2004 (12) TMI 323 - AT - Income Tax

Payments to Non-Residents Not Taxable in India, Not 'Technical Services' Under Indo-UK DTAA; Assessee's Appeals Allowed.

The Tribunal determined that payments made by the assessee to non-residents were not subject to tax in India, as the services did not qualify as 'fees for ... Reopening of assessment under section 147 and Explanation 2(b) - disallowance under section 40(a)(i) for failure to deduct tax at source - fees for technical services under Article 13 of the Indo UK DTAA - royalty under Article 13(3) of the Indo UK DTAA - independent personal (professional) services under Article 15 of the Indo UK DTAA - business profits and permanent establishment under Article 7 of the Indo UK DTAA - admissibility of agreements and auxiliary documentary evidenceReopening of assessment under section 147 and Explanation 2(b) - Validity of reassessment where AO issued intimation under s.143(1)(a) but did not issue notice under s.143(2) within 12 months - HELD THAT: - The Tribunal held that an intimation under s.143(1)(a) does not constitute an assessment and therefore the expiration of the 12 month period for issuing notice under s.143(2) does not convert the intimation into a final assessment. Reliance was placed on the decision of the Delhi High Court to that effect, and consequently the reopening of assessment under section 147 read with Explanation 2(b) was held valid. The assessee's plea that the intimation amounted to an assessment and barred reassessment was rejected. [Paras 2]Reopening upheld; ground of appeal challenging reassessment dismissed.Admissibility of agreements and auxiliary documentary evidence - fees for technical services under Article 13 of the Indo UK DTAA - disallowance under section 40(a)(i) for failure to deduct tax at source - Whether payments to various UK entities and individuals constituted royalties or fees for technical services chargeable in India and therefore unrecoverable under section 40(a)(i) for failure to deduct tax - HELD THAT: - The Tribunal examined agreements and bills on record (held admissible for adjudication) to characterise the services. It found that the payments did not fall within the definition of 'royalty' under Article 13(3). With respect to 'fees for technical services' under Article 13(4), the Tribunal applied the interpretive aid from the Indo US memorandum: services are covered only where technical knowledge, skill, know how or processes are made available to the recipient enabling its use. The services in issue related to assessment, surveillance, provision of assessors and liaison/training in the context of ISO certification and did not make technology or technical know how available to the assessee in the required sense. Consequently they were not fees for technical services. Because the payments were not chargeable to tax in India under the DTAA, the obligation to deduct tax at source did not arise and section 40(a)(i) was not attracted. [Paras 11, 12, 14, 15]Payments held not to be royalties or fees for technical services; disallowance under section 40(a)(i) set aside.Independent personal (professional) services under Article 15 of the Indo UK DTAA - disallowance under section 40(a)(i) for failure to deduct tax at source - Whether amounts paid to Mr. D.P.C. Price were taxable in India as independent personal (professional) services - HELD THAT: - The Tribunal accepted that services rendered by Mr. Price were professional (audit) services falling within the scope of Article 15 (independent personal services). Article 15 permits taxation in the source State only if the individual is present in that State for 90 days (per the DTAA) or has a fixed base regularly available there. The Revenue did not contend that Mr. Price met either condition. Thus the payments to Mr. Price were not taxable in India and no obligation to deduct tax at source arose. [Paras 12, 17]Payments to Mr. Price held to be professional services not taxable in India; no s.40(a)(i) disallowance.Business profits and permanent establishment under Article 7 of the Indo UK DTAA - disallowance under section 40(a)(i) for failure to deduct tax at source - Whether payments constituted business profits taxable in India because they accrued in India - HELD THAT: - Under Article 7, profits of an enterprise are taxable in the source State only if the enterprise carries on business there through a permanent establishment. The Revenue did not assert that the non resident payees had a permanent establishment in India. Consequently, amounts could not be taxed in India as business profits. Given that the payments were not chargeable to tax in India under Article 7, there was no obligation to deduct tax at source and section 40(a)(i) did not apply. [Paras 19]Payments not taxable as business profits in India; no s.40(a)(i) disallowance.Final Conclusion: The Tribunal upheld the validity of reassessment but on merits allowed the appeals: the payments to the foreign parties were neither royalties nor fees for technical services nor business profits taxable in India and the payment to Mr. Price was a professional service not taxable in India; consequently there was no obligation to deduct tax at source and the disallowances under section 40(a)(i) are deleted. Issues Involved:1. Validity of reassessment proceedings.2. Disallowance of payments to overseas parties for failure to deduct tax at source.3. Nature of services rendered by non-residents and their taxability under the Indo-UK Double Tax Treaty.Summary:1. Validity of Reassessment Proceedings:The first ground of appeal challenges the validity of reassessment proceedings on the basis that an intimation u/s 143(1)(a) does not constitute an assessment. The Hon'ble Delhi High Court in MTNL vs. Chairman, CBDT held that an intimation under s. 143(1)(a) is not an assessment. Consequently, the reopening of assessment falls within the parameters of s. 147, Expln. 2(b) of the Act. The ground of appeal is dismissed.2. Disallowance of Payments to Overseas Parties:The assessee challenged the disallowance of payments made to certain overseas parties for alleged failure to deduct tax at source, invoking provisions of s. 40(a)(i) of the Act. The CIT(A) confirmed the AO's action, holding that the payments were in the nature of royalty/fee for technical services as per art. 13 of the Indo-UK Double Tax Treaty and were liable to tax in India. The assessee contended that these payments did not constitute royalty/fee for technical services and were not liable to tax in India, thus no obligation to deduct tax at source existed.3. Nature of Services Rendered by Non-Residents:The Tribunal examined the nature of services rendered by non-residents to determine if they constituted 'royalty' or 'fees for technical services' under art. 13 of the Indo-UK DTAA. The services provided by M/s NQA Ltd., UK, M/s WQMN Ltd., UK, Mr. DPC Price, and UKAS were purely advisory, professional, and related to assessment and surveillance for ISO Certification, which did not involve making available technical knowledge, experience, skill, know-how, or process to the assessee. Therefore, these payments did not qualify as 'fees for technical services' under art. 13(4) of the Indo-UK DTAA.4. Professional Services under Art. 15 of Indo-UK DTAA:The Tribunal held that payments to Mr. Price were for professional services, not technical services, and thus not taxable in India under art. 15 of the Indo-UK DTAA, as he did not stay in India for 90 days or more, nor had a fixed base in India.5. Business Profits under Art. 7 of Indo-UK DTAA:The Tribunal concluded that the payments could not be considered business profits taxable in India under art. 7 of the Indo-UK DTAA, as the non-residents did not have a permanent establishment in India.Conclusion:The Tribunal held that the payments made by the assessee to non-residents were not chargeable to tax in India, and consequently, there was no obligation to deduct tax at source. The provisions of s. 40(a)(i) were not applicable, and the disallowance of these expenses by the Revenue authorities was not justified. The appeals of the assessee were allowed.