2018 (4) TMI 1681 - AT - Income Tax

Disallowance u/s 40(a)(i) for non deduction of TDS u/s 195 - Payments were in the nature of fee for technical services - withholding of tax - India-US tax treaty - HELD THAT - The scope of the services agreed with Fluor Transworld Services Inc. involves evaluation of different types of LNG vaporizers, recommendation of a suitable form of vaporizer and study of the benefits of various schemes for generating power through utilization of LNG. These services involve deployment of personnel having the requisite experience and skill to perform the services. However, it is not possible that the assessee would be able to carry out such services in future on its own without recourse to the service provider to fall within Article 12(4) of the India-US DTAA. The nature of services rendered does not indicate making available technical knowledge, skill, know-how etc. to the assessee. Thus, on the basis of the facts and circumstances of the case, payment to Flour Transworld Services Inc. does not qualify as fee for included services as per the provisions of the India-US DTAA. Although DR has argued vehemently against the action of the Ld. CIT (A) in deleting this addition, he could not point out any factual or legal inaccuracy in the finding recorded by the Ld. CIT (A). He also could not bring to our notice any judicial precedent in favour of the department. - Decided against revenue.

Summary

Issues:
1. Deletion of addition made under section 40(a)(i) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals) for assessment year 2006-07.
2. Interpretation of provisions related to fees for technical services under the Act and the Double Taxation Avoidance Agreement (DTAA) between India and USA.

Analysis:

Issue 1: Deletion of Addition under Section 40(a)(i)
The case involved an appeal by the revenue against the deletion of an addition of &8377; 38,98,851 made by the Assessing Officer under section 40(a)(i) of the Income Tax Act, 1961. The Ld. Commissioner of Income Tax (Appeals) had deleted this addition pertaining to payments made to foreign parties without tax deduction at source. The Assessing Officer disallowed the deduction, considering the payments as fees for technical services. The Ld. Commissioner of Income Tax (Appeals) upheld the disallowance for one party but deleted it for the other. The Income Tax Appellate Tribunal (ITAT) reviewed the case and dismissed the appeal of the department, supporting the decision of the Ld. Commissioner of Income Tax (Appeals) based on the provisions of the Act and the tax treaty.

Issue 2: Interpretation of Fees for Technical Services
The ITAT analyzed the nature of services provided by the foreign party, Fluor Transworld Services Inc., and the applicability of the India-US DTAA. The ITAT considered the definition of fees for technical services under section 9(i)(vii) of the Act and the relevant clauses of the India-US tax treaty. It was established that the services provided did not qualify as fees for included services under the treaty as they did not make technical knowledge available to the recipient for independent use. The ITAT emphasized the importance of the MOU concerning fee for included services, highlighting that mere technical services provision is insufficient; the recipient must be able to apply the technology independently. The ITAT concluded that the services in question did not meet the criteria under the tax treaty, supporting the decision to delete the addition by the Ld. Commissioner of Income Tax (Appeals).

In conclusion, the ITAT upheld the decision of the Ld. Commissioner of Income Tax (Appeals) to delete the addition, emphasizing the specific criteria under the tax treaty for fees for technical services. The appeal of the revenue was dismissed based on the analysis of the provisions of the Act and the India-US DTAA.