2016 (3) TMI 89 - AT - Income Tax

TDS u/s 195 - Disallowance being professional fees incurred by US branch of the assessee - non-deduction of tax at sources - disallowance u/s 40a(i) - INDO US DTAA - Held that - In this case, the services have been utilized outside India by business carried on by the US branch of the assessee, which is assessed also under US Tax laws. Therefore no income deemed to accrue or arise in the hands of the recipient of such sum. Hence there is no requirement of tax deduction at source on the same as per Indian tax Laws. Further CIT (A) has also considered various provisions of INDO US DTAA. According to article 7 of DTAA if the recipient are earning business income and there is no permanent establishments of such recipients in India, such income shall not be chargeable to tax in India. Therefore, according to DTAA also the income shall not be subject to tax in India. Hence, there is no withholding tax liability on assessee as per Income tax Act 1961 as well as per DTAA. Ld. DR could not point out any infirmity in the order of CIT (A) where in CIT (A) has dealt elaborately various provision of the Income tax act and DTAA for holding that there is no withholding tax liability on assessee with respect to payment by US branch of the assessee - Decided in favour of assessee

Issues Involved:
1. Deletion of addition made under Section 40(a)(i) of the Income Tax Act, 1961.
2. Applicability of DTAA between USA and India.
3. Taxability of payments made by the US branch office.
4. Requirement of TDS deduction under Section 195 of the Income Tax Act, 1961.
5. Treatment of US branch office as a separate entity.
6. Attribution of profits to the Indian office.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Made Under Section 40(a)(i):
The primary issue revolves around the deletion of Rs. 3,78,73,836/- added back to the income of the assessee under Section 40(a)(i) for non-deduction of tax at source. The Assessing Officer (AO) disallowed the expenditure incurred by the US branch of the assessee, treating it as fees for technical services under Section 9(1)(vii) and thereby subject to TDS under Section 195. The CIT(A) deleted this disallowance, stating that the payments were made for services utilized in the USA and were not taxable in India.

2. Applicability of DTAA Between USA and India:
The CIT(A) and the Tribunal examined the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. Article 7 of the DTAA specifies that business profits of an enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment (PE). Since the services were rendered in the USA and the US branch was considered a PE, the income was taxable in the USA, not India.

3. Taxability of Payments Made by the US Branch Office:
The payments made by the US branch to US entities were for professional services rendered in the USA. The CIT(A) noted that these payments were neither salaries nor royalties but fees for professional services. The services were utilized in the USA, and the payments were made by the US branch, which filed its tax returns and paid taxes in the USA. Therefore, these payments were not deemed to accrue or arise in India under Section 9(1)(vii).

4. Requirement of TDS Deduction Under Section 195:
Section 195 mandates TDS on payments to non-residents if the income is chargeable under the Income Tax Act. The CIT(A) concluded that since the payments made by the US branch were not chargeable to tax in India, there was no requirement for TDS under Section 195. The Tribunal upheld this view, agreeing that the provisions of Section 195 did not apply as the income was not chargeable to tax in India.

5. Treatment of US Branch Office as a Separate Entity:
The CIT(A) and the Tribunal recognized the US branch as an independent business unit carrying on business in the USA. The branch's accounts were audited as per US laws, and it paid taxes in the USA. The Tribunal confirmed that the US branch was a separate business undertaking, and its income was taxable in the USA, not India.

6. Attribution of Profits to the Indian Office:
The AO argued that the profits earned by the US branch were attributable to the Indian office. However, the CIT(A) and the Tribunal rejected this argument, stating that the services were rendered and utilized in the USA, and the payments were made by the US branch. The income from these services was not attributable to the Indian office and was not taxable in India.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the payments made by the US branch for services rendered in the USA were not taxable in India. Consequently, there was no requirement for TDS under Section 195, and the disallowance under Section 40(a)(i) was rightly deleted. The appeal of the revenue was dismissed.

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