ACIT New Delhi vs TUI India Private Limited

“1.

The Ld. CIT(A) erred in law and on facts in holding that payments made to foreign vendors for hotel bookings, transfers, excursions, ground-handling and other coordinated services were not in the nature of "Fees for Technical/Managerial Services" (FTS) w/s 9(1)(vii), and in deleting the disallowance of Rs.41,17,62,018 u/s 40(a)(i), without appreciating that these services involved human intervention and managerial effort, attracted TIDS u/s 195, and that the assessee failed to furnish agreements, TRCs or vendor-wise evidence to support its DTAA and "pass-through cost" claims.

2.

The Ld. CIT(A) erred in deleting the disallowance u/s 40(a)(ia) by incorrectly applying CBDT Circular No. 5/2002, which pertains only to purchase of airline tickets and not to composite tour-related services such as hotel bookings, transfers. logistics and excursions; and further erred in holding that the assessee was merely an intermediary despite invoices being raised directly on the assessee, and in accepting the "pass-through cost" argument without appreciating that the assessee nets off these costs from revenue and thereby inherently claims them in computation of income.

3.

The appellant craves leave to add, alter, amend, modify, substitute or withdraw any of the above grounds of appeal at the time of hearing.”

“The appellant, filed its original return of income for Assessment Year 2017-18, declaring a loss of Rs. 20,97,07,268/-, which was later revised on 15.03.2018 to a loss of Rs. 20,96,18,284/-. The case was selected for scrutiny, and the AO noted that the appellant had made payments totaling Rs. 61,97,82,564/- to various non-resident parties. These payments were booked as "pass-through costs" related to outbound travel services, including airline ticketing and hotel bookings. The appellant contended that these payments were not subject to Tax Deduction at Source (TDS) under Section 195, citing CBDT Circular No. 5/2002 and arguing the absence of a Permanent Establishment (PE) in India. The appellant further argued that the services did not constitute "Fees for Technical Services" (FTS) as they lacked a human element and were not managerial, technical, or consultancy in nature. However, the AO rejected these contentions, observing that the appellant failed to provide the necessary service agreements to substantiate the nature of the transactions. The AO noted that invoices were raised directly by international agents to the appellant, indicating no privity of contract between the end-customer and the service providers. Regarding the CBDT circular, the AO ruled it inapplicable as it primarily concerns resident-to-resident payments under Section 194C, whereas these were payments to non-residents. Relying on judicial precedents, the AO determined that managing hotel accommodations and logistics abroad involved a "human element," thus classifying the payments as FTS under Section 9(1)(vii) of the Act. Consequently, the AO held that the appellant was liable to deduct TDS under Section 195, and since it failed to do so, the entire expenditure of Rs. 61,97,82,564 was disallowed under Section 40(a)(i) (p. 9). This disallowance resulted in the appellant's loss being converted into a total assessed income of Rs. 41,01,64,280.”

6.2.2

It is seen from the details that the above payments made to non-residents fall under two broad categories, namely- payment to foreign tour operators and payment to hotels. Apart from these, the appellant has also made outward payments for services like Visa, Insurance etc. Copies of sample invoices provided by the appellant show the details like name of tourist, name of hotel booked, rate per night and number of nights etc. The AO considered the above as falling under the definition of FTS under section 9 of the Income Tax Act and being FTS, considered the same as income deemed to accrue or arise in India. Once the income is deemed to be accruing or arising in India, the same becomes ‘chargeable to tax in India’ and provisions of section 195 are attracted and TDS is deductible thereon. The Hon. Supreme Court in Transmission Corpn. of A.P. Ltd. vs. Commissioner of Income-Tax [1999] 105 Taxman 742 (SC) settled the issue that the scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves no doubt that the expression 'any other sum chargeable under the provisions of this Act' would mean 'sum' on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. It is evident that for a particular item of income to be categorized as FTS, it is necessary that some sort of managerial, technical or consultancy services should have been rendered by payees. The terms managerial, technical and consultancy do not find mention in the Income Tax Act, 1961 and it is a settle law that they need to be interpreted based on their understanding in common parlance. Hon'ble Delhi High Court, in J.K. (Bom.) Limited Vs CBDT and Another 118 ITR 312 (Del.) referred an article on Management Services wherein it is stated that the Management action includes at least the following:

(a)

Discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards the goals;

(b)

Getting the organization to adopt the policies;

(c)

Scrutinizing the effectiveness of the policies that are adopted, and

(d)

Initiating steps to change policies when they are judged to be less effective than they ought to be. Management thus pervades all organizations. Technical: In the case of Skycell Communications Ltd. Vs DCIT, the Hon'ble High Court had held that the popular meaning associated with the word 'technical' is involving or concerning applied and industrial science. Consultancy: is generally understood to mean an advisory service. Further, it may be fair to state that not all kinds of advisory could qualify as technical services. For any consultancy to be treated as technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. In case of appellant herein, there is no specific contract and the copies of invoices reveals that the appellant is making payment for services like booking of hotel rooms and tour packages.

6.2.3

From the nature of services to be performed by the overseas agents, it appears that services rendered by the foreign parties in this case are purely in the nature of advancement of business of the appellant company and cannot be categorized as managerial / technical / consultancy services. It is further seen that jurisdictional Hon'ble Delhi High Court in the case of Panalfa Autoelektrik Ltd. while explaining meaning of the word managerial, technical or consultancy services falling under the scope of FTS u/s 9(i)(vii) of the Act held that sales and marketing services made by an overseas commission agent do not fall within the meaning of aforesaid words and, therefore, the payment of commission made to such agent will not be deemed to accrue or arise in India and consequently, would not be liable to tax in India.

6.2.4

The Hon. ITAT Delhi in KGL Network (P.) Ltd. v. ACIT [2018] 97 Taxmann.com 400 held that since the amount paid to the non- resident agents was on behalf of non-resident shipping company or non-resident airline company, therefore, these amounts are not chargeable to tax in India under the domestic Law and the assessee-company was not liable to deduct TDS on these payments. It is well settled law that no TDS is required to be deducted by the payer, if the income of non-resident payee is not liable to tax in India. The Hon. Jurisdictional ITAT Delhi in Amadeus Global Travel Distribution S.A. v. DCIT [2008] 113TTJ(Del) 767 held, inter alia, that the core income of the Global Distribution System (GDS) arises from data processing, hosting and booking facilitation, all of which are performed outside India. Mere access by Indian travel agents to the CRS does not, by itself, constitute accrual of income in India. It was held that income of a foreign aggregator can be taxed in India only to the extent it is attributable to a Permanent Establishment (PE) in India. In the absence of evidence demonstrating a PE or attribution of profits thereto, the income remains non-taxable in India. The Tribunal specifically rejected the Revenue’s contention that origin of booking from India is sufficient to create taxability. What is relevant is where the commercial operations giving rise to income are carried out, not the geographical location of the user. Since the receipts of the foreign GDS were held to be not chargeable to tax in India in the absence of PE / attribution, it follows that Indian entities making payments/remittances to such foreign aggregators are not liable to deduct tax under section 195.

6.2.4

Another ground raised by appellant is that it has not claimed the payments made to foreign agents as deduction in its Profit & Loss Account and the same is just a pass through entry. The appellant submitted that for invoking Section 40(a)(i) of the I.T. Act, the A.O. should establish that assessee-company has made a claim of deduction of expenses under sections 30 to 38 of I.T. Act, on which, assessee company has failed to deduct tax at source. It is not in dispute that appellant has not made claim of expenses in its P & L A/c. In the instant case, though the payments have been released to non-resident Agents towards hotel and tour bookings etc., but these payments have not been made by the appellant-company on account of its expenses, but, have been made for and on behalf of its clients/customers, for whom, appellant-company does the work of tour bookings. The appellant-company explained and proved that payments have been made to non-resident Agents of foreign hotels etc. The same is paid by the appellant-company on behalf of its customers. There is no Privity of Contract between the appellant- company and the non-resident Agents of foreign hotels. Appellant-Company worked as a Facilitator/Agent between the parties. The same are supported by copy of the sample bills raised upon appellant-company and the bookings issued by appellant in turn, upon various customers. The copy of the P & L A/c does not show any claim for such expenses made by appellant-company