2022 (8) TMI 1517 - AT - Income Tax

Tribunal Confirms Non-Taxability of Overseas Payment Without Withholding Tax Under India-Philippines DTAA.

The Tribunal dismissed the appeal against the disallowance of payment made to an Overseas Entity without withholding tax under Section 195 of the Act. It ... Business profits under Article 7 of the India-Philippines DTAA - fee for technical services (FTS) - taxability in absence of permanent establishment - obligation to deduct tax at source under Section 195 - disallowance under Section 40(a)(i) of the Income tax ActBusiness profits under Article 7 of the India-Philippines DTAA - fee for technical services (FTS) - taxability in absence of permanent establishment - obligation to deduct tax at source under Section 195 - disallowance under Section 40(a)(i) of the Income tax Act - Characterisation of the payment to the Philippines resident and consequent obligation to deduct tax at source and applicability of disallowance under Section 40(a)(i). - HELD THAT: - The Tribunal examined whether payments shown as contractual employees cost remitted to IQOR Philippines constituted FTS attractable to tax in India or were business profits governed by Article 7 of the India-Philippines DTAA. Relying on co ordinate bench precedents, the Tribunal accepted the view that, even in absence of an explicit FTS clause in the DTAA, the income must be classified under the DTAA's other provisions and, if characterised as business profits under Article 7, such profits are taxable in India only if the non resident has a permanent establishment in India. Applying this principle, and noting the absence of PE of the Philippines resident in India, the Tribunal held that the receipt did not become taxable as FTS in India. Consequently, there was no legal obligation on the assessee to deduct tax at source under Section 195, and the disallowance under Section 40(a)(i) could not be sustained. The Tribunal followed prior decisions (including the decision cited from Jynga Game Networks India (P) Ltd. and others) and observed no contrary precedent was placed before it. [Paras 5, 7]Payments to the Philippines resident are to be treated as business profits under Article 7 and, in absence of a permanent establishment in India, are not taxable here; therefore there was no obligation to deduct tax under Section 195 and the disallowance under Section 40(a)(i) is not sustainable.Final Conclusion: Following co ordinate bench precedents, the Tribunal upheld the Commissioner (Appeals) that the payments are business profits under Article 7 of the India-Philippines DTAA and, lacking a permanent establishment, are not taxable in India; consequently there was no duty to deduct tax at source and the Section 40(a)(i) disallowance was dismissed, and the assessee's appeal is dismissed. Issues involved: Appeal against order dated 31.06.2019 of Commissioner of Income-Tax (Appeals)-4, New Delhi for assessment year 2015-16 regarding disallowance of payment made to an Overseas Entity without withholding tax under Section 195 of the Act.Summary:The assessee, a resident corporate entity engaged in providing business process outsourcing services to overseas Associated Enterprises, filed its return of income for the year under dispute. The assessing officer disallowed a payment made to an Overseas Entity, IQOR Philippines, as business auxiliary services without withholding tax under Section 195 of the Act. The assessee argued that the payment should be treated as business profit due to the absence of a Fee for Technical Services (FTS) clause in the India-Philippines Double Taxation Avoidance Agreement (DTAA). The assessing officer disagreed, considering the payment as FTS and applied domestic law provisions. The Commissioner (Appeals) held that the income should be classified as business profit under Article 7 of the DTAA, and in the absence of a Permanent Establishment (PE), the income is not taxable in India.Upon hearing both parties and examining the material, the Tribunal found in favor of the assessee based on previous decisions related to the India-Philippines DTAA. The Tribunal upheld the Commissioner (Appeals) decision, citing similar rulings in other cases. No contrary decision was presented, leading to the dismissal of the appeal.In conclusion, the appeal against the disallowance of payment made to an Overseas Entity without withholding tax under Section 195 of the Act was dismissed by the Tribunal based on the interpretation of the India-Philippines DTAA and the absence of a PE in India for the payee.