2011 (5) TMI 573 - AT - Income Tax

Non deduction of TDS - services rendered by Non resident consultants - Held that - If there is a business connection in India and some activities are carried out in India the entire profit arising from that business connection will not be deemed to accrue in India. Based on limited inspection and technical review conducted by Marriott (USA) prior to the effective date the requirements of converting the hotel to MHRS International Hotel as on the conversion date are anticipated to be set forth in the scope of works Regarding pre conversion activities it has been stated in Article 2.3. of the Agreement that MIMCO will review and approve existing concession contracts and leases for retail and lobby space within the hotel review and consult with VHL on VHL s proposed pre-conversion promotion and related activities etc - from the scoped of work it appears that the services provided by Marriott International is in the nature of advisory and review services so that the existing facilities available in the hotel can be elevated to Marriott standards - going into definition of included services in Indo US treaty so as to find out whether the services rendered by Marriott fit into the definition of included services in Articles 12(4)(a) and 12(4)(b) of the Treaty unless the services are technical in nature there cannot be any question of technology being contained therein which the person acquiring the services can be enabled to apply In the present case what was made available to the assessee company was advisory services and opinion for improvement of the existing facilities - the fees paid to Marriott International will not fall within the ambit of fees for included services. As such a provision of section 195 is not applicable - Accordingly there is no question of application of provisions of section 201(1) and 201(1)(A) of the IT Act Regarding fees for technical services - the service rendered by Anthony Corbett & Associates UK & Bensly Design Group Thailand is of similar nature as rendered by Marriott International Design & Construction Services USA - Similarly in the case of services rendered by Anthony Corbett Associates UK is in the nature of advisory services and not of technical services as there is no transfer of technology but only installation of electrical fittings and as such section 195 is not applicable Similarly the fees paid to M/s Bensly Design Thailand for rendering services of landscape architectural consultancy is not covered as per the Double Taxation Avoidance Agreement since there is no article in the relevant DTAA dealing with this nature of payments - Under Article 7 of the DTAA income earned by a non resident in India under the head business can be taxed in India only if the non resident has a permanent establishment in India - there is no PE in India and corresponding business profit of non resident cannot be taxed in India and provision of section 195 is not applicable - Decided in the favour of the assessee

Issues Involved:
1. Legality and validity of the orders passed by the Assessing Officer under sections 201(1) and 201(1A) of the IT Act.
2. Whether the payments made to non-resident consultants are subject to tax deduction at source under section 195 of the IT Act.
3. Applicability of Double Taxation Avoidance Agreements (DTAAs) between India and the respective countries of the non-resident consultants.
4. Determination of the rate of tax deduction at source applicable to the payments made to non-resident consultants.
5. Whether the CIT(A) violated Rule 46A of the Income-tax Rules by admitting additional evidence without giving the Assessing Officer an opportunity to examine it.

Issue-wise Detailed Analysis:

1. Legality and Validity of the Orders Passed by the Assessing Officer:
The primary issue in these appeals is the legality and validity of the orders passed by the Assessing Officer under sections 201(1) and 201(1A) of the IT Act, treating the assessee as an 'assessee-in-default' for failing to deduct tax at source on payments made to non-resident consultants. The Assessing Officer raised demands for different assessment years, which were contested by the assessee and the revenue before the CIT(A).

2. Tax Deduction at Source under Section 195:
The Assessing Officer treated the assessee as an 'assessee-in-default' for not deducting tax at source under section 195 on payments made to non-resident consultants. The assessee argued that the services rendered by the non-resident consultants do not fall within the scope of 'included services' or 'technical services' as per the relevant DTAAs and, therefore, are not subject to tax deduction at source.

3. Applicability of DTAAs:
The CIT(A) held that the payments made to Marriot International, USA, and Lim Hong Lian, Singapore, do not fall within the ambit of 'fees for included services' or 'technical services' under the respective DTAAs. For Marriot International, the CIT(A) concluded that the services rendered were advisory and review services, not involving technical expertise or transfer of technical knowledge. For Lim Hong Lian, the CIT(A) held that the services were independent personal services, taxable in Singapore and not in India, as per the DTAA between India and Singapore.

4. Rate of Tax Deduction at Source:
The CIT(A) noted that the Assessing Officer adopted a rate of 40% + surcharge for tax deduction at source, considering it as 'any other income'. However, the CIT(A) opined that if the income is to be taxed as 'fee for technical services', the tax rate should not exceed 20% as per the special provisions of the Act.

5. Violation of Rule 46A:
The revenue contended that the CIT(A) admitted crucial evidence in the form of an agreement between Marriot International and the assessee without giving the Assessing Officer an opportunity to examine it, thereby violating Rule 46A of the Income-tax Rules. However, the CIT(A) had called for remand reports from the Assessing Officer, which were duly submitted, and thus, there was no violation of Rule 46A.

Separate Judgments:

Revenue Appeals (ITA Nos. 401, 482 & 483/H/2007):
The CIT(A) held that the services rendered by Marriot International, USA, were advisory and review services, not involving technical expertise or transfer of technical knowledge, and therefore, not subject to tax deduction at source. The CIT(A) also held that the payments to Lim Hong Lian, Singapore, were independent personal services, taxable in Singapore and not in India. The appeals by the revenue were dismissed.

Assessee Appeals (ITA Nos. 436 & 437/H/2007):
The CIT(A) upheld the Assessing Officer's action in treating the assessee as an 'assessee-in-default' with regard to payments made to Anthony Corbett & Associates, UK. However, the CIT(A) held that the payments made to Bensly Design Group, Thailand, were partly in the nature of 'fees for technical services' and partly not, and the tax rate should not exceed 20%. The appeals by the assessee were allowed.

Conclusion:
The appeals of the revenue were dismissed, and the appeals of the assessee were allowed, with the Tribunal concluding that the services rendered by the non-resident consultants did not fall within the definition of 'fees for included services' or 'technical services' as per the respective DTAAs, and therefore, the provisions of section 195 were not applicable. Consequently, the assessee was not considered an 'assessee-in-default' under sections 201(1) and 201(1A) of the IT Act.

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