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2019 (10) TMI 133 - AT - Income Tax


Issues Involved:
1. Classification of services rendered by Mr. Alfio Firpo.
2. Taxability of payments made to Mr. Alfio Firpo under Section 9(1)(vii) of the Income Tax Act, 1961.
3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Italy.
4. Requirement of Tax Deducted at Source (TDS) under Section 195 of the Income Tax Act, 1961.

Detailed Analysis:

1. Classification of Services Rendered by Mr. Alfio Firpo:
The primary issue was whether the services rendered by Mr. Alfio Firpo were "independent professional services" or "fees for technical services." The Assessing Officer (AO) classified the services as "fees for technical services" and applied a 20% TDS rate under the DTAA. The appellant argued that the services were professional in nature, requiring engineering knowledge, and thus should be classified under "independent professional services."

2. Taxability of Payments Under Section 9(1)(vii):
The appellant contended that the payments to Mr. Alfio Firpo were not taxable in India as the services were rendered outside India and related to a business connection outside India. The AO, however, held that the payments had a business connection in India and were thus taxable under Section 9(1)(vii) of the Income Tax Act, 1961. The First Appellate Authority supported the AO's view, citing amendments to Section 9(1)(vii) by the Finance Act, 2010, which clarified that services rendered outside India but having a business connection in India are taxable.

3. Applicability of DTAA Between India and Italy:
The appellant argued that under Article 15 of the DTAA between India and Italy, the services rendered by Mr. Alfio Firpo should be classified as "independent personal services" and not "fees for technical services." The AO and the First Appellate Authority did not accept this argument, stating that the nature of services rendered did not fit within the scope of "independent personal services" as defined in the DTAA.

4. Requirement of TDS Under Section 195:
The appellant argued that no TDS was required under Section 195 of the Income Tax Act, 1961, as the income did not accrue or arise in India. The AO and the First Appellate Authority disagreed, holding that the payments were taxable in India and thus TDS was required.

Tribunal's Findings:

Classification of Services:
The Tribunal examined the consultancy contract and concluded that the services rendered by Mr. Alfio Firpo were not "fees for technical services" but were professional services aimed at setting up a new office and boosting exports. The Tribunal noted that the services required engineering knowledge and were essential for procuring orders, thus falling under "independent professional services."

Taxability Under Section 9(1)(vii):
The Tribunal referred to the explanation in Section 9(1)(vii)(b) and concluded that the services were utilized for business activities outside India. The Tribunal held that the income did not accrue or arise in India as the services were rendered entirely outside India. Therefore, the payments to Mr. Alfio Firpo were not taxable under the Income Tax Act, 1961.

Applicability of DTAA:
The Tribunal agreed with the appellant that the services rendered by Mr. Alfio Firpo fell under "independent personal services" as per Article 15 of the DTAA between India and Italy. The Tribunal noted that the nature of services was professional and did not fit the definition of "fees for technical services."

Requirement of TDS:
Given that the income was not taxable in India, the Tribunal held that there was no requirement for TDS under Section 195 of the Income Tax Act, 1961. The Tribunal canceled the orders passed under Section 201(1)/201(1A) for non-deduction of tax at source.

Conclusion:
The appeal was allowed, and the Tribunal ruled that the payments made to Mr. Alfio Firpo were not taxable in India, thus no TDS was required under Section 195. The orders passed under Section 201(1)/201(1A) were canceled.

 

 

 

 

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