2017 (3) TMI 333 - AT - Income Tax

Tribunal Ruling on Tax Deductions for Professionals and Non-Residents: Analysis and Clarifications

The Tribunal upheld the lower authorities' decision to deduct tax under Section 192 for remuneration paid to professionals, determining an ... Employer-employee relationship - salary liable to TDS under section 192 - distinction between contract for work and fee for professional/technical services - TDS on post production / printing / processing held to be deductible under section 194C - application of Double Taxation Avoidance Agreement (India-Singapore) and the 'make available' test for Fee for Technical Services - taxability of non resident's income - permanent establishment and Article 7 vs Article 12 of DTAA - TDS on rent for temporary hotel accommodation and applicability of CBDT circularEmployer-employee relationship - salary liable to TDS under section 192 - Remuneration paid to six persons engaged by the assessee constituted salary and was liable for TDS under section 192, not as professional fees under section 194J. - HELD THAT: - The Tribunal examined the written service agreements and the totality of terms - fixed monthly remuneration, designation with duties to be assigned from time to time, requirement to attend office daily with prescribed leave, provision of company car and telephone, termination clause framed as employment and absence of cogent evidence that the persons were free to render services independently. While non payment of statutory employee benefits is an indicator, it is not conclusive; the overall contractual terms and conduct indicated a full time employer-employee relationship. The Tribunal found the lower authorities' conclusion that these payments were salary to be sustainable and rejected the assessee's reliance on precedents distinguishable on facts and contracts. [Paras 10, 11, 12, 13, 14]Grounds contesting characterization as salary are rejected; payments to the six persons are treated as salary liable to TDS under section 192.Distinction between contract for work and fee for professional/technical services - TDS on post production / printing / processing held to be deductible under section 194C - Payments for post production activities (printing, processing, dubbing, digital mixing and other post production work) are contracts for work and attract TDS under section 194C, not section 194J. - HELD THAT: - The Tribunal reviewed the nature of the services (post production activities) and relied on earlier Tribunal and High Court decisions holding that taking out final negatives, print and processing, dubbing and similar post production functions fall within the definition of 'work' and are covered by section 194C. On the facts, the impugned expenses were part of post production and therefore properly classifiable as contractual work; the assessee's challenge to characterization as professional/technical services was accordingly rejected. [Paras 16, 17, 18, 19]Grounds seeking recharacterisation as professional/technical fees are allowed in favour of the assessee; TDS was required to be deducted under section 194C.Application of Double Taxation Avoidance Agreement (India-Singapore) and the 'make available' test for Fee for Technical Services - taxability of non resident's income - permanent establishment and Article 7 vs Article 12 of DTAA - Payment to VHQ SPTE Ltd., Singapore, for post production studio hire was not taxable in India under the India-Singapore DTAA as Fee for Technical Services because the service provider did not 'make available' technical knowledge, skill or know how; no PE existed, and hence no TDS obligation arose. - HELD THAT: - The Tribunal noted that VHQ performed post production work abroad and did not make available technical knowledge, experience, skill, know how or process to the assessee (the essential 'make available' criterion in Article 12). VHQ had no permanent establishment in India; therefore, business profits under Article 7 could not be taxed in India. Applying section 90(2) and DTAA principles, and the authorities on the 'make available' test, the Tribunal concluded the payment was not taxable in India and the assessee was not an assessee in default for failing to deduct TDS. [Paras 22, 23, 24, 26]Grounds challenging TDS demand on the VHQ payment are allowed; no TDS was required in view of the DTAA and absence of 'make available' or PE.Distinction between contract for work and fee for professional/technical services - Payment to KWB (UK) for dancers engaged in production was for production of a programme for broadcast and therefore TDS, if any, should have been deducted under section 194C and not under section 194J. - HELD THAT: - On the unchallenged factual finding that the payment related to production of a programme for broadcast (services in India), the Tribunal held that the specific provision in section 194C covering production of programmes applies. The Revenue raised no substantive objection to this classification at the hearing before the Tribunal. [Paras 27, 29]Ground partly allowed; TDS liability, if any, to be under section 194C rather than section 194J.TDS on rent for temporary hotel accommodation and applicability of CBDT circular - Amounts paid to hotels for temporary accommodation on ad hoc basis during shootings were not liable to TDS under section 194I where there was no prior contract for specific rooms or period, in view of CBDT circular clarifications. - HELD THAT: - The Tribunal examined hotel bills and related evidence and found no pre existing contract for specified rooms, rates or periods; rooms were hired as and when available at prevailing tariffs. Relying on the CBDT circular, the Tribunal held that such ad hoc hiring of accommodation does not attract TDS under section 194I and the relief granted by the CIT(A) (excluding food charges and applying threshold limits) was justified. [Paras 30, 31, 32]Grounds on hotel expense TDS are allowed; no TDS under section 194I was required in the circumstances.Final Conclusion: The Tribunal partly allowed the appeals. It upheld that payments to six contract persons were in fact salary liable to TDS under section 192; it held that post production, printing and processing expenses are contracts for work attracting TDS under section 194C (not section 194J); payments to the Singapore non resident VHQ were not taxable in India under the India-Singapore DTAA (no obligation to deduct TDS); payments to KWB (UK) for production services fall under section 194C; and hotel accommodation payments made on an ad hoc basis did not attract TDS under section 194I. Appeals are disposed as indicated, and lower authorities directed to follow these findings mutatis mutandis for the other years/appeals. Issues Involved:1. Deduction of tax on fees paid to professionals under Section 192 vs. 194J.2. Employer-employee relationship determination.3. Short deduction of tax and interest under Section 201(1A).4. Deduction of tax on payments to a manager for premises use under Section 194I.5. Deduction of tax on processing charges for Adlabs Films Pvt. Ltd. under Section 194J.6. Applicability of Section 194J vs. 194C for various post-production activities.7. Deduction of tax on payments to non-resident entities under DTAA provisions.8. Deduction of tax on hotel expenses under Section 194I.Detailed Analysis:1. Deduction of Tax on Fees Paid to Professionals Under Section 192 vs. 194J:The assessee contested the lower authorities' decision that remuneration paid to six professionals was liable for deduction of tax at source under Section 192, arguing instead for Section 194J. The Tribunal analyzed the service contracts and found that the terms indicated an employer-employee relationship, such as fixed monthly remuneration, provision of perks like company cars and mobile phones, and daily attendance requirements. Consequently, it upheld the lower authorities' decision to deduct tax under Section 192, rejecting the assessee’s claim.2. Employer-Employee Relationship Determination:The Tribunal reviewed the contracts and determined that the relationship between the assessee and the professionals was that of employer-employee. This was based on the nature of the duties assigned, the fixed remuneration, and the provision of perks, among other factors. The Tribunal found that the professionals were not independent contractors but employees, thus requiring tax deduction under Section 192.3. Short Deduction of Tax and Interest Under Section 201(1A):The Tribunal upheld the lower authorities' decision regarding the shortfall in TDS and the applicability of interest under Section 201(1A). It emphasized that the professionals were employees, and thus the shortfall in TDS was correctly calculated under Section 192.4. Deduction of Tax on Payments to a Manager for Premises Use Under Section 194I:Grounds 5 and 6, which involved the deduction of tax on payments to a manager for premises use, were not pressed by the assessee and were dismissed.5. Deduction of Tax on Processing Charges for Adlabs Films Pvt. Ltd. Under Section 194J:The Tribunal found that the processing charges paid to Adlabs Films Pvt. Ltd. were part of post-production activities and should be covered under Section 194C rather than Section 194J. It cited several judgments supporting the view that post-production activities fall under Section 194C. Thus, the Tribunal allowed the assessee's appeal on this issue.6. Applicability of Section 194J vs. 194C for Various Post-Production Activities:The Tribunal ruled that post-production activities, including digital mixing and processing charges, should be treated as work contracts under Section 194C. It referenced several judgments supporting this interpretation and allowed the assessee's appeal, concluding that TDS should be deducted under Section 194C.7. Deduction of Tax on Payments to Non-Resident Entities Under DTAA Provisions:The Tribunal addressed payments to VHQ Singapore and KBW Ltd., UK. For VHQ Singapore, it found that the services rendered did not involve making available technical knowledge, thus not qualifying as Fees for Technical Services under the India-Singapore DTAA. Consequently, the payment was not taxable in India, and no TDS was required. For KBW Ltd., the Tribunal agreed that the payment was for production of a program for broadcast, requiring TDS under Section 194C, not Section 194J.8. Deduction of Tax on Hotel Expenses Under Section 194I:The Tribunal reviewed the hotel expenses incurred during shooting and found that the rooms were hired on an as-and-when-available basis without any prior contract for specific rates or periods. It relied on a CBDT circular clarifying that such arrangements do not require TDS under Section 194I. Therefore, it held that no TDS was required for these expenses.Conclusion:The Tribunal partly allowed the appeals, directing the AO to follow its findings and apply the relevant sections accordingly. The judgments emphasized the importance of the nature of contracts and the specific provisions of the Income Tax Act and DTAA in determining the applicability of TDS.