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Issues: Whether the remittance made to the US resident for web promotion, social media management and related online services constituted fees for technical services or fees for included services so as to attract tax deduction at source under section 195 of the Income-tax Act, 1961, and consequent disallowance under section 40(a)(ia).
Analysis: The payment was examined in the light of both the Income-tax Act and the India-USA DTAA, since section 90(2) makes the treaty provisions applicable to the extent they are more beneficial to the assessee. Under Article 12(4) of the DTAA, services qualify as fees for included services only if they are ancillary and subsidiary to royalty or make available technical knowledge, experience, skill, know-how, processes, or a technical plan or design. The services in question were found to be online promotional and hosting-related activities carried out through servers located outside India, without any transfer of technical knowledge, skill, or know-how to the assessee. The lower authorities had treated the payment as technical services under the domestic law, but that approach was not accepted in view of the treaty test and the absence of the make available element.
Conclusion: The remittance was not taxable in India under the DTAA, no obligation to deduct tax at source arose under section 195, and the disallowance under section 40(a)(ia) could not be sustained. The issue was decided in favour of the assessee.
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