2009 (10) TMI 80 - AT - Income Tax

TDS u/s 195 - Nature of the payments - fee for technical services or merely by way of payment for supply of personnel - scope of India-USA DTAA - TDS provisions are attracted or not - whether the payments in question made by the assessee to the ACSC, were by way of fee for technical services or merely by way of payment for supply of personnel - AO held that the assessee was liable to deduct tax as per s. 195 for the remittances made to ACSC, USA and for the aforesaid default, the assessee was liable to be treated as an assessee in default as per s. 201(1) in respect of tax which it has failed to deduct - CIT(A), held that the payments made by the assessee to ACSC, USA would not be chargeable to tax in India in view of the provisions of DTAA between India and USA and cannot be fastened with the liability for TDS - whether there is any element of technical services to be rendered by the assessee in terms of the agreement? HELD THAT - In our considered view, the primary services rendered by the ACSC to the assessee is akin to recruitment and placement service rather than making available any technology, plan, design, etc. One important aspect we noticed is that the final product or result on account of deployment of technical personnel by the assessee through the ACSC is not predetermined by the ACSC or the assessee. All the agreements, invoices and related documents produced before us lead to the fact that the payments have been made only for supply of manpower for certain amount of hours and nothing more. Since there is no technology, skill, experience, technical plan, design, etc. had been made available either by the assessee or the ACSC, as held by the CIT(A), invoking the provisions of art. 12(4)(b) of the DTAA for treating the payments as chargeable to tax in India, is not justified. In our view, the CIT(A) was justified in holding that the services rendered by the ACSC for which remittances in question have been made by the assessee are akin to those of a recruitment or placement agency, and would not come within the purview of 'fee for inducted services' within the meaning of art. 12(4)(b) of the DTAA between India and USA. Even if the payments would constitute fees for technical services u/s. 9(1)(vii), in view of s. 90(2), the Indian company has option to be governed by the provisions of the tax treaty, if the same are more beneficial to it. Accordingly, the payments so made by the assessee company to ACSC will not be chargeable to tax in India, in view of the provisions of the DTAA between India and USA. We are in agreement with the elaborate reasoning given by the CIT(A) in the impugned order, and consequently we find no justification to interfere with the same. As for the case law relied on by the learned Departmental Representative, we find that the same, is clearly distinguishable in as much as in the present case the remittances made are purely for supply of manpower since the services rendered by the ACSC are akin to those of a recruitment or placement agency, and there is no involvement of any technical services. Thus we find that the other arguments advanced by the learned Departmental Representative, like a common person, Baburao Mandava, being the President for ACSC and the chairman of the assessee, and reliance on the write-up from the internet website and ruling of the AAR, are devoid of any merit. Decided against evenue.

Issues Involved:
1. Nature of payments made by the assessee to ACSC and their classification as 'fee for technical services'.
2. Applicability of TDS provisions under Section 195 of the IT Act.
3. Interpretation of the Indo-US DTAA regarding 'fee for included services'.
4. Taxability of payments under the provisions of the IT Act and DTAA.

Detailed Analysis:

1. Nature of Payments Made by the Assessee to ACSC and Their Classification as 'Fee for Technical Services':

The primary question was whether the payments made by the assessee to ACSC were for technical services or merely for the supply of personnel. The AO contended that the payments were for technical services under Section 9(1)(vii)(b) of the IT Act, which would require tax deduction at source. However, the CIT(A) concluded that the payments were not chargeable to tax in India under the DTAA between India and the USA, as they were for manpower supply and not technical services. The Tribunal upheld the CIT(A)'s view, noting that the services rendered by ACSC were akin to recruitment or placement services rather than technical services.

2. Applicability of TDS Provisions Under Section 195 of the IT Act:

The AO held the assessee as an 'assessee in default' for not deducting tax on remittances to ACSC, raising demands under Sections 201(1) and 201(1A) of the IT Act. The CIT(A) annulled this order, stating that the liability to deduct tax at source under Section 195 depends on the taxability of the income in the hands of the recipient. The Tribunal agreed, referencing the Supreme Court's decision in Hindustan Coca Cola Beverage (P) Ltd. vs. CIT, which held that when the recipient has already paid taxes, the provisions of Section 201(1) are not attracted. Therefore, if no tax is liable to be paid by the recipient, the provisions of Section 195 are not applicable.

3. Interpretation of the Indo-US DTAA Regarding 'Fee for Included Services':

The AO argued that the remittances fell under 'fees for included services' as defined in Article 12 of the Indo-US DTAA. However, the CIT(A) found that the consultancy services provided were not technical in nature and thus did not qualify as 'fee for included services'. The Tribunal upheld this interpretation, noting that the agreement between the assessee and ACSC was for manpower supply, not for making available any technical knowledge, skill, or experience. The Tribunal emphasized that the DTAA provisions prevail over the IT Act if more beneficial to the assessee, as per the Supreme Court's decision in Union of India & Anr. vs. Azadi Bachao Andolan & Anr.

4. Taxability of Payments Under the Provisions of the IT Act and DTAA:

The CIT(A) concluded that the payments made by the assessee to ACSC were not chargeable to tax in India under the DTAA. The Tribunal supported this view, noting that the payments were for supplying manpower at a specified unit price per hour, with no predetermined product or technology transfer involved. The Tribunal also referenced the Department's view in a similar case for ACSC for the assessment year 2004-05, which had become final in the absence of an appeal by the Department. The Tribunal found no merit in the arguments presented by the Departmental Representative and upheld the CIT(A)'s order, dismissing the Revenue's appeals.

Conclusion:

The Tribunal dismissed the Revenue's appeals, concluding that the payments made by the assessee to ACSC were not for technical services but for manpower supply. Consequently, the provisions of Section 195 of the IT Act were not applicable, and the payments were not chargeable to tax in India under the DTAA between India and the USA.

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