TaxTMI 
TaxTMI 
2021 (12) TMI 1077
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....of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 1,07,70,378/- made on account of diversion of income belonging to the assessee firm to an entity incorporated in tax-free jurisdiction avoidance of tax. iii) On the facts and circumstances of the case, the Ld. C!T(A) erred in deleting the addition of Rs. 21,33,805/- made on account of by treating the same as non-business expenditure and also u/s 40(a)(i) and further erred in holding that the entire amount paid to Chadha power (SA) Pty. Ltd on account of reimbursement of expenses is not backed by commercial expediency. iv) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that the reimbursement expenses can be reasonably attributed as 'fee for management services' and as per the provisions of section 40(a)(i) any amount paid to a non resident is not deductable as an expense if the requisite TDS under Chapter -XVIIB has not been deducted and paid. v) On the facts and circumstances of the case, the Ld. CIT(A) erred in not appreciating the fact that It is only if the business or profession is carried outside India, 'Fee for technical/manag....
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.... Dubai for the year ending 31.12.2012, revealed that the said entity earned gross income of 1,483,450 AED, out of which sales were 980,664 AED and management fee of Rs. 502,786 AED. Against this, revenue expenses have been shown at 526,718 AED, Finance cost of 1148 AED and net profit of 792,674 AED. The amount of management fees aggregating to 502,786 AED was in the form of reimbursement of expenses by Chadha Power, India to Chadha Projects JLT, Dubai with a 10% mark-up. After considering the assessee's detailed reply, the AO held that entire amount paid to Chadha Projects JLT, Dubai on account of reimbursement of expenses is not backed by commercial expediency and, therefore, needs to be disallowed. He further disallowed that said expenditure has to be examined from another dimension i.e. the amount is paid to a non-resident and, therefore, provisions of section 40(a)(i) is applicable because TDS is not deducted and paid. The observation of AO in this regard is as under:- " However, in the reply dated 23.03.2016 it is stated that the assessee firm was benefited by Chadha Projects JLT by securing a work order worth INR 14 crores by ZPC, another work order of Rs. 14 crores ....
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.... Accordingly, a disallowance allowance of Rs. 1,30,51,568/- is being made. Further, the allowability of expenditure of Rs. 1,30,51,5681- needs to be examined from another dimension i.e. deduction and deposit of withholding tax. As per the provisions of section 40(a)(i) any amount paid to a non-resident i.e. Chadha Projects JLT in the present case, is not deductable if the requisite TDS under Chapter-XVIIB has not been deducted and paid. In the present case, the so-called support services provided by Chadha Projects JL T to the assessee firm is in the nature of fee for technical services since the socalled work order procured by Dubai entity for the benefit of the assessee firm have been executed from India. Therefore, the support services so provided have been utilized in India and hence the income of Chadha Projects JL T for providing such services is taxable in India. Since no withholding tax has been deducted on such payment reimbursed to Chadha Projects JL T along with mark up of 10% the said expenditure needs to be disallowed as per the provisions of section 40(a)(i) of the I. T. Act, 1961 ..." 6. He has also disallowed similar expenses of Rs. 21,33,805/- paid by the assess....
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....eimbursements to Dubai and South Africa entities Detailed write ups on the two entities at Dubai and South Africa Brief summary of benefits derived from operations of these entities Supporting the case of commercial expediency - their role in tendering and procurement of new business / contracts Comprehensive justification for setting up of these entities Further, the copies of the following documents were filed at the appellate stage as well as submitted to have filed them at the assessment stage - Note on activities of the Dubai entity vis-a-vis the appellant's business - negotiating and procuring orders Certificate of Registration of Dubai entity (dated 1610112012) - trading in power generation, transmission and distribution equipment - the appellant's primary line of business Support Service Agreement with Dubai entity (dated 8/03/2012) - compensation package - reimbursement of expenses with 10% markup Statement of detailed reimbursement of expenses of Dubai entity (A Y 2013-14) Documents and invoices - evidence of logistical support service by Dubai entity in procuring material for Zimbabw....
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....12) - Infrastructure Partnerships for African Development - coordination by CPSAPL Getting ECSA (Engineering Council of South Africa) accreditation - coordination by CPSAPL Contract for City Power in Johannesburg - contract bid failed - coordination by Dubai and SA entities 5.1c From the above documents including e-mails etc., it can safely be inferred that the appellant's two subsidiaries set up in Dubai (UAE) and South Africa assisted it in its business development - coordination as well as follow up in procurement of business (orders / bidding for contracts) in Africa in line with the appellant's business - supply, installation, commissioning and maintenance of DG sets, power equipment and its spares / accessories (as already mentioned). However, in the impugned order, despite scrutinizing all the above submissions I documents, the aforementioned additions were made therein rejecting the appellant's contention of 'commercial expediency' - reimbursement of expenses with a 10% mark-up." 8. Thereafter, the ld. CIT (A) has referred to the principles laid down by Hon'ble Supreme Court in the case of SA Builders Ltd. reported in 288 IT....
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..... is not backed by any commercial expediency .... .. Examining the allowability from the dimension of the provisions of section 40(a)(i) here also no withholding tax has been deducted and therefore the same argument as afore stated in the case of Chadha Power JLT would apply and from this angle also the expenditure will get disallowed ..." From the above portion of the impugned order, it is observed that the reasons for the aforementioned disallowance is the inability of the appellant to substantiate its claim for reimbursement of expenses and that no TDS was made thereon u/s 40(a)(i). 5.3a It is gathered from the appellant's submissions at para 4 above that even in this case, similar disallowance of the appellant's claim of reimbursement of expenses along with 10% markup to M/s. Chadha Power SA (Pty.) Ltd. (South Africa) has been made as was made in respect of the appellant's claim towards M/s. Chadha Projects JL T (Dubai) on the reasoning that the appellant could not substantiate its claim at the assessment stage. Also, no TDS was made on the aforesaid payment made by it u/s 40(a)(i). 5.3b In the preceding sub-para from 5.1 through ....
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....come of the assessee firm on account of diversion of income. Penalty proceedings u/s271(1)(c) of the I.T. Act are separately initiated. [Addition of Rs. 1,07,70,378/-]" 11. Ld. CIT (A), after considering the entire documents as well as the replies and explanations given before AO and him, he held that Dubai entity is an independent entity incorporated under the laws of UAE as observed from the relevant documents filed on record. The said company has earned profits of 7,92,674 AED which included AED 63,961 as mark-up. He held that there is no evidence to prove that that the arrangement of reimbursement of expenses along with markup is sham and there is nothing on record from where any adverse inference could be drawn. Therefore, he has deleted the said addition made by the AO. 12. We have carefully considered the submissions and gone through the impugned order as well as material placed on record. Insofar as disallowance of reimbursement of expenses made to two non-resident entities i.e. Chadha Projects JLT, Dubai of Rs. 1,30,51,568/- and Rs. 21,33,805/-to Chadha Power (SA) Pty. Ltd., South Africa. The assessee's case has been that the said reimbursement of expenses o....