2021 (12) TMI 585 - AT - Income Tax

TDS u/s 195 - payments made by to parent company, Bain Company Inc. (Bain US) on account of payments made to third parties - technology was made available to the appellant and hence tax was required to be deducted on these payments under Article 12 of India-USA Double Tax Avoidance Agreement ( DTAA ) - whether there is no evidence that such expenses were reimbursement of expenses on a cost to cost basis? - whether services were not technical services so as to fall within the ambit of FIS under the India- USA DTAA.? - HELD THAT - CIT(A) has only held that technical services were made available to the assessee, but, he is silent on whether technology was made available to the assessee or not which, in our opinion, is a sine qua non for holding payment as FIS under the Indo-USA DTAA. Further, the submission of the ld. Counsel that services were rendered outside India and, therefore, payments for the services could not qualify as fee for technical services in view of the decision of the Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. 2007 (1) TMI 91 - SUPREME COURT which was applicable at the relevant time, could not be controverted by the ld. DR. We find, the Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) has held that for a nonresident to be taxed in India, two events need to be fulfilled i.e., not only should the services be utilized in India, but, the same should also be rendered in India. We find, the above proposition was amended retrospectively by the Finance Act, 2010 with retrospective effect from 1st June, 1976. Therefore, we find merit in the argument of the ld. Counsel that it was under a bona fide belief that the payments were not taxable in India. We find, the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT has thoroughly discussed the issue regarding royalty under the Income-tax Act and has held that a person mentioned in section 195 of the Income-tax Act cannot be expected to do the impossible, namely to apply the expanded definition of royalty inserted by Explanation 4 to section 9(1)(vi) of the Income-tax Act for the assessment years in question at a time when Explanation was not actually and factually in the statute. We are of the considered opinion that the assessee was not liable to withhold tax payment on account of the four items the details of which are given at para 12 of this order. Accordingly, the order of the CIT(A) is set aside and the grounds raised by the assessee are allowed.

Summary

Issues Involved:

1. Non-deduction of tax on professional support cost.
2. Non-deduction of tax on client-related expenses.
3. Non-deduction of tax on computer maintenance expenses.

Issue-wise Detailed Analysis:

1. Non-deduction of tax on professional support cost:

The Assessing Officer (AO) held that the professional support services received by the assessee from Bain USA were technical in nature and did not satisfy the 'Make Available' clause under the India-USA Double Tax Avoidance Agreement (DTAA). Consequently, the AO concluded that the assessee should have deducted taxes on payments amounting to INR 5,47,89,345/-. However, the Commissioner of Income Tax (Appeals) [CIT(A)] after a thorough factual analysis, determined that these services were neither technical in nature nor did they satisfy the 'Make Available' clause. Therefore, the CIT(A) concluded that there was no requirement for withholding taxes on such payments.

2. Non-deduction of tax on client-related expenses:

The AO took an ad hoc percentage (80%) of the client-related expenses and held that the assessee was obligated to deduct tax on 80% of the expenses amounting to INR 2,04,85,020/-. The AO categorized some expenses like Gerson Lehrman charges and market research charges as consultancy payments, thus requiring tax withholding. The CIT(A) partially upheld the AO's decision, stating that the assessee was liable to withhold taxes on four specific expenses totaling INR 82,34,242/-. The CIT(A) justified this by stating that these expenses involved technical services made available to the assessee, qualifying as 'Fee for Included Services' (FIS) under the India-USA DTAA.

3. Non-deduction of tax on computer maintenance expenses:

The AO disallowed the computer maintenance expenses of INR 36,96,067/- by holding that the use of software licenses by the assessee amounted to royalty/Fees for Technical Services (FTS). The CIT(A), however, decided this issue in favor of the assessee, stating that the payment was for using a common global portal shared by all globally affiliated companies and did not make available any technology. Therefore, there was no requirement for withholding taxes on these payments.

Tribunal's Decision:

The Tribunal found merit in the assessee's arguments. It noted that the CIT(A) had correctly held that the professional support costs and computer maintenance expenses did not require tax withholding. However, regarding client-related expenses, the Tribunal stated that the CIT(A) had only held the services were made available but did not confirm if technology was made available, which is essential under the Indo-USA DTAA for qualifying as FIS. Additionally, the Tribunal acknowledged the retrospective amendment by the Finance Act, 2010, and the Supreme Court's ruling in Ishikawajima-Harima Heavy Industries Ltd., which required services to be both rendered and utilized in India for taxation.

The Tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT, which emphasized that retrospective amendments creating chargeability cannot be valid from a tax withholding standpoint. Therefore, the Tribunal concluded that the assessee was not liable to withhold tax on the payment of INR 82,34,242/- related to the four specific client-related expenses.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, setting aside the CIT(A)'s order regarding the withholding tax on client-related expenses amounting to INR 82,34,242/-. The decision was pronounced in the open court on 10.11.2021.