2015 (1) TMI 469 - AT - Income Tax

Non deduction of tax at source - TDS u/s 195 on foreign remittances - whether part of the consideration for purchases of plant, machinery or equipment can be attributed to the installation, commissioning or assembly of the plant and equipment, or any supervision activity - Held that - even if a part of the income, embedded in the impugned payments made to non-resident vendors, can indeed be attributed to the installation, assembly or commissioning activities of the plant, machinery or equipment purchased, such an income, on the facts of this case, cannot be brought to tax as business income under article 7 read with article 5 of the respective DTAAs. Hon ble Supreme Court in the case of Union of India vs. India Fisheries (P) Ltd. 1965 (4) TMI 52 - SUPREME COURT OF INDIA has held that, If there is an apparent conflict between two independent provisions of law, the special provision must prevail. If we are to interpret the FTS and FIS clauses overlapping with PE clause in practice, and apply the FTS and FIS clauses when PE taxation cannot be invoked, the very purpose of PE provisions will stand defeated and it will be contrary to the UN Model Convention Commentary quoted earlier in this order, which, as a coordinate bench has held in the case of Graphite India Ltd Vs DCIT 2002 (10) TMI 232 - ITAT CALCUTTA-C , are in the nature of contemporanea expositio . Just because the assessee has accepted a taxability in respect of some other transaction, no matter howsoever related, the legal remedies available to the assessee cannot be negated. There cannot be, and there is no, estoppel against the law. In view of the above discussions, in our considered view, in a situation in which there are specific PE clauses in relation to a particular type of services, which are covered in the scope of servi ces covered by the scope of the fees for technical services or fees for included services , the taxability of consideration for such services must remain confined to taxability of profits under the relevant specific PE clause. In our humble understanding, the provisions for taxability as FTS or FIS will not come into play in such cases. Installation, commissioning or assembly of a plant, machinery or equipment , or any supervision activity connected therewith, is ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of such a property i.e. plant, equipment or machinery. Therefore, for this short reason, any consideration for installation, commissioning or assembly activities, or supervision services in respect thereof, of a property, which obviously includes a plant, equipment or machinery, cannot be included in fees for included services under the Indo Swiss tax treaty as well. Accordingly, even if there be any income embedded in the impugned payments, in respect of installation, commissioning or assembly activities, or supervisory activities connected therewith, the same cannot be brought to tax, in view of the provisions of Article 12(5)(a) of Indo Swiss tax treaty, in the hands of the Swiss vendors as well. FTS or FIS provisions cannot be invoked for taxing a nonresident on the basis of accrual of liability, whether credited or not, or on the notions of fiction of an element of FTS or FIS being embedded in the business receipts for sale of plant, equipment or machinery. The receipts in the hands of the vendors are in the nature of business income, and the deeming fiction, as sought to be canvassed by the revenue, has no application in the matter. Demands under section 201 r.w. 195 set aside - Decided in favor of assessee. However, the facts stated by the assessee with regard to the PE of foreign vendors not being in existence may need to be verified, and particularly as the assessee did not make proper submissions, duly supported by the facts on this aspect of the matter, at the assessment or the appellate stage. - Matter remanded back for establishing the facts - Decided partly in favor of revenue.

Issues Involved:
1. Non-deduction of tax on foreign remittances for the purchase of plant and machinery.
2. Levy of interest under section 201(1A) of the Income Tax Act.
3. Determination of whether the payments to foreign suppliers constitute income taxable in India.
4. Interpretation and application of the Double Taxation Avoidance Agreements (DTAAs).
5. Classification of contracts as composite contracts involving services and supply components.
6. Obligations under Section 195 of the Income Tax Act for tax deduction at source.
7. Assessment of the existence of a Permanent Establishment (PE) of foreign vendors in India.

Issue-wise Detailed Analysis:

1. Non-deduction of tax on foreign remittances for the purchase of plant and machinery:
The core issue was whether the appellant was required to deduct tax at source under Section 195 of the Income Tax Act from payments made to foreign suppliers for the purchase of plant and machinery. The Assessing Officer (AO-TDS) held that the payments included not only the cost of the machinery but also incidental services like installation and commissioning, which necessitated tax deduction. The appellant argued that these payments were purely for purchases and did not entail any tax liability in India.

2. Levy of interest under section 201(1A) of the Income Tax Act:
The appellant contested the levy of interest under Section 201(1A) on the grounds that there was no liability to deduct tax at source. The AO-TDS and CIT(A) upheld the interest levy, reasoning that the appellant failed to deduct tax on amounts that were deemed taxable in India.

3. Determination of whether the payments to foreign suppliers constitute income taxable in India:
The authorities below concluded that the payments for plant and machinery included an element of income taxable in India, particularly for services related to installation and commissioning. The AO-TDS and CIT(A) relied on the concept of composite contracts and the need to apportion the taxable and non-taxable parts of the payments.

4. Interpretation and application of the Double Taxation Avoidance Agreements (DTAAs):
The Tribunal emphasized the necessity to consider the provisions of applicable DTAAs, which override the Income Tax Act if more beneficial to the assessee. The Tribunal noted that the authorities below did not adequately address the taxability under the respective tax treaties. The Tribunal found that, based on the DTAAs with Austria, Belgium, China, Germany, Switzerland, the UK, and the USA, the non-resident vendors' income from the sale of machinery was not taxable in India unless they had a Permanent Establishment (PE) in India.

5. Classification of contracts as composite contracts involving services and supply components:
The AO-TDS classified the contracts as composite contracts, including both supply and service components, thereby necessitating tax deduction at source. The Tribunal, however, found that the authorities failed to substantiate that the contracts were indeed composite and that the services were integral to the supply of machinery.

6. Obligations under Section 195 of the Income Tax Act for tax deduction at source:
The Tribunal clarified that Section 195 applies only when the payment to non-residents includes an element of income chargeable to tax in India. The Tribunal held that the appellant was not required to deduct tax at source since the payments were not chargeable to tax in India under the applicable DTAAs.

7. Assessment of the existence of a Permanent Establishment (PE) of foreign vendors in India:
The Tribunal examined whether the foreign vendors had a PE in India, which would make their income taxable in India. The Tribunal found no evidence of the vendors having a PE in India. It noted that the installation and commissioning activities did not meet the threshold time limits specified in the DTAAs for constituting a PE.

Conclusion:
The Tribunal allowed the appeals, setting aside the demands under Section 201 r.w.s. 195. It held that the payments to foreign suppliers were not taxable in India under the provisions of the respective DTAAs and that the appellant was not liable to deduct tax at source. The Tribunal also directed that if the AO could later demonstrate that the foreign vendors had a PE in India, fresh demands could be raised.

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