Applicability of TDS to be determined having regard to the agreement between the contracting parties and not by particular assumption of the deductee about the nature of transaction
Brief Facts of the case:
During the course of assessment proceedings, for AY 2004-05, the Assessing Officer (AO) noticed that the assessee Company made payment of Rs.56,54,963/- to M/s. CGS International, UAE and Rs. Rs 37,76,863/- to M/s. Marble Arts & Crafts LLC, UAE (aggregating to Rs.94,31,826/-) The AO noted that no TDS had been deducted by the assessee while making the payment to the said two foreign concerns. Accordingly, AO required the assessee to show cause why the said expenditure should not be disallowed under Section 40(a)(i) of the Act. The assessee contended that the payments were made towards commission and that neither of these concerns had any business in India nor had they filed any income tax return in India.
The AO during the course of cross confirmation came to know about that those two concerns had credited the said sum paid to them under the head “consultancy charges”. Thus, AO treating those payments as fee for rendering technical services disallowed the said amounts.
Aggrieved by the order of AO, assessee preferred an appeal before the CIT (A).
The CIT(A) held that the payment made by the assessee to the two UAE entities would not come within the purview of “technical services‟, as defined in Explanation 2 to Section 9(1)(vii) of the Act because payment was made for availing the liasioning with the assessee to procure clients and market its services and consequently, the provisions of Section 9(1)(vii) were not attracted in the assessee’s case.
Further, the CIT(A) held that Article 14 of the DTAA with UAE, dated 18.11.1993, is applicable in the facts of the case and that the AO could not have denied the applicability of the said on the sole premise that the two UAE entities are companies. Accordingly, since the remittances to such non-resident entities are liable to be taxed in the UAE, no TDS was required to be deducted. Thus, CIT(A) allowed the assessee’s appeal and deleted the disallowance made by AO. Aggrieved by the CIT(A)’s order, department moved the matter before the ITAT Delhi , ITAT also confirmed the findings of CIT(A) and dismissed the revenue’s appeal.
Contention of the Assessee:
The learned counsel for the assessee contended that the CIT(A) and ITAT rightly rejected the AO’s finding that the remittances made by the assessee were in respect of “consultancy charges‟, attracting the provisions of Section 9(1)(vii) of the Act. . Further, he submitted that the CIT (A) correctly interpreted Article 14 of the DTAA in light of the definition of “person‟ in Article 3 of the Treaty, and rightly held it to be applicable. Thus, the disallowances deleted by CIT(A) and ITAT were right in law.
Contention of the Revenue:
The learned counsel for the revenue contended that the assessee failed to establish the authenticity and genuineness of the agreements on which reliance has been placed by the CIT(A) and ITAT. He heavily relied on the fact that the service provider foreign companies have credited the consultancy fees and also confirmed the same during the course of independent confirmation. He also contended that the benefit of Article No. 14 of DTAA is not available as the same is not available in case of company deductees. Thus, the order of ITAT should be quashed and the disallowance by AO should be upheld.
Decision of the Hon’ble High Court:
The High court after considering the rival submissions at the outset clarified that the mere fact that CGS International confirmed that it received consultancy charges from the assessee would not be determinative of the issue. The actual nature of services rendered by CGS International and Marble Arts & Crafts needs to be examined for this purpose. It would be appropriate to note the details of services provided by the two entities.
The court further observed that the transaction between the assessee and Marble Arts & Crafts, (non-resident) implies that the non-resident has acted as an agent of the assessee for the purposes of the assessee’s dealings with the Works Department, Abu Dhabi, which included coordinating with the authorities in the said department and handling invoices for the assessee. As far as CGS International is concerned, it acted as a liasioning agent for the assessee, and receives its remuneration from each client that it successfully solicits for the assessee.
As far as question of determination that whether the services provided by the UAE entities are in the nature of “independent personal services‟ defined in Article 14 of the DTAA. Article 14 of the DTAA states that income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State. Article 3(e) defines “person‟ to include a company. Therefore, the CIT (A) rightly rejected the revenue’s contention that Article 14 is inapplicable for the reason that the services in question were provided by companies, as opposed to individuals.
Thus, the action of the assessee is in line with DTAA which exempts such incomes from the Indian taxation.
Therefore, the appeal of revenue was dismissed.