2015 (11) TMI 1544 - AT - Income Tax

Non-resident patent attorney fees not taxable in India; TDS not required

Deputy Commissioner of Income-tax, and Assistant Commissioner of Income-tax Circle-52, Kolkata Versus Shri Subhotosh Majumder

Deputy Commissioner of Income-tax, and Assistant Commissioner of Income-tax Circle-52, Kolkata Versus Shri Subhotosh Majumder - TMI Issues Involved:1. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of TDS under Section 195.2. Determination if payments to non-resident patent attorneys are chargeable to tax in India.3. Application of Section 9(1)(vii)(b) and Section 5 of the Income-tax Act.4. Interpretation of professional vs. technical services.5. Retrospective application of amendments to the Income-tax Act.6. Impact of CBDT Circulars and certificates issued by International Taxation Department.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961 for non-deduction of TDS under Section 195:The common issue in the appeals was the disallowance made by the AO under Section 40(a)(i) for non-deduction of TDS on payments made to non-resident patent attorneys. The CIT(A) deleted the disallowance, concluding that the payments were not chargeable to tax in India and thus, TDS under Section 195 was not required. The Tribunal upheld this view, emphasizing that the services were rendered outside India and had no territorial nexus with India.2. Determination if payments to non-resident patent attorneys are chargeable to tax in India:The Tribunal examined whether the payments made to non-resident patent attorneys were chargeable to tax in India. It was noted that the services were rendered outside India, and the patents granted in foreign countries could only be utilized in those countries. The Tribunal agreed with the CIT(A) that there was no territorial nexus between the rendition of services and India, and thus, the payments were not chargeable to tax in India.3. Application of Section 9(1)(vii)(b) and Section 5 of the Income-tax Act:The AO's contention that the payments were for technical services utilized in India was rejected. The Tribunal held that the services were of a procedural nature and did not involve any technical information or consultancy. The Tribunal also noted that the income did not accrue or arise in India as per Section 9(1)(vii)(b) and Section 5, as the services were rendered outside India and the payments were made outside India.4. Interpretation of professional vs. technical services:The Tribunal distinguished between professional and technical services, noting that the services rendered by the non-resident attorneys were professional services related to obtaining patent/trademark registrations and not technical services. The Tribunal agreed with the CIT(A) that professional services are different from technical services, as defined in Section 194J and Section 9(1)(vii) of the Act.5. Retrospective application of amendments to the Income-tax Act:The Tribunal addressed the retrospective amendment to Section 9(2) by the Finance Act, 2010. It was held that while the amendment was retrospective, the tax withholding liability depends on the law as it existed at the time of payment. The Tribunal emphasized that a retrospective amendment cannot impose a tax withholding obligation retrospectively. Therefore, the assessee was not liable to deduct TDS based on the law prevailing at the time of the payments.6. Impact of CBDT Circulars and certificates issued by International Taxation Department:The Tribunal considered the relevance of CBDT Circulars and certificates issued by the International Taxation Department, which authorized the assessee to remit amounts without TDS. It was noted that these certificates indicated the Department's interpretation that the payments were not chargeable to tax in India. The Tribunal found this interpretation relevant and supportive of the assessee's position.Conclusion:The Tribunal confirmed the deletion of disallowance under Section 40(a)(i) by the CIT(A), concluding that the payments to non-resident patent attorneys were not chargeable to tax in India, and thus, TDS under Section 195 was not required. The appeals of the revenue were dismissed.