2015 (2) TMI 983 - AT - Income Tax

Disallowance u/s 40(a)(i) - non deduction of TDS on payments made to non-resident persons outside India for representation charges - whether the consideration paid by assessee to overseas nonresident agents can be categorized as FTS u/s 9(i)(vii) - Held that - From the nature of services to be performed by the overseas agents, we are of the view that services rendered by the agents in this case are purely in the nature of advancement of business of the assessee company and cannot be categorized as managerial / technical / consultancy services. Accordingly, the consideration paid by the assessee cannot be classified as fee for technical services (FTS). Representation charges and commission paid by assessee were not liable to be taxed in India and consequently no tax was required to be deducted and therefore disallowance u/s 40(a)(i) was not warranted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) for non-deduction of TDS on payments made to non-resident persons.
2. Disallowance of excess depreciation on computer peripherals.
3. Taxability of payments made to non-resident agents under Section 9(1)(vii) as fees for technical services (FTS).
4. Applicability of DTAA provisions.
5. Impact of CBDT Circulars on TDS obligations.

Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Non-Deduction of TDS on Payments Made to Non-Resident Persons
The primary issue was whether the payments made by the assessee to non-resident agents for representation charges, commission, and tour expenses were subject to tax deduction at source (TDS) under Section 40(a)(i). The Assessing Officer (A.O.) held that these payments fell within the meaning of "fee for technical services" as defined under Section 9(1)(vii) and, therefore, were liable for TDS. Consequently, the A.O. disallowed these expenses for non-deduction of TDS.

The CIT(A) partially upheld and partially deleted these disallowances. The ITAT, after analyzing the nature of services provided by the non-resident agents, concluded that these services were purely for the advancement of business and did not fall under managerial, technical, or consultancy services. Therefore, the payments were not categorized as FTS and were not liable to TDS. The ITAT relied on various case laws, including the Delhi High Court's decision in Panalfa Autoelektrik Ltd., which held that sales and marketing services by overseas agents do not qualify as FTS.

2. Disallowance of Excess Depreciation on Computer Peripherals
The A.O. disallowed excess depreciation claimed by the assessee on computer peripherals. The CIT(A) deleted this disallowance, relying on various judicial precedents. The ITAT upheld the CIT(A)'s decision, finding no infirmity in allowing the depreciation based on established case laws.

3. Taxability of Payments Made to Non-Resident Agents under Section 9(1)(vii) as Fees for Technical Services (FTS)
The ITAT examined whether the payments made to non-resident agents for services like marketing and promotion fell under FTS as defined in Section 9(1)(vii). The tribunal noted that for a payment to be classified as FTS, it must involve managerial, technical, or consultancy services. The agreements with non-resident agents showed that their services were related to business promotion and did not involve managerial, technical, or consultancy elements. Therefore, these payments were not deemed to accrue or arise in India and were not liable to tax in India.

4. Applicability of DTAA Provisions
The assessee argued that under the Double Taxation Avoidance Agreement (DTAA), the payments made to non-residents were not liable to tax in India. The ITAT acknowledged that DTAA provisions override the Income Tax Act if they are beneficial to the assessee. The tribunal found that the services rendered by non-resident agents did not make available any technical knowledge, skill, or know-how to the assessee, as required under the DTAA's definition of FTS. Hence, the payments were not taxable in India.

5. Impact of CBDT Circulars on TDS Obligations
The assessee relied on CBDT Circulars 23 and 786, which stated that no TDS was required on payments made to non-resident agents for services rendered outside India. Although these circulars were withdrawn by Circular No. 7/2009, the ITAT noted that the withdrawal was prospective and not applicable to the assessment years in question. The tribunal cited the Delhi High Court's decision in CIT vs. EON Technology P. Ltd., which upheld the applicability of these circulars for the relevant period. Therefore, the assessee was not liable to deduct TDS based on these circulars.

Conclusion:
The ITAT allowed the appeals filed by the assessee, holding that the payments made to non-resident agents were not liable to TDS under Section 40(a)(i) as they did not qualify as FTS. The tribunal also upheld the CIT(A)'s decision on allowing excess depreciation on computer peripherals. The appeals filed by the Revenue were dismissed.