2023 (2) TMI 174 - HC - Income Tax

Court Rules Payments to IBM Philippines as Business Profits, Not Taxable in India; No TDS Under Section 195.

The HC ruled in favor of the assessee, dismissing the Revenue's appeals. It determined that payments made to IBM Philippines were business profits, not ... Business profits - fees for technical services - permanent establishment - tax deduction at source under Section 195 - assessee in default under Section 201 - application of DTAA vis-a -vis domestic law (Section 90)Business profits - fees for technical services - application of DTAA vis-a -vis domestic law (Section 90) - Whether payments by the assessee to IBM Philippines for payroll and related services constituted fees for technical services or were business profits of IBM Philippines. - HELD THAT: - The Tribunal and this Court found as an undisputed factual matrix that IBM India had a contract with P&G India and the work was outsourced to IBM Philippines which acted as a subcontractor performing the assignment described in the India-P&G agreement. IBM Philippines did not render technical services to IBM India but provided payroll, data management and related services in the course of its business and earned profit by rendering those services to P&G India. The DTAA framework and the factual character of the transactions led to treating the receipts as business income of IBM Philippines rather than FTS. The Court also noted that the specific contention that FTS was absent under the India-Philippines Treaty had been taken by Revenue and that the Treaty's treatment, read with the factual finding of no technical service to IBM India, supported the business profits characterisation. [Paras 9, 11, 12, 13]Payments were business profits of IBM Philippines and not fees for technical services.Permanent establishment - business profits - Whether the business profits of IBM Philippines were taxable in India despite payments being received from an Indian assessee. - HELD THAT: - Relying on Article 7 of the India-Philippines DTAA, the Court recorded that business profits of an enterprise of a Contracting State are taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. It was an admitted fact that IBM Philippines had no permanent establishment in India. Consequently, under the DTAA (and the domestic law read in that context), the business profits of IBM Philippines were taxable only in the Philippines. [Paras 10, 13]Absent a permanent establishment in India, the receipts of IBM Philippines are taxable in the Philippines and not in India.Tax deduction at source under Section 195 - assessee in default under Section 201 - Whether the assessee was liable to deduct tax at source under Section 195 and consequently liable as an assessee in default under Section 201. - HELD THAT: - Having concluded that the payments were business profits of IBM Philippines not chargeable to tax in India (in view of the absence of a permanent establishment and the DTAA allocation of taxing rights), the Court held that Section 195 was not attracted. Since no tax was payable under the domestic law read with the DTAA on those receipts, the assessee could not be treated as an assessee in default under Section 201 for failure to deduct TDS. [Paras 13, 14]Section 195 did not apply and the assessee was not an assessee in default under Section 201 in respect of the payments to IBM Philippines.Final Conclusion: The appeals by the Revenue are dismissed: the payments by the assessee to IBM Philippines were business profits of IBM Philippines (not FTS), IBM Philippines had no permanent establishment in India so its profits are not taxable in India under the DTAA, and consequently no TDS under Section 195 was attracted and the assessee is not an assessee in default under Section 201. Issues:1. Whether payments made for payroll services by IBM Philippines to the assessee constitute technical services or business profits under Section 195 of the Income Tax ActRs.2. Whether the payments received by IBM Philippines are taxable in India due to a permanent establishmentRs.3. Whether the Double Taxation Avoidance Agreement (DTAA) between India and Philippines defines Fee for Technical ServicesRs.4. Whether the Assessing Officer was correct in not levying interest under Section 201(1) of the ActRs.Issue 1: Payments for Payroll ServicesThe ITAT held that the services provided by IBM Philippines to the assessee were not technical services but constituted business profits. The Revenue argued that the services fell under managerial and consultancy services, including data management, which should be considered technical services. The Revenue contended that the income should be deemed to accrue in India under specific sections of the Income Tax Act.Issue 2: Taxability and Permanent EstablishmentIBM Philippines did not have a permanent establishment in India and was considered a subcontractor under IBM India. The income earned by IBM Philippines from the assessee was determined to be business income as it was paid out of the amount received from P&G India. The Revenue argued that the transactions were conducted in the course of business, and IBM Philippines would be taxable in the Philippines under the India-Philippines DTAA.Issue 3: Definition of FTS under DTAAThe ITAT correctly determined that the DTAA did not define Fee for Technical Services (FTS). However, it was established that IBM Philippines was providing services related to payroll and data management as per the agreement between IBM India and P&G India. The DTAA provisions indicated that the business profits of IBM Philippines would be taxable only in the state where it had a permanent establishment.Issue 4: Interest Levy under Section 201(1)The ITAT concluded that the Assessing Officer was not justified in levying interest under Section 201(1) of the Act as the payments to IBM Philippines were not liable for TDS under Section 195. Therefore, the assessee was not deemed an 'assessee in default.'ConclusionThe High Court dismissed the appeals, ruling in favor of the assessee and against the Revenue. The payments made by the assessee to IBM Philippines were considered business profits rather than technical services, and as IBM Philippines did not have a permanent establishment in India, the income was not taxable in India. The DTAA provisions were applied, and the court found no basis for levying interest under Section 201(1) of the Act.