These cross appeals filed by the assessee and revenue respectively are against the order of Ld. CIT(A)-1, Kolkata dated 28.03.2016 for AY 2012-13.
2. First of all we take up assessee’s appeal in ITA No. 1047/Kol/2016. The ground nos. 1 to 6 of the assessee are against the action the of the Ld. CIT(A) to confirm the disallowance of marketing expenses of Rs.2,96,05,045/- paid to foreign companies u/s. 40(a)(i) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”).
3. Briefly stated facts of the case are that a company named M/s BNKe Solutions Pvt. Ltd. (in short BSPL) was engaged in the business of providing BPO services and real On Process Technoology India P. Ltd., AY- 2012-13 estate. It had established wholly owned subsidiary at USA by the name M/s. BNKe Solutions Inc. USA to provide marketing support services to the Indian assessee for securing orders abroad. Apart from the US subsidiary, it also availed market support services from other entities. Under a scheme of arrangement affirmed by the Hon’ble Calcutta High Court, M/s. BSPL transferred by way of demerger its BPO business to M/s. BNKe Software Services Pvt. Ltd. (M/s. BNKSSPL) w.e.f. 01.04.2011. The said resultant company M/s. BNKe Software Service Pvt. Ltd. (M/s. BNKSSPL) was taken over by M/s. On Process Technology Inc. of USA in the month of December, 2011 and consequently M/s. BNKSSPL i.e. the resultant company was renamed as M/s. On Process Technology India Pvt. Ltd., i.e. the present assessee before us. Thereafter, the assessee continued to carry on its BPO business from its office located at Sector V, Salt Lake, Kolkata. It was primarily catering to its clients based in USA, UK and Australia. The BPO services were primarily rendered in the field of supply chain optimisation and customer experience management services. To secure orders and solicit business from foreign customers, the assessee engaged the services of foreign marketing companies to whom market support fees of Rs.2,96,05,045/- was paid. The party wise break-up is as follows:
|a)||BNKe solutions Inc.||Rs. 2,10,18,533/-|
|b)||National Services Alliances||Rs. 26,52,160/-|
|c)||Armstrong Associates||Rs. 31,96,273/-|
|d)||M/s. Kirk Halsted||Rs. 24,03,804/-|
|e)||Fe Building Intelligence Ltd.||Rs. 3,34,275/-|
From the foregoing details as were filed before the AO, he noted that such fees were paid without deduction of tax u/s. 195 of the Act and, therefore, he show caused the assessee as to why expenditure should not be disallowed in terms of sec. 40(a)(i) of the Act. It was submitted by the assessee that the fees were paid for marketing service rendered outside India and hence, did not become chargeable to tax in India requiring tax deduction u/s. 195 of the Act. The assessee’s submissions were rejected and the AO held that since the orders were executed in India, income accrued to the payees in India and u/s. 9(1)(i) and 5(2)(b) of the Act, it was chargeable to tax in India and u/s. 195 use the expression “any sum” paid to the non-resident and, therefore, it was obligatory on the part of assessee to deduct tax at source. Accordingly, since assessee failed to deduct tax u/s. 195 of the Act, the entire marketing support fees paid was disallowed u/s. 40(a)(i) of the Act. On appeal, the Ld. On Process Technoology India P. Ltd., AY- 2012-13 CIT(A) upheld the disallowance albeit on a different footing. According to Ld. CIT(A), the payments made to foreign entities qualified to be called as ‘fees for technical services” both under the domestic law provisions of sec. 9(1)(vii) of the Act as well as Article 12 of the Tax Treaty between India and USA. Aggrieved by the order of Ld. CIT(A), assessee is before us.
4. We have heard rival contentions and perused the paper book comprising of 128 pages. We note that the assessee was granted registration by the Ministry of Communications & I. T, Department of Telecommunication, Telecom Enforcement Reserves & Monitoring Cell, Kolkata recognising the assessee to be other service provider (OSP) as per the guidelines annexed to the Registration Certificate, the expression OSP, inter alia, included activities of call centre, tele tracking system, bill payment etc. From the list of services rendered by the assessee and the list of employees of the assessee’s pay roll and their respective educational qualifications indicated that the assessee was performing functions of ‘Call Centre’. The assessee also furnished copies of few agreements with its customers and few sample copies of invoices to substantiate its contention that the assessee was primarily performing the task of tracking calls, tracing shipments, conducting follow ups and performing customer care activities. With reference to its documents, the Ld. AR submitted that the assessee primarily rendered BPO services to its foreign clients and the service fees were paid on the number of hours called by the employees on attending to the customer calls. The Ld. AR submitted that in order to procure new customers and also to service the existing customers in foreign countries, the assessee had engaged the services of companies incorporated in USA. Referring to the list of payments, the Ld. AR pointed out that more than 75% of the fees were paid to the wholly owned subsidiary M/s. BNKe solutions Inc. USA which was engaged in promoting sale of BPO services to clients based in USA. Drawing our attention to the agreement with the wholly owned subsidiary, the Ld. AR pointed out that the said agreement acknowledges that all rights, title and interest in the confidential information and IPRs vested in the assessee company in India which was the ‘entrepreneur’ and US subsidiary was described to be ‘service provider”, which we note from page 43 of the paper book. The said US subsidiary was to provide marketing and support service and to whom the IPRs belonging to the Indian Company were granted on non-transferable and non-exclusion basis to enable it to grant BPO services of the Indian holding company i.e. the assessee. In consideration for rendering marketing and support services, the assessee paid arms length remuneration which was calculated @ actual cost plus mark up of 5%. The assessee had similar agreements with other service providers who were also being paid fees or remuneration either on fixed/monthly basis or performance based service fees for securing orders from the foreign customers. With reference to these documents, the Ld. AR submitted that the AO was unjustified in invoking the provisions of section 9(1)(i) read with section 5(2) of the Act merely because the BPO services were performed in India and the payments were made to foreign entitles by an Indian company. The Ld. AR submitted that the services by the foreign payees were rendered outside the Indian territory. Rather the services were entirely performed in USA for promoting the BPO services of the Indian assessee and to secure orders for its BPO business. According to ld. AR, the authorities below did not bring on record any tangible material which in any manner even suggested that the services were rendered in India or they had any territorial nexus with the India while rendering their services. The ld. AR particularly drew our attention to para 3.4 of the assessment order wherein the AO himself has observed as under:
“The business of the assessee is controlled from India. Execution of any order regarding the business activity in India or abroad commences as well s terminates in India. Disbursement of any fund to any party including non-residents is controlled from the office based in India. In the instant case, though the payment was made to the non-residents who had rendered service to the parties outside India but execution of the order arises from India.”
5. In the light of the AO’s factual finding, the Ld. AR submitted that no income had accrued in India either in terms of section 5 or section 9(1)(i) of the Act and in that view of the matter the income of the payees were chargeable to tax which is to attract sec. 195 of the Act as erroneously held by the AO. The ld. AR further submitted that the order passed by the Ld. CIT(A) was full of contradictions and suffered from many factual infirmities because either he did not correctly understand the facts of the case or he collected the facts out of context leading to totally incorrect legal and factual affairs. The Ld. AR drew our attention to page 29 of the impugned order of the Ld. CIT(A) wherein he has recorded the following admitting that the assessee was rendering BPO services which did not involve rendering of any technical or software development service. He in his own words what has stated which is reproduced as under:
“BNKe Solutions Pvt. Ltd. was acquired by Onprocess Technology, Inc. BNKe Solutions Pvt. Ltd. provides business process outsourcing services. The company offers field service management services, which include field service dispatch, parts dispatch, parts planning and management, customer service, and tech support; and warranty administration services including policy administration, claims processing and part returns, contract compliance, supplier recovery, and warranty analytics. The company also provides logistics services, such as order management, carrier set up, loan management, and coordination between plant and field locations; dispatch, track and trace and POD; and accounting, freight.”
6. However, as per page 30 of the impugned order, the Ld. CIT(A) has recorded a contradictory and contrary finding that the assessee was in the business of developing and providing computer software analytic packages. The Ld. CIT(A)’s relevant finding is as under:
“The appellant, “OnProcess Technology India P. Ltd.” (now BNKe Solutions), which works only a a service Provider/BPO i.e. developing automated computer analytics solution packages for clients, which include all “business solutions” developed by the Indian subsidiary coy” Thus, the only products/services available with the appellant coy are the in-house developed process automation solutions and skilled manpower i.e. software developers for servicing the process solutions, which are evidently in the nature of “Technical Services” over which all IPRs are enjoyed by the holding coy i.e. BNKe Inc., USA”
7. The Ld. AR further submitted that the material issue for decision was not whether the assessee was rendering BPO services or technical services to its foreign customers but the moot question for decision was whether the foreign entities to whom the assessee had made payments rendered any ‘technical’ services to the Indian assessee so as to requiring TDS u/s. 195 of the Act. Even in this regard, the Ld. AR pointed out that the Ld. CIT(A)’s recorded finding which was contrary to the facts on record. Drawing our attention to pages 27, 28 and 31 of the impugned order, he pointed out that the Ld. CIT(A) presumed that M/s. BNKe solutions Inc., USA was the holding company and the Indian assessee was its subsidiary which was using IPRs and other intangible belonging to foreign holding company and for which the payments were being made. Drawing our attention to the agreement between the parties the ld. AR pointed out that the actual fact was exactly opposite and the Indian assessee was holding company who owned the IPRs and other intangibles and the US subsidiary was granted limited right of use for promoting the sales and BPO services of the assessee amongst US based customers. According to the Ld. AR, since the facts of the case clearly established that the foreign subsidiary and other entities were rendering only the marketing and market support services and not any ‘technical’ services, no income chargeable to tax accrued to any of the foreign payees in India. He therefore, submitted that both under the provisions of domestic tax laws of India and under the provisions of DTAA between India and USA, the fees received by the foreign entitles were not taxable in India so as to require tax withholding u/s. 195 of the Act. He, therefore, prayed that the orders of the lower authorities be reversed and disallowances may be deleted.
8. On the other hand, the Ld. DR appearing on behalf of the revenue supported the order of the Ld. CIT(A). The Ld. DR submitted that the consultancy service was embedded in the marketing services described in the agreement between the assessee and the foreign companies and following the principle of ejusdem generis the marketing service was covered under the phrase ‘technical consultancy’ used in sec. 9(1)(vii) of the Act. The Ld. DR, therefore, claimed the payment made by the assessee was taxable under the provisions of the Act. The Ld. DR further submitted that the assessee being the payer cannot place reliance on the DTAA between India and USA and in this regard relied on decision rendered by the Bangalore Tribunal in the case of Vodafone South Ltd. 53 com441. He further drew our attention to Article 24 – “Limitation and Benefits” of the DTAA between India and USA. Referring to the said article, the ld. DR submitted that since the assessee had not demonstrated before the lower authorities that the treaty benefits were indeed available to the payees, the assessee could not claim application of the beneficial clauses contained in Article 12 of the DTAA.
9. We have considered the submissions and the documents on record and the contentions put forth by both the parties and judicial precedence relied on. The documents and facts on record go on to prove that the assessee company operated Call Centre at Kolkata which only provided BPO service in the field of supply chain optimization customer management. These activities did not require the assessee to provide any technical knowhow or service to its customers. Moreover, in deciding the issue at hand, what are required to be ascertained is whether or not the foreign entities to which payments were made by the assessee had rendered any ‘technical’ services to the assessee and consequently whether or not such service had territorial nexus with India. From the list of payees, we note that 70% of the payments were made to the assessee’s wholly owned subsidiary M/s. BNKe solutions Inc., USA. From the agreement with the USA company, we note that the IPRs and other intangibles concerning the assessee’s BPO service business were owned by the assessee who was described to be the ‘entrepreneur’ and the USA subsidiary was engaged only to provide market support service and, therefore, described as ‘service provider’. From the scope of work defined in the agreement, we find that M/s. BNKe Solutions Inc USA was required to provide only the following services as per schedule A which is placed at page 51 of the paper book.
“The Service Provider shall at all times during the term of this Agreement use best efforts to assist and support the Entrepreneur by providing the following Services-
1. Render marketing and support services
2. Recruit and maintain at all times appropriate number of marketing personnel and other competent personnel for the performance of servies under this agreement.”
10. From the sample copies of the invoices placed in the paper book, we find that such services were confined to rendering marketing of assessee’s BPO service on cost plus mark up basis and no part of the marketing services were rendered or performed in India. We further note that the nature of services contractual performed by the M/s BNKe solutions Inc., USA did not involve rendering or providing or making available to the assessee any technical service or technical knowledge so as to attract the provisions of sec. 9(1)(vii) of the Act or Article 12 of the DTAA between India and USAR. Similar are the facts with regard to the agreement with other service provider to whom the marketing fees were paid by the assessee. We note that in respect of the agreement with National Service Alliance (NSA) (page 34 to 38 of paper book) the Ld. CIT(A) observed that the assessee had understanding for joint development to arrive at combined business solutions and thereby NSA was to provide proposed technology solutions. We, however, find that the agreement required NSA to provide marketing of ‘combined business solutions’ schedule A to the agreement established that services of NSA were engaged only for rendering market support services and not to provide processed technology solutions as stated by the Ld. CIT(A). We, therefore, find that the scope of agreement with each of the service provider and to whom fees aggregating to Rs.2,96,05,045/- were paid during the relevant year clearly demonstrate that the contractual services were confined only to market assessee’s BPO service amongst US customers and to provide market support to such foreign customers. Since such services were performed outside India and such services not being in the nature of ‘technical service’, making available to the assessee as technical knowledge or know how, the payment of fees did not come within the taxing provisions of sec. 9(1)(vii) of the Act or the DTAA between India and USA. We are, therefore, of the considered opinion that the authorities below were incorrect in holding that the assessee had an obligation to deduct tax before making payment to foreign parties. We find that in arriving at this conclusion, the Ld. CIT(A) erroneously referred to few of the judicial decisions which have no application to the assessee’s case.
11. The Ld. AR drew our attention to the fact that in the impugned order, the Ld. CIT(A) extensively referred to the decision of Mumbai bench of this Tribunal in the case of Foster Wheeler France SA Vs. Dy. Director of Income Tax 157 ITR 593. On a perusal of the said decision we note that not only the said decision was not applicable because the facts of the assessee’s case were much different. We also note that the Ld. CIT(A) had erroneously lifted portion of the said judgment and incorporated the same in his order as part of his finding for deciding the assessee’s case. In the case decided by the Tribunal admittedly the French company was engaged in the business of providing technical and engineering services to the Indian companies in India. The said French company in turn engaged the services of its US holding company M/s. Foster Wheeler, USA for reviewing the work and services performed by its employees for M/s. Reliance Petroleum Ltd. in India. On these facts, the issue arose whether the non-resident company while making payment to the US holding company was liable to withhold tax u/s. 195 of the Act. In the case before the Tribunal, Mumbai it was an admitted fact that US holding company was in fact making available to the non-resident company technology, know-how and service in connection with business carried on in India. However, in the present case, the Ld. CIT(A) did not bring on record any material which can in any manner prove that any of the foreign service providers rendered any technical service or made available any technological know-how to the assessee in India in connection with BPO business carried on in India. We also note that the Ld. CIT(A) in the impugned order erroneously found similarities of assessee’s case with the facts of the Foster Wheeler, France, USA, supra and we note at many places straight away lifted the facts and finding recorded in that decision, which have been pasted in the impugned order and this action of Ld. CIT(A) we do not understand, and cannot be countenanced.
12. From the foregoing discussion, we find that in the present case, the foreign payees to whom marketing support fees totaling Rs.2,96,05,045/- was paid were engaged only in rendering services for promoting and marketing of assessee’s BPO service in USA. Save and except canvassing for customers in the foreign territories, these entities did not render any service in India nor the services performed were technical in nature. We are, therefore, of the opinion that no part of the income embedded in such payment was chargeable to tax in India so as to require deduction of tax u/s. 195 of the Act. Our finding in this regard gets support from the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Eon Technology Pvt. Ltd. 15 com391 and of the Hon’ble Madras High Court in the case of CIT Vs. Faiezan Shoes pvt. Ltd. 48 taxman.com 48. We, therefore, hold that the fees of Rs.2,96,05,045/- paid by the assessee to US entitles for rendering marketing and sale support services was not chargeable to tax in terms of sec. 9(1)(i) of the Act.
13. From the impugned order of the Ld. CIT(A) , we note that he suo moto considered the taxability of the fees received by the foreign payees by way of ‘fees for technical services’ in term of taxing law provisions of sec. 9(1)(vii) as well as Article 12(4) of the DTAA between India and USA. We, however, find that even though at page 29 of the impugned order, the Ld. CIT(A) after conducting his Internet search of Bloomberg accepted the fact that the assessee was engaged in providing BPO service, yet in the later part of the order, the very same the Ld. CIT(A) changed the entire course and opined that the assessee was really engaged in the business of providing computer analytical packages. As discussed earlier, it appears that the Ld. CIT(A) wrongly inferred the assessee’s facts with the facts involved in the case of Cochin and Mumbai Tribunal in the case of US Technology Research Pvt. Ltd., supra and Foster Wheeler France SA (supra) respectively wherein the payers to foreign entities were involved in the business rendering engineering service, software development and in connection with which payments were made to foreign companies for availing their technical knowledge and technical services. Having regard to the facts in the respective cases, the Coordinate Benches at Cochin and Mumbai held that since the foreign companies made available to the Indian payers technical services, the payers had the liability to withhold tax u/s. 195 of the Act.
14. In the present case, it is however, noted that the foreign payees rendered only marketing and sales support services for canvassing assessee’s BPO business in foreign countries and, therefore, no technical service was either rendered or any technical know-how, drawings and designs were made available by them to the assessee in India to enable it to carry on its BPO business. We also note that in the present case the payments were made to the entities based in USA and, therefore, the provisions of DTAA between India and USA came into play deciding as to whether the assessee had liability to deduct tax at source or not.
15. Article 12 (4) of the Indo USA DTAA deals with “fees for included services” and relevant articles reads as follows:
“4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services
(including through the provision of services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer ora technical plan or technical design.
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply.”
A plain reading of 12(4) of DTAA makes it clear that only such technical and consultancy service are covered which is either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in article 12(3) or (b) ‘make available’ technical knowledge, experience, skill, know-how etc. We find that rendering of technical service cannot be equated with making available the technical service. Whereas for attracting sec. 9(1)(vii) ‘rendering’ of technical, managerial or consultancy services by itself is sufficient, the tax treaty between India and USA goes further and requires that rendering of services should further result to ‘make available’ technical knowledge, experience, skill etc. to the person utilizing services. The use of the expression ‘making available’ in the tax Treaty reference to the stage subsequent to the ‘making use of’ stage.
The qualifying word is ‘which’. The use of this relative pronoun denotes some additional function. The ‘rendering of service’ must fulfill and that is it should also ‘make available’ technical knowledge, experience, skill etc. The normal, plain and grammatical meaning of the language employed is, is that mere rendering of service is not roped in Article 12 of the Treaty unless the person utilizing services is also able to make use of the technical knowledge, experience, skill etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, expertise, skills etc. must remain with the person utilizing the services even after the rendering of service comes to an end. This has also been specifically explained in the MOU between India and USA on the DTAA. The relevant extracts of the MOU is reproduced as under:
“Article 12 includes only certain technical and consultancy services. But technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.
Under paragraph 4, technical and consultancy services are considered included services only to the following extent: (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which are royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services”
16. In the present case we have already set out the nature of services rendered by the foreign companies to the assessee. The scope of work as entailed in the agreements clearly goes on to show that the foreign entities were providing marketing and sale support services. Nothing is made available to assessee by the foreign entities as to whether or not giving marketing services can be considered to be ‘making available’ included services. Example no. 7 given in MOU between India and USA on the DTAA shows more light on the understanding of the subject which example is as follows:
The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services?
The fees would not be for included services; The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill etc nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4( b). ”
17. This example set out in the MOU between India and USA governments makes it clear that consideration for consultancy services rendered cannot be treated as fees for included services under Article 12(4)(b). From a reading of the Article 12(4) and example set out in the annexure to the treaty, we note that the services which the foreign entities rendered to the assessee herein were in the field of marketing of assessee’s BPO services in foreign countries and it did not involve making available to the assessee any technical know-how, drawings, designs etc. with the help of which the assessee carried on its BPO business. As noted in the earlier paras the assessee was not engaged in the business of software analytical packages and, therefore, the Ld. CIT(A)’s extensive reliance on the decision of the coordinate bench of this Tribunal at Cochin and Mumbai in the case of US Technology Research Pvt. Ltd. ITA No. 222/Coch/2013 dated 27.09.2013 and Foster Wheeler France SA (supra) was clearly untenable and erroneous.
18. On the other hand, reliance placed by the Ld. AR on the decision of the Hon’ble Delhi high Court in the case of DIT Vs. Guy Carpenter & Co. Ltd. (2012) 346 ITR 504 (Del) and Hon’ble Karnataka High Court in the case of CIT Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar) appear more appropriate on the facts of the case. We also note that the Coordinate bench of this Tribunal at Kolkata in the case of ADIT Vs. Timken Co. in ITA Nos. 387 & 398/Kol/2010 dated 29.11.2017 considered the said Article 12(4) of the Indo-USA DTAA while deciding the issue of taxability of intra group service, inter alia, including managerial, marketing and coordination services. In the said case also the revenue had claimed that the services rendered by the US companies to its Indian subsidiary was liable to taxes in India under article 12(4) and, therefore, withholding of tax was considered necessary. In deciding the issue, the coordinate bench held that to fit into the terminology “fees for included services” the technical knowledge and skills etc. must remain with the person receiving services even after the principal contract comes to an end and the receiver should be able to deploy similar technology or techniques in future without depending on the provider. Referring to the MOU between India and USA the coordinate bench held that the provisions of consultancy or marketing services which did not ‘make available’ any technical know how, knowledge, design or skill to the payer was not liable to tax as “fees for included services” under article 12 of DTAA between India and USA. Following the ratio laid down in this decision, we find merit in the assessee’s submission that the payments made by the assessee to foreign companies for receiving marketing and support service shall come within the ambit of “fees for technical services” as defined in DTAA and hence not taxable in India.
19. Before parting with this issue, we may also deal with the Ld. DR’s contention that the assessee, whose obligation was to deduct tax at source u/s. 195 of the Act cannot place reliance on the DTAA between India and USA. In support of this contention, the Ld. DR relied on the decision of this Tribunal in the case of Vodafone South (supra). We have carefully perused the said decision and found that the observations of the Tribunal were made in the context of dispute raised by the revenue that the payee was not tax resident of either countries and, therefore, benefits of the DTAA between India and UK could not be pressed into service by the payer which fact is clear from a plain reading of para 37 of the said decision. In the present case, however, no dispute was raised by any of the authorities below that the payees were not the tax resident of the USA and the benefits of DTAA between India and USA cannot, therefore, be available to the parties. In fact this is completely a new contention raised by the ld. DR without bringing any material on record to support such an averment. We are therefore of the view that the decision in the case of Vodafone South (supra) is factually not applicable and, therefore, is of no help to the new plea of the revenue before us.
20. In the course of the argument, the ld. DR also submitted that in view of Article 24 of the Indo-USA DTAA, the assessee could not have invoked the benefit of Tax Treaty. According to Ld. DR, the onus was on the assessee to prove that the foreign entities to which payments were made were eligible to claim benefit of the provision of the Tax Treaty and for that purpose it was for the assessee to prove that conditions prescribed in Article 24(1) were satisfied by the parties. In the absence of any material brought on record which proves that the parties were eligible to claim the benefit of DTAA it was not open to the assessee to claim the protection provided by DTAA between India and USA. We find that the revenue has raised this objection for the first time before the Tribunal without bringing on record any cogent material in its support. We find from the orders of the authorities below that it was the Ld. CIT(A)’s case that even under the Treaty provisions the market support fees paid by the assessee came within the charging provisions of Article 12(4) of the DTAA requiring tax withholding at the rate prescribed in Article 12. In these circumstances, we do not find force in the Ld. DR’s altogether new arguments that the assessee had failed to prove that the foreign payees did not qualify to claim Treaty benefit for failure to comply with the conditions prescribed in Article 24(1). On the contrary, we find that almost 70% of the total payment was made by the assessee to its wholly owned subsidiary M/s. BNKe Solutions Inc., USA which company was incorporated in USA and the assessee itself directly owned 100% of its issued equity capital. It is not in dispute that the assessee which is incorporated in India is an Indian Tax Resident. Article 24(1)(a) provides that in order to avail the benefit of tax treaty more than 50% of the number of shares of a company should be owned directly or indirectly by one or more individual resident of one of the contracting states i.e. either in India or USA. In assessee’s case, the shares of M/s. BNKe Solutions Inc., USA incorporated in USA were 100% owned by the Indian Tax Resident and, therefore, conditions of Article 24(1)(a) were clearly fulfilled. In the said circumstances, therefore, we do not find merit in the objection raised by the ld. DR at this stage before the Tribunal.
21. For the reasons discussed in the foregoing, we are in agreement with the assessee that the payment of Rs.2,96,05,045/- made by the assessee to foreign entities towards marketing and sale support services were not chargeable to tax in India and in that view of the matter the assessee was right in law in not deducting any tax thereon under sec. 195 of the Act. Accordingly, we hold that the impugned disallowance of Rs.2,96,05,045/- made by the AO as well as confirmed by the Ld. CIT(A) u/s 40(a)(i) of the Act is unsustainable. Accordingly, it is directed to be deleted. This ground of appeal of assessee is allowed.
22. Now coming to Revenue’s appeal. Ground no. 1 of revenue’s appeal is against the action of Ld. CIT(A) in deleting the addition on account of employee’s contribution to PF by invoking provision of section 36(1)(va) of the Act. For this revenue has raised the following ground no.1:
“1. Whether on the basis of facts and circumstances of the instant case, the Ld. CIT(A) – 1, Kolkata has erred in deleting the addition without adjudicating the issue as to whether the employee’s contribution to PF after the due date of the relevant Act will be guided as per provision of section 36(1)(va) r.w.s. 2(24)(x) of the Act or under section 43B of the Act. ”
23. Briefly stated facts of the case are that the assessee being the employer had withheld the PF and ESI contributions payable by its employees from their salaries. As per sec. 36(1)(va) of the Act, employees contribution to PF & ESI withheld by the employer could not be allowed to be deducted if not paid on or before the due dates provided under the relevant laws governing PF & ESI. Before the AO, the assessee pleaded that the employees’ contribution to PF & ESI has been paid by the assessee on or before the due date of filing the return of income for the relevant assessment year u/s. 139(1) of the Act and, therefore, deduction claimed should be allowed as provided under the proviso to sec. 43B of the Act. The said plea was rejected by the AO for the reason that proviso to sec. 43B of the Act cannot be read into the provision of sec. 36(1)(va) of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who deleted the addition made by the AO holding that employees shares of contribution to PF & ESI should be allowed as deduction which is paid on or before the due date of filing the return of income u/s. 139(1) of the Act. Aggrieved, the Revenue is before us.
24. We have heard rival submissions and gone through the material available on record. We note that the Hon’ble Calcutta High Court has also taken the view that employee’s contribution to PF paid on or before the due date of filing of return of income u/s. 139(1) of the Act should be allowed as deduction. In this regard, the decision of Hon’ble Calcutta High Court in the case of M/s. Akzo Nobel India Ltd. Vs. CIT in ITA No. 110 of 2011 dated 14.06.2016 and in the case of CIT Vs. Vijayshree Ltd. of the Hon’ble Calcutta High Court in GA No. 2607 of 2011 dated 06.09.2011 was filed before us. In the order in the case of Vijayshree Ltd. (supra) the Hon’ble Calcutta High Court held as follows:
“The only issue involved in this appeal is as to whether the deletion of the addition by the Assessing Officer on account of Employees ‘Contribution to ESI and PF by invoking the provision of Section 36(1 )(va) read with Section 2(24 )(x) of the Act was correct or not. It appears that the Tribunal below, in View of the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., reported in 2009 Vol.390 ITR 306, held that the deletion was Justified.
Being dissatisfied, the Revenue has come up with the present appeal.
After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1 st April, 1988.
Such being the position, the deletion of the amount paid by the Employees’ Contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act.
We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal.””
25. In view of the aforesaid decision of the Hon’ble Calcutta High court, we are of the view that deduction claimed should be allowed as the employee’s contribution to PF & ESI has been admittedly remitted on or before the due date for filing the return of income u/s. 139(1) of the Act. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and, we confirm the same and dismiss this ground of appeal of revenue.
26. Ground no. 2 of the revenue is against the action of the Ld. CIT(A) which relates to disallowance of bad debts of Rs.35,58,342/- u/s. 36(1)(vii) of the Act. Briefly stated the facts of the case are that the assessee had written off unrealized bad debts to the extent of Rs.35,58,342/-. According to AO, the assessee could not establish the said debts have actually become bad and were incidental to the business which according to him was the basic condition for claiming deduction u/s. 36(1)(vii) of the Act and he, therefore, disallowed the aforesaid claim. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who deleted the impugned disallowance in view of the decision of the Hon’ble Supreme Court in the case of TRF Ltd. Vs. CIT 323 ITR 397 wherein the Hon’ble Supreme Court held that it is not necessary for the assessee to establish that the debts written off had actually become bad and to allow the claim it is sufficient that the debts are written off in the books of account. Aggrieved by the order of the Ld. CIT(A) the revenue is in appeal before us.
27. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the Ld. DR was unable to controvert the finding of the Ld. CIT(A). The Ld. AR drew our attention to the fact that subsequent to the judgment of Hon’ble Supreme Court in the case of TRF Ltd. (supra), the CBDT has also issued a circular no. 12/2016 dated 30.05.2016 wherein the Board have clarified that it is no longer necessary for the assessee to prove irrecoverability of debts and once the debts are written off in the books of account, then the assessee is legally entitled to claim bad debts u/s. 36(1)(vii) of the Act subject to satisfying condition of section 36(2) of the Act. In view of the foregoing, therefore, we hold that this ground raised by the revenue has no merit and, therefore, stands dismissed.
28. Ground no. 3 is against the disallowance of loss of sale of fixed assets not added back in the computation of income. Briefly stated facts of the case are that the assessee had sold certain fixed assets during the year from which derived profit of Rs.2,72,482/- which was credited to the P&L Account under the head “other income”, and shown in Schedule 19 and loss of Rs.8,18,562/- which was debited to the P&L Account under the head “other expenses” at schedule no. 21. The assessee, therefore, added back the net sum of Rs.5,46,200/- (Rs.8,18,562 – Rs.2,72,482) in the computation of income. The assessee thus submitted before the AO that the entire loss of Rs.8,18,562/- had been added back to the total income. The AO, however, rejected the explanation of the assessee and held that the disallowance offered by the assessee was only at Rs.5,46,200/- as opposed to Rs.8,18,562/-and hence, short by Rs.2,72,482/-. Accordingly, the said sum was added back by the AO. Aggrieved, the assessee preferred appeal before the Ld. CIT(A) who found that the AO misperceived the separate a ccounting entries of the profit of Rs.2,72,482/- and loss of Rs.8,18,562/- derived by the assessee on sale of fixed assets in the P&L Account and the depiction of net addition of Rs.5,46,200/- in the computation of income. Therefore, the Ld. CIT(A) held the finding of AO to be factually erroneous and hence, deleted the impugned disallowance holding it to be a double addition. Aggrieved by the Ld. CIT(A)’s decision, the Revenue is before us.
29. Before us, the Ld. DR appearing on behalf of the revenue was unable to controvert this fact and could not point out any infirmity in the order of the Ld. CIT(A) and accordingly, this ground of appeal of revenue is dismissed.
30. Ground no. 4 of revenue relates to the disallowance of deduction claimed u/s. 35DD of the Act in respect of travelling expenses of Rs.15,29,581/-. Briefly stated the facts of the case are that the assessee company was the resultant company under the scheme of de merger which was approved by the Hon’ble Calcutta High Court during the year. In relation to the scheme of demerger, the assessee had incurred travelling expenses of the legal advisors to the extent of Rs.15,29,581/- of which 1/5thwas claimed as deduction u/s. 35DD of the Act. The AO required the assessee to explain as to why the said claim should be allowed in the absence of any certification by the auditor. In response the assessee furnished the details of expenses from which it was evident that expenses were incurred n relation to scheme of demerger and hence, claimed that no adverse view could be taken in respect of the claim made u/s. 35DD of the Act. The AO, however, rejected the claim of and held that the travelling expenses were not incurred in relation to scheme of the demerger and, therefore, disallowed the deduction of 1/5th amount claimed u/s. 35DD of the Act. Aggrieved by the action of the AO, the assessee preferred an appeal before the Ld. CIT(A). In the appellate proceeding, the assessee reiterated his claim for deduction u/s. 35DD of the Act and alternatively claimed that if the deduction u/s. 35DD of the Act was not allowed then the entire amount of travelling expenses be allowed u/s. 37(1) of the Act since the fact that the expenses were incurred in the course of business was not in dispute. The Ld. CIT(A) found merit in the original claim of the assessee and allowed the deduction u/s. 35DD of the Act being 1/5th of the travelling expenses of Rs.3,05,916/-. Aggrieved, the revenue is before us.
31. We have heard rival submissions and gone through the facts and circumstances of the case. Sec. 35DD(1) reads as under:
“Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place.”
32. On perusal of the above provision shows that any expenditure wholly and exclusively in relation to scheme of demerger cannot be allowed as deduction from the profits of the business in one go but the same will have to be amortized for income tax purposes over a period of five years and the deduction will be allowed accordingly. There is no pre-condition set out in the above section mandating any certification from the auditor. We note that the tax auditor indeed did not report this claim u/s. 35DD of the Act but the tax auditor’s non-report could not disentitle the assessee from making a claim which was otherwise legally permissible. We note that the Ld. CIT(A) after examining the details of travelling expenses found that it was incurred wholly and exclusively for the purpose of scheme of demerger and this finding has remained uncontroverted before us. In such a scenario, in our considered view, therefore, the claim made by the assessee u/s. 35DD of the Act was legally permissible and, therefore, we do not find any infirmity in the order passed by the Ld. CIT(A) and, therefore, we confirm the order of Ld. CIT(A). This ground of appeal of revenue is dismissed.
33. In the result, the appeal of assessee is allowed and that of the revenue is dismissed.
Order is pronounced in the open court on 24.05.2018