Income Tax – Payments made for services provided from abroad will be taxable as income in hands of recipient – payments made to foreign contractor are liable to TDS : ITAT

NEW DELHI, DEC 31, 2007 : THIS is an appeal before the Tribunal by M/s Hotel Scopevista Ltd over the order of the Commissioner of Income Tax (Appeals), confirming the orders of the A.O. directing the assessee to deduct tax at source in respect of payments made to the foreign contractor.

The Facts of the case are as follows.

The assessee company which is engaged in the business of operating and maintaining hotels was constructing Lodhi hotel at New Delhi. For this purpose, the assessee had entered into an agreement dated 14.2.2003 with PSIL a foreign contractor, under which the latter was required to render project management services in relation to construction of the said hotel. The assessee submitted before the A.O. that the services rendered by PSIL were step in aid to the process of construction as ultimate aim of the services rendered was the construction of hotel building. Such services were therefore to be excluded from the definition of fees for technical services in view of exception provided in Explanation (2) of section 9(1)(vii). The A.O. however, did not accept the plea of the assessee and held that payment made by the assessee was for the various management services and not for construction of hotel and the case was therefore, not covered by the exception provided in Explanation (2) of Section 9(1)(vii) and directed the assessee to deduct tax at source @ 20% of the gross payment. In appeal, the CIT(A) agreed with the view taken by the A.O. that PSIL was responsible only for certain project management services and that the payment had not been made by the assessee for construction of hotel and therefore, the case of the assessee was not covered by the exclusionary clause in Explanation2. Commissioner of Income Tax (Appeals) (A) accordingly upheld the decision of the A.O. to deduct tax at source.

Aggrieved by the said decision, the present appeals have been filed by the assessee before the tribunal.

The tribunal after perusal of the records and considering the rival contentions carefully, observed:-

1. Services provided by the non resident were of the nature of technical design and management services which were entirely different from the construction activity. The only point to be considered is whether payment for such services can be considered as consideration for any “construction project” so as to exclude it from the definition of “fees for technical services” as provided in Explanation 2.

2. In the present case as the services in this case had been provided from the foreign country without actually undertaking any activities in India in relation to the construction of the hotel.

3. The reference to the provisions of section 44BB of the Act, which relate to computation of profit and gain in connection with the business of exploration etc with reference to various services provided in connection with exploration of mineral oil such as comprehensive geological and geophysical studies, supply of supervisory staff and personnel having expertise in operation and management of drilling rigs, imparting training etc. were different from the fees for technical services referred in Explanation 2 of section 9(1)(vii).

4. the various managerial, technical and consultancy services provided by the foreign contractor from the foreign country in connection with the construction project without actually taking up any such activities in India, will not be covered within the meaning of the words used in the Explanation 2 to section 9(1)(vii). In other words the payments made for various services provided from abroad by the foreign contractor will be taxable as income in the hands of the recipient under the provisions of the Act and accordingly the payments made by the assessee to the foreign contractor are liable for the deduction of tax at source.

Accordingly, the tribunal upheld the orders of CIT(A) and dismissed the appeals filed by the assessee.

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