TaxTMI 
TaxTMI 
2026 (9) TMI 1300
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....d three (3) branches outside India, whose details are noted to be as follows: 3. For the year under consideration, the assessee had filed its return of income on 12.03.2022 declaring a total income of Rs.65,47,28,850/-. The case of the assessee was selected for scrutiny and thereafter referred to the Transfer Pricing Officer ('TPO'). The TPO passed an order u/s.92CA of the Income Tax Act, 1961 (hereinafter referred to as `the Act') dated 17th October 2023 proposing an upward adjustment to the tune of Rs.25,17,564/- on account of interest on outstanding trade receivables from the foreign Associate Enterprises ('AE'). Subsequently, the AO is noted to have passed the draft assessment order u/s.144C r.w.s.143(3) of the Act dated 29.12.2023 proposing the following additions/disallowances: Particulars Amount (in Rs.) 1. Disallowance u/s 40(a)(i) Nature of transaction Name of the related party and country of location Amount (in Rs.) 68,11,29,132 a) Expenses for services rendered i) Expleo Solutions Pte. Ltd. (Singapore) 11,51,69,480 ii) Expleo Solutions UK Ltd. (UK) 17,75,45,214 iii) Expleo Solutions Inc. (USA) 4,94,84,670 ....
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....0(a)(i): a. The DRP erred in confirming addition of rupees Rs. 68,11,29,132/- u/s 40(a)(i) on account of non-deduction of tax at source in respect of payments made to the subsidiaries and associate companies abroad towards services rendered by them to third parties abroad and reimbursement of expenses incurred by them abroad in the course providing services to third parties abroad without appreciating the arguments of the Appellant. b. The DRP has not appreciated the business pattern of the Appellant and has concluded that payment to subsidiaries and associate companies are in the nature of "Fees for Technical Services" (FTS) requiring tax to be deducted at source in view of sec 9(1)(vii) ignoring the provisions of the DTAAs and exclusion under sec 9(1)(vii)(b). c. The DRP should have appreciated that what was paid to the subsidiaries and associate concerns were in respect of the services rendered by them to 3rd parties abroad and the amount payable to the Subsidiaries and Associates by Non-residents for services rendered abroad. Hence no part of the income accrues or taxable in India. Consequently, no tax needs to be deducted at source in respect of paym....
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....al proceedings. 6. At the outset, the Ld.AR of the assessee Shri Vikaram Vijayaraghavan, Advocate, assailing the action of the AO/DRP disallowing Rs.68,11,29,132/- u/s.40(a)(i) of the Act submitted that the lower authorities had made the impugned disallowance without giving proper opportunity to the assessee to substantiate the underlying transaction for which the payments made to its Associated Enterprises (AEs). Drawing our attention to Para No.9.2 of the draft assessment order dated 29.12.2023, he pointed out that, the AO had given show cause only on 28.11.2023 requiring the assessee to explain as to why the related party payments to the tune of Rs.68,32,10,511/- should not be disallowed on account of non-deduction of TDS u/s.40(a)(i) of the Act. The assessee had claimed that the TDS was not applicable for the aforesaid transaction for the following reasons: a) For all the transactions including reimbursements - it was submitted that the payments were not taxable in India under the relevant DTAAs owing to: ● the "make available" condition in the definition of FTS under the DTAAs with the USA, UK, Singapore, and Netherlands, and ● the abs....
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....bmission made by the assessee w.r.t transaction amounting to Rs.20,81,379/- with Expleo Technologies is found to be acceptable. 9.2.3 The submissions made by the assessee with regard to balance amount of Rs.68,11,29, 132/-(Rs.68,32,10,511 Rs.20,81,379) have been considered carefully and the same does not appear satisfactory. The assessee has also relied on various case laws. In this regard, it is pertinent to mention that the provision of the Income Tax Act must be applied with reference to the facts and circumstances of each case. 9.2.4 In view of the above discussion, the addition of Rs.68,11,29,132/- u/s. 40(a)(i) of the Act is made to the total income of the assessee. (emphasis supplied) 8. It was brought to our notice that, the DRP confirmed the action of the AO by holding as under: 7.2 Panel: The relevant section is as under Section 9: Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India- (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect ....
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....will become redundant. In the case of ACIT Vs Evolv Clothing Company Ltd, the Chennai Tribunal held that payments made by the assessee for availing services to its overseas entity not having PE in India, with deducting tax could be disallowed under section 40(a) (i) of the Act. Accordingly, with respect to the cost to cost reimbursements to related parties in UAE and Egypt, the Panel is of the opinion that taxes should be withheld for the reimbursement of expenses. Grounds rejected. As regards the payments made to wholly owned subsidiaries in the USA, UK, Singapore or the Netherlands, the assessee submitted that it has customers both in and outside India. With respect to the customers outside India, the service is required to be rendered on site as well i.e., the location of the customer which is outside India. In such cases, wherever, the applicant has its wholly owned subsidiaries or other group companies outside India, such work which is required to be done on site is carried out by such wholly owned subsidiaries / group companies as per the service agreement and also certain costs are reimbursed on cost-to-cost basis. The assessee contended the payments made to the rel....
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....nt along with its UK subsidiary and copy on invoices raised by the UK subsidiary on the customer 159-186 7 Service Agreement between Appellant and its UK Subsidiary 187-195 8 Service Agreement between Appellant and its UAE Subsidiary 196-203 9 Copy of the ITR filed in the USA for the USA Subsidiary 204-233 10 Copy of the ITR filed in the UK for the UK Subsidiary 234-244 11 Copy of the ITR filed in Singapore for the Singapore Subsidiary 245-248 12 Copy of the Financial Statement of the UAE Subsidiary 249-263 13 Reimbursement Debit Notes issued by the USA Subsidiary along with back to back invoice copies 264-298 14 Reimbursement Debit Notes issued by the UK Subsidiary along with back to back invoice copies 299 - 341 15 Employee secondment Agreement between the appellant and Fayafi Infomatic Co. LLP, UAE 342-348 16 SOW for transactions with Expleo Technology Egypt 349-354 17 Order of the Hon'ble ITAT in Aspire Systems India (P.) Ltd [2023] 157 taxmann.com 699 (Chennai - Trib.) 355-368 10. Therefore, he prays that the additional-evidences (supra) may be admitted for delivery of ....
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....rder. This ground is therefore allowed for statistical purposes. 12. The next ground agitated by the assessee is against the transfer pricing adjustment on account of interest on outstanding trade receivables to the tune of Rs.18,67,077/-. The facts as noted are that, the TPO had treated outstanding receivables exceeding thirty (30) days as interest-free loans. It was reasoned that, an independent third party in an uncontrolled situation would have sought compensation for the delay payment of receivables. The TPO calculated the interest rate to be 4.186% (LIBOR 0.686 + 350 BPS) and computed the interest on invoices outstanding beyond thirty (30) days at Rs.25,17,464/-. Pursuant to the directions of the DRP, the TPO is found to have re-calculated the interest with reference to individual invoice-wise delay in days and accordingly arrived at the final transfer pricing adjustment of Rs.18,67,077/-. Aggrieved by the same, the assessee is now in appeal before us. 13. Assailing the action of the lower authorities, the Ld. AR contended that, the assessee, likewise, had also not charged any interest on its outstanding receivables from its non-AEs and therefore it was unjustified to h....
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....ranted in the hands of the tested party. The relevant extract of the decision of the Tribunal is reproduced as under: "15.1 It is brought to our notice that the assessee is a debt free company. In such circumstances it is not justifiable to presume that, borrowed funds have been utilized to pass on the facility to its AE's. The revenue has also not brought on record that the assessee has been found paying interest to its creditors or suppliers on delayed payments. 16. In lieu of the discussions and the ratio laid down in the case of Kusum Healthcare Pvt. Ltd., we direct that no separate adjustment for interest on receivables are warranted in the hands of the assessee. Grounds no. 3 of the assessee's appeal is there by allowed." 11.5 On appeal by the Revenue, against the above order of the Tribunal, the Hon'ble Delhi High Court (ITA No. 379/2016) in order dated 21/07/2016 dismissed the appeal observing as under: "4. As far as question (B) concerning the adjustment for interest no receivables, the Court finds that the ITAT has returned a detailed finding of fact that the Assessee is a debt free company and the question of receiving any ....