2016 (4) TMI 590 - AT - Income Tax

TDS u/s 195 - payments to non-resident entities - Taxability in India - withholding tax - payments made to Liftech as Royalty / Fees for Technical Services under Article12(3)(a) /12(4) of the India-USA Double Tax Avoidance Agreement ( DTAA ) - Held that - The definition of royalty under the DTAA under art. 12(3) useed the expression or for information concerning industrial, commercial or scientific experience ,that there was no parting of information concerning industrial, commercial or scientific experience by GIA when it issued the grading certificate,that under sub-cl. (4) the payments received must be in consideration for services of managerial, technical or consultancy nature,that it would include the application or enjoyment of the right, property or information,that it was not making available technical knowledge, experience, skill, etc.to enable the person acquiring the service to apply the technology contained therein,that GIA was not imparting its technical knowledge, experience, skill, etc. to its customers,that when there was no transfer of right to use, payment cannot be treated as royalty within the meaning of art. 12 of the DTAA,that payment received by the petitioner a Singaporean company, as a subparticipant of GIA s network from Indian clients for collecting and shipping diamonds and certification thereof by GIA did not fall within the expression royalty. Respectfully following the judgment of Diamond Services International (P)Ltd. (2007 (12) TMI 182 - BOMBAY HIGH COURT ),we reverse the order of the FAA.We hold that the payment made to Liftech was not royalty or FIS or FTS and the assessee was not supposed to deduct tax at source for making the payment to Lifetech and therefore cannot be treated as assessee in default. - Decided in favour of the assessee. Existence of PE in India - AO held that part of the basic installment and purchase agreement included element of service contract also,that the job done under the basic agreement could be termed FIS - Held that - Dervices rendered in setting up of machine could not be treated as personal service even if the agreement for rendering the services was embodied in a separate agreement,that the German Company had no PE in India,that in view of the Indo-German DTAA no income had accrued in India,that there was no liability to deduct tax source.Finally,we would like to refer to the order of the Special Bench of the Chennai Tribuanl,delivered in the case Prasad Production Limited (2010 (4) TMI 784 - ITAT MADRAS-B).In that matter the assessee had purchased Considering the above,we hold that the FAA was not justified in holding that services rendered in pursuance of the purchase agreement can be taxed as FIS/FTS. FAA had held that UBCB had performed activities on behalf of ZPMC, that it was an agent of Chinese co. in India, that UBCB constituted agency PE of ZPMC in India.It is found that UBCB was sub contractor of ZPMC,but it had no authority to conclude any contract on behalf of ZPMC,that it had rendered services relating to the installation and commissioning of crane not only to assessee but to other parties also.Therefore, in our opinion there was no agency PE in India under Article-5(4) of the India China DTAA of the non-resident entity-i.e. ZPMC. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Payment to M/s Liftech Consultants Inc., USA treated as taxable in India and liable to withholding tax.
2. Payment to Shanghai Zhenhua Port Machinery Co. Ltd. (ZPMC), China for purchase of cranes treated as taxable in India and liable to withholding tax.
3. Payments made by ZPMC to APM Terminals BV, Netherlands (APMT) treated as indirect payment made by the Assessee, requiring withholding tax.

Detailed Analysis:

Issue 1: Payment to Liftech Consultants Inc., USA
The Assessee challenged the CIT(A)'s order treating payments to Liftech as taxable under Article 12 of the India-USA DTAA, and thus liable to withholding tax. The AO had classified these payments as Fees for Technical Services (FTS) or Royalty, arguing that Liftech provided technical/consultancy services utilized in India, and thus the income was chargeable under section 9(2) of the Act.

The Assessee contended that Liftech was hired for reviewing designs and construction audits of cranes, with services rendered outside India, and no technical plan or design was transferred to the Assessee. The FAA upheld the AO’s decision, stating that Liftech’s services involved the development of technical plans and thus fell under FTS as per Article 12(4)(b) of the DTAA.

The Tribunal found that all services related to the audit and construction of cranes were availed outside India and that Liftech did not transfer any technical plan/design to the Assessee. Therefore, the provisions of Article 12 of the DTAA were not applicable. The Tribunal held that Liftech had no PE in India, and thus, the payments could not be taxed as business income in India. Consequently, the Assessee was not required to deduct tax at source for the payments to Liftech. The Tribunal reversed the FAA’s order, deciding in favor of the Assessee.

Issue 2: Payment to Shanghai Zhenhua Port Machinery Co. Ltd. (ZPMC), China
The Assessee argued that payments to ZPMC for cranes were not taxable in India as ZPMC did not have a PE in India, and the services rendered were not FTS. The AO had treated 10% of the consideration paid to ZPMC as taxable, citing that ZPMC had a PE in India due to the duration of their project exceeding 183 days.

The FAA upheld the AO’s decision, stating that the duration of the employees' stay in India exceeded the threshold limit, thereby constituting a PE. However, the Tribunal found that the actual stay of ZPMC employees in India was less than 183 days when excluding the after-sales service period. Thus, ZPMC did not have a PE in India under Article 5(2)(j) of the India-China DTAA. The Tribunal referred to various case laws, concluding that the services provided under the basic agreement were part of the service contracts and not taxable as FTS. The Tribunal decided in favor of the Assessee.

Issue 3: Payments by ZPMC to APM Terminals BV, Netherlands (APMT)
The AO had treated payments made by ZPMC to APMT as indirect payments by the Assessee, requiring withholding tax. The FAA upheld this view, considering UBCB as an agent of ZPMC and thus constituting an agency PE in India.

The Tribunal found that UBCB, a sub-contractor of ZPMC, did not have the authority to conclude contracts on behalf of ZPMC and provided similar services to other parties. Therefore, UBCB did not constitute an agency PE under Article 5(4) of the India-China DTAA. The Tribunal decided in favor of the Assessee, holding that the payments made by ZPMC to APMT were not taxable in India.

Conclusion:
The Tribunal allowed the appeal filed by the Assessee, deciding all issues in their favor. The payments made to Liftech were not considered as royalty or FTS, and the Assessee was not required to deduct tax at source. The payments to ZPMC for cranes were not taxable in India as ZPMC did not have a PE in India. Lastly, the payments made by ZPMC to APMT were not treated as indirect payments by the Assessee, and thus not taxable in India.