2006 (6) TMI 423 - AT - Income Tax

Deduction of tax at source - only grievance of the assessee is that the learned Commissioner of Income-tax (Appeals) has erred in holding that tax was required to be deducted at source in respect of payment made to M/s. Chang Leung Hvi and LI CPA Ltd. Hongkong in spite of the fact that such payment is covered under exception clause of 9(1)( vii )( b ) - HELD THAT - Source of income is not a legal concept but it must mean something which a practical man regard as a real source of income. When the customer of company i.e. associate company is located outside India than it cannot be said that source of income is not outside India. It is not the case of the revenue that associate company was importing the goods but is mentioned that assessee-company was making exports. Fees paid for getting the patent registered in Hongkong is for making or earning income from a source outside India. The Legislature has used the word making or earning income. The income of the assessee-company is profit from sale to associate company and such sale is a part of marking of income. Making an assessment has been held to cover the whole period during which assessment is made. Keeping in view the fact that patent was registered outside country for making an income from a source outside the country. The amounts paid are covered in exception provided in section 9(1)( vii )( b ). Hence, the assessee was not required to deduct tax at source - Moreover, it is not the case of revenue that professional fees paid to M/s. Chang Leung Hvi and Li C PA Ltd., Hongkong are taxable in India and steps have been taken to tax the same. If the receipts are not taxable in the hands of recipient then payee is not required to deduct tax at source as per provisions of section 195 of the Income-tax Act. The appeal is allowed.

Summary

Issues:
1. Whether tax deduction at source was required for payment made to M/s. Chang Leung Hvi and LI CPA Ltd. Hongkong under exception clause of 9(1)(vii)( b).

Analysis:
The appeal was filed against the order of the Commissioner of Income-tax (Appeals) regarding the requirement of tax deduction at source for a payment made to M/s. Chang Leung Hvi and LI CPA Ltd. Hongkong. The assessee contended that the payment was covered under the exception clause of 9(1)(vii)( b) as it was for technical services utilized in a business carried on outside India or for making income from a source outside India.

The facts presented by the assessee revealed that the company was engaged in the manufacture and sale of watches and jewelry under the brand name 'Titan'. An associate company in Singapore promoted the sale of Titan watches in the Asia Pacific region. To facilitate business operations in Hongkong, the company's name was registered through M/s. Chang Leung Hvi & Li CPA Ltd., for which a fee was charged. The assessee argued that since the services were rendered outside India and utilized in the business abroad, no tax deduction at source was necessary.

The Commissioner of Income-tax (Appeals) observed that the assessee did not have a permanent establishment outside India and was not earning income from any source outside India. However, the ITAT Bangalore noted that the services were indeed technical in nature and utilized outside India for the purpose of making or earning income from a source outside India, as per the exception clause of 9(1)(vii)( b).

Referring to legal interpretations, the ITAT highlighted that the payment for services rendered in Hongkong was for making income from a source outside India, which exempted it from tax deduction at source. Citing a precedent, the ITAT emphasized that payments made for earning income outside India fell within the exclusionary clause of section 9(1)(vii)( b), supporting the assessee's position.

Ultimately, the ITAT concluded that since the patent was registered outside the country for generating income from a foreign source, the payment made to M/s. Chang Leung Hvi and LI CPA Ltd. Hongkong was covered under the exception provided in section 9(1)(vii)( b). Therefore, the assessee was not required to deduct tax at source, and the appeal was allowed in favor of the assessee.