2016 (6) TMI 37 - AT - Income Tax

TDS u/s 195 - payment in the nature of fees for technical services within the meaning of that expression u/s 9(1)(vii) - withholding of tax - Held that - Undisputedly disallowance has been made in the present case by holding the impugned payments as being in the nature of FTS. Admittedly no services in respect of the impugned payments were rendered in India. Further it is also not disputed that the entire amount has been paid and nothing is outstanding for payment. Thus all payment having been made before 8th May 2010, and no services having been rendered in India, the decision of the Hon ble Tribunal in the preceding year squarely applies in this year also and following the same we uphold the conclusion arrived at by the Ld. CIT(A) that the assesee did not have any tax withholding liabilities from foreign remittance for fees for technical services and thus no disallowance under section 40(a)(i) was warranted.- Decided in favour of assessee.

Summary

Issues Involved:
1. Obligation to deduct tax at source under section 195 r.w.s 9(1)(vii) of the Income Tax Act, 1961.
2. Nature of payments made by the assessee and their classification as fees for technical services (FTS).
3. Applicability of section 40(a)(i) for disallowance of expenses due to non-deduction of tax at source.
4. Impact of retrospective amendments to section 9(1) by the Finance Act, 2010.
5. Taxability of payments under the Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

1. Obligation to Deduct Tax at Source:
The primary issue was whether the assessee was required to deduct tax at source on payments made to foreign nationals/companies for design charges under section 195 r.w.s 9(1)(vii). The Assessing Officer (AO) contended that the payments were in the nature of fees for technical services (FTS) and thus subject to tax deduction at source. However, the assessee argued that the payments were not FTS under section 9(1)(vii) or the applicable DTAA, and since the recipients had no permanent establishment in India, the amounts were not taxable in India.

2. Nature of Payments:
The assessee categorized the expenses into three heads: purchase of material samples, offshore services, and reimbursement of expenses. The AO accepted part of the payments for material samples as outright purchases, not subject to TDS. However, the balance payments for material samples, offshore services, and reimbursement of expenses were treated as FTS by the AO, leading to disallowance under section 40(a)(i) due to non-deduction of tax.

3. Applicability of Section 40(a)(i):
The CIT(A) deleted the disallowance made by the AO, following a precedent from the preceding assessment year 2008-09. The CIT(A) held that the impugned payments were either not FTS or, if they were, the relevant taxability provisions were amended retrospectively, and the assessee could not have anticipated such amendments. Moreover, the offshore services were not taxable in India under the DTAA with Spain, and the reimbursement of expenses was not subject to disallowance under section 40(a)(i).

4. Impact of Retrospective Amendments:
The Tribunal noted that the legal position before the Finance Act, 2010, required services to be rendered in India for FTS to be taxable. The retrospective amendment negated this requirement, but the Tribunal held that the tax deduction obligation should be based on the law as it stood at the time of payment. Therefore, for payments made before the amendment, no TDS was required if services were not rendered in India, and no disallowance under section 40(a)(i) was warranted.

5. Taxability under DTAA:
The CIT(A) also considered the DTAA provisions, particularly with Spain, concluding that offshore services were not taxable in India. The Tribunal upheld this view, noting that the payments did not attract tax withholding obligations under section 195, as no services were rendered in India.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that the assessee had no tax withholding liabilities for the payments in question. The Tribunal emphasized that the law at the time of payment should govern tax deduction obligations, and since no services were rendered in India, no disallowance under section 40(a)(i) was justified.

Order Pronounced:
The appeal of the Revenue was dismissed, and the conclusions of the CIT(A) were upheld. The Tribunal's decision was based on the consistent application of legal principles and precedents, ensuring that the assessee's actions were in compliance with the law as it stood at the relevant time.