2010 (7) TMI 792 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of fees for technical services under Section 40(a)(i) due to non-deduction of tax at source.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Austria.
3. Relevance of Section 195 and Section 195(2) of the Income Tax Act.
4. Determination of the applicable DTAA between India and Austria for the assessment year 2002-03.

Detailed Analysis:

1. Disallowance of Fees for Technical Services:
The assessee contested the disallowance of fees for technical services amounting to Rs. 1,15,36,306 under Section 40(a)(i) of the Income Tax Act, arguing that the payment was made to an Austrian company for services rendered in Austria, and thus, no tax was deductible at source.

2. Applicability of DTAA between India and Austria:
The assessee argued that the DTAA entered into between India and Austria in April 1963 was applicable for the assessment year 2002-03. According to Article 7 of this treaty, fees for technical services paid by an Indian company to an Austrian company were not liable to tax in India unless the services were performed in India. The new DTAA signed in September 2001 would only be applicable from the assessment year 2003-04 onwards.

3. Relevance of Section 195 and Section 195(2):
The Revenue contended that the assessee was required to deduct tax at source under Section 195. However, the Tribunal noted that Section 195 applies only if the sum paid is chargeable under the Income Tax Act. Given that the DTAA between India and Austria (1963) exempted the technical service fees from Indian taxation, the provisions of Section 195 and consequently Section 195(2) were not applicable.

4. Determination of the Applicable DTAA:
The Tribunal confirmed that the DTAA entered into in April 1963 was applicable for the assessment year 2002-03. Under Article 7 of this treaty, the fees for technical services provided by the Austrian company, which were rendered entirely in Austria, were not taxable in India. Therefore, no tax was deductible at source, and the provisions of Section 40(a)(i) could not be invoked to disallow the expenditure.

Conclusion:
The Tribunal concluded that the payment made for technical services to the Austrian company was not taxable in India under the applicable DTAA for the assessment year 2002-03. Consequently, the provisions of Section 195 did not apply, and the requirement to obtain a certificate under Section 195(2) did not arise. The disallowance made by the Assessing Officer and upheld by the Commissioner of Income Tax (Appeals) was deleted, and the appeal of the assessee was allowed.