2017 (3) TMI 572 - AT - Income Tax

TDS u/s 195 - remittances towards technical consultancy and professional services - DTAAs with USA and Canada - PE in India - Held that - We noticed that non-resident parties have no PE in India. We find that Article 12(4)(b) of the DTAAs with USA and Canada is not applicable since the non-resident parties did not make available any technical knowledge, and the services rendered to the assessee by the above foreign parties has not transmitted any technical knowledge. We noticed that mere provision of bio-availability services cannot be said to result in a transfer of technology as the assessee has not derived enduring benefits to utilize this knowledge on his own in further. Regarding remittance to Linkalters LLP, Belgium and Price Water House Cooper, Belgium, we observed that services rendered by the non-resident were for the purpose of due diligence in connection with the proposed acquisition outside India. The services were rendered outside India and utilized outside India. We find that the assessing officer failed to prove that the Belgium non-resident parties have made available any technical knowledge or know-how to the assessee. The assessing officer has not accepted assessee s submission and stated remittance to the professional firm/company were chargeable for tax deduction as technical consultancy services as per section 9(i)(vii) of the act as well as Article 12 of the tax treaty with Belgium. We noticed that the assessee has contended that it was entitled to the benefit of the Most Favoured Nation (MFN) clause of the DTAA with Belgium. We also noticed that the services provided by two Belgium parties cannot be considered as technical services as there was no making available of technology by the said two non-resident parties. We have also considered the findings of the Ld. CIT(A) that because of the MFN clause, the scope of fees for technical services under the India- Canada DTAA and the India-USA DTAA was more restricted than that under India-Belgium DTAA, therefore, the language of article 12 of the aforesaid two treaties shall apply to the DTAA between India and Belgium. Thus we justify the findings of the Ld. CIT(A) that the services provided to the assessee by the above stated non-resident parties did not fall within the purview of included services/technical services and hence there was no liability on the assessee to deduct TDS u/s. 195 . - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the payments made to non-resident entities were "fees for technical services" under the respective Double Taxation Avoidance Agreements (DTAAs) with USA, Canada, and Belgium.
2. Whether the assessee was liable to deduct tax at source under section 195 of the Income Tax Act, 1961.
3. Whether the assessee could be held liable as an "assessee in default" under section 201(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Fees for Technical Services under DTAAs:
The primary issue was whether payments made to non-resident entities constituted "fees for technical services" under the respective DTAAs with the USA, Canada, and Belgium. The assessing officer contended that the payments were indeed fees for technical services as per section 9(1)(vii) of the Income Tax Act and the relevant DTAAs. However, the CIT(A) and ITAT found otherwise.

For the payments to B.A. Research International LP, USA, and B.A. Research Company, Canada, it was concluded that the services provided did not "make available" any technical knowledge, skill, experience, or know-how to the assessee. This conclusion was based on the interpretation that "making available" requires the recipient to be able to apply the technical knowledge independently in the future, which was not the case here. The services were technical but did not transfer any enduring benefit or knowledge to the assessee.

For the payments to Linklaters LLP, Brussels, and PricewaterhouseCoopers, Belgium, the CIT(A) applied the "Most Favoured Nation" (MFN) clause of the DTAA with Belgium. This clause implied that the scope of fees for technical services under the India-Canada and India-USA DTAAs, which is more restrictive, should apply to the India-Belgium DTAA. Consequently, the services provided by the Belgian entities were not considered technical services as they did not "make available" any technology.

2. Liability to Deduct Tax at Source under Section 195:
The CIT(A) and ITAT both concluded that there was no liability on the assessee to deduct tax at source under section 195. This conclusion was based on the finding that the services provided did not fall within the purview of "included services" or "technical services" under the respective DTAAs. The ITAT upheld the CIT(A)'s decision, noting that the non-resident entities did not have a Permanent Establishment (PE) in India and the services rendered did not result in any transfer of technology.

3. Liability as an "Assessee in Default" under Section 201(1):
Given the findings on the nature of the services and the applicability of the DTAAs, the CIT(A) and ITAT held that the assessee could not be considered an "assessee in default" under section 201(1). The ITAT emphasized that even if the payments were taxable under section 9(1)(vii), the provisions of the DTAAs, which were more favorable to the assessee, would prevail due to section 90(2) of the Income Tax Act. Thus, the demand raised under section 201(1) was not justified.

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the payments made to the non-resident entities did not constitute fees for technical services under the respective DTAAs and that there was no liability on the assessee to deduct tax at source under section 195. Consequently, the assessee could not be held liable as an "assessee in default" under section 201(1). The order was pronounced in the open court on 06-02-2017.