2018 (6) TMI 1278 - AT - Income Tax

Withholding of tax u/s 195 - section 40(a)(i) disallowance - scope of taxation of fee for technical services - Benefit of Most Favoured Nation (MFN) in the absence of correspondence notification - entitled to claim benefit of India Portugal Double Taxation avoidance agreement restricting the scope of taxation of fee for technical services to be automatically applicable in Indo-Sweden DTAA - whether or not the CIT(A) has rightly held the relevant restricted assessment of fee for technical services in India-Sweden DTAA as stipulated in India Portugal DTAA even in absence of a corresponding notification? - Held that - A coordinate bench in DCIT vs ITC Ltd 2001 (12) TMI 196 - ITAT CALCUTTA-A has already held that a protocol to DTAA is indispensable part of the treaty in question with same binding force as the main clauses carry Hon ble Delhi high court s recent decision in Steria (India) Ltd vs CIT 2016 (8) TMI 166 - DELHI HIGH COURT rejects Revenue s similar grievance in terms of India and France DTAA importing relevant corresponding articles of Indo-UK DTAA regarding taxation fee for technical services. The Revenue s plea therefore that such benefits can be imported from Indo-Portugal DTAA to Indo-Sweden DTAA only after necessary notification u/s 90(1) of the Act is devoid of merit since the protocol itself makes it clear that the said MFN clause shall apply in India-Sweden DTAA. Issuance of a notification has nowhere been stipulated as a condition precedent therein. Section 90(1) is very clear that only a DTAA would be notified and not the application of such a MFN clause. The Revenue s next argument seeking to place reliance on section 9(1)(vii) Explanation does not carry any substance since the assessee is already covered under the relevant beneficial provisions of a DTAA . The Revenue has therefore failed to prove that assessee s recipient was assessable to tax in India qua the impugned payments under Chapter-XVII of the Act. Hon ble apex court s landmark decision in GE India Technology Centre Pvt. Ltd. Vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA settles the law that liability to deduct TDS applies only in case the payment in question is assessable to tax in overseas recipient s hands in India under the provision of the Act. CIT(A) has rightly deleted the impugned disallowance u/s 40(a)(i) of the Act. - decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) for non-deduction of TDS on payments made to a Swedish entity.
2. Application of the 'Most Favoured Nation' (MFN) clause in the protocol between India and Sweden.
3. Taxability of the recipient's income in India under Section 9(2)(vii) and Article 12 of the India-Sweden Double Taxation Avoidance Agreement (DTAA).

Detailed Analysis:

1. Disallowance under Section 40(a)(i) for non-deduction of TDS on payments made to a Swedish entity:
The Revenue challenged the CIT(A)'s order reversing the Assessing Officer's disallowance of ?90,65,000/- under Section 40(a)(i) due to the assessee's failure to deduct TDS on payments made to M/s Triginta Travel & Tours of Sweden. The Assessing Officer had disallowed the expenditure under Section 40(a)(i) on the grounds that the income was taxable in India and the assessee had not deducted TDS as required under Section 195. The CIT(A) found that the payment was not taxable in India under the provisions of the India-Sweden DTAA as the Swedish entity did not have a permanent establishment in India.

2. Application of the 'Most Favoured Nation' (MFN) clause in the protocol between India and Sweden:
The Revenue contended that the CIT(A) erred in applying the MFN clause from the India-Portugal DTAA to the India-Sweden DTAA without a corresponding notification from the Government of India. The CIT(A) concluded that the payment was in the nature of fees for technical services but applied the restricted scope of taxation from the India-Portugal DTAA based on the MFN clause in the protocol to the India-Sweden DTAA. The Tribunal upheld this view, citing that the protocol is an integral part of the DTAA and has the same binding force as the main clauses. The Tribunal referenced the ITC Ltd. case, which established that a protocol to a DTAA is indispensable and carries the same legal weight.

3. Taxability of the recipient's income in India under Section 9(2)(vii) and Article 12 of the India-Sweden DTAA:
The Revenue argued that the recipient's income was taxable in India under Section 9(2)(vii) Explanation 2 and Article 12 of the India-Sweden DTAA. The CIT(A) found that the payment under consideration did not fall within the definition of 'fees for technical services' as per the India-Portugal DTAA, which was applicable due to the MFN clause. Therefore, the payment was not taxable in India, and the assessee was not required to deduct TDS. The Tribunal supported this conclusion, noting that the Revenue failed to demonstrate that the recipient was assessable to tax in India. The Tribunal referenced the Supreme Court's decision in GE India Technology Centre Pvt. Ltd. vs. CIT, which clarified that TDS liability arises only if the payment is assessable to tax in the recipient's hands in India.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the disallowance under Section 40(a)(i). The Tribunal held that the MFN clause in the India-Sweden DTAA protocol applied automatically without the need for a separate notification, and the payment in question was not taxable in India under the provisions of the DTAA. The Tribunal also emphasized that the Revenue failed to establish the taxability of the recipient's income in India, thus negating the need for TDS deduction by the assessee.