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2012 (12) TMI 694 - AT - Income TaxDenying liability to deduct tax at source - appeals u/s 248 - Held that - The assessee has entered into contracts of repairs for its imported machinery with the foreign suppliers i.e. in Germany of the machinery. From the copy of the purchase order and the invoices it is found that the Germany Company is required to carry out the services through which the machinery has to be repaired and not to be modified or improved . As decided in the case of Lufthansa Air Cargo (2004 (6) TMI 273 - ITAT DELHI-B) it was considered whether repair work carried out in the normal course of its business in Germany without any involvement or participation of the assessee s personnel can be said to be of any managerial or technical or consultancy services and it was held that the payments made by the assessee to the non-resident workshops outside India do not constitute payment of fees for managerial, consultancy or technical services as defined in Explanation 2 to sec. 9(1)(vii). As in the present case facts are very much similar to the facts of the case of Lufthansa Air Cargo (cited Supra) the payments to the recipients in Germany do not come within the purview of fees for technical services. This, therefore, cannot be treated as FTS but is business income of the nonresident company. As per the law in force, business income of a nonresident recipient is chargeable to tax in India only if it is arising or accruing or deemed to arise or accrue in India provided that they have permanent establishment in India. As it is not disputed that the non-resident recipients of the remittances have no PE in India, their business income is not chargeable to tax in India. Since the very nature of income has been decided to be business income and not fees for technical services, the payments do not require withholding of tax at source u/s 195. In the result, the assessee is not under an obligation to withhold tax leave alone @ 20% u/s 206AA and the issue of grossing up would not arise. Assistance in analyzing and solving technical problem and disfunctions - providing telephonic advice analysis and assistance to the operator - Held that - The services are not mere repairs but are towards preventive maintenance which clearly show that the recipients are providing technical assistance and services to the assessee in India. Therefore the assessee is liable to withhold tax from the payment of fees for technical services - the assessee s are non-residents and admittedly the income exceeds the taxable limit prescribed by the relevant Finance Act. In the circumstances, the recipients are bound and are under an obligation to obtain the PAN No. and furnish the same to the assessee. For failure to do so, the assessee is liable to withhold tax at the higher of rates prescribed u/s 206AA i.e. 20% and the CIT(A) has rightly held that the provision of sec. 206AA are applicable to the assessee. Grossing up u/s 195A - financial year in which such income is payable OR 20% as specified u/s 206AA - Held that - Considering the provisions of Sec 195A & GE India Technology (2010 (9) TMI 7 - SUPREME COURT OF INDIA) the income shall be increased to such amount as would after deduction of tax thereto at the rate in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. Thus the grossing up of the amount is to be done at the rates in force for the financial year in which such income is payable and not at 20% as specified u/s 206AA of the Act.
Issues Involved:
1. Nature of payments made to non-residents (business profits vs. fees for technical services). 2. Applicability of Section 206AA regarding higher TDS rates due to non-availability of PAN. 3. Grossing up of income under Section 195A for TDS purposes. Detailed Analysis: 1. Nature of Payments Made to Non-Residents: The primary issue was whether the payments made by the assessee to foreign suppliers for repairs and annual maintenance contracts (AMC) should be classified as business profits or fees for technical services (FTS). The assessee argued that these payments were business profits arising in Germany and not taxable in India since the non-residents did not have a Permanent Establishment (PE) in India. The CIT(A) concluded that the payments were FTS and taxable in India, irrespective of whether the services were rendered in India or if the non-residents had a business connection in India, based on the explanation to Section 9(2) of the Income-tax Act, 1961. Upon appeal, the Tribunal examined the nature of the services rendered by the non-residents. It was found that the services were purely for repairs and did not involve any technical, consultation, or managerial services. The Tribunal referenced the Hyderabad Bench's decision in BHEL-GE-GAS Turbine Servicing (P) Ltd., which held that repairs do not fall under the category of technical services. Consequently, the Tribunal determined that the payments were business income, not FTS, and since the non-residents did not have a PE in India, their income was not chargeable to tax in India. Therefore, the assessee was not liable to deduct tax at source under Section 195. 2. Applicability of Section 206AA: The second issue was the applicability of Section 206AA, which mandates a higher TDS rate of 20% if the payee does not provide a PAN. The assessee contended that non-residents were not required to obtain a PAN as per Section 139A(8)(d) and Rule 114(1)(b) of the Income-tax Rules. The CIT(A) held that Section 206AA overrides other provisions, and the requirement to obtain a PAN applies to all non-residents for payments liable to TDS. The Tribunal, however, found that since the payments were determined to be business income and not FTS, the provisions of Section 206AA were not applicable. The Tribunal further noted that the CIT(A)'s reliance on the CBDT press release was misplaced as it cannot override the statutory provisions. 3. Grossing Up of Income Under Section 195A: The final issue was the grossing up of income for TDS purposes under Section 195A. The assessee argued that the grossing up should be done at the rates specified in the DTAA (10%) or the rates in force (10.5575%) rather than the 20% specified under Section 206AA. The CIT(A) had held that the grossing up should be done at 20%. The Tribunal clarified that Section 195A requires grossing up at the rates in force for the financial year in which the income is payable, not at the rate specified under Section 206AA. Therefore, the grossing up should be done at the applicable rates in force or as per the DTAA, whichever is beneficial to the assessee. Conclusion: - The payments made by the assessee to non-residents for repairs were classified as business income, not FTS, and hence not taxable in India due to the absence of a PE. - Section 206AA was not applicable since the payments were not FTS. - Grossing up of income for TDS purposes should be done at the rates in force or as per the DTAA, not at the higher rate specified under Section 206AA. Judgment: - The appeals in ITA Nos. 552, 553, 554 & 555/Bang/2011 were allowed, concluding that the payments were business income not subject to TDS. - The appeals in ITA Nos. 556, 557 & 558/Bang/2011 were partly allowed, affirming the applicability of Section 206AA for technical services but clarifying the correct method for grossing up under Section 195A.
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