assessee firm in the garb of support services where no such services were required from the angle of commercial expediency. Whatever services are being claimed to have been provided by Chadha Power JLT through Mr. Pradeep Chadha could have been provided by him directly in his capacity as Partner of the assessee firm without there being any need for introduction of a new entity in the form of Chadha Power JLT. It is also apparent why this entity was incorporated in Dubai, which is a tax-free jurisdiction. There is no work order received from any entity in GCC or Middle East. Whatever work orders are being claimed have been received from entities in Africa and therefore if there was a real need for setting up any entity for providing market support services, it could have been set up either in South Africa or Zimbabwe (from where the work orders have been procured). Setting up of the entity in Dubai is therefore with a motive to divert the income of the assessee firm to a tax-free jurisdiction….
6.1 In view of the facts discussed above in detail, it cannot but be concluded that the entire amount paid to Chadha Projects JLT aggregating RS.1,30,51,568/- on account of reimbursement of expenses is not backed by commercial expediency and therefore needs to be disallowed. Accordingly, a disallowance allowance of Rs.1,30,51,568/-is being made. Further, the allowability of expenditure of Rs.1,30,51,5681- needs to be examined from another dimension i.e. deduction and deposit of withholding tax. As per the provisions of section 40(a)(i) any amount paid to a non-resident i.e. Chadha Projects JLT in the present case, is not deductable if the requisite TDS under Chapter-XVIIB has not been deducted and paid. In the present case, the so-called support services provided by Chadha Projects JL T to the assessee firm is in the nature of fee for technical services since the so-called work order procured by Dubai entity for the benefit of the assessee firm have been executed from India. Therefore, the support services so provided have been utilized in India and hence the income of Chadha Projects JL T for providing such services is taxable in India. Since no withholding tax has been deducted on such payment reimbursed to Chadha Projects JL T along with mark up of 10% the said expenditure needs to be disallowed as per the provisions of section 40(a)(i) of the I. T. Act, 1961 …”
6. He has also disallowed similar expenses of Rs.21,33,805/- paid by the assessee to Chadha Power (SA) Pte Ltd. wholly and exclusively incorporated in South Africa for similar reasons.
7. CIT (A) has discussed this issue after considering various documents placed on record as well as the submissions made by the assessee in the following manner:-
“5.1a It is gathered from the appellant’s submissions in para 4 above that in respect of the above-mentioned disallowance of expenditure reimbursed to M/s. Chadha Projects JLT (Dubai) and M/s. Chadha Power (SA) (Pty.) Ltd. on the ground that business expediency was not established and due taxes were not withheld, the total disallowance could not exceed Rs.1,26,15,697/-(1,04,81,892 + 21,33,805), the balance Rs.4,35,871/- represented local expenses.
5.1b It is also gathered that the appellant is in the business of supply, installation, commissioning and maintenance of DG Sets, power equipment and its spares/ accessories. Its business is in different countries where from it receives orders for execution, which are executed by the assessee. An entity was opened in Dubai with the name of Chadha Projects JL T and in South Africa in the name of The Chadha Power (SA) Pty. Ltd. (CPSAPL). While the South African entity was set up in 2009, the Dubai Unit was set up in AY 2012-13.
It appears from the appellant’s submissions that both entities supported and coordinated its business activities – marketing and distribution and provided logistical support. The appellant apparently made these submissions at the assessment stage as well as reiterated them at the appellate stage. In support of its contention, the AR of the appellant filed copies of the following –
