2013 (10) TMI 748 - AT - Income Tax

Utilization of services of non-residents outside India - Whether the fee for technical services paid to divers by the assessee was covered by the exception provided in section 9(1)(vii)(b) of the Act - Therefore, there was no requirement for the assessee to deduct tax at source at the time of payment made to the divers and hence, no disallowance can be made by invoking the provisions of section 40(a)(i) of the Act - The assessee is in the business of providing underwater diving services in Saudi Arabia under a contract with M/s Mashhor Covus SDB BHD, Brunei and M/s Khalifa A Algosaibi Diving and Marine Services Co., and paid divers fees outside India Held that - Assessee has paid fee for technical services to non-residents of Rs. 74,63,768/- during the year under consideration - Assessee is a resident in India - Except in two circumstances, firstly, where the fee is paid in respect of services utilized in a business carried on by the assessee outside India or secondly, fee is paid for the purposes of earning any income from any source outside India, in all other circumstances, the assessee is liable to deduct tax on the amount of technical fee paid to non-residents Section 9(1)(vii)(b) itself provides the exception. If the Resident-assessee utilizes the services of the Non-resident, in its business outside India, it is covered under the exception given in the section itself and the payment received by the non-resident cannot be deemed to accrue or arise in India - Assessee company, utilized the services of two non-resident in its business outside India, i.e. in Nigeria - Services were provided by the assessee outside India and for this business the services of non-residents were utilized to whom technical fee in question was paid Following the decision of the Hon ble Tribunal in the Assessee s own case for the year 2007-08, it is held that the services of non-residents to whom the technical fee of Rs. 74,63,768/- was paid by the assessee were utilized for the business which was carried out outside India for earning income from a source outside India Appeal allowed Decided in favor of Assessee.

Summary

Issues Involved:
1. Applicability of Section 9(1)(vii)(b) of the Income Tax Act.
2. Disallowance of fee for technical services for non-deduction of TDS under Section 40(a)(i).

Issue-wise Detailed Analysis:

1. Applicability of Section 9(1)(vii)(b) of the Income Tax Act:

The primary issue in this appeal was whether the provisions of Section 9(1)(vii)(b) of the Income Tax Act were applicable to the payments made by the assessee to non-resident divers. The assessee contended that the technical services were rendered outside India, and hence, as per Section 9(1)(vii)(b), the payments should not be taxed in India. The assessee relied on the decisions of the ITAT Delhi Bench in Havells India Ltd. v. Addl. CIT and the Madras High Court in CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany by BHEL to support their claim.

The CIT(A) dismissed the appeal, stating that the Explanation to Section 9, introduced by the Finance Act, 2007, and further clarified by the Finance Act, 2010, made it clear that the place where technical services were rendered was immaterial if the services were utilized for business in India. The CIT(A) also noted that the exceptions under Section 9(1)(vii)(b) would apply only if the assessee had a branch or a permanent establishment (PE) outside India, which was not the case here.

2. Disallowance of Fee for Technical Services for Non-deduction of TDS under Section 40(a)(i):

The Assessing Officer disallowed the deduction of Rs. 74,63,768/- paid to non-resident divers, invoking the provisions of Section 40(a)(i) for non-deduction of TDS. The assessee argued that since the services were rendered outside India, the payments were not taxable in India under Section 9(1)(vii)(b), and hence, there was no requirement to deduct TDS.

The CIT(A) upheld the disallowance, reasoning that the payments were made from India and the business was carried on in India, thus falling outside the exceptions provided in Section 9(1)(vii)(b). The CIT(A) relied on various judicial precedents, including the Andhra Pradesh High Court's decision in Elkem Technology v. DCIT, to support this conclusion.

Tribunal's Findings:

The Tribunal examined whether the fee for technical services paid to divers was covered by the exception provided in Section 9(1)(vii)(b). It noted that the assessee provided underwater diving services outside India and paid the divers for services rendered abroad. The Tribunal found that the CIT(A) had not adequately examined whether the payments were for services utilized for earning income from a source outside India.

The Tribunal referred to its earlier decision in Ajappa Integrated Project Management Consultants (P.) Ltd. v. ACIT, where it was held that payments made for services utilized in a business carried on outside India fall under the exception in Section 9(1)(vii)(b). The Tribunal concluded that the services of non-residents were utilized for a business carried out outside India, and therefore, the payments were not taxable in India. Consequently, the disallowance under Section 40(a)(i) was not warranted.

Conclusion:

The Tribunal allowed the appeal, holding that the payments made to non-resident divers were for services utilized in a business carried on outside India, thus falling under the exception provided in Section 9(1)(vii)(b). As a result, there was no requirement to deduct TDS, and the disallowance under Section 40(a)(i) was not justified. The appeal was allowed, and the order of the CIT(A) was set aside.