1. By way of this appeal, the assessee appellant has challenged correctness of learned CIT(A)’s order dated 10th July 2012, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the assessment year 2009-10.
2. Grievances raised by the assessee, in substance, are against learned CIT(A)’s upholding (i) the disallowance , under section 40(a)(i), of Rs 4,54,28,424, in respect of reimbursement of payroll costs, and of Rs 16,86,463, in respect of reimbursement of related professional and legal fees, to Burt Hill Inc USA; (ii) the disallowance of Rs 12,77,927 in respect of medical insurance premium paid for the employees, placed at the disposal of the assessee under secondment agreement with Burt Hill Inc USA; and (iii) the disallowance of Rs 1,50,000 being house rent paid to Managing Director of the assessee company. For the record, however, the detailed grounds of appeal raised by the assessee are set out below:
1. (a) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs. 4,54,28,424/- being expenditure incurred on pay-roll ( man power) costs of the employees of the company who were working in India for the appellant company’s business operations on full time basis under the secondment agreement paid by way of reimbursement to its parent foreign company i.e. Burt, Hill Inc, USA.
(b) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs. 16,86,463/- being expenditure on legal and professional fees paid by way of reimbursement to its parent foreign company i.e. Burt, Hill Inc, USA.
(c) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs.4, 71,14,887/- (Rs. 4,54,28,424/- on account of reimbursement of expenditure on pay-roll costs + Rs. 16,86,463/- on account of reimbursement of legal and professional fees) by arbitrarily holding that the payments are in the nature of fees for technical services and therefore chargeable to tax in the hands of the payee in India u!s. 9(1)(vii) of the I. T. Act.
(d) The learned CIT(A) has grossly erred in law and on facts of the case in confirming the action of the AO in making the impugned addition of Rs.4,71,14,887/- ignoring the ratio of the various judgments of the ITAT, High Court and Supreme Court which were brought to the notice of the AO and CIT(A) in the course of assessment proceedings!appellate proceedings. The learned CIT(A) has grossly erred in law and on facts of the case in not applying & following ratio of decision of Delhi High Court in the case of HCL Infosystems Ltd. in the absence of any other decision of any other High Court taking a contrary view on identical facts Ignoring principles of Binding nature of decisions as laid down by various High Courts.
(e) The learned CIT (A) has grossly erred In law and on facts of the case in not considering provisions of Double Taxation Avoidance Treaty between India & USA pursuant to which also the said reimbursements of pay roll costs & legal fees do not amount to Fees for Included Services and therefore not chargeable to tax in India and consequently provisions of section 195 are not applicable as held by Supreme Court in the case of GE India Technology Centre Pvt. Ltd.
(f) It is therefore prayed that the impugned addition made on erroneous presumptions is wrong on facts and circumstances of the case and may please be deleted.
2 (a) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in making the impugned addition of Rs.4, 71,14,887/- without issuing any show cause notice to the appellant assessee of his Intention to make such addition!disallowance. The impugned assessment order has been passed In violation of the principle of natural Justice of affording reasonable opportunity of being heard and therefore such order is liable to be quashed. The learned CIT (A) failed to adjudicate the Ground No. 6 taken in the grounds of appeal before him.
(b) It is therefore prayed that Impugned addition of Rs. 4,71,14,887/- may please be deleted.
3.(a) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in disavowing an amount of Rs, 12,77,927/- being medical Insurance premium in respect of the personnel placed In the disposal of the appellant company for its business operations by the parent company.
(b) The learned CIT (A) has grossly erred In law and on facts of the case in confirming the action of the AO in making the Impugned disallowance of Rs, 12,77,927/- without Issuing any show cause notice to the appellant assessee of his Intention to make such The impugned assessment order has been passed in violation of the principle of natural justice of affording reasonable opportunity of being heard and therefore such order is liable to be quashed. The learned CIT (A) did not adjudicate Ground 7 (b) of the Grounds of Appeal taken before him.
(c) It is therefore prayed that impugned addition ! disallowance of 12,77,927/- may please be deleted.
4 (a) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in disallowing an amount of Rs. 1,50,000/- being expenditure on rent paid by way of reimbursement to Mr. Jayesh Hariyani, Managing Director of the company, by invoking the provisions of Section 40(a)(ia) of the I. T. Act ignoring the fact that there was no legal obligation to deduct tax at source from such reimbursement of expenditure incurred by the Managing Director of the company.
(b) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in making the impugned disallowance of Rs. 1,50,000/- by arbitrarily considering the payment as rent in utter disregard to the fact that the payment in question is not in the nature of rent falling within the meaning and scope of Explanation-1 below Section 1941 of the I.T. Act and the payment is nothing but reimbursement of expenditure incurred by the Managing Director of the company.
(c) It is therefore prayed that impugned addition/disallowance of 1,50,000/- may please be deleted.
5. Without prejudice to all above,
(a) The learned CIT (A) has grossly erred in law and on facts as well as on circumstances of the case in holding that the appellant cannot be granted deduction!exemption u/s. 10A of the I.T. Act in utter disregard to the fact that the appellant company is a unit registered with Software Technology Park of India (STPI), that the company is engaged in the business of providing Information Technology Enabled Services (ITES), that about 90% of the revenue of the company is derived from export of Information Technology Enabled Services and that the proceeds thereof has been realized in convertible foreign exchange by 30th September, On facts and circumstances of the case, the appellant company has complied with all the conditions for eligibility of deduction u!s 10A and is therefore eligible for deduction computed in accordance with the provisions of said section.
(b) The learned CIT (A) has grossly erred in law and on facts of the case in confirming the action of the AO in ignoring the appellant’s claim, vide paragraph 13 of submission dated 13/12/2011 as well as para 6 of submission dated 20th December, 2011; that though the appellant is entitled to deduction u/s. 10A, in the return of income filed for the year under appeal, no such claim was made as there was no positive income and in the event of determination of positive income as per the assessment order, the appellant may be granted deduction u/s. 10A of the I.T. Act. The appellant had furnished before the AO complete details and justification with regard to its claim for deduction u/s. 10A in the event of determination of positive income.
(c) It is therefore prayed that the appellant may please be allowed deduction u/s. 10A of the I.T. Act.
6. The appellant craves liberty to add or alter any ground at the time of hearing.
3. So far as the first grievance of the assessee is concerned, we find that the issue is now covered, by our order of even date in assessee’s own case in respect of tax withholding demands under section 195 r.w.s 201, wherein we have, inter alia, observed as follows:
4. As we deal with these appeals, we consider it appropriate to reproduce, for ready reference, the related statutory provision set out in Section 195(1). This is as follows:
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”) shall, at the time of credit of such income to the account of the payee or 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, deduct income-tax thereon at the rates in force
[Emphasis, by underlining, supplied by us]
5. Quite clearly, therefore, as long as a payment to non-resident entity is in the nature of payment consisting of income chargeable under the head ‘Income from Salariesз the assessee does not have any tax withholding obligations under section
6. There is no, and there cannot be any, dispute about the factual aspect that the payment made to Burt Hill Co Inc USA consists of income which is chargeable, and has been charged, to tax in India under the head ‘income from salaries’. There is also no dispute that the payments for all the four years before us are of the same nature, under the same agreement and of the same character. What was held to be income in the nature of salaries for the assessment years 2008-09, 2010-11 and 2011-12 cannot be of any different nature for the assessment year 2009-10 just because the assessee, rather than deducting tax at source under section 192, paid the advance taxes on behalf of the seconded employees in that particular assessment year. It is not the fact of tax deduction under section 192, but the nature of income embedded in related payments which is relevant for deciding whether or not section 195 will come into play. Of course, there are separate set of consequences for not discharging tax withholding obligations under section 192. However, the assessee has discharged these obligations and there are no pending issues about the same. Whether the seconded employees continue to be in employment of the foreign entities or not is wholly irrelevant for this purpose. What is relevant is that the income embedded in the payments in question is taxable in India under the head ‘Salaries’, and if that be so, there are no tax withholding obligations under section 195. That precisely is the undisputed position on the facts of this case- as duly accepted by the income tax authorities. The income embedded in the impugned payments being in the nature of income chargeable to tax under the head ‘income from salariess the assessee cannot be said to have any tax withholding obligations under section 195. For this short reason alone, we must hold that the impugned tax withholding demands, under section 201 r. w.s 195, are wholly devoid of any legally sustainable merits.
7. That is not, however, the only reason why the revenue must fail in its case.
8. A lot of emphasis has been placed on the fact that there was a service PE in the present case. Nothing, however, turns on the existence of the PE because admittedly whatever has been paid to Burt Hill Inc USA is, in turn, paid by Burt Hill Inc UA to its employees seconded to the assessee. There cannot be any profits, therefore, in the hands of the Service PE, and what is taxable in the hands of the PE under article 7(1) is not the gross receipt but the profits attributable to the PE. The existence of service PE, in the present case, will be wholly academic inasmuch as whatever is the aggregate of receipts said to be attributable to the PE, is exactly the same as aggregate of expenditure attributable to the PE. It is not the revenue’s case that any other receipts of the Burt Hill Inc USA, other than the receipts on account of reimbursements for salaries, or any other income could be attributed to the so called Service PE. The payments in question have not resulted in any income taxable in the hands of the assessee. Be that as it may, in any event, when undisputedly the payments are in the nature of the reimbursements, and, particularly when even the income embedded in these payments has already been brought to tax in India in the hands of ultimate beneficiaries- i.e. the seconded employees, there cannot be any tax withholding obligations under section 195. It is only elementary that the tax deduction source liability under Section 195 is a vicarious liability in the sense that it’s survival in the hands of tax-deductor is wholly dependent on existence of tax liability in the hands of recipient of income. When a payment made by, an Indian resident, to a non-resident, does not trigger the taxability of that income in the hands of recipient, the tax deduction liability does not come into play at all. This scheme of the Act is implicit from the wordings of Section 195 (1) which refer to “ any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries”)” When income embedded in a payment is not taxable under the Income Tax Act, 1961, the tax withholding liability does not get triggered at all. This is what Hon’ble Supreme Court has also held in the case of G E Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 456(SC)]. While holding so, Their Lordships have, inter alia, observed as follows:
…………….The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at source only if the tax is assessable in India. If tax is not so assessable, there is no question of tax at source being deducted. [See: Vijay Ship Breaking Corporation and Others Vs. CIT 314 ITR 309]
9. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in Section 195. For example, Section 194C casts an obligation to deduct tax at source in respect of “any sum paid to any resident”. Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of “any amount” referred to in the specified provisions. In none of the provisions we find the expression “sum chargeable under the provisions of the Act”, which as stated above, is an expression used only in Section 195(1). Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act.
9. The decision to withheld tax from a credit or payment to a non-resident is not taken de horse the taxability of income embedded in the related payment. It is taken in the light of the tax liability of the non-resident in respect of the amount in question, and, if there were any doubts on this proposition, these doubts have now been set at rest by Their Lordships. As for the payments made by the assessee being in nature of the fees for technical services, this stand of the Assessing Officer is equally There is not even an effort to show as to how any technical knowledge, skills, knowhow or processes etc are “made available” by these services inasmuch as these services can be performed by the assessee without any recourse to the service provider. Unless this condition, under make available clause under article 12(4)(b), is satisfied the fees for technical services cannot be brought to tax in India in the hands of entities fiscally domiciled in United States. It is even more elementary that once these payments cannot be brought to tax under the provisions of the India US DTAA, there cannot be any occasion to invoke Section 9(1)(vii) of the Act either because it cannot be more beneficial to the assessee- as is the condition precedent, under section 90(2), for invoking the same.
10. For the detailed reasons set out above, we are of the considered view that the demands raised on the assessee under section 201 r.w.s 195 are wholly devoid of any legally sustainable merits.
4. In view of the views so expressed by us, the assessee did not have any tax withholding obligations so far as these reimbursements are concerned. As the assessee did not have any tax withholding obligations, the very foundation of impugned disallowance under section 40(a)(i), which get triggered by the lapses in discharging such obligations, ceases to hold good in law. We, therefore, uphold the grievance of the assessee, and direct the Assessing Officer to delete the impugned disallowance.
5. Ground no.1 and 2 are thus allowed.
6. As regards the second issue, i.e. ground no. 3, there is no dispute that the insurance premium of Rs 12,77,927 has been paid for medical and other insurance of the employees of Burt Hill Inc USA who were on secondment to India and in accordance with statutory obligations of Burt Hill Inc USA. The Assessing Officer, however, disallowed the expenses on the ground that these persons were employees of Burt Hill Inc USA, and not the assessee. The Assessing Officer further noted that there is no evidence of business nexus between these expenses and the business of the assessee. These were also held to be personal expenses of the seconded employees. It was in the backdrop of these observations by the Assessing Officer that the impugned disallowance of Rs 12,77,927 was made. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Not satisfied, the assessee is in second appeal before us.
7. Having heard the rival contentions and having perused the material on record, we are inclined to uphold the grievance of the assessee, for the simple reason that the seconded employees, in respect of which the impugned insurance premium was paid, were not only de facto employees of the assessee at the relevant point of time, the assessee had the obligation, under secondment agreement, to bear these costs. The expenses so incurred are in the nature of employee benefits, though paid under secondment agreement, in respect of persons working for the assessee. It was in the furtherance of legitimate business interests of the assessee that these payments were made, and, therefore, the deduction was indeed admissible under section 37(1) of the Act. We uphold the grievance of the assessee. The Assessing Officer is, therefore, directed to grant deduction of the impugned amount of Rs 12,77,927.
8. Ground no. 3 is thus allowed.
9. Coming to the disallowance of Rs 1,50,000 in respect of expenses incurred on guest house, the assessee did not press the same for smallness of amount. As regards the other alternate ground raised in the appeal, given the fact that the assessee has succeeded in its substantive grounds of appeal, these are rendered academic and not pressed as such.
10. Ground no. 4 and 5 are thus dismissed as not pressed.
11. In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open court today on the 28thday of March, 2017.