TDS not deductible on service neither availed nor rendered in India

Mastek Ltd Vs DCIT (ITAT Ahmedabad)

ITAT Ahmedabad held that tax deduction at source doesn’t apply to service which are neither availed nor rendered and not even utilized in India. Accordingly, disallowance u/s 40(a)(ia) unjustified.

Facts- During the course of assessment, AO observed that the UK branch of the assessee made payment on certain professional and consultancy services to U.K. resident companies on which no tax was deducted. During the course of assessment proceedings, the assessee submitted that the U.K. branch of the assessee was a separate legal entity formed under the U.K. regulations. It was submitted that the services availed by the U.K. branch, non-residents had been rendered and utilised outside India. Accordingly, in view of the exception provided in sub-clause “C” of section 9(1)(vii) of the Act, no tax is required to be deducted on such payment. However the AO made disallowance u/s. 40(a)(ia) of the Act.

CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.

Conclusion- ITAT in assessee’s own case has held that The UK branch of the assessee has availed services of non-resident consultants. These services were provided from outside India. And these services have also been utilized outside India. Since the services in question were neither “availed” nor “rendered” and even not “utilised” in India, therefore no tax was required to be deducted at source.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

These four appeals, two filed by assessee and two filed by Department for assessment years 2011-12 & 2012-13 are against the order of the ld. Commissioner of Income Tax, CIT(A)-2, Ahmedabad, in proceeding u/s. 250 vide orders dated 27/10/2027 & 22-02-2018.

ITA No. 2931/Ahd/2011 filed by assessee for A.Y. 2011-12

2. The assessee has taken the following grounds of appeal:-

“GROUND NO. 1

a) The learned CIT (A) has erred in law and on facts in upholding the adjustment of Rs. 6,508,491 made by Transfer Pricing Officer (“TPO”) in relation to the financial guarantee given by the Appellant to its Associated Enterprise (“AE”).

In doing so, the learned CIT (A).-has erred in not appreciating the following:-

1. The financial guarantee-is in the nature of shareholder activity; as it was to enable the AE pay purchase consideration ‘of acquisition, decision in relation to which was made by the Appellant;

2. The financial guarantee is quasi-equity in nature as the loan availed through financial guarantee, has been repaid from time to time by equity infusion; and

3. Provision of guarantee is not an international transaction as per section 92B of the Act.

b) Without prejudice to the above, the¹ learned CIT (A) has erred in the following:-

1. Not undertaking a credit rating analysis for the Appellant and the AE and not considering ratings for both Appellant and the AE and the spread between them on an adhoc basis;

2. Disregarding the comparable uncontrolled price details submitted by the Appellant

3. Not appreciating the fact that, no cost is incurred by the Appellant in relation to the financial guarantee, and .

4. Mot appreciating that the jurisdiction Tribunal in various rulings has levied a charge of approx. 0.3 to 0.5%.

GROUND NO. 2

a) The learned CIT(A) has erred in law and on facts by grossly rejecting the contentions of the Appellant and upholding the action of the TPO in determining the arm’s length price of the international transaction of provision of software services rendered by P&C Division of the Appellant to its AE at Rs. 4,22,04,828.

In doing so, the learned CIT (A) has erred in not appreciating the following:-

1. The CIT(A) have erred in disregarding the transfer pricing analysis carried out by the Appellant. In the case under consideration, none of the conditions set out in section 92C(3) of the Act get satisfied. The Appellant complied with the provisions of section 92C (1) and 92C (2) of the Act at the time of conducting the transfer pricing study.

2. In conducting a fresh search and selecting a final set of 20 comparable

b) Without prejudice to the above, the CIT(A) has erred in law and on facts in rejecting the use of multiple year data and insisting on the use of current year data for benchmarking the transaction. Thus, the CIT(A) have failed to appreciate the intent of the provisions of Rule 10D (4) of the income -tax Rules, 1962 (“the Rules”) which require that the data to be used for uncontrolled analysis should relate to the relevant financial year a.id be available as on the specified date. Both the above two conditions prescribed by the Rules are mutually inclusive end as such, if any one of these conditions is not satisfied, the relevant comparable ought not to be included in the comparability analysis.

c) Without prejudice to the above, the CIT(A) erred in not granting economic adjustments on arithmetic mean of comparables, more so when the TPO has himself carried out a risk adjustment on comparables considered for benchmarking the transaction with MUK.

GROUND NO. 3

a) The learned CIT(A) has erred in law and on facts by enhancing the adjustment of Rs. 3,800,000 made in relation to the performance guarantee given by the Appellant to the customers. In doing so, the learned CIT(A) has erred in not appreciating the following:-

1. The service liability risk is borne by the Appellant as the services are either provided by its delivery center in India (offshore) or branch in UK (onsite in case of Mastek (UK.) Ltd); and

2. The said performance guarantee is in the nature of shareholder activity.

b) Without prejudice to the above, the learned CIT(A) has erred in not appreciating the following:-

1. No cost is incurred by the Appellant in provision of these performance guarantees;

2. The said performance guarantees cannot be equated with financial guarantee;

Your Appellant craves leave to add to and/or to amend and/or to modify and/or to cancel any one or mere grounds of appeal at any time before or at the time of hearing.”

Ground No. 1 (Upward adjustment of Rs. 65 lakhs for financial guarantee given by assessee to AE)

3. The brief facts in relation to this ground of appeal are that the assessee is engaged in providing services in the life and annuity which is a vertical of the insurance sector. In order to expand its business in another vertical (property and casualty), the assessee decided to acquire STG (USA). Accordingly, it was decided to undertake the acquisition through Majesco Mastek, US (MMUS), a wholly owned US subsidiary of the assessee and acting as a distributor of software services capabilities of the assessee. The assessee issued a guarantee to ICICI bank, Canada, which in turn gave a loan to MMUS, which enabled the latter to pay the purchase consideration for the acquisition of STG (USA). Further, the assessee also decided to make an equity investment of USD 26 million in MMUS over a period of three years, which would interalia was to be used for repayment of loan, availed for payment of acquisition of STG (USA).

4. During the course of assessment proceedings, the TPO/Assessing Officer observed that the assessee has not benchmarked the provision for guarantee given by it on behalf of its AE. However, the Assessing Officer held that providing guarantee to another company represents a service rendered on behalf of the other company. It involves shifting a considerable burden/risk on the guarantee provider and such service would be required to be compensated on arms length basis. Accordingly, the Assessing Officer/TPO made an upward adjustment of Rs. 65.08 lakhs by adopting a rate of 2.12% (being the average difference in coupon rate in respect of AA rated bonds and BBB rated bond.

5. In appeal, the CIT(A) upheld the addition by following the order rendered by CIT(A) for assessment years 2008-09, 2009-10 and 2010-11, which were rendered on identical set of facts. While confirming the order passed by Assessing Officer/TPO, ld. CIT(A) has made the following observations:-

“9.9. Considering the above fact and the fact that the identical issue on similar facts has been dismissed by CIT(A)-4, Ahmedabad in its order for A. Y. 2010-11 and has confirmed the addition relying upon the order for A. Y. 2009-10, the ground of appeal for this year is also confirmed.

The ground of appeal is dismissed.”

6. Before us, the counsel for the assessee submitted that the financial guarantee is the nature of share holder activity as it was to enable the AE to pay purchase consideration of acquisition, the decision in relation to which was made by the assessee. It was further, submitted that financial guarantee is quasi equity in nature as the loan availed by the AE of the assessee company through financial guarantee has been repaid back to the assessee company through equity infusion made by the assessee company into its subsidiary. It was further submitted that provision of guarantee is not covered under transfer pricing regulations. The counsel for the assessee submitted the case of the assessee is covered in its favour by decision of ITAT for assessment year 2008-09, 2009-10 and 2011-12.

7. We have heard the rival contentions and perused the material on record. We observe that the ITAT in assessee’s own case for preceding assessment year have held that providing of corporate/financial guarantee does not tantamount to an international transaction, and hence there is no requirement for benchmarking the same. However, we observe that the Allahabad High Court in the case of Jubilant Pharmoba Ltd. 146 com 319 (Allahabad) held that transaction of furnishing corporate guarantee to overseas AEs constitute an international transaction. Further, the Hon’ble Supreme Court in the case of Jubilant Pharmoba Ltd. vs. Additional CIT 146 taxman.com 318 (SC) also dismissed the SLP filed by the assessee against the order of High Court. Further, the Madras High Court in the case of PCIT vs. Radington India Ltd. 122 taxman.com 136 held that inherent risk cannot be ruled out in providing guarantees and hence adjustments are required for carrying commissions. Further, in the case of Rubani Ltd. 131 taxman.com 344, Ahmedabad ITAT held that corporate guarantee extended by assessee to its AE is an international transaction and corporate adjustment guarantee addition has to be made to an extent of 0.5% only. Similarly, the Bombay High Court in the case of Siro Clinpharm 131 taxman.com 73 (Mumbai Tribunal) held that corporate guarantee constitutes international transaction u/s. 92B of the Act and further the ITAT directed the Assessing Officer to adopt 0.5% as an arms length consideration for the corporate guarantee issued by the assessee in favour of its AE.

8. In view of the aforesaid decisions, we are of the considered view that extending of corporate guarantee to AE constitutes an “international transaction” and the Assessing Officer is directed to adopt 0.5% as an arms length consideration for the corporate guarantee issued by the assessee in favour of its AE.

9. In the result, ground no. 1 of assessee’s appeal is partly allowed.

Ground No. 2 (upward adjustment of Rs. 4.22 crores for software services by P & C division of assessee to AE)

10. The brief facts in relation to this ground of appeal are that during the course of assessment, the TPO/Assessing Officer observed that the P & C Division of Mastek entered into international transaction relating to rendering of IT services during the impugned year under consideration with its associated enterprise. The TPO/Assessing Officer made an upward adjustment of Rs. 4.22 crores for the software services rendered by P & C division of the assessee to its associated enterprise. The assessee had selected 16 comparables with PLI of 7.66%, whereas the own PLI of the assessee was 15%. While making upward adjustment of Rs. 4.22 crores, the Assessing Officer/TPO took a list of 20 comparables with PLI of 25.75%.

11. In appeal, before ld. CIT(A), the assessee sought removal of 9 comparables for various reasons such as functional dissimilarity, significant RPT, high turnover, lack of availability of segmental data etc. The ld. CIT(A) confirmed the addition by following the order of ld. CIT(A) for assessment year 2010-11. Before us, the counsel for the assessee submitted that the facts and issues for consideration for assessment year 2010-11 are completely different and unconnected it was submitted before us, that in the instant case, it may be noted that order of ld. CIT(A) for assessment year 2010-11, on which reliance has been placed by ld. CIT(A) while confirming the adjustment has been reversed by ITAT subsequently. However, in the instant facts, the matter needs to be set aside to see whether the comparables which have been taken are correct or not. In the instant facts, the TPO would need to examine the comparables in light of earlier years’ orders.

12. On going through the facts of the instant case, in the interest of justice, the issue is being set aside to the file of TPO for carrying out afresh analysis of the comparables, after taking the submissions of the assessee on record. Further, ld. Departmental Representative also not objected to the matter being set aside to the file of TPO for de-novo consideration, in the interest of justice.

13. In the result, ground no. 2 of assessee’s appeal is allowed for statistical purposes.

Ground No. 3 (Upward adjustment of Rs. 38 lakhs for giving comparables carrying out by assessee to the customers of associated enterprise)

14. The brief facts in relation to this ground of appeal are that the assessee had given performance guarantee to customers of MUK, its associated enterprise based in U.K. As per the assessee, the performance guarantees are made to ensure that the services are provided towards customers as per the contract entered into by MUK with the customers. The services for which the performance guarantee is given are performed by the assessee either through its off shore facilities or on-site through its branch in U.K. MUK is a distributor of the assessee’s software capabilities and is not engaged in provision of services. However, the ld. CIT(A) made an upward adjustment of Rs. 38 lakhs for getting performance guarantee by the assessee to the customer of AE by following the decision rendered by his predecessor, CIT(A) for assessment year 2010-11.

15. Before us, the counsel for the assessee drew our attention to pages 177-222 of the paper book (para 6-8) and pages 126-163 of the paper book (para 6-7) and submitted that the ITAT has specifically adjudicated on this issue in favour of the assessee. Accordingly, it was submitted that this issue may be decided in favour of the assessee in light of order passed by the ITAT in assessee’s own case for the earlier assessment years.

16. We observe that the ITAT in assessee’s own case on identical set of facts for assessment years 2008-09 and 2009-10 and 2010-11 has decided the issue in favour of the assessee with the following observations:-

“The other contention which has been taken by the appellant is that performance guarantee and financial Guaranty are entirely different products and therefore, it would not be appropriate to adopt the rates given for financial Guaranty for evaluating the performance guarantee. The contention of the appellant is justified. The criteria for giving the performance guarantee for a particular product would be entirely different than that of the financial Guaranty for a particular loan or credit. The performance guarantee would depend on the technical expertise and the skills of the company and the historical performance data of the product which is being sold by the distributor. It has been observed that the performance guarantee is worked out by evaluating the historical data of similar claims made in the past and the value of the product for which the performance guarantee that have been claimed, it is noted from the facts that no such historical figure or any comparable data is available for deciding the issue. The appellant is giving a commission of 5.5% of the revenues generated through MUK. It is this commission which varies in absolute terms in accordance with the price fixed by MUK while selling a product, which is guaranteed by the appellant company. The appellant has furnished a copy of sample performance guarantee agreement entered by it with British Telecommunication and it is noted that it has guaranteed due and punctual performance by MUK of each and all of the obligations, warranties or representations due to it etc. It also had agreed to indemnify the British Telecom against all losses which may incur due to breach of contract by the MUK and also the losses which may incur due to certain guaranteed obligations being enforceable, invalid or illegal. It is an admitted fact that out of the total sale consideration received by the MUK, it is retaining only 5.5% of the sales value and balance is given to the appellant company. The performance guarantee component in this commission can be only certain Percentage of the 5.5% commission retained by MUK. It is also a fact that MUK is also undertaking other functions of selling and distribution. It is making efforts in marketing the product and undertaking activities so as to achieve the maximum possible sales. However, the contracts are signed by MUK and manage. the customer relationships until the point of final delivers of the product to the buyer. Therefore, the majority of the commission given by the appellant to UK is attributable to the activities as a distributor or the marketing agent of the appellant company and only a small component or certain percentage of that commission can be attributed due to performance guarantee given by the appellant. It is noted that the TPO has evaluated this commission at 2% of the total sales made by the appellant company. After considering overall facts and circumstances, it would be appropriate if the upward adjustment on account of performance guarantee is pegged at 2% of the sale consideration retained by the MUK. Since the MUK is retaining 5.67% of the sale consideration the amount would come to 2% of 5.67% i.e. 0.11% (rounded off) of the sales.

The appellant has objected that even if certain percentage is to be attributed to the performance guarantee, it can only be attributed to the sales made by the appellant company through MUK on which the performance guarantee was given by the appellant. The objection and argument of the appellant is justified as this can only be applied to those sales made through MUK on which to performance guarantee has been given by the appellant. Accordingly, the sales made through MUK on which the performance guarantee was given by the appellant should only be considered for applying the above rate. The appellant has submitted that it has given performance guarantee on the sales of Rs.260.35 crores made through MUK. The AO is directed to verify this figure and apply the above rate accordingly. The addition made by the AO, on without prejudice basis, is accordingly upheld to that extent.

The ground of appeal is partly allowed. “

17. Accordingly, arms length price in respect of performance guarantee may be decided in light of above observations made by the ITAT in assessee’s own case for assessment year 2008-09.

18. In the result, ground no. 3 of assessee’s appeal is partly allowed.

ITA No. 159/Ahd/2018 filed by Revenue for A.Y. 2011-12

19. The Department has taken the following grounds of appeal:-

“1. The Ld CIT(A) has erred in law and on facts in deleting the adjustment while computation of arms length price of the international transactions of software services distributed by MUK(Associated Enterprise) by making upward adjustment of Rs 17,48,63,595/-

2. The Ld CIT(A) has erred in law and on facts in deleting the adjustment made by way of Human Resource Management Services amounting to Rs 80,70,360/-

3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.”

Ground No. 1 (Ld. CIT(A) erred in deleting upward adjustment of software development of Rs. 17.48 crores)

20. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer/TPO made an upward assessment of Rs. 17.48 crores on account of benchmarking of transactions on sale of software to Mastek, USA primarily on the ground that while in the TP documentation, the assessee has categorized MUK, UK as a full-fledged distributor eligible for above normal margin of sales and the assessee tried to justify the margin allowed to MUK by submitting that significant functions are being performed by employees of MUK, and the same are not merely distribution functions, however, on a perusal of FAR analysis revealed that UK entity is merely performing pure distribution functions without carrying any financial, functional or inventory risks. Hence, this function is different from normal independent distributor which bears financial and inventory risk. Further, the Assessing Officer observed that though MUK has been presented as a risk bearing entity, it is seen that its profits have remained at 4.5% without any reference to the margin earned by the assessee company which has fallen significantly in the current year. Therefore, it is clear that all the risks are being taken by the Indian entity while there is an attempt to attribute higher risks to MUK. This clearly leads to the conclusion that in the TP documentation, the assessee has wrongly attributed higher risks to MUK whereas there are no such risk actually being taken by MUK. In view of the above observations, the Assessing Officer/TPO made an upward adjustment of Rs. 17.48 crores. In appeal, the CIT(A) deleted the addition by following the order passed by his predecessor, CIT(A) for assessment year 2008-09, assessment year 2009-10 and 2010-11.

21. The Department is in appeal before us against the aforesaid deletion made by ld. CIT(A). Before us, at the outset, the counsel for the assessee submitted that this issue has been conclusively decided in favour of the assessee by ITAT in assessee’s own case for assessment years 2006-07, 2007-08, 2009-10 and 2010-11. Accordingly, since this issue has been conclusively decided in favour of the assessee by the ITAT in assessee’s own case, the issue may be decided in favour of the assessee. It would be useful to reproduce the relevant extracts of the decision of ITAT in assessee’s own case for assessment years 2009-10 and 2010-11:

“20. Ground no.4: This ground relates to the order passed by the “Ld.CIT (A)” in deleting the upward adjustment of Rs.272,600,835/-made by the T.P.O by recomputing the ALP of the international transactions of software services distributed by MUK.

21. During the hearing of the matter it was pointed out to us that the issue is covered by the Hon’ble Tribunal Judgment in assessee’s own case in ITA No.2254/Ahd/2012 for A.Y. 2007-08. The Ld. DR, failed to controvert such contentions made by the assessee.

22. We have heard the respective parties, we have perused the relevant materials available on records and judgment passed by the Co-ordinate Bench. It appears that while dismissing this ground of appeal preferred by the Revenue the Ld. Tribunal observed as follows:

“…13. The next ground is with respect to the addition of Rs.26,02,07,754/- made by TPO u/s 92CA(3):- During the course of assessment proceedings, the A.O. noted that the assessee company had international transactions as defined in Section 92B of the Act with the associate enterprise. The associated transactions were made for software development and related services rendered for India to onsite software project execution etc. Reference was made to TPO who held that adjustment are required to be made with respect to international transactions by any amount paid towards software services, repair & maintenance services and adjustment on account of excess credit provided to AEs. The total adjustment of income as proposed by TPO was Rs.26.02,07,754/-. Aggrieved by the aforesaid action of the A.O., the assessee carried the matter before Ld. CIT(A) who after considering detailed submissions of the assessee, deleted the addition bv holding as under:

“11:10 I have considered the facts and submissions of the Ld. AR and the IT AT order for AY 2006-07 carefully. I agree with the appellant that the facts for .AY 07-08 are no different from the facts brought forth in the JTAT order for AY 06-07. Accordingly, my views are as under. The appellant has submitted the following to evidence the activities performed by MUK vis-a-vis the customers:

• Master Agreement between MUK and Mustek;

• detailed FAR analysis of MUK and India;

• details of employees of MUK, including their roles, designations and. qualifications;

• case studies demonstrating selling function performed bv employees of MUK • Another aspect which merits consideration is that the employees of sales team of MUK were incentivized to achieve increase in sales, by paying a percentage of sales achieved by them, over and above their fixed pay. The above evidences support the appellant’s contentions that it has its own set of people in a position to negotiate and conclude contracts both in terms of the scope of work and the pricing of the same. Therefore, in m\ considerate view, the appellant, over and above marketing, carries out selling functions also and should therefore be characterized as a distributor.

As MUK is held to be a distributor and not a marketing service provider, it is prudent that the remuneration to be earned by MUK should be linked to its selling function and should therefore be related to sales i.e. Return on Sales (ROS) and not on a cost plus mark up basis. A company, which has achieved a substantial increase in revenues on a year over year basis and whose employees too are incentivized on the basis of sales achieved by them, cannot be remunerated on a cost plus mark up basis. … Further, the TPO has looked at the comparable companies with an assumption that MUK is engaged in providing marketing services and therefore rejected the comparables considered by the appellant in the Transfer Pricing study. Now that MUK has been held to be a distributor, the comparability approach adopted by the TPO is rejected.

11.11 Based on the facts and evidences provided by the appellant for AY 07-08 and the conclusions of the IT AT Ahmedabad bench for identical facts for AY 06-07, the appellant’s contentions find favour. Therefore, MUK’s operations can be considered to be correctly characterized as a distributor and a return based on sales which incentives MUK to generate more revenue appears to be appropriate. Accordingly, this ground no. 10 is fully allowed.”

14. Ld. D.R. supported the order of the A.O. whereas the Ld. A.R. submitted that the facts are identical to that of the earlier year and supported the order of the Ld. CIT(A).

15. We have considered the rival submissions and perused the material on record. We find that Ld. CIT(A) while deleting the addition has held that the facts of the case of the year under appeal are identical to that of earlier year and has followed the order of his predecessor. Further, he has also relied on the decision of Hon’ble ITAT in the assessee’s own case for assessment year 2006-07 for deleting this addition. The finding of Ld. CIT(A) could not be controverted by the Ld. D.R. by-bringing any contrary material on record. We, therefore, find no reason to interfere in the order of Ld. CIT(A). Thus this ground of the Revenue is also dismissed. “

Since the issue has already been decided by the Ld. Tribunal, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench and we do not find any infirmity in the order passed by the “Ld. CIT (A)” so as to warrant interference, hence, this ground of appeal preferred by the Revenue is dismissed.”

22. Respectfully following the decision rendered by ITAT in assessee’s own case for earlier assessment years, ground no. 1 of the Department’s appeal is hereby dismissed.

Ground No. 2 (ld. CIT(A) erred in deleting upward adjustment of HRM services amounting to Rs. 80,70,360/-)

23. The brief facts in relation to this ground are that the assessee provides it’s own employee on secondment basis to its associated enterprises. The assessee does not charge any remuneration for the aforesaid services rendered towards associated enterprise. The TPO/Assessing Officer was of the view that the services rendered by the assessee for the benefit of its seconded employees as per their requirement is a human resource management services. This involves recruitment, training, reallocation of personnel across subsidiaries and further handling their other administrative function back home. The assessee incurs substantial expenditure on this amount. Accordingly, the TPO/Assessing Officer made an upward adjustment of Rs. 80,70,360/-.

24. In appeal, ld. CIT(A) deleted the addition by following the order passed by his predecessor, ld. CIT(A) for assessment year 2010-11, assessment year 2009-10 and assessment year 2008-09.

25. The Department is in appeal before us against the aforesaid relief provided by ld. CIT(A). Before us, the counsel for the assessee submitted that the ITAT in assessee’s own case for assessment years 2006-07, 2007­08, 2008-09, 2009-10 and 2010-11 has decided this issue in favour of the assessee and accordingly, this issue may be decided in favour of the assessee accordingly. It may be useful to reproduce the relevant extracts of the decision of ITAT in assessee’s own case for assessment years 2009-10 and 2010-11 for ready reference:-

“20. Ground no.4: This ground relates to the order passed by the “Ld. CIT (A)” in deleting the upward adjustment of Rs.272,600,835/-made by the T.P.O by re-computing the ALP of the international transactions of software services distributed by MUK.

21. During the hearing of the matter it was pointed out to us that the issue is covered by the Hon’ble Tribunal Judgment in assessee’s own case in ITA No.2254/Ahd/2012 for A.Y. 2007-08. The Ld. DR, failed to controvert such contentions made by the assessee.

22. We have heard the respective parties, we have perused the relevant materials available on records and judgment passed by the Co-ordinate Bench. It appears that while dismissing this ground of appeal preferred by the Revenue the Ld. Tribunal observed as follows:

“…13. The next ground is with respect to the addition of Rs.26,02,07,754/- made by TPO u/s 92CA(3):- During the course of assessment proceedings, the A.O. noted that the assessee company had international transactions as defined in Section 92B of the Act with the associate enterprise. The associated transactions were made for software development and related services rendered for India to onsite software project execution etc. Reference was made to TPO who held that adjustment are required to be made with respect to international transactions by any amount paid towards software services, repair & maintenance services and adjustment on account of excess credit provided to AEs. The income as proposed by TPO was Rs.26,02,07,754/-. Aggrieved by the aforesaid action of tire A.O., the assessee carried the matter before Ld. CIT(A) who after considering detailed submissions of the assessee, deleted the addition by holding as under:

“11:10 I have considered the facts and submissions of the Ld. AR and the 1TAT order for AY 2006-07 carefully. I agree with the appellant that the facts for .AY 07-08 are no different from the facts brought forth in the IT AT order for AY 06-07. Accordingly, my views are as under. The appellant has submitted the following to evidence the activities performed by MLJK vis-a-vis the customers:

• • • Master Agreement between MUK and Mastek;
    • detailed FAR analysis of MUK and India;
    • details of employees of MUK, including their roles, designations and. qualifications;
    • case studies demonstrating selling function performed by employees of MUK
    • Another aspect which merits consideration is that the employees of sales team of MUK were incentivized to achieve increase in sales, by paying a percentage of sales achieved by them, over and above their fixed pay. The above evidences support the appellant’s contentions that it has its own set of people in a position to negotiate and conclude contracts both in terms of the scope of work and the pricing of the same. Therefore, in my considerate view, the appellant, over and above marketing, carries out selling functions also and should therefore be characterized as a distributor.

As MUK is held to be a distributor and not a marketing service provider, ft is prudent that the remuneration to be earned by MUK should be linked to its selling function and should therefore be related to sales i.e. Return on Sales (ROS) and not on a cost plus mark up basis. A company, which has achieved a substantial increase in revenues on a year over year basis and whose employees too are incentivized on the basis of sales achieved by them, cannot be remunerated on a cost plus mark up basis. … Further, the TPO has looked at the comparable companies with an assumption that MUK is engaged in providing marketing services and therefore rejected the comparables considered by the appellant in the Transfer Pricing study. Now that MUK has been held to be a distributor, the comparability approach adopted by the TPO is rejected.

11.11 Based on the facts and evidences provided by the appellant for AY 07-08 and the conclusions of the IT AT Ahmedabad bench for identical facts for AY 06-07, the appellant’s contentions find favour. Therefore, MUK’s operations can be considered to be correctly characterized as a distributor and a return based on sales which incentives MUK to generate more revenue appears to be appropriate. Accordingly, this ground no. 10 is fully allowed.”

14. D.R. supported the order of the A.O. whereas the Ld. A.R. submitted that the facts are identical to that of the earlier year and supported the order of the Ld. CIT(A).

15. We have considered the rival submissions and perused the material on record. We find that Ld. CIT(A) while deleting the addition has held that the facts of the case of ‘the year under appeal are identical to that of earlier year and has followed the order of his predecessor. Further, he has also relied on the decision of Hon ‘hie ITAT in the assessee’s own case far assessment year 2006-07 for deleting this addition. The finding of Ld. CIT(A) could not be controverted by the Ld. D.R. by-bringing any contrary material on record. We, therefore, find no reason to interfere in the order of Ld. CIT(A). Thus this ground of the Revenue is also dismissed. “

Since the issue has already been decided by the Ld. Tribunal, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench and we do not find any infirmity in the order passed by the “Ld.CIT (A)” so as to warrant interference, hence, this ground of appeal preferred by the Revenue is dismissed.”

26. In light of the above observations made by ITAT in assessee’s own case for assessment year 2009-10 and 2010-11, the appeal of the Department is accordingly dismissed.

27. In the result, ground no. 2 of Department’s appeal is dismissed.

ITA No. 1074/Ahd/2018 filed by Assessee for A.Y. 2012-13

28. The assessee has taken the following grounds of appeal:-

“The following grounds of appeal are distinct and separate and without prejudice to each other:

GROUND NO. 1

The learned CIT(A) has erred in law and on facts in upholding the adjustment of Rs. 193,294 made by Transfer Pricing Officer (“TPO”) in relation to the financial guarantee given by the Appellant to its Associated Enterprise (“AE”).

In doing so, the learned CIT (A) has erred in not appreciating the following:-

1. The financial guarantee is in the nature of shareholder activity; as it was to enable the AE pay purchase consideration of acquisition, decision in relation to which was made by the Appellant;

2. The financial guarantee is quasi-equity in nature as the loan availed through financial guarantee, has been repaid from time to time by equity infusion;

3. Provision of financial guarantee is not an international transaction as per section 92B of the Act; and

4. No cost has been incurred by the Appellant in provision of such financial guarantee.

GROUND NO. 2

a) The learned GIT(A) has erred in law and on facts by enhancing the adjustment to Rs. 3,677,994 made in relation to the performance guarantee given by the Appellant to the customers of the AE. F In doing so, the learned CIT(A) has erred in not appreciating the following:-

1. The service liability risk is borne by the Appellant as the services are either provided by its delivery center in India (offshore) or branch in UK (onsite in case of AE);

2. The said performance guarantee is in the nature of shareholder activity;

3. Provision of performance guarantee is not an international transaction as per section 92B of the Act; and

4. No cost is incurred by the Appellant in provision of these performance guarantees.

Your Appellant craves leave to add to and/or to amend and/or to modify and/or to cancel any one or more grounds of appeal at any time before or at the time of hearing.”

Ground No. 1 (upward adjustment of financial guarantee given by assessee to AE)

29. We observe that ground no. 1 of assessee’s appeal is same as ground no. 1 of assessee’s appeal for assessment year 2011-12. Accordingly, our observations for assessment year 2011-12 shall apply to this year as well.

30. In the result, ground 1 of assessee’s appeal is partly allowed.

Ground No. 2 of assessee’s appeal: (Enhancement by ld. CIT(A) by upward adjustment of Rs. 36.77 lakhs made in relation to performance guarantee given by the assessee to the customer of the AE)

31. We observe that ground no. 2 of assessee’s appeal is same as ground no. 3 of assessee’s appeal for assessment year 2011-12. Accordingly, our observations for assessment year 2011-12 shall apply to this year as well.

32. In the result, ground no. 2 of assessee’s appeal is partly allowed.

ITA No. 1215/Ahd/2012 filed by Revenue for A.Y. 2012-13

33. The Revenue has taken the following grounds of appeal:-

“1. The Ld CIT(A) has erred in law and on facts in deleting the adjustment made by way of Human Resource Management Services amounting to Rs 2,75,03,807 /-

2. The Ld CIT(A) has erred in law and on facts in deleting the disallowance of recruitment expense of Rs 43,26,027/- being 20% of the recruitment and training expense of Rs 2,16,30,133/- treating the same as no incurred for the purpose of business.

3. The Ld CIT(A) has erred in law and on facts in deleting the disallowance of Rs 70,01,53,135/- u/s 40(a)(ia) of the IT Act incurred as professional and consultancy expense paid outside India.

4. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.”

Ground No. 1 (ld. CIT(A) erred in deleting adjustment by way of human resource management services amounting to Rs. 2.75 crores)

34. We observe that this ground is same as ground no. 2 for assessment year 2011-12. Accordingly, our observations for assessment year 2011-12 shall apply to this year as well.

35. In the result, ground no. 1 of Department’s appeal is dismissed.

Ground No. 2 (ld. CIT(A) erred in deleting disallowance of recruitment expense of Rs.43,26,027/- being 20% of the recruitment and training expense of Rs. 2,16,30,133/- treating the same incurred for the purpose of business)

36. Before us, the counsel for the assessee submitted that the aforesaid disallowance is purely adhoc disallowance made by the Assessing Officer during the course of assessment proceedings. Accordingly, the ld. CIT(A) allowed the appeal of the assessee by following the decision of ITAT for assessment year 2006-07 wherein on similar facts, the ITAT has allowed this ground of appeal in favour of the assessee. It would be useful to reproduce the relevant extracts of the decision rendered by ITAT for reference:-

“GROUND No. 7: Disallowance of 20% of recruitment and training expenses

The Ld. AO has erred in law and on facts in disallowing 20% of recruitment find [raining expenses amounting to Rs.47,20,099 on the ground that such expenses have been incurred on employees deputed to overseas subsidiaries. The Ld. AO ought to have appreciated the following:

i. None of the recruitment and training expenses have been specifically incurred to recruit or train emplovees for the purpose of deputation to its subsidiaries. The expenses incurred are general in nature and hare been incurred at an organizational level for its entire staff.

ii. All conditions laid down in section 37 of the Act are satisfied with respect to the recruitment and training expenses.

iii. Without prejudice to the above, the Ld. TPO has already made an upward adjustment in respect of HRM function for the captioned assessment on the ground that the assessee is not justified in not charging any mark-up on account of services for provision of skilled manpower to group companies. The Ld. TPO has accordingly made an upward adjustment of Rs. 2.92 crores calculated at 9% of the total annual salary of the persons seconded. As such, recruitment and training expenses cannot be again disallowed.

iv. The aforesaid issue has been decided in favour by the Hon’ble CIT (A) in appellant’s own case in AY2005-06.

37.1. It was noticed that the assessee had incurred an amount of Rs.2,36,00,496/- for recruitment and training expenses. In compliance of show-cause, it was informed that the nature of business of the assessee is to provide services to customers which constitute composite deliverables as well as “onsite” – “offshore” services. Therefore, to provide “onsite” software development services to customers, the technical support and the technical services of technical staff is required. It was categorically stated before the AO that none of the recruitment and training expenses have been specifically incurred to train the employees only for the purpose of deputation to its subsidiaries. The expenditure has been incurred at organizational level. The HR Department of the Company on a continuous basis is indulged in recruitment programmes, training programmes, so as to retain the talent of technical persons. The assessee has explained the business rationale behind such expenditure that the Company derives double benefits, one. increase in offshore revenue, second, employees with upgraded skill has enhanced solution delivery skills. It has also been informed that there is “continuity of employment” even if sent abroad to AEs. Such employees remain on the pay-roll of the assessee-company. A detailed explanation was furnished, however the AO was not convinced and expressed that the Company had seconded as many as 148 persons to its AEs. The assessee is, therefore, in the opinion of the AO, is a supplier of man-power to its offshore subsidiaries. But those persons were recruited and trained at the expense of the Company. In his opinion, such persons deployed outside India may or may not come back and may be absorbed by AE. In such a situation, the benefits of recruitment and training have been enjoyed by AEs of the Company outside India. The AO has therefore held that 20% of the recruitment and training expenses has to be disallowed being not incurred wholly and exclusively for the purpose of the assessee’s business. He has therefore disallowed a sum of Rs.47,20,099/-. however, and also held that the said disallowance cannot be added while computing the deduction u/s. 10A of the IT Act.

37.2. In this regard, ld. Counsel has submitted that none of the recruitment and training expenses have been specifically incurred to recruit or train employees for the purpose of deputation to its subsidiaries. The expenses incurred are general in nature and have been incurred at an organizational level for all staff. Therefore there is no direct linkage of recruitment and training expenses with employees deputed to its subsidiaries. The ld. Counsel further pointed out that on an ongoing basis, the significant risk in the software industry where the assessee operates is to manage attrition and hence retention of employees is of utmost importance. The HR department of the company, therefore, on a continuous basis is required to indulge in activities such as recruitment programs, trainings required to obtain and retain the said world-class talent, etc., which enables the company to render world class solutions. It needs to be noted that the company’s expertise in domain knowledge helps in attracting good talent from other competitors, which helps in delivering software solutions. In this regard, it is pertinent to note that the inflow of the employees for the company need not be only from the fresh recruits but also from the onsite employees returning during the concerned year.

37.3. On the other hand, from the side of the Revenue, the ld. DR supported the order of the AO.

38. On hearing the submissions of both the sides, we are of the conscientious view that in a situation where the requisite detail in respect of training of employees and the genuineness of the expenditure was very much before the AO and in respect of these two reasons, no disallowance was suggested, then it was unjustifiable on the part of the AO to say that a 20% recruitment and training expenses would be disallowed on mere presumption that it was not wholly beneficial to the assessee. There is no evidence in the possession of the AO to hold that a particular expenditure on training was not business related. In fact, the argument of the assessee appears to be logical that considering the nature of the services provided a training of the technical staff is always a business necessity and because of the trained staff the assessee’s revenue has substantially gone up. In the absence of any adverse material, we are not inclined to approve such an adhocism. This disallowance is hereby deleted and Ground is allowed.”

37. Accordingly, respectfully following the decision of ITAT rendered in case of assessee on similar set of facts. Ground no. 2 of department’s appeal is hereby disallowed.

Ground No. 3 ( Ld. CIT(A) erred in deleting disallowance of 70 crores on account of non-deduction of tax u/s. 40(a)(ia) of the Act)

38. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the UK branch of the assessee made payment on certain professional and consultancy services to U.K. resident companies on which no tax was deducted. During the course of assessment proceedings, the assessee submitted that the U.K. branch of the assessee is a separate legal entity formed under the U.K. regulations. It was submitted that the services availed by the U.K. branch, non-residents have been rendered and utilized outside India. Accordingly, in view of the exception provided in sub-clause “C” of section 9(1)(vii) of the Act, no tax is required to be deducted on such payment. Further, the ld. CIT(A) for assessment year 2005-06 has deleted the disallowance of expenses u/s. 40(a)(ia) of the Act on similar payments. Further, reliance was placed on a decision of Hon’ble Supreme Court in the case of CIT vs. Hundai Heavy Industries 291 ITR 482 (SC) which has observed that a branch of a foreign company for the purposes of taxation, is a separate and distinct taxable entity from its foreign parent. Further, it was submitted that the non-resident entities to whom payments were made by the U.K. branch have no business connection/permanent establishment in India. Accordingly, in absence of PE/business connection of the non-resident entities, there is no requirement to deduct tax at source. In addition, the “fee for technical services” clause under Article 13 of the India-U.K. Tax Treaty contains the “make available” clause for a service to qualify as FTS under the India-U.K. Tax Treaty. In the instant facts, the non-resident treaties have rendered services to the U.K. branch by providing consultants having requisite technical knowledge. The U.K. branch utilizes services provided by these consultants for assistance in executing software development projects. The services provided by them do not make available any technical knowledge, skill, know-how etc. in the nature of transfer of technical plan or design. Accordingly, there is no requirement to deduct tax at source on such payments. However, the Assessing Officer made disallowance of Rs. 70,01,53,135/- u/s. 40(a)(ia) of the Act by making the following observations:-

“2.12 In this connection it is to be noted that the alleged payments through the branch are not accounted as transfer to branch or lump sum expenditure in the books under the head ‘branch’ but accounted as such with in the name of the payee under the same title under relevant head in the books of the company. This shows that the expenditure is incurred by the company and paid by the company as against what is argued by the assessee. Under the circumstances it cannot be said that the payments are made by the branch, but are actually made by the company through the account in UK for convenience. In this regard attention of provisions of section 195 with regard to mode of payment is invited. The section provides that “at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier”. The payment through transfer through the branch is covered by the phrase ‘by any other mode.’ Therefore it is held that the company was under obligation to deduct tax from the payments made to non-residents mentioned by the company.

2.13 Further with regard to the applicability of tax deduction at source u/s 195 of the Act against the payments, it is submitted by the assessee that that major portion of the payments consists of software consultancy expenses in form of subcontracting. All the entities have rendered the same services on year on year basis. Some times these services are mentioned as professional services at the head note later listed as consultancy services. The consultancy services, management services, technical services are covered by the definition of FTS in section 9(1)(vii) of IT Act. Coming to the DTAA with UK these services are also covered by the definition of Technical services. The definition of FTS is as under in the DTAA with UK:

Article 13(4). For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services ‘means payments of any kind of any person. In consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which

(a) are ancillary and subsidiary to the application or enjoyment of the right. property or information for which a payment described in paragraph 3(a) of this article is received; or.

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received: or

(c) make available technical knowledge, experience, skill know-how or processes, or consists of the development and transfer of a technical plan or technical design.

2.14 Therefore under the DTAA with UK, FTS means consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which make available technical knowledge, experience skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.

2.15 The issue of ‘make available’ in the DTAA and concept laid down in Raymond Ltd (86 ITD 791) has to be understood and interpreted to the working of ‘computer software¹ industry. In a software business, consultancy involves study of the issues and chalking out a plan. Some times this involves, teaching the software personnel the new software or new techniques. In both these instances of consultancy, the trained persons of company will be able to handle the issues after the consultant leaves and will be in a position to do it themselves without the presence of the trainer. Therefore the issue of make available discussed in the case relied by the assessee is of no avail as in the software industry FTS involves invariably the making available the technical knowledge, experience, skill. In the present case, the knowledge is passed after the consultant leaves the company may do it the same with its manpower. Further it is also to be noted that, foreign parties from which services are regularly availed on year on year basis. Therefore the consultancy services for which the company paid the charges on regular basis are covered by the definition of FTS in IT Act and also by the definition given in the DTAA with UK.

2.16 From the above discussions and disallowance has been made consistently in earlier years on the same facts of the case. Thus, it can be said that the assessee was under obligation to deduct tax from the certain payments made by the UK Branch to non-resident companies for professional and consultancy. Therefore, amount of Rs. 70,01,53,135 are disallowable u/s 40(a)(i) on account of non-deduction of tax.”

39. In appeal, the ld. CIT(A) deleted addition by following the order passed by his predecessor, CIT(A) for assessment year 2011-12 vide order dated 27-10-2017. While allowing the appeal of the assessee, the ld. CIT(A) made the following observations:-

“4.4. On going through the facts of the case, it is noticed that similar issue’ has been decided by this office in appellant’s own case for immediately preceding year i.e. A. Y. 2011-12 vide appellate order dated 27/10/2017. The relevant findings given in the order are reproduced hereunder:-

“4.3. Decision:

I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has made the disallowance u/s. 40(a)(i) amounting to Rs.20,69,17,536/- on account of non – deduction of tax.

4.4. On going through the facts of the case, if is noticed that identical issue on similar facts has been decided by CIT(A) – 4, Ahmedabad in appellant’s own case for A. Y. 2010-11 vide appellate order No. No.CIT(A)-4/136/DCIT/Cir. 2(1)(2)/14-15 dated 01/12/2015. The relevant findings given in the order are reproduced hereunder:-

“7.3. Decision:-

I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The said issue and nature of payment is covered by order in the case of the appellant for A, Y. 2005-06, 2007-08, 2008-09 & 2009-10. The issue has been decided in detail in Para no. 8.9 to 8.15 of A. Y. 2005-06, Para no. 6.11 to 6.15 of A. Y. 2007-08 and Para no.4.3 of A. Y. 2009-10. The Hon’ble ITAT, Ahmedabad has decided this issue in favour of the appellant while deciding the appeal for A. Y. 2006-07. Since the facts and the nature of payment in the present year are similar, the findings given in that order would be applicable to the present year also. Following the same, the disallowance made by Assessing Officer u/s. 40(a)(ia) of the 1. T. Act is directed to be deleted. The ground of appeal is allowed.”

4.5. Considering the above facts of the case and the fact that the identical issue on similar facts has been decided by the ITAT, Ahmedabad in appellant’s own case for A. Y. 2006-07, the disallowance made by the AO on account of non deduction of tax u/s. 40(a)(i) amounting to Rs.20,69,17,536/- is directed to be deleted. The ground of appeal is allowed.”

40. Before us, the assessee submitted that the case of the assessee is directly covered by order of ITAT passed in assessee’s own case for assessment year 2006-07, wherein on identical set of facts, the addition was deleted. It would be useful to reproduce the relevant facts of the assessee’s case for ready reference:

“A) FACTS:

35.1. It was noted by the AO that the assessee has made payment to 19 parties, listed in the assessment order, for software consultation and recruitment services. The payment to the extent of Rs.12,26,18,416/-was made without deduction of tax. A show cause was issued as to why the disallowance under the provisions of section 40(a)(i) should not be made in respect of the said payment. The explanation of the assessee was that the MIL is executing software development project in UK through its branch set up in UK. During the course of execution of software development project, the UK branch has incurred various expenses. The payments to those parties for the said expenditure have been directly made by the UK branch from its bank account in UK. The submission of the assessee was as follows:-

“2.1. Assessee’s branch in UK is a separate and distinct entity:

a. It is submitted that the UK branch is considered as a Permanent Establishment (‘PE’) of Mustek in the UK and accordingly charged to tax in terms of Article 7 of India – UK Double Taxation Avoidance Agreement (‘DTAA’) on profits attributable to branch operations in the UK. As per Article 7(5) of India – UK DTAA, in the determination of the profits of a PE, there shall be allowed as deduction, expenses which are incurred for the purposes of the business of the PE, including executive and general administrative expenses so incurred whether in the UK or elsewhere, which are allowed under the provisions of and subject to the limitations of the UK law. Thus the allowability of expenses of the UK branch is governed by the UK law as per India – UK DTAA.

b. Further, we submit that expenses incurred by the assessee and expenses incurred by its UK branch need to be treated separately. UK Branch is a separate legal entity formed under the UK Regulations. The same is evident from Article 7(2) of India – UK DTAA, which states that where an Indian entity carries on business in the UK through a PE situated therein, the profits which that PE might be expected to make if it were a distinct and separate enterprise. Further, Circular No.740 dated 17 April 1996 states that branch of a foreign company/concern in India is a separate entity for the purposes of taxation. Applying the same logic, foreign branch of an Indian Entity has to be treated as a separate legal entity.”

35.2 It was contested before the AO that the services were availed by UK branch from non-residence. Those services were rendered as well as utilized outside India. According to assessee, there was no application of section 195 on the said payment. It was also contested that as per DTAA with UK the assessee was not under obligation to deduct TDS. The AO was not convinced and after analyzing section 195 of IT Act and the provisions of section 9(1)(i) and section 9(l)(vii) held that the payment was in the nature of “Fees for Technical Services” (‘FTS’). He has mentioned that in section 9(T)(vii) the word used is the services “utilized in India” as against “services rendered in India”. He has explained that the effect of the word “utilized” in place of “rendered” is that the nonresident need not to come physically to India or the transaction need not to take place in India. According to AO, it is enough if the services or the end result of the services are utilized in India. He was of the view that irrespective of the source and place of delivery, the FTS deemed to accrue or arise in India, if the services are utilized in India for which FTS is paid. The AO has also referred Explanation to section- 9(1) of IT Act. The intention of this Explanation is to bring certain income of nonresidents to tax in India if the source is in India. According to AO, the source is MIL, an Indian Company. From the side of the Assessee, CBDT Circular 740 was cited for the argument that the branch of a foreign company in India being treated as a separate entity, likewise branch of the assessee in UK should be considered as a separate nonresident entity. However, the AO was not convinced and stated that the branch in UK is only a branch as well as part and parcel of Indian Company. The AO has also mentioned that the alleged payment which was made through the branch was not accounted as transferred to branch but accounted as such in the name of the payees. According to him, the expenditure was incurred by the assessee-company. The AO has finally concluded as under:-

“7.20. In view of the above facts and legal position it is held that the assessee was under obligation to deduct tax from the payments made to non resident for consultancy and training and recruitment which it had failed to discharge. Therefore the expenditure claimed under recruitment and training and consultancy paid to non resident is disallowed and added back to income u/s.40(a)(i) of Income tax Act. Thus an amount of R.s.l2,26J8,416/- being expenses in the nature of consultancy income on which TDS has not been deducted, is disallowed as expenditure in the hands of the assessee. However, since all these expenses relate to the export income of the assessee for which deduction under section IOA has been claimed, the assessee’s income for the purpose of deduction shall be modified accordingly. ”

B) ARGUMENTS :

35.3. The first and the foremost submission of Id.AR is that in A.Y. 2005-06, Id.CTT(A) had already allowed this issue in favour of the assessee. Our attention was drawn by Id.AR on some of the observation of Id.CIT(A) while deciding this issue for A.Y. 2005-06. The main thrust was that the services was (i) availed by the UK branch and the services (ii) rendered by non-residents and that the services was also(iii) utilized outside India. It has also been argued that the said services were not “make available” to assessee. The technical knowledge or the skill had not remained with the assessee. Ld.CIT(A) has expressed that as per clause (b) of section 9(l)(vii) an exception has prescribed that where fees are payable in respect of services utilized in a business earned on by such person outside India or for the purpose of making income from any source outside India. According to Id.CIT(A), UK branch was considered as a “permanent establishment in UK”. He has referred Article 1 of UK DTAA to hold that the profit is charged to tax attributable to branch operations in UK. In his view, the UK branch is a separate legal entity formed under UK regulations. In his opinion, after the combined reading of exception laid down in section 9(l)(vii)(b) along with India-UK DTAA the consultancy charges paid by the UK branch not to be held as income accrue or arising in India. A decision of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai 288 ITR 408 was cited. Further, a decision of Hon’ble Madras High Court in the case of Skycell Communications Ltd. v. DCIT [2001] 251 ITR 53 was also cited.

35.4. From the side of the Revenue, Id.DR has placed reliance on the order of the AO and the order of the DRP.

C) CONCLUSION;

36. We have heard both the sides and noticed the basic facts that the impugned payment was made without deduction of tax. It is also not in dispute that the payment was made to 19 (Nineteen) parties and all of them are not Indian Residents. It is also not in dispute that the nature of expenses were, namely, “Recruitment Services”, “Training Services” and “Software Consulting”. Before DRP, the assessee has described the party-wise nature of services. Relevant pages of DRP are page Nos. 141 to 147, referred so as to understand the description of said services rendered. Section 40(a)(i) of the Act was invoked. This section starts with an obstante clause that notwithstanding of anything to the contrary in sections 30 to 38, certain amounts shall not be deducted in computing the income chargeable under the head “profits & gains of business” in the case of an assessee any interest, royalty, fees for technical services or other some chargeable under this Act which is payable outside India or in India to a non-resident on which tax is deductible at source under Chapter XVII-B of Act, but such tax at source has not been deducted or after deduction has not been paid. The emphasis of argument is that the said sum should be “chargeable under the Act”‘. This aspect has to be seen thoroughly because this phrase is used in the charging Section i.e. 40(a)(i). The next step is therefore to peruse the provisions of Section 195 of IT Act which says that any person responsible for paying to a non-resident any other sum chargeable under the provisions of this Act shall at the time of credit of such income to the account of the payee or at the time of payment thereof, deduct income tax thereon at the rate in force. Undisputedly, even in Section 195 the Statute has incorporated that for the purpose of deduction of TDS income is to be “chargeable” under the Act. As far as the facts of the case are concerned, the said 19 parties are (i)not the resident of India and they also(ii) do not have ‘PE’ in India. It has also not been found by the AO that except the TDS provision, was there any other provision under Act due to which the said parties could be held chargeable to tax in India.

36.1. The next step is the application of Section 9 of IT Act which prescribes deeming provision to decide accrual of an income in India. Because of the deeming provision section 9(1) of IT Act says that certain incomes shall be deemed to accrue or arise in India, such as, any income from any business connection in India or an income from any property in India. Vide Explanation-l(b), an exception is that in the case of a nonresident, no income shall be deemed to accrue or arise in India to him from operations which are confined to the purchase of goods in India for the purpose of export. An issue has therefore been raised that the professional charges paid by the UK Branch of the assessee to various entities which are non-resident, then whether it can be held that an income has deemingly accrued in India. As far as the assessee’s vehement contention is that the AO should not have decided against the order of C1T(A) pronounced in A.Y. 2005­06. wherein vide an order dated 30/09/2009. the CIT(A)-VIII Ahmedabad has considered this aspect at length and thereupon held as under-

“8.12. It may be further pointed out that Article 7 of the DTAA between India and UK states that business income of the UK enterprise shall not be taxable in India unless the UK enterprise has a Permanent Establishment (‘PE’) in India. The Ld. A.R. pointed out that the entities from whom UK branch availed services does not have PE in India. From the invoices submitted before me, it was observed that these entities are based in the United Kingdom with no business presence in India. The A.O. while drawing adverse conclusion has not brought any fact on record to controvert the claim of the app in this regard. I am of the view that the professional fees payable to should be considered as business income of the said entities and in the absence of PE in India, the same would n9ot be liable to tax in India. Since such income of non-residents is not liable to tax in India, the provision of section 195 of the IT Act are not attracted on such payments and consequently no disallowance can be made under section 40(a)(i) of the IT. Act.”

36.2. This is the one aspect which has been argued and the other aspect was that on such income the deeming provisions of section 9 do not apply because the impugned income do not accrue or arise in India. In this regard, section 9(l)(vii)(b) has been cited and reproduced below:-

“Income deemed to accrue or arise in India

9.(1) The following incomes shall be deemed to accrue or arise in India:-

(vii) income by way of fees for technical services payable by-fa) ..

(b) A person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or”

Therefore income by way of fees for technical services shall not be deemed to accrue or arise in India if payable in respect of services utilized in a business earned on by such person outside India or for the purpose of earning any income from any source outside India. The UK branch of the assessee has availed services of non-resident consultants. These services were provided from outside India. And these services have also been utilized outside India. These services were in fact rendered in UK for carrying out “onsite” work at UK. The Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai 288 ITR 408 (supra) has opined that whatever was payable by a resident to a non­resident by way of technical fees would not always come within the purview of section 9(l)(vii). According to the Hon’ble Court, it must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. If any service has been rendered outside India, then the other condition for taxability is that it must be utilize in India. The Hon’ble Apex Court has therefore said that two conditions for taxability are that firstly, rendered in India and secondly, utilized in India. As far as the instant case is concerned, it is not in dispute that services from the foreign consultants were neither rendered in India nor utilized in India. Our attention has been drawn on an insertion of an Explanation below Section 9(2) of IT Act and for ready reference, reproduce 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 non-resident has a residence or place of business or business connection in India; or

(ii) The non-resident has rendered services in India.”

This Explanation has been inserted by Finance Act, 2007 and later on substituted by Finance Act, 2010. Due to this reason, at the relevant point of time, i.e. during the relevant Financial Year, it was not possible on the part of the assessee to comply with the said Statute. We therefore hold since the services in question were neither “availed” nor “rendered” and even not “utilized” in India, therefore no tax was required to be deducted at source. Rest of the issues about the nature of the FTS and whether it was made available to the assessee are alternate plea of the assessee and need not to be addressed because on the preliminary question of “chargeability”, the issue stands decided in favour of the assessee. This ground of the assessee is therefore allowed.”

41. Respectfully following the decision rendered by ITAT for assessment year 2006-07 in assessee’s own case, ground no. 3 of department’s appeal is dismissed.

42. In the result, the appeal of the Department is dismissed.

43. In the combined result, the appeal for A.Y. 2011-12 of the assessee is partly allowed for statistical purposes, the appeal for A.Y. 2012-13 of the assessee is partly allowed and the appeal for A.Ys. 2011-12 & 2012-13 of the Department are dismissed.

Order pronounced in the open court on 26-07-2023