The assessee-company had made various payments to its holding company M/s. Alstom Holdings, France but no deductions of tax at source were made. – there is justification for the assessee’s conviction at the time of payment that no tax was deductible at source. It was neither a composite payment. The payment could not be held as made for technical services, as argued by the Revenue. Neither it is a case of royalty. Therefore, we find that the assessee was not bound to deduct tax at source for the disputed payment and therefore, as rightly held by the C.I.T.(Appeals), there was no justification to pass the orders under sec.201(1) and 201(1A)
Facts: Alstom Ltd. (the assessee) is a public limited company engaged in the business of manufacturing switch-gears and transformers and other instruments for generating and transmitting electric power. A survey was conducted in the office of the assessee wherein it was noticed that the assessee had made various payments to its holding company Alstom Holdings, France; but no deductions of tax at source were made. On the basis of the activities carried on by the assessee and the services availed by the assessee, the Assessing Officer (AO) came to the conclusion that the assessee was assessee in default for non deduction of tax at source. Accordingly, the AO passed an order under section 201 and 201(1A) of the Income tax Act, 1961 (the IT Act) for the alleged failure of the assessee to deduct tax at source.
On appeal, Commissioner of Income Tax (Appeals) [CIT(A)] held that the case of the assessee was not coming under the purview of tax deduction at source under section 195 and therefore, the orders passed under sections 201(1) and 201(1 A) were not justified.
On appeal filed by the Revenue, the Income Tax Appellate Tribunal (the Tribunal) set aside the CIT(A) order and upheld the action of the AO.
On appeal filed by the assessee, the High Court set aside the order of the Tribunal and remitted back the matter for reconsidering the issue to the Tribunal in the light of the relevant contract and its terms.
Observation and decision of the Tribunal:
• The assessee had made the payments to the holding company for networking services provided by Equant, UK by virtue of an agreement entered into between the holding company and Equant, UK. The holding company had procured communication software by name “lotus notes” from Equant, UK, which supported the wide area network (WAN) commissioned by the holding company for transmitting data and information within the group companies around the world. This communication software helped the holding company and its subsidiaries in different countries including the assessee to have instant online access to various data and information relating to the group business activities.
• As the services were utilized by various subsidiaries, the holding company apportioned and disbursed the cost incurred on account of the services rendered by Equant, UK to its subsidiary companies in different countries on the proportion of actual usage, without adding any element of profit.
• The networking services provided by Equant, UK would not come under the purview of royalty or fees for technical services. The business of the assessee is manufacturing of instruments and system necessary for generating and transmitting electric power. Equant, UK did not provide any knowledge or technique, which is necessary for the business carried on by the assessee. The payment was made by the assessee for availing a common business service for networking and the expenditure incurred by the assessee was in the nature of business expenditure. If the payment made by the assessee was in the nature of business expenditure and thereby Equant, UK had earned an element of income, the same could be considered only as business income. Such income could be taxable only in the event Equant, UK had a permanent establishment in India.
• Relying on the Supreme Court decision in case of GE India Technology Centre P. Ltd. v. CIT (327 ITR 456) and Transmission Corporation Of A. P. Ltd. & Anr. v. CIT(239 ITR 587), the Tribunal held that if the payment does not have any composite nature and the assessee thinks that there is no income element as well, there is no compulsion on the part of the assessee to apply under section 195(2).
• The payment made by the assessee was neither a composite payment nor the payment could not be held as made for technical services, as argued by the Revenue. Also it is not a case of royalty. Therefore, the assessee was not bound to deduct tax at source for the disputed payment and therefore, as rightly held by the CIT(A), there was no justification to pass the orders under section 201(1) and 201(1A).
The Tribunal has correctly held that if the amount remitted by the payer is not taxable in India in the hands of a non-resident recipient, the question of withholding tax under section 195 does not arise.
In this case, the Tribunal has examined the nature of transaction from an end-to-end perspective, rather than looking at the same as mere reimbursement of expenses, for the purpose of determining its taxability. This aspect is normally lost sight of by taxpayers, who have such type of global arrangements (apportionment and disbursement of cost) and they look at the transaction as just a pass through cost or reimbursement of expenses.
The Tribunal has held that the payment made by the assessee was for the purpose of availing a common business service like networking services and therefore, the same cannot be considered to be in the nature of fees for technical services or royalties. This is in line with the decisions in the case of Skycell Communications Ltd. v. DCIT (251 ITR 53) (Mad) and Cable & Wireless Networks India (P.) Ltd., In Re. (315 ITR 72)(AAR) wherein it was held that provision of a cellular telephone or networking services are nothing but the facility being given to communicate with others and therefore there was no provision of technical services.
ITO v. Alstom Ltd. (2010-TII-182-ITAT-MAD-INTL)
Madras bench of the Income-tax Appellate Tribunal