2023 (4) TMI 939 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee had paid professional fee to various overseas entities without withholding tax at source - payment made to a German entity - Reliance on preceding assessment years - Assessee submitted that the payments made are taxable at the hands of the overseas entities as profit of business and profession - CIT-A observed payment made is consultancy services, hence, has to be treated as FTS under Article 12(4) of India-Germany DTAA - HELD THAT - On careful reading of the provisions relating to Independent Personal Services in treaties considered by the Tribunal in the preceding assessment years in contrast to Article 14 of India- Germany Treaty, we find a marked difference. While, in all other treaties considered Articles governing Independent Personal Services refer to both individual and partnership firm, however, Article 14 of India- Germany Treaty is quite restricted in its scope as paragraph 1 of Article 14 refers only to income earned by an individual. Decisions of the Tribunal in preceding assessment years would not apply, qua, the payment made to a German entity, which no doubt, is a partnership firm. Therefore, the assessee cannot take the benefit o Article 14 of India-Germany Treaty. Whether the payment made can be treated as FTS under Article 12(4) of the India-Germany Treaty?- From the nature of services for which payment was made, it can very well be said that neither it is managerial, nor technical nor consultancy services. Even, AO has admitted that it is in the nature of professional fee. Thus, undoubtedly, payment made by the assessee to CA firm is for professional services rendered. The fact that payment made for professional services will not fall within the definition of FTS under Article 12(4) of the treaty is evident from putting it under Article 14 of the treaty, though, it applies to Individuals only. Once the payment does not fall either under Article 12 or Article 14, in absence of any other provision in the treaty specifically dealing with such payment, it has to be treated as business profit at the hands of the recipient. Thus in absence of a PE or fixed base, the payment is not taxable at the hands of the recipient. That being the case, there was no obligation on the assessee to withhold tax at source on such payment. Therefore, we delete the disallowance made u/s 40(a)(i) - Assessee appeal is allowed.

Summary

Issues involved:
The dispute in the present appeal is confined to disallowance of Rs.7,57,940 made under Section 40(a)(i) of the Income-Tax Act,1961.

Disallowed payment to Warth&Klein Grant Thornton AG of Germany:
The Revenue did not appeal against the decision of the learned Commissioner (Appeals) to delete disallowance made under Section 40(a)(i) in respect of payments made to entities in UK, USA, Singapore, Cyprus, and Indonesia. The only disallowance sustained was in respect of the payment made to Warth&Klein Grant Thornton AG of Germany.

Nature of payment and taxability in India:
The issue revolved around whether the payment made to the German entity should be treated as Fee for Technical Services (FTS) under Article 12(4) of the India-Germany DTAA or as Independent Personal Services under Article 14 of the Treaty. The Tribunal analyzed the provisions of both articles to determine the taxability of the payment.

Decision and reasoning:
The learned Commissioner (Appeals) upheld the disallowance of the payment to Warth&Klein Grant Thornton AG of Germany as FTS under Article 12(4) of the India-Germany DTAA. However, the Tribunal disagreed with this interpretation. It noted that Article 14 of the India-Germany Treaty only applies to income derived by an individual, not a partnership firm like the German entity. Therefore, the Tribunal concluded that the payment could not be treated as Independent Personal Services under Article 14.

Treatment as business profit:
Since the payment did not qualify as FTS under Article 12(4) or Independent Personal Services under Article 14, the Tribunal determined that it should be treated as business profit at the hands of the recipient. Without a specific provision in the treaty addressing such payments, the Tribunal held that in the absence of a Permanent Establishment (PE) or fixed base, the payment was not taxable at the hands of the recipient. Consequently, the disallowance made under Section 40(a)(i) of the Act was deleted, and the appeal was allowed.