2014 (9) TMI 352 - AT - Income Tax

Fees for technical services remitted to non-resident Applicability of Article 13(c) Indo-UK DTAA Effect of Explanation to section 9(1)(vii) w.e.f. 1.6.1976 Held that - In the case of Diamond Services International (P.) Ltd. v. Union of India 2007 (12) TMI 182 - BOMBAY HIGH COURT it has been held that the job of grading diamonds in the laboratory and furnishing a grading certificate did not amount to transferring of any technical skill or knowledge to the customer - the grading report by GIA is a statement of fact regarding the characteristics of a diamond - the payment received by GIA is not one for the right to use the experience - if the fruits of the services remained with the service provider then out of the ambits of the term make available but after the fruits of the service rendered remained with the service recipient and the service recipient is able to perform similar activity, for which the services were sought, without the help or recourse of the service rendered then the technology can be said to be transferred or made available to the recipient - there are significant distinction between the definition as prescribed u/s.9 of IT Act of fees for technical services as compared with the definition prescribed in Article 13 of Indo-UK treaty. The provisions of DTAA overrides the provisions of IT Act in the matter of ascertainment of taxability under the Income Tax Act also in Union of India v. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME Court it has been held that there was no obligation for withholding the tax on any person making payment to a non-resident if the payment made to the non-resident is not chargeable under the provisions of IT Act - the issue is limited to the applicability of the provisions of Article 13 of DTAA between India and UK thus, the fees for technical services was not paid for making available the technical knowledge, experience, know-how to the assessee - the payment made by the assessee to the said resident is out of the ambits of the provisions of Section 195 of IT Act the order of the CIT(A) is upheld Decided against revenue.

Issues Involved:
1. Whether the payment made by the assessee to a non-resident company constitutes "fees for technical services" under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA).
2. Whether the payment made by the assessee is subject to tax deduction at source under Section 195 of the Income Tax Act, 1961.
3. Applicability of the deeming provisions as per Explanation to Section 9(1)(vii) of the Income Tax Act, inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976.
4. Whether the assessee should be held liable for non-deduction of tax at source under Sections 201(1) & 201(1A) of the Income Tax Act.

Detailed Analysis:

Issue 1: Fees for Technical Services under Article 13 of India-UK DTAA
The primary contention was whether the payment made to M/s. HR Wallingford Ltd., UK for navigation studies at Dholera Port constitutes "fees for technical services" under Article 13 of the India-UK DTAA. The assessee argued that the services provided did not "make available" technical knowledge, skill, or know-how to the recipient, as required by Article 13(4)(c) of the DTAA. The CIT(A) supported the assessee's stance, stating that the report provided by HR Wallingford Ltd. contained data and information without transferring any technical knowledge or skill to the assessee. Consequently, the payment did not qualify as "fees for technical services" under the DTAA and was considered business income in the hands of the British company.

Issue 2: Tax Deduction at Source under Section 195
The Assessing Officer (AO) argued that the payment should be treated as fees for technical services, and thus, the assessee was required to deduct tax at source under Section 195 of the Income Tax Act. The AO computed the tax and interest payable by the assessee for non-deduction of tax at source. However, the CIT(A) and later the Tribunal concluded that since the services did not make available any technical knowledge, the payment was not subject to tax deduction under Section 195.

Issue 3: Deeming Provisions under Section 9(1)(vii)
The AO invoked the deeming provisions of Section 9(1)(vii), which were inserted by the Finance Act, 2007, with retrospective effect from 1.6.1976, to argue that the payment for sedimentation studies constituted "fees for technical services." However, the Tribunal emphasized that the provisions of the DTAA override the provisions of the Income Tax Act in matters of taxability. Since the payment did not qualify as "fees for technical services" under the DTAA, the deeming provisions under Section 9(1)(vii) were not applicable.

Issue 4: Liability under Sections 201(1) & 201(1A)
The AO held the assessee liable under Sections 201(1) & 201(1A) for non-deduction of tax at source, raising a demand for tax and interest. The Tribunal, however, upheld the CIT(A)'s decision that the payment was not subject to tax deduction under Section 195, thereby nullifying the assessee's liability under Sections 201(1) & 201(1A).

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue, confirming that the payment made by the assessee to the non-resident company did not constitute "fees for technical services" under Article 13 of the India-UK DTAA. Consequently, the assessee was not liable to deduct tax at source under Section 195, and the deeming provisions of Section 9(1)(vii) were not applicable. The assessee was also not liable under Sections 201(1) & 201(1A) for non-deduction of tax at source.

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