TaxTMI 
TaxTMI 
2025 (5) TMI 1709
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....g the total income at Rs. 5,38,33,130. 5. The AO has erred in raising a demand of Rs. 42,84,572. 6. The AO has erred in initiating penalty proceedings u/s 270A of the Act. 7. Any other grounds that may be urged at the time of hearing. 3. Ground No.1 and 2 are general in nature and does not require any specific adjudication. Even the assessee has not brought anything in support of these grounds to show that the order passed by the AO in pursuance to the directions of the DRP is bad in law. 4. Ground No.3 to 5 are regarding disallowance of business development and marketing expenditure u/s 40(a)(i) for want of TDS. The assessee claimed expenses of Rs. 1,98,77,458/- towards Head Office business development expenses. The assessee is a branch office/PE of a foreign company located in USA. The assessee is engaged in the business of rendering professional consulting services in civil infrastructure to the Governments, PSUs, governmental organizations and is largely focused on construction of roads and highways. In the draft assessment order, the AO proposed disallowance of these expenses u/s 40(a)(i) of the Act on the ground that the assessee failed to ded....
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.... these expenses as general administrative expenses, falling within the ambit of section 44C of the Act and disallowed the same while passing the assessment order. The assessee challenged the action of the AO and this Tribunal vide order dated 16.10.2024 for the A.Y.2020-21 remanded the matter to the record of the AO for proper verification and adjudication. For the year under consideration the AO has correctly held that the services are technical in nature both in the draft assessment order as well as in the remand report, but erroneously, made an observation that these technical services are made available to India PE office to secure and execute contract in India and such technical services are liable to tax in India. The Ld.AR has submitted that since the payment does not fall under the fee for technical services as per the Article 12 of Indo-US DTAA, therefore, the same is not chargeable to tax in India and consequently the disallowance made by the AO u/s 40(a)(i) is unjustified and liable to be deleted. She has also referred to the protocol of Indo-US DTAA, where, some illustrations of make available is given to clarify the term "make available" employed in the Article 12 of I....
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....erm "fee for technical services" as per the definition u/s 9(1)(vii) of the Act as well as the definition provided in Article 12 of Indo-US DTAA. So far as the term "fee for technical services" provided in section 9(1)(vii) of the Act is concerned, the assessee has not disputed that the payment in question falls in the category of fee for technical services, which is an income in the hand of the US company arising in India. Even otherwise, as per explanation 1 and 2 of section 9(1)(vii) makes it clear that the fee for technical services means any consideration for rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel. The assessee has strongly raised upon the definition of FTS provided in Article 12 of Indo-US DTAA. For ready reference, Article 12 of Indo-US DTAA is reproduced as under : ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the C....
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.... 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 of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (....
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....ces paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the convention. 8. Thus, if the payment is found to be in the nature of fee for technical services, then the same is liable to be taxed @15% of gross amount of the payment in case if the fee is paid by the Government of the contracting state and @20% in other cases for the duration of first 5 years and thereafter 15% of the gross amount of such fee. A similar corresponding provision is also made in the Act in section 44DA of the Act and therefore, the contention of the assessee that this payment does not involve any element of profit or mark up but, it is only the reimbursement of the expenses incurred by the Head Office towards providing the services would not hold good, when the payment itself is liable to be taxed at gross amount basis. The assessee has not produced any communication between the assessee PE and the Head Office to throw some light a....
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....raphy, end user, human resources, products and services to be rendered, time for execution etc." 12. Assessee's contention that the service rendered by the assessee is 'project based' is not disputed by the Revenue. Thus, in substance, the Indian entity seeks the opinion of its one of the group companies based in USA to review the risk factor involved in the particular project. The DRP has also recorded that Minutes of Meeting is circulated to the whole team which contains the issues discussed and action to be taken to mitigate the risks involved in executing the project and based on such discussion, the working team of Indian company makes necessary changes in the proposed project and the bid is submitted to the proposed customer for evaluation. 13. Thus, it is clear that the fee paid is for the evaluation of risk factor by the assessee company which is based in USA. Though it was argued by Shri Aravind that the results of such activities are made available to the other entities with ABB group, we may record the explanation given by Shri Suryanarayana that the word 'made available' used in portion of the agreement extracted in Para 6.7 of DRP&....
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....he DRP proceedings, produced additional evidences. Therefore, the Panel forwarded the same to the AO calling for a remand report. In response, the AO submitted his/her remand report dated 21.11.2024 vide email dated 27.11.2024. The relevant extract of the remand report is produced here as under: The assessee in response to the show cause notice, replied that the dedicated team works towards pre-bid and post-bid functions for the assessee's projects in India and the payments by the Indian PE to the dedicate teams in Head Office, USA caimed as business development expenses. The services provided by dedicated team from USA involves identifying and choosing projects, analyzing technical feasibility, making technical presentation, price negotiations etc. requires lot of technical knowledge and skills considering the business in which the assessee operates and the activities performed by US ofice are not really business development but are technical in nature. These technical services are made available to India PE office to secure and execute the contract in India and such technical services are chargeable to India in India as per circular No. 649, dated 31-3-1993 hence the....
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....penses should not be categorized as fees for technical services (FTS) and hence are not subject to tax u/s. 195. The Assessee further argues that the expenses were incurred for business operations and should be allowed as deductions under normal business principles. 2.2.4 With regard to the classification of the payments as business development expenses, the Panel observes that the nature of the services rendered by the Head Office team involves technical analysis, feasibility studies, project presentations, and negotiations. These activities require a significant level of technical expertise and directly contribute to securing and executing contracts in India. Therefore, the characterization of these payments as business development expenses is not substantiated. The services rendered align with the definition of FTS under Article 12 of the India-USA DTAA, as they make available" technical knowledge and skills to the India PE. 2.2.5 Furthermore, the Panel notes that Circular No. 649, dated 31-03-1993, explicitly states that payments for technical services by a branch office in India to the Head Office are taxable in India. The Assessee's argument that these p....