TaxTMI 
TaxTMI 
2026 (6) TMI 358
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.... Ground 3: The AO erred in disallowing Backstopping Expenses Technical Support expense claimed amounting to Rs. 1,68,80,151/- Ground 4: The AO erred in disallowing Business Development Expense claimed amounting to Rs. 64,15,569/- Ground 5: The AO has erred in overlooking the Article 26 of India US DTAA and disallowing 100% of the backstopping expense technical support and business development expense u/s 40(a)(i). Ground 6: The AO has erred in disallowing 100% of the backstopping expense technical support and business development expense u/s 44C while both the expenses are project direct expenses. Ground 7: The AO has erred in assessing the total income at Rs. 5,08,61,997/- Ground 8: The AO has erred in raising a demand of Rs. 1,15,01,680/- Ground 9: The AO has erred in initiating penalty proceedings u/s 270A of the Act. Ground 10: Any other grounds that may be urged at the time of hearing" Apart from that, the assessee company has raised the following additional grounds of appeal: "1. Having disallowed Backstopping expense Technical Support expenses under section 44C of the Act, the AO erred in not co....
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.... BP". However, it was observed that the assessee company had claimed that the "Backstopping technical support" and "Business development expenses" were direct project-related expenses incurred for Indian operations and therefore outside the scope and ambit of Section 44C of the Act. The assessee company had claimed that the HO from its pool of business development and marketing team has dedicated designated team members based in the USA, viz., Jan Twarowski, Manish D Kothari, Anil Anumarlapudi, Ahmed Majdiyar, Almas Tasawar, Safi Ahmad, Seydi Fatou, Te'asia L. Capies, Jenphaniah Samwel, Paul Lord, and Mohammad Kaak, Corey Best, to take care of its Indian operations. Elaborating further, it was submitted that the job role of the said persons was to take care of the company's Indian operations, like identifying eligible projects, bidding for projects, designing, directing, supervising, and monitoring the project activities, etc., and the team so designated was responsible and accountable for the operations in India. Explaining the nomenclature of the expenditure, it was submitted by the assessee company, viz. (i). that the cost relating to the pre-bid and post-bid functions incurred ....
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....id not arise at all. 6. The AO was of the view that the aforesaid expenses represented executive and managerial services rendered by Head Office personnel outside India and accordingly constituted Head Office expenditure within the meaning of Section 44C of the Act. The AO further held a conviction that the payments also partook the character of fees for technical services ("FTS"), and since tax was not deducted at source on the subject payments under Section 195 of the Act, the same were liable to be disallowed under Section 40(a)(i) of the Act. 7. Accordingly, the AO, vide his draft assessment order passed under Section 144C(1) of the Act, dated 28/03/2025, based on his aforesaid deliberations, proposed to disallow, viz. (i) Backstopping Expenses Technical Support: Rs. 1,68,80,151/-; and (ii) Business Development Expenses: Rs. 64,15,569/- 8. Aggrieved, the assessee company filed objections before the DRP. The DRP, vide its order dated 29/12/2025, passed under Section 144C(5) of the Act, confirmed the additions/disallowances, holding that the services rendered by Head Office personnel were managerial and supervisory in nature and therefore fell within the scope and ambit ....
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....ome generation but only supported over all India operations from a management perspective. The Ld. AR submitted that a similar issue had come up before the Tribunal in the assessee's own case for the AY 2020-21 in ITA No. 423/Hyd/2023, dated 16/10/2024, wherein, after deliberations, the Tribunal, after drawing support from the judgment of the Hon'ble High Court of Bombay in the case of CIT vs. Emirates Commercial Bank Ltd. (2004) 134 Taxman 682 (Bom) and the order of a coordinate bench of the Tribunal in DDIT Vs. Samsung Engg. Co. Ltd. [2011] 43 SOT 38 (Mumbai) and certain other judgments/orders had observed that the expenditure incurred by the Head Office (HO) directly connected to the PE has to be allowed without subjecting the same to any ceiling under section 44C of the Act. Elaborating further on her contention, the Ld. AR submitted that the Tribunal, after deliberating on a similar set of facts on the subject issue as was involved in the case before them, had after taking cognizance of the time sheets maintained on a daily basis for each employee, etc., produced by the assessee company before them, principally concurred with the assessee company that the expenditure incurred ....
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....ed 22/05/2025 for AY 2022-23. 13. Elaborating further on her contention, the Ld. AR submitted that the subject reimbursements were made on a cost-to-cost basis without any markup, and, therefore, as no income accrued to the Head Office, no tax was deductible at source under Section 195 of the Act. Alternatively, the Ld. AR submitted that though the reimbursement by the assessee company to its Head Office (HO) were for the technical services provided by the aforesaid set of designated employees, but as no technical knowledge, skills or know-how was "made available" by the Head Office (HO) to the Indian operations, thus, as per the Article-12 of the Indo-US DTAA the same could not be brought within the meaning of 'Fee for Technical Services' (FTS) liable for deduction of tax at source under section 195 of the Act. However, the Ld. AR, on being confronted with the fact that the said issue, qua its liability for deduction of tax at source under section 194 of the Act, had been decided against it by the Tribunal vide its order passed in ITA No.1401/Hyd/2024, dated 22/05/2025 for AY 2022-23, failed to rebut the same. 14. The Ld. AR had further drawn our attention to the time sheets....
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....us, had rightly been brought within the meaning of Managerial Services by the AO/DRP. The Ld. CIT-DR, to buttress his contention that the true nature of the expenses must be determined in the backdrop of the doctrine of substance over form, had relied upon the judgment of the Hon'ble Supreme Court in the case of The Authority for Advance Rulings (Income Tax) and Ors. vs. Tiger Global International III Holdings (Civil Appeal No. 262 of 2026). The Ld. CIT-DR further submitted that as the services rendered constituted technical/consultancy services chargeable to tax in India, tax was deductible under Section 195 of the Act. Elaborating further on his contention, the Ld. CIT-DR submitted that in the absence of any tax having been deducted at source by the assessee company on the subject reimbursements, the disallowance u/s 40(a)(i) was rightly made by the AO. The Ld. CIT-DR had also relied upon the earlier order of the Tribunal for AY 2021-22, wherein the disallowance under section 40(a)(i) of the Act for failure to deduct tax at source under section 195 of the Act had been upheld by the Tribunal. 17. We have given thoughtful consideration to the contentions advanced by the Ld. Auth....
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....e was involved, had set aside the issue to the AO's file with an observation that if the subject expenses were exclusively incurred for the Indian project by the Head Office and were not in the nature of overheads, then such expenses are to be excluded from the purview of Section 44C of the Act. As brought to our notice, the AO, pursuant to the directions of the Tribunal, vide his order giving effect, dated 07/11/2025 for AY 2020-21, apparently without recording any specific reasons, has held the claim of the assessee company in order and vacated the entire amount of disallowances made by the AO/DRP, which, inter alia, comprised, viz. (i). Consultancy charges: Rs. 46,40,500/-; and (ii). Business development expenses: Rs. 1,81,67,730/-, Page Nos. 1187-1188 of APB. The Ld. AR has submitted before us that the subject expenses for the year under consideration pertain to the same set of employees as were present in the assessee's case for the preceding year, i.e., AY 2020-21. In our view, considering the aforesaid factual position, for the sake of consistency, we deem it apposite to set aside the matter to the file of the AO with a direction to verify as to whether or not the subjec....
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.... on the fact that the same does not fall within the meaning of "Head Office expenditure" as defined in the "Explanation" to Section 44C of the Act. At the same time, we may herein reiterate that, as per the judgment of the Hon'ble Supreme Court in Director of Income Tax (International Taxation) v. American Express Bank Ltd. (supra) even if the impugned expenditure was incurred wholly for Indian projects and operations, the same would nevertheless remain subject to the restriction contemplated under Section 44C of the Act once the expenditure answers the description of Head Office expenditure within the meaning of the said provision. Accordingly, the matter is set aside to the file of the AO, who is directed to verify, viz. (i). that as to whether or not the subject expenditure incurred by the Head Office for the Indian project falls within the meaning of "Head Office expenditure" as defined in the "Explanation" to Section 44C of the Act; and (ii). if the subject expenditure does not fall within the meaning of "Head Office Expenditure" as defined in the "Explanation" to Section 44C of the Act, then, while considering the allowability of the assessee's claim for deduction of the subj....
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....eceding year in ITA No. 1401/Hyd/2024 dated 22/05/2025 for AY 2022-23, wherein identical facts were involved, has upheld the disallowance made by the AO under Section 40(a)(i) of the Act for the failure of the assessee company to deduct tax at source on the payments made to the Head Office towards FTS by observing as under: 7. We have considered the rival submissions as well as relevant material on record. The assessee has admitted this fact that the payment is made to the Head Office towards services provided by the dedicated team of Head Office in identifying and choosing projects, analysing technical feasibility, making technical presentation, price negotiation etc. apart from the supervising and monitoring the project activities in India. The assessee has also accepted that these services are technical in nature and to that extent accepted the AO's finding that the services provided by the Head Office are technical in nature. The dispute before us is only whether the payment made by the assessee to the Head Office towards rendering these services falls in the term "fee for technical services" as per the definition u/s 9(1)(vii) of the Act as well as the definition prov....
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....der paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 4. For purposes of this Article, "fees for included services" means payments of ....
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....s, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship,....
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....the field and even provided the managerial services also while monitoring and supervising the project activities. The issue before the Hon'ble Karnataka High Court in the case of CIT Vs. ABB Inc. (supra) was only for rendering the technical and consultancy service to an Indian company. The Hon'ble High Court has held in para 11 to 14 as under: "11. We have carefully perused the above provision. It is applicable only if 'services' are made available. The word 'services' used is in plural and it is referrable to both technical and consultancy services. It is relevant to note that clause (b) which excludes fee for 'included services' is applicable to both technical and consultancy services. It is recorded by the DRP in Para 6.4 as follows: "The Indian company approaches the assessee company for risk evaluation of the proposed project and the prospective steps to be taken towards bidding process. Through a web based software "RISK REVIEW", the Indian Company submits the details of the proposed project which include the name of the project, customer details, geography, end user, human resources, products and services to be rendered, time for exe....
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....ds bidding process. The service of providing risk evolution of the project and prospective step towards bidding process was only in the nature of reviewing the proposed project of the Indian company by the US company. In the case in hand with limited material available before us and in the absence of the relevant communication if any, between the parties, we find that when the entire task of identifying, choosing projects, analysing technical feasibility, making technical presentation, price negotiations, monitoring, supervising of the projects are undisputedly technical services rendered by the US Head Office. Since these services were rendered in India therefore, falls in the terms of make available as per the Article 12 of Indo-US DTAA. It is not the case of seeking a review or evolution of the proposed projects but the entire services right from selecting the project to the bidding and completion of the projects are provided by the Head Office. The DRP has considered this issue in para 2.2.1 to 2.2.8 as under: xxx xx xxx 10. Thus, it is clear that the assessee was given another opportunity at the level of DRP to substantiate its claim that the payments do not fall i....