2018 (4) TMI 180 - AT - Income Tax

Tribunal rules lease line charges not subject to tax under DTAA with USA. Appeal successful.

M/s. T-3 Energy Services India Pvt. Ltd. Versus Jt. Commissioner of Income Tax, Range – 10, Pune

The Tribunal allowed the appeal, determining that the lease line charges were reimbursements without profit element. These charges did not qualify as ... TDS u/s 195 - Disallowance u/s 40(a)(i) - payment to its associated enterprise towards lease line charges without deduction of tax - whether payment was in the nature of royalty and also in the nature of Fees for Technical Services (FTS), because of amendment to section 9(1)(v) of the Act? - DTAA with USA - reimbursement of charges not subject to tax in India - Held that:- Though definition of ‘Royalty’ under the Act had been amended, but the term ‘Royalty’ under the DTAA between India and USA is not amended. In the absence of the same, we hold that in view of the definition of ‘royalty’ under DTAA, the assessee is not liable to withhold tax on the payments made to its associated enterprise on account of lease line charges. Applying the principle laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (2016 (2) TMI 415 - DELHI HIGH COURT), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act and the definition of ‘royalty’ having not been undergone any amendment in DTAA, the assessee was not liable to withhold tax on the lease line charges paid by it. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended. We have already decided this issue in the paras hereinabove that under the provisions of DTAA, the term ‘royalty’ is defined and it does not cover any such services availed and payment made and hence, there is no merit in the stand of Revenue in this regard and the same is dismissed. In any case, the privity of contract is between Qwest Communications Inc, the service provider and T-3, USA, who in turn had received bandwidth and passed on the services to various entities of group on cost to cast basis. The assessee as recipient of services had reimbursed the same and in the absence of profit / income element, there is no liability to deduct tax at source. Hence, the assessee cannot be held to be in default. Acceptance of international transactions to be at arm's length price by the TPO in its order passed under section 92CA(3) - Once the nature of expenses has been so accepted by the TPO, the Assessing Officer cannot sit in judgment of the TPO order since under the provisions of the Act, the order passed by the TPO is binding upon the Assessing Officer. The Assessing Officer at best could have invoked the provisions of Income Tax Act perse and not question the nature of expenditure i.e. after the TPO accepted to be reimbursement of expenses, the Assessing Officer challenged the same and held it to be ‘royalty’. We find no merit in the order of Assessing Officer in this regard and hence, the assessee succeeds on the alternate plea also. Accordingly, we hold that there is no merit in the disallowance of ₹ 20,47,432/- being payment to associated enterprise towards reimbursement of lease line charges by invoking provisions of section 40(a)(i) of the Act. Payment which relates to the preceding year - Admittedly, the said expenditure was booked in the preceding year and has been allowed in the hands of assessee. Once the same has been so allowed, there is no merit in making the disallowance again in the year under appeal. The said expenditure was reported in TP study report being reimbursement of lease line charges relating to the preceding year, but the same was paid in the year under consideration. The provisions of section 40(a)(i) of the Act are attracted at the first stage i.e. when booked on account of accrual basis or paid, whichever is earlier. If the said provisions had to be applied, then the same at best could be applied in the preceding year and not in the year under consideration. Accordingly, we reverse the order of Assessing Officer in this regard - Assessee appeal allowed Issues Involved:1. Disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax on payment of lease line charges.2. Nature of lease line charges as reimbursement of expenses.3. Classification of lease line charges as royalties or fees for included services under the DTAA with the USA.4. Applicability of retrospective amendments to Section 9(1)(vi) of the Act on the deductor's obligations.Detailed Analysis:1. Disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax on payment of lease line charges:The Assessing Officer (AO) disallowed the deduction of Rs. 31,22,300/- under Section 40(a)(i) of the Act, arguing that the assessee failed to deduct tax at source on payments made to Qwest Communications Inc., USA through its associated enterprise T-3 Energy Services Creekmont. The AO contended that these payments were not mere reimbursements but payments for services provided, thus attracting TDS under Section 195 of the Act. The AO also referenced amendments to the definition of 'royalty' under Section 9 of the Act, asserting that the lease line charges fell within this definition, necessitating TDS deduction.2. Nature of lease line charges as reimbursement of expenses:The assessee argued that the lease line charges were reimbursements for expenses incurred by its associated enterprise, T-3, USA, which had a contract with Qwest Communications Inc. The assessee provided evidence, including back-to-back invoices, showing that the payments were made on a cost-to-cost basis without any profit element. The Transfer Pricing Officer (TPO) accepted these transactions as arm's length, indicating no profit element. The CIT(A) and the AO, however, viewed these payments as not mere reimbursements but payments for services, thus requiring TDS deduction.3. Classification of lease line charges as royalties or fees for included services under the DTAA with the USA:The AO and CIT(A) classified the lease line charges as royalties or fees for included services under the DTAA with the USA, following retrospective amendments to Section 9(1)(vi) of the Act. The assessee contended that these payments did not fall under the definition of 'royalty' or 'fees for included services' as per the DTAA. The Tribunal referred to the decision of the Delhi High Court in DIT Vs. New Skies Satellite BV, which held that amendments to domestic law could not unilaterally alter the terms of a DTAA. Therefore, the Tribunal concluded that the payments did not constitute royalties or fees for included services under the DTAA, and the assessee was not liable to withhold tax on these payments.4. Applicability of retrospective amendments to Section 9(1)(vi) of the Act on the deductor's obligations:The Tribunal held that the retrospective amendments to Section 9(1)(vi) of the Act, which expanded the definition of 'royalty,' could not be applied to the DTAA unless the treaty itself was amended. The Tribunal emphasized that unilateral amendments to domestic law could not override the provisions of a DTAA. Consequently, the Tribunal concluded that the assessee was not required to withhold tax on the lease line charges under the DTAA, and the disallowance under Section 40(a)(i) was unwarranted.Conclusion:The Tribunal allowed the appeal, holding that the lease line charges paid by the assessee to its associated enterprise were reimbursements of expenses without any profit element. These payments did not constitute royalties or fees for included services under the DTAA with the USA. Therefore, the assessee was not liable to withhold tax on these payments, and the disallowance under Section 40(a)(i) was unwarranted. The Tribunal also noted that once the TPO accepted the transactions as arm's length, the AO could not recharacterize the nature of the expenses. The appeal was allowed, and the disallowance of Rs. 31,22,300/- was reversed.