2007 (11) TMI 436 - AT - Income Tax

Tribunal Upholds No Default on Tax Deduction, Distinguishing Between Technical Services and Contract Payments.

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision that the assessee was not in default for non-deduction of tax under section ... Deduction of tax at source u/s 194C instead 194J - ''Assessee in Default'' u/s 201(1)/201(1A) - nature of payments is 'Professional services or fees for technical services or Not' - maintenance support agreement, fabrication of chilled water line, work order for thermal insulation/erection, conversion of partially oriented yarn (POY) into polyester textured yarn and twisted yarn - HELD THAT:- In the present case, it is seen that there may be use of services of technically qualified persons to render the services but that itself do not bring the amount paid as ‘fees for technical services’ within the meaning of Explanation 2 to section 9(1)(vii). The amounts paid are towards annual maintenance contract of certain machinery or for converting POY into textured/twisted yarn. The technology or the technical knowledge of the persons is not made available to the assessee but only by using such technical knowledge services are rendered to the assessee. In such a case, it cannot be said that the amount is paid as ‘fees for technical services’. Rendering services by using technical knowledge or skill is different than charging fees for technical services. In a latter case, the technical services are made available due to which the assessee acquired certain right which can be further used. In the present case, it is not so. The persons rendering certain services has only maintained machinery or converted yarn but that knowledge is not now vested with the assessee by which itself it can do research work. Thus, the amount paid cannot be considered as fees for technical services within the meaning of section 194J of the Act. In the result, the appeal is dismissed. Issues:Assessment under section 201(1) for non-deduction of tax at source under the correct section 194J instead of 194C.Analysis:The appeal by revenue challenged the order treating the assessee as in default for not deducting tax under section 194J for payments made. The Assessing Officer contended that the payments were for 'fees for technical services' and not merely to a contractor. The CIT(A) held that the payments were not for technical services based on a judgment and a circular. The revenue appealed, arguing that the payments were indeed for technical services under section 194J.The revenue contended that the work involved sophisticated equipment and skilled labor, requiring technical skill or special knowledge. The revenue sought to set aside the CIT(A)'s order and restore the Assessing Officer's decision.The Tribunal considered the definition of 'fees for technical services' under Explanation 2 to section 194J. Referring to a judgment by the Madras High Court, the Tribunal highlighted examples where the use of technology does not necessarily constitute technical services. The Tribunal noted that the technical knowledge used to render services did not transfer to the assessee, distinguishing it from fees for technical services. The Tribunal concluded that the payments made were not for technical services under section 194J.In conclusion, the Tribunal dismissed the appeal, upholding that the payments made did not fall under the category of fees for technical services as per section 194J of the Income-tax Act, 1961.