2017 (9) TMI 33 - AT - Income Tax

Server maintenance, testing and development payments: whether nonresident fees are taxable/subject to TDS and s.40(a)(i) disallowance under DTAA

Whether disallowance under s.40(a)(i) for non-deduction of TDS is permissible given DTAA non-discrimination: Tribunal applied the non-discrimination ... TDS u/s.195 - addition u/s.40(a)(i) - belated remittance of the TDS made u/s.195 - non-discriminating Clause provided in DTAA with Indo-US Treaty - PE in India - Held that:- Similar payments in residents does not attract the disallowance in the event of non-deduction of tax at source. Thus, taxing the amount u/s.40(a)(i) for non-deduction of tax at source on similar amounts tantamount to discrimination. Therefore, the DTAA and the decision relied upon by the assessee in in the case of Millennium Infocom Technologies Ltd. vs. ACIT [2008 (1) TMI 437 - ITAT DELHI-E] for non-discrimination clause squarely applicable in the assessee’s case and accordingly, we held that the disallowance u/s.40(a)(i) would not be applicable in the case of the assessee. - Decided in favour of assessee. Server maintenance and testing and development charges - permanent establishment - DTAA - whether payment made not for FTS? - Held that:- AO and Ld.CIT(A) did not bring any material to show human involvement in the activities explained by the assessee. From the above facts it is observed that the assessee is merely using the technology provided by the parent company and no managerial, consultancy and technical services are provided by the parent company. Therefore, we are of the considered opinion that the payment made is not for FTS and the decisions cited in the above cases relied upon by the Ld.AR are squarely applicable in the assessee’s case and we agree with the assessee that the payment was for reimbursement of expenses and in reimbursement of expenses, no tax is deductible u/s.195 of IT Act as held by this Tribunal in Cairn Energy Pvt. Ltd. v. Assistant Commissioner of Income tax [2009 (2) TMI 259 - ITAT CHENNAI]. Accordingly, we delete the addition made by the AO and set-aside the orders of lower authorities. The assessee’s appeal on server maintenance charges is allowed. In respect of testing and development charges, the payment was made to Hutchinson Italy for the services rendered in the Vendor location in Italy. For establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. The explanation to section 9(2) was introduced by Finance Act 2007 w.e.f.1976 and as on the date of assessment there was no provision to tax the FTS rendered outside India and hence we agree with the Ld.A.R that no tax is deductible u/s 195 and consequent disallowance is not called for. We hold that the payment made by the assessee for FTS for the services rendered outside India are not taxable under section 9(1)(vii) of I.T. Act in the assessment year under consideration and the disallowance is not called for and we delete the addition made by the AO and set-aside the lower authorities orders. The assessee’s appeal on this issue is allowed. Issues Involved:1. Jurisdiction of the Assessing Officer (AO) and validity of reopening of assessment.2. Disallowance of professional charges and corporate maintenance charges under Section 40(a)(i) of the Income Tax Act.3. Disallowance of server maintenance charges and testing and development charges under Section 40(a)(i).4. Application of Double Taxation Avoidance Agreement (DTAA) provisions.5. Levy of interest under Section 234B.Detailed Analysis:1. Jurisdiction of the AO and Validity of Reopening of Assessment:- The appellant argued that the order of the Commissioner of Income Tax (Appeals) [CIT(A)] was without jurisdiction and that the reopening of the assessment was bad in law. However, these grounds were not pressed by the appellant's representative and were subsequently dismissed.2. Disallowance of Professional Charges and Corporate Maintenance Charges:- The AO disallowed professional charges of Rs. 6,52,000 and corporate maintenance charges of Rs. 27,55,966 under Section 40(a)(i) due to the belated remittance of TDS deducted under Section 195. The appellant contended that the disallowance should not apply as the tax was deducted, albeit paid later.- The Tribunal examined the provisions of Section 40(a)(i) before and after the amendment by the Finance Act, 2003, and concluded that both deduction and payment of TDS are mandatory for claiming the expenditure. The disallowance was upheld as the appellant had not complied with the timely remittance requirement.3. Disallowance of Server Maintenance Charges and Testing and Development Charges:- The AO disallowed server maintenance charges of Rs. 7,32,960 and testing and development charges of Rs. 16,20,432 under Section 40(a)(i) as no TDS was deducted.- Server Maintenance Charges:- The appellant argued that these were reimbursements for using the parent company's server, without any profit element, thus not attracting TDS. The Tribunal agreed, noting the lack of human involvement and considering it a reimbursement of expenses, not fee for technical services (FTS). The disallowance was deleted.- Testing and Development Charges:- The appellant contended that these charges were for machine-operated testing with minimal human intervention, thus not qualifying as FTS. However, the Tribunal found significant human involvement in the testing process, deeming the payments as FTS.- The appellant further argued that under the DTAA with Italy, the payments should not be taxed as the parent company had no permanent establishment in India. The Tribunal disagreed, noting that FTS is covered under Article 13 of the DTAA, not Article 7. However, it acknowledged that the retrospective amendment to Section 9(2) could not be anticipated by the appellant, thus no TDS was required for that period. The disallowance was deleted.4. Application of DTAA Provisions:- The appellant argued that the disallowance provisions under Section 40(a)(i) should not apply due to the non-discrimination clauses in the DTAAs with Germany and the UK. The Tribunal agreed, citing precedents where similar disallowances were not applicable to domestic payments, thus applying the non-discrimination clause to non-domestic payments as well. The disallowances were deleted.5. Levy of Interest under Section 234B:- The appellant objected to the levy of interest under Section 234B, but no specific arguments were advanced. The Tribunal dismissed this ground as consequential.Conclusion:- The appeal was allowed in favor of the appellant. Disallowances under Section 40(a)(i) for professional charges, corporate maintenance charges, server maintenance charges, and testing and development charges were deleted based on the DTAA provisions and the retrospective nature of the Section 9(2) amendment. The levy of interest under Section 234B was dismissed as consequential.