P.M. Jagtap, Accountant Member - (1.) THIS appeal by the assessee is directed against the order of learned CIT(A)-XXIX, New Delhi dated 12/1/2004.
(2.) The assessee in the present case is a wholly owned subsidiary company of Hughes Network Systems, Hughes Electronic Company having its registered office in USA. It is engaged in the business of providing telecom related services including installation and site supervision. M/s Hughes Telecom Co. was awarded contract for installation of telephony system in Mumbai. This job was subcontracted by the said company to HNSIPL (Indian) who, in turn, gave the said job to the assessee. During the relevant period, installation was done by the assessee at 12 different sites in Mumbai. In its return of income filed for the year under consideration declaring a total income of Rs. 2,42,61,670/-, a net profit ratio of 39.3% was shown by the assessee. During the course of assessment proceedings, it was noticed by the Assessing Officer that the said rate of net profit was lower than the NP rate of 56.5% shown by the assessee while obtaining certificate Under Section 195/197. It was also noticed by the Assessing Officer that the assessee company has sub-contracted various jobs relating to installation to the contractors in US and payments were claimed to have been made to the said contractors in US against the sub-contracted work. Since no tax at source was deducted by the assessee from the payments made to the said contractors outside India as required by Section 195, the Assessing Officer sought explanation of the assessee in this regard. In reply, it was submitted on behalf of the assessee that the sub-contract work was carried out by the overseas sub-contractors outside the Indian territory primarily in the US and since the said sub-contractors had no business connection or territorial presence in India during the relevant period, they were not liable to tax in India in terms of Section 5 read with Section 9. It was thus contended that the provisions of Section 195, therefore, were not applicable to the said payments and there was also no question of deducting tax at source from such payments. According to the Assessing Officer, the services of the sub-contractors were availed by the assessee for the purpose of job to be done in India and the basis of such sub-contracts being the Indian project, the payments made to the sub-contractors were clearly attributable to the execution of project by the assessee in India. He also noted that in the profitability projection filed by the assessee while seeking authorizations Under Section 195, there was no provision made for the contractual expenses. He, therefore, sought clarification/explanation from the assessee in these matters and in reply, the nature and scope of services provided by the sub-contractors was explained by the assessee. The assessing Officer, however, observed that these services, having regard to the very nature and scope as explained by the assessee, did not fall within the scope of the contract/job executed by the assessee. He also found that traveling expenses of the sub contractors in India were borne by the assessee and taking note of this fact as well as the nature of contractual amounts claimed to have been paid by the assessee to the sub contractors to perform the jobs assigned, he held that tax at source was required to be deducted by the assessee from the payments made to the sub-contractors as per the provisions of Section 195. An attempt was again made by the assessee to submit before the Assessing Officer that income of the concerned sub-contractors being not taxable in India, the provisions of Section 195 were not applicable. It was also submitted that merely because there was failure on the part of the assessee to apply for certificate Under Section 195(2) from the Assessing Officer, the entire amount paid to the sub-contractors could not be disallowed by invoking Section 40(a)(i). It was contended that the issue relating to applicability of the provisions of Section 195 to the payments made to sub-contractors has to be examined independently at the assessment stage before invoking the provisions of Section 40(a)(i). The Assessing Officer, however, found no merits in the submissions made on behalf of the assessee company and observing that the payments made by the assessee to the sub-contractors were clearly and unambiguously attributable to Indian operations, he held that the provisions of Section 195 were clearly applicable to the said payments and tax was required to be deducted by the assessee therefrom. The terms of contracts with the sub-contractors also could not be filed/furnished by the assessee before the Assessing Officer. He, therefore, disallowed the entire expenses claimed by the assessee on account of payment made to sub-contractors amounting to Rs. 58,72,144/- keeping in view the provisions of Section 40(a)(i) as well as his finding based on the nature and scope of services claimed to be provided by the sub-contractors to the assessee which, according to him, did not fall within the scope of assessee's contract. He also disallowed the expenses of Rs. 22,90,926/- claimed to have been incurred by the assessee in connection with travelling of the sub-contractors. Aggrieved by the order of the Assessing Officer, the assessee company preferred an appeal before the learned CIT(A) and the submissions made on its behalf before the Assessing Officer, by and large, were reiterated before the learned CIT(A). It was also submitted that the Assessing Officer has failed to appreciate that in terms of the contract entered between the assessee and HNSIPL, the assessee company was responsible, inter-alia, for RF network configuration and testing, specifications, configuration document, installation plans and test plans and in terms of the said contract, it was free to sub-contract any part or whole of the contract It was also submitted that in the absence of sufficient time given by the Assessing Officer, the terms of contract between the assessee and sub-contractors could not be furnished/filed before him during the course of assessment proceedings. It was also submitted that the sub-contractors had no business presence in India during the relevant period and since there was no business connection in India within the meaning of the term as defined in Section 9(1)(i), the provisions of Section 195 were not attracted to the payments made to them. It was also submitted on behalf of the assessee before the learned CIT(A) that the supervisory services rendered by the concerned sub-contractors did not fall within the purview of "fees for included services" in the absence of imparting of any technical knowledge, skills etc. by the sub-contractors and therefore, the provisions of Section 40(a)(i) read with Section 195 were not applicable to the payments made to the said sub-contractors. The learned CIT(A), however, found no merits in the submissions made on behalf of the assessee before him and proceeded to confirm the disallowances made by the Assessing Officer on account of payment to sub-contractors as well as travelling expenses incurred in connection with their travelling in India for the following reasons given in paragraph No. 2.5 of his impugned order:- "2.5 I have considered the submissions of the appellant and facts of the case carefully. In spite of giving sufficient time to the appellant at the appellate stage appellant has not been able to submit the agreement with the sub-contractors in spite of the fact that the appellant had asked further time vide its letter dt.25th November, 2003 which was allowed to the appellant. Vide its submissions dt. 17th December, 2003 it has been admitted by the appellant these sub-contractors work on continuing basis and the terms and conditions are determined on the basis of global understanding. As a result, there are no separate agreements entered into with these sub-contractors for each and every project. Therefore, it is clear that the appellant has not been in a position to submit the copy of agreement between sub-contractors and also has not given the basis of amount paid to the contractors. The appellant has not given the basis of predecided rates for various activities carried on through the sub-contractors. I have gone through the vouchers and nature of services rendered by the sub-contractors which are mainly in equipment installation, FSU installation and are absolutely technical in nature. It has also been admitted by the appellant that these services are being provided on a continuing basis and the duration of the project has been of about five years. These services have been provided by the foreign subcontracts in India and for Indian project on continuing basis as admitted by the appellant. These services like installation have been rendered on India sites. There nature is technical. The employees of sub contractor have travelled to India and the expenditure on their travelling has been claimed by the appellant separately. As the appellant has not given the copy of agreement with sub-contractor it is not in a position to justify that the travelling expenses were to be borne by the appellant. Otherwise also the travelling expenses were of technical persons and these were part of payment of technical services. Therefore, once these sub-contractors had provided technical services to the appellant on a continuing basis the total amount paid by the appellant to these sub-contractors was in the nature of fees for technical services. Therefore, such services were chargeable to tax in India as the amount has been paid on continuing basis and the provisions of Section 195 were clearly attracted. The appellant has failed without justifiable reasons to explain as to why no TDS was deductible on such payments. Therefore, as per Section 40a(i) of the IT Act if TDS has not been deducted the amount will not be allowable as deduction. Therefore, AO was justified in disallowing the expenses which is hereby confirmed. Similarly, the travelling expenses which have been incurred by the appellant have not been substantiated by the appellant in the absence of any contract agreement and are also part of technical services on which TDS was to be deducted. Therefore, considering the facts and circumstances and legal position the disallowance of such expenses is also upheld. Accordingly, ground Nos. 1, 2, 3, 5, 6, 7 & 8 are dismissed." Aggrieved by the aforesaid order of the learned CIT(A), the assessee company has preferred this appeal before the tribunal challenging the disallowances made by the Assessing Officer on account of sub-contracting expenses as well as traveling expenses of the sub contractors borne by it in Ground No. 1 & 2 respectively raised therein.
(3.) THE learned counsel for the assessee submitted before us that installation work was done by the assessee company for Wireless Support Services ( 'WSS' in short ), a Division of HNS India VSAT Inc. and the said job was carried out in India in the state of Maharashtra. He invited our attention to a copy of the contract entered by the assessee company with WSS and pointed out that the assessee company was entitled to sub-contract any or all of the work to be performed under the said contract. He submitted that part of the work to be performed in pursuance to the said contract was got done by the assessee company through sub-contractors and payment was also made for the services rendered by the sub-contractors. He submitted that the expenditure incurred by the assessee company on account of such payments thus was a business expenditure of the assessee company and the same was rightly claimed by it as deductible in computing the business income. He submitted that the Assessing Officer, however, disallowed the same by invoking the provisions of Section 40(a)(i) read with Section 195 since no tax at source was deducted by the assessee company from the payments made to the sub-contractors. In this regard, he contended that the sub-contractors were not liable to tax in India for the various reasons explained by the assessee company before the authorities below and therefore, no tax was deductible from the payment made by it to the said sub-contractors as per the provisions of Section 195. He submitted that the services rendered by the said sub-contractors to the assessee company were not covered in the definition of "technical services" given in Double Tax Avoidance Agreement between India and US and on this count also, the payment made by the assessee to the concerned sub-contractors from US was not covered by the provisions of Section 195. He contended that the Assessing Officer thus was not correct in disallowing the sub-contracting expenses claimed by the assessee by invoking the provisions of Section 40(a)(i) and the learned CIT(A) was not justified in confirming the said disallowance. He submitted that the disallowance on this count was also made by the Assessing Officer giving a reason that the services claimed to have been rendered by the sub-contractors to the assessee company did not fall within the scope of job carried out by the assessee company in terms of contract with WSS. In this regard, his contention was that this basis allegedly adopted by the Assessing Officer was mainly for the reason that terms of contract with the sub-contractors were not furnished/filed by the assessee company. He submitted that no such written agreement with the sub-contractors was entered into by the assessee company and since there was no such legal requirement to execute a written contract, there was no reason for the Assessing Officer to disallow the sub-contracting expenses mainly for the reason that the terms of contracts were agreed orally. He submitted that the findings/observations recorded by the Assessing Officer as well as by the learned CIT(A) while holding the provisions of Section 195 to be applicable to the payments made by the assessee company to the concerned sub-contractors were sufficient to show that the factum of services rendered by the said sub-contractors was accepted even by them and in these circumstances, there was no justification in disallowing the claim of the assessee for sub-contracting expenses by saying that the services rendered by the sub-contractors did not fall within the scope of job carried out by the assessee company in terms of contract with WSS. He, therefore, contended that both the basis adopted by the Assessing Officer for disallowing the claim of the assessee for sub-contracting expenses were not well-founded and the learned CIT(A) was not justified in confirming the disallowance made by the Assessing Officer on this count.;