Director of Income Tax(IT)-I vs. M/s Credit Lyonnais [Income Tax Appeal No.2120 of 2013 dt 22/2/2016; Bombay High Court.]

TDS – Sub arranger fees and commission paid to non resident – nature of commission / brokerage – Circular No.786 dated 7th February 2000 – Not liable to deduct TDS u/s. 195 :

Amortization of expenditure – Entries in books of account are not determinative or conclusive :

During the A Y: 2001-02, the Assessee was appointed by State Bank of India (SBI) as an arranger for mobilizing deposits in its India Millennium Deposits Scheme (IMDS). In turn, Assessee was entitled to appoint sub-arrangers for mobilizing IMDs both inside and outside India. The assessee explained that it mobilized deposits worth Rs.1235.8 crore and SBI accordingly provided it a long term deposit of Rs.617.9 crore for a period of 5 years. Besides, the assessee received a sum of Rs.22.19 crore from SBI as arranger fees and commission. It in turn paid an amount of Rs.37.07 crore to the sub-arrangers by way of sub-arranger fees and commission. An amount of Rs.26.75 crore out of Rs.37.07 crore was paid by way of sub-arranger fees and commission to non-residents. However, the assessee had failed to deduct tax at source on Rs.26.75 crore paid to non-residents as sub-arranger fees and commission. Therefore, the Assessing Officer invoked section 40(a)(i) of the Act for failing to deduct tax u/s. 195 to disallow the expenditure on the ground that this payment to non-resident sub-arranger was in the nature of fees for technical services u/s. 9(1)(vii) of the Act.

In Appeal, the CIT(A) held that the amount paid to the nonresident sub-arranger was in the nature of commission / brokerage and not fees for technical services in terms of section 9(1)(vii) of the Act.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal. The Tribunal by relying upon the Circular No.786 dated 7th February, 2000 held that the amount paid to the non-resident sub-arrangers is in the nature of commission / brokerage and was not chargeable to tax in their hands. Consequently section 195 of the Act would have no application, thus upheld the deletion of the disallowance u/s. 40(a)(i) of the Act passed by the CIT(A).

The Tribunal further analyzed the nature of services being rendered by the sub-arrangers to the assessee and in the context of section 9(1)(vii) of the Act viz. whether these services are managerial, technical and consultancy services. whether these services are managerial, technical and consultancy services. The services could not be sort technical. So far as the managerial services are concerned, the impugned order relied on the decision of the Apex Court in the case of R. Dalmia vs. CIT, New Delhi, 106 ITR 895 wherein the Apex Court has held that the words “person concerned in the management of the business” would mean a person not only directly participates or engages in the management of the business but also one who indirectly controls its management through the managerial staff, from behind the scenes. Management includes the act of managing by direction, or regulation or administration or control or superintendence of the business. In the present case, the Tribunal, on examination of the services rendered by the sub-arrangers to the assessee concluded that the services rendered in obtaining deposits of IMD Scheme could not be considered to be management services. In the above view, the Tribunal upheld the order of the CIT(A) and held that there could be no application of provisions of section 40(a)(i) read with section 195 of the Act in the present facts

The Revenue filed an appeal before the High Court challenging the order of ITAT . The Hon’ble court observed that section 195 of the Act obliges a person responsible for paying to non-resident any sum chargeable to tax under the Act, to deduct tax at the time of payment or at the time of credit to such non-resident. In terms of section 5 of the Act, a non-resident is chargeable to tax received or deemed to be received in India or accrued or arising in India. Section 9 of the Act describes income which is deemed to accrue or arise in India. The impugned order examined the nature of fees in the context of section 9(1) (vii) of the Act to hold that it is not a technical service as defined therein. This view of the Tribunal in the context of the services being rendered by the sub-arrangers is a factual determination and is a possible view, not shown to be perverse or arbitrary. Moreover, the services are admittedly rendered by the non-resident sub-arrangers outside India. In such a case, there is no occasion for any income accruing or arising to the non-resident in India. The services of the non-resident sub-arrangers of attracting deposit to IMDS Scheme is carried out entirely outside India. As held by the Apex Court in the case of CIT, A.P. vs. Toshoku Ltd., 125 ITR 525, no income can be said to accrue or arise in India where payment is made for service by non-resident outside India. The CBDT had issued a Circular No.786 of 2000 dated 7th February 2000 reiterating the view of the Apex Court in Toshoku Ltd.’s case (supra). In the above view, as no income has accrued or arisen to the non-resident sub-arrangers in India, the question of deduction of tax u/s. 195 of the Act will not arise. Question of law raised on this issue was accordingly dismissed.

The other question of law raised was in regards to amortization of expenditure . Assessee received a sum of Rs.22.19 crore as fees and commission from SBI for services rendered as arranger. The Assessee had in turn paid an amount of Rs.37.07 crore by way of sub-arranger fes and commission to the subarrangers appointed. In the above view, the Assessee claimed as expenditure an amount of Rs.14.87 crore to determine its taxable income for the subject Assessment Year. However, in its books of account, the Assessee amortized the above expenditure of Rs.14.87 crore over a period of five years and for the subject A Y, only debited Rs.99.16 lakh to its profit and loss account. The Assessing Officer did not dispute that expenditure had been incurred for business purposes. However, in his assessment order it was held that the expenditure of Rs.14.87 crore had been amortized over a period of five years in the books of account i.e. in line thereto, a deduction only to the extent of Rs.99.16 lakh was allowable in the subject Assessment Year.

Being aggrieved, the Assessee carried the issue in appeal to the CIT(A). The CIT(A) upheld the order of the Assessing Officer . Being aggrieved, the Assessee carried the issue in Appeal to the Tribunal. The Tribunal, considered the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. v/s. CIT, 225 ITR 802 and earlier decision of the Supreme Court in the case of India Cements Ltd. vs. CIT, 60 ITR 52 to conclude that the expenditure incurred by making payment to sub-arrangers was the amounts spent in collecting deposits under the IMD Scheme and it was deductible in its entirety in the year of expenditure.

The Hon’ble court observed that the issue is no longer res integra in view of the decision of the Apex Court in Taparia Tools Ltd. vs. Joint CIT, 372 ITR 605 (SC). In the aforesaid case, the issue for consideration was whether the liability to pay interest is allowable as deduction in the first year itself or it be spread over for a period of five years. The High Court had on application of the principle of matching concept upheld the view of the Assessing Officer to spread the interest paid in the very first year over a period of five years because the term of the debt was five years and the Assessee therein had itself in its books of account amortized the interest over a period of five years. In Appeal, the Apex Court while reversing the decision of High Court held that normally the ordinary rule is that the Revenue expenditure incurred in a particular year is to be allowed in the year of expenditure and the Revenue cannot deny a claim for entire expenditure as deduction made by the Assessee. However, the apex Court also held that in case the expenditure is shown over a number of years and so claimed while determining its income, then it would open to Revenue only on the principles of matching concept to deal with the submission as the Assessee. It is not so in this case. The Apex Court held that once the return has been filed making a particular claim, then the Assessing Officer was bound to carry out assessment by applying provisions of the Act and he could not go beyond the return. The Apex Court made reference to the decision in the case of Kedarnath Jute Manufacturing Co.Ltd. vs. CIT, 82 ITR 363 to hold that entries in books of account are not determinative or conclusive for the purpose of determining whether or not a particular income is chargeable to tax under the Act. This had to be determined only on the basis of the provisions contained in the Act. In this case, in its return of income the Assessee had claimed the entire expenditure of Rs.14.87 crores in the subject assessment year. The expenditure was to be allowed.