2017 (3) TMI 1515 - AT - Income Tax

TDS u/s 195 - payment on FTS - employees seconded to the assessee - Permanent Establishment in India - payment to non-resident entity - Held that - What is relevant is that the income embedded in the payments in question is taxable in India under the head Salaries , and if that be so, there are no tax withholding obligations under section 195. That precisely is the undisputed position on the facts of this caseas duly accepted by the income tax authorities. The income embedded in the impugned payments being in the nature of income chargeable to tax under the head income from salaries , the assessee cannot be said to have any tax withholding obligations under section 195. For this short reason alone, we must hold that the impugned tax withholding demands, under section 201 r.w.s 195, are wholly devoid of any legally sustainable merits. A lot of emphasis has been placed on the fact that there was a service PE in the present case. Nothing, however, turns on the existence of the PE because admittedly whatever has been paid to Burt Hill Inc USA is, in turn, paid by Burt Hill Inc UA to its employees seconded to the assessee. There cannot be any profits, therefore, in the hands of the Service PE, and what is taxable in the hands of the PE under article 7(1) is not the gross receipt but the profits attributable to the PE. The existence of service PE, in the present case, will be wholly academic inasmuch as whatever is the aggregate of receipts said to be attributable to the PE, is exactly the same as aggregate of expenditure attributable to the PE. As for the payments made by the assessee being in nature of the fees for technical services, this stand of the Assessing Officer is equally frivolous. There is not even an effort to show as to how any technical knowledge, skills, knowhow or processes etc are made available by these services inasmuch as these services can be performed by the assessee without any recourse to the service provider. Unless this condition, under make available clause under article 12(4)(b), is satisfied the fees for technical services cannot be brought to tax in India in the hands of entities fiscally domiciled in United States. It is even more elementary that once these payments cannot be brought to tax under the provisions of the India US DTAA, there cannot be any occasion to invoke Section 9(1)(vii) of the Act either because it cannot be more beneficial to the assessee- as is the condition precedent, under section 90(2), for invoking the same. Thus he demands raised on the assessee under section 201 r.w.s 195 are wholly devoid of any legally sustainable merits. - Decided in favour of assessee

Issues Involved:
1. Tax withholding obligations under section 195.
2. Nature of payments made to Burt Hill Inc USA.
3. Existence of a Service Permanent Establishment (PE).
4. Classification of payments as fees for technical services.
5. Relevance of tax payments made by seconded employees.
6. Application of Double Taxation Avoidance Agreement (DTAA) provisions.

Detailed Analysis:

1. Tax Withholding Obligations Under Section 195:
The primary issue revolves around whether the payments made by the assessee to Burt Hill Inc USA required tax withholding under section 195 of the Income Tax Act, 1961. The Tribunal noted that section 195 mandates tax withholding for payments to non-residents only if the payments are chargeable under the Act, excluding salaries. Since the payments in question were reimbursements for salaries and were taxed under the head 'Income from Salaries' in India, the Tribunal concluded that there were no tax withholding obligations under section 195.

2. Nature of Payments Made to Burt Hill Inc USA:
The Tribunal examined the nature of payments made by the assessee to Burt Hill Inc USA, determining that these were reimbursements for payroll costs of seconded employees. The payments were found to be devoid of any profit element and were merely reimbursements for salaries paid by Burt Hill Inc USA. Consequently, these payments were not considered taxable income in the hands of Burt Hill Inc USA.

3. Existence of a Service Permanent Establishment (PE):
The Assessing Officer contended that the seconded employees created a Service PE in India under Article 5(2)(l) of the India-USA DTAA. However, the Tribunal held that the existence of a Service PE was academic since the payments were reimbursements of salaries and did not generate any profits attributable to the PE. Therefore, the PE's existence did not impact the taxability of the payments.

4. Classification of Payments as Fees for Technical Services:
The Assessing Officer argued that the payments should be classified as fees for technical services under Article 12(4) of the Indo-US DTAA and section 9(1)(vii) of the Income Tax Act. The Tribunal rejected this argument, noting that the services provided by seconded employees did not "make available" any technical knowledge, skills, or processes to the assessee, a requirement under Article 12(4)(b) of the DTAA. Consequently, the payments could not be classified as fees for technical services.

5. Relevance of Tax Payments Made by Seconded Employees:
The Tribunal acknowledged that the assessee had deducted tax at source under section 192 for the seconded employees' salaries for the assessment years 2008-09, 2010-11, and 2011-12. For the assessment year 2009-10, the assessee paid advance taxes on behalf of the seconded employees. The Tribunal emphasized that the nature of the payments, not the method of tax payment, was crucial for determining tax withholding obligations under section 195.

6. Application of Double Taxation Avoidance Agreement (DTAA) Provisions:
The Tribunal highlighted that the payments in question were not taxable under the provisions of the India-US DTAA. Since the payments were reimbursements for salaries, they did not fall under the purview of fees for technical services or business income under the DTAA. Consequently, section 9(1)(vii) of the Income Tax Act could not be invoked as it would not be more beneficial to the assessee.

Conclusion:
The Tribunal concluded that the tax withholding demands under section 201 read with section 195 were devoid of any legally sustainable merits. The payments made by the assessee to Burt Hill Inc USA were reimbursements for salaries, not taxable under section 195. The Tribunal allowed the assessee's appeals and dismissed the Assessing Officer's appeals, emphasizing the proper interpretation of tax withholding obligations and the nature of payments under relevant legal provisions.

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