2018 (6) TMI 1276 - AT - Income Tax

Tribunal remits case for fresh adjudication, allows assessee to present evidence for Indo-US tax treaty benefits.

The Tribunal remitted the case to the CIT(A) for fresh adjudication, allowing the assessee to provide evidence, including the Tax Residency Certificate, ... TDS u/s 195 - withholding of tax - payments made for installation and commissioning of certain equipment purchased by the assessee - fees for technical services under section 9(1)(vii) - services provided by Teems Electric Co Inc USA - whether the TEI, i.e. the US entity to which the payments were made by the assessee company, was entitled to the benefits of Indo US tax treaty? - Held that:- The matter should be remitted to the file of the CIT(A) for fresh adjudication, inter alia, after (i) giving the assessee a fresh opportunity of furnishing evidences not limited to, but including, the tax residency certificate under section 90(4), in support of US entity’s entitlement to the benefits of Indo US tax treaty benefits; (ii) taking into account the information furnished by the assessee with respect to the time spent by the representatives of the US entity and all such other information and submissions as may be filed by the assessee; and (iii) giving the assessee yet another opportunity of hearing while giving effect to these directions. As the matter is being remitted to the file of the CIT(A) for fresh adjudication, inter alia, on the fundamental aspect of treaty entitlement, it would not be appropriate for us to deal with other questions with respect to the treaty provisions which seem to academic as on this stage. We cannot address ourselves to such academic issues. Issues Involved:1. Entitlement of the US entity to the benefits of the Indo-US tax treaty under Section 90(4) of the Income Tax Act, 1961.2. Taxability of payments made to the US entity under Section 9(1)(vii) of the Income Tax Act.3. Compliance with tax withholding obligations under Section 195 of the Income Tax Act.4. Determination of the existence of a Permanent Establishment (PE) of the US entity in India under the Indo-US tax treaty.5. The applicability of the 'make available' clause under Article 12(4)(b) of the Indo-US tax treaty.Detailed Analysis:1. Entitlement of the US Entity to the Benefits of the Indo-US Tax Treaty under Section 90(4):The primary issue was whether the US entity, Teems Electric Inc. (TEI), was entitled to the benefits of the Indo-US tax treaty. The CIT(A) had denied treaty benefits due to the absence of a Tax Residency Certificate (TRC) as required under Section 90(4). However, the Tribunal held that Section 90(4) cannot be construed as a limitation to the treaty superiority under Section 90(2). The Tribunal emphasized that while a TRC is a simpler way to establish treaty entitlement, the absence of a TRC does not automatically disqualify the entity from treaty benefits. The US entity must still demonstrate its residency status under Article 4(1) of the Indo-US tax treaty.2. Taxability of Payments Made to the US Entity under Section 9(1)(vii):The payments made by the assessee to TEI were for services rendered in the installation and commissioning of certain equipment. The Assessing Officer (AO) treated these payments as fees for technical services under Section 9(1)(vii) of the Income Tax Act, making them liable for tax withholding. The AO rejected the assessee's claims that the services were inextricably linked to the purchase of equipment, did not involve transfer of technology, and were capitalized. The AO concluded that the services provided by TEI were independent of the equipment purchase and fell within the definition of fees for technical services.3. Compliance with Tax Withholding Obligations under Section 195:The AO raised tax withholding demands under Section 201 read with Section 195 due to the non-deduction of tax at source by the assessee on payments made to TEI. The Tribunal noted that the AO had directed the assessee to apply Section 195A for grossing up the tax liability since the payments had already been made without tax deduction.4. Determination of the Existence of a Permanent Establishment (PE) of the US Entity in India:The CIT(A) had concluded that TEI had a PE in India under Article 5(2)(k) of the Indo-US tax treaty based on the duration of stay of TEI's employees in India. The Tribunal noted that there was a communication gap regarding the number of days TEI's representatives worked in India, which is crucial for determining the existence of a PE. The Tribunal directed the CIT(A) to re-examine this aspect after considering the information provided by the assessee.5. The Applicability of the 'Make Available' Clause under Article 12(4)(b):The CIT(A) had also determined that the services rendered by TEI included training and documentation development, thus making available knowledge and technical know-how, which fell under the definition of 'fees for included services' under Article 12(4) of the Indo-US tax treaty. The Tribunal did not address this issue in detail, as it was contingent on the fundamental question of treaty entitlement, which was remitted back to the CIT(A) for fresh adjudication.Conclusion:The Tribunal concluded that the matter should be remitted to the CIT(A) for fresh adjudication, allowing the assessee to furnish evidence, including the TRC, to establish TEI's entitlement to the Indo-US tax treaty benefits. The CIT(A) was directed to re-examine the issues related to the PE and the nature of services provided by TEI, considering all submissions and evidence provided by the assessee. The appeals were allowed for statistical purposes, with all issues remaining open for fresh consideration by the CIT(A).