Western India Regional Council of
The Institute of Chartered Accountants of India

(Setup by an Act of Parliament)

September 24, 2019

CA. Hinesh Doshi, CA. Ronak Soni

Knight Frank (India) (P.) Ltd vs. Assistant Commissioner of Income Tax, [2019] 107 taxmann.com 363 (Mumbai-Trib.) dated 12th June, 2019

Facts:

The assessee company, engaged in the business of rendering international real estate advisory and property management services. The assessee paid referral fees to US concern, Newmark for introducing clients to it without deduction of TDS at the time of making such payment.

AO was of the view that irrespective of the fact that the foreign concern had a residence or place of business or business connection in India and that whether or not foreign company had rendered services in India or not, the amount of referral fees would be taxable in the hands of said foreign concern in India. Thus, the Assessing Officer disallowed the referral fees under section 40(a)(i).

On appeal, the Commissioner (Appeals) upheld the said disallowance.

Aggrieved, the assessee filed appeal before the Tribunal.

Issue:

Whether there would be obligation upon the assessee to deduct TDS u/s. 195 on payment made to foreign company?

Whether the referral fees could only be brought to tax in USA in absence of PE?

Held:

ITAT held that the services rendered by the foreign concern for introducing a client did not “make available” any technical knowledge, experience, skill, know-how or processes to the assessee and did not fall under “Fees for included services” as per Article 12 of India-USA, DTAA.

ITAT held that the payment made to the foreign concern for the services which were rendered entirely in USA constituted business profits as per Article 7 of India-USA DTAA. The said foreign concern cannot be taxed in USA in the absence of PE in India.

ITAT held that no obligation for deduction of TDS was cast upon the assessee and thus ruled in favor of the assessee.

M/s. Braitrim UK Limited vs. DCIT (IT)-1(3)(2), Mumbai [TS-502-ITAT-2019(Mum) dated 21st August, 2019

Facts:

The assessee, a UK based foreign company, engaged in the business of supplying world class hangers. The assessee entered into agreements with various global retail chains and due to such arrangement gave rebate/discount to the retailers based on the volume/units of sales achieved by its group and subsequently, the proportionate share of rebate/discount is recovered from the group companies based on the relative sales of those group companies.

During the impugned years, the assessee received such reimbursements from its Indian subsidiary as well which were treated as mere re-imbursement of administrative charges not taxable in India.

AO treated these receipts as royalty. Aggrieved, the assessee has filed appeal before Mumbai ITAT.

Issue:

Whether the remittances received by the assessee should be treated as reimbursement of expenses or as royalty?

Held:

Referring to the Cost Reimbursement Agreement laying down the nature, purpose and mode of computation of the payments (reimbursements), inferred that the payments would be in the nature of reimbursement of the rebate/discount passed on by the assessee to the retailers.

ITAT noted that there is no mark-up retained by the assessee while recovering the rebate/discount from the Indian subsidiary and no discount/rebate or administrative charges are payable to the assessee in case of sales made by Indian subsidiary to other independent parties.

ITAT noted that the reimbursements are in respect of specific and actual expenses incurred by the assessee and do not involve any mark-up and the assessee had furnished sufficient evidence to demonstrate the incurrence of expenses.

Relying on SC decision in AP Moller and HC decision in Siemens Aktiongesellschaft, ITAT concluded that the payments qualify as a pure reimbursement of expenses and accordingly, not taxable in India.

ITAT thus ruled in favor of the assessee.

Hind Energy & Coal Benefication (India) Ltd vs. ITO (International Taxation & Transfer Pricing [TS-493-ITAT-2019 (Ind] dated 21st August, 2019

Facts:

The assessee company, imported coal from non-resident suppliers through agent based in India and made remittance to non-resident suppliers without deduction of TDS u/s 195 of the Act.

AO held that there exist “business connection” as well as “PE” as per Article 5 of respective treaties w.r.t profits earned by non-resident suppliers. The assessee defaulted u/s 201(1) and 201(1a) of the Act due to non-deduction TDS u/s195 of the Act.

CIT (A) upheld the order of AO. Aggrieved, the assessee appealed before Indore ITAT.

Issue:

Whether TDS is applicable on payment made to non-residents for coal imports through agent in India?

Whether the agent and its activities as agent constituted the business connection for the non-resident suppliers?

Held:

ITAT perused the entire process of procurement adopted by assessee for import of coal, invoices, emails exchanged. ITAT found that the agent merely acted as broker and did not have full authority to negotiate and finalize the rate of coal.

ITAT observed that the assessee had directly entered into contracts with NR suppliers on a principal to principal basis, which were executed outside India.

ITAT also observed that agent did not have any stock in hand and no direct sales were made by it.

ITAT further observed that non-resident suppliers or their representatives did not appear in the shareholding pattern or panel of directors of the agent.

ITAT held that the agent is an Independent agent under the proviso to section 9(1) of the Act which provides that ‘business connection shall not include any business activity carried out through a broker/agent commission agent or any other agent having an independent status if such broker, agent, commission agent having an independent status is coming in the ordinary course of his business’.

ITAT held that since no business connection was established of the non-resident suppliers in India for the purpose of computing income as per section 9(1) of the Act, there was no PE of non-resident suppliers in India.

ITAT further held that no income was deemed to accrue or arise in India of the non-resident supplier in India and thus TDS default on the deemed profit was uncalled for.

ITAT deleted the demand created by AO and thus ruled in favor of assessee.

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