2018 (3) TMI 580 - AT - Income Tax

Liability to deduct TDS u/s 195 - whether TDS provisions as applicable not only to the expenses incurred by the PE in India but also by the Head Office or any other branch of the assessee in any country, if such expenses are debited to the P&L accounts of the PE in India - Held that - The appellant was not liable to deduct tax at source out of the expenses incurred by the head office, as no payments were made by the P.E., nor was any liability incurred by it. The action of the assessing officer in holding the assessee to be an assessee in default u/s 201 is misplaced. - Decided against revenue.

Summary

Issues Involved:
1. Liability to deduct TDS under Section 195 of the Income Tax Act, 1961.
2. Existence and implications of a Permanent Establishment (PE) in India.
3. Taxation of reimbursements and payments between head office and PE.
4. Application of Double Taxation Avoidance Agreement (DTAA) between India and Canada.
5. Non-discrimination clause under DTAA.
6. Classification of payments as "fees for technical services" or "royalty."

Issue-wise Detailed Analysis:

1. Liability to Deduct TDS under Section 195:
The core issue revolves around whether the assessee was required to deduct tax at source on certain payments made to non-resident persons under Section 195 of the Income Tax Act, 1961. The revenue argued that the CIT(A) erred in holding that the assessee was not liable to deduct TDS, contending that the TDS provisions apply to expenses incurred by both the PE in India and any other branch of the assessee if such expenses are debited to the P&L accounts of the PE in India.

2. Existence and Implications of a PE in India:
The CIT(A) found that the assessee did not have a PE in India until the setting up of a project office on August 16, 2000. Consequently, for the financial year 1999-2000, there could not have been a 'payment' or 'reimbursement' by a non-existent PE. This finding was not contested by the revenue during the hearing, and it was conceded that no PE was established during the financial year relevant to the assessment year 2000-01.

3. Taxation of Reimbursements and Payments Between Head Office and PE:
The CIT(A) observed that the head office rendered services directly to NHPC, and not to a PE. Therefore, the expenses debited as work-in-progress could not be considered fees for technical services paid by the PE to the head office. The CIT(A) also noted that even if payments had been made by a PE to a head office, these would amount to payments to self, which cannot be subjected to TDS. This view was supported by the Special Bench of the ITAT, Kolkata in the case of ABN Amro Bank, which held that a branch/PE is not a separate legal entity.

4. Application of DTAA Between India and Canada:
The CIT(A) and the assessee's counsel relied on the DTAA between India and Canada to argue that the assessee was not liable to deduct tax. The CIT(A) noted that the payments in dispute were not claimed by the PE against the receipts of the project in India for the relevant assessment year, and hence, Section 195 could not be invoked.

5. Non-discrimination Clause Under DTAA:
The CIT(A) agreed with the assessee that as per the "non-discrimination" provisions of the DTAA with Canada, the appellant could not be subjected to any taxation requirement more burdensome than that applicable to an Indian national. The CIT(A) referenced the judgment of the ITAT, Delhi bench in the case of SMS Demag Pvt. Ltd., which held that provisions of Section 40(a)(i) would not be applicable in case of payments to a non-resident by a resident assessee for the period prior to 01-04-2004, as it would lead to discrimination.

6. Classification of Payments as "Fees for Technical Services" or "Royalty":
The CIT(A) held that the expenditure related to the purchase of off-the-shelf computer software and computer hire charges could not be treated as royalty. The CIT(A) referenced the Special Bench of the Delhi Tribunal, which held that payment for a copyrighted article is not royalty. Additionally, the CIT(A) noted that the assessing officer had incorrectly applied a withholding tax rate of 100% on the expenses for computer repairs and maintenance, whereas the maximum rate under the DTAA was 20%.

Conclusion:
The CIT(A) concluded that the appellant was not liable to deduct tax at source out of the expenses incurred by the head office, as no payments were made by the PE, nor was any liability incurred by it. The action of the assessing officer in holding the assessee to be an assessee in default under Section 201 was deemed misplaced. The ITAT affirmed this finding, and both appeals by the revenue were dismissed.