Case Law Details
Court: Chennai Bench of the Income-tax Appellate Tribunal
Citation: VA Tech Wabag Ltd. Vs. ACIT [2010-TII-109-ITAT-MAD-INTL]
Brief: VA Tech Wabag Ltd. Vs. ACIT [2010-TII-109-ITAT-MAD-INTL]
Facts:-The assessee was engaged in the business of executing a turnkey project of water/waste water treatment and sewerage treatment plants. For the Assessment Year (“AY”) 2002-03, the Assessing Officer (“AO”) disallowed the fees for technical services amounting to Rs. 11,536,306 by invoking the provisions of section 40(a)(i) of the Act since the assessee had not deducted tax at source under section 195 of the Act while making the payment to the foreign company. On appeal, the Commissioner of Income-tax (Appeals) (“CIT(A)”) upheld the action of the AO.
Issue:-The assessee contested the action of the CIT(A) before the Tribunal on the ground that it was not liable to deduct tax.
Assessee’s contentions:-The assessee contended that under Article 7 of the old tax treaty between India and Austria, which was applicable for the year under consideration, the fees for technical services would be taxable in India only if the services were rendered in India. As the services were rendered in Austria, the amount paid by the assessee to the Austrian company was not liable to tax in India and consequently, no tax was liable to be deducted and no disallowance under section 40(a)(i) of the Act was called for.
Revenue’s contentions:- The Revenue argued that the applicability of section 195(2) of the Act was mandatory and if the assessee did not want to deduct TDS on the payment to the non-resident, it was incumbent upon the assessee to make an application under section 195(2) of the Act. Further, as per the provisions of section 40(a)(i) of the Act, the expenditure claimed was liable to be disallowed.
The Revenue placed reliance on the decision of the Karnataka High Court in the case of CIT v. Samsung Electronics Ltd [2010] 320 ITR 209 (Kar).
Tribunal Ruling
Under the provisions of the tax treaty, the payment made by the assessee would not be subject to tax in India.
A perusal of the provisions of section 195 of the Act clearly showed that if any sum chargeable under the provisions of the Act was paid to a non-resident then tax was liable to be deducted. Here, what is important is the sum chargeable under the provisions of the Act.
It is undisputed that the provisions of sections 90 and 91 of the Act would override the other provisions of the Act. Thus, when the transaction is covered under the provisions of the tax treaty, it is to be first shown that the tax treaty does not apply or that the particular income is taxable in India under the provisions of the Act if the provisions of section 195 of the Act are to be invoked.
As the income of the Austrian enterprise was not taxable in India, the provisions of section 195 of the Act would not be applicable for the year under consideration.
As the provisions of section 195(1) of the Act were not applicable, the requirement of the assessee to obtain a nil withholding certificate under section 195(2) of the Act also did not survive and on that count, no dis allowance under section 40(a)(i) of the Act could be made.
Conclusion
There have been various decisions (See note 1 below for list) to the effect to the effect that section 195(2) of the Act is applicable only where income is chargeable to tax in India. Further, one may note that as per information received from the Supreme Court today, the Karnataka High Court in the case of Samsung Electronics Ltd. (above) is reversed by the Supreme Court.
Note-1
- Van OordACZ India (P) Ltd. v. CIT [2010] 323 ITR 130 (Del)
- ITO v. Prasad Productions Ltd. [2010] 129 TTJ 641 (Chennai) (SB)
- Maharishi Housing Development Finance Corporation Ltd. v. ACIT (ITA No. 222/Del/2009) dated 8 April, 2010
