Payment made to foreign company for service rendered in the nature of business not chargeable to tax in India in the absence of permanent establishment

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES “G”, MUMBAI

BEFORE SHRI DINESH KUMAR AGARWAL (J.M.)

AND SHRI RAJENDRA SINGH (A.M.)

ITA No. 6181/Mum/2011

Assessment Year : 2004-05

Yahoo India Private Limited

(Formerly known as Yahoo Web

Services India Private Limited).

Unit No. 1261, 6th floor,

Building 12,

Solitaire Corporate Park,

Guru Hargovindji Marg,

Andheri (E),

Mumbai 400 093.

PAN: AAACY 1252B

(Appellant)

Vs.

Deputy Commissioner of Income

Tax 7(3),

Mumbai.

 (Respondent)

Assessee by: Shri R. Murlidhar

Assessee by: Shri Amar Deep

Date of hearing 31-7-2012

Date of pronouncement 03-8-2012

O R D E R

PER DINESH KUMAR AGARWAL, J.M.

This appeal preferred by the assessee is directed against the order dated 7-4-2011 passed by the ld. CIT (A)-13, Mumbai for the A.Y. 2004- 05 taking the following ground of appeal:-

“On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) – 13 [CIT (A)] erred in confirming the following ground:

The CIT (A) has erred on facts and in law by confirming penalty u/s 271(1)(c) of the Income tax Act, 1961 (“the Act”) of Rs. 12,50,942/- on the ground that the appellant has furnished inaccurate particulars of income which were not bonafide and thereby concealed the income.”

2. At the time of hearing the ld. counsel for the assessee submits that in this case the A.O. has imposed the penalty u/s 271(1)(c) of the Income Tax Act, 1961 (the Act) in respect of payments made to non-resident amounting to Rs. 34,86,947/- without deducting tax thereon. He further submits that the Tribunal in the quantum appeal of the assessee, however, deleted the same very addition made by the A.O. vide order dtd. 24-6-2011 reported in (2011) 140 TTJ (Mumbai) 195. He therefore submits that the penalty imposed by the A.O. and sustained by the ld. CIT(A) be deleted.

3. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A).

4. We have carefully considered the submissions of the rival parties and perused the material available on record. The undisputed facts of the case in brief are that the assessee company is a fully owned subsidiary of Yahoo. Inc. USA which is engaged in the business of providing consumer services such as search engine, content and information on wide spectrum of topics, e-mail, chat etc. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has made a payment of Rs. 34,86,947/- to Yahoo Holdings (Hong Kong) Ltd. being cost of services/research material/advertisement media. Since the assessee company did not deduct tax at source from the payment remitted to Yahoo Holdings (Hong Kong) Ltd., the deduction claimed by the assessee on account of the said payment was disallowed by the A.O. by invoking the provisions of section 40(a) of the Act which was upheld by the ld. CIT(A). However, on second appeal before the Tribunal vide order dtd. 24-6-2011 (supra) , the Tribunal held that the payment made by assessee to a foreign company for the services rendered by it for uploading and display of the banner advertisement on its portal was in the nature of business profit and not royalty and such payment was not chargeable to tax in India as the recipient has no PE in India and, therefore, assessee was not liable to deduct tax at source from the payment for such services and the same cannot be disallowed by invoking the provisions of section 40(a)(i) for non-deduction of tax.

5. In the absence of an contrary material placed on record by the Revenue and in view of the fact that the quantum appeal has been decided in favour of the assessee, virtually the basis for imposition and levy of penalty u/s 271(1)(c) of the Act is not available and as such the penalty imposed by the A.O. and sustained by the ld. CIT(A) is deleted. The ground taken by the assessee is, therefore, allowed.

6. In the result, the assessee’s appeal stands allowed.

Order pronounced on 03-8-2012.

                                                              Sd/-                                  Sd/-

                                          (RAJENDRA SINGH)    (DINESH KUMAR AGARWAL)

                                      ACCOUNTANT MEMBER        JUDICIAL MEMBER

Mumbai, Dated 3-8-2012

RK

Copy to:

1. The Appellant

2. The Respondent

3. Commissioner of Income Tax (Appeals)- 13 Mumbai

4. Commissioner of Income Tax – -7, Mumbai

5. Departmental Representative, Bench ‘G’, Mumbai

//TRUE COPY//

BY ORDER

ASSTT. REGISTRAR, ITAT, MUMBAI