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 Director Of Income-Tax International Taxation Bangalore., The Dy. Director of Income-Tax (International Taxation) Circle-1 (1) Bangalore. Versus IBM India Private Limited

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 ... TDS u/s 195 - assessee in default - payroll services rendered by IBM Philippines to the assessee - As held by tribunal it is not Technical Services but constitute business profits and hence Section 195 is not attracted - HELD THAT:- It is not in dispute that under the companion agreement, IBM India Pvt. Ltd., has entered into an agreement with P&G India. The said work has been outsourced to IBM Philippines. IBM Philippines is carrying out the work described in the agreement between IBM India and P&G India. Hence, IBM Philippines was not rendering any technical service and therefore, the income in the hands of IBM Philippines is a business income. Whether ITAT was right in holding that DTAA does not define FTS? - Revenue has taken a specific contention that FTS was absent under the India-Philippines Treaty. Further, it is also not in dispute that under the agreement, IBM Philippines was rendering service in the field of payroll, data management etc., in connection with the work/assignment described in the agreement between IBM India and P&G India. ITAT has, in our considered view rightly recorded that as per Article 7(1) of Indian Philippines DTAA, the business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Admittedly, there is no permanent establishment of IBM Philippines in India. As per Article 23 of DTAA, the business profit of IBM Philippines shall be taxable in that State only. Further, the CIT(A) has also held that the transactions between the assessee and IBM Philippines were in the course of its business and the same has not been disputed by the Revenue. Hence, the payments received by IBM Philippines shall not be liable for TDS under Section 195 of the IT Act. Therefore, assessee cannot be deemed as an 'assessee in default'. - Decided in favour of assessee. 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.