TaxTMI 
TaxTMI 
2019 (5) TMI 1882
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....2.1 The Ld. CIT (A) ignored the finding recorded by the A.O and the fact that the income in question accrued in India and is liable for TDS." 2.1 Whereas the Grounds of Appeal raised by the Assessee in its appeal are as under:- 1. "On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) (CIT (A)) on erroneous and insufficient grounds, has grossly erred in confirming an addition of Rs. 21,58,139 holding that the expenditure was not made in the course of business or on account of commercial expediency. 2. That the Ld. CIT(A) erred in confirming an addition of Rs. 21,58,139 made by the Ld. DCIT u/s 40(a)(i) of the Act, on erroneous and insufficient grounds and without offering any opportunity to the Appellant , erred in not appreciating that the expenditure was incurred for the purpose of business of the Appellant and was therefore, allowable in full. 3. That the sustaining of the addition of Rs. 21,58,139 by the Ld. CIT(A) by not offering any opportunity to the Appellant is against the principles of natural justice and is liable to be quashed. 4. That Ld. CIT(A) has failed to appreciate the ....
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....s outbound and inbound freight forwarding services, functions performed can be classified three types of services to its customers which has been explained in the following manner:- ORIGIN SERVICES I. These services are provided both in the case of Import as well as Export transactions. In the case of import into India, the origin services are provided by the AEs and in the case of exports out of India, the origin services are provided by the Assessee. II. In these services, the Assessee and the AE provide a mirror reflection of services in their respective countries/ territories. In effect, it means that the AE provides their part of the services in their Territory only and no part of the services are provided in Indian Territory. Similarly, the Assessee provides services in the Indian Territory only and no part of the services is provided by the Assessee in the overseas territory. III. That with respect to the above services, the entire revenue earned and expenses incurred for rendering the services is kept by the respective AEs and the Assessee, who perform them in their respective territory only, and no part of such revenue or expenses ....
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....d to the air/shipping line for carrying out the shipping activity. The balance amount i.e. Rs. 20 is distributed equally between the AE and the Assessee as profit share. The addition of Rs. 21,05,07,858/- is predominantly covered under this service. DESTINATION SERVICES I. These services are being provided both in the case of Import as well as Export transactions. In the case of Export from India, the services are provided by the AE and, in the case of Imports into India, the services are provided by the Assessee. The Assessee and the AE, for these services, provide a mirror reflection of services in their respective countries/ territories. In effect, it means that the AE provides their part of the services in their territory only and no part of the services is provided for in the Indian Territory. Similarly, the Assessee provides services in the Indian Territory only and no part of the services is provided by the Assessee in the overseas territory. That with respect to the above services, the respective AE and the Assessee keeps the entire revenue earned and bears the expenses incurred and no part of such revenue or expense is shared. Example of such ser....
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....ook the view that nonresident associate enterprises have derived income through the presence of the assessee company which falls under the definition of 'business connection in India'. The Assessee in response to query by Assessing Officer furnished its reply, the relevant extracts of which find mention in the assessment order and are also mentioned herein below- "5. During the course of assessment proceedings, vide order sheet entry dated 29.11.2010, the assessee company was asked to furnish details of payments to nonresidents and if, tax was deducted at source. In response vide written submission dated 08.12.2010, the assessee company has given details of payments made to non-resident associate enterprises for freight and forwarding services rendered by them amounting to Rs. 21,05,07,858/-. Vide order sheet entry dated 08.12.2010, the assessee company was asked to justify non deduction of tax at source on these payments. In response the assessee company vide written submission.......... It is submitted that the facts of the transaction amply demonstrates that the JAS Overseas entities are carrying on the business and not rendering any services in the natur....
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....ded by JAS Group of Companies and destination services would be provided by the Assessee Company. Basis the above facts, since the non-resident overseas entities did not carry any activity or business operation in India, and they did not render any service in India, no portion of their business profits earned by them exclusively for services rendered outside India can be brought to tax in India, either under Section 9(1) or otherwise or at all. Therefore, there is no question of treating the relationship between the Appellant Company and the overseas entities as a business connection within the meaning of Section 9(1)(i) of the Income Tax Act, 1961. It was submitted that a relation to be a "business connection" must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the nonresident. In the absence of a precise meaning of the term, determination of business connection has been the subject matter of litigation and a number of judicial precedents are available on the matter. However, the question whether there is a business connection from or through which income, profits or gains arise or accrue ....
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....ssment order as well as in the Remand report and also material placed on record. I have also pursued the case laws cited by the Assessing officer and the Assessee. It has not been established by the Assessing officer that there was any relationship between the Assessee and the non-resident associate enterprises and which part of activity was carried out by the above non-resident associate enterprises in India. In other words, the Assessing officer has not been able to establish that any part of the income was attributable to the operations carried out in India and there was any business connection of the non-resident associate enterprises in India. The perusal of the material placed on record reveals that(a) there was no business connection of the non- resident associate enterprises in India; (b) the Assessee was not an agent of the non- resident associate enterprises in India & (c ) the non-resident associate enterprises do not exercise any control over the activities performed by the Assessee. 6.2 It is also observed that the AO has overlooked the expression 'any such sum chargeable under this act' and given a finding contrary to this expression. The AO has place....
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....ed by aforementioned order, the Revenue is now in appeal before us. During the course of the arguments before us the Ld. CIT(DR) submitted that the Assessee has an agency agreement with JAS Forwarding Worldwide and operates as exclusive agent in India and referred to para 6, page 23 of CIT(A) order. It acts as an intermediary and would take responsibility for entire shipment including loading and unloading, transportation, insurance etc. Thus, it cannot be said that payees have no business connection in India. The Agency Agreement mentions the Assessee as an agent and the payee companies as Principal. It is evident as the Principal has been defined as "JAS group of companies as listed in the attachment" and the names appearing in the attachment are names of payee companies. Therefore, the said agency agreement has been signed between each of the payee company being Principal and the assessee as agent. The Ld. CIT (DR) relied on the detailed findings of the Assessing Officer and stated that all the essential features/conditions of "business connection" as mentioned and discussed in the assessment order, stand satisfied in the present case. 12. The Ld. Counsel, on the other ....
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....o be deducted at source, the section does not get attracted and no disallowance can be made under this section. iii. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of G. E. India Technology Center India Pvt. Ltd Vs. CIT & Anr [234 CTR 153 (SC)], wherein the Apex Court observed that disallowance u/s 40(a)(i) can be made when there 'is a liability to deduct tax, and is not deducted. Thus, the Hon'ble Apex Court observed that sec 40(a)(i) ensures effective compliance of Sec 195 by disallowing the sum paid without withholding of tax. The Supreme Court have laid lot of emphasis on the phrase "chargeable under the provisions of this Act" while deciding the issue of tax deduction at source by a person making payment to a non-resident. For this, the Hon'ble Court relied upon an earlier ruling in the case of CIT v. Cooper Engg. Ltd. (1968) 68 ITR 457 (Bom.), wherein it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source. iv. The Courts have considered the import of words "sum chargeable under the provisions of the Act" appea....
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....cludes the written submissions filed by both the parties and the paper book placed on record. During the course of hearing, the Bench had also asked for certain further documents, which have been placed on record by the Assessee and have been perused by us. From the facts and arguments discussed above, it can be clearly inferred that the Assessee and Associated Enterprises though being AEs, are operating on a principal to principal model and there is no 'Principal-Agent' relationship between JAS India and its AEs/Affiliates. From the documentary evidences depicting negotiations, quotations, contracts and exchange of e-mail correspondence between JAS India and end-customers in India along with underlying invoices which have been placed on record pursuant to our directions, it is seen that the terms of contracts with clients distinctively specify the principal-to principal relationship between the parties. For instance, the particular clause of a customer contract entered with Gates India Private Limited is reproduced below ready reference:- "MANNER OF PERFORMANCE Subject to any contract to contrary the contractor shall execute the job/work or contract independently....
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....a freight or airfreight, irrespective of whether freight is prepaid or collect..." 17. Thus, it can be seen that mere use of the word 'agency' is not sufficient to conclude that the Assessee and the AEs do not operate on principal-to-principal basis and nomenclature is not the determinative factor. The above mentioned evidences filed clear show that JAS India has not been impelled by any instructions from AEs/Affiliates and the specific clause to this effect has been mentioned in the agreement. It has also been informed to us that above principle of 50:50 Profit Split are a widely accepted pricing formula prevalent across the global freight-forwarding industry at large. In support, the Ld. Counsel for the Assessee has placed reliance on recent ruling in case of Balmer Lawrie & co. Ltd. [2016] 68 taxmann.com 384 (Kolkata- Trib.), wherein 50:50 profit split method has been upheld. In the said case this issue had come up for, wherein Tribunal vide para 32 has categorically stated that merely the use of the word agency in the agreement does not amount that there exists a relationship of agency. The Tribunal held that: "....With regard to the issue of agency relationship we ....
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....s AEs/Affiliates. These payments are not governed by the Agency Agreement as such, albeit the universal 50/50 revenue sharing model is common to both inbound/ outbound transactions and perhaps this universal 50/50 revenue sharing model which is common, has led the Ld. CIT (DR) to raise this argument. The Ld. CIT (DR) relied on a ruling of the AAR (AAR No. 542 of 2001) in the case of ABC. However, it can be seen that the facts of the case before us are different. In the present case, JAS India invoices customers in the capacity of a Principal, and correspondingly deals with overseas AEs/Affiliates on a Principalto- Principal basis. Quite contrary to the terms of 'compensation' (clause 2.12) as defined under the 'transportation agreement' in case of ABC, it is JAS India who compensates the overseas AEs/Affiliate on an arm's length basis for services availed in the respective overseas jurisdictions. The service invoices raised on payments received from Indian customers entirely belong to JAS India as integral part of its own business. Further, unlike the facts in the case of ABC, JAS Worldwide is in no manner responsible for meeting/ reimbursing the salary and other establishment expe....
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....me Court ruling in the case GE India Technology Cent. (P) Ltd (2010); 327 ITR 456. The Hon'ble Supreme Court has held that person paying interest or any other sum to non-resident is not liable to deduct tax if such sum is not chargeable to tax. Thus, in the absence of any 'business connection, there was no obligation on the Assessee to deduction tax u/s 195 of the Act and thus correspondingly no disallowance could be made u/s 40(a)(i) of the Act. 21. The payments made to non-resident are not on account of rendering any services in the nature of technical or professional services or fees for technical services or getting any income on account of royalty, albeit the nature of activities performed by the non-resident are purely business activities. The AEs are carrying on the business of freight forwarding services in their respective jurisdictions which are mirror reflection of the business activities carried on by the Assessee. This issue has also been discussed and adjudicated in favour of the Assessee in the case of Mumbai ITAT, UPS SCS (Asia) Limited, [2012] 18 taxmann.com 302 (Mum.), wherein the Tribunal has held that payments to nonresidents for providing freight and logisti....
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....H, Frankfurt, Germany Germany 20224 Reimbursement of travelling cost JAS Forwarding (USA) INC. USA 755655 Reimbursement of NVOCC Insurance Expenses JAS Forwarding (USA) INC. USA 58428 Reimbursement of NVOCC Tariff Filing Expenses TOTAL 2158139 4.2 At the outset, it is to be noted that the sums were paid by way of expenses to non-resident third parties who had rendered services to the assessee. These payments therefore fall within the purview of section 9(1)(vii) and are therefore taxable in India as fee for technical services. 4.3 The contention of the assessee that the payment made is reimbursement against actual expenses, and therefore not chargeable to tax is not acceptable. 4.5 To reiterate, the taxation of fee for included services/royalties/included services is not on net basis, had it been so, out of the receipts, such expenses would be required to be deducted for computing the net income and such income would be taxable at the normal higher rate of tax (as opposed to the rates of TDS). 4.6 The assessee has taken the plea that there is no income embedded in the payment made. Howeve....
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....rt on it under section 195(1) of the Income Tax Act, 1961 which was mandatory. In view of the above, the claim of the assessee needs to be rejected and the additional evidence submitted during the course of appellate proceedings are not sufficient for the claim of the assessee." 25. The CIT (A) thereafter admitted the additional evidence and noted that the AO has also not made any adverse comment with regard to admission of additional evidence. Before the CIT (A), the Assessee preferred written submissions explaining the nature of reimbursements. Relevant extracts of the submission which also find mention in the order of the CIT (A) are reproduced herein below- "The Assessee carried out certain transactions during the year under appeal with overseas JAS Group of Companies and other domestic entities. In this regard, JAS Group of Companies incurred certain expenses totaling Rs. 21,58,139/- *on behalf of the Assessee which were later on recharged by its associates on cost to cost basis. The nature of such expenses are discussed below:- (i) Reimbursement of Server Maintenance Cost amounting to Rs. 13,780:-Here, the expenses only represented proportionate ....
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....e. members of the Group Companies and accordingly the Assessee was required to reimburse its portion of the expenses. (iii) Reimbursement of Management Expenses amounting to Rs. 10,12,859:Jas Worldwide Management LLC, situated in Atlanta, USA perform administrative, business development activity for common interest of the JAS Group which in-turn help the entities to grow their businesses. In this procedure, they incur some cost which they allocate within the group members which are benefited by the said activity, directly or indirectly. The Assessee was also charged its share of expenses, for which the Assessee made the payment. Further, the expenses only represented proportionate expenses incurred by the non-resident to avail administrative, business development activity. (iv) Reimbursement of Traveling Cost amounting to Rs. 1,18,328:The said expenses were incurred by the Assessee on behalf of the non-resident on account of local air tickets of foreign delegates coming to India. The same was cross charged by the Assessee to the respective nonresident during the year. However, during the assessment proceedings, when the Assessee provided the details of the payment....
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....nd disallowed this amount on account of commercial expediency. 28. Accordingly, before us the Ld. Counsel argued that the amount cross charged represented only reimbursement of expenses without any mark up i.e. actual cost incurred by the AEs of the Assessee on behalf of the Assessee outside India and reimbursement of expenses can never represent "income", therefore, before making the payments to non-resident, the Assessee was not liable to deduct TDS. In any case, the question of allowability does not arise as these are all basic expenses relatable to the business of the Assessee. During the course of the arguments, the Assessee made the several arguments, which are summarized as below:- That the reimbursement made by the Assessee is reimbursement of cost, thus, there is no income element added to it. Hence, the reimbursements made by the Assessee are not at all income in the hands non-resident in terms of sec 5(2) of the Act. In this regard, reliance is placed- ACITv. Mis. J.B. Boda Surveyors Pvt. Ltd in ITA No. 4252/Mum/2009. CITv. Dunlop Rubber Co. Ltd.[142 ITR 493 (Cal)} Clifford Chance United Kingdom v. Dy. CIT [2....