IN THE ITAT BANGALORE BENCH ‘C’
Income-tax Officer, International Taxation, Bangalore
IT APPEAL NOs. 552 TO 558 (BANG.) OF 2011
[ASSESSMENT YEAR 2011-12]
Date of pronouncement- 11.10.2012
These appeals are filed by the assessee. The relevant assessment year is 2011-12. The appeals are directed against the order of the Commissioner of Income-tax – (Appeals) IV at Bangalore dated 23.02.2011 rejecting the appeals of the assessee filed u/s 248 of the Income-tax Act, 1961.
2. The brief facts of the case are that the assessee is a manufacturing company with both imported and indigenous plant and machinery. For preventive maintenance & repairs, annual maintenance contracts were entrusted to foreign suppliers of machinery and equipment. Likewise, repair contracts are also entrusted to the foreign suppliers who are residents of Germany. All these payments to non-residents which are chargeable to tax in India are subject to deduction of tax at source (TDS) u/s 195 of the Indian Income-tax Act. However, according to the assessee, the payments represented business receipts and as none of the non-residents have PE in India and the payments are not chargeable to tax in India. However, out of abundant caution, the assessee deducted the tax before making the payments to the foreign entities as per the provisions of sec. 195 r.w.s 206AA and paid it to the Govt. account. However, denying its liability to deduct tax at source, the assessee has filed appeals before the CIT(A) u/s 248 of the I.T Act.
3. It was submitted before the CIT(A) that –
(a) The sum received by the non-resdients is their business profit arising in Germany and is not laible to be taxed in India as they have no PE in India; and
(b) The amounts paid by the assessee is not ‘Fees for Technical Services’ (FTS) as per Article 12(4) of the DTAA between India and Germany or u/s 9(1)(vii) of the IT Act.
4. The CIT(A) after considering the assessee’s contentions at length, came to the conclusion that the payments made by the assessee to the non-residents towards repairs and AMC are not their business profits but are ‘fees for technical services’ (in brief FTS). He held that as far as ‘FTS’ is concerned, it is chargeable to tax in India irrespective of whether the services are rendered in India or not and whether the non-residents have any business connection in India or not. He observed that this is the position in view of the explanation to sub-sec. (2) of sec. 9 substituted by the Finance Act 2010 w.e.f 1.6.76.
Thereafter, he proceeded to consider the assessee’s objection to the rate of tax at which the tax is to be deducted from the payments. The assessee objected to the application of the provision of sec. 206AA of the Act and the adoption of the rate of tax @ 20% of the payment on the ground that the non-residents have not obtained the PAN No. and furnished the same to the assessee. According to assessee, u/s 139A(8)(d), r.w.rule 114(1)(b) of I.T Rules, the non residents are not required to apply for and obtain PAN No. and, therefore, the provisions of sec. 206AA are not applicable. The assessee also submitted that a DTAA overrides the IT Act and as provided under the DTAA between India and Germany, the rate of tax at which tax is to be deducted at source on FTS is 10% and this rate only is to be applied in the assessee’s case. The CIT(A), after considering the above objections, concluded that sec. 206AA overrides all other provisions of the Act as it starts with the non-absante clause ‘notwithstanding anything contained in the other provisions of the Act…’. As regards the non-requirement of the nonresidents to apply for and obtain a PAN No., he held that the press release of the CBDT dated 20.01.2010 clarifies that the requirement of obtaining PAN No. will apply to all non-residents in respect of payments/remittances liable to TDS. He also observed that the Hon’ble Supreme Court in the case of G.E India Technology Centre Pvt. Ltd. in Civil Appeal Nos.7541-7542 of 2010, dated 9.9.2010 has held that when the chargeability is confirmed as per its decision in the case of A.P Transmission Corporation reported in 239 ITR 587 (SC), the assessee’s are liable to deduct tax at source. Thus he held that the provisions of sec. 206AA are specific and shall over ride sec. 139(A)(8)(d) of the Act and as the non-resident recipients failed to obtain PAN, the consequences are that the higher of the three amounts being rates specified in the Act, rate or rates in force, or at 20% whichever is higher has to be withheld.
5. The CIT(A) also considered the assessee’s objection to the grossing up u/s 195A of the Act. The assessee’s contention was that the rates in force for relevant assessment year was 10.5575%, while under DTAA it was 10% and u/s 206AA, it was 20% and the benefit of grossing up at the rates in force or at the rate of 10% under DTAA should be adopted and not @ 20%. The CIT(A), however held that as the assessee was liable to withhold tax @ 20%, the grossing up also is to be done with reference to the same rate of tax. He accordingly dismissed assessee’s appeals.
6. Aggrieved, assessee is in appeal before us.
7. The learned senior counsel for the assessee, Shri Pardiwala, while reiterating the assessee’s submissions before the CIT(A), submitted that the income of a non-resident is taxable in India if it is its business income arising or accruing in India or deemed to arise or accrue in India provided they have a PE in India. He submitted that the services of repairs of machinery are all rendered outside India, i.e. in Germany, and, therefore, the business income has not arisen or accrued or deemed to arise or accrue to the non-residents in India particularly since they do not have a PE in India. Thus, according to him, when the business income of the non-resident is not chargeable to tax in India, the assessee is not liable to deduct tax at source u/s 195 of the IT Act.
8. The next argument of the learned counsel for the assessee is that the nature of the services has to be considered before concluding that the payment is ‘fees for technical services’. He submitted that as per the purchase order and invoices, it is clear that the services are in the nature of repairs only and not technical, consultation or managerial services are rendered by the non-residents to the assessee company for repairing the machinery. He has drawn our attention to the copies of the purchase order and invoices raised by assessee and M/s Werkzeubau Siegfried Hofmann Gmbh, Germany respectively to demonstrate this point. He submitted that the Hyderabad Bench of the Tribunal in the case of M/s BHEL-GE-GAS Turbine Servicing (P) Ltd. In ITA No.976/Hyd/2011, dated 31.7.2012, has considered the question as to whether repairs would fall under the category of technical services as defined both under the Income-tax Act and the DTAA between India and other countries and has held that repairs cannot be considered as technical services even if they require specific and technical expertise to perform the work order. According to him, this decision is applicable to the facts of the case before us and, therefore, the assessee is not liable to withhold tax before making the remittances. He submitted that it is only out of abundant caution that the assessee has made the TDS at 20% and paid it to the Govt. account, but denies its liability to do so.
9. As regards the applicability of the rate of 20% u/s 206AA, the learned counsel for the assessee submitted u/s 139A(8)(d) r.w.rule 114c(b), the non-residents are not required to apply and obtain a PAN u/s 139A. He submitted that the reliance of the CIT(A) on the press note dated 20.01.2010 is misplaced, as according to him, the press note cannot override the provisions of law. He submitted that the provisions of sec. 206AA are applicable only where the recipients are required under the law to obtain the PAN and not otherwise. In support of this contention, he placed reliance upon the judgment of the Hon’ble Karnataka High Court in the case of Smt. A Kowsalya Bai and others v. Union of India reported in 346 ITR 156 (Kar).
10. The next argument of the assessee is on the grossing up for withholding of tax u/s 195A of the Act. The learned counsel for the assessee submitted that sec. 195A speaks only of the rates in force for the financial year in which such income is payable and does not refer to the rate applicable u/s 206AA of the Act. Thus, according to him the rates in force during the relevant financial year being 10.5575% or the rate as per the DTAA being 10%, whichever is beneficial only is to be applied and not 20% as held by the CIT(A).
11. The learned DR, on the other hand, supported the orders of the CIT(A) and submitted that as per the form 15CB furnished by the assessee, the payments for repairs have been treated as ‘FTS’ and the rate of tax is mentioned as 20%. Thus, according to him, this certificate issued by the assessee’s own auditors is binding on the assessee and the assessee has rightly deducted tax @ 20% as provided u/s 206AA of the Act.
12. As regards the requirement of the non-residents to apply and obtain the PAN No., the learned DR submitted that the CBDT in its press note dated 20.01.2010 has clearly stated that the procedure of obtaining PAN No. is easy and inexpensive and that even nonresidents are required to obtain the same. He submitted that sec. 206AA has overriding effect on all other provisions of the Act and, therefore, whenever there is taxable income, the non-residents are required to furnish their PAN No. to the deductors failing which the rate specified u/s 206AA has to be applied. As regards the decision of the Hon’ble Karnataka High Court, in the case of Smt. Kowsalya Bai & Others, relied upon by the learned counsel for the assessee, he submitted that the said decision is distinguishable on facts. He submitted that in that case, the assessees’ therein, whose income was below the taxable limit are residents, while in the case before us, the recipients of the remittances are non-residents having income above the taxable limit and the income being taxable in India being FTS, are required to obtain PAN No. failing which the rate u/s 206AA is applicable.
13. As regards the rate to be adopted for the purpose of grossing up, u/s 195A of the Act, he relied upon the order of the CIT(A).
14. In the rejoinder, the learned counsel for the assessee submitted that the Form 15CB is prepared by the Auditor/C.A of assessee company but it would only reflect the opinion or view of the Auditor/ C.A and cannot be considered as the admission of the assessee. He submitted that the assessee had the right to deny its liability to deduct tax at source and it has to be decided in accordance with law and not on the basis of the opinion of the Chartered Accountant or the authorized representative of the assessee.
15. Having heard both the parties and having considered their rival contentions, we deal with the issue of Form No.15CB and its binding nature on the assessee. The argument of the learned DR that the assessee by furnishing Form No.15CB has admitted that the payment is ‘fee for technical services’ cannot be accepted because Form No.15CB is a certificate issued by an accountant (other than an employee) and, therefore, it is the opinion or view of the accountant and cannot be said to be binding on the assessee. Every transaction between the assessee and the non-residents has to be considered in its own right and its nature is to be decided in accordance with the intention of the parties and in accordance with law. Even if it is to be considered as an admission by the assessee, the same cannot be accepted to be gospel truth and has to be verified by the AO. The assessee has every right to challenge the opinion given by its own Auditor or CA and it is for the Revenue authorities to decide the issue in accordance with law and, therefore, we hold that the form No.15CB alone would not determine the nature of the transaction.
16. Coming to other issues raised in this appeal, we find that undisputed facts of the case are that the assessee has entered into contracts of repairs for its imported machinery with the foreign suppliers of the machinery. The repairs are carried out outside India i.e. in Germany. For any income of a non- resident to be chargeable to tax in India, it has to arise or accrue in India is should be deemed to arise or accrued in India u/s 9 of the I.T Act. For determining the question as to whether any income is chargeable to tax in India, it has to arise or accrue in India, the nature of the income is to be determined first. Therefore, the first question to be considered by us is the nature of the services, rendered by the non-resident company to the assessee, whether it is ‘mere repairs’ or ‘technical services’. For appreciating and determining the nature of the services, it is necessary to consider the exact services to be rendered out by the non-residents. From the copy of the purchase order and the invoices, we find that the Germany Company is required to carry out the following services.
1 piece Repair of moulding tool TS61W5 Nap No. 2& Packaging of Moulding tool TS61W5
According to our offer 15489_1 of 24.02.2010.
– Your Item : 00001
– Repair area of moulding tool TS61W5 No.2;
Completion date :
Approximately 2 working weeks after receive of the above mentioned mould
– Packing of moulding tool TS61W5 No. 2: 1,280,00 Euro
Packing date :
Approximately 4 working days after completion of repair of the above mentioned mould
17. From a plain reading of the above, it appears that the machinery has to be repaired and not to be modified or ‘improved’. As observed by the CIT(A), every repair needs a technical skill or expertise. But can any and every activity which involves skill and expertise be called as technical services. As per the Cambridge Dictionary, the word ‘repair’ means to put something, damaged, broken or not working correctly back into condition or make it work again. This definition pre-supposes that there is a machinery or a tool which is damaged and which has to be brought back to its original working conditions. This cannot be done without the knowledge about the machinery and the skill to bring it back to its original working or to workable condition. The word ‘services’ denotes that it is an activity to help achieve something or result in something useful or purposeful. Explanation 2 to clause (vii) of sub. Sec. (1) of sec. 9 defines ‘fees for technical services’ as any 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 projects undertaken by the recipients or consideration which would be income of the recipients chargeable under the head ‘salaries’. Thus, it can be seen that the definition not only contains the positive constituents of the services being managerial technical or consultancy services but also enumerates the services which are not included in the technical services. The ‘positive constituents’ of the definition are that they should be managerial, technical or consultancy services. These terms are very wide and needs to be considered with an exhaustive meaning attributable to them. We find that the definition of ‘fees for technical services’ as given in the DTAA between India and Germany also contains similar language. Whether services rendered by the recipients repairing the machinery of the assessee would fall within the scope of definition of ‘fees for technical services’ under the Act or under the DTAA is to be examined. The learned counsel for the assessee had relied upon the decision of the ‘A’ Bench of the Hyderabad Tribunal in the case of BHEL-GE-Gas Turbine Servicing Pvt. Ltd., in support of his contention that the repairs of machinery would not fall within the scope of technical services. In the case before Hyderabad Bench of the Tribunal, the non-resident recipients were hired to repair and refurbish machinery and no tax was deducted at source. The Tribunal considered the meaning of the term ‘technical services’ and after considering the decision of the Delhi Bench of the Tribunal in the case of Lufthansa Air Cargo reported in 274 ITR 820 held that technical repairs are different from technical services and every consideration made for rendering of services do not constitute income within the meaning of sec.9(1)(vii) of the Act and for considering the same first of all, the said consideration should be for the FTS. We find that in the case of Lufthansa Air Cargo (cited Supra), the Delhi Bench of the Tribunal has considered whether repair work carried out in the normal course of its business in Germany without any involvement or participation of the assessee’s personnel can be said to be of any managerial or technical or consultancy services and it was held that the payments made by the assessee to the non-resident workshops outside India do not constitute payment of fees for managerial, consultancy or technical services as defined in Explanation 2 to sec. 9(1)(vii) of the Act. As facts of the case before us are very much similar to the facts of the case before the Delhi Bench of the Tribunal in the case of Lufthansa Air Cargo (cited Supra), we hold that the payments to the recipients in Germany do not come within the purview of fees for technical services. This, therefore, cannot be treated as FTS but is business income of the nonresident company. As per the law in force, business income of a nonresident recipient is chargeable to tax in India only if it is arising or accruing or deemed to arise or accrue in India provided that they have permanent establishment in India. As it is not disputed that the non-resident recipients of the remittances have no PE in India, their business income is not chargeable to tax in India. Since the very nature of income has been decided to be business income and not fees for technical services, the payments do not require withholding of tax at source u/s 195 of the Income-tax Act.
18. In the result, the assessee is not under an obligation to withhold tax leave alone @ 20% u/s 206AA of the Income-tax Act and the issue of grossing up would not arise.
19. In the result, the appeal of the assessee in ITA No.552 is allowed.
ITA Nos.553, 554 & 555/Bang/2011
20. In these cases also the services rendered by the non-residents are towards repairs of assessee’s machinery carried out in Germany. As the facts and circumstances are similar to the facts of the case in ITA No.552 of 2011, these appeals of the assessee are also allowed.
ITA Nos.556, 557 & 558/Bang/2011
21. As regards these appeals, we find that the services of repairs by the non-residents rendered include its assistance in analyzing and solving technical problem and disfunctions by locating and mending the cause of the disfunction by providing telephonic advice, analysis and assistance to the operator and for preventive maintenance. These services clearly fall within the purview of definition of ‘fees for technical services’. In these cases, the services are not mere repairs but are towards preventive maintenance which clearly show that the recipients are providing technical assistantce and services to the assessee in India. Therefore the assessee is liable to withhold tax from the payment of fees for technical services. In view of explanation 2 to clause (vii) of sec. 9(1), the ‘fees for technical services’ is chargeable to tax in India and the assessee is liable to deduct tax at source.
Now, having held that the services rendered by the nonresidents are technical services, we will have to examine the applicability of sec. 206AA of the Income-tax Act. The assessee’s contention has been that the assessee being a non resident is not required to apply for and obtain PAN No. by virtue of Rule 114(C)(b) of Income-tax Rules read with sec. 139A(8)(d) of the Income-tax Act. We cannot agree with this contention of the assessee. The provisions of sec. 206AA clearly overrides the other provisions of the Act. Therefore, a non recipient whose income is chargeable to tax in India has to obtain PAN No. and provide the same to the assessee deductor. The only exemption given is that non-resident whose income is not chargeable to tax in India are not required to apply and obtain PAN No. However, where the income is chargeable to tax irrespective of the residential status of the receipeints, every assessee is required to obtain the PAN No. and this provision is brought in to ensure that there is no evasion of tax by the foreign entities. The assessee’s reliance upon the decision of the Hon’ble Karnataka High Court in the case of Kowsalyabai (cited Supra), in our opinion, is misplaced and distinguishable on facts from the facts of the case before us. In the case of Kowsalyabai and others, the recipients of the interest were residents of India and their total income was less than the taxable limit prescribed by the relevant Finance Act. It was in these facats and circumstances that the Hon’ble High Court has held that where the recipients of the ‘interest income’ were not having income exceeding taxable limits, it was not required to obtain the PAN No. But in the case before us, the assessee’s are non-residents and admittedly the income exceeds the taxable limit prescribed by the relevant Finance Act. In the circumstances, the recipients are bound and are under an obligation to obtain the PAN No. and furnish the same to the assessee. For failure to do so, the assessee is liable to withhold tax at the higher of rates prescribed u/s 206AA of the Income-tax Act i.e. 20% and the CIT(A) has rightly held that the provision of sec. 206AA are applicable to the assessee.
22. As regards the grossing up u/s 195A of the Income-tax Act is concerned, we find that the provision reads as under :
“[In a case other than that referred to in subsection (1A) of sec. 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.”
23. Thus, it can be seen that the income shall be increased to such amount as would after deduction of tax thereto at the rate in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. A literal reading of sec. implies that the income should be increased at the rates in force for the financial years and not the rates at which the tax is to be withheld by the assessee. The Hon’ble Apex Court in the case of GE India Technology (cited Supra) has held that the meaning and effect has to be given to the expression used in the section and while interpreting a section, one has to give weightage to every word used in that section. In view of the same, we are of the opinion that the grossing up of the amount is to be done at the rates in force for the financial year in which such income is payable and not at 20% as specified u/s 206AA of the Act.
24. In the result, this ground of appeal is allowed and assessee’s appeals are partly allowed.