2022 (5) TMI 1274 - AT - Income Tax

Tribunal rules in favor of assessee, payments to GBAs & BDAs classified as business profits.

The Tribunal ruled in favor of the assessee, concluding that the payments made to Global Business Affiliates (GBAs) and Business Development Associates ... TDS u/s 195 - withholding of tax - Income accrued to India - PE in India - payments were made to the consultant which are covered under section 9(1)(vii) - as per AO payments made by the assessee to GBAs were in the nature of fees for technical services (“FTS”) and do not fall within the scope of Article 7 of DTAA and that “make available” clause is applicable to the assessee - AR submitted that the payments made to GBAs are in the nature of commission for sales promotion services rendered by them on which no tax is required to be deducted at source as the same constitutes business income of the payees which is not taxable in India in the absence of PE of the payees in India - whether services rendered by GBAs were in the nature of business support services and not in the nature of managerial or technical or consultancy services? - HELD THAT:- As nature of business carried out by the assessee, arrangement with the GBAs/ BDAs, nature and scope of services rendered by these GBAs/BDAs discussed above it is obvious that the services rendered by these parties is purely for promotion of sales (of services) and soliciting new clients. The scope of service and the nature of services rendered by these parties have been very illustratively defined in the MSAs with these parties and cannot be subject to any kind of different interpretation. While arriving at his conclusion, AO/ CIT(A) failed to appreciate the exact nature of services rendered by GBAs/ BDAs. Just by naming these parties as ‘consultant’ in the MSAs who are actually engaged in carrying out activities for sale promotion and in lieu thereof getting commission cannot be the basis of concluding that the sums paid to these parties are in the nature of FTS and therefore liable to be taxed in India having accrued in India. In our view the entire payments to the GBAs/ BDAs in all the three assessment years under consideration are not FTS for the reasons that no specialised technical services are rendered to the assessee and that the assessee did not have any personal interaction with these service providers and that these service providers acted within the scope defined in the MSA. GBAs/BDAs are not paid for rendering any managerial, technical or consultancy services but only for promoting sale on behalf of the assessee and therefore such payments are business income of the payees which squarely falls within the scope of the Article 7 of the respective DTAAs relating to ‘business profits’. It is an undisputed fact that the GBAs/ BDAs located overseas are non-residents and do not have PE in India. Hence, the payments to GBAs/ BDAs being the business profit of the GBAs/ BDAs are not taxable in India in the absence of PE. The assessee is therefore not liable to withhold any tax on such payments. There is plethora of judicial precedents wherein it has been held that commission payments to non-resident agents/ service providers for services like sales promotion, marketing, publicity, procuring sales order etc. are not FTS but business profit in the hands of the service provider to which Article 7 of the DTAA is applicable. Payments made to the GBAs/ BDAs are not FTS but business profits not taxable in the hands of GBAs/BDAs in India in the absence of PE by virtue of the Article 7 of the DTAA, no tax is required to be deducted at source on such payments. In the case of GE India Technology Centre Pvt. Ltd. [2010 (9) TMI 7 - SUPREME COURT] held that obligation under section 195(1) to withhold tax arrives only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making a remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. Thus, the payments made to the GBAs/ BDAs are not subject to any withholding tax, such payments being not chargeable to tax in India. Appeal of assessee allowed. Issues Involved:1. Nature of payments made to Global Business Affiliates (GBAs) and Business Development Associates (BDAs).2. Applicability of Section 9(1)(vii) of the Income Tax Act, 1961.3. Applicability of Article 7 and Article 13 of the Double Taxation Avoidance Agreement (DTAA).4. Requirement to deduct tax at source under Section 195 of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Nature of Payments Made to GBAs and BDAs:The primary issue was whether the payments made to GBAs and BDAs were for consultancy services (as claimed by the Assessing Officer) or for business promotion services (as claimed by the assessee). The assessee argued that the services rendered by GBAs were purely for business promotion, including procuring export orders, providing confirmed export orders, and getting the export sales executed. The GBAs were compensated with a fixed fee and additional commission based on the orders procured. The Assessing Officer, however, classified these payments as consultancy services under Section 9(1)(vii) of the Income Tax Act, 1961, which would require the deduction of tax at source.2. Applicability of Section 9(1)(vii) of the Income Tax Act, 1961:The Assessing Officer argued that the payments were for consultancy services and thus fell under Section 9(1)(vii) of the Income Tax Act, 1961. The assessee contended that the services were business support services and did not involve managerial, technical, or consultancy services. The assessee emphasized that the nature of the services did not 'make available' any technical knowledge or expertise to the assessee, a condition required under various DTAAs.3. Applicability of Article 7 and Article 13 of the DTAA:The assessee argued that the payments should be considered under Article 7 of the DTAA, which pertains to business profits, and not under Article 13, which deals with fees for technical services (FTS). The CIT(A) partially agreed, stating that while the payments were in the nature of FTS, they did not 'make available' any technical knowledge or expertise to the assessee, thus falling under the exception clause of the respective DTAAs with the USA and UK. However, for payments to entities in Switzerland, the CIT(A) held that these payments were FTS as the DTAA with Switzerland did not contain the 'make available' clause.4. Requirement to Deduct Tax at Source under Section 195 of the Income Tax Act, 1961:The CIT(A) directed the Assessing Officer to verify and restrict the payments made to the recipient in Switzerland for withholding tax. The assessee argued that the payments were business profits of the GBAs/BDAs, not taxable in India in the absence of a Permanent Establishment (PE) in India. The Tribunal agreed with the assessee, stating that the payments were for business promotion and not for consultancy services, thus falling under Article 7 of the respective DTAAs. The Tribunal held that the payments were not subject to withholding tax as they were not chargeable to tax in India.Conclusion:The Tribunal concluded that the payments made to GBAs/BDAs were not fees for technical services but business profits, which are not taxable in India in the absence of a Permanent Establishment. Therefore, the assessee was not required to deduct tax at source on these payments. The Tribunal allowed all three appeals of the assessee, stating that the entire payments to GBAs/BDAs in the assessment years under consideration were not FTS but business profits, not taxable in India.