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2014 (1) TMI 1501 - AT - Income TaxDisallowance u/s 40(a)(ia) of the Act TDS not deducted on training expenses DTAA treaty between India and US - Scope of Article 12 of DTAA - Held that - The Assessing Officer has disallowed the payment in question as per the provisions of section 9(1)(vii) without considering the provisions of DTAA - prior to the assessment year 2006-07 there is no disallowance by the AO u/s 40(a)(i) - the assessee cannot be expected to do something which were impossible to perform Relying upon Sterling Abraive Ltd. v. Asstt. CIT 2010 (7) TMI 803 - ITAT AHMEDABAD - the assessee acted bona fide in conformity with the provision of act - At the relevant point of time it was impossible on the part of the assessee to deduct tax on the income of non-resident - up to the insertion of explanation vide Finance Act, 2007, the assessee was under bona fide belief not to deduct tax and accordingly he acted as per law - the assessee has acted under bonafide belief that no tax was to be deducted at source on these payments. Apart from the bonafide belief we further noted that as per para 4(b) of Article 12 of Indo-US DTAA fees for included services means if such services made available technical knowledge, experience, skill, know-how, or processes, or consists of the development and transfer of a technical plan or technical design. The training was given to the pilots and other staff as per the requirement of the DGCA Rules thus, it was only a part of the eligibility of the pilots and other staff for working in the industry of aviation and such training would not fall under the term service make available - the disallowance of u/s 40(a)(i) is not justified and accordingly the same is deleted Decided in favour of Assessee.
Issues Involved:
1. Legality of the order passed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961. 2. Disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax at source on payments made towards training expenses. Issue-wise Detailed Analysis: 1. Legality of the Order Under Section 143(3): - The assessee contended that the order passed by the Assessing Officer (AO) under Section 143(3) was illegal and bad in law. However, this ground was considered general in nature and consequential to the outcome of the second ground regarding the disallowance under Section 40(a)(i). 2. Disallowance Under Section 40(a)(i) for Non-Deduction of Tax at Source: - Facts and Contentions: - The assessee, engaged in the business of charter hire of helicopters, made payments towards training expenses to Bell Helicopter Textron Inc. without deducting tax at source. - The AO disallowed these payments under Section 40(a)(i) on the grounds that they constituted "Fees for Technical Services" as per Section 9(1)(vii) and thus were taxable in India. - The assessee argued that the recipient company, a resident of the USA, had no permanent establishment in India and the payments fell under the business profits article of the Indo-US DTAA, which did not require TDS in the absence of a permanent establishment. - The AO and subsequently the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, relying on the retrospective amendment introduced by the Finance Act 2010 effective from 1.6.1976. - Arguments by the Assessee: - The assessee contended that the expenditure was incurred under the Government of India Regulations applicable to the Aviation Industry and with the approval of DGCA. - The training was conducted abroad, and the companies providing the training had no business presence in India. - The retrospective amendment by the Finance Act 2010 was subsequent to the payments, and thus, the provisions of Section 40(a)(i) should not apply. - The payments were not taxable in India under Article 12 of the Indo-US DTAA as they did not constitute "fees for included services" which involve the transfer of technical knowledge, experience, skill, know-how, or processes. - Arguments by the Department: - The Department argued that the training provided to the assessee's employees made the services available to the assessee, falling under the definition of "fees for technical services" as per Section 9(1)(vii) and Article 13(4)(c) of the Indo-UK DTAA. - Cited decisions from various cases to support that the utilization of services in India attracts taxability, irrespective of the location of service provision. - Tribunal's Analysis and Decision: - The Tribunal noted that the AO disallowed the payment based on Section 9(1)(vii) without considering the provisions of the DTAA. - The retrospective amendment by the Finance Act 2010 was not in existence when the payments were made, and the assessee acted under a bona fide belief that no TDS was required. - The Tribunal referred to the decision in Sterling Abraive Ltd., emphasizing that the law does not compel a person to do something impossible, such as deducting tax retrospectively. - The Tribunal concluded that the training provided did not fall under "fees for included services" as per the Indo-US DTAA, as it was standard training required by DGCA rules and did not transfer specific technical knowledge or skills to the assessee. - The Tribunal held that the disallowance under Section 40(a)(i) was not justified and deleted the disallowance. Conclusion: - The appeals of the assessee were allowed, and the disallowance under Section 40(a)(i) was deleted. The Tribunal emphasized the bona fide belief of the assessee and the applicability of the DTAA provisions over the retrospective amendment.
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