2023 (7) TMI 553 - AT - Income Tax

Income taxable in India - Treating the remittance as fees for technical services - supervision installation and commissioning services - whether activity/services performed by CBV did not impart or transfer any technical knowledge/knowhow skills to the services recipient? - DTAA between India and Belgium - Restrictive definition of FTS as in the India-Portugal DTAA cannot be extended into the India-Belgium DTAA - HELD THAT - Coordinate bench of the ITAT in the case of M/s Essity Hygiene Health 2022 (6) TMI 1411 - ITAT MUMBAI wherein after following the decision of ITAT Pune 2022 (2) TMI 769 - ITAT PUNE it is held that there is no requirement of separate notification for importing the beneficial treatment from the agreement. Therefore, respectfully following the aforesaid decisions we are of the considered view that CBDT Circular No. 3/2022 dated 03.02.2022 is not applicable to the present appeal, therefore, assessee is entitled to claim the benefit of the restricted definition under India-Portugal DTAA. Since, the assessee have been found not to have made available any technical knowledge experience or skill or knowhow, therefore, the impugned services received by the assessee cannot be taxed under the provision. Accordingly, appeal of the assessee is allowed.

Summary

Issues Involved:
The issues involved in the judgment are:
1. Whether non-deduction of TDS on expenditure incurred towards supervision installation and commissioning services under section 40(a)(ia) of the Act is justified.
2. Whether the penalty levied on the erroneous addition is valid.

Issue 1: Non-deduction of TDS on Expenditure:
The assessee, a German company, provided services in India and paid INR 17,13,981 to a sub-contractor from Belgium without deducting TDS. The Assessing Officer (AO) considered the payment as fees for technical services (FTS) and held it liable for TDS. The AO argued that the technical knowledge provided by the sub-contractor fell under the definition of FTS as per the Act and the India-Belgium DTAA. The Dispute Resolution Panel (DRP) upheld the AO's decision, leading to the final assessment order treating the remittance as FTS.

Issue 2: Validity of Penalty Levied:
The AO imposed a penalty on the erroneous addition under section 270A(2) of the Act. The appellant challenged this penalty, contending that the services provided did not transfer technical knowledge or skills. The appellant also invoked the Mutual Agreement Procedure (MAP) clause between India and Portugal to argue against TDS deduction. The appellant cited judicial pronouncements and argued that the CBDT Circular requiring a separate notification for the MFN clause should not apply retrospectively. The Tribunal agreed with the appellant, holding that the CBDT Circular was not applicable to the assessment year in question. Following precedents, the Tribunal ruled in favor of the appellant, allowing the appeal.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the services received did not involve the transfer of technical knowledge or skills. The Tribunal also determined that the CBDT Circular requiring a separate notification for the MFN clause should not apply retrospectively. Therefore, the assessee was entitled to claim the benefit of the restricted definition under the India-Portugal DTAA, resulting in the appeal being allowed.