2004 (4) TMI 269 - AT - Income Tax

Income-tax Tribunal: Payments to IPI not taxable under Section 195(1), DTAA prevails

Assistant Commissioner Of Income-Tax. Versus Malayala Manorama Co. Ltd.

The Tribunal upheld the decision that Section 195(1) of the Income-tax Act did not apply to payments made to the International Press Institute (IPI) as ... Deduction Of Tax At Source Issues Involved:1. Applicability of Section 195(1) of the Income-tax Act, 1961.2. Taxability under Section 9(1)(i) of the Income-tax Act, 1961.3. Interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and Austria.Issue-wise Detailed Analysis:1. Applicability of Section 195(1) of the Income-tax Act, 1961:The primary issue is whether Section 195(1) of the Income-tax Act, 1961, which mandates tax deduction at source for payments to non-residents, applies to the payments made by the assessee to the International Press Institute (IPI). The revenue argued that the payments, including membership fees, donations, and advertisement charges, fall within the ambit of income under Section 9(1)(i) of the Act and thus require tax deduction at source. However, the first appellate authority held that Section 195(1) is not applicable as IPI is a non-resident body without a permanent establishment in India. The Tribunal upheld this view, stating that the payments were voluntary, with no contractual or legal obligation, and thus not chargeable under the Act. This interpretation aligns with the decision in CIT v. K. Ramabrahmam & Sons (P.) Ltd. [1978] 115 ITR 369.2. Taxability under Section 9(1)(i) of the Income-tax Act, 1961:The revenue's stance was that the payments to IPI should be considered as income accruing or arising in India under Section 9(1)(i). The first appellate authority disagreed, noting that IPI had no property, asset, or source of income in India, and the payments made by the assessee were purely voluntary. The Tribunal affirmed this, emphasizing that the assessee, Malayala Manoramma, could not be considered a source of income for IPI, and the services rendered by IPI were performed outside India. Therefore, Section 9(1)(i) did not apply.3. Interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and Austria:The DTAA between India and Austria was crucial in determining the taxability of the payments. Article III of the DTAA stipulates that tax shall not be levied on the industrial or commercial profits of an enterprise unless derived through a permanent establishment in the taxing territory. The first appellate authority and the Tribunal both concluded that IPI had no permanent establishment in India, and thus, the payments could not be taxed under Indian law. Additionally, Article XIV of the DTAA, which addresses professional services, further supported the non-taxability of the payments as the services, if any, were rendered in Vienna, not India.The Tribunal also referenced the Supreme Court's decision in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, which held that in case of conflict between a general law and a special Act, the special Act (DTAA in this case) prevails. Therefore, the DTAA's provisions took precedence over the general provisions of the Income-tax Act.Conclusion:The Tribunal upheld the first appellate authority's decision, confirming that the provisions of Section 195(1) of the Income-tax Act, 1961, were not applicable to the payments made by the assessee to IPI. The payments were voluntary and did not constitute income accruing or arising in India under Section 9(1)(i). Moreover, the DTAA between India and Austria, which took precedence over the Income-tax Act, further exempted these payments from Indian taxation due to the absence of a permanent establishment of IPI in India. Consequently, the revenue's appeal was dismissed.