2011 (10) TMI 617 - HC - Income Tax

TDS u/s 195 - Intelsat has made available technical knowledge/know-how/skill/experience to the assessee in respect of tracking, telemetry and command support of the satellite launched by the assessee - whether such services would squarely fall within the definition of ancillary services as definrd in the DTAA between India and USA? - whether the service rendered by a non-resident is a technical service? - Held that - By virtue of cl. 7 of the Protocol, even though such a benefit is not available under DTAA with France the beneficial clause in the DTAA entered into by India with the USA applies in respect to the DTAA with France. Therefore, unless the technical knowledge, experience, skill, know-how or processes are transferred to the assessee, the liability to tax does not arise. The said favourable clauses in the DTAA read with protocol override the provisions of the IT Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income to the extent of inconsistency with the terms of DTAC. In the instant case, it is not in dispute that the remuneration is only for the services rendered on a foreign soil. In lieu of consideration paid, the foreign company has not made available any technical knowledge to the assessee nor any technical knowledge is transferred to the assessee and therefore, the income derived out of rendering technical services is not liable to tax. If there is no liability to pay tax by a non-resident, there is no obligation cast on the assessee to deduct tax at source.

Issues Involved:
1. Whether the service rendered by a non-resident is a technical service.
2. Whether the remuneration paid in lieu of technical service is liable under the Act and if so, whether the assessee is liable to deduct tax under Section 195(1) of the Act.
3. Whether the assessee is liable to pay interest for non-deduction of tax.
4. Whether the delay in filing appeals by the assessee can be condoned.

Detailed Analysis of the Judgment:

1. Whether the service rendered by a non-resident is a technical service:
The court examined the nature of the services provided by the French company Arianespace and the American company Intelsat to the assessee. The services involved launching satellites into orbit and providing tracking, telemetry, and command support. The Assessing Authority initially classified these services as "technical services" under Section 9(1)(vii) of the Income Tax Act and the respective Double Taxation Avoidance Agreements (DTAAs) with France and the USA. However, the Tribunal found that the services provided by Arianespace were akin to hiring a transport medium and did not involve the provision of technical services. Similarly, Intelsat's services were deemed to be merely informational and not technical. The High Court upheld the Tribunal's view, stating that the services did not involve the transfer of technical knowledge or skills to the assessee, as required under the DTAAs.

2. Whether the remuneration paid in lieu of technical service is liable under the Act and if so, whether the assessee is liable to deduct tax under Section 195(1) of the Act:
The court analyzed the relevant sections of the Income Tax Act and the DTAAs. It noted that under the DTAAs, technical services are defined as those that "make available" technical knowledge, experience, skill, know-how, or processes to the recipient. The court found that the services provided by Arianespace and Intelsat did not meet this criterion. Consequently, the remuneration paid to these companies was not liable to tax under the Act, and the assessee was not required to deduct tax at source under Section 195(1).

3. Whether the assessee is liable to pay interest for non-deduction of tax:
Since the court concluded that the services provided by Arianespace and Intelsat were not taxable, it followed that the assessee was not liable to deduct tax at source. As a result, the interest levied for non-deduction of tax was also deemed unwarranted. The court directed the Revenue to refund the interest collected from the assessee.

4. Whether the delay in filing appeals by the assessee can be condoned:
The court considered the appeals filed by the assessee, which were dismissed by the CIT(A) due to a delay of five years. The court found that the delay was justified given the circumstances, particularly the ongoing litigation and the subsequent favorable ruling for the assessee. The court condoned the delay and remanded the matter back to the CIT(A) for fresh consideration in accordance with the directions provided in the judgment.

Conclusion:
The High Court dismissed the Revenue's appeals, upholding the Tribunal's decision that the services rendered by Arianespace and Intelsat were not technical services and, therefore, not liable to tax. The court also allowed the assessee's appeals, deleting the interest levied for non-deduction of tax and condoning the delay in filing appeals. The CIT(A) was directed to dispose of the remanded appeals within three months.

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