2017 (1) TMI 246 - AT - Income Tax

Payments to overseas payees located at Switzerland, Canada and USA without deducting any TDS - whether the above remittances were in fact in the nature of fee for royalty/technical services covered by deeming fiction under section 9(1)(vi) and (vii) ? - DTAA applicability - Held that - There is hardly any dispute about section 90(2) of the Act envisaging that in case there exists a Double Taxation Avoidance Agreement in respect of any country, provisions of the Act apply to the extent they are more beneficial to such an assessee and not otherwise. The assessee in the instant case refers to Indo-Portuguese DTAA containing make available condition to be applied in case of its Swiss remittances as per Indo-Swiss DTAA Protocol on the ground that although such a make available condition in respect of technical services is not explicitly contained in latter DTAA, same is deemed to have been applicable by virtue of Indo-Portuguese DTAA Protocol specified hereinabove involving a specific condition to this effect. This plea fails to impress upon us. We make it clear that no make available articles in respect to fee for technical service is used in Indo- Swiss DTAA or Protocol. The said protocol only postulates that India and Swiss shall enter into negotiation to this effect if former State enters into a DTAA with a member of OECD State either reducing rate of tax or restricting the scope of specified categories of income hereinabove. Revival of section 201(1) and 201(1A) demands pertains to TDS not deducted upon assessee s canadian and american remittances hereinabove. There is no dispute that India and these countries have entered into DTAAs and same contain make available stipulation with respect to the impugned services to be involved in corresponding Article 12(4)(b) in both cases. The Revenue fails to take us through any evidence that assessee s payees in question based in Canada or USA have made it available their expertise and technical knowhow thereby enabling it to use the same independently without their assistance. It transpires that these payees have merely rendered consultancy services without imparting any knowledge. We find that no reason to interfere with the ld.CIT(A) observation extracted hereinabove quoting various judicial precedents in support as well.

Summary

Issues Involved:
1. Liability of TDS deduction on payments made to non-residents for consultancy and professional services.
2. Applicability of Double Taxation Avoidance Agreements (DTAA) with Switzerland, Canada, and the USA.
3. Interpretation of "fees for technical services" and "make available" clause under respective DTAAs.
4. Validity of demands under section 201(1) and 201(1A) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Liability of TDS Deduction on Payments Made to Non-Residents for Consultancy and Professional Services:
The assessee, engaged in the manufacturing and marketing of pharmaceutical products, made payments to entities in Switzerland, Canada, and the USA without deducting TDS. The Assessing Officer (AO) concluded that these payments were in the nature of fees for royalty/technical services under section 9(1)(vi) and (vii) of the Income Tax Act, 1961, leading to a demand of ?20,92,072. The assessee contested this, arguing that the payments were covered under respective DTAAs and did not "make available" any technical knowhow.

2. Applicability of Double Taxation Avoidance Agreements (DTAA) with Switzerland, Canada, and the USA:
- Switzerland: The CIT(A) upheld the AO's decision that the payments to RCC Ltd. for consultancy services were fees for technical services under section 9(1)(vii) and taxable in India. The CIT(A) noted that the India-Switzerland DTAA did not contain a "make available" clause, and the payments were deemed to accrue in India.
- Canada: The CIT(A) ruled in favor of the assessee, stating that the payments to Anapharm for conducting studies did not "make available" any technical knowledge, thus not qualifying as fees for technical services under the India-Canada DTAA. As a result, no TDS was required.
- USA: Similar to the Canadian case, the CIT(A) found that payments to entities in the USA did not "make available" technical knowledge. Therefore, under the India-USA DTAA, these payments were not taxable in India, and no TDS was required.

3. Interpretation of "Fees for Technical Services" and "Make Available" Clause Under Respective DTAAs:
- Switzerland: The CIT(A) rejected the assessee's argument that the Protocol to the Indo-Swiss DTAA, which envisages renegotiation for more favorable terms, should apply. The CIT(A) emphasized that the current treaty provisions did not include a "make available" clause, and the payments were taxable as fees for technical services.
- Canada and USA: The CIT(A) relied on judicial precedents, including the Authority for Advance Ruling (AAR) and ITAT decisions, to conclude that the services rendered did not "make available" technical knowledge. Therefore, these payments were not taxable in India under the respective DTAAs.

4. Validity of Demands Under Section 201(1) and 201(1A) of the Income Tax Act, 1961:
- Switzerland: The CIT(A) confirmed the demand under section 201(1) and interest under section 201(1A) for non-deduction of TDS on payments to RCC Ltd.
- Canada and USA: The CIT(A) deleted the demands under section 201(1) and interest under section 201(1A) for payments to entities in Canada and the USA, as these were not taxable in India under the respective DTAAs.

Conclusion:
The Tribunal dismissed both the assessee's and Revenue's appeals. It upheld the CIT(A)'s decision that payments to the Swiss entity were taxable in India, while payments to entities in Canada and the USA were not taxable and did not require TDS deduction. The Tribunal emphasized the importance of the "make available" clause in determining the taxability of technical services under DTAAs.