Non-resident entity's India business connection upheld; withholding tax applies. Tax Tribunal ruling on Section 195.

The Tribunal upheld the decision that a non-resident entity had a business connection in India through its subsidiary, making payments subject to withholding tax under Section 195 of the Income Tax Act. The Tribunal confirmed the non-deduction of Tax at Source by the assessee, dismissing appeals for both Assessment Years and affirming the default status.

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Issues Involved:
1. Non-deduction of Tax at Source under Section 195 of the Income Tax Act.
2. Determination of "business connection" in India for the non-resident entity.
3. Applicability of withholding tax on payments made to non-resident entities.

Issue-wise Detailed Analysis:

1. Non-deduction of Tax at Source under Section 195 of the Income Tax Act:
The assessee company, engaged in manufacturing wheat products, purchased spare parts for old machines and flour milling machines from a non-resident supplier, Buhler AG, Switzerland, during Financial Years 2014-15 and 2015-16. The payments made were Rs. 38,093/- and Rs. 2,83,438/- respectively. The assessee did not deduct tax at source under Section 195, arguing that the purchases were capital goods and not subject to TDS. The Income Tax Officer (ITO) issued a show cause notice, treating the assessee as in default for not deducting TDS on these payments.

2. Determination of "business connection" in India for the non-resident entity:
The ITO investigated and found that Buhler AG, Switzerland, had a subsidiary in India, Buhler India Pvt. Ltd. (BIPL), which played a significant role in the transaction. BIPL was involved in negotiating, raising quotations, revising quotations, and confirming orders on behalf of Buhler AG. The ITO concluded that Buhler AG had a "business connection" in India through BIPL, making the profit element in the sales subject to withholding tax under Section 195.

3. Applicability of withholding tax on payments made to non-resident entities:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's decision, stating that BIPL's involvement constituted a business connection in India for Buhler AG. The CIT(A) elaborated that BIPL's activities went beyond mere marketing support and included substantial functions like negotiating and finalizing orders, which established a business connection under Explanation 2 to Section 9(1) of the Income Tax Act. The Tribunal confirmed this finding, noting that BIPL's role in the transaction was crucial and that Buhler AG's income from the transaction was deemed to accrue in India, necessitating TDS under Section 195.

Conclusion:
The Tribunal dismissed the assessee's appeals for both Assessment Years 2015-16 and 2016-17, confirming that Buhler AG, Switzerland, had a business connection in India through its subsidiary BIPL. Consequently, the payments made by the assessee to Buhler AG were subject to withholding tax under Section 195 of the Income Tax Act. The Tribunal found no inconsistency in the CIT(A)'s findings and upheld the decision to treat the assessee as in default for non-deduction of TDS.

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