2015 (7) TMI 475 - AT - Income Tax

Non-deduction of tax at source in terms of section 195 - expenses incurred by the assessee to International Project Services Oy. (IPS) - Held that - The income derived by a resident of Finland in respect of professional services or other independent activities of a similar character performed in India can be taxed in India if he is present in India for a period or periods aggregating to 90 days or more in the relevant fiscal year or has a fixed base regularly available to him in India for the purpose of performing his activities. It is noticed that the ld. CIT(A) has computed the period of 90 days by considering the presence of these persons in India from 24.11.2008 to 24.4.2009. As AR contended that the ld. CIT(A) has considered total period of stay of all the five persons taken together without considering it on individual basis. We find force in the submission of the ld. AR in this regard. Once it is held that five individuals from Finland were not representing IPS and, in fact, there was no valid agreement between the assessee and IPS, then, what remains to be examined is such five residents of Finland on individual basis. The amounts payable to each of such five persons satisfying the duration test on individual basis would enable the ultimate triggering of Article 15 of the DTAA. Only those Finland residents out of such five persons who independently and individually satisfy the condition about their presence in India for a period of 90 days or more in the relevant fiscal year or having a fixed place regularly available to them in India for the purpose of performing the supervisory functions, can be brought within the purview of Article 15. If, however, this condition is found wanting qua some individuals, then the amount payable to such individual residents of Finland, would cease to be chargeable to tax in terms of Article 15 of the DTAA notwithstanding its taxability under section 9(1)(vii) read with section 5 of the Act. Since the relevant information for ascertaining the duration of stay of such residents of Finland in India is not available on record and, further, it is not clear whether they had a fixed base regularly available to them in India for performing such services, we cannot forthwith ascertain whether or not such a pre-requisite condition is fulfilled. Under such circumstances, we set aside the impugned order and remit the matter to the file of the ld. CIT(A) for deciding this aspect of the matter and, thereafter, determining the question of disallowance u/s 40(a)(i) of the Act. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Confirmation of disallowance made by the Assessing Officer (AO) for non-deduction of tax at source under section 195 of the Income-tax Act, 1961.
2. Genuineness of the agreement between the assessee and International Project Services Oy (IPS).
3. Applicability of Article 13 and Article 15 of the Double Taxation Avoidance Agreement (DTAA) between India and Finland.

Detailed Analysis:

1. Confirmation of Disallowance for Non-Deduction of Tax at Source:

The primary issue in the appeal is whether the disallowance of Rs. 1.92 crore under section 40(a)(i) of the Income-tax Act, 1961, for non-deduction of tax at source, was justified. The assessee claimed that the amount paid to IPS was not chargeable to tax in India under Article 13 of the DTAA between India and Finland. However, the AO held that the amount was chargeable to tax as it constituted 'fees for technical services' under section 9(1)(vii) of the Act. The AO disallowed the deduction under section 40(a)(i) due to the failure to deduct tax at source.

2. Genuineness of the Agreement with IPS:

The CIT(A) questioned the authenticity of the agreement between the assessee and IPS. The agreement, dated 1.11.2008, was found to be on plain paper, with the first two pages unsigned and lacking any seal or stamp. The CIT(A) also noted inconsistencies, such as the agreement with IPS being dated before the agreement with Sterlite (21.11.2008). The assessee failed to produce the original agreement, weekly time sheets, or any correspondence with IPS, leading the CIT(A) to conclude that the agreement was not genuine and was a camouflage to defraud the Revenue.

3. Applicability of Article 13 and Article 15 of the DTAA:

Article 13 - Fees for Technical Services:

Article 13 of the DTAA deals with 'Royalties and fees for technical services.' It defines 'fees for technical services' as payments for rendering technical or consultancy services that 'make available' technical knowledge, skill, or know-how to the payer. The Tribunal noted that the services provided by the engineers from Finland did not 'make available' any technical knowledge to the assessee or Sterlite for future use. Therefore, the payments did not fall under the definition of 'fees for technical services' in Article 13.

Article 15 - Independent Personal Services:

The CIT(A) held that the services rendered by the five engineers from Finland fell under 'Independent personal services' as defined in Article 15 of the DTAA. Article 15 covers professional services or other independent activities, including those of engineers. The CIT(A) found that the engineers were present in India for more than 90 days, making their income chargeable to tax in India. The Tribunal agreed with the CIT(A) that the services rendered fell under Article 15, not Article 13, due to the exclusion clause in Article 13(5)(e).

Remand for Further Examination:

The Tribunal noted that the CIT(A) considered the total period of stay of all five engineers collectively, rather than individually. The Tribunal remanded the matter to the CIT(A) to ascertain the individual duration of stay of each engineer and determine if they met the 90-day threshold or had a fixed base in India. The Tribunal directed the CIT(A) to decide the issue of disallowance under section 40(a)(i) after this examination.

Conclusion:

The Tribunal set aside the impugned order and remitted the matter to the CIT(A) for further examination of the duration of stay of the engineers and the applicability of Article 15. The appeal was allowed for statistical purposes, and the assessee was granted a reasonable opportunity of hearing in the remanded proceedings.

← Previous Next →