2017 (1) TMI 1053 - AT - Income Tax

Applicability of Section 40(a)(ia) - non deduction of tds professional charges - AO disallowed the amount on the reason that the services rendered by the said person are technical services and as per the provisions of Section 9(1)(vii)(b), the payment was liable for TDS - India-USA DTAA - period of stay in India - Held that - CIT(A) made a mistake in calculating days by including day of arrival and day of departure also for the period of stay. One of the days is to be excluded to consider the period of stay. If that is taken into consideration, for the seven trips made by Mr. Joe Mitchell, the period of stay will come to eighty six days i.e., less than ninety days. Looking at either way, as the amount is not taxable in India applying the provisions of DTAA, question of disallowance u/s. 40(a)(ia) does not arise. Moreover, from the record, no steps were taken by the AO u/s. 201 / 201(1A) under the provisions of TDS. Keeping the amendment brought to Section 40(a)(ia) on this issue also, we have to hold that the amount is not disallowable u/s. 40(a)(ia). Accordingly, assessee s grounds are allowed. AO is directed to exclude the amount and allow the same as deduction. - Decided n favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 40(a)(ia) of the Income Tax Act.
2. Classification of services rendered by Mr. Joe Mitchell as technical services under Section 9(1)(vii)(b) of the Income Tax Act.
3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and USA.
4. Calculation of the period of stay in India for taxability under Article 15 of the DTAA.
5. Consideration of services as independent personal services or dependent personal services under DTAA.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) of the Income Tax Act:
The primary issue was whether the payment of ?1,05,05,655/- made by the assessee to Mr. Joe Mitchell, a foreign consultant, should be disallowed under Section 40(a)(ia) of the Income Tax Act due to non-deduction of TDS. The Assessing Officer (AO) disallowed the payment on the grounds that it constituted fees for technical services under Section 9(1)(vii)(b) and was thus liable for TDS.

2. Classification of Services Rendered by Mr. Joe Mitchell:
The CIT(A) classified the services rendered by Mr. Joe Mitchell as technical services, based on the detailed description of his activities, which included technical decisions, purchase evaluations, recruitment, maintenance schedules, and negotiations. The CIT(A) concluded that these services fell under the category of technical services as per Section 9(1)(vii)(b) of the Income Tax Act, making the payment taxable in India.

3. Applicability of the DTAA between India and USA:
The assessee argued that the DTAA between India and USA should prevail over the provisions of the Income Tax Act. The CIT(A) and the Tribunal both acknowledged that the DTAA provisions override the Income Tax Act, as held by the Hon’ble Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan (2003).

4. Calculation of the Period of Stay in India:
The CIT(A) calculated Mr. Joe Mitchell's stay in India as 93 days, including both the days of arrival and departure. However, the Tribunal noted that the correct method was to exclude either the day of arrival or the day of departure. Upon recalculating, the Tribunal found that Mr. Joe Mitchell's stay totaled 86 days, which is less than the 90 days threshold stipulated in Article 15 of the DTAA for independent personal services.

5. Consideration of Services under DTAA:
The Tribunal considered whether the services rendered by Mr. Joe Mitchell should be classified as independent personal services under Article 15 or dependent personal services under Article 16 of the DTAA. The Tribunal concluded that since Mr. Joe Mitchell's stay was less than 90 days, his services did not qualify as taxable under Article 15. Furthermore, if considered as dependent personal services, the stay was less than 183 days, making the income non-taxable under Article 16 as well.

Conclusion:
The Tribunal ruled that the payment made to Mr. Joe Mitchell was not taxable in India under the DTAA provisions. Consequently, the disallowance under Section 40(a)(ia) was not applicable. The Tribunal directed the AO to exclude the amount and allow it as a deduction. The appeal of the assessee was allowed, and the order was pronounced in the open Court on 16th December 2016.