2025 (1) TMI 1277 - AT - Income Tax

AO must re-examine foreign payments under DTAA provisions before applying TDS Section 195

Janet Christine Depenning Versus The Income Tax Officer, International Taxation ward-1 (1), Chennai

The ITAT Chennai ruled in favor of the assessee regarding TDS u/s 195 on foreign payments. The AO had treated all payments to foreign associates as fees ... TDS u/s 195 - Non-Deduction of tax on foreign payments - assessee has argued that the foreign associates are predominantly individuals and in some cases are body corporate and these services rendered are either professional services or business profit as per respective DTAA - HELD THAT:- Though, the AO in the order has observed that if the relevant DTAA provides the clause of independent personal services which includes legal services, the assessee is eligible to available the benefit. However, he has considered entire amount paid as fee for technical services and levied tax to be deducted and interest u/s. 201(1A) without examining the relevant DTAA. As relying on Sri Subhatosh Majumder [2015 (11) TMI 1544 - ITAT KOLKATA] we direct the A.O to examine the assessee’s plea that payments were non taxable in India because of the beneficial provisions of the DTAAs with respective countries. The A.O shall grant adequate opportunity of being heard to the assessee and will also permit him to furnish necessary documents and evidences in support of his claim. In view of the above, the appeal filed by the assessee is allowed for statistical purposes only. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment were:1. Whether the payments made by the assessee to foreign attorneys should be classified as 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act, thereby necessitating tax deduction at source under Section 195.2. Whether the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the respective foreign countries exempt these payments from taxation in India.ISSUE-WISE DETAILED ANALYSIS1. Classification of Payments as 'Fees for Technical Services'- Relevant Legal Framework and Precedents: The Income Tax Act, particularly Section 9(1)(vii), defines 'fees for technical services' as payments made for rendering technical, consultancy, or managerial services. The Tribunal referenced prior decisions, including the case of GVK Industries Ltd, to interpret the term 'consultancy services'.- Court's Interpretation and Reasoning: The Tribunal examined whether the services rendered by foreign attorneys fell under 'consultancy services'. It was determined that the foreign attorneys provided specialized advice and services essential for the registration of intellectual property rights, which involved technical and advisory elements.- Key Evidence and Findings: The Tribunal noted that the services provided by foreign attorneys were not merely clerical but required specialized knowledge of IP laws, thus qualifying as consultancy services.- Application of Law to Facts: The Tribunal found that the payments made by the assessee to foreign attorneys were indeed 'fees for technical services' under Section 9(1)(vii), as they were used to fulfill professional commitments in India.- Treatment of Competing Arguments: The assessee argued that the services were not technical but rather clerical and executionary. However, the Tribunal rejected this, emphasizing the specialized nature of the services.- Conclusions: The Tribunal concluded that the payments were 'fees for technical services', and the assessee was obligated to deduct tax at source under the Income Tax Act.2. Applicability of the DTAA Provisions- Relevant Legal Framework and Precedents: The Tribunal considered the provisions of the DTAA, which may provide tax exemptions for certain types of income, including independent personal services and business profits.- Court's Interpretation and Reasoning: The Tribunal acknowledged that the DTAA provisions could potentially exempt these payments from taxation in India if the services were not rendered through a permanent establishment in India.- Key Evidence and Findings: The Tribunal noted that the lower authorities had not adequately examined the DTAA provisions relevant to the countries of the foreign attorneys.- Application of Law to Facts: The Tribunal directed the Assessing Officer to examine whether the payments were non-taxable in India due to DTAA provisions, which had not been previously considered.- Treatment of Competing Arguments: The assessee argued that under the DTAA, these payments were not taxable in India. The Tribunal found merit in this argument and remanded the issue for further examination.- Conclusions: The Tribunal set aside the orders of the lower authorities and directed a fresh examination of the DTAA provisions to determine the taxability of the payments.SIGNIFICANT HOLDINGS- Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal emphasized the need for a detailed examination of the DTAA provisions, stating, 'The A.O shall grant adequate opportunity of being heard to the assessee and will also permit him to furnish necessary documents and evidences in support of his claim.'- Core Principles Established: The judgment reinforced the principle that payments for services requiring specialized knowledge and expertise can be classified as 'fees for technical services'. It also highlighted the importance of considering DTAA provisions in determining tax liability.- Final Determinations on Each Issue: The Tribunal concluded that the payments were 'fees for technical services' under domestic law but remanded the case to determine the applicability of DTAA provisions, allowing the appeals for statistical purposes.