2019 (3) TMI 330 - AT - Income Tax

Tribunal Decision: Taxability upheld for some foreign payments, but software purchase tax deleted.

The Tribunal upheld the taxability of payments to M/s Windforce Private Limited, Sri Lanka, and M/s Wingtec Rotor Service, Germany, as well as to M/s ... Fees for technical services - royalty - tax deduction at source (TDS) / deeming of payer as defaulting under section 201 - application of Double Taxation Avoidance Agreement and concept of permanent establishment - treatment of packaged/shrink wrap software as non royaltyFees for technical services - royalty - application of Double Taxation Avoidance Agreement and concept of permanent establishment - tax deduction at source (TDS) / deeming of payer as defaulting under section 201 - Whether payments made to M/s Windforce Pvt. Ltd., Sri Lanka (for erection/installation and hiring of crane) and to M/s Wingtec Rotor Service, Germany (for repair services) are taxable in India as FTS or royalty and whether the assessee is in default for non deduction of TDS. - HELD THAT: - The Tribunal affirmed the findings of the AO and the CIT(A) that the contracts and work orders show provision of skilled technical personnel, site superintendence and services beyond mere construction or mundane repairs; the services were held to be of a managerial/technical/consultancy nature falling within the scope of 'fees for technical services' (and, in respect of the crane hiring, also within the definition of royalty/right to use industrial equipment) under the domestic provisions and the relevant DTAA Articles. The Tribunal accepted the view that these payments related to the assessee's turnkey projects which, although executed outside India, arose out of the assessee's business carried on from India and that the foreign recipients did not have any PE in India does not alter the character of the receipts as FTS/royalty for withholding purposes under the treaty clauses invoked. Consequently, the non deduction of tax attracted deeming of default under the relevant provisions and tax and interest were rightly levied by the AO. [Paras 5]Payments to Windforce (Sri Lanka) and Wingtec (Germany) held to be FTS/royalty; assessee held in default for non deduction of TDS and tax and interest sustained.Treatment of packaged/shrink wrap software as non royalty - tax deduction at source (TDS) / deeming of payer as defaulting under section 201 - Whether the amount paid for purchase of packaged software 'WindPro' from EMD International A/s, Denmark constitutes royalty and whether the assessee is in default for not deducting TDS. - HELD THAT: - The Tribunal accepted the assessee's submissions that the consideration was for purchase of packaged software and for the right to use the software; relying on precedents and the treaty definition, the Tribunal held that such consideration does not fall within 'royalty' under the Indo Denmark DTAA and accordingly is not taxable as royalty in India. On that basis, the Tribunal directed that the assessee should not be treated as in default and ordered deletion of the tax and interest levied by the AO. [Paras 7]Consideration for purchase of packaged software held not to be royalty; tax and interest levied for non deduction of TDS deleted.Fees for technical services - royalty - tax deduction at source (TDS) / deeming of payer as defaulting under section 201 - Whether the payment to M/s Ernst & Young, UAE for a market study constitutes FTS or royalty and whether the assessee is in default for not deducting TDS. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the market study involved provision of information concerning commercial experience and consultancy/technical services. Applying section 9(1)(vii) and the Indo UAE DTAA definitions, the Tribunal found the remittance to be in the nature of FTS and/or royalty chargeable to tax in India and, since no TDS was deducted, sustained the AO's action treating the assessee as in default and levying tax and interest. [Paras 9]Payment to Ernst & Young, UAE held to be FTS/royalty; assessee held in default for non deduction of TDS and tax and interest sustained.Final Conclusion: The appeal is partly allowed: the Tribunal upholds the tax and TDS default treatment in respect of payments to the Sri Lankan and German service providers and to Ernst & Young UAE as FTS/royalty, but allows the appeal in respect of the purchase of packaged software from Denmark, directing deletion of tax and interest for that transaction. Issues Involved:1. Taxability of payments made to M/s Windforce Private Limited, Sri Lanka for erection and commissioning services.2. Taxability of payments made to M/s Wingtec Rotor Service, Germany for repair services.3. Taxability of payments made for the purchase of software from EMD International A/s, Denmark.4. Taxability of payments made to M/s Ernst & Young, UAE for market study services.Detailed Analysis:1. Taxability of Payments to M/s Windforce Private Limited, Sri Lanka:The assessee engaged M/s Windforce Private Limited, Sri Lanka for erection and commissioning services and paid Rs. 1,19,47,013/-. The Assessing Officer (AO) classified these services as 'technical services' taxable under section 9(1)(vii) of the Income Tax Act. The AO also held that under the Double Taxation Avoidance Agreement (DTAA) with Sri Lanka, the fee for technical services payable to a non-resident is taxable in India at 10%. The assessee argued that these services were utilized for business outside India, thus not taxable in India, citing CIT V. Faizan Shoes (P.) Ltd. and other cases. However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the services involved significant technical expertise and were not merely construction or assembly work. The CIT(A) also noted that the payments could be considered royalty for the use of industrial equipment (cranes). Consequently, the payments were liable to a 10% withholding tax, and the assessee was in default for not deducting TDS.2. Taxability of Payments to M/s Wingtec Rotor Service, Germany:The assessee paid Rs. 3,34,414/- to M/s Wingtec Rotor Service, Germany for repair services. The AO classified these payments as fees for technical services (FTS) under section 9(1)(vii) and Article 12 of the India-Germany DTAA, subject to 10% TDS. The CIT(A) upheld this classification, noting that the repairs required sophisticated techniques and were not mundane. Therefore, the payments were rightly treated as income chargeable to tax in India, and the assessee was in default for not deducting TDS.3. Taxability of Payments for Software Purchase from EMD International A/s, Denmark:The assessee purchased software called 'windpro' from EMD International A/s, Denmark, for Rs. 5,23,545/-. The AO treated this payment as royalty under explanation 4 to section 9(1)(vi) of the Act and Article 13(3) of the Indo-Denmark DTAA, subject to tax in India. The assessee argued that the DTAA definition of royalty did not include payments for software, citing various cases where domestic law amendments were not read into the DTAA. The Tribunal found force in the assessee's submissions, holding that the payment for software was not royalty. Therefore, the AO was directed not to treat the assessee in default under section 201/201(1A) and to delete the taxes and interest levied.4. Taxability of Payments to M/s Ernst & Young, UAE for Market Study:The assessee paid Rs. 12,01,000/- to M/s Ernst & Young, UAE for a market study. The AO classified this payment as royalty under the Indo-UAE DTAA, arguing that it was for information concerning commercial experience. The assessee contended that the market study was for business outside India, thus not taxable under section 9(1)(vii)(b). The CIT(A) upheld the AO's decision, stating that the market study constituted technical services and was in the nature of royalty. The Tribunal found no reason to interfere with this finding, as the assessee did not provide material to dislodge the CIT(A)'s conclusions.Conclusion:The Tribunal upheld the CIT(A)'s decision on the taxability of payments to M/s Windforce Private Limited, Sri Lanka, and M/s Wingtec Rotor Service, Germany, as well as the payments to M/s Ernst & Young, UAE. However, it ruled in favor of the assessee regarding the payment for software purchase from EMD International A/s, Denmark, directing the AO to delete the taxes and interest levied. The assessee's appeal was partly allowed.