2023 (8) TMI 1169 - AT - Income Tax

Assessee in Default u/s 201(1) 201(1A) - non-deduction of tax at source u/s 194J and u/s 195 of the IT. Act with regard to payment by way of reimbursement to member companies allowances paid to resident and non-resident personnel and payment to foreign agents - reimbursement of Indian Salary and benefits to members company is termed as fees for technical services as per explanation 2 to Sec. 9(1)(vii) and tax is thus deductible at source therefrom u/s 194J and p ayment made to secondees by the assessee who are non-resident tax is deductible at source as per provisions of Sec. 195 since the payment is chargeable to income tax under Sec. 5(2)(b) - member companies have provided expert personnel to PII/assessee for rendering technical services for which the assessee is also making payment to the member companies - CIT(A) deleted addition - HELD THAT - CIT(A) has rightly overturned the findings returned by the AO that factum of providing expert personnel of member company to PII for rendering technical services TDS was deductable u/s 194J of the Act by relying upon the provisions contained in the Explanation 2 of section 9(1) by treating the same as fee for technical services on the ground that as per agreement on record between PII and overseas clients it is assessee/PII who is responsible for providing the technical services to the overseas clients and there is no privity of contract between member employer company and the overseas industrial units. Moreover under MOU member companies have placed its employee at the disposal of PII on a net profit basis and employee to fulfill its contractual obligation to the overseas clients. Moreover member companies have not incurred anything out of pocket for providing these services rather they are fully reimbursed by PII. So we are in agreement with the Ld. CIT(A) that member companies are not rendering technical services to the PII. Member employer company deducts tax at source under section 192 of the Act from the Indian salary of such employee as they continue to get their salary from his employer member companies. Member companies have also continued to deduct statutory deduction like PF tax ESI from his salary paid by the member company. Since expert employees continued to get the salary from the member companies during the period of secondment their employer employee relationship continues even during the period of secondment - member company in its books of account does not consider the reimbursement by PII as an item of income but the same is credited to the salary of account and as such the CIT(A) has rightly reached the conclusion that explanation 2 to section 9(1)(vii) is not attracted. Payment made to secondees who are residents - AO reached the conclusion that the tax should be deducted at source under section 194J - CIT(A) decided this issue by considering fact that such secondees to whom payment was made remained abroad for less than 182 days and has rightly analysed the payment in two parts. (1) payment of such allowances made to employees who were residents in India as per section 6(1) of the Act but were working abroad and the payment made to them at the most can be considered as part of the salary and when there is no employee employer relationship between PII and secondees PII cannot be held responsible for making payment by virtue of section 204 of the Act. CIT(A) has also rightly relied upon the decision rendered in case of CIT vs. H Link 1999 (12) TMI 27 - GUJARAT HIGH COURT that living allowance paid to the employees is a personal advantage and therefore does not constitute pre-requisite which can be subjected to tax. So the tax was not required to be deducted from the payment made to the secondees who were resident under section 194J of the Act as has been rightly decided by the Ld. CIT(A). Payment to non-resident secondees - CIT(A) has rightly reached the conclusion that the foreign allowances food and out of pocket expenses paid to non resident secondees was not chargeable to tax under section 5(2)(b) of the Act. Because there was no employer employee relationship between PII and secondees and that the services in respect of which allowances in question paid were rendered by the non-resident employee outside India. So we find no ground to interfere into the findings returned by the Ld. CIT(A). Payment to foreign agents - TDS under section 195 - CIT(A) has rightly reached the conclusion that tax was not required to be deducted by the assessee under section 194J of the Act in respect of the payment made to foreign agents on the ground inter-alia that there was no business connection in India between the agents and the assessee nor the agent has performed any job/operation in India; that there was no employer employee relationship between the payer and the payees and therefore payee being the third party cannot enforce his right against the payer. CIT(A) has also taken into consideration affidavit dated 28.08.2000 executed by executive chairman of PII wherein it is duly discussed the issue as to reimbursed expenses to employees deputed outside India by various Indian companies eg. Tata Infotech State Bank of India Systime Bank of Baroda Engineers India Limited Tata Consultancy Services etc. who are paying such allowances to the employee deputed outside India but are not deducting tax at source on allowance paid in foreign currency to their personnel and all those personnel who are sent to overseas also draw an Indian salary component as a whole. CIT(A) has rightly held the assessee not in default u/s 201(1) r.w.s. 201(1A) of the Act hence aforesaid appeals filed by the Revenue are hereby dismissed.

Summary

Issues Involved:
1. Deletion of demand raised under sections 201(1) and 201(1A) of the IT Act for non-deduction of tax at source under sections 194J and 195.
2. Determination of whether the payments made to member companies, resident secondees, non-resident secondees, and foreign agents are subject to TDS.

Summary:

1. Deletion of Demand Raised under Sections 201(1) and 201(1A):
The Revenue sought to set aside the CIT(A)'s order deleting the demand raised by the AO under sections 201(1) and 201(1A) for the assessment years 1996-97, 1997-98, and 1998-99. The AO had raised the demand based on the non-deduction of tax at source under sections 194J and 195 for payments made by the assessee.

2. Payments to Member Companies:
The AO contended that the payments to member companies for providing technical personnel should be considered as "fees for technical services" under section 9(1)(vii) and thus subject to TDS under section 194J. However, the CIT(A) found that the member companies were reimbursed on a no-profit basis and did not render technical services to the assessee. The CIT(A) concluded that the reimbursement of Indian salary and benefits did not constitute "fees for technical services," and the assessee was not in default.

3. Payments to Resident Secondees:
The AO argued that payments to resident secondees should be subject to TDS under section 194J. The CIT(A) held that since the secondees were working abroad for less than 182 days and the payments were akin to salary, section 194J did not apply. The CIT(A) also noted that there was no employer-employee relationship between the assessee and the secondees, making the assessee not responsible for TDS under section 204.

4. Payments to Non-Resident Secondees:
The AO claimed that payments to non-resident secondees were subject to TDS under section 195 as the income accrued in India. The CIT(A) disagreed, stating that the services were rendered outside India, and thus the income did not accrue in India. The CIT(A) concluded that section 195 did not apply, and the assessee was not in default.

5. Payments to Foreign Agents:
The AO asserted that payments to foreign agents for services rendered outside India were subject to TDS under section 195. The CIT(A) found that the agents performed their services wholly outside India, and no part of the income was chargeable to tax in India. The CIT(A) relied on CBDT Circular No. 786, which clarified that TDS was not required for payments to foreign agents operating outside India.

Conclusion:
The Tribunal upheld the CIT(A)'s findings, concluding that the assessee was not in default under sections 201(1) and 201(1A) for non-deduction of tax at source under sections 194J and 195. The appeals filed by the Revenue were dismissed.