2022 (6) TMI 1251 - HC - Income Tax

TDS u/s 195 - application for 'Nil TDS Certificate' has been rejected and the petitioner has been directed to deduct tax at source at the applicable rate - Deduction u/s 195(2) on the 'sum chargeable under this Act' - Whether the petitioner is required to deduct TDS under Section 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of FISCAL evasion? - Whether the application of the petitioner dated 15.01.2020 filed under Section 195(2) of the Income Tax Act was not maintainable? - HELD THAT - Keeping in mind that the determination under Section 195(2) or under Section 197 by grant of Certificate being tentative in nature, the assessee must be permitted to invoke such provision and seek for certificate in order to avoid consequences of non-deduction as enumerated above. It cannot be stated that the assessee is debarred from invoking such a provision if he were of the view that the payment being made was not chargeable under the provisions of the I.T. Act. To place such a heavy burden of adjudication upon the assessee before invoking the tentative determination under Section 195(2), considering the nature of proceedings, may not be called for. Accordingly, the recourse to Section 195(2) is perfectly in consonance with the object of Section 195 and cannot be faulted. Whether the petitioner is required to deduct TDS u/s 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of FISCAL evasion? - It is clear that 'FIS' under Article 12(4) would refer to payments of any kind to any person in consideration for rendering of technical or consultancy services (including through the provision of services of technical or other personnel) if such services make available technical knowledge, experience, skill, know-how or processes or consists of development or transfer of technical plan or technical design. In terms of Article 12(4)(b) for the purpose of construing 'FIS', it is necessary that the rendering of technical or consultancy services must make available technical knowledge, experience, skill, know-how or processes. Further, it may also consist of development and transfer of a technical plan or technical design.Accordingly, it is not a mere rendering of technical or consultancy services, but the requirement of make available in terms of Article 12(4)(b) requires to be fulfilled. In light of the above legal requirement whether the present payment would amount to 'FIS' requires to be determined. M.S.A., if subjected to scrutiny as regards the aspect of secondment does not reveal the satisfaction of the requirement of 'make available' which is a sine qua non for being a 'FIS'. DCIT has proceeded to pass the impugned order without examining this aspect. The fact that the employees seconded have the requisite experience, skill or training capable of completing the services contemplated in Secondment (Clause 6.2.4 of M.S.A.) by itself is insufficient to treat it as 'FIS' as has been concluded, de hors the satisfaction of 'make available.'The proceeding under Section 195 results in a tentative finding more as a safeguard to the payee and if such determination exempts the payee from making a deduction at that stage, such tentative deduction, it must be emphasized is still subject to final determination of taxability qua the recipient. Accordingly, the contention of respondents raised at the time of oral arguments that the enquiry regarding 'make available' still remains to be determined and is based on further material to be submitted regarding the requisition of the employees by the petitioner is an enquiry that is not called for. As the M.S.A. does not support 'make available', further enquiry beyond that may not be called for, considering the nature and scope of proceedings. Deduction u/s 195(2) on the 'sum chargeable under this Act' - DCIT has grossly erred while concluding that where the payment is made for the services rendered, then whether the charge for the services rendered is equivalent to the cost or not becomes irrelevant. The finding that the services rendered fall within the description of services as in Explanation-2 in Section 9(1)(vi) and that the element of profit is not an essential ingredient of receipt, to make it taxable is erroneous. It must be noted that as observed above, the provisions of the I.T. Act, will have to give way to the provisions of 'DTAA' when 'DTAA' is more beneficial to the assessee. It is in this context that the reliance on Explanation-2 in Section 9(1)(vii) may not be of relevance. The aforesaid provision of the I.T. Act which deals with 'FTS' is different from the concept of 'FIS' under Article 12(4). The 'make available' requirement that is mandated under Article 12(4) grants benefit to the petitioner and accordingly, the question of falling back on the provisions of Section 9 of the I.T. Act does not arise. On this score alone, the conclusion in the impugned order of the payment for the service falling within the description under Section 9 of the I.T. Act as 'deemed income', is to be rejected. Whether Deduction is on gross receipts? - What needs to be noticed is that the logic of deduction of tax on the gross amount as has been held in respect to Section 194C and Section 194J cannot be extended to Section 195 which specifically uses the term any other sum chargeable under the provisions of this Act. Such terminology is absent in Section 194C and Section 194J of the I.T. Act. The difficulty of ascertainment of income component as being an impossible burden on the payer in the context of Section 194C as observed by Apex Court is obviated in the present case, as Section 195(2) provides for a mechanism whereby the Assessing Officer may be called upon to determine proportion of the sum which is so chargeable. Accordingly, the contention of learned counsel for the Revenue regarding deduction on gross amount deserves to be rejected. Secondment and reimbursement of costs - Any conclusion on an interpretation of secondment as contained in the M.S.A. to determine who the employer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for 'FIS' in light of the further requirement of make available. Conclusion - As the finding as regards deduction of tax at source under Section 195 of the I.T. Act is tentative insofar as the Revenue is concerned. Even if the Revenue orders that there was no obligation to make deduction under Section 195, the question of liability of the recipient still remains to be decided subsequently. Accordingly, the question of prejudice to the Revenue at the stage of Section 195 order is unavailable to it. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the C.I.T. seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to-cost reimbursement. However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside. As observed by this Court in Director of Income Tax (International Taxation) v. Abbey Business Services India (P.) Ltd. ( 2020 (12) TMI 570 - KARNATAKA HIGH COURT ), it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee. Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was 'FIS'. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting 'nil tax deduction at source.' Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 01.05.2020 is set aside and the respondent No.1 is directed to issue a Certificate under Section 195(2) of I.T. Act to the effect of 'Nil Tax Deduction at Source' as regards the petitioner's application dated 15.01.2020.

Summary

Issues Involved:
1. Whether the application of the petitioner dated 15.01.2020 filed under Section 195(2) of the Income Tax Act was not maintainable?
2. Whether the petitioner is required to deduct TDS under Section 195(2) read with Article 12(4) of the convention between Government of United States of America and the Government of Republic of India for the avoidance of Double Taxation and the prevention of fiscal evasion?
3. Deduction under Section 195(2) of the Income Tax Act on the 'sum chargeable under this Act.'
4. Whether Deduction is on gross receipts?
5. Secondment and reimbursement of costs.
6. Distinguishing the Judgment in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I, New Delhi.

Analysis:

I. Brief Facts:
The petitioner, engaged in providing IT solutions for e-commerce, sought a 'Certificate of No Deduction of Tax at Source' for payments made to Walmart Inc. for the Assessment Year 2020-2021. These payments were reimbursements for salaries of expatriate employees seconded to the petitioner. The application was rejected by the first respondent, directing the petitioner to deduct tax at source at the applicable rate.

II. Contentions of Petitioner:
1. Reimbursements and Withholding Obligations: The petitioner argued that reimbursements are not chargeable to tax under the Act, citing GE India Technology Centre Private Limited v. Commissioner of Income Tax.
2. DTAA Provisions: According to Article 12 of the DTAA, the payments do not qualify as Fee for Technical Services (FTS) and hence, are not taxable in India.
3. Actual Costs: The payments were mere reimbursements without any markup, relying on judgments like Director of Income Tax (IT)-I v. A.P. Moller Maersk A S.
4. Employer-Employee Relationship: The petitioner claimed to be the real employer of the seconded employees, issuing appointment letters and contributing to Provident Fund Authorities.
5. Legal Precedents: The petitioner cited various judgments to support their claim that the payments should not be subjected to TDS under Section 195.

III. Contentions of Respondents:
1. Non-maintainability of Application: Section 195(2) does not contemplate 'Nil deduction of tax at source.'
2. Employer-Employee Relationship: The Assessing Officer concluded that there is no employer-employee relationship between the petitioner and the seconded employees.
3. Nature of Services: The services rendered by the seconded employees are technical services under the Income Tax Act and DTAA.
4. Gross Receipts: The tax at source should be deducted on the gross payment.

IV. Analysis:

(A) Maintainability of Application under Section 195(2):
1. Revenue's Contention: The application under Section 195(2) is maintainable only for composite payments, not for 'Nil Deduction Certificates.'
2. Court's Observation: The DCIT did not address this aspect and rejected the application on merits. The court held that the application under Section 195(2) is maintainable, as it is distinct from Section 197, which is for the recipient's application.

(B) TDS under Section 195(2) read with Article 12(4) of DTAA:
1. DTAA Provisions: Article 12(4) defines 'fees for included services' (FIS) and requires that services must 'make available' technical knowledge, experience, skill, know-how, or processes.
2. Court's Observation: The DCIT failed to consider the 'make available' requirement. The M.S.A. does not satisfy this requirement, and hence, the payments do not qualify as FIS under Article 12(4).

(C) Deduction on 'Sum Chargeable under this Act':
1. Court's Observation: The provisions of DTAA, being more beneficial to the assessee, prevail over the I.T. Act. The DCIT's reliance on Explanation-2 in Section 9(1)(vii) is misplaced.

(D) Deduction on Gross Receipts:
1. Revenue's Contention: The deduction should be on gross receipts, similar to Sections 194C and 194J.
2. Court's Observation: Section 195 specifically uses the term 'any other sum chargeable under the provisions of this Act,' distinguishing it from Sections 194C and 194J. The deduction should not be on gross receipts.

(E) Secondment and Reimbursement of Costs:
1. Court's Observation: The seconded employees are under the control of the petitioner during the period of secondment. The petitioner is the real employer, and the payments are reimbursements, not taxable as FIS under DTAA.

(F) Distinguishing Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I:
1. Court's Observation: The facts in Centrica are different, and the judgment does not support the Revenue's case. The requirement of 'make available' is not satisfied in the present case.

V. Conclusion:
The impugned order dated 01.05.2020 is set aside. The respondent No.1 is directed to issue a Certificate under Section 195(2) of the I.T. Act for 'Nil Tax Deduction at Source' regarding the petitioner's application dated 15.01.2020. The court emphasized that the finding under Section 195 is tentative and subject to final determination of taxability.