2018 (8) TMI 2091 - AT - Income Tax

Appeal allowed: Payment to non-resident not taxable under tax treaty

The Tribunal allowed the assessee's appeal, ruling that the payment for professional services to a non-resident company was not taxable as Fees for ... TPS u/s 195 - Disallowance u/s 40(a)(i) - non-deduction of TDS in relation to payments made for professional services obtained from non-resident - scope of India-Philippines Double Taxation Avoidance Agreement - whether CIT (Appeals) has erred in upholding a disallowance for non-deduction of TDS on payment for gaming moderation services, to Stratpoint Technologies Inc. ['Stratpoint'/ 'Service provider']? - HELD THAT:- CIT(Appeals) has not spelt out as to which category the payment by the assessee to Startpoint would fall. In our view, it cannot be for the use of or right to use any copyright of literary, artistic or scientific work, etc. It cannot also be for the use of any patent, trademark, etc. It cannot also be for the use of or right to use, industrial, commercial or scientific equipment. If at all, it can be analysed as to whether it can be for the use of or right to use information concerning industrial, commercial or scientific expertise. We have already seen the nature of services rendered by Startpoint. The services rendered by Startpoint was in the nature of moderator for an online game developed by the assessee. As a moderator, certain services are expected to be performed by Startpoint. The results of moderation are given in the form of a report. By giving the results of moderation in the form of a report, assessee does not make payment to Startpoint by the Assessee as a payment for use of or right to use information concerning industrial, commercial or scientific expertise. Therefore, even under this clause of the definition of ‘royalty’, the payment in question cannot be said to be royalty and chargeable to tax under Article 13 of the DTAA. Thus we hold that the payment in question cannot constitute ‘royalty’ under Article 13 of the DTAA. Consequently, the payment in question cannot be brought to tax. Since the sum in question is not taxable in India, the provisions of section 40(a)(ia) of the Act are not applicable and therefore disallowance made by the revenue authorities cannot be sustained. The same is directed to be deleted. Ground No.1 is allowed. Issues Involved:1. Disallowance under section 40(a)(i) on account of non-deduction of TDS for payments made for professional services obtained from a non-resident.2. Classification of payment as 'Fees for Technical Services' (FTS) or 'Royalty' under the India-Philippines Double Taxation Avoidance Agreement (DTAA).3. Application of Article 7 and Article 13 of the India-Philippines DTAA.4. Applicability of section 40(a)(ia) of the Income-Tax Act, 1961.5. Consequential interest under section 234B of the Income-Tax Act, 1961.Issue-Wise Detailed Analysis:1. Disallowance under section 40(a)(i) on account of non-deduction of TDS for payments made for professional services obtained from a non-resident:The assessee, a company engaged in the development of computer software, made a payment of Rs. 5,660,370 to Stratpoint Technologies Inc., a company based in the Philippines, for gaming moderation services. The Assessing Officer (AO) disallowed the deduction of this payment under section 40(a)(i) of the Income-Tax Act, 1961, due to non-deduction of TDS, treating the payment as fees for technical services under section 9(1)(vii) of the Act.2. Classification of payment as 'Fees for Technical Services' (FTS) or 'Royalty' under the India-Philippines Double Taxation Avoidance Agreement (DTAA):The assessee argued that the payment should be considered as business income under Article 7 of the India-Philippines DTAA, as there is no specific article dealing with FTS in the DTAA. The assessee contended that since Stratpoint did not have a Permanent Establishment (PE) in India, the income was not chargeable to tax in India. The CIT(Appeals) upheld the AO's decision but also considered the payment as 'royalty' under Article 13 of the DTAA, which was contested by the assessee.3. Application of Article 7 and Article 13 of the India-Philippines DTAA:The Tribunal observed that the CIT(Appeals) could not simultaneously classify the payment as FTS and 'royalty'. It agreed with the assessee's argument that in the absence of a specific FTS clause in the DTAA, the payment should be treated as business income under Article 7. Since Stratpoint did not have a PE in India, the income could not be taxed in India. Additionally, the Tribunal found that the payment did not fall under the definition of 'royalty' in Article 13 of the DTAA, as it was for services rendered and not for the use of any intellectual property.4. Applicability of section 40(a)(ia) of the Income-Tax Act, 1961:The Tribunal concluded that since the payment was not taxable in India under the DTAA, the provisions of section 40(a)(ia) of the Act were not applicable. Therefore, the disallowance made by the revenue authorities was not sustainable and was directed to be deleted.5. Consequential interest under section 234B of the Income-Tax Act, 1961:The Tribunal noted that the issue of interest under section 234B was purely consequential and directed the AO to provide consequential relief.Conclusion:The appeal of the assessee was allowed, with the Tribunal holding that the payment in question could not be taxed as FTS or 'royalty' in India under the India-Philippines DTAA. Consequently, there was no obligation to deduct tax at source under section 195, and the disallowance under section 40(a)(ia) was deleted. The interest under section 234B was directed to be adjusted accordingly. The judgment was pronounced on August 3, 2018.