Case Law Details
ITAT CHENNAI BENCH ‘A’
Aqua Omega Services (P.) Ltd.
versus
Assistant Commissioner of Income-tax Co. Circle I(2), Chennai
IT Appeal No. 1648 (Mds.) 2012
[ASSESSMENT YEAR 2008-09]
JANUARY 15, 2013
ORDER
N.S. Saini, Accountant Member
This is an appeal filed by the assessee against the order of the CIT(A)-III, Chennai, dated 18.6.2012.
2. The assessee has taken the following grounds of appeal:
“1. The order of the learned Commissioner of Income Tax (Appeals) has erred in coming to the conclusion that provisions of sec. 9(1)(vii)(b) is not applicable, based on the wrong facts, circumstances and provisions of law.
2. The learned Commissioner of Income Tax (Appeals) has mis-directed on the premise that the technical know-how has been put into use in India in paragraphs 6.4,6.6 and 6.7.
2.1 The learned Commissioner of Income Tax (Appeals) has distinguished the ITAT Delhi Bench’s decision in the case of Havells India Limited v. Additional Commissioner of Income Tax reported in 140 ITJ 283 and Madras High Court decision in the case of CIT v. Aktiengesellschaft Kuhnle Kopp And Kausch W. Germany By Bhel reported in 262 ITR 513 without any difference and hence it is only a distinction without difference and a difference without distinction.
2.2 The learned Commissioner of Income Tax (Appeals) is not correct in coming to the conclusion based on the decision of Kerala High Court in the case of Cochin Refineries Ltd. v. Commissioner of Income Tax reported in 222 ITR 354 on the facts and circumstances of the case.
2.3 The learned Commissioner of Income Tax (Appeals) is not correct in coming to the conclusion that for the sources earned outside India there should be either a Branch outside India or a PE outside India.
2.4 Having the settled fact that the payments are made to Non Residents and having seen that the payments are made for earning income outside India, both the Assessing officer and the Commissioner of Income Tax (Appeals) is not correct in not applying the provisions of sec. 9(1)(vii)(b) and misdirected themselves in arriving at the conclusion that Explanation introduced under sec. 9(1) will take way the Exception conferred u/s 9(1)(vii)(b) of the Act (Ajappa Integrated Project v. ACIT in ITA No. 349/MDS/2012 dated 25.06.2012).
3. For the above reasons and such other reasons to be adduced at the time of hearing, the order of the learned Commissioner of Income Tax (Appeals) and the Assessing Officer be directed to be modified accordingly.”
3. The sole issue raised in this appeal by the assessee is that the CIT(A) erred in coming to the conclusion that the provisions of section 9(1)(vii)(b) of the Act are not applicable; and in confirming the disallowance of fee for technical services of Rs. 74,63,768/- paid to non-resident divers for non-deduction of TDS by invoking the provisions of section 40(a)(i) of the Act.
4. The brief facts are that the Assessing Officer disallowed deduction on account of professional charges paid to divers of Rs. 74,63,768/- out of the total amount of Rs. 3,07,06,730/- claimed by the assessee by observing that the services rendered by the divers are technical services and fall u/s 9(1)(vii) of the Act and the assessee has failed to deduct TDS and therefore, the provisions of section 40(a)(i) are attracted.
5. Being aggrieved by the said order of the Assessing Officer, the assessee filed appeal before the CIT(A).
6. Before the CIT(A), the A.R of the assessee submitted that a sum of Rs. 74,63,768/- was paid for professional charges to divers engaged for work for its clients, M/s Mashhor Covus SDB BHD, Brunei and M/s Khalifa A Algosaibi Diving and Marine Services Co., Saudi Arabia, with whom the assessee had a contract. This makes it clear that the assessee earned income outside India. It was further submitted that the divers were taken from India to outside India on a ship owned by the assessee. The assessee used their expert diving experience, therefore, the remuneration paid to the divers will be treated as technical services u/s 9(1)(vii) of the Act which is taxable in India since it is paid by resident of India u/s 9(1)(vii). It was further submitted that when such divers stay outside India for more than 180 days, they become non-residents and payment made to them by the assessee was not taxable in India according to the provisions of section 9(1)(vii)(b) of the Act. It was further submitted that the Assessing Officer, in his remand report, has wrongly relied on Explanation to section 9 inserted by Finance Act, 2007 with effect from 1.6.1976 and submitted that the Explanation will cover the above payment. It was submitted that after the decision of Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408, the Explanation had been brought in only to explain the provisions of section 9(1)(vii)(c) and not take away the exception given in section 9(1)(vii)(b). It was further contended that the provisions of section 9(1)(vii)(b) clearly stipulates that the amount paid by a resident to a non-resident for services rendered outside India was not taxable in India in view of exception contained in that section. It was stated that Explanation would not take away the exception. For this, reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Havells India Ltd. v. Addl. CIT [2011] 47 SOT 61 (URO) and Hon’ble Madras High Court’s decision in the case of CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany by BHEL [2003] 262 ITR 513. Further, it was submitted that the Assessing Officer has stated in his remand report that the assessee does not have any Branch or Permanent Establishment (PE) outside India and hence, in the strict sense, it cannot be said to have carried on any business outside India. It cannot , therefore, decide suo motu that provisions of section 9(1)(vii)(b) are applicable to the payments made to non-resident divers and that there was no requirement to make application u/s 195(2) of the Act. The Assessing Officer further stated that the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) has held that technical fees paid by a resident to a non-resident for services of technicians engaged for services outside India, the amounts cannot be treated as income. This basic principle that non-resident is taxable on the income in the form of technical fees arising in India has been nullified by the insertion of Explanation to section 9 by the Finance Act, 2007 with effect from 1.6.1976. The Assessing Officer also stated that since the transactions are not covered under the exception provided u/s 9(1)(vii)(b) and by virtue of the explanation inserted to section 9 by the Finance Act, 2007, there cannot be leeway available to the assessee in non-compliance to deduction and payment of withholding tax, before making the payments to the non-residents.
7. The A.R argued that Explanation was introduced to explain the provisions of section 9(1)(vii)(c) and not to take away the exception that was given in section 9(1)(vii)(b). It was submitted that Memorandum explaining the provisions in the Finance Bill, 2010 very clearly states the intention of the legislature which was to tax all non-residents whether they have a residence or place of business or business connection in India or not and the non-resident has rendered services in India or not. Explanation to section 9(1) does not take away the exception that has been given in section 9(1)(vi)(b). Section 9(1)(vii)(b) which clearly lays out that for all sources outside India, the payment made by a resident to a non-resident for the services rendered outside India, tax cannot be charged as per the said exception. It was further submitted that if the intention of legislation was to cancel the exception then they would have removed the provisions in the Act and not by inserting an Explanation to the Act. Under these circumstances, the payment made by the assessee to the non-residents for services rendered outside India was not taxable in India, hence, the disallowance u/s 40(a)(i) is not warranted.
8. The CIT(A), after considering the above submissions of the assessee, dismissed the appeal of the assessee by observing as under:
“6.4 I have carefully considered the facts of the case and the submission of the Id AR. I have also gone through the decisions relied on by the AO and the AR. I have also carefully perused the relevant provisions of the Act and the Explanation introduced by the Finance Act, 2007 and Finance Act, 2010. The appellant has paid to non-resident divers a sum of Rs.74,63,768/- which is not disputed. The divers are Indian citizens who became non-resident because of their stay outside India for more than 180 days. The nature of payments are “fees for technical services”(FTS). There is no dispute regarding this. Income from technical service rendered by a non-resident is taxable in India irrespective of the fact whether the non-resident has a residence or a place of business or business connection in India. The same is provided by Explanation below sec.9(2) introduced by the Finance Act, 2007 with retrospective effect from 1.6.1976. However, the Hon’ble Karntaka High Court in Jindal Power Company Ltd. (2010) 321 ITR 31 (Karn.) had held that the above Explanation did not have the effect of nullifying the decision of the Hon’ble Supreme Court in Ishikawajima Harima Heavy Industries Ltd. (supra) which had held that services rendered outside India would not be liable to tax. The intent was, therefore, clarified by a further amendment in the Finance Act, 2010 w.r.e.f. 1.6.1976. This substitution was to rule out the inference that the technical services should be rendered in India in order to attract tax liability. The amendment makes it clear that in case of FTS, the place where such benefit is made available is immaterial as long as they are utilized for the business in India. Therefore, the reliance placed by the AR on the decision of Ishikawajima Harima Heavy Industries Ltd. (supra) and Jindal Power Company Ltd. (supra) does not come to the rescue of the appellant in the amended scenario.
6.5 The AR has further contended that the Explanation below sec 9(2) would be applicable to the provisions of sec 9(1)(vii)(c) and not 9(1)(vii)(b). This assertion is not tenable since the plain reading of the Explanation makes it abundantly clear that the Explanation is applicable in respect of income which is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-sec (1) to sec 9 and is not specific to sec 9(1)(vii)(c). The exclusions provided under sub-clause (b) would be applicable if the assessee has a branch or a permanent establishment (PE) at the place outside India and payments are made by those entities abroad. In absence of branch or PE outside India and since the payments were made to the non-residents from India, the business cannot be said to be carried on outside India. Therefore, the transactions fall outside the ambit of the exceptions provided in sec 9(1)(vii)(b). The decision of M/s Havells India Ltd v. Addl.CIT [140 TTJ (Del) 283] also does not come the rescue of the appellant because the issue involves the export activity which signified that the business was conducted outside India. In the decision in the case of CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany (supra), the relief was provided to the assessee since the source for royalty is from the source situate outside India i.e., the royalty paid on export sales. Since the place of business was outside India, the decision is not applicable.
6.6 The question whether the payment would come within the exclusion part of this Explanation 2 to sec 9(1)(vii) or not would have to be established by the person who claims the exclusion as held by the Orissa High Court in Orissa Synthetics Ltd. v. ITO (203 ITR 34). From a combined reading of clause (vii)(b) and Explanation 2 of Sec.9(1), it becomes abundantly clear that any consideration, whether lump sum or otherwise, paid by a person who is resident in India to a non-resident for rendering any managerial or technical or consultancy service would be income by way of fees for technical services and would, therefore, be within the ambit of “income deemed to accrue or arise in India”. It is to be noted that u/s 9(1)(vii)(b), the expression used is fees for services utilised in India and not the expression fees for services rendered in India. It may be that some of the services are rendered abroad by the personnel employed or deputed by non-resident company under collaboration agreement with the Indian company. But if the fees are paid for services utilised by the Indian company in its business carried on by it in India, irrespective of the place where the services were rendered, the amounts of the fees should be deemed to accrue or arise in India.
6.7 In Steffen, Robertson and Kirsten Consulting Engineers and Scientists v. CIT, 230 ITR 206 (AAR), where fees were paid in respect of preparatory studies carried out in South Africa, it was held that fees would be liable to tax as income accruing or arising in India, irrespective of whether these payments were made in India or abroad, when the payments were made for services to be utilised in India or abroad.
6.8 In Cochin Refineries Ltd. v. CIT, 222 ITR 354 (Ker.), the refineries requested a foreign company to evaluate whether the coke produced from a blend of vacuum bottoms and clarified oil from Bombay High crude was suitable for making anodes for aluminium industry. The tests were carried out in the USA. Part of the payments were in the nature of reimbursement of the payments made to the personnel of the said consultant. It was held that the services rendered by the foreign company would be in the nature of technical services and would, therefore, consequently, be covered fully by the Explanation to section 9(1)(vii).
6.9 Relying on the decisions in Orissa Synthetics Ltd., Steffen, Robertson and Kirsten Consulting Engineers and Scientists and Cochin Refineries Ltd. cited supra, the Hon’ble Andhra Pradesh High Court in the case of Elkem Technology v. DCIT (250 ITR 164) held under similar circumstances that payment made by the Indian company to the Norwagian company towards charges for engineering and other personnel services would be part and parcel in the process of utilizing those technical services in India and would come within the meaning of Explanation to section 9(1)(vii). In the present case, the fact situation is exactly similar to that of Elkem Technology (supra) and the place of business is in India. Hence, respectfully following the decision of Hon’ble Andhra Pradesh High Court in the case of Elkem Technology (supra), it is held that the transactions with non-residents is not covered under the exclusions provided u/s 9(1)(vii)(b). The Explanation below sec 9(2) also strengthens the disallowance made by the AO. In absence of branch or PE outside India and since the payments were made to the non-residents from India, the business cannot be said to be carried on outside India. Therefore, the transactions fall outside the ambit of the exceptions provided in sec 9(1)(vii)(b). Therefore, the payments made to non-residents are liable to be taxed in India in the hands of the non-residents. For failure to deduct tax, the AO has rightly disallowed such payments u/s 40(a)(i). The ground is dismissed.”
9. The A.R of the assessee reiterated the submissions made before the lower authorities. He placed reliance on the decision of the Chennai Bench of the Tribunal in the case of Ajappa Integrated Project Management Consultants (P.) Ltd v. Asstt. CIT [2012] 24 taxmann.com 116, and submitted that the case of the assessee was squarely covered by the said decision.
10. On the other hand, the DR fully supported the orders of the lower authorities. He argued that the assessee did not have any Branch or PE outside India and as the payments were made to non-residents from India, the business cannot be said to be carried on outside India. He further submitted that the said expenses were claimed as deduction in the Profit & Loss Account of the business in India and claimed as deduction from the income earned by the assessee. Therefore, for non-deduction of TDS, the disallowance was rightly made u/s 40(a)(i) of the Act.
11. In reply to the submission of the DR, the A.R of the assessee submitted that the assessee was a resident in India and therefore, its global income was taxable in India and income earned outside India was shown in the Profit & Loss Account by the assessee. He submitted that the assessee was in the business of providing underwater diving services. The assessee had contract with M/s Mashhor Covus SDB BHD, Brunei and M/s Khalifa A Algosaibi Diving and Marine Services Co., Saudi Arabia, and in terms of the contract, the assessee hired the services of the divers who were paid the fees. The services were rendered outside India by the assessee and therefore, the income earned by the assessee was from business carried on outside India and hence, the payment made to the divers as fees was exempt from tax in view of the provisions of section 9(1)(vii)(b) of the Act.
12. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. In the present appeal, the issue to be adjudicated upon by us is whether the fee for technical services paid to divers by the assessee of Rs. 74,63,768/- was covered by the exception provided in section 9(1)(vii)(b) of the Act and therefore, there was no requirement for the assessee to deduct tax at source at the time of payment made to the divers and hence, no disallowance can be made by invoking the provisions of section 4(a)(i) of the Act. The assessee is in the business of providing underwater diving services in Saudi Arabia under a contract with M/s Mashhor Covus SDB BHD, Brunei and M/s Khalifa A Algosaibi Diving and Marine Services Co., and paid divers fees outside India. The assessee claimed that this amount was paid in connection with the business of underwater diving services provided outside India and therefore, the same falls within the exception of section 9(1)(vii)(b) of the Act and was not taxable in India and therefore, the assessee was not required to deduct TDS at the time of making such payments to the divers. The Assessing Officer held that the services rendered by the divers were technical services falling u/s 9(1)(vii) of the Act and therefore, was liable for deduction of tax at source which the assessee had not deducted and therefore, the provisions of section 40(a)(i) were applicable. He, therefore, disallowed the entire expenditure of Rs. 74,63,768/-.
13. The CIT(A) has confirmed the action of the Assessing Officer observing that the decision of the Hon’ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) and the decision of the Hon’ble Karnataka High Court in the case of Jindal Thermal Power Co. Ltd. v. Dy. CIT (TDS) [2010] 321 ITR 31, were nullified by the amendment made by Finance Act, 2010 with retrospective effect from 1.6.1976 by insertion of explanation below section 9(2) of the Act. He relied on the decision of Hon’ble AP High Court in the case of Elkem Technology v. Dy. CIT [2001] 250 ITR 164, and held that the facts in the present case are similar to the facts that were before the Hon’ble High Court. The Hon’ble AP High Court in that case has held that payments made by Indian Company to the Norwegian company towards charges for engineering and other personnel services were part and parcel in the processing of utilizing the technical services in India and would come within the meaning of section 9(1)(vii) of the Act. Therefore, the CIT(A) held that the transaction with non-residents in the case of the assessee was not covered under the exclusions provided in 9(1)(vii)(b) of the Act. He observed that the assessee did not have any Branch or PE outside India and therefore, since the payments were made to non-residents from India the business cannot be said to be carried on outside India so as to fall within the ambit of exceptions provided in section 9(1)(vii)(b) of the Act. He, therefore, upheld the order of the Assessing Officer.
14. We find that recently the Hon’ble Delhi High Court in the case of CIT v. Havells India Ltd. [2012] 208 Taxman 114, has observed that in order to fall within the exception provided in section 9(1)(vii)(b) source of income should be situated outside India. In the present case before us the assessee provides services of underwater diving. For rendering such services under a contract, the assessee took its personnel to Saudi Arabia where the services of underwater diving was rendered. The source of receipt was from business carried on abroad with its trained manpower. Section 9(1)(vii)(b) of the Act provides that the income by way of fee for technical services payable by a person who is a resident shall be deemed to accrue or arise in India except where it is payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning income from any source outside India.
15. The relevant portion of section 9(1)(vii)(b) of the Act is extracted as under:
“Income deemed to accrue or arise in India.
9. (1) The following incomes shall be deemed to accrue or arise in India :-
……………………………………………..
(vii) income by way of fees for technical services payable by-
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.]
[Explanation 1.- For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.]
Explanation [2].-For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.]
(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India.
[Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,-
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.]”
16. We find that it is not in dispute that the assessee has paid fee for technical services to non-residents of Rs. 74,63,768/- during the year under consideration. Further, it is also not in dispute that the assessee is a resident in India. Thus, except in two circumstances, firstly, where the fee is paid in respect of services utilized in a business carried on by the assessee outside India or secondly, fee is paid for the purposes of earning any income from any source outside India, in all other circumstances, the assessee is liable to deduct tax on the amount of technical fee paid to non-residents. For carrying out the above business or to earn income from the above source, the services in respect of which technical fee in question was paid by the assessee to non-residents. We find that the Assessing Officer held that the assessee is liable to deduct tax in respect of payments made to non-residents only because the payment relates to technical fee without examining the existence or otherwise of the two circumstances quoted above wherein he assessee is not obliged to deduct TDS.
17. The CIT(A) confirmed the action of the Assessing Officer by observing that in absence of a Branch or PE outside India and since the payments were made to non-residents from India, the business cannot be said to be carried on outside India. However, the CIT(A) has not examined as to whether the fee was paid in respect of the services utilized for the purposes of making or earning any income from any source outside India or not.
18. Before us, the A.R relied upon the decision of this Bench of the Tribunal in the case of Ajappa Integrated Project Management Consultants (P.) Ltd. (supra), ChenTrib, wherein the assessee was engaged in providing consultancy services at Nigeria. The Tribunal in the said case has held as under:
“18 After considering the rival submissions and perusing the orders of the lower authorities and materials available on record, we find that the assessee is engaged in the business of rendering technical consultancy services for oil and exploration industries in India and abroad. During the year under consideration, the assessee received consultancy fees of Rs. 12,33,75,833/- against which it claimed to have paid consultancy fees of Rs. 10,22,97,112/-. From the details filed by the assessee, the Assessing Officer found that for the following non-residents, TDS had not been deducted, claiming that the services of the consultants have been utilized by the resident company in a business located outside India. According to the Assessing Officer, the assessee-company ought to have deducted TDS @ 33.99% on the following amounts paid:
| Shri |
Amount paid |
| Bhushan |
75,62,974 |
| Harsh |
17,97,142 |
| Janardhan Pannir |
55,37,687 |
| Javed Ahmed |
15,88,000 |
| Jayamanohar Daniel |
5,35,305 |
| J. Muthukumar |
1,11,14,105 |
| Naidu Bakam |
10,83,000 |
| Shasikanth |
72,98,683 |
| Umamaheshwar |
1,11,42,080 |
|
4,76,58,976 |
19. The Assessing Officer observed that same issue had come up for consideration in assessment year 2007-08 and on appeal by the assessee in I.T.A. No. 527/09-10/A.III, Chennai, vide his order dated 28.9.2010, deleted the addition. He also observed that the CIT(A) placed reliance on the decision of Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd v. CIT, 327 ITR 356 and observed that section 195(2) springs into action only when the payment to the recipient contains an element of income chargeable to tax in India. Since the sum is not chargeable to tax in India, the provisions of section 195(2) are not attracted and disallowance u/s 40(a)(i) would not arise. The Assessing Officer observed that objecting to the order of the CIT(A)-III, Chennai dated 28.9.2010 for assessment year 2007-08, the Department approached the Tribunal by way of an appeal and the issue has not attained finality. Therefore, he disallowed the payment of consultancy fees of Rs. 4,76,58,976/- by invoking the provisions of section 40(a)(i) of the Act.
20. On appeal, the CIT(A) allowed the appeal of the assessee following the order of the Tribunal in assessee’s own case for assessment year 2007-08 in I.T.A. No. 2169/Mds/2010, dated 22.6.2011.
21. The DR has fairly conceded that this issue is covered against the Revenue and in favour of the assessee by the said order of the Tribunal. We find that the Tribunal, while deciding the issue in assessment year 2007-08, has held as under:
“11. Vide its ground No. 3, Revenue is again aggrieved regarding deletion of disallowance made under Section 40(a)(i) of the Act by the Assessing Officer. But, here, the payments made by the assessee to non-residents were in respect of projects in Nigeria.
12. Short facts apropos are that assessee had paid consultancy fees to one Shri Sashi Kant and Shri Umamaheshwar for consultancy services rendered in Nigeria. When put on notice regarding non-deduction of tax at source, reply of the assessee was that the said consultants were used in the business of the assessee in Nigeria and therefore, sub-clause (b) of clause (vii) of sub-section (1) of Section 9 would apply. Assessee submitted before the A.O. that the payments were for services rendered by the consultants on account of its business abroad and hence, the income of such non-residents could not be deemed to accrue or arise in India. However, the A.O. was not impressed. He, following the directions of ACIT under Section 144A of the Act, held that assessee was not carrying any separate business outside India and it did not have any branches outside India. Therefore, according to A.O., assessee was not liable for tax in Nigeria and the payments constituted income in India of the concerned non-residents. He, therefore, considered the amounts as income of the non-residents accruing in India and for non-deduction of tax at source, disallowance of Rs. 60,95,311/- was made relying on Section 40(a)(i) of the Act.
13. In its appeal before ld. CIT (Appeals), argument of the assessee was that the payments were not chargeable to tax in india and Section 195(1) of the Act would make it obligatory to deduct tax at source only from the income chargeable to tax as per the provisions of the Act in India, in the hands of the concerned non-residents. Ld. CIT (Appeals) deleting the disallowance held as under:-
“5.2.1 As per sec. 9(1)(vii)(b) income by way of fees for technical services payable by a resident shall be deemed to accrue or arise in India except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any sources outside India. As rightly observed by the Addl. CIT if the resident assessee utilizes the services of non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Having held so, he could not have pressed into service the mischief of section 40(a)(i) because the appellant did not make application u/s 195(2). For this he has relied on the decision of the Karnataka High Court in the case of Samsung Electronics (supra). However, the Hon’ble Supreme Court in its recent ruling in GE India Technology Centre Pvt. Ltd. v. CIT & Others in Civil Appeal Nos. 7541-4542 of 2010 dated 09.09.2010 held as under:
“Section 195 uses the word ‘payer’ and not the word ‘assessee’. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under Section 195(1). If the payment does not contain the element of income, the payer cannot be made liable. He cannot be declared to be an assessee-in default.”
Further it held
“In our view, Section 195(2) is based on the ‘principle of proportionality’. The said sub-section gets attracted in cases where the payment made is composite payment in which certain portion of the payment has an element of ‘income’ chargeable to tax in India.”
It also stated
“This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lays down that tax at source is deductible only from ‘sums chargeable’ under the provisions of the Act, i.e. chargeable under sections 4, 5 and 9 of the Income-tax Act, 1961.”
It is absolutely clear from the above ruling of the Apex Court that section 195(2) springs into action only when the payment to the recipient contains an element of income chargeable to tax in India. It has already been discussed above that the payments made to the non-residents for services rendered outside India would not amount to income accrued or arising in India. Since the sum is not chargeable to tax in India, provisions of sec. 195(2) are not attracted. Hence, the disallowance u/s 40(a)(i) would also not arise. Accordingly the AO is directed to delete the addition. This ground is accordingly allowed.”
14. Now before us, learned D.R., strongly assailing the order of ld. CIT (Appeals), submitted that the assessee could not be given freedom to decide whether tax is to be deducted at source or not. According to him, the assessee-company had made payments directly from India and not from Nigeria and whether Section 9(1)(vii)(b) of the Act would apply or not was not clear.
15. Per contra, learned D.R. supported the order of ld. CIT (Appeals).
16. We have perused the orders and heard the rival contentions. This issue is slightly different from the issue raised by the Revenue in its ground No.2. Here, the payments made by the assessee were to non-residents Indian who were working abroad. Assessee had made no deduction of tax at source whatsoever. As per the assessee, they were working for its business carried on in Nigeria and hence, by virtue of Section 9(1)(vii)(b) of the Act, the fees payable to such non-residents could not be considered as income accruing or arising to them in India. We find that that the ACIT in his directions under Section 144A of the Act, had stated as under:-
“S 9(1)(vii)(b) itself provides the exception. If the Resident-assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India. Here, the assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria.
Therefore, though assessee company has shown that the payments are directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria leaves some ambiguity in determining whether the exception provided to the non-resident on utilization of services outside India would directly apply to the said non-resident consultants and whether the income accrue to them in India or abroad, as section 9(1)(vii)(b) is a deeming provision.” (emphasis supplied)”.
17. It is clear from the above that the payments made by the assessee to non-resident consultants, were directly related to the Nigerian projects of the assessee. Assessee being engaged in consultancy business, the fees paid to such consultants on its projects abroad has to be considered as fees paid for services utilized in the business of the assessee outside India. Therefore, clearly Section 9(1)(vii)(b) of the Act applied and the income earned by such non-residents cannot be deemed to accrue or arising in India. Therefore, assessee had every reason to hold a bonafide belief that no part of the payment had any element of income which was chargeable to tax in India. When the assessee held such a bonafide belief, it is clearly covered by the decision of Hon’ble Apex Court in GE India Technology Centre Pvt. Ltd. (supra) and decision of Special Bench of this Tribunal in Prasad Productions Ltd. (supra). This being so, assessee could not be put in a position where it can be visited with the rigours associated with non-deduction of tax at source. It cannot be fastened with any liability associated with non-deduction of tax at source on such payments. In these circumstances, application of Section 40(a)(i) of the Act was not called for. Ld. CIT (Appeals) was right in deleting the addition. No interference is called for. Ground No.3 raised by the Revenue is dismissed.”
22. The facts being identical, respectfully following the order of the Tribunal for assessment year 2007-08 in assessee’s own case, we dismiss the grounds of appeal of the Revenue.”
19. We find that similar to the facts of that case, in the instant case also services were provided by the assessee outside India and for this business the services of non-residents were utilized to whom technical fee in question was paid. No good reason could be shown by the DR as to why the aforesaid decision of the Tribunal is not applicable in the instant case and why the said decision should not be followed in the instant case. We, therefore, following the above decision, hold that the services of non-residents to whom the technical fee of Rs. 74,63,768/- was paid by the assessee were utilized for the business which was carried out outside India for earning income from a source outside India. Therefore, the grounds of appeal of the assessee are allowed.
20. In the result, the appeal of the assessee is allowed.
Dear Sandeep sir
I would like have your advice on TDS on payment of consultancy fees / commission payable to UK resident for developing business in UK for Indian business Concern
Whether TDS is deductible?