Ita/214/2014 Of The Director Of Income Tax v. M/S Abbey Business Services India Pvt Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 1 DAY OF DECEMBER 27070PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD BETWEEN: ILT.A. NO.214 OF 2014 1.|THE DIRECTOR OF INCOME-TAX. INTERNATIONAL TAXATION. RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE. 2.|THE DY. DIRECTOR OF INCOME-TAX. (INTERNATIONAL TAXATION)|CIRCLE -1 (1)RASHTROTHANA BHAVANNRUPATHUNGA ROADCIRCLE -1 (1)RASHTROTHANA BHAVANNRUPATHUNGA ROAD BANGALORE. (BY SRI.K.V.ARAVIND, ADV.,) .., APPELLANTS. AND" M/S ABBEY BUSINESS SERVICES INDIA PVT. LTD.THE RESIDENCY, 7TH FLOOR.133/1, RESIDENCY ROAD.BANGALORE - 560 O25. .., RESPONDENT (BY SRIL.HIMANSHU SHEKHAR SINHA ADV. FORSRI.R.V.GOUTHAM ADV.SRI.BHUWAR DOOPAR ADV.|SRI.YASH VERMANI ADV. ) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961L ARISING OUT OF ORDER DATED 20.12.20L3 PASSED IN ITANO.1029/BANG/2013 FOR THE ASSESSMENT YEAR 2005-06,PRAYING TQ: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED ABOVE.(11) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.OASSED BY THE INCOME TAX APELLATE TRIBUNAL, BANGALOREIN|LIANO.1029/BANG/2013.DATED20.17.2013.DATED20.12.2013 AND CONFIRM THE ORDER OF THE APPELLATE.COMMISSIONER CONFIRMING THE ORDER PASSED BY THE.DEPUTY DIRECTOR OF INCOME TAX, CIRCLE - 1(1), BANGALORE. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY,|ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short)has been preferred by the revenue. The subject matter|of the appeal pertains to the Assessment year 2005-06.The appeal was admitted by a bench of this Court videorder dated 12.01.2016 on the following substantialquestions of law:| (1)WhetherIn|thefactsandcircumstances of the case, the tribunal Is justified in law in holding that the assesseecannot be held as ‘assessee in default’ under|Section 201(1) of I.T. Act even when the. proceedings initiated by revenue under said|provision is in accordance with parameters ofsaid section?| (il)WhetherIn|thefactsandcircumstances of the case, the tribunal Is justified in law in holding that the assesseecannot be held as ‘assessee in default’ under|Section 201(1A) of I.T.Act even when the.proceedings initiated by revenue under said|provision is in accordance with parameters ofSaid section?| (111)WhetherOf)thefactsandcircumstances of the case, the tribunal Is rightin holding that the payments made by|assessee to Abbey National Pic, UK are not.liable for deduction of [DS under Section 195|of the I.T. Act and as such invoking of Section 40(a)(i) by assessing authority is not proper|even when the nature of transactions andmaterials available on record established that|paymentsmadeby aSSCSSCECCO Abbey|National Pic, UK, can be categorized as feesfor tecnnical services’ under Section 9(1)(vii) of the Act and as such liable for Geduction of| TDS under Section 195 of the Act?| (iv)Whether.Of)thefacts|andcircumstances of the case, the tribunal Is rightin law in holding that the assessee cannot beheld as ‘assessee [in defau/t under Section201(1) of the Act’ even when the assessing|authority after considering the particulars|furnished by assessee, passed order under|Section 201(1) of the I.T. Act holding that|services rendered by Abbey UK to Abbey,|India are in the neture of Technical Services|as per Section 9(1)(vil) Explanation 2 Article13(4)(c) of the India - UK Double Taxation|Agreement (for short DTAA)? 2.|TnefactualDackground,In|WNICcntheaforesaid substantial questions of law arise for ourconsideration needs mention. [Tne assessee is an InaianCOM padNincorporatedOn|22.01.7004|undertheCompanies Act, 1956. It is a subsidiary of ANITCO Ltd. a.group company of Abbey National Pic, UK (nereinafterreferred to as ANP for snort). ANP had entered into aagreementOn)07.11.2003|WwitnAbbey,India.CO 2.|TnefactualDackground,In|WNICcntheaforesaid substantial questions of law arise for ourconsideration needs mention. [Tne assessee is an InaianCOM padNincorporatedOn|22.01.7004|undertheCompanies Act, 1956. It is a subsidiary of ANITCO Ltd. a.group company of Abbey National Pic, UK (nereinafterreferred to as ANP for snort). ANP had entered into aagreementOn)07.11.2003|WwitnAbbey,India.CO outsource the provision of certain process and callcenters to M/s Msource India Pvt. Ltd. Under the.agreement, Msource India Pvt. Ltd was required to|provide high quality services which supports the positionof ANP and its affillates as well as to customers in UK In!order to ensure that high quality services were providedby Msource India Pvt. Ltd, ANP entered into aconsultancy agreement with the assessee on 04.02.2004in wnich description of services to be provided by tneassessee has been mentioned and for which the'assessee was to be compensated at cost plus 12% which.included depreciation Dut excluded exchange fluctuation|loss. In order to. facilitate outsourcing agreementpetween ANP and Msource India Pvt. Ltd. an agreement.for secondment of staff was entered into between ANP|and the assessee on 04.02.2004. For deputation of itsemployees, Abbey, India had made certain payments to.AbbeyUK|and|ANP.part|ofwhichWaSsalaryreimbursement on whnicn tax was deducted. Tne assessee filed an application under Section 195(2) of the.Act seeking authorization for payments to non residents.without deduction of tax vide communication dated|22.06.2005 before the Assessing Officer. The AssessingOfficer by an order dated 31.03.2006|inter allaheld thatthe application under Section 195 was filed much afterthe date of credit of the sums to the accounts of the'payee and considered the application asnon est' anddisposed of the same without adjudicating the claim ofthe assessee on merits. The assessee thereupon filed a_petition under Section 264 of the Act before Director ofIncome Tax who rejected the petition preferred by the|aSSe@SSAEC 3.)Tnereafter, the Assessing Officer neard theassessee and found that assessee had deducted tax onlyon an amount of Rs.16,62,04,340/- and did not deducttne tax on the balance amount of Rs.10,91,02,/24/-.The Assessing Officer vide order dated 07.07.2010Interallaneld tnat as per the agreement, the employees ot | ANP were seconded to India who were highly skilled in technical personnel and ANP had agreed to providetraining to some of the employee of MSourcE. It was|further held that the assessee's claim that there was nexus between ANP and the provision of servicesrendered by the expatriates is not correct as theemployees were on the payroll of ANP and ANP was.involved in providing technical services. The Assessing|Officer held that amount of Rs.10,91,02,/724/- wastowards payment of fees for technical services’ as perSection 9(i)(vil) of the Act, Explanation 2 and Article13(4)(c)Of Indo-UK|DoubleTaxation|Avoidance|Agreement (nereinafter referred to as tne DTAA forsnort). © 4Being aggrieved, the assessee filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 15.02.2011 dismissed the appeal.Thereupon the assessee approacned the Income Tax.Appellate Tribunal (nereinafter referred to as tne tribunal’ for short) by filing an appeal. The tribunal by anorder dated 20.12.2013 inter alia by placing reliance on.its previous decision held that assessee has been able to.establish that payment made to non resident is nottaxable in India. It was further held that there was no/§Obligation on the part of the assessee to deduct the tax|at source on the payments made to ANP and therefore,the assessee cannot be treated as ‘assessee in default’|under Section 201(1) of tne Act. Accordingly, the orderlevying interest under Section 201(1A) of the Act was|quashed. In the result, the appeal preferred by theassessee was allowed. Being aggrieved by the order|passed by the tribunal, the revenue has approached this.court. tribunal’ for short) by filing an appeal. The tribunal by anorder dated 20.12.2013 inter alia by placing reliance on.its previous decision held that assessee has been able to.establish that payment made to non resident is nottaxable in India. It was further held that there was no/§Obligation on the part of the assessee to deduct the tax|at source on the payments made to ANP and therefore,the assessee cannot be treated as ‘assessee in default’|under Section 201(1) of tne Act. Accordingly, the orderlevying interest under Section 201(1A) of the Act was|quashed. In the result, the appeal preferred by theassessee was allowed. Being aggrieved by the order|passed by the tribunal, the revenue has approached this.court. 5.|Learned counsel for the revenue submittedthat the assessee is rendering technical services and|substance of the agreement instead of the form of theagreement has to be seen and from perusal of tneagreement, it is evident that the payment in question. has been made under Fee for Technical Services (FTS).It is further submitted that reimbursement is only amanner of computation for consideration towards FITSand the finding recorded by the tribunal is contrary to the judgment of the High Court of Delhi in.M/SCENTRICAINDIAOFFSHOREPVT.LTD,VS.COMMISSIONER OF INCOME TAX-I & ORS., W.P.(C)|No.6807/2012 dated 25.04.2014, in which’ similaragreement and similar services rendered by tneassessee were considered and the Special Leave Petition as well as Review Petition filed before the Supreme.Court was rejected and the aforesaid decision of the|Delhi High Court applies squarely to the facts of theinstant case. It is also submitted that key features of theagreement, wnicn Nas been entered into by the assessee|in the instant case are exactly similar, which is evident.from the order passed by the Commissioner of IncomeTax (Appeals) and the controversy has been now settledby the aforesaid Judgment of the Delhi High Court in M/S CENTRICA INDIA OFFSHORE PVT. LTD.SUDPId,in’ which Delhi High Court has considered all thejudgments on the issue involved in this appeal. It is pointed out that the issue pertaining to FITS and ‘makeavailable is adjudicated by the Delhi High Court in|paragraphs 24 and 30 and 32 respectively. 6.|It is also urged that the tribunal ought toNave appreciated that the order under Section 201 isstrictly in conformity with Section 201 of the Act and theAssessing Officer was well within his jurisdiction to pass|such an order. It is alSo pointed out that the order dated18.07.7012|passedDY|thetribunal In|I.T.A.No.1141(B)/2010 in case of the assessee py the.tribunal is subject matter of appeal filed by the revenue.before this court viz., I.T.A.No.420/2015 and the fate of|the aforesaid appeal would depend on the decision taken.by tnis court in this appeal. It is therefore urged that in.view of decision of Delhi High Court inM/S CENTRICAINDIA OFFSHORE PVT, LTD.|Supra the substantial| questions of law framed in this appeal deserve to be.answered in favour of the revenue. 7On the other hand, learned counsel for theassessee at the outset submitted that the order passedby the Assessing Officer is per se without jurisdiction as the Assessing Officer has assumed jurisdiction under|Section 201(1A) of the Act while examining the issue in|the light of the order passed by the Director of Income|Tax in the context of Section 195(2) of the Act. It is also.urged that since, the aforesaid issue is a pure question|of law and pertains to jurisdiction, therefore, the same|can be raised for the first time in this appeal. It isfurtner submitted that consequences for non deduction.of tax are provided in various provisions of the Act. In.this connection, our attention has been invited to.Section 40(a)(i) and Section 201 of the Act. It is furthersubmitted that the dispute in this appeal is limited onlyto the extent of expenses incurred by the assessee fornotel and traveling expenses to the tune of Rs.10.96. Crores and whether the same can be treated asexpenses for providing technical services. It is also.urged that decision rendered by High Court of Delhi in|M/S CENTRICA INDIA OFFSHORE PVT. LTD.SUDFadoes not apply to the facts of the case for two reasons,firstly, the court dealt with the issue of permanentestablishment in the aforesaid decision, secondly, theissue Involved in the aforesaid decision was whether.expenses incurred towards salary can be treated asexpenses for providing technical services. It is also|urged that High Court of Delhi while passing the|aforesaid judgment has not considered the decision|rendered by it in."DIT VS. HCL Info SYSTEM LTD./,|2/74 ITR 261 (DELHI 8 _It is also submitted that mere deputation ofthe employees doesn’t amount to making available|tecnnical Know-How. Learned counsel nas also invited|our attention to Articles 5, 7 and 13 of DTAA. It is urged.tnat|No|substantialquestionoflaw.arisesfor. consideration in this appeal and the matter standsconcluded by finding of fact, which have not been.demonstrated to be perverse. Lastly, it is urged that.there is no obligation to withhold tax on payments made|for reimbursement of costs incurred by a non residententerprise. In support of aforesaid submissions, reliance.Nas been placed on decisions in|'SREE MEENAKSHIMILLS LTD. VS. CIT’, (1957) 31 ITR 28 (SC), ‘CITVS. SIEMENS AKTIONGESELLSCHAFT', (2009) 310|ITR 320 (BOMBAY), ‘CIT VS. DUNLOP RUBBER CO.LTD., (1983) 142 ITR 493 (CALCUTTA), ‘DIT VS.WNS GLOBAL SERVICES (UK) LTD.', (2013) 32TAXMANN.COM 54 (BOMBAY), ‘DIT VS. KRUPPUDHE GMBH, (2013) 354 ITR 173 (BOMBAY), ‘CITVS. A.P.MOLLER MAERSK A/S, (2015) 374 ITR 497|(BOMBAY),'CUT|VS.SEEENTERTAINMENTENTERPRISES LTD.', ITA NOS.1107, 1117, 1174,OF 2015 & 126 OF 2016 (BOMBAY), DIT VS. HCL.INFOSYSTEM LTD, (2005) 274 ITR 261 (DELHI), — CIT VS. DE BEERS INDIA MINERALS (P.) LTD.',(2012) 346 ITR 467 (KAR), © IDS SOFTWARE.SOLUTTIONS (INDIA)(P.) LTD. VS. ITO’, (2009)122 TTI 410 (BANGALORE) & ‘DIRECTOR OFINCOME-TAX (INTERNATIONAL TAXATION) VS.MORGAN STANLEY & CO.', (2007) 292 ITR 416(SC). oiWe have considered the submissions made.by learned counsel for the parties and have perused therecord. Before proceeding further, it is apposite to take|note of Section 9(i)(viil) and Section 195(1) of the Act,which is reproduced below for the facility of reference: WD)(vil) income by way of fees’ fortechnical services13 payable by—_ (a) the Government; or| (b) a person who is a resident, exceptwhere the fees are payable in respect ofservices utilised in a business or profession.carried on by sucn person outside Inala or for.the purposes of making or earning any income.from any source outside India ; or (c) a person who Is a non-resident, wherethe fees are payable in respect of services.utilised in a business or profession carried on-by such person in India or for the purposes of.making or earning any income from any sourcein India : Provided that nothing contained in thisclause Shall apply in relation to any income by.way of fees for technical services payable inpursuance of an agreement made before theIst day of April, 1976, and approved by theCentral Government. Explanation 1.—For the purposes of theforegoing proviso, an agreement made on orafter the ist day of April, 1976, shall be.deemed to have been meade before that date ifthe agreement is made in accordance with.proposals approved by the Central Government|before that date. Explanation 2.—For the purposes of thisclause, ‘fees for technical services’ means any.consideration(includingdhhylumpSUNconsideration)for.therendering|OF|dhhy managerial, technical or consultancy services(including the provision of services of technicalor other personnel) but does not include|considerationforqdhiconstruction16,assembly, mining or like project undertaken by|the recipient16 or consideration which would.be income of the recipient chargeable under|the head "Salaries". Explanation 1.—For the purposes of theforegoing proviso, an agreement made on orafter the ist day of April, 1976, shall be.deemed to have been meade before that date ifthe agreement is made in accordance with.proposals approved by the Central Government|before that date. Explanation 2.—For the purposes of thisclause, ‘fees for technical services’ means any.consideration(includingdhhylumpSUNconsideration)for.therendering|OF|dhhy managerial, technical or consultancy services(including the provision of services of technicalor other personnel) but does not include|considerationforqdhiconstruction16,assembly, mining or like project undertaken by|the recipient16 or consideration which would.be income of the recipient chargeable under|the head "Salaries". 195(1) Any person responsible for payingto a non-resident, not being a company, or toa foreign company, any interest (not being.interest referred to in section 194LB or section|194LC) or section 194LD or any other sum.Chargeable under the provisions of this Act(not being income chargeable under the head“Salaries’) shall, at the time of credit of such.income to the account of the payee or at the.time of payment thereof in cash or by the issueof a cheque or draft or by any other mode,whicheverISearlier,deductIncome-texthereon at the rates in force -: 10. After having noticed the relevant statutoryprovisions, we may take note of relevant clauses of. DTAA. Article 5 of DTAA deals with ‘permanent:establishment. Article 5(2)(k) describes the expression|‘permanent establishment and furnishing of services|including managerial services, other than those taxable|under Section 13 within a Contracting State by an/enterprise through employees or other personnel. Article|7 deals with business profits and provides that profits ofa business of a Contracting State shall be taxable only intnat state unless the enterprise carries on Dusiness inother contracting state to a permanent establishment|situate therein. Article 13 inter alia provides thatprovisions of paragraphs 1 and 2 of this Article shall not|apply if the beneficial owner of the royalties or fees fortecnnical services, being a resident of a ContractingState, carries on business in the otner Contracting Statein which the royalties or fees for technical services arisethrough a permanent establishment situated therein, or performs in that other State independent personalservices from a fixed base situated therein, and the right, property or contract in respect of which the|royalties or fees for technical services are paid iseffectivelyconnected|withsuch|permanentestablishment or fixed base. 11. Now we may advert to the facts of the case inNand. From perusal of the relevant clauses of theagreement as well as the nature of services provided by the assessee under the agreement, it is evident that theassessee had entered into a secondment agreement for|securing services to assist assessee in its business. The|expenses incurred by the seconded employees whichwere reimbursed by the assessee is not liable todeduction to tax at source and the aforesaid amount|could not be considered as ‘fees for technical services’.|It is also pertinent to note that secondment agreement|constitutes an independent contract of services in.respect of employment with assessee. From the perusalof the key features of the agreement, which have been.reproduced by the Commissioner of Income Tax. 11. Now we may advert to the facts of the case inNand. From perusal of the relevant clauses of theagreement as well as the nature of services provided by the assessee under the agreement, it is evident that theassessee had entered into a secondment agreement for|securing services to assist assessee in its business. The|expenses incurred by the seconded employees whichwere reimbursed by the assessee is not liable todeduction to tax at source and the aforesaid amount|could not be considered as ‘fees for technical services’.|It is also pertinent to note that secondment agreement|constitutes an independent contract of services in.respect of employment with assessee. From the perusalof the key features of the agreement, which have been.reproduced by the Commissioner of Income Tax. (Appeals), it is evident that the seconded employees.have to work at such place as the assessee may instructand the employees have to function under the control,direction and supervision of the assessee and inaccordance with the policies, rules and _ guidelineapplicable to the employees of the assessee. Theemployees in their capacity as employees of theassessee had to control and supervise the activities ofMsource India Pvt. Ltd. Therefore, the assessee for all)practical purposes has to be treated as employer of theseconded employees. There is no obligation in law for|deduction of tax at source on payments made forreimbursement of costs incurred by a non residententerprise and therefore, the amount paid by tneassessee was not to suffer tax deducted at source UNCEerSection 195 of the Act. Similar view has been taken by.High Court of Delhi in HCL INFO SYSTEM LTD. supra inrespect of salaries paid to foreign tecnnicians on bDenalfof the assessee, 12. So far as reliance placed by learned counselfor the revenue on the decision otfM/S CENTRICAINDIA OFFSHORE PVT. LTD.Supra Is concerned, fromperusal of paragraph 29 of the aforesaid decision, it is evident that the High Court of Delhi considered the issue|whether the secondment of employees by BSTL andDEML, the overseas entities fall within Article 12 of)India, Canada and Article 13 of India, UK DTAAs, which.embodytheconcept.ofservicepermanentestablishment. In the instant case, the issue of.permanent establishment is not involved. Therefore, theaforesaid decision is not applicable to the fact situationof the case. In view of preceding analysis, tne substantialquestions of law framed by a bench of this court areanswered against the revenue and in favour of the.aSSeSSA2E. ������������������������������������������������������������������������������������������������ ������������ ��� �����������