2014 (9) TMI 256 - AT - Income Tax

Non deduction of tax u/s 40(a)(ia) payment to non residents - managerial service - Fees for technical services - Whether the payment made by the assessee company to USA company for the services rendered would be taxed in India or not - Held that - The assessee, a resident company, entered into management service agreement with a company, viz. US Technology Resources LLC, a company incorporated in USA and a tax resident in USA - the USA company agreed to provide assistance, advice and support to assessee company in management decision making, sales and business development, financial decision making, legal matters and public relation activities, treasury service, risk management service and any other management support as may be mutually agreed between the parties - the USA company provided its assistance, advice and support and the assessee company paid a sum in consideration of the services rendered by the USA company - the term managerial service as found in Explanation 2 to section 9(1)(vii) of the Indian Income-tax Act, 1961 is not found in clause 4 of Article 12 of the DTAA between India and USA - in view of section 90(2) of the Income-tax Act, 1961, the assessee is entitled to take the benefit out of the DTAA between India and USA. Article 12 Indo-US DTAA - Which are the services included in clause 4 of Article 12 of the DTAA between India and USA Held that - The assessee has received the above services from the USA company in terms of management service agreement between the assessee and the USA company - the USA company provides highly technical services which are used by the assessee for taking managerial decision, financial decision, risk management decision, etc. - Therefore, it is obvious that the USA company provides highly technical services which are used by the assessee for taking managerial decision, financial decision, risk management decision, etc. Nature of services - Fees for technical services u/s 9(1)(vii) - Whether the services provided by the USA company are technical in nature or not Held that - The USA company facilitated the assessee company for making decision in the managerial, financial and risk management system by providing their knowledge, expertise, experimentation to the assessee company - The entire experiment, knowledge, expertise was made available to the assessee and the assessee was facilitated to take a decision on the knowledge, expertise, experimentation which were made available by the USA company - rendering of service and making use of the service are two sides of the same coin - after considering the word which the Authority for Advance Ruling found that rendering technical or consultancy service is followed by relative pronoun which and it has the effect of qualifying the services- The service offered may be the product of intense technological effort and lot of technical knowledge and the experience of the service provider would have gone into it - The Authority for Advance Ruling found that the technical knowledge and the experience of the service provider should be imparted to and absorbed by the receiver, so that the receiver can deploy similar technology or techniques in future without depending on the provider - the information, expertise and training provided by the USA company was absorbed by the assessee company in their decision making process and it was utilized for the purpose of business - The USA company made available all the technical data, information, expertise to the assessee company which was absorbed and made use of by the assessee company in their managerial and financial decision making process and other decision in the development of the business - the expertise and technology which was made available by the USA company is technical service within the meaning of Article 12(4)(b) of the DTAA between India and USA the order of the lower authority is upheld Decided against Assessee.

Issues Involved:
1. Disallowance of Rs. 85,22,743 on account of non-deduction of tax under section 40(a)(ia) of the Income-tax Act.
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and USA.
3. Interpretation of "fees for included services" under Article 12 of the India-USA DTAA.
4. Determination of whether the services provided by the US company constituted "technical or consultancy services."

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 85,22,743 on Account of Non-Deduction of Tax:
The assessee, engaged in software development services, claimed a deduction for payments made to a US-based company for management services. The Assessing Officer disallowed this payment under section 40(a)(ia) of the Act, presuming it to be consultancy fees requiring tax deduction under section 195. The CIT(A) confirmed this disallowance.

2. Applicability of DTAA between India and USA:
The assessee argued that the payment should be governed by the DTAA between India and USA, which would override the provisions of the Indian Income-tax Act if more beneficial. The assessee cited section 90(2) and section 5(2) of the Act, emphasizing that the income of a non-resident includes income deemed to accrue in India as defined in section 9.

3. Interpretation of "Fees for Included Services" under Article 12 of the India-USA DTAA:
The assessee contended that the term "managerial service" is excluded from "fees for included services" as per Article 12(4) of the DTAA. They argued that the services provided did not "make available" technical knowledge, skills, etc., to the assessee, which is a requirement under the DTAA for the services to be taxable.

4. Determination of Whether the Services Provided Constituted "Technical or Consultancy Services":
The Tribunal examined whether the services rendered by the US company were technical in nature. The Tribunal noted that the US company provided assistance in management decision-making, financial decision-making, legal matters, public relations, treasury services, and risk management. The Tribunal referred to various judgments and definitions to determine that these services involved technical knowledge and expertise.

Key Findings:

A. Nature of Services:
The Tribunal found that the services provided by the US company were technical and consultancy services. It noted that the managerial advice involved technical knowledge, experience, and skills, which were made available to the assessee and used in their decision-making processes.

B. Technical Knowledge and Expertise:
The Tribunal emphasized that the technical knowledge and expertise provided by the US company were absorbed and utilized by the assessee. This constituted "making available" technical knowledge, thus falling within the definition of "fees for included services" under Article 12(4)(b) of the DTAA.

C. Precedents and Legal Interpretations:
The Tribunal referred to various judgments, including the Andhra Pradesh High Court in G.V.K. Industries Ltd. and the Karnataka High Court in De Beers India Minerals Pvt Ltd, to support its conclusion that the services rendered were technical in nature. It distinguished these cases based on the facts and the nature of services provided.

D. Conclusion:
The Tribunal concluded that the payment made by the assessee to the US company constituted "fees for included services" as per the DTAA and was taxable in India. Consequently, the assessee was required to deduct tax at source under section 195 of the Act.

Final Judgment:
The Tribunal upheld the disallowance of Rs. 85,22,743 and dismissed the appeal of the assessee, confirming the order of the lower authority. The services provided by the US company were deemed technical and consultancy services, making the payments taxable in India under the DTAA provisions.

← Previous Next →