2014 (2) TMI 653 - AT - Income Tax

Tribunal rules no tax deduction required for services not in India, upholds appeal decision

The Tribunal upheld the Commissioner (Appeals)'s decision, stating that the appellant had no obligation to deduct tax at source under Section 195 as the ... Deletion of disallowance u/s 40(a)(ia) of the Act - Foreign remittances made for design and development expenses – TDS not deducted u/s 195 r.w.s. 9(1)(vii) of the Act – Held that:- The decision in Ishikawajima Harima Heavy Industries Ltd Vs DIT [2007 (1) TMI 91 - SUPREME COURT ] relied - in order to bring a fees for technical services to taxability in India, not only that such services should be utilized in India but these services should also be rendered in India - the assessee did not have any tax withholding liabilities from foreign remittances for fees for technical services unless such services were rendered in India, and a fortiori no disallowance can be made under section 40(a)(i) for assessee's failure to deduct tax at source from such payments. The assessee did not have any liability under section 195 r.w.s. 9(1)(vii) to deduct tax at source from these payments – thus, no disallowance can be made in respect of these payment - there is no need to deal with the taxability of incomes embedded in these payments under the provisions of the applicable tax treaties – thus, the conclusions arrived at by the CIT(A) upheld – Decided against Revenue. Issues Involved:1. Deletion of disallowance under Section 40(a)(i) of the Income Tax Act, 1961.2. Obligation to deduct tax at source under Section 195 r.w.s. 9(1)(vii) of the Income Tax Act, 1961.3. Taxability of fees for technical services (FTS) under Indian domestic law and applicable tax treaties.4. Retrospective amendment by the Finance Act, 2010 and its impact on tax withholding obligations.Detailed Analysis:1. Deletion of Disallowance under Section 40(a)(i):The primary issue revolves around the correctness of the Commissioner (Appeals)'s decision to delete the disallowance of Rs. 51,98,819 made under Section 40(a)(i) of the Income Tax Act. The Assessing Officer (AO) had disallowed this amount on the grounds that the appellant failed to deduct tax at source on payments made to non-residents for design and development expenses. However, the Commissioner (Appeals) concluded that these amounts were not taxable in India and thus, no tax was deductible.2. Obligation to Deduct Tax at Source under Section 195 r.w.s. 9(1)(vii):The AO argued that the appellant was obligated to deduct tax at source under Section 195 read with Section 9(1)(vii) of the Act, as the payments made were considered 'fees for technical services' (FTS). The appellant countered this by stating that the payments were not FTS and that none of the non-residents had a permanent establishment in India, thus not taxable under Indian law. The Commissioner (Appeals) supported the appellant's view, stating that even if the payments were considered FTS, no TDS was required as the services were not rendered in India.3. Taxability of Fees for Technical Services (FTS):The judgment references the Supreme Court's decision in Ishikawajima-Harima Heavy Industries Ltd Vs DIT, which held that for FTS to be taxable in India, the services must be both rendered and utilized in India. This was further supported by the Bombay High Court in Clifford Chance Vs DCIT. The Tribunal noted that the law required a territorial nexus for taxability, meaning that services must have a direct link to India to be taxed.4. Retrospective Amendment by the Finance Act, 2010:The Tribunal acknowledged that the Finance Act, 2010, introduced a retrospective amendment stating that income deemed to accrue in India would be taxable regardless of whether the services were rendered in India. However, it emphasized that tax withholding obligations are based on the law as it stood when the payments were made. The Tribunal clarified that a retrospective amendment could not impose a retroactive tax withholding obligation.Conclusion:The Tribunal concluded that since there was no evidence that the design and development services were rendered in India, the appellant had no obligation to deduct tax at source under Section 195. Consequently, no disallowance under Section 40(a)(i) could be made. The Tribunal upheld the Commissioner (Appeals)'s decision and dismissed the AO's appeal. The judgment emphasized that tax withholding obligations must be assessed based on the legal position at the time of payment, not on subsequent retrospective amendments.Pronouncement:The appeal was dismissed, and the judgment was pronounced in the open court on 14th February 2014.