2022 (4) TMI 1489 - AT - Income Tax

Tribunal Partly Allows Appeal, Orders Reassessment of Subcontracting Charges for 2011-2012; Dismisses 2012-2013 Appeal.

M/s. Infosys Limited Electronic City, Hosur Road Bangalore Versus The Deputy Commissioner of Income-tax, International Taxation, Circle 1 (1) Bangalore.

The Tribunal partly allowed the appeal for the assessment year 2011-2012, directing the AO to reassess the taxability of subcontracting charges paid ... TDS u/s 195 - payments made to Infosys China is liable for tax deduction u/s 9(1)(vii) of the I.T.Act, as fees for technical services (FTS) - order passed u/s 201(1) and 201(1A) - CIT(A) held that the payments made by the assessee to Infosys China is both liable as FTS and royalty under the domestic law as well under the relevant DTAA - HELD THAT:- The Special Bench of the Tribunal in the case of Nagarjuna Fertilizders and Chemicals Ltd. [2017 (3) TMI 81 - ITAT HYDERABAD] had held if rate of tax applicable under DTAA is lower than 20% tax rate prescribed u/s 206AA of the Act, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN. Further, the Hon’ble Delhi High Court in the case of Danisco India P. Ltd. [2018 (2) TMI 1289 - DELHI HIGH COURT] had held that provisions of DTAA override section 206AA of the Act. In view of the above cited judicial pronouncements, we hold that the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act. It is also to be noted that while passing the order u/s 201(1) and 201(1A) of the Act for assessment year 2012-2013, the Assessing Officer has calculated TDS liability at 10% as per the Indo-China DTAA. Therefore, ground is allowed. Issues Involved:1. Violation of principles of natural justice.2. Taxability of payments under Section 9(1)(vii) as 'fees for technical services' (FTS).3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and China.4. Classification of payments as 'royalty' under Section 9(1)(vi).5. Applicability of Section 206AA regarding TDS rates.6. Levy of interest under Section 201(1A).Issue-wise Detailed Analysis:1. Violation of Principles of Natural Justice:The appellant contended that the order passed by the Deputy Director of Income Tax without providing sufficient opportunity for hearing and rebuttal was against the principles of natural justice. The Tribunal, however, did not find merit in this argument, as the CIT(A) had concluded no violation of natural justice principles occurred.2. Taxability of Payments under Section 9(1)(vii) as 'Fees for Technical Services':The appellant argued that payments made to Infosys China were not chargeable under Section 9(1)(vii) as FTS, claiming the exception under Section 9(1)(vii)(b) since the services were utilized for business outside India. However, the Tribunal relied on the Mumbai Bench's decision in Ashapura Minichem Limited v. ADIT, which held that the retrospective amendment to Section 9 negates the requirement of services being rendered in India for taxability. The Tribunal upheld the taxability of payments under Section 9(1)(vii).3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and China:The appellant claimed that under the India-China DTAA, the payments should not be considered FTS or royalty. The Tribunal referred to Article 12 of the DTAA, which deems royalties or FTS to arise in the contracting state where the payer is situated, thus supporting the taxability of payments made by an Indian resident to a Chinese entity. The Tribunal rejected the appellant's arguments, affirming the applicability of DTAA provisions.4. Classification of Payments as 'Royalty' under Section 9(1)(vi):The appellant contended that the payments did not constitute 'royalty' under Section 9(1)(vi). The Tribunal, however, upheld the CIT(A)'s conclusion that the payments were liable as royalty under both domestic law and the DTAA, following the reasoning in Ashapura Minichem Limited v. ADIT.5. Applicability of Section 206AA Regarding TDS Rates:The appellant argued against the applicability of Section 206AA, which mandates a 20% TDS rate in the absence of PAN. The Tribunal referred to the Special Bench decision in Nagarjuna Fertilizers and Chemicals Ltd. v. ACIT and the Delhi High Court judgment in Danisco India P. Ltd. v. UOI, which held that DTAA provisions override Section 206AA. Consequently, the Tribunal directed that the TDS rate should be 10% as per the India-China DTAA.6. Levy of Interest under Section 201(1A):The appellant contested the levy of interest under Section 201(1A), arguing it was not applicable. The Tribunal, however, upheld the CIT(A)'s decision, finding no grounds to delete the interest levied.Conclusion:For the assessment year 2011-2012, the appeal was partly allowed, with the Tribunal directing the AO to reconsider the taxability of subcontracting charges paid before the enactment of the Finance Act, 2010. For the assessment year 2012-2013, the appeal was dismissed, affirming the CIT(A)'s order. The Tribunal's decision was pronounced on April 11, 2022.