TaxTMI 
TaxTMI 
2022 (4) TMI 1489
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....eal for assessment year 2012-2013. Therefore, we shall adjudicate first IT(IT)A No.4/Bang/2014 pertaining to assessment year 2011-2012. IT(IT)A No.4/Bang/2014 (Asst.Year 2011-2012) 3. The grounds raised read as follows:- "1.1 The order passed by the learned Commissioner of income tax (Appeals) - IV, Bangalore [learned CIT(A)] is bad in law and liable to be quashed. 2.1 The learned CIT(A) has erred in concluding that there was no violation of principles of natural justice in passing the order passed under section 201 (1) of the Income tax Act, 1961 [Act]. 2.2 The order passed by the learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore without providing sufficient and proper opportunity of hearing, without allowing the appellant to rebut I submit explanation in respect of the conclusions drawn from examination of the senior employee of appellant, is against the principles of natural justice, bad in law and hence liable to be quashed. 3.1 The learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore has erred in concluding that payments made to M/s Infosys Technologies (China) Comp....
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.... 8.1 On facts and in the circumstances of the case and law applicable, the impugned conclusion the learned CIT(A) that the reimbursement of expenses is liable for deduction tax at source under section 195 is incorrect, bad in law and liable to be quashed. 9.1 Assuming without admitting that the payments made to overseas subsidiary were chargeable to tax in India, the learned CIT(A) has erred in concluding that the said payments are liable for TDS at the rate of20% as per section 206AA of the IT Act, 1961 9.2 The learned CIT(A) has erred in not appreciating that (i) Overseas subsidiary was not required to obtain PAN under the provisions of the Income tax Act, 1961 and consequently there was no requirement to furnish its PAN under section 206AA; (ii) Section 206AA does not override the Double Taxation Avoidance Agreements an or section 90 of the Income tax Act; (iii) in any case, the TDS rate as per section 206AA cannot exceed the rate at which the income is chargeable to tax in the hands of non-resident. 9.3 In any case and without prejudice, despite having called for and obtained the PAN of overseas subsidiary during the ap....
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....05 and 01.08.2011, the assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, the assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. The assessee's contention was that the payments were not chargeable to tax under the Act or under the relevant Double Taxation Avoidance Agreement (DTAA). 5. The assessee, however, received order u/s 201(1) and 201(1A) of the I.T.Act (order dated 31.03.2013 for assessment year 2011-2012) whereby the Assessing Officer held that the assessee to be an `assessee in default' for not deducting tax at source u/s 195 of the I.T.Act. The A.O. held that the payments made to Infosys China is liable for tax deduction u/s 9(1)(vii) of the I.T.Act, as fees for technical services (FTS). The A.O. while concluding, placed heavy reliance on the order of the Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT reported in (2010) 40 SOT 220 (Mum.). The A.O. also rejected the plea of the assessee that it is entitled to the exception of section 9(1)(vii)(b) of the I.T.Act (refer page 26 to 36 of the A.O.'s order ....
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....ning any income from any source outside India. Thus, these payments would not be regarded as royalty / fees for technical services as per the exception contained in section 9(1)(vi)(b) / 9(1 )(vii)(b). . Decisions, Circulars relied on • Infosys Ltd v DDIT (International Taxation) IT(IT)A Nos. 2 & 3/Bang/2014 - dated 25.5.2016 ITAT Bangalore bench [Page 1072 to 1086 of compilation filed on 9.12.2021] Paras 11 to 13 • OGE to IT AT order passed on 27.12.2017 for AY 2009-10 & 2010-11 [page 1088 to 1091 of compilation filed on 9.12.2021] Paras 4 to 8 • Qualcomm Incorporated v ADIT [2015] 56 taxmann.com 179 (Delhi Trib) [Page 910 of compilation filed on 17.3.2017 - Para 67 • Circular No 1/2011 dated 6.4.2011 explaining the provisions of Finance Act 2010 - page 1093 of the compilation filed on 9.12.2021] [Para 5.1] • Device Driven (India) P Ltd v CIT [2021] 126 taxmann.com 25 Kerala High Court [Page 1140 to 1150 of compilation filed on 9.12.2021] [Paras 23 to 30] • PCIT v MotifIndiaInfotech P Ltd [2018] 409 ITR 178 (Guj) [Page 1119 to 1126 of compilation filed on 19.1.2022] Para 7 to 11 • Ashapur....
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....)(vii), the services must be rendered in India This position was overruled by the Finance Act 2010 w.e.f. 8.5.2010. The OGE to ITAT order passed for AY 2009-10 and AY 2010-11 has accepted the fact that services were rendered by Infosys China outside India only. Thus, applying the said principles, sub contracting charges of Rs.16,74,44,314*paid on l.5.2010 for services rendered by Infosys China outside India was not chargeable to tax in India *and consequently not liable for TDS under section 195. Non applicability of section 206AA • Without prejudice, for AY 2011-12, the. learned AO has computed TDS under section 195 at 20% by invoking section 206AA for the reason that PAN of Infosys China is not available. [refer page 106 of the order passed under section 201 (1)&(1 A) for AY 2009-10 to AY 2011-12] The learned CIT(A) called for the PAN of Infosys China and the same was submitted on 27.9,2013. [Page 363 to 366 of paper book] However, the learned CIT(A)has not allowed any relief on this issue. • Ground No 9.1 to 9.3 before the Tribunal challenges the applicability of section 206AA. • DTAA overrides section 206AA - Decisions relied on - Nagar....
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....t and so for as the utilisation is concerned as final product after utilisation of the partial services rendered by Infosys China being exported from India, the test of utilisation also satisfied. 6. The issue raised in the above appeal is covered by the decision of the ITAT Mumbai bench in the case of Ashapura Minichem Ltd, wherein the similar issues has been considered in the context of DTAA with China. 7. The reliance placed by the assessee on the judgement of the Kerala High Court in the case of Device Driven India Private Limited, the said judgement is not applicable to the facts and circumstances of the present case as the services rendered by Infosys China have been utilised by the assessee in India before exporting the software Wherefore it is respectfully prayed that this Hon'ble Tribunal may be pleased to confirm the order passed u/s 201 of the act and order of CIT(A) and dismissed the appeal filed by the assessee in the interest of Justice and equity." 9. We have heard rival submissions and perused the material on record. We are of the view that the issue of tax deduction at source u/s 195 of the I.T.Act on the payment made by the assessee to Inf....
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....proposition is assessee's reliance on the Hon'ble Bombay High Court's judgment in the case of Clifford Chance vs. DCIT6. It is, therefore, necessary to deal with this case in some detail. 7. In the case of Clifford Chance, the appellant, an English law firm, was rendering legal services in connection with three projects in India, namely, Bhadravati Power Project, Vizag Power Project and Raviva Oil and Gas Field Project. While the claim of the assessee was that only such portion of the fees received, in connection with these projects is taxable in India as is attributable to services performed in India, the Assessing Officer opined that the total fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon'ble Bombay High Court, it was, inter alia, contended by the assessee that "the place of utilization of service is not relevant but place of performance of the service is what 6 (supra) would be determinative (of taxability)........" and reliance was placed on Hon'ble Supreme Court's judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT7 Their Lordships....
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....crue or arise in India" as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a nonresident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a nonresident would not, as services of a nonresident to a resident utilized in India may not have much relevant in determining whether the income of the nonresident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c) which clearly states...where the fees are payable in respect of se....
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....y arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties of fees for technical services. 3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any parent, trade mark design or model, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement. 5. The provisions of paragraphs 1....
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....managerial, technical or consultancy nature" by a resident of a Contracting State in the other Contracting State. In other words, technical services being provided by resident of one of the contracting state in the other contracting state is what will be covered by the basic rule under Article 12 (4). The expression 'provision of services' is not defined or elaborated anywhere in the tax treaty. The argument of the learned counsel is that 'provision of services' should be construed as `rendition of services, but we will come to that aspect a little later. 15. It is also important to take note of the deeming fiction under Article 12(6) of the treaty. This article, inter alia, provides that, "Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that ContractingState, a political subdivision a local authority thereof or a resident of that Contracting State". In other words, irrespective of the situs of technical services having been rendered, according to this treaty provision, the fees for technical services will be deemed to have accrued in the tax jurisdiction in which person making the payment is loca....
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....ked. He invites our attention to corresponding article of China Pakistan tax treaty10 , i.e. Article 13, which does not have any such deeming fiction but which provides that "the term 'fees for technical services', as used in this Article, means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of one of the contracting state in the other contracting state". It is pointed out that in China Pakistan tax treaty, there is no additional source rule, i.e. deeming fiction, for the fees for technical services, even though there is a deemingfiction of source rule for 'royalties'. It is th us pointed out that Chinese tax treaties, which do not generally have 'fees for technical services' clause, have a 'place of performance test', or negation of source rule, in several tax treaties. We are urged to recognize this underlying principle in Chinese tax treaties. It is also pointed out that this phenomenon is not unique to Chinese tax treaties. Our attention is invited to India Israel tax treaty11 which provides, under Article 13(5), that 'fees for technical services' will be deemed to arise ....
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....the other contracting state, though they have a permanent establishment or fixed base in the other contracting state, there is no such corresponding clause in China-Pakistan tax treaty. It is thus clear, from the material placed before us, that while India China tax treaty follows the source rule in the matter of fees for technical services, Pakistan China tax treaty does not do so. That's a conscious choice by the respective Governments, and just because China Pakistan have negotiated a bilateral tax treaty in a particular manner, it does not mean that India China tax should also be construed on the same basis. 18. We have also noted that any other meaning being assigned to the scope expression 'fees for technical services' will render Article 12(6) meaningless. When we put this proposition to the learned counsel for the assessee, he could not point out any situations in which, in such a situation, Article 12(6) will have any application but then he added that merely because a provision will be rendered infructuous, he should not be shy of giving the treaty a correct lit eral interpretation. We donot think that will be a correct approach for us. In the case of Hindalco In....
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....by reference to all of the relevant information and all on the relevant context. There cannot, however, be any residual presumption in favour of a domestic law meaning of a treaty term. (Emphasis supplied by us by underlining) 19. In view of the above, a literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to the clear and unambiguous scheme of the treaty, has to be avoided. In any case, even on merits, we are of the considered view that the scope of the expression 'provision for services' is much wider in scope that the expression 'provision for rendering of services' and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state. Therefore, the technical services in question are clearly covered by Article 12(4) of the treaty. This position is further clarified, and is specifically covered by the deeming fiction under Article 12(6) as well. The impugned payment to the Chinese company, therefore, is covered by the scope of "fees for technical services" within meanings assigned to that expression under Article 12 of the....
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....vices may also taxed in the Contracting State in which they arise/ and according the laws of that Contracting State/ but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount the royalties or fees for technical services. 3. The term "royalties" as used in this Article means payment of a kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process/ or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. 4. The term ''fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State/ but does not include payment for activities mentioned in paragraph 2(k ) of Article 5 and Article 15....
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.... (2). Para 1 is dealing with primary right to tax which lies with resident country. As per para 2, the secondary right to tax "fees for technical services" lies with the source country in which such payments arise. With respect to definition of the term "fees for technical services", reference may be made to Article 12(4) which also deals with general scope of the term "accrual". With respect to deemed accrual, reference may be made to the specific provision i.e., Article 12(6). It is well accepted that what is in specific prevails over generic items. Further, the Article 12(4) is primarily dealing with definition of the term FTS and therefore there is a necessity to read down `accrual' concept as referred thereunder to the extent there is conflict with Article 12(6) of the Act. The provisions of the Article 12(4) and 12(6) have to be read harmoniously but not antagonistically by applying well accepted and well settled canons of construction of statutes i.e. doctrine of harmonious construction. As Article 12(6) deems that the payment arises in the country of payer, thereby attracting provisions of Article 12(2) of the Indo-China treaty. Therefore, in the absence of any distinguishi....
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...., therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situatedonly in India. We are making a distinction between the source of the income and the source of the receipt of the monies. In order to fall within the second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and not the receipt, should be situated outside India. That condition is not satisfied in the present case. The Tribunal, with respect, does not appear to have examined the case from this aspect. Its conclusion that the technical services were not utilised for the assessees business activity of production in India does not bring the assessees case within the second exception in Section 9(1)(vii)(b) of the Act. It does not bring the case under the first exception either, because in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilized in a business carried on outside India. Therefore, we ca....
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.... were rendered or utilized in India. The learned AR had placed reliance on the judgment of the Hon'ble Kerala High Court in the case of Device Driven (India) Pvt. Ltd. v. CIT reported in 126 taxman.com 25. The said judgment is not applicable to the facts of the present case, as the services rendered by Infosys China has been utilized by the assessee in India before exporting the software. The issue of claim of benefit of exception provided u/s 9(1)(vii)(b) of the Act has been elaborately dealt by the Assessing Officer in the impugned order passed u/s 201(1) and 201(1A) of the I.T.Act. The A.O. followed various judicial pronouncements including AAR Ruling in assessee's own case reported in 350 ITR 178 (AAR), wherein the facts are identical to that of the instant case and held that the assessee's case does not fall with the exception of section 9(1)(vii)(b) of the Act. The relevant observation of the AO in this regard reads as follows:- "2. It is claimed by Infosys that only onsite work in China is subcontracted by Infosys to ITCL. This is based on the assumption made by Infosys Limited that only work pertaining to clients located in China is outsourced to ITCL. In the submi....
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.... of the retrospective amendment by which the pre-requisition condition of rendering of services in India had been done away, would not impose a liability on the assessee to deduct tax at source on the payment made prior to such retrospective amendment. Accordingly, we are of the view that retrospective amendment will not change withholding tax liability of the deductor on the payment made prior to such amendment brought into statute. However, this legal proposition applies only in respect of payments which are on account of services rendered outside India by the nonresident. Though the assessee has claimed that payment in question has been made to Chinese subsidiary, ITCL in respect of services provided outside India, however, the AD rejected this claim of assessee by stating in para 2 and 2.1 at pages 26 & 27 of his order as under:- "2. It is claimed by Infosy that only onsite work in China is sub-contracted by Infosys to ITCL. This is based on the assumption made by Infosys Limited that only work pertaining to clients located in China is outsourced to ITeL. In the submission dt. 24.10.2011 at page 18 of Annexure V it is claimed that the Infosys sub-contracts work to ITCL....
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....7 In the light of the above order of the Tribunal, which had followed the dictum laid down by the Hon'ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra), we restore the issue of taxability with regard to subcontracting charges paid on 01.05.2010, to the files of the AO. The AO is directed to take a decision in accordance with law after affording a reasonable opportunity of being heard to the assessee. 9.8 Another alternate contention of the assessee is that for assessment year 2011-2012, the AO has computed TDS u/s 195 of the I.T.Act at the rate of 20% by invoking section 206AA of the Act for the reason that PAN of Infosys China was not available. Before the CIT(A) the same was submitted on 27.09.2013. However, the CIT(A) did not allow any relief on this issue. 9.9 We have heard rival submissions and perused the material on record. The relevant ground with regard to the above issue are grounds 9.1 to 9.3. The Special Bench of the Tribunal in the case of Nagarjuna Fertilizders and Chemicals Ltd. v. ACIT reported in (2017) 78 taxmann.com 264 had held if rate of tax applicable under DTAA is lower than 20% tax rate prescribed u/s 206AA of the ....
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....rvices to different locations. Indian outsourcers have been drawn to China partly by the country's low-cost labor and reliable infrastructure, coupled with rising costs and labor shortages in India. Both outsourcers and customers can reduce their exposure to risk by moving part. of their operations to China, she said. But when asked why a customer would choose to outsource to China rather than India, Vellamore said the first concem for global customers is choosing an Outsourcer that can provide services in multiple locations and time zones. The Outsourcer itself can then decide where to perform the service, he said, "For multinational customers it doesn't matter where it is getting done," he said. China is largely a satellite for Infosys and its operations in India. Infosys has about 1,250 staff in China, compared with 100,000 worldwide. 2.3 In an Article appearing in the newspaper Business Standard on March 24th, 2012 it is stated that: Incorporated in 2004, Infosys China on Wednesday employs over 3,300 people with about 95 of them being local recruits. In the fiscal 2011, Infosys Chino recorded revenues of $78 million. At present, i....
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....t centres located in India. It is true that work related to a project may be outsourced Document 3 to a subsidiary. But that alone does not mean that Infosys is carrying on business outside India. It is Infosys Limited which decides to assign work to its subsidiaries and under the subcontracting agreements, the subsidiaries are required to perform services in accordance with the requirements and directions given by Infosys. 2.1 In this case Infosys is trying to bring in the end-customer ie. the client who has awarded the project to Infosys into picture. However the transaction which is the subject matter of discussion is between Infosys and its subsidiary ITCL and this transaction comes into picture only after the contract is awarded to Infosys by the client/end-customer. ITCL will appear in the picture only after Infosys wins a contract from the end-customer/client. Infosys is making reference to the client/end-customer in order to state that it is earning income from source outside India. However that is definitely not the case as the operations and the activities to earn income from export of software are carried out in India. Therefore the ....
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....e applicant, the benefit of exception envisaged by section 9(1)(vii) (b) will be available to it. In the context of this argument, it is pointed out by the applicant that the two limbs of clauses (a) and (b) supra are distinct and the mere fact that the business is carried on in India and not outside India does not come in the way of invoking the exception provided by the latter limb. i.e., for the purpose of earning income from a source outside India. It was difficult to accept the applicant's contention. No doubt, the factum of the applicant carrying on business in Indio does not come in the way of its getting the benefit of the exception. It is possible to visualize the situations in which the business is carried out principally in India whereas a particular source of income is wholly outside India but, that is not the situation here. The income which the applicant earns by data processing and other software export activities cannot be said to be from a source outside India. The 'Source of such income is very much within India and the entire business activities and operations triggering the expods take place within India. The Source w....
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....a. It is true that Infosys Australia is a 100% subsidiary of Infosys India. They are independent entities in the eve of low, Unless, it is postulated that the applicant is a permanent establishment of Infosys Australia, the income at the hands of Infosys Australia, a non-resident, for the work done by it, cannot be taxed in India. The work in Australia is no doubt secured by the applicant and the income from it is its income. But, what the applicant pays to Infosys Australia for getting the work done in Australia, can only be deemed as its expenditure, as pointed out by the representative of the Revenue. But that does not make that payment taxable at the hands of Infosys Australia by the authorities under the Act. As far as infosys Australia is concerned, the income is eamed by it for the work done in Australia, no doubt, based on a contract given to it by the applicant for a work the applicant has undertaken to perform in Australia, but that does by itself lead us to the conclusion that the income eamed by Infosys Australia is chargeable to tax under the Act. 9. Can it be said that the entire income earned by Infosys Australia is earned....
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.... Australia. 14. On a consideration of the relevant aspects, it is seen that the source of income of Infosys Australia has to be fixed as India Document 8 2.5 In the case of Wallace Pharmaceuticals Pvt. Ltd. (AAR) ((2005)278 ITR 97) the appellant was an Indian company and was engaged in the business of manufacture and sale of pharmaceutical products. The appellant was availing services of a US-based company, wherein the US-based company was assisting the appellant company in targeting customers outside India. The issue before the AAR was, whether the technical fees payable by the appellant can be said to be in relation to business carried on by it outside India or carning any income from a source India?. The Hon'ble AAR in its ruling held that: it cannot be disputed that the applicant is an Indian company and a tax resident of India. It is carrying on business in India. It is not doubt true that P is a fox resident of USA but its area of operation for providing consultancy services and inter alia, procuring businesses for the applicant, is not limited to USA. It operates internationally. However, the fact remains that the benefit of con....