Case Law Details
1. The brief background of the issue is that during the F.Y. 2004-05, the assessee paid a sum of Rs.8,46,838/- to M/s VHQ Singapore without deducting tax on the same. The AO was of the opinion that this amount was in the nature of professional fee and, therefore, assessee was required to deduct tax at source on the applicable rates. The assessee submitted before the AO that the recipient company was located in Singapore and it did not have a Permanent Establishment (PE) in India. The said company had rendered post production services in Singapore for the purpose of an advertisement film and the work was executed wholly outside India and, therefore, the assessee company was not liable to deduct TDS on the same. However, AO was not satisfied with the reply of the assessee and was of the opinion that since payment was made for processing of a film, assessee was liable to deduct tax u/s 194J and accordingly, he held the assessee in default u/s 201 / 201(1A) of the Act. During the course of appeal before CIT(A), the assessee submitted as under:-
“ A payment of Rs.8,45,838/- was made to VHQ SPTE Ltd., which was a company located in Singapore. The said company had no permanent establishment in India. The amount was paid towards studio hire charges in Singapore for post product/on work for an advertisement film produced by the appellant company. As per the provisions of DTAA between India and Singapore,, the appellant company did not deduct any tax on the payments made to the VHQ SPTE Ltd. as it had no permanent establishment in India. In the original assessment, the assessing officer did not raise any demand on account of TDS for this payment as he was convinced from the verification of bills/ vouchers, that no tax was deductible on account of these payments. However, while completing the assessment u/s 201 (1)1 201(1 A) r.w.s 263 of the Income Tax Act, 1961, the then assessing officer considered the payment to the party liable for deduction of tax u/s 194I. He mentioned that as the payment is made for processing of the film, it was liable for deduction u/s 194J attracted for such payments. Further, as per the DTAA between India and UK, as the party did not have any permanent establishment in India, it was not liable to deduction of tax for this payment. It may be appreciated from the bills that the services were rendered by a non-resident company to which the DTAA between the two countries applies. Further, even as per the certificate issued in annexure B by a Chartered Accountant, no tax was liable to be deducted on this payment. In light of the above submissions and the bills/ vouchers submitted, we request Your Honour to delete the demand of Rs.81,878/- made on ac of the payment to KBW Ltd. by the assessing officer and oblige.”
2. However, Ld. CIT(A) did not accept the submissions of the assessee. It was held by him that amendment was brought in section 9(1) wherein it was provided that situs of rendering services was not relevant in determining the taxability of the income of the payee u/s 9 of the Act as far as payment on account of FTS was concerned. It was held that services rendered in Singapore for production of advertisement film was used in India, therefore, the same was taxable in India and accordingly the order of the AO was upheld.
3. During the course of hearing before us, Ld. Counsel of the assessee vehemently contested this issue. The arguments made by him are summarized as under:-
1. “’VHQ.’ merely carried out post production activity. In the process no technical knowledge, experience, skill, know-how or process as envisaged by Article 12 of the India Singapore DTAA was made available to the Appellant. Hence, the transaction cannot be held to be a fee for technical services as envisaged by Article 12 (4)(a) of the said DTAA. (Pg. 60 – 61 – Case Law PB 3)
2. Hence, as per the India Singapore DTAA, the fees paid to ‘VHQ’ were business profits as per Article 7 of the India Singapore DTAA and could be taxed only in the Singapore as ‘VHQ’ did not carry out any business via any permanent establishment in India.
(Pg. 62 – Case Law PB 3)
3. It is a settled position of law that in case of an International transaction governed by a DTAA, the specific provisions of the DTAA shall override the general provisions of the act. This is amply demonstrated by Circular No. 333 [F No. 506/42/81-FTD] dated 2-4- 1982 that states that “where a double taxation avoidance agreement provides for a particular mode of computation of income, the some should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income.” The circulars of the CBDT are binding upon the Department.
Reliance placed upon CIT v. Hero Cycles Pvt. Ltd. [228 ITR 463 (SC), K.P. Varghese v. ITO 131 ITR 597 (SC) and UOl v. Azadi Bachao Andolan 263 ITR 706 (SC).
4. Hon’ble Jurisdictional High Court in the case of CIT v. Siemens Aktiongesellschaft [20091 310 ITR 320 (Born) held that where the provisions of the DTAA are more beneficial than provisions of the Act, the provisions of the DTAA would prevail.
5. For Article 12 of Singapore – India DTAA to apply, technical knowledge, experience, skill, know-how or process needs to be ‘made available’. Generally speaking, technology would be considered ‘made available’ when the person acquiring the service is enabled to apply the technology as was also held in:
- Mc. Kinsey & Co., Inc. (Philippines) v. ADIT 99 ITD 549 (Mum ba i)
- ICICI Bank Ltd. v. DIT 20 SOT 453 (Mumbai)
- Anapharm Inc., In re 305 ITR 394 (AAR)
As the payment made to ‘VHQ’ is not taxable in India, assessee cannot be held to be an Assessee in default.
4. Per contra, Ld. DR vehemently supported the order of the Ld. CIT(A) and AO and submitted that since payment has been made for the work used in India, the assessee should deduct TDS u/s 194J.
5. We have gone through the facts and circumstances of this case and orders passed by the lower authorities. The undisputed fact is that ‘VHQ’, i.e. the recipient merely carried out post production activities. Nothing has been brought before us to indicate or show that in the process of carrying out any work, whether any technical knowledge, experience, skill, know-how or process was made available to the assessee. VHQ is resident of Singapore. This is also an admitted fact that it had no PE in India. This amount could be brought to tax in India only subject to the provisions of Double Taxation Avoidance Agreement between India and Singapore. Since this activity was not carried out through any PE in India, it cannot be taxed as business profit of VHQ under Article 7 of India Singapore DTAA. Therefore, we have to examine its taxability under Article 12 of India Singapore DTAA which provides for taxability of Fee for Technical Services. It has been stipulated in Article 12(4)(b) of India Singapore DTAA that ‘Fees for Technical Services’ means payment to any person in consideration for services of managerial, technical or consultancy nature fee, if such services make available technical knowledge, experience, skill, know-how or process which enables the person availing the services to apply the technology contained therein.
6. In the facts of the case before us, VHQ has carried out post production job. In this process, no technology or skill has been made available to the assessee. In case assessee would need similar job again, then he will have to go back to VHQ to get this job done. No replication or repetition is possible at the end of the assessee at its own. Thus, the requisite mandatory condition of ‘make available’ of technical knowledge or know-how or skill is missing in this case. Therefore, in our considered opinion, this amount cannot be brought to tax as FTS under India-Singapore DTAA. The judgments relied upon by the Ld. Counsel in his submissions have taken similar view. It is also noted that as per provisions of section 90(2) of the Act, most beneficial provision shall be available to the assessee between provisions of the Act and the provisions of the DTAA. Therefore, we find that this amount was not taxable in the hands of VHQ in India. Therefore, assessee was not obliged to deduct tax at source on the payment made to VHQ. As a result, these grounds are allowed.
