2020 (6) TMI 137 - AT - Income Tax

TDS u/s 195 - Default for making the above payments to NRI without deducting tax at Source - Whether the activity carried out by BIPL falls under the definition of business connection provided in explanation 2 to Section 9(1) of the Act which deals with the Income accrued and derived in India ? - HELD THAT - BIPL leaves no confusion that BIPL being subsidiary/group company of Buhler AG, Switzerland is having regular business activity in India and apart from the trading business it also regularly providing marketing services to Buhler AG, Switzerland. The activities carried out by B/s BIPL for Buhler AG, Switzerland squarely falls in activity (a), (b) (c). Since Business connection of Buhler AG, Switzerland in India and M/s BIPL, Bangalore is established beyond doubt, the income portion in the transaction between the Buhler AG, Switzerland and the assessee is subject to tax and the same has been rightly carried out by Ld. A.O. Since the non resident supplier Buhler AG, Switzerland has carried out the transaction of sale of goods to the assessee company through its subsidiary/group company BIPL, Bangalore business connection is established and therefore Section 9 of the Act dealing with Income deemed to accrue or arise in India comes into operation and thus the transaction needs to pass through Section 195 - Decided against assessee.

Summary

Issues Involved:
1. Non-deduction of Tax at Source under Section 195 of the Income Tax Act.
2. Determination of "business connection" in India for the non-resident entity.
3. Applicability of withholding tax on payments made to non-resident entities.

Issue-wise Detailed Analysis:

1. Non-deduction of Tax at Source under Section 195 of the Income Tax Act:
The assessee company, engaged in manufacturing wheat products, purchased spare parts for old machines and flour milling machines from a non-resident supplier, Buhler AG, Switzerland, during Financial Years 2014-15 and 2015-16. The payments made were ?38,093/- and ?2,83,438/- respectively. The assessee did not deduct tax at source under Section 195, arguing that the purchases were capital goods and not subject to TDS. The Income Tax Officer (ITO) issued a show cause notice, treating the assessee as in default for not deducting TDS on these payments.

2. Determination of "business connection" in India for the non-resident entity:
The ITO investigated and found that Buhler AG, Switzerland, had a subsidiary in India, Buhler India Pvt. Ltd. (BIPL), which played a significant role in the transaction. BIPL was involved in negotiating, raising quotations, revising quotations, and confirming orders on behalf of Buhler AG. The ITO concluded that Buhler AG had a "business connection" in India through BIPL, making the profit element in the sales subject to withholding tax under Section 195.

3. Applicability of withholding tax on payments made to non-resident entities:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's decision, stating that BIPL's involvement constituted a business connection in India for Buhler AG. The CIT(A) elaborated that BIPL's activities went beyond mere marketing support and included substantial functions like negotiating and finalizing orders, which established a business connection under Explanation 2 to Section 9(1) of the Income Tax Act. The Tribunal confirmed this finding, noting that BIPL's role in the transaction was crucial and that Buhler AG's income from the transaction was deemed to accrue in India, necessitating TDS under Section 195.

Conclusion:
The Tribunal dismissed the assessee's appeals for both Assessment Years 2015-16 and 2016-17, confirming that Buhler AG, Switzerland, had a business connection in India through its subsidiary BIPL. Consequently, the payments made by the assessee to Buhler AG were subject to withholding tax under Section 195 of the Income Tax Act. The Tribunal found no inconsistency in the CIT(A)'s findings and upheld the decision to treat the assessee as in default for non-deduction of TDS.