Principal Commissioner Of Income Tax, Delhi-2 v. M/S Boeing India Pvt. Ltd

$~1 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 71/2022 PRINCIPAL COMMISSIONER OF INCOME TAX, DELHI-2 ..... Appellant Through:Mr.Sanjay Kumar, Sr.StandingCounsel for the Revenue.Counsel for the Revenue. versus M/S BOEING INDIA PVT. LTD...... Respondent Through:Ms.Sachit Jolly with Mr.Rohit Garg,Ms.Disha Jham and Mr.Sphum Dua,Advocates.Ms.Disha Jham and Mr.Sphum Dua,Advocates. %Date of Decision: 11[th]October, 2022 CORAM: HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORAJ U D G M E N T MANMOHAN, J (Oral): C.M.No.15980/2022 Exemption allowed, subject to all just exceptions. Accordingly, the application stands disposed of. ITA No.71/2022 1.Present appeal has been filed challenging the order dated 17[th]August,2020 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITANo.9765/Del/2019 for the Assessment Year 2015-16. ITA No.71/2022 2.The appellant-revenue has suggested thefollowing substantialquestions of law:- “1.Whether on facts and in the circumstances of the case andalso on the prevailing law, Hon’ble ITAT is justified in allowingthe appeal of the assessee on the grounds that draft order framedu/s 144(c(1) of the Act is in the name of a non-existent companyandaccordingly,voidabinitio,makingallsubsequentproceedings non-est, ignoring the fact that final assessment orderhas been passed in the name of the new entity as per thedirections of Hon’ble DRP. 2.Whether on facts and in circumstances of the case andalso on the prevailing law, Hon’ble ITAT is justified in deletingaddition of Rs.22,16,059/- on account of receivables, which incontravention of the judgment of Hon’ble Delhi High court in thecase of Kusum Healthcare. 3.Whether on facts and in the circumstances of the case andalso on the prevailing law, Hon’ble ITAT is justified in allowingthe appeal of the assessee on disallowance u/s 40A(i) of theIncome Tax Act, 1961 ignoring the facts that the matter has beendecided in favour of Revenue in the case of Centrica IndiaOffshore India Ltd.364 ITR 336 before the Hon’ble HighCourt.” 3.Learnedcounsel for the appellant states that ITAT has erred inallowing the appeal of the assessee on the ground that the draft order framedunder Section 144C(1) of the Income Tax Act, 1961 (‘the Act’) was issuedin the name of a non-existing company and was accordingly void ab-initiomaking all subsequent proceedings non-est ignoring the fact that initialjurisdictional notice dated 16[th]March, 2016 under Section 143(2) of the Acthad been issued to the correct entity and the final assessment order dated29[th]October, 2019 had been passed in the name of the new entity as per theDirections of the Dispute Resolution Panel (DRP). ITA No.71/2022 4.He further states that the ITAT has erred in deleting the addition ofRs.22,16,059/- on account of receivables in contravention of the judgmentof this Court in Principal Commissioner of Income Tax vs. Kusum HealthCare Pvt. Ltd., (2017) SCC OnLine Del 12956, wherein it has been held asunder:- ITA No.71/2022 4.He further states that the ITAT has erred in deleting the addition ofRs.22,16,059/- on account of receivables in contravention of the judgmentof this Court in Principal Commissioner of Income Tax vs. Kusum HealthCare Pvt. Ltd., (2017) SCC OnLine Del 12956, wherein it has been held asunder:- “11.The court is unable to agree with the above submissions.The inclusion in the Explanation to section 92B of the Act of theexpression “receivables” does not mean that dehors the contextevery time of “receivables” appearing in the accounts of an entity,which may have dealings with foreign associated enterprises wouldautomatically be characterized as in international transaction.There may be a delay in collection of monies for supplies made,even beyond the agreed limit, due to a variety of factors which willhave to be investigated on a case to case basis. Importantly, theimpact this would have on the working capital of the assessee willhave to be studied. In other words, there has to be a proper inquiryby the Transfer Pricing Officer by analyzing the statistics over aperiod of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an associatedenterprise, the arrangement reflects an international transactionintended to benefit the associated enterprise in some way.”The inclusion in the Explanation to section 92B of the Act of theexpression “receivables” does not mean that dehors the contextevery time of “receivables” appearing in the accounts of an entity,which may have dealings with foreign associated enterprises wouldautomatically be characterized as in international transaction.There may be a delay in collection of monies for supplies made,even beyond the agreed limit, due to a variety of factors which willhave to be investigated on a case to case basis. Importantly, theimpact this would have on the working capital of the assessee willhave to be studied. In other words, there has to be a proper inquiryby the Transfer Pricing Officer by analyzing the statistics over aperiod of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an associatedenterprise, the arrangement reflects an international transactionintended to benefit the associated enterprise in some way.” 5.Leraned counsel for the appellant also states that the ITAT has erredin deleting the additions of Rs.56,58,19,799/- made by the Assessing Officerunder Section 40(a)(ia) read with Section 195 of the Act withoutappreciating that the assessee was clearly liable to deduct tax on thisexpenditure. In support of his submission, he relies upon the judgment ofthis Court in Centrica India Offshore Pvt. Ltd. vs. Commissioner ofIncome Tax and Ors., (2014) 364 ITR 336 (Delhi). 6.Having heard learned counsel for the parties this Court finds that theITAT in the impugned order has deleted the adjustment of Rs.22.16 lakhs onaccount of receivables holding as under:- ITA No.71/2022 “20.We have carefully considered the orders of the authoritiesbelow. The undisputed fact is that the assessee is a debt freecompany. It is also not in dispute that no interest was paid to thecreditor/supplier nor any interest has been earned from unrelatedparty. Moreover, being a 100% captive service provider, therevenue of the assessee is 100% from its AEs. In our consideredopinion, the question of receiving any intererest on receivables doesnot arise. Considering the facts of the assessee in hand, in totality,we do not find any merit in the TP adjustment of Rs.22.16 lakhs andthe same is, accordingly, directed to be deleted.” ITA No.71/2022 “20.We have carefully considered the orders of the authoritiesbelow. The undisputed fact is that the assessee is a debt freecompany. It is also not in dispute that no interest was paid to thecreditor/supplier nor any interest has been earned from unrelatedparty. Moreover, being a 100% captive service provider, therevenue of the assessee is 100% from its AEs. In our consideredopinion, the question of receiving any intererest on receivables doesnot arise. Considering the facts of the assessee in hand, in totality,we do not find any merit in the TP adjustment of Rs.22.16 lakhs andthe same is, accordingly, directed to be deleted.” 7.Onsimilarfacts,theITAT,DelhiBenchI-2inITANo.1478/Del/2015 titled ‘Bechtel India Pvt. Ltd. vs. DCIT’ dated 21[st]December, 2015 has held that “It is brought to our notice that the assessee isa debt free company. In such circumstances it is not justifiable to presumethat, 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 foundpaying interest to its creditors or suppliers on delayed payments.” 8.Upon the said matter being carried forward in an appeal, the DivisionBench of this Court in Principal Commissioner of Income Tax-2 vs. M/sBechtel India Pvt. Ltd. in ITA No.379/2016 dated 21[st]July, 2016 held asunder:- “4. As far as question (B) concerning the adjustment for intereston receivables, the Court finds that the ITAT has returned adetailed finding of fact that the Assessee is a debt free companyand the question of receiving any interest on receivables did notarise.Consequently, no substantial questin of law arises forconsideration as far as this issue is concerned.” 9.A Special Leave Petition against the aforesaid judgment being CCNo. 4956/2017 was dismissed by the Supreme Court on 21[st]July, 2017. Theorder of the Supreme Court is reproduced hereinbelow:- “We are in agreement with the High Court that as far asQuestion-B concerning adjustment for interest on receivabales isconcerned,theTribunalhasreturnedafindingoffact.Consequently, no substantial question of law therefore, arises, onthe facts of this case. The special leave petition is dismissed.” 10.Even the judgment of this Court in Principal Commissioner ofIncome Tax vs. Kusum Healthcare Pvt. Ltd. (supra) is not in favour of theappellant. The Division Bench while dismissing the appeal of the revenueobserved as under:- “12. The court finds that the entire focus of the Assessing Officerwas on just one assessment year and the figure of receivables inrelation to that assessment year can hardly reflect a pattern thatwould justify a Transfer Pricing Officer concluding that thefigureofreceivablesbeyond180daysconstitutesaninternational transaction by itself. With the assessee havingalready factored in the impact of the receivables on the workingcapital and thereby on its pricing/profitability vis-a-vis that of itscomparables, any further adjustment only on the basis of theoutstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible inlaw as explained by this court in CIT v. EKL AppliancesLtd., (2012) 345 ITR 241 (Delhi). Consequently, the court isunable to find any error in the impugned order of the Income-taxAppellate Tribunal giving rise to any substantial question of lawfor determination. The appeal is, accordingly, dismissed.” 11.As far as disallowance under Section 40(a)(ia) of the Act isconcerned, this Court finds that there is no dispute that the assessee has ITA No.71/2022 deducted tax at source under Section 192 of the Act. This Court is inagreement with the opinion of the ITAT that Section 195 of the Act has noapplication once the nature of payment is determined as salary anddeduction has been made under Section 192 of the Act. 11.As far as disallowance under Section 40(a)(ia) of the Act isconcerned, this Court finds that there is no dispute that the assessee has ITA No.71/2022 deducted tax at source under Section 192 of the Act. This Court is inagreement with the opinion of the ITAT that Section 195 of the Act has noapplication once the nature of payment is determined as salary anddeduction has been made under Section 192 of the Act. 12.This Court is further of the view that the judgment in Centrica IndiaOffshore Pvt. Ltd (supra) has no application to the present case as the ITAThas returned a finding that the real employer of the seconded employeescontinues to be the Indian entity and not the overseas entity. 13.In Director of Income Tax (IT)-I vs. A.P.Moller Maersk A S, theSupreme Court in Civil Appeal No.8040/2015 decided on 17[th]February,2017 has held as under:- “11.Aforesaid are the findings of facts. It is clearly held that notechnical services are provided by the assessee to the agents. Oncethese are accepted, by no stretch of imagination, payments madeby the agents can be treated as free for technical service. It is inthe nature of reimbursement of cost whereby the three agents paidtheir proportionate share of the expenses incurred on these saidsystems and for maintaining those systems. It is reemphasized thatneither the AO nor the CIT(A) has stated that there was any profitelement embedded in the payments received by the assessee fromits agents in India. Record shows that the assessee had given thecalculations of the total costs and pro-rata division thereof amongthe agents for reimbursement. Not only that, the assessee havebeen submitted before the Transfer Pricing Officer that thesepayments were reimbursement in the hands of the assessee and thereimbursement was accepted as such at arm’s length. Once thecharacter of the payment is found to be in the nature ofreimbursement of the expenses, it cannot be income chargeable totax.” 14.A Division Bench of this Court in Commissioner of Income Tax,Delhi II vs. Karl Storz Endoscopy India (P) Ltd., ITA No.13/2008 decided ITA No.71/2022 on 13[th]September, 2010 has held as under:- 1.This appeal pertains to the Assessment Year 2001-02. Theissue relates to the treatment which is to be given to the amount ofRs.6,59,416 paid by the assessee to its parent foreign company,i.e., Karl Storz Vertriebs GMBH & Company. The assessee hadclaimed that he parent company had deputed one of theemployees, viz., Mr. Peter Laser to the Indian Company/assesseeand the aforesaid amount represented reimbursement of thesalary, which was payable to Mr.Peter Laser. The AssessingOfficer (AO), however, was of the opinion that since no agreementbetween the assessee and the parent company was produced andeven the agreement between the parent company anditsemployees. Mr. Peter Lazer on the basis of which he waspurportedly deputed to the Indian Company was produced, thisamount should be treated as payment towards technical fee. xxxxxxxxx 3.Learned counsel for the respondent-assessee has pointedout that this was not the first year in which such a claim wasmade. He stated that the Indian Company was incorporatedduring the Assessment year 1998-99 and for the establishment ofthis company which is subsidiary to the aforesaid foreigncompany. Mr. Peter Laser was deputed, the amount paid from theAssessment year 1998-99 onwards were always treated as salaryand accepted as such. Learned counsel for the respondent hasproduced the copy of the orders dated 15.06.2005 passed by theITAT, which relates to the Assessment year 1998-99, i.e. the firstyear of the incorporation of the respondent-company. Perusal ofthis orders shows that this very issue is decided and the followingfindings were arrived at by the Tribunal holding that the aforesaidpayment would be treated as salary to Mr.Peter Laser. "10. The foreign company had deputed one of its employees tolook after the affairs of the Indian Company. The salary payableto this employee was to be borne by the foreign company. TheIndian company was to reimburse this salary at cost, i.e. withoutany mark-up. Thus, it was merely the question of payment ofsalary to Mr. Peter Laser. There is no question of any technicalfees being paid to the foreign company. Assuming for the sake ofargument that it was in the nature of technical fees paid to theforeign company; then, as rightly pointed out by the learned ITA No.71/2022 counsel, Article 12.4 was applicable and not Article 13.4 ascontended by the learned DR. Even if Article 12.4 was applicable,the said Article specifically excludes payments mentioned inArticle 15. Article 15 states that salaries, wages and other similarremuneration derived by a resident of a Contracting State(Germany) in respect of an employment shall be taxable in theother Contracting State (Indian) only if the employment isexercised there. In other words, salaries paid to such personnellike Mr. Laser are taxable in India and they cannot be consideredto be fees for technical services. Further, even as per Section 9 ofthe Act, the payment cannot be treated as fees for technicalservice. Explanation 2 to Section 9(1)(vii) gives the meaning ofthe expression "fees for technical services" as per which, interalia, any consideration which would be income of the recipientchargeable under the head "salaries", then such payment will notbe considered as fees for technical services. Thus, even as per theprovisions of the Act, the payment in question cannot be treated asfees for technical services. Moreover, since it is paid as salary toMr. Laser, tax has been deducted under Section 192 of the Act." 4.Learned counsel also submitted that thereafter in theAssessment Year 1990-00 as well as 2000-01, the amountsreimbursed in identical manner were treated as “salary” toMr.Laser. He further states that no appeal was filed against theaforesaid order of the Tribunal by the Revenue.” 15.Consequently, this Court is of the view that the issues of ‘receivables’as well as ‘disallowance’ under Section 40(a)(ia) of the Act are essentiallyquestions of fact, which give rise to no substantial questions of lawespecially when the findings of the ITAT are not perverse. 16.This Court may mention that though it was inclined to admit QuestionNo.1 proposed by the appellant, yet keeping in view of the fact that thisCourt has concurred with the findings of fact rendered by the ITAT onQuestion No.2 & 3 and as a consequence no substantive addition can bemade in the present appeal, the Question No.1 is left open to be agitated in ITA No.71/2022 an appropriate matter. 17.With the aforesaid liberty, the present appeal is dismissed. MANMOHAN, J OCTOBER 11, 2022KA/AS MANMEET PRITAM SINGH ARORA, J ITA No.71/2022