• The taxpayer had entered into a technical assistance agreement with Mazda Motor Corporation (“Japanese company”) envisaging transfer of rights to assemble and manufacture vehicles in India
  • As per the agreement, the Japanese company provided training to the engineers of the taxpayer. The consideration paid by the taxpayer was by way of daily overseas allowance on account of stay of the personnel of the Japanese company.
  • The taxpayer filed an application under section 195(2). No Objection Certificate was granted permitting no deduction of tax in respect of the payments made to the Japanese company.
  • The AO held that the payment made to the Japanese company was assessable to tax as fees for technical services and that the taxpayer was liable to deduct tax at source..

Issues: Whether the payment of daily overseas allowance by the taxpayer to the Japanese company and the expenses incurred by the taxpayer on the Japanese engineers during their stay in India were in the nature of fees for technical services?


The High Court referred to the following observations of the Tribunal:

  • Imparting of training does not find any mention either in clause (vi) or (vii) of section 9(1) of the ITA
  • The payments made by the taxpayer to the Japanese company were to meet out-of-pocket expenses of the engineers sent by the Japanese company for training the workers and technicians of the taxpayer. Such payments do not partake of the character of royalty or fees for technical services
  • There was no evidence on record to substantiate the assumption that part of the remittance was retained by the Japanese company as a surplus which amounted to commercial profits. In the absence of any evidence on record, it would not be appropriate to assume that the entire money received from the taxpayer was not dispersed among the Japanese engineers.
  • The High Court observed that the certificate granted under section 195(2) of the ITA was never cancelled under section 195(4) of the ITA, in absence of which the taxpayer was not required to deduct tax at source and could not be treated as assessee in default.
  • If the taxpayer was not required to deduct tax at source and could not be declared assessee in default, the question whether the payment was in the nature of fees for technical services or in the nature of reimbursement for the expenses incurred or whether the Tax Treaty overrides the provisions of the ITA, need not be gone into.

Swaraj Mazda (10 taxmann.com 178) (Punjab & Haryana HC)

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June 2021