2005 (10) TMI 419 - AT - Income Tax

Summary

Issues:
Assessment of withholding tax liability on payments made to foreign entities for professional services under section 201(1) read with section 195 and section 201(1A) read with section 195 for the assessment years 1999-2000 and 2000-01.

Analysis:
The appeals filed by the revenue challenged the relief granted by the CIT(A) concerning demands raised on the assessee under section 201(1) read with section 195 and section 201(1A) read with section 195 for the assessment years 1999-2000 and 2000-01. The CIT(A) had held that the fees paid by the assessee to professionals abroad were not taxable under section 9(1)(i) or section 9(1)(vii)(b) of the Income-tax Act, leading to the deletion of the demands. The assessee contended that the payments were for professional services and not subject to tax in India. The Assessing Officer disagreed, considering the amounts taxable under section 9(1)(vii) of the Act. The CIT(A) accepted the assessee's contentions, leading to the revenue's appeal.

The Tribunal observed that under the Income-tax Act, payments for professional services are not treated differently under section 9(1)(vii) compared to tax treaties. The nature of the service, whether technical, consultancy, or managerial, determines taxability under section 9(1)(vii). In this case, services for registration and enforcement of intellectual property rights abroad were considered technical and consultancy services, making the fees taxable in India under section 9(1)(vii)(b). The Tribunal disagreed with the CIT(A)'s conclusion that the services were purely professional and not taxable in India.

Regarding the application of the Indian Income-tax Act, the Tribunal highlighted the importance of Double Taxation Avoidance Agreements (DTAA). Section 90(2) states that if an agreement exists between India and another country, tax liability should be determined based on the agreement's provisions. However, in this case, neither party had analyzed the taxability status of the foreign entities under the relevant DTAA. The Tribunal remitted the matter to the Assessing Officer to assess the taxability of each receipt by the foreign entity based on the DTAA principles, providing an opportunity for the assessee to present its case.

The Tribunal allowed the appeals for statistical purposes, directing a fresh assessment by the Assessing Officer considering the DTAA provisions. The issue of interest under section 201(1A) was deemed consequential, dependent on the outcome of the withholding tax liability assessment under section 201(1) read with section 195.