The Director of Income-Tax Vs IBM India Private Limited (Karnataka High Court)
The Hon’ble Karnataka High Court in The Director of Income-Tax v. IBM India Private Limited [I.T.A NO. 218 of 2014 dated January 16, 2023] has held that, the pay roll related services by assessee outsourced to its foreign company would be treated as business income earned by the foreign company and not a technical service therefore, would not be liable for Tax Deducted at Source (“TDS”) under Section 195 of the Income Tax Act, 1961 (“the IT Act”). Further held that, the payments received by foreign company, would be chargeable to tax outside India.
Facts:
IBM India Private Limited (“the Respondent”) is a company engaged in the business of information technology services. IBM USA had entered into a global arrangement with Procter and Gamble (“P&G”), USA for rendering payroll related services to P&G USA, for which IBM India entered into an agreement with P&G India. Further, the payroll related services and certain human resource services to be rendered by IBM India to P&G India was outsourced to IBM Philippines.
Thereafter, an Order-in-Original dated September 14, 2012 (“the OIO”) was passed by the Revenue Department (“the Appellant”) wherein, it was alleged that the Respondent had made payments to IBM, Philippines for payroll services without deducting tax at source under Section 195 of the IT Act therefore, the Respondent was treated as ‘assessee in default’ as per Section 201 of the IT Act.
Being aggrieved an appeal was filed before the Commissioner of Income Tax (Appeals), wherein the OIO was confirmed. Thereafter, an appeal was filed before the ITAT, Bangalore, wherein, vide Order-in-Appeal dated January 24, 2014 (“the OIA”), it was held that the payments made by the Respondent were not chargeable to tax under the India-Philippines Double Taxation Avoidance Agreement (“DTAA”) and hence, no tax was required to be deducted.
Hence, this appeal has been filed by the Appellant on the ground that the services rendered by IBM Philippines falls under the category of managerial and consultancy services, which would fall under the category of ‘technical services’ therefore, as per Explanation 2 to Section 9(1)(vii) of the IT Act, the services being technical in nature and not business profits is deemed to accrue in India under Section 5(2)(b) of the IT Act.
Issues:
