2017 (1) TMI 1084 - AT - Income Tax

TDS u/s 195 - default under section 201(1) & 201(1A) of the Act for not deducting tax while making remittance to non-residents - withholding of tax - PE in India - commission paid to export commission agents - Held that - Commission payments made to the non resident agents did not have any taxability in India, even under the provisions of the domestic law i.e. Section 9. Once we come to the conclusion that the income embedded in these payments did not have any tax implications in India, no fault can be found in not deducting tax at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent s income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions. TDS on payments are for subscription fees for specialized database containing copyright material - Held that - We find that as the treaty provision unambiguously requires, it is only when the use is of the copyright that the taxability can be triggered in the source country. In the present case, the payment is for the use of copyrighted material rather than for the use of copyright. The distinction between the copyright and copyrighted article has been very well pointed out by the decisions of Hon ble Delhi High Court in the case of DIT Vs Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT . In this case all that the assessee gets right is to access the copyrighted material and there is no dispute about. Even during the course of hearing before us, learned Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view, it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments. - Decided in favour of the assessee. Supervision charges paid to Buck Subish Millan Company Limited (Trinidad) as Fees for Technical Services both under section 9(1)(vii) of the Act as well as Article 12(3)(b) of DTAA between India and Trinidad - Held that - Learned counsel has a very limited argument on this issue as he fairly submits that the issue is covered by decision of a coordinate bench of this Tribunal, in the case of DCIIT Vs Virola International 2014 (2) TMI 653 - ITAT AGRA to the extent that so far as remittances before 8th May 2010 are concerned, the assessee cannot be expected to deduct tax at source from these payments inasmuch as the amendment under section 9(1)(vii) was effected on that day and the assessee could not be expected to give effect to the law, while discharging his tax withholding obligations, prior to that date. Learned Departmental Representative also fairly accepts this legal position even as he relies upon the stand of the authorities below. Thus we remit the matter to the file of the Assessing Officer for exclusion of the cases, if any, of remittances having been made before 8th May 2010 which shall remain uninfluenced by the amendment in section 9(1)(vii) with effect from this date. Grossing up the amount of remittances made for the purpose of section 195A of the Act by applying the rates mentioned in section 206AA - Held that - We find that so far as the treaty provisions are concerned, the grossing up does not come into play. There is no dispute or controversy about this position, nor, in a treaty situation, the provisions of the domestic law, unfavourable to the assessee, can be pressed into service- as is the unambiguous legal position under section 90(2) of the Act. The provisions of Section 206AA cannot also be, for the same reasons, pressed into service either. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Tax withholding demands under section 201 r.w.s 195 of the Income Tax Act, 1961.
2. Commission payments to non-resident export commission agents.
3. Taxability of payments for subscription charges as royalty.
4. Taxability of supervision and testing charges as Fees for Technical Services (FTS).
5. Grossing up of remittances under section 195A and application of section 206AA.

Detailed Analysis:

1. Tax Withholding Demands Under Section 201 r.w.s 195:
The cross appeals concern the tax withholding demands raised on the assessee under section 201 r.w.s 195 for the assessment year 2010-11. The core issue is whether the assessee was liable for non-deduction of tax at source from payments made to non-resident export commission agents.

2. Commission Payments to Non-Resident Export Commission Agents:
The commission agents were categorized into three groups:
- Residents of jurisdictions without tax treaties with India: Payments to agents from Algeria and Venezuela were analyzed. The Assessing Officer (AO) argued these payments were for technical services, but the CIT(A) disagreed, stating they were business income.
- Residents of jurisdictions with tax treaties lacking specific FTS articles: Payments to agents from Thailand and UAE were considered. The CIT(A) held these payments were not taxable as FTS under the respective treaties.
- Residents of jurisdictions with tax treaties including conventional FTS articles: Payments to agents from Malaysia and Oman were analyzed. The AO's stance that these payments were taxable as FTS was rejected by the CIT(A).

The CIT(A) concluded that the payments were not for technical services but for business income, which was not taxable in India due to the absence of a Permanent Establishment (PE) or business connection in India. This conclusion was upheld by the Tribunal, emphasizing that the services rendered were not technical but entrepreneurial activities aimed at securing orders.

3. Taxability of Payments for Subscription Charges as Royalty:
The AO treated subscription charges paid to Metal Bulletin (UK) and The Datamyne Inc. (USA) as royalty under section 9(1)(vi) and the applicable DTAA. The CIT(A) upheld this view. However, the Tribunal found that these payments were for copyrighted material, not the use of copyright, and thus could not be treated as royalty. The Tribunal relied on judgments from the Delhi and Bombay High Courts, which distinguished between the use of copyrighted material and the use of copyright.

4. Taxability of Supervision and Testing Charges as FTS:
The AO and CIT(A) treated supervision charges paid to Buck Subish Millan Company Limited (Trinidad) and testing charges paid to Intercon Holdings Limited (Hong Kong) as FTS under section 9(1)(vii). The Tribunal remitted the matter to the AO to exclude remittances made before 8th May 2010, as the amendment to section 9(1)(vii) was effective from that date. The Tribunal emphasized that the assessee could not be expected to comply with the law retrospectively.

5. Grossing Up of Remittances Under Section 195A and Application of Section 206AA:
The CIT(A) upheld the AO's application of section 206AA for grossing up remittances due to the non-furnishing of PAN by the non-residents. The Tribunal, following the decision in DDIT vs Serum Institute of India Pvt Ltd, held that the provisions of the DTAA would override domestic law, including section 206AA. Therefore, the grossing up should be based on the rates in the DTAA, not section 206AA.

Conclusion:
The Tribunal upheld the CIT(A)'s findings that the commission payments were not taxable in India and rejected the AO's stance that these payments were for technical services. The Tribunal also ruled that subscription charges were not royalty, supervision and testing charges before 8th May 2010 were not taxable as FTS, and grossing up should follow DTAA rates, not section 206AA. The appeals of the AO were dismissed, and the assessee's appeal was partly allowed.