2013 (12) TMI 308 - AT - Income Tax

Whether payment made to consultant is covered by the definition of the term fees for technical services under article 13 of the India-U.K. Double Taxation Avoidance Agreement Held that - As per article 13 of the India U.K. treaty, clause (c) of sub-article 4 the consultant, i.e., Texoplast Ltd. is required to transfer the fabric design to the assessee and those fabric designs are to be developed by the consultant The party is required to provide detailed quantity progress report in writing to the assessee along with specific or new design developed - The services rendered by the consultant to the assessee-company are fees for technical services. Fabric design is made available to the assessee and the assessee can apply such fabric design to process and produce garments and it can also sell and transfer such fabric design to outsider for consideration - There is no restriction on the assessee in this regard in the agreement between the assessee and the consultant - The services received by the assessee and provided by the consultant is fees for technical services - Tax is deductible by the assessee from the payments made by the assessee, to the consultant - Decided against assessee.

Issues Involved:
1. Erroneous order by the Commissioner of Income-tax (Appeals).
2. Requirement to deduct tax at source under section 195.
3. Classification of payment to Texoplas Ltd. as 'fees for technical services' under the India-U.K. Double Taxation Avoidance Agreement.
4. Permanent establishment of Texoplas Ltd. in India.
5. Refund of tax paid by the appellant.

Detailed Analysis:

1. Erroneous Order by the Commissioner of Income-tax (Appeals):
The appellant contended that the order passed by the Commissioner of Income-tax (Appeals) was erroneous and contrary to the provisions of law and facts, thus requiring modification.

2. Requirement to Deduct Tax at Source under Section 195:
The appellant argued that they were not required to deduct tax at source under section 195 for payments made to Texoplas Ltd. The Commissioner of Income-tax (Appeals) held that the services rendered by Texoplas Ltd. fell under the definition of 'fees for technical services' as per article 13 of the India-U.K. Double Taxation Avoidance Agreement, making them taxable in India and necessitating tax deduction at source under section 195.

3. Classification of Payment to Texoplas Ltd. as 'Fees for Technical Services':
The appellant argued that consultancy services must have a technical element to be classified as 'fees for technical services' under article 13(4)(c) of the India-U.K. Double Taxation Avoidance Agreement. They further contended that the definition of 'fees for technical services' should cover only those services that make available the knowledge of the technical element to the recipient. The Commissioner of Income-tax (Appeals) and the Assessing Officer concluded that the services rendered by Texoplas Ltd. were consultancy services covered under the definition of 'fees for technical services' and thus taxable in India.

The Tribunal examined the agreement between the appellant and Texoplas Ltd., noting that the consultant was required to provide fabric designs and detailed progress reports to the appellant. It was determined that these services fell within article 13(4)(c) of the India-U.K. Double Taxation Avoidance Agreement, making them 'fees for technical services.' Hence, tax was deductible by the appellant from the payments made to Texoplas Ltd.

4. Permanent Establishment of Texoplas Ltd. in India:
The appellant claimed that Texoplas Ltd. did not have a permanent establishment in India, and thus, their income should not be taxable in India as per article 7 of the India-U.K. Double Taxation Avoidance Agreement. However, since the services provided were classified as 'fees for technical services,' this argument was not upheld.

5. Refund of Tax Paid by the Appellant:
The appellant requested a refund of the tax paid, contingent on the holding that no tax was required to be deducted at source. However, since the Tribunal upheld the requirement to deduct tax at source, this request was denied.

Conclusion:
Both appeals filed by the assessee for the assessment years 2009-10 and 2010-11 were dismissed. The Tribunal upheld the decision that the payments made to Texoplas Ltd. constituted 'fees for technical services' under the India-U.K. Double Taxation Avoidance Agreement, requiring tax deduction at source under section 195. The Tribunal also noted that the appeal under section 248 was correctly admitted by the Commissioner of Income-tax (Appeals) and that the Revenue did not challenge this admission. Thus, the objections raised by the Departmental representative were rejected.

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