2016 (3) TMI 89

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....ns of India Act are fully applicable on it. 4. The Ld. CIT (A) has erred in law arid on facts by ignoring the fact that though the payments were made by the branch office out of the profits earned; these profits were directly or indirectly attributed to India office of the assessee. 5 The Ld. CIT (A) has erred in law arid on facts in failing to consider the fact that Sec.195 of the Act requires TDS to be deducted on all payments for any managerial, technical and consultancy fees, 6. The Ld CIT (A) has erred in law and on facts by ignoring the fact that the power of making agreements/contracts for the USA office is only with the Indian Office." 2. Though revenue has taken six effective grounds of appeal but they deal with single issue of disallowance of Rs. 37873836/- being professional fees incurred by US branch of the assessee for non-deduction of tax at sources and hence disallowable u/s 40a(i) of The Income tax Act ( In short 'The Act'). 3. The facts in brief of the case are that the assessee company is engaged in the business of development of computer software. The assessee filed e-return on 30.09.2009 declaring total income at NIL and book pro....

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....t in section 9 of the Act, income is deemed to accrue or arise in India and therefore is chargeable to tax and tax should have been deducted thereon. He further submitted that US branch is not a separate entity but is one unit of the assessee company and therefore there is no exemption to it from provisions of the Act related to tax deduction at source. 6. LD AR on the other hand submitted that assessee is an Indian company and it has one USA branch, which is carrying on independent business in USA and filing tax return in USA. RBI also approved branch of Assessee by its regulations prevalent at that time. Accounts of USA branch are consolidated in India for the purposes of payment of Indian taxes and complying with The Company laws. USA branch has paid the professional fees of Rs. 37873386/- on which no tax is deductible as there was no requirement of tax deduction at sources. The amount is also borne out by the US branch of the assessee for earning income in USA. Therefore as the managerial fees is covered by exception u/s 9(1) (vii) (b) of the act and no tax is required to be deducted at source on this payments. 7. We have carefully considered the rival contentions. It is ....

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.... the US clients for onsite development of software in USA. For this purpose, it hires the services of Software professionals in USA. From the audit report and details of professional software development charges paid it is evident that the payments are received from the clients which is credited as the income of the branch and payments are made by the branch to the professionals /or US companies (US entities) making available the services of the professionals. Services were utilized by the clients of the US branch of the appellant for which the clients made payments to the US branch which was the source of income of the branch. The services were obtained by the US branch from the entities based in USA. The services were utilized in USA and the payments were made from USA by the US branch of appellant directly for professional services of qualified software professionals. 6.4 There is also no dispute that the payments of Rs. 3,76,22,236/- [Rs.3,75,62,852 + Rs. 59,384] made from US Branch to the US entities are neither salaries, nor interest nor royalty. The amounts are paid as fees for professional services of qualified software professionals. Therefore, in order to examine....

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....ices are utilized for the purpose of earning any income from any source outside India, the payments made for such services shall not deemed to accrue or arise in India. In the instant case the services of software professionals hired in USA were utilized in USA by the clients of the US branch of appellant. The payments are received in USA from the clients and are credited as income of the US branch. Payments are made by the branch directly from USA to the US entities for the services of qualified software professionals rendered in USA. The accounts of the branch are audited in USA as per US laws and income tax return are also filed by the US branch of the appellant in USA. Therefore, services of the US entities were utilized in the business of branch office of the appellant which is carried on in USA. The services of US entities were utilized by the US branch for the purpose of earning income from USA. The payments were made by the US branch of the appellant to the US entities in respect of services utilized in business carried on in USA and for the purpose of earning income from USA. Therefore, in view of the above provisions of sec 9(l)(vii), the income by way of fees paid by the....

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....ces are taxable only in USA and not in India. It is not the case of the A.O that services were rendered in India by the US entities through a P.E in India. On the other hand, as the branch office of the appellant in USA is a PE of the appellant in USA, therefore, the profits attributed to the PE (branch office) are taxable in USA and accordingly the Branch office of the appellant is filing income tax return in USA and taxes are paid in USA for that profit as per US laws. Further, the services of the US entities utilized in the business of appellant's PE carried on in USA shall be taxable only in USA and not in India. 6.7 Reliance placed by the A.O. in the decision of Hon'ble ITAT, Mumbai in the case of M/s Linklaters LLP Vs. Income Tax Officer (supra) and Ashapura Minichem Ltd.vs. ADIT (supra) are also not applicable in the instant appeal. In the above cases the projects were located in India the assessee had earned fees in connection with these projects in India and so the source of fees were the projects in India and consequently it was held that provisions section 9(l)(vii) were attracted. However, the above decisions are not applicable in the instant case as th....