No section 195 TDS on Charges for Services for issuance of GDR

CIT Vs Indusind Bank Ltd (Bombay High Court)

The issue under consideration is whether the services in relation to issuance of GDRs are covered under the provisions of Section 9(i)(vii) and whether the same liable for TDS under the provisions of Section 195 of the Act?

High Court states that services rendered by Amas Bank were purely of a commercial nature and bore the character of income arising to it wholly outside India, emanating from commercial services rendered by the Bank in the course of carrying on of its business wholly outside India. Such services were neither rendered in India nor utilized in India and therefore, such services did not partake the character of fees for technical services. It is indisputable that the requirement of deducting tax while making such payment would arise only if payee has the liability to pay tax on such payment.  HC may recall the assessee desired to raise capital through Global Depository Receipts. To assist the assessee in such process, the assessee had engaged Amas Bank for certain financial services. The payment was made for such financial services rendered by Amas Bank. The GDR was issued outside India. The services were rendered by Amas Bank outside India for raising such funds outside India. It come to the conclusion that the services rendered by Amas Bank were neither rendered in India nor utilized in India and the charterer of income arising out of such transaction was wholly outside India emanating from commercial services rendered by the bank in course of carrying business wholly outside India. The Tribunal was, therefore, correctly of the opinion that such services cannot be included within the expression technical services in terms of Section 9(1)(vii)(b) read with Explanation to Section 9.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

1. These appeals involve the same assessee, similar facts and legal issues. They have been heard together and would be finally disposed of by this common order. For convenience, we may refer facts from Income Tax Appeal No. 659 of 2018.

2. The appeal is filed by the Revenue to challenge the judgment of the Income Tax Appellate Tribunal, Mumbai (“the Tribunal” for short) dated 26.4.2017. Following questions are presented for our consideration:-

(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in payments made to Amas Bank Middle East Ltd towards services in relation to issuance of GDRs are covered under the provisions of Section 9(i)(vii) r/w explanation 2 and liable fort TDS under the provisions of Section 195 of the I.T. Act, 1961?

(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in ignoring the decision of jurisdictional special bench in the case of Mahindra & Mahindra Ltd Vs. Dy. CIT (2009) 30 SOT 374 (Mum)(SB) wherein it was held that fee for technical services (FTS) under Section 9(i)(vii) read with explanation 2, covered management commission, selling commission and legal expenses paid to non-resident lead managers in respect of GDR issue?”

3. Respondent – assessee is a scheduled bank and is engaged in banking business duly registered under the Banking Regulation Act. For its need for capital, the bank decided to raise capital abroad through the issuance of Global Depository Receipts (“GDRs” for short). The assessee engaged different agencies for such purpose. The assessee had engaged one Amas Bank (Middle East) Ltd which was incorporated under the laws of United Arab Emirates and was carrying on financial services, for providing services such as Global coordinator and Lead Manager to the said GDR offer. The assessee bank had raised USD 51,732,334/-by way of the gross proceeds of GDR issued. The agency would be paid the agreed sum of money which was later on renegotiated. The assessee paid sum of USD 20,09,293/-. The issue at hand is with respect to the assessee’s obligation to deduct tax at source while making such payment of agency charges which in terms of equivalent Indian currency comes to Rs. 90.83 Lacs (rounded off). The Revenue contends that being the payment of technical services, deduction ought to have been made as prescribed under Section 195 of the Income Tax Act, 1961 (“the Act” for short). The assessee argued that the foreign payee had no tax obligation in India and therefore, requirement of deducting tax at source does not arise.

4. The Assessing Officer and the CIT(A) ruled in favour of the Revenue. The issue thereupon reached the Tribunal. The Tribunal by the impugned judgment reversed the decisions of the Revenue Authorities and allowed the assessee’s appeal making following observations:-

“4. Facts in brief are that the assessee is a scheduled Bank duly registered and carrying on the business of banking under the Reserve Bank of India Act and Banking Regulation Act of India. For the purpose of expanding its banking business activities and also for meeting other capital needs, the Bank felt the need to raise capital abroad through the issuance of Global Depository Receipts (GDRs). After considering various option and evaluating the cost as well as benefits of raising such capital through GDRs the assessee decided to engage Amas Bank (Middle East) Ltd. (Amas Bank for short) incorporated and carrying on Financial Services business in the United Arab Emirates (U.A.E.) as a licensed entity by Dubai Financial Services Authority (“DFSA”), for providing the services as sole Book-runner, Global coordinator and Lead-Manager to the above mentioned GDR offer. The proposed transaction was aimed at raising initially around USD 100 million through issuance of GDRs on the Luxembourg Stock Exchange’s Euro MTF Market. It was agreed that for their services Amas Bank shall be paid a fee equal to 3.5% of the gross proceeds of the GDR issue, the payment of fees being net of withholding tax).

5. In pursuance of the assignment, Amas Bank were successful in raising an aggregate amount of USD 51,732,334 by way of the gross proceeds of GDR issued. The fees at 3.5% of the gross proceeds worked out to approximately USD 18,10,632. The said fees were adjusted from the proceeds of GDR and transferred to an escrow account on 25/06/2008. Pursuant to this remittance, the assessee on the due date of payment of tax being 7/7/2008 paid income tax thereon under section 195 of the Income Tax Act (the Act) in the amount of Rs.90,83,185. (Copy of receipted challan enclosed – Annexure – 2). In accordance with the procedure for foreign remittances prescribed with reference to section 195 of the Act, certificate of Chartered Accountants, M/ s B.K Khare & Co. was obtained dated 4/7/2008. Although the certificate in item (4) therein mentioned and certified deduction of tax at source of USD 2,13,722 equivalent to Rs.90,83,185/- being the amount of tax grossed up @ 10.5575%, the assessee contended that no tax was payable at all under section 195 of the Act.

6. In view of the above discussion, we do not find anything wrong in asessee’s denial of its liability to pay tax u/s.195 of the IT Act. In respect of the amount payable to AMAS Bank UAE, we also found that the services rendered by Amas Bank were purely of a commercial nature and bore the character of income arising to it wholly outside India, emanating from commercial services rendered by the Bank in the course of carrying on of its business wholly outside India. Services under the Agreement with Amas Bank were neither rendered in India nor utilized in India. In this view of the matter, the services did not partake of the character of fees for technical services as defined in the Explanation to Section 9(1)(vii)(b) of the Act. The issue is squarely covered by the decision of Bangalore bench in case of ABB FZ-LLC 162 ITD 89 and also by the decision in case of Mckinsey Business Consultants 68 SOT 178.

7. In view of the above, the payment of fees by assessee’s bank to Amas Bank is not liable to tax in India and the tax already paid be refunded to assessee. In terms of paragraph 4 of the Agreement (Annexure – 1 hereto), so entered by assessee, the payment of fees shall be free, inter alia, of any withholding tax, meaning thereby that such tax was to be borne by the assessee under the Agreement, thus the basis condition for making an appeal under Section 248 of the Act for a declaration that no tax was deductible on the said income being fulfilled.

8. In the result, appeals of the assessee are allowed.”

5. In essence, the Tribunal came to the conclusion that services rendered by Amas Bank were purely of a commercial nature and bore the character of income arising to it wholly outside India, emanating from commercial services rendered by the Bank in the course of carrying on of its business wholly outside India. Such services were neither rendered in India nor utilized in India and therefore, such services did not partake the character of fees for technical services.

6. As is well known, under sub-section (1) of Section 195 of the Act, any person responsible for paying to a non-resident any other sum chargeable under the provisions of the Act (not being income chargeable under the head “salaries”), would at the time of credit of such income to the account of the payee or at the time of payment in cash or by issuance of cheque or draft or by any other mode, whichever is earlier deduct income tax thereon at the rates in force. It is, thus, indisputable that the requirement of deducting tax while making such payment would arise only if payee has the liability to pay tax on such payment. In case of GE INDIA Technology Centre P Ltd Vs. CIT1, this aspect was elaborately discussed by the Supreme Court. It was held that the expression “chargeable under the provisions of the Act” in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. It was observed that if the tax is not so assesseable, there is no question of tax at source being deducted. With this background, we may revisit the nature of transaction between the assessee and Amas Bank. We may recall the assessee desired to raise capital through Global Depository Receipts. To assist the assessee in such process, the assessee had engaged Amas Bank for certain financial services. The payment was made for such financial services rendered by Amas Bank. The GDR was issued outside India. The services were rendered by Amas Bank outside India for raising such funds outside India. It was, in this context, the Tribunal had, as noted above, come to the conclusion that the services rendered by Amas Bank were neither rendered in India nor utilized in India and the charterer of income arising out of such transaction was wholly outside India emanating from commercial services rendered by the bank in course of carrying business wholly outside India. The Tribunal was, therefore, correctly of the opinion that such services cannot be included within the expression technical services in terms of Section 9(1)(vii)(b) read with Explanation to Section 9.

7. Learned counsel for the Revenue, however, put stress on two successive amendments. First of inserting the Explanation to Section 9 by Finance Act of 2007 w.r.e.f. 1.6.1976 and subsequently replacing it by by Finance Act of 2010 w.r.e.f. 1.6.1976. By virtue of this explanation, whether or not the non-resident has a residence or place of business connection in India, or had rendered services in India, would be inconsequential when one decides whether in terms of Section 9(1) of the Act, the income was to be charged in India or not. He submitted that Section 9 gives rise to deeming fiction which must be allowed to take its full effect.

8. As is well known, Section 9(1) of the Act specifies the incomes which would be deemed to be accrued or arise in India. Clause (vii) thereof reads as under:-

“(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.”

9. An explanation was inserted at the end of Section 9 by Finance Act of 2007, w.r.e.f. 1.6.1976 which reads as under:-

“Explanation – For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.”

As per this explanation, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub- section (1), such income would be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India. This explanation starts with expression “For the removal of doubts, it is hereby declared…….”.                Through this explanation, thus, the legislature desired to delink the question of income deemed to have accrued or arisen in India from the requirement of the non-resident having a residence or place of business or business connection in India. This, however, did not imply that the basic requirement of income having arisen in relation to the activity in India and having connection to the consumption of such services in India was totally done away with. This explanation was subsequently substituted by the following explanation by the Finance Act of 2010 w.r.e.f. 1.6.1976:-

“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.”

Like the previous explanation, the present explanation also contains the expression “For the removal of doubts, it is hereby declared that …..”. It provides that for the purpose of the said Section, the income of a non-resident would be deemed to accrue or arise in India under clauses (v),(vi) and (vii) of sub-section (1) and would be included in the total income of the non-resident whether or not such non-resident has a residence or place of business or business connection in India, or, the non-resident has rendered services in India. This explanation further seeks to delink the concept of income deemed to have accrued or arisen in India to the non-resident having rendered services in India. In case of CIT Vs. Gujarat Reclaim and Rubber Products Ltd2, this Court had come to the conclusion that payment of commission to non-resident agent which commission was not an income deemed to accrue or arise in India would not invite the requirement of deducting tax at source. In case of Jindal Thermal Power Co Ltd Vs. Deputy CIT (TDS)3 in the context of Section 9 of the Act, the Karnataka High Court observed that the twin requirement of rendering of services in India and utilization of services in India would have to be satisfied. The Court was examining the effect of the newly inserted explanation to Section 9 by virtue of Finance Act of

We are conscious that subsequent explanation which replaced the previous one by the Finance Act of 2010 has somewhat widened the scope of applicability of Section 9. However, the question of non-resident having rendered services in India is quite different from such services having been consumed by the assessee in India.

10. In the result, we do not find any error in the view of the Tribunal. The appeals are dismissed.

Notes :-

1. [2010] 327 ITR 456 (SC)

2. [2016] 383 ITR 236 (Bom)

3[2010] 321 ITR 31 (Karn)