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2012 (6) TMI 717 - AT - Income TaxDTAA between India and Singapore - taxability - consultancy charges @ 1% of the total transacted volume of forex derivatives, futures and options paid to Singapore Company - dis-allowance u/s 40(a)(i) on ground of non deduction of tax at source u/s 195 - Held that - There is no dispute with the factual position that the GMPL did not have any permanent establishment in India, and with the legal principle laid down in the applicable tax treaty that, in the absence of the PE of GMPL, its business profits could not be taxed in India. The taxability under the source state under Article 7 of the applicable tax treaty, therefore, clearly fails. Further, services were simply consultancy services which did not involve any transfer of technology. Unless there is a transfer of technology involved in technical services extended by Singapore company, the make available clause is not satisfied and, accordingly, the consideration for such services cannot be taxed as FTS under Article 12(4) of India Singapore tax treaty. Therefore, the income from consultancy services, which cannot be taxed under article 7, 12 or 14 because conditions laid down therein are not satisfied, cannot be taxed under article 23 either. It is also only elementary that when recipient of an income does not have the primary tax liability in respect of an income, the payer cannot have vicarious tax withholding liability either. Hence, CIT(A) was justified in holding non-taxability of such fees in India and non-existence of assessee s tax withholding obligation - Decided against Revenue.
Issues Involved:
1. Taxability of consultancy fees paid to a Singapore-based company in India. 2. Applicability of Section 40(a)(i) for non-deduction of tax at source under Section 195. Issue-Wise Detailed Analysis: 1. Taxability of Consultancy Fees Paid to a Singapore-Based Company in India: The primary issue was whether the consultancy fees paid by the assessee to a Singapore-based company, Global Maharaja Pte Ltd (GMPL), were taxable in India. The assessee argued that the services were rendered outside India, and thus, the consultancy fees did not qualify as 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act, 1961. The Assessing Officer, however, contended that due to a retrospective amendment introduced by the Finance Act 2010, it was irrelevant whether the services were rendered inside or outside India as long as they were used in India. Consequently, the Assessing Officer held that the fees were taxable in India. Upon appeal, the CIT(A) ruled in favor of the assessee, stating that the provisions of the India-Singapore Double Taxation Avoidance Agreement (DTAA) would override the Indian Income Tax Act. The CIT(A) determined that the consultancy fees did not fall under the definition of 'fees for technical services' as per Article 12 of the India-Singapore tax treaty. Additionally, since GMPL did not have a permanent establishment (PE) in India, the income could not be taxed as 'business profits' in India. The Tribunal upheld this view, noting that the consultancy services did not involve any transfer of technology, and thus, the 'make available' clause under Article 12(4)(b) was not satisfied. The Tribunal also rejected the Departmental Representative's argument that the income could be taxed under Article 23 of the tax treaty, emphasizing that this article applies to items of income not expressly covered by Articles 6-22, which was not the case here. 2. Applicability of Section 40(a)(i) for Non-Deduction of Tax at Source under Section 195: The second issue was whether the non-deduction of tax at source under Section 195 would result in disallowance under Section 40(a)(i) of the Income Tax Act. The Assessing Officer disallowed the consultancy fees paid to GMPL on the grounds that the assessee failed to deduct tax at source. The CIT(A) countered this by stating that since the income was not taxable in India under the DTAA, the assessee had no obligation to deduct tax at source, referencing the Supreme Court's decision in GE Technology Centre Pvt Ltd Vs CIT (327 ITR 456). The Tribunal agreed with the CIT(A), affirming that the consultancy fees were not taxable in India and, therefore, the assessee was not required to deduct tax at source. The Tribunal reiterated that the payer's obligation to withhold tax is contingent upon the primary tax liability of the recipient. Since GMPL's income was not taxable in India, the assessee's failure to deduct tax did not attract disallowance under Section 40(a)(i). Conclusion: The Tribunal dismissed the appeal, upholding the CIT(A)'s decision that the consultancy fees paid to GMPL were not taxable in India and that the assessee had no obligation to deduct tax at source. Consequently, the disallowance under Section 40(a)(i) was not warranted. The judgment emphasized the precedence of DTAA provisions over domestic tax laws and clarified the conditions under which consultancy fees could be taxed under the India-Singapore tax treaty.
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