Sections 9, 195, 201(1A) of the Act – On facts, since non-resident supplier had ‘business connection’ in India, the resident payer was required to withhold tax u/s 195

13. [2020] 117 taxmann.com
322 (Indore-Trib.) Sanghvi Foods (P.)
Ltd. vs. ITO ITA Nos. 743 &
744/Ind/2018 A.Ys.: 2015-16
& 2016-17 Date of order: 3^rd
June, 2020

Sections 9, 195,
201(1A) of the Act – On facts, since non-resident supplier had ‘business
connection’ in India, the resident payer was required to withhold tax u/s 195

FACTS

The assessee was an
Indian company engaged in the business of manufacturing plants. It had
purchased spare parts for its machinery from a company in Switzerland (Swiss
Co) for which it made payments during F.Ys. 2014-15 and 2015-16. The assessee
did not withhold tax from the payments on the basis that the purchase was
directly made from a non-resident and that, too, for purchase of capital goods.

The Swiss Co had a
wholly-owned subsidiary in India (I Co)
which was primarily engaged in the manufacture and trading of food processing
machinery, spares and components, and also providing repair, maintenance and
engineering services, etc. In addition, it provided marketing support services
to its group companies, including Swiss Co.

In the course of
his examination, the A.O. found the following:

•  While the
  assessee had contended that it was not aware whether Swiss Co had any
  representative in India, it had extensive email communication with I Co. Such
  communication showed:

•  The assessee had
  placed an order on Swiss Co on the basis of the quotation received from I Co;

•  I Co was
  authorised to negotiate, issue quotation, revise quotation and also confirm the
  order;

•  The assessee
  confirmed the order on Swiss Co through I Co;

•  While I Co had an
  active role in concluding the contract, Swiss Co had raised only the final
  invoice.

The A.O. had issued
notice u/s 133(6) of the Act to I Co. In response, I Co provided information
and communication between it and the assessee which supported the findings of
the A.O.

Accordingly, the
A.O. concluded that Swiss Co had ‘business connection’ in India through I Co.
Consequently, the profits arising from the sales to the assessee were subject
to withholding of tax u/s 195 of the Act. Therefore, the A.O. determined 10% of
the amount remitted as net profit and calculated tax @ 41.2% on a gross basis
in respect of both the payments.

In his order, the
CIT(A) observed that the functions performed by I Co proved that it was not a
mere business-sourcing agent but was concluding contracts on behalf of Swiss
Co. This resulted in a business connection in India. He further observed that
irrespective of whether the payment was for the purchase of capital goods, the
payer was obliged to withhold tax once the business connection was established.

HELD

The investigation
of the A.O. and the findings of the CIT(A) show that the role of I Co could not
be ignored at any stage. I Co was involved since the beginning when the assessee
was looking for suppliers of spares. The reply of I Co u/s 133(6) of the Act
further supported this finding.

The activities
performed by I Co for Swiss Co were squarely covered within clauses (a),
(b) and (c) of the definition of ‘business connection’ in Explanation
2 to section 9(1) of the Act.

Based on the facts
and findings on record, Swiss Co had a ‘business connection’ in India through I
Co.

Accordingly, the transaction was subject to section 9(1) and the income
of Swiss Co was deemed to accrue or arise in India. Consequently, in terms of
section 195, the payer was required to withhold tax from the payment ¹.

1   It
appears that both the CIT(A) and the Tribunal have discussed only the issue of
‘business connection’ and have not made any observations on the quantum of
profit determined by the A.O.