2019 (7) TMI 1719 - AT - Income Tax

TDS u/s 195 - assessee failed to deduct tax at source on payments made to Non-resident parties on account of professional fee - AO rejected the contention of the assessee that services rendered by the 6 non-resident entities are not in the nature of independent personal services - CIT-A deleted the addition - HELD THAT - DR could not controvert the finding of the Ld. CIT(A) that the article on independent personal services is applicable on income derived by a person who is an individual or firm of individuals or by an individual, whether in his own capacity or any member of a partnership firm. Further in the DTAA with Netherland, the word resident has been used for the benefit of independent personal services, which is wider than individual and the firm, who has rendered services is entitled to benefit of said provision. No error in the order of the Ld. CIT(A) on this issue. CIT(A) has also analysed in view of the various DTAAs that the services rendered by the those non-resident parties are not Fee for Technical Services. DR could not establish that any technical knowledge was made available in the process of providing services by the non-resident parties to the assessee. In absence of not making available, the technical knowledge to the assessee, in view of the Article 13 of the respective DTAAs, the payment for services cannot be held as fee for technical services under the provisions of the respective DTAAs. We do not find any error in the order of the Ld. CIT(A) on this issue also. CIT(A) has further observed that Article 13 of DTAAs provisions defining Fee for Technical Services being more favourable to the assessee as compared to the provisions of section 9(1)(vii) of the Act which has defined Fee for Technical Services, and thus the assessee was having option of choosing more favourable provisions of the DTAAs. In our opinion, the finding of the Ld. CIT(A) is in accordance with the established legal position on the issue. CIT(A) in view of the decision in the case of Van Oord ACZ India (P) Ltd versus CIT 2010 (3) TMI 167 - DELHI HIGH COURT has held that the sum payable to the nonresidents was not chargeable to income tax in their hands and thus the assessee was not liable for deduction of tax at source on such payment under the provisions of section 195 and no disallowance under section 40(a)(i) could be made. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition due to non-deduction of tax at source on payments made to non-resident parties.
2. Applicability of Article 15 of DTAAs to limited liability partnership firms.
3. Classification of payments as Fee for Technical Services under DTAAs.

Detailed Analysis:

1. Deletion of Addition Due to Non-Deduction of Tax at Source:
The Revenue appealed against the order of the Ld. CIT(A)-18, New Delhi, which deleted the addition of ?1,98,28,897/- made by the AO. The AO had added this amount because the assessee failed to deduct tax at source on payments made to non-resident parties for professional fees, thereby committing a default under Section 40(a)(ia) of the Income Tax Act, 1961. The CIT(A) had previously adjudicated a similar issue in the assessee's case for the assessment year 2010-11, where it was held that the services rendered by the non-resident entities were not in the nature of independent personal services and thus not subject to tax deduction at source.

2. Applicability of Article 15 of DTAAs to Limited Liability Partnership Firms:
The Revenue contended that Article 15 of the respective DTAAs applies only to individuals, not to limited liability partnership firms. However, the CIT(A) and the Tribunal found that the professional services rendered by the non-resident entities, which included lawyering and accounting, were indeed covered under Article 15 of the relevant DTAAs. The CIT(A) analyzed various DTAAs, including those with the UK, USA, Netherlands, and France, and concluded that these agreements allow the benefit of Article 15 to both individuals and firms of individuals, including LLPs. The Tribunal upheld this finding, noting that the professional fees paid were for services rendered outside India, with no fixed base or permanent establishment in India, making the income taxable only in the country of residence of the service provider.

3. Classification of Payments as Fee for Technical Services:
The CIT(A) further analyzed whether the payments made to the non-resident entities could be classified as Fee for Technical Services (FTS) under the DTAAs. It was found that the services provided did not involve the "make available" clause, meaning that no technical knowledge, experience, or skill was transferred to the assessee that could be used independently in the future. The Tribunal cited various judicial precedents supporting this view, including decisions from Cushman & Wakefield (S) Pte., Sandvik Australia Pty. Ltd., and CIT Vs. De Beers India Minerals Pvt. Ltd., among others. The Tribunal concluded that the payments did not qualify as FTS under Article 13 of the respective DTAAs, thus not requiring tax deduction at source under Section 195 of the Act.

Conclusion:
The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal. It found no material change in the facts from the previous assessment year and concluded that the professional fees paid to non-resident entities were not taxable in India under the relevant DTAAs. Consequently, the assessee was not liable for tax deduction at source, and no disallowance under Section 40(a)(i) could be made. The Tribunal's decision was pronounced in the open court on 25/07/2019.