Revenue's appeal dismissed on TDS disallowance u/s 40(a)(i) for non-resident payments under India-Netherlands DTAA benefits

ITAT Delhi dismissed Revenue's appeal regarding TDS disallowance u/s 40(a)(i) for non-deduction on payments to non-resident for management and sales marketing support services. AO treated payments as FTS requiring TDS deduction. CIT(A) deleted addition holding services non-taxable under India-Netherlands DTAA with MFN clause benefits. ITAT upheld CIT(A)'s interpretation that since recipient's income was non-taxable, no TDS obligation existed u/s 195, consequently no disallowance u/s 40(a)(i) warranted.

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Issues Involved:
1. Disallowance of Rs. 6,74,32,200/- under section 40(a)(i) for non-deduction of TDS on payment to non-resident categorized as Fee for Technical Services (FTS).

Summary:

Issue 1: Disallowance under Section 40(a)(i) for Non-Deduction of TDS on FTS Payment

The Revenue questioned whether the CIT(A) erred in deleting the disallowance of Rs. 6,74,32,200/- under section 40(a)(i) for non-deduction of TDS on payment to a non-resident, which was deemed as Fee for Technical Services (FTS). The assessee, engaged in the business of import/export, trading, manufacturing, and consulting in lighting products, paid management fees to NTL Lemnis Holding BV, a tax resident of the Netherlands, under a management agreement.

The Assessing Officer (AO) held that the nature of services provided under the agreement were advisory and consultancy services, falling under FTS as per the Income Tax Act and the India-Netherlands tax treaty. Consequently, the AO disallowed the deduction of Rs. 6,74,32,200/- under section 40(a)(i) for non-deduction of TDS on these payments.

The assessee argued that the services were administrative and managerial, not technical, and did not meet the "make available" clause under the India-Netherlands DTAA. They contended that the payments were not taxable in India, thus no TDS was required under section 195. The CIT(A) accepted the assessee's argument, noting that the services did not impart technical knowledge or skills to the assessee, and hence, were not FTS.

The CIT(A) also considered the assessment order of the DCIT, International Taxation, Noida, which concluded that the income received by NTL Lemnis Holding BV was non-taxable in India. The CIT(A) ruled that since the income was non-taxable in the hands of the recipient, the disallowance under section 40(a)(i) for non-deduction of TDS was unwarranted.

The Revenue's appeal was dismissed by the Tribunal, which upheld the CIT(A)'s interpretation of the MFN clause in the India-Netherlands Tax Treaty. The Tribunal agreed that the services provided did not qualify as FTS and thus were not subject to TDS under section 195. Consequently, the disallowance under section 40(a)(i) was rightly deleted.

Order Pronounced in the Open Court on 22/01/2024.

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