2013 (9) TMI 232 - AT - Income Tax

Tribunal disallows Commissioner's deletion of disallowance under Income Tax Act, upholds TDS requirement for non-resident fees.

Assistant Commissioner of Income Tax, Chennai Versus Evolv Clothing Company Pvt.

The Tribunal held that the Commissioner of Income Tax (Appeals) erred in deleting the disallowance under section 40(a)(i) of the Income Tax Act. The ... Indo-Italian DTAA. - TDS on payment made to non residents - Nature of payment - overseas commission or fee for technical services (FTS) - Revenue contended that the payee in question had rendered technical services in the nature of 'systematic research' to the assessee and received fee in lieu thereof, which is liable to be taxed as per Article 13 – Held that:- In sub-section (1)(vii) of section 9, income by way of 'fee for technical services' is defined - Section 9(1)(i) is a general provision whereas, clause (vii) is in the nature of specific provision – Explanation introduced by Finance Act, 2010 makes it categoric that in cases covered by clause (vii) or for that section 9, sub-section (1)(vi) - (vii), it would not be necessary for the non-resident to have residence or place of business or business connection in India - In case of 'fee for technical services', the mandate of the legislative is that clause (vii) would have overriding effect by virtue of aforesaid explanation to section 9(1)(i). In present case, assessee has paid for 'systematic research' made by the overseas entity - In Explanation 2 of clause (vii) (supra) of section 9(1) with effect from 01.04.1977, fee for 'technical services' means any consideration paid for 'technical' or 'consultancy' services – It is held that word 'technical' services would imply an operation involving skilled precision which 'systematic research' also involves – Payment made to overseas entity amounts to fees for 'technical' services - Hence, assessee was liable to deduct TDS as per the provisions of the Act, failure of which would entail disallowance under section 40(a)(ia) of the Act – Decided in favor of Revenue. Issues Involved:1. Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was correct in deleting the disallowance under section 40(a)(i) of the Income Tax Act, 1961 for non-deduction of TDS on overseas commission payments.2. Whether the payments made to the non-resident agent constituted 'fees for technical services' under section 9(1)(vii) of the Act and were hence taxable in India.Issue-wise Detailed Analysis:1. Deletion of Disallowance under Section 40(a)(i) for Non-Deduction of TDS:The Revenue argued that the CIT(A) erred in deleting the disallowance under section 40(a)(i) of the Act, as the assessee did not deduct TDS on the commission payments made to a non-resident agent. The Assessing Officer (AO) had disallowed the amount of Rs. 3,74,09,773/- under section 40(a)(ia) for non-deduction of TDS, asserting that the payments were taxable in India under section 195 of the Act. The CIT(A) deleted the disallowance, holding that the services rendered by the foreign agent were not technical services and hence not taxable in India. The CIT(A) noted that the agent's obligations were related to market research, order procurement, and coordination for timely completion of export obligations, which did not qualify as technical services under section 9(1)(vii).2. Characterization of Payments as 'Fees for Technical Services':The Revenue contended that the payments made to the non-resident agent for systematic research constituted 'fees for technical services' as per Article 13 of the Indo-Italian Double Taxation Avoidance Agreement (DTAA) and section 9(1)(vii) of the Act. The CIT(A) disagreed, stating that the services rendered were related to market surveys and coordination, which do not fall under the category of technical services. The CIT(A) relied on various judicial pronouncements and CBDT Circulars to support this view.Tribunal's Findings:The Tribunal examined the agreement between the assessee and the foreign agent, which included services such as market research, order procurement, and coordination for timely completion of export obligations. The Tribunal noted that section 9(1)(vii) defines 'fees for technical services' as any consideration for rendering managerial, technical, or consultancy services. The Tribunal held that the term 'technical services' implies operations involving skilled precision, which systematic research also involves. Therefore, the payments made to the foreign agent were considered fees for technical services, making the assessee liable to deduct TDS under section 195.The Tribunal also referred to the Explanation inserted by the Finance Act, 2010, with retrospective effect from 01.06.1976, which clarifies that income of a non-resident shall be deemed to accrue or arise in India under section 9(1)(vii) irrespective of the non-resident's place of business or the location of service rendering. The Tribunal found that the explanation and the statutory provisions were not considered in the case laws cited by the assessee.Conclusion:The Tribunal concluded that the CIT(A) erred in deleting the disallowance under section 40(a)(i) of the Act. The payments made to the non-resident agent were deemed fees for technical services, and the assessee was liable to deduct TDS under section 195. Consequently, the Tribunal restored the order of the Assessing Officer, allowing the Revenue's appeal.Judgment:The appeal by the Revenue was allowed, and the order of the Assessing Officer was restored. The Tribunal pronounced the order on 11/03/2013 at Chennai.