Case Law Details
Advocate Akhilesh Kumar Sah
DCIT, International Taxation Vs IBM India Pvt. Ltd (ITAT Bangalore)
IBM India Pvt. Ltd case: IBM Philippines received the monies in the course of their business and did not have PE in India and therefore the receipt in question could not be brought to tax
Case in brief:
In DCIT, International Taxation vs. IBM India Pvt. Ltd [IT(IT)A Nos.1288, 1291, 1294, 1297, 1300, 1303 & 1306/Bang/2017, A.Y. 2009-10 to 2015-16, decided on 16.11.2018], there were appeals by the DCIT (International Taxation) Circle 1 (1), Bangalore, against the order dated 31.3.2017 of CIT(Appeals)-12, Bengaluru, relating to assessment years 2009-10 to 2015-16. The Revenue aggrieved by two reliefs allowed to the Assessee in the common order of the CIT(A) and had filed 7 appeals for AY 2009-10 to 2015-16.
IBM India Pvt. Ltd., (hereinafter referred to as ‘IBM India” or “Assessee” or “Respondent”) being a company incorporated under the Companies Act, 1956, engaged in the business of selling computers, software, besides rendering Software Development and Information Technology Services and lease financing activities of its products is a wholly owned subsidiary of International Business Machines, USA (IBM USA).
The Assessee is part of the IBM group that has entities across the world. IBM Group has policy of sending employees of its group in one country on deputation to another group in another country on assignment. Such people sent on deputation were called employees sent on Secondment “Expatriate Employee” etc. The group had a standard expatriate Agreement to regulate and set out the terms and conditions on which employees of IBM group in one country will send on deputation its employee to another group in another country. The terms of the expatriate Agreement dated 1.1.2002 between IBM UK and IBM India, whereby IBM UK agreed to send its employees on request by IBM India to work for IBM India.
IBM India deducted tax at source under section 192 of the Act on the salary paid to the seconded employees and paid the same to the credit of the Central Government. IBM India had to reimburse the salary cost of the expatriate employees to the concerned IBM oversees entity. At the time of making payment of such reimbursement, no taxes were deducted at source by IBM India n respect of reimbursements made to IBM Overseas companies in respect of salary paid to seconded employees as, according to IBM India, the same was in the nature of cost to-cost reimbursements and no element of income was involved. The Deputy Commissioner of Income-tax, International Taxation, Circle 1(1) (“DCIT”) issued notices calling for details in respect of reimbursements made by IBM India to IBM Overseas companies during the years under consideration and also required IBM India to show cause as to why reimbursements made to IBM Overseas companies should not be treated as Fees for Technical Services (FTS) and why IBM India should not be treated as an assessee in default in respect of reimbursements made to IBM Overseas companies on which no taxes were deducted at source.
It was the plea of IBM India that the said reimbursements did not constitute FTS in the hands of IBM Overseas companies as contemplated under the provisions of the Income-tax Act, 1961 (The Act’) and also as per the provisions of the Double Taxation Avoidance Agreement entered between India and other respective countries (the Treaty’). It was therefore submitted that IBM India was not required to deduct tax from these payments under section 195 of the Act. 8. The DCIT passed an order under section 201(1) and section 201(1A) of the Act, dated March 6, 2016 (served on IBM India on March 7, 2016) holding that reimbursements made to IBM Overseas companies would be covered under the definition of “FTS” as per the provisions of section 9(1)(vii) of the Act and also as per the provisions of the Treaty and consequently treating IBM India as an assessee-in-default’ under the provisions of section 201(1) of the Act on account of alleged failure to withhold taxes in respect of the aforesaid payments.
On appeal before ITAT Bangalore, the learned Members of the ITAT observed the rival submissions. There were two common issues which arose for consideration in the above appeals by the Revenue. The first issue was as to whether the CIT(A) was right in holding that even if the reimbursement by IBM India to IBM Philippines are regarded as “FTS”, yet in so far as payments by IBM India to IBM Philippines was concerned, the same would not be chargeable to tax in the hands of IBM Philippines in India, the source country and therefore there would be no obligation to deduct tax at source under section 195 of the Act by IBM India when it makes payment to IBM Philippines in view of the absence of article in DTAA between India and Philippines (DTAA) dealing with FTS, can it be taxed in the source country as “other income” under Article 23(1) of the DTAA or under section9(1)(vii) Expln.2 of the Act as “FTS” had been concluded in several decisions of Tribunal in the context of DTAA clauses which are identical with DTAA between India and Philippines. The Assessee made payments to IBM Philippines by way of reimbursement of salary of expatriate employees sent on secondment to IBM India. One of the IBM Oversees entity to whom IBM India made payments was a tax resident of Philippine. It is in that context the issue came before the CIT(A) as to whether IBM India was obliged to deduct tax at source under section195 of the Act, when making payment In fact in the case of IBM India Pvt. Ltd. vs. DDIT in IT(IT)A Nos.489 to 498/Bang/2013 chargeability to tax of income in the nature of FTS when there is no such provision of taxing for Fees for Technical Services in the Indo-Phillipines Treaty was considered and decided by the Bangalore Bench of ITAT in favour of the Assessee.
The learned Members of the ITAT opined that the aforesaid decision would squarely apply to the present case as IBM Philippines received the monies in the course of their business and did not have PE in India and therefore the receipt in question cannot be brought to tax under Article 7 of DTAA as well. In view of the above decision of the co-ordinate bench in the case of IBM India Pvt. Ltd. vs. DDIT (I.T) (supra), they were of the considered opinion that in the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India. Consequently, the learned Members held that there was no merit in the appeals by the Revenue on this issue.
In respect of the other issue regarding rate of tax at which TDS has to be deducted in the event of the non-resident payee not obtaining Income Tax PAN in India the learned Members of the ITAT observed that this issue had been settled by a Special Bench ITAT Hyderabad in the case of Nagarjuna Fertilizers & Chemicals and Another vs. ACIT (2017) 49 CCH 0053 (Hyd-Trib). The Special Bench held that the non-obstante clause contained in machinery provision of section 206AA of the Act was required to be assigned restrictive meaning and same could not be read so as to override even relevant beneficial provisions of Treaties, which override even charging provisions of the Income Tax Act by virtue of section 90(2) of the Act. Therefore, an Assessee could not be held liable to deduct tax at higher of rates prescribed in section 206AA of the Act in case of payments made to non-resident persons having taxable income in India in spite of their failure to furnish Permanent Account Numbers. There was, therefore, no merit in appeals by the Revenue on this issue also.
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