2016 (11) TMI 1765 - AT - Income Tax

Deduction of TDS/withholding tax u/s 40(a)(i) - assessee company has made payment to the Malaysia company for services rendered in the financial year as per the agreement these payments - HELD THAT - As perused the provisions of section 9(1)(vii) of the Act where the fees for technical services have been considered and the services being international transaction the DTAA agreement between India and Malaysia shall come into effect. In Article 13 of DTAA fees for technical services for services being rendering of any managerial technical or consultancy services and includes the provision of services for technical or other which does not include payment for services mentioned in Article 15 16 of the agreement. Malaysia Company (BASC) provides services under Article 13 r.w.s Article 5 and Article 7 of DTAA. The Article 5 deal with permanent establishment defined as the fixed place of business through which the business of enterprise is wholly or partly carried on. The facts are not disputed by the Revenue that there is no PE of the Malaysia Company in India and the services are rendered outside the country. Whereas the Article 7 deals with the profits of establishment taxable through PE of foreign company having operations. Considering the apparent facts provisions of law DTAA and undisputed facts that there is no PE in India and the services are in the nature of data operating entry of Accounts and Human Resource (HR) Service duly supported with evidence of samples invoices and Journal voucher produced we found that the services of BASC Malaysia does not fall in the category u/s. 9(1)(vii) of the Act and provisions of section 40(a)(i) are not applicable we found Ld. CIT (A) has dealt on this disputed issue exhaustively in his order Vis-a-vis explanations of the assessee and passed reasoned order in treating the services as not in the nature of technical services and provision of section 40(a)(i) of the Act are not applicable and we uphold the same and dismiss the Revenue appeal.

Summary

The issues presented and considered in the judgment are as follows:1. Whether the services provided by a foreign company to the assessee company can be classified as 'managerial,' 'consultancy,' or 'technical' under section 9(1)(vii) of the Income Tax Act.2. Whether the payments made by the assessee company to the foreign company for services rendered are subject to deduction of TDS/withholding tax under section 40(a)(i) of the Income Tax Act.The detailed analysis of the issues is as follows:Issue 1:- Relevant legal framework and precedents: Section 9(1)(vii) of the Income Tax Act, Explanation 2 to section 9(1)(vii), Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia.- Court's interpretation and reasoning: The Assessing Officer considered the services provided by the foreign company to be in the nature of technical services covered under Article 13 of the DTAA. The CIT(A) disagreed and held that the services were purely administrative and did not fall under the categories of managerial, technical, or consultancy services.- Key evidence and findings: The services agreement between the parties, details of the services provided, and the nature of the services rendered.- Application of law to facts: The Court analyzed the nature of the services provided, the definitions under the relevant legal provisions, and the applicability of the DTAA.- Treatment of competing arguments: The Revenue argued that the services required expertise and fell under the provisions of section 9(1)(vii) for TDS deduction. The assessee contended that the services were data entry operations and did not require technical or managerial expertise.- Conclusions: The Court upheld the CIT(A)'s decision, ruling that the services provided did not qualify as technical services under section 9(1)(vii) and that the provisions of section 40(a)(i) were not applicable.Issue 2:- Relevant legal framework and precedents: Section 40(a)(i) of the Income Tax Act.- Court's interpretation and reasoning: The Assessing Officer disallowed the payment made by the assessee to the foreign company for services rendered due to non-deduction of TDS/withholding tax. The CIT(A) found that the provisions of section 40(a)(i) were not applicable in this case.- Key evidence and findings: Details of the payment made, the service agreement, and the arguments presented by both parties.- Application of law to facts: The Court examined the requirements of section 40(a)(i) and the circumstances of the case to determine the applicability of the provision.- Treatment of competing arguments: The Revenue argued for the disallowance of the payment under section 40(a)(i), while the assessee contended that the provision was not applicable.- Conclusions: The Court upheld the CIT(A)'s decision and dismissed the Revenue's appeal regarding the disallowance under section 40(a)(i).Significant holdings:- The Court held that the services provided by the foreign company were not technical, managerial, or consultancy services under section 9(1)(vii) of the Income Tax Act.- The Court also held that the provisions of section 40(a)(i) were not applicable to the payment made by the assessee to the foreign company for the services rendered.In conclusion, the Court dismissed the Revenue's appeals for the assessment years 2009-10 and 2010-11 based on the above analysis and holdings.