HC grants Nil TDS certificate under Section 195(2) as payments don't meet DTAA "make available" criteria for FIS

The HC set aside the impugned order rejecting the Nil TDS certificate application under Section 195(2) of the I.T. Act. It held that the petitioner was entitled to seek a tentative determination under Section 195(2) to avoid premature tax deduction. The Court found that the payments did not satisfy the "make available" requirement under Article 12(4) of the India-US DTAA for Fees for Included Services (FIS), thus not attracting TDS under Section 195 read with the DTAA. The HC rejected the Revenue's contention to deduct tax on gross receipts and clarified that Section 195 provides a mechanism to determine the taxable portion. The Court noted errors in the DCIT's findings, including misinterpretation of secondment and employer-employee relationship. Consequently, the HC directed issuance of a Nil TDS certificate, allowing no deduction at source on the petitioner's payments.

---

---

Issues Involved:
1. Whether the application of the petitioner dated 15.01.2020 filed under Section 195(2) of the Income Tax Act was not maintainableRs.
2. Whether the petitioner is required to deduct TDS under Section 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of fiscal evasionRs.
3. Deduction under Section 195(2) of the Income Tax Act on the 'sum chargeable under this Act.'
4. Whether Deduction is on gross receiptsRs.
5. Secondment and reimbursement of costs.
6. Distinguishing the Judgment in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi.

Analysis:

I. Brief Facts:
The petitioner, engaged in providing IT solutions for e-commerce, sought a 'Certificate of No Deduction of Tax at Source' for payments made to Walmart Inc. for the Assessment Year 2020-2021. These payments were reimbursements for salaries of expatriate employees seconded to the petitioner. The application was rejected by the first respondent, directing the petitioner to deduct tax at source at the applicable rate.

II. Contentions of Petitioner:
1. Reimbursements and Withholding Obligations: The petitioner argued that reimbursements are not chargeable to tax under the Act, citing GE India Technology Centre Private Limited v. Commissioner of Income Tax.
2. DTAA Provisions: According to Article 12 of the DTAA, the payments do not qualify as Fee for Technical Services (FTS) and hence, are not taxable in India.
3. Actual Costs: The payments were mere reimbursements without any markup, relying on judgments like Director of Income Tax (IT)-I v. A.P. Moller Maersk A S.
4. Employer-Employee Relationship: The petitioner claimed to be the real employer of the seconded employees, issuing appointment letters and contributing to Provident Fund Authorities.
5. Legal Precedents: The petitioner cited various judgments to support their claim that the payments should not be subjected to TDS under Section 195.

III. Contentions of Respondents:
1. Non-maintainability of Application: Section 195(2) does not contemplate 'Nil deduction of tax at source.'
2. Employer-Employee Relationship: The Assessing Officer concluded that there is no employer-employee relationship between the petitioner and the seconded employees.
3. Nature of Services: The services rendered by the seconded employees are technical services under the Income Tax Act and DTAA.
4. Gross Receipts: The tax at source should be deducted on the gross payment.

IV. Analysis:

(A) Maintainability of Application under Section 195(2):
1. Revenue's Contention: The application under Section 195(2) is maintainable only for composite payments, not for 'Nil Deduction Certificates.'
2. Court's Observation: The DCIT did not address this aspect and rejected the application on merits. The court held that the application under Section 195(2) is maintainable, as it is distinct from Section 197, which is for the recipient's application.

(B) TDS under Section 195(2) read with Article 12(4) of DTAA:
1. DTAA Provisions: Article 12(4) defines 'fees for included services' (FIS) and requires that services must 'make available' technical knowledge, experience, skill, know-how, or processes.
2. Court's Observation: The DCIT failed to consider the 'make available' requirement. The M.S.A. does not satisfy this requirement, and hence, the payments do not qualify as FIS under Article 12(4).

(C) Deduction on 'Sum Chargeable under this Act':
1. Court's Observation: The provisions of DTAA, being more beneficial to the assessee, prevail over the I.T. Act. The DCIT's reliance on Explanation-2 in Section 9(1)(vii) is misplaced.

(D) Deduction on Gross Receipts:
1. Revenue's Contention: The deduction should be on gross receipts, similar to Sections 194C and 194J.
2. Court's Observation: Section 195 specifically uses the term 'any other sum chargeable under the provisions of this Act,' distinguishing it from Sections 194C and 194J. The deduction should not be on gross receipts.

(E) Secondment and Reimbursement of Costs:
1. Court's Observation: The seconded employees are under the control of the petitioner during the period of secondment. The petitioner is the real employer, and the payments are reimbursements, not taxable as FIS under DTAA.

(F) Distinguishing Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I:
1. Court's Observation: The facts in Centrica are different, and the judgment does not support the Revenue's case. The requirement of 'make available' is not satisfied in the present case.

V. Conclusion:
The impugned order dated 01.05.2020 is set aside. The respondent No.1 is directed to issue a Certificate under Section 195(2) of the I.T. Act for 'Nil Tax Deduction at Source' regarding the petitioner's application dated 15.01.2020. The court emphasized that the finding under Section 195 is tentative and subject to final determination of taxability.

---