2015 (8) TMI 1029 - AT - Income Tax

Non-deduction of TDS for payment of product designing charges outside India for services rendered outside India - Held that - The services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services , we are the firm view that Section 9 of the Act is not applicable to the case on hand and consequently, Section 195 of the Act does not come into play. In view of the above finding, the decision of the Supreme Court in Transmission Corporation of A.P. Ltd. case, 1999 (8) TMI 2 - SUPREME Court relied upon by the learned Standing Counsel for the Revenue is not applicable to the facts of the present case. - Decided in favour of assessee. Non-deduction of TDS towards payment of rent to the partners of the firm - Held that - Section 194-I of the Act provides that tax has to be deducted at source on payment of rent by an assessee who is not an individual or a HUF at the specified rate. In this case, the assessee is a firm assessable under the provisions of the Act and therefore bound to deduct tax at source on payment of rent to its partners who are individuals and distinct assessable entities as held by the Ld. Assessing Officer. It is pertinent to mention that the provisions of TDS represent an alternative and more efficient tax collection mechanism for the Government. Neither provisions of TDS is a separate charge nor levy in addition to income tax under the Act. Non-compliance of the provisions of TDS will result in disallowance u/s 40(a)(ia) of the Act, rising of demand U/s.201(1) of the Act, charging of interest U/s.201(1A) of the Act and levy of penalty U/s.271C of the Act. There is no provision under the Act to suggest that the relationship between the two assessable entities will determine the applicability of Section.194-I of the Act. Therefore, we hereby set aside the order of the Ld. CIT (A) and confirm the order of AO on this issue. - Decided in favour of revenue.

Summary

Issues Involved:
1. Non-deduction of TDS for payment of product designing charges outside India for services rendered outside India.
2. Non-deduction of TDS towards payment of rent to the partners of the firm.

Issue-wise Detailed Analysis:

1. Non-deduction of TDS for payment of product designing charges outside India for services rendered outside India:

The Revenue contended that the remuneration paid in foreign currency to Ms. Joanne Collins in the USA for product design services rendered outside India should be taxed in India, and thus, TDS should be deducted under Section 195 of the Act. The Assessing Officer cited Section 9(1)(vi) of the Act and Article-12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA, arguing that "royalties" and "fees for services rendered" are taxable in the contracting state where they arise, necessitating TDS deduction.

The CIT(A) deleted the addition, relying on the Supreme Court decision in Toshoku Ltd., which held that remuneration paid in foreign currency for services rendered outside India is not liable for TDS under Section 195. The CIT(A) noted that Ms. Joanne Collins had no business connection or permanent establishment in India, and the remuneration was paid for services rendered entirely outside India.

The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Toshoku Ltd. and the Madras High Court's decision in CIT v. Faizan Shoes Pvt. Ltd. Both cases established that commission or remuneration earned by non-residents for services rendered outside India does not constitute income accrued or arisen in India, thus not attracting TDS under Section 195.

2. Non-deduction of TDS towards payment of rent to the partners of the firm:

The Revenue argued that the assessee firm paid rent to its partners without deducting TDS as mandated by Section 194-I of the Act. The Assessing Officer added the rent payments to the assessee's income under Section 40(a)(ia) for non-compliance with TDS provisions.

The CIT(A) deleted the addition, reasoning that the rent payments were legitimate debits in the trading account and not deductions falling under Sections 32 to 38 of the Act.

The Tribunal disagreed with the CIT(A), noting that Section 194-I requires tax deduction at source on rent payments by entities other than individuals or HUFs. The Tribunal emphasized that TDS provisions serve as an efficient tax collection mechanism and non-compliance results in disallowance under Section 40(a)(ia) and other penalties. The Tribunal found no provision exempting TDS on rent payments between a firm and its partners and thus set aside the CIT(A)'s order, confirming the Assessing Officer's addition.

Conclusion:

The Tribunal partly allowed the Revenue's appeal, upholding the CIT(A)'s decision on the non-deduction of TDS for foreign remuneration but reversing the CIT(A)'s decision on the non-deduction of TDS for rent payments to partners. The order was pronounced on 5th August 2015 at Chennai.