2018 (3) TMI 1709 - HC - Income Tax

Foreign agent payments not taxable under Income Tax Act: High Court ruling

THE PR. COMMISSIONER OF INCOME TAX -3 Versus ENGINEERS INDIA LTD.

The High Court dismissed the appeal, affirming the decision of the ITAT that payments made to a nonresident foreign agent were not taxable under Sections ... TDS u/s 195 - Disallowance u/s 40(a)(ia) - tds liability in respect of activities abroad - Held that:- Assessee-a public sector company is engaged in engineering consultancy and contract work. It provides engineering and technical consultancy services and support for execution of contract on turnkey basis in the oil and hydrocarbon/gas sectors. Its return for AY 2010-11 declared income in excess of 715 crores and was processed but later scrutiny was undertaken and a sum of ₹ 94,91,410/- was added on the ground that the amounts paid to nonresident foreign agent whose services were utilized were taxable under Sections 9(1)(i) and 9(1)(vii)(b) of the Act. The services provided by the agent were assistance, in the tendering process undertaken by the assessee, in response to foreign government public tenders. This Court notices that the ITAT has followed the judgment of the Division Bench of this Court in Commissioner of Income Tax vs. Eon Technology (P) Ltd. [2011 (11) TMI 20 - DELHI HIGH COURT] where the Court in similar circumstances held that providing such services, in respect of activities abroad, do not constitute fee for technical services and therefore, disallowable under Section 40(a). In view of these circumstances, no substantial question of law arises. Issues:1. Question of law regarding disallowance under Section 40(a) of the Income Tax Act, 1961 for payments made to a nonresident foreign agent.2. Determination of nature of services provided by the nonresident agent and its taxability under Sections 9(1)(i) and 9(1)(vii)(b) of the Act.Analysis:1. The appellant, a public sector company engaged in engineering consultancy and contract work, declared income exceeding 715 crores for AY 2010-11. Following scrutiny, a sum of &8377; 94,91,410/- was added by the Assessing Officer, contending that payments to a nonresident foreign agent were taxable under Sections 9(1)(i) and 9(1)(vii)(b) of the Act. The agent assisted in the tendering process for foreign government public tenders. Both the CIT(A) and the ITAT allowed the assessee's appeal, emphasizing that the services provided did not constitute technical services as per the Act. The CIT(A) reasoned that the agent's assistance in tendering and providing business environment insights did not amount to technical services, relying on the judgment in Eon Technology (P) Ltd. case.2. The Court observed that the ITAT decision aligned with the precedent set by the Division Bench in Commissioner of Income Tax vs. Eon Technology (P) Ltd., where it was held that services provided abroad did not fall under fee for technical services and thus were not disallowable under Section 40(a). The Court concluded that no substantial question of law arose from the case, leading to the dismissal of the appeal. The judgment reiterated that for nonresident business profits to be taxable, a Permanent Establishment (PE) in India is required, as established in previous legal precedents.This detailed analysis of the judgment highlights the key issues addressed by the High Court regarding the taxability of payments made to a nonresident foreign agent and the nature of services provided, ultimately emphasizing the significance of legal precedents in determining tax liabilities under the Income Tax Act.