2019 (12) TMI 441 - AT - Income Tax

Tribunal allows appeal delay, disallows payments to non-residents under Section 40(a)(ia) for Germany and Spain.

The Tribunal condoned the Revenue's delay in filing the appeal and admitted it. Disallowance under Section 40(a)(ia) for payments to non-residents was ... TDS u/s 195 - disallowance u/s 40(a)(ia) - fees for technical services - failure of the assessee to file certificates in Form 15CA and 15CB - as per assessee no technology involved, the provisions of Section 9(1)(vii) would not apply to the above said services - HELD THAT:- CIT(Appeals), after examining the services rendered by the non-residents, found that the non-residents who rendered services do not have any permanent establishment in India. CIT(Appeals) also found that there was no business connection within the meaning of Section 9(1)(i). Therefore, the CIT(Appeals) found that Section 9(1)(i) of the Act has no application to this case and payments received by the non-residents cannot be assessed as their business income in India under Section 9(1)(i) CIT(Appeals) is not correct in saying that the services rendered by the non-residents are technical services. Since the services rendered are not technical services, this Tribunal is of the considered opinion that the payment received by the non-residents from the assessee is not taxable in India. In IMP Power Ltd. [2006 (1) TMI 171 - ITAT BOMBAY-E] found that even legal fees paid in U.K. is not taxable in India. Hence, there cannot be any disallowance. Therefore, the assessee is not liable to deduct tax as required under Section 195. The Apex Court has also examined this issue in Transmission Corporation of A.P. Ltd. v. CIT [1999 (8) TMI 2 - SUPREME COURT] and found that when the payment made to non-resident is not taxable in India, it is not necessary to deduct tax under Section 195 of the Act. Therefore, there cannot be any disallowance under Section 40(a)(ia) of the Act We are unable to uphold the orders of the CIT(Appeals) in respect of the payment made to non-residents who are in USA and UK. In respect of payments made to non-residents at Germany and Spain, we confirm the order of the AO not on the ground on which the CIT(Appeals) deleted the disallowance but on the ground that such payments made by the assessee to non-residents at Germany and Spain are not liable for taxation in India. In other words, the non-residents in Germany and Spain also not rendered any technical service. Hence, the assessee is not required to deduct tax under Section 195 of the Act. Assessee has not filed certificates in Form 15CA and 15CB as required - We have carefully gone through the provisions of Section 195 of the Act. Section 195(6) of the Act says that the person responsible for paying to a non-resident any sum whether or not chargeable under the provisions of Income-tax Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed. Rule 37BB of the Income-tax Rules provides for furnishing such information in Form 15CA and 15CB. Sub-section (6) of Section 195 of the Act does not require the assessee to deduct tax. What is required is furnishing information in the specified form, namely, Form 15CA and 15CB. However, subsection (1) of Section 195 of the Act requires the assessee to deduct tax at the time of credit of such income to the account of the payee. The Apex Court in Transmission Corporation of A.P. Ltd. [1999 (8) TMI 2 - SUPREME COURT] examined this issue and while interpreting Section 195(1) of the Act held that the taxpayer in India is liable to deduct tax in case the payment made to non-resident is liable for taxation in India. Therefore, the assessee is required to deduct tax under Section 195(1) of the Act. Provided the non-resident recipient is liable to pay tax. The violation of Section 195(6) of the Act and failure to file certificates in Form 15CA and 15CB is punishable separately under Section 271I of the Act. Therefore, at the best, for the failure of the assessee for furnishing Form 15CA and 15CB, the Assessing Officer may initiate penalty proceeding under Section 271I of the Act. However, there cannot be any disallowance under Section 40(a)(ia) of the Act. In other words, Section 195(6) of the Act, which requires the assessee to furnish information, does not require the assessee to deduct tax at the time of payment. Therefore, the question of disallowance under Section 40(a)(ia) of the Act does not arise for consideration. Payment made to the non-residents at UK, USA, Germany and Spain cannot be disallowed. Accordingly, the order of the CIT(Appeals) in respect of payment made to the non-residents at USA and UK is set aside and the disallowance made by the Assessing Officer is deleted. Issues Involved:1. Condonation of delay in filing the appeal by the Revenue.2. Disallowance under Section 40(a)(ia) of the Income-tax Act, 1961 due to non-deduction of tax at source on payments made to non-residents.3. Classification of services rendered by non-residents as technical or non-technical services.4. Applicability of Double Taxation Avoidance Agreements (DTAA) between India and other countries.5. Requirement to file Form 15CA and 15CB under Section 195(6) of the Income-tax Act.Detailed Analysis:1. Condonation of Delay:The Tribunal found a reasonable cause for the Revenue's delay of 146 days in filing the appeal. Consequently, the delay was condoned, and the appeal was admitted.2. Disallowance under Section 40(a)(ia):The Revenue disallowed Rs. 2,95,31,708/- paid to non-residents under Section 40(a)(ia) due to non-deduction of tax at source. The CIT(Appeals) deleted the disallowance for payments to non-residents in the USA and UK but upheld it for Germany and Spain. The Tribunal examined if the services rendered by non-residents were technical services, which would necessitate tax deduction under Section 195.3. Classification of Services:The Tribunal analyzed whether services like copy editing, indexing, and proofreading rendered by non-residents were technical services. The Tribunal noted that these services do not involve technology or technical expertise. The Mumbai Bench's decision in IMP Power Ltd. and the Tribunal's decision in Cosmic Global Ltd. were cited, confirming that such services are not technical. Therefore, payments for these services are not taxable in India, and no tax deduction is required under Section 195.4. Applicability of DTAA:The CIT(Appeals) applied the 'make available' clause from the DTAA between India and the USA/UK, concluding that since technology was not made available, the payments were not taxable. However, for Germany and Spain, where the 'make available' clause is absent, the CIT(Appeals) upheld the disallowance. The Tribunal disagreed, stating that the services were non-technical and thus not taxable, irrespective of the DTAA provisions.5. Requirement to File Form 15CA and 15CB:The Tribunal clarified that Section 195(6) requires furnishing information in Form 15CA and 15CB but does not mandate tax deduction. Non-compliance with this requirement attracts penalties under Section 271I but does not justify disallowance under Section 40(a)(ia).Conclusion:The Tribunal concluded that payments to non-residents in the USA, UK, Germany, and Spain for services like copy editing, indexing, and proofreading are not taxable in India as they are non-technical services. Consequently, the assessee is not liable to deduct tax under Section 195, and there can be no disallowance under Section 40(a)(ia). The Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal.