Infosys Limited Vs DCIT (ITAT Bangalore)
Conclusion: The applicable rate of TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA.
Held: Assessee was an Indian company, engaged in the business of development and export of computer software and related services. Infosys China was a company incorporated in China. It was a wholly owned subsidiary of the assessee. Pursuant to sub- contracting agreement, assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. Assessee’s contention was that the payments were not chargeable to tax under the Act; or under the relevant Double Taxation Avoidance Agreement (DTAA). It was held in the case Nagarjuna Fertilizders and Chemicals Ltd. v. ACIT reported in (2017) 78 taxmann.com 264, if rate of tax applicable under DTAA was lower than 20% tax rate prescribed u/s 206AA, TDS had to be deducted at such lower rate even if non-resident deductee failed to furnish its PAN. Further, the Hon’ble Delhi High Court in the case of Danisco India P. Ltd. v. UOI reported in (2018) 90 taxmann.com 295 (Delhi) had held that provisions of DTAA override section 206AA. Hence, the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the IT Act. It was noted that while passing the order u/s 20 1(1) and 201(1A) for assessment year 2012-2013, AO had calculated TDS liability at 10% as per the Indo-China DTAA.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals at the instance of the assessee are directed against two orders of the CIT(A) and are pertaining to assessment years 2011-2012 and 2012-2013 (for assessment year 2011-2012, the CIT(A)’s order is dated 28.11.2013 and for assessment year 2012-2013, the CIT(A)’s order is dated 24.03.2014). The orders of the CIT(A) arise out of orders passed u/s 201(1) and 201(1A) of the I.T.Act. Common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order.
2. The adjudication of appeal for assessment year 20112012 will apply mutatis mutandis for disposal of appeal for assessment year 2012-2013. Therefore, we shall adjudicate first IT(IT)A No.4/Bang/2014 pertaining to assessment year 2011-2012.
IT(IT)A No.4/Bang/2014 (Asst.Year 2011-2012)
3. The grounds raised read as follows:-
“1.1 The order passed by the learned Commissioner of income tax (Appeals) – IV, Bangalore [learned CIT(A)] is bad in law and liable to be quashed.
2.1 The learned CIT(A) has erred in concluding that there was no violation of principles of natural justice in passing the order passed under section 201 (1) of the Income tax Act, 1961 [Act].
2.2 The order passed by the learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore without providing sufficient and proper opportunity of hearing, without allowing the appellant to rebut I submit explanation in respect of the conclusions drawn from examination of the senior employee of appellant, is against the principles of natural justice, bad in law and hence liable to be quashed.
3.1 The learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore has erred in concluding that payments made to M/s Infosys Technologies (China) Company Ltd [overseas subsidiary] amounting to Rs.239,93,89,985/- resulted in accrual or arisal of income in India under section 5(2), consequently chargeable to tax in India in the case of the overseas subsidiary and the learned CIT(A) has erred in concluding that the issue of accrual or arisal of income under section 5(2) is academic in nature and hence need not be adjudicated.
4.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made to overseas subsidiary constitute ‘fees for technical services’ under section 9(1)(vii) of the Income tax Act, 1961. The said payments were covered within the exception clause of section 9(1 )(vii)(b), therefore, outside the purview of section 9(1)(vii) and consequently not liable for TDS under section 195.
5.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1 (1), Bangalore that the payments made to overseas subsidiary constitute ‘fees for technical services’ under Article 12 of the Double taxation avoidance agreement (DTAA) between India – China.
6.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made to overseas subsidiary constitute ‘royalty’ as per Explanation 2 to section 9(1)(vi) of the Income tax Act, 1961.
6.2 Assuming without admitting that the payments made to overseas subsidiary constitute ‘royalty’ as defined in Explanation 2 to section 9(1)(vi), such payments, having been made in respect of right, property or information used or services utilised for the purposes of business carried on by the appellant outside India or for the purposes of making or earning any income from any source outside India, were outside the scope of section 9(1)(vi) of the Income tax Act, 1961 and consequently not liable for TDS under section 195 of the Act.
7.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made overseas subsidiary constitute ‘royalty’ under Article 12 of the DT AA between India – China.
8.1 On facts and in the circumstances of the case and law applicable, the impugned conclusion the learned CIT(A) that the reimbursement of expenses is liable for deduction tax at source under section 195 is incorrect, bad in law and liable to be quashed.
9.1 Assuming without admitting that the payments made to overseas subsidiary were chargeable to tax in India, the learned CIT(A) has erred in concluding that the said payments are liable for TDS at the rate of20% as per section 206AA of the IT Act, 1961
9.2 The learned CIT(A) has erred in not appreciating that
(i) Overseas subsidiary was not required to obtain PAN under the provisions of the Income tax Act, 1961 and consequently there was no requirement to furnish its PAN under section 206AA;
(ii) Section 206AA does not override the Double Taxation Avoidance Agreements an or section 90 of the Income tax Act;
(iii) in any case, the TDS rate as per section 206AA cannot exceed the rate at which the income is chargeable to tax in the hands of non-resident.
9.3 In any case and without prejudice, despite having called for and obtained the PAN of overseas subsidiary during the appellate proceedings, the learned CIT(A) erred in concluding that the impugned payments were liable for TDS at 20% under section 206AA of the IT Act, 1961.
10.1 The learned CIT(A) has erred in confirming the levy of interest under section 201(1A) of the Act amounting to Rs. 24,82,57,4411- On facts and in the circumstances of the case and law applicable, interest under section 201 (lA) is not leviable. The appellant denies its liability to pay interest under section 201(lA) of the Income tax Act, 1961.
11.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed under section 201(1A) be quashed Or in the alternative
(i) Payments made to overseas subsidiary be held as not accruing / arising in India under section 5(2) of the Income tax Act, 1961;
(ii) Payments made to overseas subsidiary be held as outside the purview of section 9(1)(vi) under the Income tax Act, 1961;
(iii) Payments made to overseas subsidiary be held as not in the nature of ‘royalty’ under Article 12 of the DTAA between India – China;
(iv) Payments made to overseas subsidiary be held as outside the purview of section 9(1 )(vii) under the Income tax Act, 1961;
(v) Payments made to overseas subsidiary be held as not in the nature of ‘fees for technical services’ under Article 12 of the DT AA between India – China;
(vi) Payments made to overseas subsidiary to overseas subsidiary be held as not chargeable to tax in India under the provisions of the Income tax Act and the Treaty;
(vii) Payments made to overseas subsidiary be held as not liable for deduction of tax at source under section 195 of the Act.
(viii) In any case and without prejudice, section 206AA and the 20% rate of TDS mentioned thereunder be held as inapplicable in the present case.
(ix) Interest levied under section 201(lA) be deleted.
4. Brief facts of the case are as follows:
The assessee is an Indian company, engaged in the business of development and export of computer software and related services. Infosys Technologies (China) Co. Ltd. (hereinafter referred to as `Infosys China’ or `ITCL’ for the sake of brevity) is a company incorporated in China. It is a wholly owned subsidiary of the assessee. Pursuant to subcontracting agreement dated 01.10.2005 and 01.08.2011, the assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, the assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. The assessee’s contention was that the payments were not chargeable to tax under the Act or under the relevant Double Taxation Avoidance Agreement (DTAA).
5. The assessee, however, received order u/s 201(1) and 201(1A) of the I.T.Act (order dated 31.03.2013 for assessment year 2011-2012) whereby the Assessing Officer held that the assessee to be an `assessee in default’ for not deducting tax at source u/s 195 of the I.T.Act. The A.O. held that the payments made to Infosys China is liable for tax deduction u/s 9(1)(vii) of the I.T.Act, as fees for technical services (FTS).
The A.O. while concluding, placed heavy reliance on the order of the Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT reported in (2010) 40 SOT 220 (Mum.). The A.O. also rejected the plea of the assessee that it is entitled to the exception of section 9(1)(vii)(b) of the I.T.Act (refer page 26 to 36 of the A.O.’s order passed u/s 201(1) and 201(1A) of the Act).
6. Aggrieved, the assessee filed an appeal to the first appellate authority. The CIT(A) confirmed the order passed u/s 201(1) and 201(1A) of the Act. The CIT(A) held that the payments made by the assessee to Infosys China is both liable as FTS and royalty under the domestic law as well under the relevant DTAA.
7. Aggrieved by the order of the CIT(A), the assessee has filed this appeal before the Tribunal. The learned AR has filed elaborate submissions stating that the assessee is not liable for tax deduction at source u/s 195 of the I.T.Act either under the domestic law or under the relevant DTAA. The submissions of the learned AR summarized as follows:-
