2025 (2) TMI 43 - AT - Income Tax

Non-resident assessee not liable for TDS under section 195 on payments to Singapore entity without Indian PE

ITAT Kolkata dismissed revenue's appeal regarding TDS deduction under section 195. The assessee made payments to Singapore-based entity for consultancy ... TDS u/s 195 - payment was in the nature of consultancy/advisory services - PE in India or not? - payment made to the Star Consortium Pvt. Ltd., Singapore as ‘Fees for Technical Services’ u/s 9(1)(vii) and Article 12 of the India Singapore-DTAA, as the services provided by foreign entity was consultancy in nature - HELD THAT:- During the year both the assessee as well as the recipient were non-resident. The assessee was a Director with 50% share holding in SCPL of Singapore. However, SCPL was a company registered in Singapore, a non-resident and the director was also a non-resident. Merely because for some period the director may have been resident in India, it cannot be said that the key management decisions took place in India so as to hold that M/s. SCPL had a PE in India and the assessee was required to deduct TDS on the payment made to it. Assessee was rendering advisory services to DOTEPL through The Safe Consortium and was working as Investment Banker and Strategic Management Consultant and The Safe Consortium was appointed as advisors and facilitators for raising funds for DOTEPL. TSC had further appointed SCPL Singapore as its advisor for raising funds for DOTEPL and advisory fee of 0.75% of the amount of fund raised for DOTEPL was to be paid to the advisor SCPL by the mandator TSC. Thus, by no stretch of imagination the payment of advisory fee could be termed as a royalty or fee for technical services as it was in the nature of commission for the financial services rendered. It has been stated that no disallowance u/s 40(a)(i) was made in the initial assessment order and the subsequent proceedings initiated in response to the notice u/s 263 of the Act were quashed by the Tribunal, thereby rendering the consequential assessment order made to give effect to the finding in order u/s 263 of the Act as non-est. The income of the non-resident accrued outside India. It is not comprehensible as to on what basis the Ld. AO has apportioned the income in the ratio of 55% to 45% between India and Singapore and allowed 10% as expenses. Thus, in the absence of a PE, the income was neither liable to be assessed as business profit of the payee nor as royalty as per the finding of the Ld. CIT(A) and therefore, the finding of the Ld. CIT(A) in this regard is upheld and the appeal of the revenue is dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:1. Whether the payment made by the assessee to Star Consortium Pvt. Ltd., Singapore, should be considered as 'Fees for Technical Services' or 'Royalty' under Section 9(1)(vi) and 9(1)(vii) of the Income Tax Act, 1961, and Article 12 of the India-Singapore Double Taxation Avoidance Agreement (DTAA).2. Whether the assessee was required to deduct tax at source under Section 195 of the Income Tax Act, 1961, on payments made to Star Consortium Pvt. Ltd., Singapore.3. Whether the assessee could be held as an 'assessee-in-default' under Section 201(1) for non-deduction of tax at source.4. Whether the interest under Section 201(1A) for non-deduction of tax at source was applicable.5. Whether the appeal was maintainable on account of low tax effect, considering the exceptions under CBDT Circular No. 5/2024.ISSUE-WISE DETAILED ANALYSIS1. Nature of Payment as 'Fees for Technical Services' or 'Royalty'- Legal Framework and Precedents: The relevant sections of the Income Tax Act, 1961, are Section 9(1)(vi) and 9(1)(vii), which define 'Royalty' and 'Fees for Technical Services,' respectively. Article 12 of the India-Singapore DTAA provides definitions that are more beneficial to the taxpayer.- Court's Interpretation and Reasoning: The Tribunal noted that the payment was for financial advisory services and not for the use of any intellectual property or technical services as defined under the Act or the DTAA. The Tribunal relied on the definition of 'Royalty' in Article 12 of the DTAA, which was found to be more beneficial to the assessee.- Key Evidence and Findings: The Tribunal examined the nature of services provided, which were advisory and financial in nature, and not technical or involving the transfer of any rights over intellectual property.- Application of Law to Facts: The Tribunal concluded that the payment did not qualify as 'Royalty' or 'Fees for Technical Services' under the Act or the DTAA, and thus, no income accrued in India.- Treatment of Competing Arguments: The Tribunal considered the Revenue's argument that the payment was royalty but found it unsubstantiated based on the nature of services.- Conclusions: The payment was not liable to be taxed as 'Royalty' or 'Fees for Technical Services' in India.2. Obligation to Deduct Tax at Source under Section 195- Legal Framework and Precedents: Section 195 of the Income Tax Act, 1961, mandates tax deduction at source for payments to non-residents.- Court's Interpretation and Reasoning: Since the payment was not considered taxable in India, the obligation to deduct tax under Section 195 did not arise.- Key Evidence and Findings: The Tribunal referenced the absence of a Permanent Establishment (PE) of Star Consortium Pvt. Ltd. in India.- Application of Law to Facts: The Tribunal found that the payment was made to a non-resident entity without a PE in India, and thus, Section 195 was not applicable.- Treatment of Competing Arguments: The Tribunal dismissed the Revenue's claim for tax deduction at source based on the DTAA and the absence of a PE.- Conclusions: The assessee was not obligated to deduct tax under Section 195.3. Assessee-in-Default Status under Section 201(1)- Legal Framework and Precedents: Section 201(1) pertains to the consequences of failure to deduct tax at source.- Court's Interpretation and Reasoning: The Tribunal held that since there was no obligation to deduct tax, the assessee could not be deemed in default.- Key Evidence and Findings: The Tribunal noted the absence of a PE and the nature of the payment as non-taxable in India.- Application of Law to Facts: The Tribunal applied the DTAA provisions, which overrode the domestic law, to conclude no default status.- Treatment of Competing Arguments: The Tribunal rejected the Revenue's assertion that the assessee was in default, based on the DTAA and the absence of a PE.- Conclusions: The assessee was not an 'assessee-in-default' under Section 201(1).4. Interest under Section 201(1A)- Legal Framework and Precedents: Section 201(1A) deals with interest for non-deduction of tax at source.- Court's Interpretation and Reasoning: As the assessee was not in default, the interest under Section 201(1A) was not applicable.- Key Evidence and Findings: The Tribunal's decision on non-applicability of Section 195 led to the conclusion on interest.- Application of Law to Facts: The Tribunal vacated the interest demand based on the absence of a default.- Treatment of Competing Arguments: The Tribunal found the Revenue's claim for interest baseless due to the non-default status.- Conclusions: The interest under Section 201(1A) was not applicable.5. Maintainability of Appeal on Low Tax Effect- Legal Framework and Precedents: CBDT Circular No. 5/2024 provides exceptions to the low tax effect rule.- Court's Interpretation and Reasoning: The Tribunal considered the exception for TDS/TCS disputes under the Circular.- Key Evidence and Findings: The Tribunal noted the exception applied to the nature of the dispute.- Application of Law to Facts: The Tribunal found the appeal maintainable under the exception.- Treatment of Competing Arguments: The Tribunal acknowledged the Revenue's argument under the Circular's exception.- Conclusions: The appeal was maintainable despite low tax effect.SIGNIFICANT HOLDINGS- The Tribunal held that the payment to Star Consortium Pvt. Ltd., Singapore, was not 'Royalty' or 'Fees for Technical Services' under the India-Singapore DTAA and the Income Tax Act, 1961.- The Tribunal concluded that the assessee was not obligated to deduct tax under Section 195, and thus, could not be held as an 'assessee-in-default' under Section 201(1).- The Tribunal vacated the interest demand under Section 201(1A) due to the non-default status of the assessee.- The Tribunal found the appeal maintainable under the exceptions provided in CBDT Circular No. 5/2024.- The Tribunal dismissed the appeals filed by the Revenue, upholding the decision of the Ld. CIT(A).