2018 (12) TMI 1146 - HC - Income Tax

TDS u/s 195 - disallowance u/s 40 (a)(i) - non deduction of tds on fees for technical services to one foreign based company M/s. Pacific Hub Corporation, Philippines - Income deeded to accrue or arise in India - whether payment received by PHP, Philippines was deemed to be income of PHP Philippines in terms of Section 9 1 (vii) read with Section 5 2 - Held that - In the present case, the Commissioner Appeals and the Tribunal have accepted assessee s factual assertion that the payments were for technical services provided by a nonresident, for providing services to be utilized for serving the assessee s foreign clients. Thus, the fees for technical services was paid by the assessee for the purpose of making or earning any income from any source outside India. Clearly, the source of income namely the assessee s customers were the foreign based companies. In the view by a judgment of Karnataka High Court in the case of Commissioner of Income tax, Bangalore v. ITC Hotels Limited, reported in 2015 (8) TMI 987 - KARNATAKA HIGH COURT in which it was held that where the recipient of income of parent company is not chargeable to tax in India, then the question of deduction of tax at source by the payer would not arise. Delhi High Court in the case of Commissioner of Income tax vs. Havells India Limited, reported in 2012 (5) TMI 449 - DELHI HIGH COURT was of the opinion that the payment made by the assessee to a US based company for certification facilitating export was not in relation to the source of income which was based in India. The facts were thus different. In the present case, we have primarily gone on the question of the nature of assessee s activities and the nature of services rendered by the parent based company, for which commission was paid. - Decided against revenue

Summary

Issues:
1. Whether the Appellate Tribunal erred in deleting the disallowance made under Section 40(a)(i) of the Income Tax Act?
2. Whether the Appellate Tribunal erred in not holding that the payment received by a foreign company was deemed income of the foreign company under Section 9(1)(vii) read with Section 5(2) of the Income Tax Act?

Analysis:
1. The case involved an appeal by the Revenue against the Income Tax Appellate Tribunal's judgment regarding the disallowance made under Section 40(a)(i) of the Income Tax Act. The dispute arose from the non-deduction of tax at source by the assessee while making a payment to a foreign company for technical services. The Assessing Officer disallowed the expenditure, citing Section 195 of the Act. However, the CIT(A) ruled in favor of the assessee, emphasizing that the services were utilized outside India for business purposes. The Tribunal upheld this decision, noting that the payment was for services provided outside India, thus not attracting tax liability in India.

2. The second issue revolved around whether the payment received by the foreign company should be deemed income under Section 9(1)(vii) of the Act. The Tribunal found that the payee did not have a permanent establishment in India and the services were provided outside India for the assessee's overseas clients. Referring to Section 9(1)(vii)(b), the Tribunal concluded that the payment for technical services, utilized outside India for earning income from foreign sources, was not taxable in India. The Court further discussed relevant case laws, such as G.E India Technology Center P. Limited and ITC Hotels Limited, to support the decision.

3. The judgment highlighted the importance of determining tax liability based on whether the payment made to a nonresident was taxable under the Act. It referenced the Supreme Court's interpretation of Section 195 and the subsequent insertion of Explanation II, clarifying the applicability of tax deduction provisions to all persons, regardless of their presence in India. The Court emphasized that tax deduction at source is only required when the payment is chargeable to tax. The case also distinguished between payments related to income sources in India and those outside India, citing relevant provisions of the Act and judicial precedents.

4. The Court's analysis included a comparison with the decision in Havells India Limited, where the payment was not linked to Indian income sources. Additionally, the judgment discussed the relevance of the nature of the assessee's activities and the services provided by the foreign company in determining tax liability. Despite the pending appeal in the Adani Enterprises case, the Court dismissed the Tax Appeal, affirming the Tribunal's decision based on the factual and legal considerations presented in the case at hand.