By TIOL News Service

CHENNAI, APRIL 26, 2016: THE issue is - Whether TDS is liable to be deducted in respect of fees for technical services paid by the assessee, where the manufacturing activity as well as the export contracts entered into by such assessee were concluded in India only. YES is the answer.

Facts of the case

The assessee is a company. It had filed its return of income which was processed u/s 143(1) determining refund. Subsequently, the assessee had filed revised return, enhancing inter alia, the claim on account of provisions made in earlier year but actually spent during the concerned previous year. The claim was enhanced from Rs.3,52,50,200/- to Rs.4,45,50,000/- by inclusion of claim on account of reversal of entries on the provisions made for 'C' forms. The case of the assessee was selected for scrutiny and notice u/s 143(2). Assessment was completed u/s 143(3) after making various additions. Assessing Officer suo motu reopened the assessment order passed u/s 143(3) by issuing notice under section 148. Assessee filed the return of income and requested that the revised return filed earlier may be taken as return filed. In response to the notice issued, reasons were communicated to the assessee on 11.09.2008 and notice u/s 143(2) also issued on 11.09.2008. Assessing Officer disposed off assessee’s objections and completed assessment u/s 143(3) r.w.s. 147 by making addition and revised the loss to the extent of Rs.2,79,48,783/-. CIT(A) uashed the assessment order on the ground that the reopening of assessment u/s 147 beyond 4 years from the end of the relevant assessment year was bad in law.

Assessee had developed prototypes of 420 KV 40/50 KA SF6 Gas Circuit Breakers & 36 KV 200a Outdoor Type PCOB 36 Vacuum Circuit Breakers and the said prototype development will be completed only after the design tests as specified in the IEC standards are fulfilled. KEMA is an internationally recognised testing agency in Europe which carries out these design tests for the electrical engineering industry. Towards this purpose, the assessee company had entered into contract with KEMA to conduct various types of tests to these Circuit Breakers that is mandatory to achieve world wide acceptance of the Company's Circuit Breakers and components thereby make these products saleable in export markets. Like KEMA Netherlands, CESl, ltaly was another international agency to carry out the design tests for the electrical engineering industry. The Company at its factory at Naini/Kolkata had entered into a contract with CESI Italy (an International Testing Laboratory) to conduct various types of tests to Vacuum Circuit Breakers. These tests are mandatory to achieve world wide acceptance of the Company's Circuit Breakers and components, thereby make these products saleable in export markets. For the above purpose, the assessee has paid Rs.1,01,37,434/- towards testing charges and claimed deduction of the expenditure. Assessing Officer has observed that the assessee has not deducted TDS under section 195 of the Act towards the payment for the purpose of testing charges to the non-residents in foreign currency and therefore, disallowed the same and added to the total income of the assessee. CIT(A) observed that the assessee's case is squarely covered by the exception provided in clause (b) of section 9(1)(vii) and held that no income has accrued or arisen in India on these transactions and therefore TDS is not deductible and allowed the ground raised by the assessee.

Having heard the parties, the ITAT held that,

+ CIT(A) has passed the first appellate order for both the AYs 2003-04 and 2004-05, wherein, challenging the jurisdiction of reopening of assessment u/s 147 has been quashed by the CIT(A) and held to be valid and dismissed the ground raised by the assessee. Against the order of the CIT(A), the assessee has not preferred any appeals before the ITAT. Aggrieved by the order of the CIT(A) on other issue, the Revenue has filed appeals for both the AYs with regard to the issue of deletion of disallowance under section 40(a)(i). Despite service of notice on the assessee for putting its appearance against the appeals filed by the Revenue, the assessee has slept on the order of the CIT(A) dated 11.01.2013 as well as notice served by the ITAT over a period of 240 days and finally the assessee has filed its Cross Objections for both the assessment years. Though the assessee has stated some reasons in the nature of assumption/belief in the affidavit for belatedly filing the cross objections before the ITAT, the reasons mentioned in the affidavit are very vague and not sufficient to condone the huge delay of 240 days. It is an undisputed fact that in Form No. 36A filed by the assessee in the Cross Objections, the assessee has received notice of hearing issued to the assessee intimating the date of hearing of appeals of the Revenue. It was sheer negligence on the part of assessee to simply slept on the orders of the first appellate authority and did not wake-up even though the ITAT has issued notice of hearing and the assessee has not only received the notice, but also the hearings were adjourned at the request of AR, who put his appearance on many occasion before the ITAT but factually not filed its cross objections before the ITAT in time. To condone the delay, the onus lies on the assessee to substantiate sufficient cause for delay in filing the cross objections. Since the assessee has failed to substantiate sufficient cause for delay in filing the cross objections beyond the stipulated time, the affidavits filed for condonation of delay is liable to be dismissed.

+ the assessee had claimed a sum towards payment of VRS launched during the various financial years prior to the assessment year. The Assessing Officer restricted the allowance being 1/5th by applying section 35DDA of the Act. ITAT vide its consolidated order against the appeal preferred by the Revenue had held that AO was required to see whether such payments were allowed on mercantile basis in the preceding assessment years. If such payments are not claimed in the preceding year, this can be allowed in the year under consideration.

++ assessing Officer has simply ignored the order passed by the ITAT and suo moto reopened the assessment by issuing notice under section 148 after 4 years from the end of the assessment year 2001-02. Once the assessment order under section 143(3) r.w.s. 147 was held to be invalid and quashed by the CIT(A), the addition made in the reassessment order has no legs to stand. Under the above facts and circumstances, the appeal filed by the Revenue stands dismissed.

+ the export contracts are concluded in India and the assessee's products are sent outside India under these contracts. Further the manufacturing activity of the assessee is also located in India. The source of income is created at the moment when the export contracts are concluded in India. Even though the importer of the assessee's products is situated outside India, he is only the source of the monies received and he cannot be regarded as a source of income. In order to fall within the second exception provided in Section 9(1)(vii)(b), the source of the income, and not the receipt should be situated outside India and this condition is not satisfied in the present case.

++ the assessee's case does not even fall under the first exception, since in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. It is not the payer of income but the location of the manufacturing activity and concluding of the export contract from India that will determine the source of income. Further the assessee needs to specifically demonstrate that the technical services were utilised in a business carried on outside India in order to fall under the exception. FTS paid to KEMA Netherlands and CESI, Italy, TDS is, therefore, deductible under section 195 and the AO has rightly invoked provisions of section 40(a)(i) and made disallowance. Thus, the order passed by the CIT(A) on this issue is hereby reversed and restored that of AO and allowed the appeal filed by the Revenue for the assessment year 2003-04.

(See 2016-TIOL-614-ITAT-MAD)