2019 (1) TMI 2057 - AT - Income Tax

TDS u/s 195 - Disallowance u/s 40(a)(i) - legal and personal charges - services were rendered by the non resident certification agencies outside India - HELD THAT - Assessee availed certification services from non residents in US for certifying its products to be sold in USA and Europe which was a pre condition for selling the products in those markets as the assessee has to ensure that the products meet the minimum quality standard. For the said purpose the assessee paid to five parties as mentioned above and to the remaining two parties assessee paid professional charges for compilation of documents in USA for the purpose of transfer pricing requirements. The assessee made the payment towards the services rendered out in USA by these certification agencies and professional firms. Whether the said constituted fee for technical services under section 9(1)(vii) and under 12(4) of Indo German DTAA? - Having considered the rival submissions and various case laws we find that in the present case before us the payments were made to non residents for rendering services outside India and the recipients were not having any PE in India and thus income does not accrue or arise in India as there was no business transactions in India. Since the recipients do not have any PE in India and under Article of Business Profit of Double Taxation Avoidance Agreement such payments are not chargeable to tax in India unless the services were made available to the assessee in India. Article 12(4) of DTAA between India and USA such fee is chargeable to tax in India if such services make available technical knowledge experience skill knowhow and a process or transfer of technical plans or designs. However all these certification agencies and professional firms have not made available such services to the assessee such as knowhow. Therefore service rendered by them outside India is not chargeable to tax in India and the provisions of section 195 of the Act are not applicable and consequently the assessee is not liable to deduct TDS at source. Therefore disallowance under section 40(a)(i) of the Act is not correct. The case of the assessee is supported by a series of decisions as mentioned above in the case of DIT vs. TUV Bayren India Ltd 2015 (10) TMI 486 - BOMBAY HIGH COURT wherein the Hon ble Bombay High Court has held that audit work and certification would not come within the realm of fees for technical services under section 9(1)(vii) and under 12(4) of Indo German DTAA. In the case of Diamond Services International P. Ltd. 2007 (12) TMI 182 - BOMBAY HIGH COURT it was held by the Hon ble Bombay High Court that payment without TDS made for grading certificate issued by foreign company to Indian clients involving no transfer of technical knowledge or skill. There was no imparting of its experience by the institute in favour of client. On the principle of consistency also as held in the case of Pr. CIT vs. Quest Investment Advisors Pvt. Ltd 2018 (7) TMI 479 - BOMBAY HIGH COURT that on the principle of consistency no disallowance is warranted when a fundamental aspect is accepted in other years. There is no change in facts and in law in the present case also. The expenses were allowed under similar facts by the Revenue in the earlier and succeeding years. Therefore on this ground also disallowance is not called for. Accordingly we are setting aside the order of Ld. CIT(A) and directing the AO to allow the deduction - Decided in favour of assessee.

Summary

Issues Involved:

1. Confirmation of disallowance of Rs. 32,25,963 under section 40(a)(i) read with section 195 of the Income Tax Act for payments made to non-resident certification agencies.
2. Classification of certification services as "fees for technical services" under Article 12(4) of the Indo-US DTAA.
3. Requirement of withholding tax under section 195 for payments made to non-resident entities.

Detailed Analysis:

Issue 1: Disallowance under Section 40(a)(i) and Section 195

The primary issue in the appeal was the confirmation of disallowance amounting to Rs. 32,25,963 by the Commissioner of Income Tax (Appeals) [CIT(A)] as made by the Assessing Officer (AO) concerning legal and professional charges under section 40(a)(i) read with section 195 of the Income Tax Act. The assessee contended that the payments were made to non-resident certification agencies for services rendered outside India, which should not be taxable in India. The AO, however, disagreed and treated the payments as liable for tax deduction at source (TDS), leading to the disallowance of the expenditure.

Issue 2: Classification as "Fees for Technical Services"

The CIT(A) upheld the AO's decision, observing that the certification services were technical in nature and amounted to "fees for included services" under Article 12(4)(b) of the Indo-US DTAA. The CIT(A) noted that the certification services provided technical knowledge and expertise, which were utilized in the manufacturing and sale of the products, thus falling within the scope of "fees for technical services" as per the definition under section 9(1)(vii) of the Act.

Issue 3: Withholding Tax Requirement

The assessee argued that the services rendered by non-resident entities did not "make available" technical knowledge or skills as required under Article 12(4) of the DTAA, and therefore, the payments were not chargeable to tax in India. The assessee asserted that since the services were conducted and utilized entirely outside India, and the non-resident entities had no permanent establishment (PE) in India, the provisions of section 195 were not applicable. The assessee also emphasized the principle of consistency, stating that similar payments in prior and subsequent years were not disallowed by the department.

Tribunal's Findings:

The Tribunal agreed with the assessee, concluding that the payments made for certification services did not constitute "fees for technical services" as they did not "make available" technical knowledge or skills to the assessee. The Tribunal referenced various judicial precedents, including the decision in DIT vs. TUV Bayren India Ltd., where it was held that audit and certification services do not fall under "fees for technical services" under section 9(1)(vii) and Article 12(4) of the DTAA. The Tribunal also upheld the principle of consistency, noting that the department had accepted similar expenses in other years without disallowance. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to allow the deduction.

Conclusion:

The appeal was allowed, with the Tribunal ruling in favor of the assessee, thereby reversing the disallowance made under section 40(a)(i) and confirming that the payments to non-resident certification agencies were not subject to withholding tax under section 195.