TDS not deductible on business profit of non-resident in absence of PE in India

Apurva Goswami Vs DDIT (International Taxation) (ITAT Delhi)

Facts- From 15CA/CB certificates filed by the assessee, the Ld. AO noted that the assessee has remitted amounts to various parties outside India without deducting tax at source.

It was pointed out that the Global Business Affiliates (GBA), as per the terms and conditions of the agreement were entitled to fixed compensation and further additional commission on orders procured for the assessee. It was further stated that the nature of services as rendered by non resident agent who is carrying out business activities in other contracting state falls squarely within the scope of Article 7 of DTAA. As per Article 7 the profits of an enterprise of other State would be taxable in India if there was a PE of such enterprise in India.

The explanation of the assessee was not acceptable to the ld. AO. According to him the impugned payments were made to the consultant which are covered under section 9(1)(vii) and not to the agent as claimed. The assesee was liable to deduct tax at source from fee paid for consultancy services.

Conclusion- Held that the payments made to the GBAs/ BDAs are not FTS but business profits not taxable in the hands of GBAs/BDAs in India in the absence of PE by virtue of the Article 7 of the DTAA, no tax is required to be deducted at source on such payments. In the case of GE India Technology Centre Pvt. Ltd. vs. CIT (2010-TMI-77380-SC) the Hon’ble Supreme Court held that obligation under section 195(1) to withhold tax arrives only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making a remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. Thus, the payments made to the GBAs/ BDAs are not subject to any withholding tax, such payments being not chargeable to tax in India.

FULL TEXT OF THE ORDER OF ITAT DELHI

The above three appeals by the assessee are directed against the consolidated order dated 23.03.2016 passed by the Commissioner of Income Tax (Appeals)-43 New Delhi (“CIT(A)”) pertaining to the assessment years (“AY”) 2010-11, 2011-12 and 2012-13. Since common issues are involved in them, they were heard together and are being disposed of by this common order.

2. The assessee is an individual. He is proprietor of M/s. Quantum Solutions India which is a contract research organisation and specializes in the area of pharmacovigilance (drug safety) services.

2.1 From 15CA/CB certificates filed by the assessee, the Ld. Assessing Officer (“AO”) noted that the assessee has remitted amounts to various parties outside India without deducting tax at source. He tabulated details thereof as under :-

AY 2010-11

AY 2011-12

AY 2012-13

2.2 The Ld. AO sought explanation from the assessee. Vide letter dated 22.08.2012 the assessee explained the nature of services rendered by his non-resident Global Business Affiliates (“GBAs”)/ Business Development Associates (“BDAs”) which in short consisted of :

(i) procuring export orders;

(ii) providing confirmed export orders;

(iii) providing information regarding respective customers; and

(iv) getting the export sales executed.

It was pointed out that the GBAs, as per the terms and conditions of the agreement were entitled to fixed compensation and further additional commission on orders procured for the assessee. It was further stated that the nature of services as rendered by non resident agent who is carrying out business activities in other contracting state falls squarely within the scope of Article 7 of the Double Taxation Avoidance Agreement (“DTAA”). As per Article 7 the profits of an enterprise of other State would be taxable in India if there was a Permanent Establishment (“PE”) of such enterprise in India.

2.3 The explanation of the assessee was not acceptable to the ld. AO. According to him the impugned payments were made to the consultant which are covered under section 9(1)(vii) of the Income Tax Act, 1961 (“Act”) and not to the agent as claimed. The assesee was liable to deduct tax at source from fee paid for consultancy services.

2.4 Vide reply dated 17.5.2013 the assesee again submitted that the services rendered by GBAs were in the nature of business support services and not in the nature of managerial or technical or consultancy services. It was further claimed by the assessee that the services rendered by the GBAs did not in any manner ‘make available’ any services to the assessee as envisaged in various DTAAs and as interpreted by various judicial authorities. It was emphasised that the impugned payments were purely in the nature of commission and not fees for technical services.

2.5 The Ld. AO did not agree. He was of the view that payments were made for consultancy services. Even the agreement with M/s. Abroms & May (which the Ld. AO reproduced in his order) mentions the provider of services as ‘Business Consultant’. According to him the nature of services rendered by GBAs to the assessee, e.g. locating and identifying potential clients; presenting assessee’s profile with a view to identify clients; explore potential for business; appoint any sub-affiliates or agents located anywhere in the world; locate and communicate with potential clients and if necessary to make presentations; act as conduit between global clients and the assessee; represent the assessee in regard to any support or any kind of assistance required or sought by the global clients in respect of services rendered by the assessee; not to act on behalf of or accept any assignments from competitors of the assessee clearly proved that the GBAs provided consultancy services covered under section 9(1)(vii) of the Act and the assesses should have deducted tax at source from such payments. Regarding the assessee’s contention of non-fulfilment of the condition of “make available” in Article 13 of the DTAAs with USA in his case, the AO observed that the assessee is deriving an enduring benefit in the shape of clients which would continue to be associated with it once they have been introduced by the consultants. He concluded that the assessee was liable to deduct tax on payments made for consultancy services provided by the various GBAs to the assessee. Accordingly, he raised demand of Rs. 9,54,288/-; Rs. 12,98,731/- and Rs. 10,87,180/- for the assessment years 2010-11, 2011-12 and 2012-13 respectively in his order dated 01.10.2013 under section 201 and 201(1A) of the Act.

3. The assessee filed appeals before the Ld. CIT(A) on identical grounds challenging the finding of the Ld. AO that the payments made by the assessee to GBAs were in the nature of fees for technical services (“FTS”) and do not fall within the scope of Article 7 of DTAA and that “make available” clause is applicable to the assessee.

4. The Ld. CIT(A), on perusal and consideration of the submissions of the AR of the assessee recorded his findings in para 4.6, 4.7 and 4.8 of his common order dated 23.03.2016. He agreed with the Ld. AO that the impugned payments were in the nature of FTS liable for deduction of tax at source under section 195 of the Act. The Ld. CIT(A), however, accepting the alternate argument of the assessee held that though payments made to the parties located in USA and UK were in the nature of FTS but since services of these payees did not “make available” to the assessee the technology, did not make the assessee able or wiser and get equipped with the knowledge or expertise enabling him to independently apply the technology and in future independently function without support from service provider, the concept of make available was not applicable and such payments qualified to be excluded from the ambit of FTS only on this ground. As regards payment of parties located in countries other than USA and UK (i.e. Switzerland) he held that these payments were in the nature of FTS as the DTAA with Swiss Confederation did not contain the exclusion clause of ‘make available’ and need to suffer tax deduction at source which amounted to Rs. 15,98,506/-and Rs. 27,21,995/- pertaining to assessment year 2010-11 and 2011-12 respectively. For assessment year 2012-13 the Ld. CIT(A) directed the Ld. AO to verify whether payments of Rs. 48,27,260/- were made to the recipient in Switzerland and restrict such amount only for withholding tax. With regard to other payments in all the three years the Ld. CIT(A) held that the assessee need not deduct tax at source. Thus the assesee got part relief in all the three assessment years.

4.1 The findings of the Ld. CIT(A) for assessment year 2010-11 are reproduced hereunder. The findings are same for succeeding assessment years 2011-12 and 2012-2013.

“4.6 The appellant’s submissions have been perused. It has been established by the AO that the services as received, are in the nature of technical services. Therefore, Fee for Technical Services (or Fee for Included Services) is the issue at hand. In the India-US DTAA, vide MoU dated 15.05.1989, certain examples have been provided to illustrate “Included Services”. Example 7 reads as follows:-

“Facts:

The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the U.S. company for included services?

Analysis:

The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred, to the Indian company through the service contract is commercial information. The fact that, technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b). ”

The facts of the appellant are similar. Whereas, it is clear in the example that the services are in the nature of consultancy service which involves the use of substantial technical skill and expertise, yet the condition of ‘make available’ is not fulfilled. It is for this reason, in this example that the consultancy services are not taxable.

It is therefore clear that the services rendered are in the nature of Fee for Technical Services, or Fee for Included Services. But the same can be taxed only if they ‘make available’ to the Indian company any technical experience, knowledge or skill etc. I find that the ‘make available’ condition is not fulfilled with regard to payments made to recipients not residents of Switzerland.

4.7 With regard to payments made to Swiss entities (or Swiss GBAs), I hold that the ‘make available’ clause is not obtainable in the India-US DTAA. Article 12(4) of India-US DTAA reads as follows :- “For purposes of this Article the term ‘Fees for Technical Services” means payments of any kind to any person in consideration for the rendering of any managerial, technical or consultancy services, including the provision of services by technical or other personnel.”

Thus, there is no ‘make available’ clause in the aforesaid treaty. Thereafter a protocol was entered into between India and Switzerland on 16.02.2000′ (Amending Notification No. GSR 74(E) dated 07.02.2001), whereby the protocol dated 02.11.1994 was amended. Further, this protocol was amended vide Notification No. SO 2903(E) dated 27.12.2011, which read as follows:-

“With reference to Article 10, 11 and 12

With reference to Article 10, 11, 12 and 22

The provisions of Article 10, 11, 12 and 22 shall not apply in respect to any dividend, interest, royalty, fees for technical services or other income paid, under, or as part of a conduit arrangement The term conduit arrangement means a transaction or series of transactions which is. structured in such a way that a resident of a contracting state entitled to the benefits of the agreement receives an item of income arising in the other contracting state but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either contracting state and who, if it received that item of income directly from the other contracting state, would not be entitled under a convention of agreement for the. Avoidance of double taxation between the state in which that ‘other person, is resident and the contracting state in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favourable than, those available under this agreement to a resident of a contracting state; and the main purpose of such structuring is obtaining benefits under this agreement.

In respect of Article 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services), if under any convention, agreement or protocol between India and a third state which is a member of the OECD signed after the signature of this Amending Protocol, India limits its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower than the rate provided for in this agreement, on the said items of income, the same rate as provided for in that convention, agreement or protocol on the said items of income shall also apply between both contracting states under this agreement as from the date on which such convention, agreement or protocol enters into force.

If after the date of signature this Amending Protocol, India under any convention, agreement or protocol with a third stale which is a member of the OECD, restricts the scope in respect of royalties or fees for technical services than the scope for these items of income provided for in Article 12 of this agreement, then Switzerland and India shall enter into negotiations without undue delay in order to provide the same treatment to Switzerland as that provided to the third State.”

(Emphasis supplied)

In view of the aforesaid, to trigger the ‘same treatment’ clause (which would have meant bringing in the ‘make available’ clause similar to India-US, India-UK and other countries), negotiations would have had to begin and an agreement reached. No such triggered agreement on this issue is available (or has been reached) between India and Switzerland.

4.8 In light of the above, I hold that the payments made to GBAs in Switzerland are in the nature of Fee for Technical Services and need to suffer tax deduction at source, though, the appellant claims them as Sales Promotion Services. To this extent action of the AO is confirmed with regard to the following payments:-

The appellant need not deduct tax with regard to other payments.

The appellant, thus, gets part relief as detailed above in appeal for AY 2010-11.”

5. Aggrieved, the assessee is in appeal before us.

5.1 The Ld. AR submitted that the payments made to GBAs are in the nature of commission for sales promotion services rendered by them on which no tax is required to be deducted at source as the same constitutes business income of the payees which is not taxable in India in the absence of PE of the payees in India.

5.2    The Ld. DR strongly relied upon the findings of the Ld. AO/ CIT(A). He referred to certain clauses of the agreement where GBAs are worded as consultants in support of his contention that the payments are FTS. He further submitted that the assessee is engaged in the provision of highly technical services and that the services of payees are also technical in nature.

6. We have heard the Ld. Representatives of the parties and pursued the material on record. The Ld. CIT(A) though has granted part relief in respect of the payments made to GBAs/ BDAs in USA and UK holding it to be FTS but falling under exception clause of ‘make available’ under the respective DTAAs and hence not taxable, the grievance of the assessee before us is that these payments are not at all in the nature of FTS but business profits of the payees which is not taxable in India pursuant to Article 7 ‘Business Profit’ of the respective DTAAs. The assessee has filed detailed written submissions in support of his contention. According to the assessee these payments comprised of commission paid to the business promotion agents located outside India. With a view to expand the scope of its current activities to the overseas markets, showcasing and presenting its profile and locating and identifying further business relating to export of IT enabled services in the field of pharmacovigilance, the assessee engaged services of agents located in USA, UK, Singapore and Switzerland. The agents appointed to propagate sale (of services) and to promote the business of the assessee were designated as GBAs/ (BDAs). The GBAs/ BDAs were entitled to receive a fixed minimum remuneration and in addition thereto percentage of the new contracts got awarded through them as commission.

7. The assessee executed Master Services Agreement (”MSA”) with the GBAs outlining the terms and conditions and scope of work to be done by the GBAs. We have reproduced below the relevant clauses of MSA with Abroms & May LLC dated 1^st October, 2011 for reference :-

“Whereas the First Party is a Contract Research Organization (CRO) and is engaged in rendering services to its clients located outside India in the field relating to Pharmacovigilance.

Whereas the Second Party is a business consultant by profession, located in California, USA and capable of rendering such services to its clients, has sufficient experience in the field of business development and propagation, and has represented itself to be having adequate infrastructure and expertise to function as a propagation, liaison and coordinating agency.

Whereas the First Party is desirous of expanding the scope of its current activities to the US market, and also of locating and identifying further business relating to export of IT-enabled services in the field of Pharmacovigilance, and is desirous of showcasing and presenting its profile solely with a view to propagating and soliciting business related to its present profile and for the purpose of identifying potential clients/companies, and further to functioning, as an agent for the clients availing services from the First Party, and also for rendering any post-completion services/assistance to the clients, has for this purpose identified the Second Party, and which has represented itself to be sufficiently experienced for this purpose and for providing services to the First Party anywhere in the world, and particularly in the US, as agreed.

Whereas the Second Party has offered its services as a consultant, more specifically outlined in this agreement (the “Agreement”), to the First Party.

Now this Agreement witnessed hereunder:

1. That the Second Party shall act as a ‘Global Business Affiliate’ to the First Party and shall be responsible for locating and identifying clients seeking to utilize the services of a Contract Research Organization in the field of Pharmacovigilance.

2. That the Second Party shall render services for presenting the First Party’s profile with a view to identifying such companies/clients wishing to avail and retain the services of the First Party.

3. That the scope of work will be:

a) To explore potential for business primarily in the US, but also globally if required.

b) To appoint any sub-affiliates or agents located anywhere in world for facilitating and promoting business.

c) To showcase the First Party as an established CRO in India and to present its business abilities and background, solely with a view to obtaining business from clients.

d) To locate, and communicate with, potential clients and, if necessary, to make presentations before them after gaining approval and concurrence from the First Party in this regard.

e) To act as a conduit between global clients and the First Party with a view to ensuring a smooth flow of information between both the parties in respect of work assigned and executed.

f) To represent the First Party in regard to any support or any kind of assistance required or sought by the global clients in respect of services rendered by the First Party, if required.

5. That the Second Party shall act as a communicating link between the First Party and its clients, and ensure timely communication and dissemination of information to/between both sides.

6. That the Second Party shall act diligently on behalf of First Party and shall accurately represent the First Party to all potential clients.

7. That the Second Party shall not act on behalf of or accept any assignments from competitors of the First Party during the validity of this Agreement. The Second Party shall not act in any manner so as to jeopardize the interest of the First Party or put to harm the First Party.

8. That the Second Party shall be eligible to receive the following remuneration for services rendered:

(a) A flat fee of USD 10,000 per month for services rendered between October 1, 2011 and September 30, 2012.

(b) If any business/contract (one or more) materializes at any stage from the initiatives of the Second Party during this one year then the First Party shall pay to the Second Party a commission of 5% of the total value of each invoice raised by the First Party towards the fulfilment of such contract(s), within fifteen (15) days of submitting such, invoice(s).

(c) Travel cost (for business- meetings/conferences/summits approved by the First Party) will be reimbursed to the Second Party, upon the receipt of an invoice with copy of the detailed bills to justify the expenses.

14. That upon termination of this Agreement, the Second Party shall promptly return all sales and marketing material provided by the First Party.

15. That the Second Party undertakes to maintain confidentiality of the information accessed by it during the course of rendering services to and on behalf of the First Party.”

8. From the perusal of the scope of work as envisaged in the MSA it is evident that the GBAs/ BDAs act as a business promotion agents and promote sale (of services) of the assessee for which they are compensated by way of fixed fee and also additional commission. This contention is also supported by the clause 7 of MSA which lays down that all the marketing materials / sale (of services) materials held by the GBA on behalf of the assessee will be returned back immediately at time of termination of the contract. The GBA is appointed only with a view to propagate and solicit business and not to render any managerial, advisory, technical or consultancy services. It is also brought to our notice that no personal interaction ever took place between the assessee and the GBAs and the GBAs were not to suggest or undertake any changes in the functioning pattern of the assessee. GBA is required to strictly function as per business model, and instructions given by the assessee from time to time. GBAs/ BDAs are entitled to receive a minimum stipulated sum as remuneration for services rendered and also additional percentage as further add on in event of any contract getting materialised.

9. The Ld. AO and the Ld. CIT(A) have referred to the word “consultant” used in the MSA to arrive at the conclusion that the payments made to the GBAs are in the nature of FTS. It is not denied that the payees are referred to as consultant in the MSA, but the issue that needs to be considered is what is the exact nature of services rendered by these GBAs/ BDAs which led the Revenue to conclude that payments for services rendered by the payees fell within the scope of FTS.

10. In our considered view, examination of the MSA in its entirety reveals that the services rendered by the GBAs/ BDAs are solely for business promotion for which they are compensated by payment of commission on the basis of business solicited for new clients introduced by them and also fixed payment on monthly basis as retainer fee so that they continue to remain connected with the assessee. Further, the nature of payments made to GBAs/ BDAs finds adequate mention in the invoices raised by them and also Form 15CB at the time of making remittance to these parties. The word ‘consultant’ has been too narrowly construed by the income tax authorities to the detriment of the assessee and has been the sole basis of holding that the payments made to GBAs/ BDAs are in nature of FTS. The Ld. AO and the Ld. CIT(A) have referred to only chosen portions of MSA and not gone through the whole agreement to arrive at the exact nature of arrangement and understanding between the assessee and the GBAs/ BDAs. A subjective and complete understanding of the arrangement, conduct, activities undertaken by the GBAs/ BDAs and transaction suitably reveals that the payments to these parties are in respect of promotion of business of the assessee in the overseas territories and for no other reason.

11. From the facts of the case, nature of business carried out by the assessee, arrangement with the GBAs/ BDAs, nature and scope of services rendered by these GBAs/BDAs discussed above it is obvious that the services rendered by these parties is purely for promotion of sales (of services) and soliciting new clients. The scope of service and the nature of services rendered by these parties have been very illustratively defined in the MSAs with these parties and cannot be subject to any kind of different interpretation. While arriving at his conclusion, the Ld. AO/ CIT(A) failed to appreciate the exact nature of services rendered by GBAs/ BDAs. Just by naming these parties as ‘consultant’ in the MSAs who are actually engaged in carrying out activities for sale promotion and in lieu thereof getting commission cannot be the basis of concluding that the sums paid to these parties are in the nature of FTS and therefore liable to be taxed in India having accrued in India.

12. In our view the entire payments to the GBAs/ BDAs in all the three assessment years under consideration are not FTS for the reasons that no specialised technical services are rendered to the assessee and that the assessee did not have any personal interaction with these service providers and that these service providers acted within the scope defined in the MSA. The GBAs/BDAs are not paid for rendering any managerial, technical or consultancy services but only for promoting sale on behalf of the assessee and therefore such payments are business income of the payees which squarely falls within the scope of the Article 7 of the respective DTAAs relating to ‘business profits’. It is an undisputed fact that the GBAs/ BDAs located overseas are non-residents and do not have PE in India. Hence, the payments to GBAs/ BDAs being the business profit of the GBAs/ BDAs are not taxable in India in the absence of PE. The assessee is therefore not liable to withhold any tax on such payments. There is plethora of judicial precedents wherein it has been held that commission payments to non­resident agents/ service providers for services like sales promotion, marketing, publicity, procuring sales order etc. are not FTS but business profit in the hands of the service provider to which Article 7 of the DTAA is applicable. The following decisions may be referred to in support thereof :-

(i) ACIT vs. Kapoor Industries [2019 (5) TMI 1602–ITAT Delhi]

(ii) Le Passage to India Tours & Travels (P) Ltd. vs. DCIT [2015 (2) TMI 983–ITAT Delhi]

(iii) DCIT vs. Angelique International Ltd. [2012 (12) TMI 838-ITAT Delhi]

(iv) CIT vs. M/s. Grupism P. Ltd. [2015 (6) TMI 10–Delhi High Court]

(v) DIT vs. Panalfa Autoelektrik Ltd. [2014 (9) TMI 706–Delhi High Court]

(vi) DIT vs. Sheraton International Inc. [(2009) 178 Taxman 84-Delhi High Court]

13. Having held that the payments made to the GBAs/ BDAs are not FTS but business profits not taxable in the hands of GBAs/BDAs in India in the absence of PE by virtue of the Article 7 of the DTAA, no tax is required to be deducted at source on such payments. In the case of GE India Technology Centre Pvt. Ltd. vs. CIT (2010-TMI-77380-SC) the Hon’ble Supreme Court held that obligation under section 195(1) to withhold tax arrives only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making a remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. Thus, the payments made to the GBAs/ BDAs are not subject to any withholding tax, such payments being not chargeable to tax in India. The assessee succeeds in all its three appeals.

14. In the result, all the three appeals of the assessee are allowed.

Order pronounced in the open court on 24^th May, 2022.