Case Law Details
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:
- Whether the pay roll services rendered by IBM Philippines to the Respondent is technical service or constitute business profits?
- Whether the term ‘Fee and Technical Service’ (“FTS”) as defined in Section 90 of the IT Act can be considered w.r.t. service provided by IBM Philippines?
- Whether the interest under Section 201(1) of the IT Act is leviable on the Respondent?
Held:
The Hon’ble Karnataka High Court in I.T.A NO. 218 of 2014 held as under:
- Observed that, as per Article 7 of India-Philippines DTAA, IBM Philippines would be chargeable to tax in Philippines on the transactions between the Respondent and IBM Philippines.
- Noted that, IBM Philippines work as a sub-contractor under IBM India and earns profit by rendering service to P&G India and further does not have a permanent establishment in India.
- Held that, the income in the hands of IBM Philippines from the Respondent is a business income as IBM Philippines was not rendering any technical service. Thus, the payments received by IBM Philippines shall not be liable for TDS under Section 195 of the IT Act.
- Further, held that the Respondent cannot be termed as ‘assessee in default’ as per Section 201(1) of the IT Act.
Relevant Provisions:
Section 195 of the IT Act:
“Other sums
(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :
Explanation.1-For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
Explanation 2.-For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has-
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-section (1).
(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officers before the expiry of such period, till such cancellation.
(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.
(6) The person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.
(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable.”
Section 201(1) of the IT Act:
“Consequences of failure to deduct or pay-
(1) Where any person, including the principal officer of a company-
(a) who is required to deduct any sum in accordance with the provisions of this Act; or
(b) referred to in sub-section (1A) of section 192, being an employer,
does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:
Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee-
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed:
Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax.”
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
These appeals by the Revenue, directed against common order passed by the ITAT1 dated January 24, 2014 in ITA No. 491/Bang/2013 and connected cases have been admitted to consider following questions of law:
1. Whether on the facts and in the circumstance of the case, and in law the Tribunal was correct in holding that payroll services rendered by IBM Philippines to the assessee is not Technical Services but constitute business profits and hence Section 195 of the Act is not attracted?
2. Whether on the facts and in the circumstance of the case, and in law the Tribunal was correct in holding that IBM Philippines has rendered services to the assessee in the course of business carried on by it and hence payment received is business profits in the hands of the IBM Philippines and the same is not taxable in India as the recipient company has no permanent establishment in India?
3. Whether on the facts and in the circumstance of the case, and in law the Tribunal was correct in holding that the DTAA between India and Philippines does not define Fee for Technical Services and hence the definition of Fee for Technical Services under the Income Tax Act cannot be applied in view of Section 90 of the Act?
4. Whether on the facts and in the circumstance of the case, and in law the Tribunal was correct in holding that the Assessing Officer was not in levy of interest under Section 201(1) of the Act?
2. Briefly stated the facts of the case are, Assessee is a company engaged in the business of information technology services. IBM USA had entered into a global arrangement with Procter and Gamble, USA (‘P&G USA’ for short) for rendering payroll related services to P&G USA. In terms of a companion agreement, IBM India had entered into an agreement with P&G India. The services to be rendered by IBM India to P&G India was outsourced to IBM Philippines. In addition, IBM India had also outsourced certain human resource services to IBM Philippines for the project.
3. In his order dated September 14, 2012 the Assessing Officer has recorded that the Assessee had made payments to IBM Business Services, Philippines for payroll services without deducting tax at source. The AO2 concluded that in respect of payments made towards FTS3 TDS ought to have been deducted under Section 195 of the Income Tax Act, 1961 (the Act for short). Assessee was treated as ‘assessee in default’ under Section 201 of the Act. The CIT(A)4 confirmed AO’s order. Assessee challenged the said order before the ITAT5. By the impugned order, the ITAT has allowed the appeal holding that the payments made by the assessee were not chargeable to tax under the India-Philippines DTAA6 and hence, no tax was required to be deducted. Hence, this appeal by the Revenue.
4. Shri. K.V Aravind, Learned Senior Standing Counsel for the Revenue, assailing the impugned order submitted that:
- the service rendered by IBM Philippines falls under the category of managerial and consultancy services. Data management is also one of the services rendered and it would fall in the category of ‘technical services’.
- that ITAT has erroneously construed that services rendered by IBM Philippines is in the course of business and the payment received is business profit in the hands of IBM Philippines;
- the ITAT has proceeded to hold that FTS is not defined under DTAA. However, the definition of FTS cannot be applied in view of Section 90 of the Act;
- the ITAT has failed to consider that the services rendered by IBM Philippines are technical in nature as per Explanation 2 to Section 9(1)(vii) of the Act and therefore, the income is deemed to accrue in India under Section 5(2)(b) of the Act;
5. In substance, Revenue’s case is, the payments made to IBM Philippines is for technical services and cannot be treated as business profits.
6. Opposing the appeal, Shri. Suryanarayana, Learned Senior Advocate for Assessee submitted that:
- in terms of the companion agreement, IBM India has entered into an agreement with P&G India and IBM India has outsourced the services to be rendered by IBM Philippines. IBM Philippines was not rendering any technical service to IBM India. For the services rendered to P&G India on behalf of the assessee, assessee was paying the service charges to IBM Philippines. Therefore, it was ‘income earned’ in the hands of IBM Philippines;
- as per Section 90(2) of the Act, the provisions of the Act or DTAA whichever is more beneficial to the assessee has to be applied. In support of his contention, he relied upon Union Of India v. Azadi Bachao Andolan7.
7. With the above submissions he prayed for dismissal of these appeals.
8. We have carefully considered rival contentions and perused the records.
9. Undisputed facts of the case are, assessee has entered into an agreement with P&G India to render certain services. It has outsourced the said assignment to IBM Philippines. Assessee pays to the IBM Philippines from out of the amount which it receives from P&G India. As far as IBM Philippines is concerned, it works like a sub-contractor under IBM India. It earns profit by rendering service to P&G India. It does not provide any technical service to the assessee. Further, IBM Philippines does not have a permanent establishment (PE) in India. Therefore, the income in the hands of IBM Philippines from the assessee is a business income.
10. We may record that Revenue’s case is also that the transactions between the assessee and IBM Philippines were performed in the ‘course of its business’. As per Article 7 of India-Philippines DTAA, IBM Philippines would be chargeable to tax in Philippines.
11. The first and second substantial questions are, whether ITAT was correct in holding that pay roll services rendered by IBM Philippines to the assessee is not technical service. It is not in dispute that under the companion agreement, IBM India Pvt. Ltd., has entered into an agreement with P&G India. The said work has been outsourced to IBM Philippines. IBM Philippines is carrying out the work described in the agreement between IBM India and P&G India. Hence, IBM Philippines was not rendering any technical service and therefore, the income in the hands of IBM Philippines is a business income.
12. The third question is, whether ITAT was right in holding that DTAA does not define FTS. This question does not arise for consideration because, as recorded in para 7.3.9 of impugned order, Revenue has taken a specific contention that FTS was absent under the India-Philippines Treaty. Further, it is also not in dispute that under the agreement, IBM Philippines was rendering service in the field of payroll, data management etc., in connection with the work/assignment described in the agreement between IBM India and P&G India.
13. The ITAT has, in our considered view rightly recorded in para 8.1.3 of its order that as per Article 7(1) of Indian Philippines DTAA, the business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Admittedly, there is no permanent establishment of IBM Philippines in India. As per Article 23 of DTAA, the business profit of IBM Philippines shall be taxable in that State only. Further, the CIT(A) has also held that the transactions between the assessee and IBM Philippines were in the course of its business and the same has not been disputed by the Revenue. (See: para 8.1.4)
14. Hence, the payments received by IBM Philippines shall not be liable for TDS under Section 195 of the IT Act. Therefore, assessee cannot be deemed as an ‘assessee in default’.
15. In view of the above, these appeals must fail. Hence, the following:
ORDER
(a) Appeals are dismissed.
(b) The questions of law are answered in favour of the assessee and against the Revenue.
No costs.
Notes:-
1 Income Tax Appellate Tribunal.
2 Assessing Officer
3 Fees for Technical Services
4 Commissioners of Income Tax (Appeals) vide order dated February 2, 2013.
5 Income Tax Appellant Tribunal.
6 Double Taxation Avoidance Agreement
7 [2003] 132 Taxman 373 (SC)
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