2018 (8) TMI 1264 - HC - Income Tax

TDS u/s 195 - Taxability of management fees paid by the appellant to UST Global - DTAA between India and USA - Fee for included services - Article 12 of the said DTAA - definition of make available as per the India-USA DTAA - Held that - There can be no dispute that the income generated by the US Company under the agreement entered into with the Indian Company as remuneration for the services provided is brought within the scope of total income under Section 5(2) of the Act. The services which come under the included services , meaning a technical and consultancy service as understood by the DTAA, have further been elaborated in sub-clauses (a) and (b) of Clause 4 under Article 12. We are concerned with sub-clause (b) of Article 12(4), which speaks of technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of a technical plan or technical design. The same has to be read along with the MOU which has been entered into on May 15, 1989 and is a part of the notified DTAA. The MOU and the narrow definition given to included services takes the services availed by the appellant herein, out of the included services as per the DTAA. The non-resident Company only assists the Indian Company in making the correct decisions on such aspects as is specifically referred to in the agreement, as and when such advise is required. There is no transfer of technology or know-how, even on managerial, financial, legal or risk management aspects; which would be available for the Indian Company to be applied without the hands-on advise offered by the US Company. The advise offered on such aspects would have to be on a factual basis with respect to the problems arising at various points of time and there cannot be found any transfer of technical or other know-how to the Indian Company. The remuneration received by the US Company for the services offered to the Indian Company being not a technical or consultancy service as defined under the DTAA, would also not be a fee for included services. The remuneration so obtained by the US Company definitely being an income accruing within India would not, hence, be taxable in India under the DTAA. - Consequently no TDS liability u/s 195 AO is directed to consider the claim of expenditure afresh without looking at the application of Section 195(1), which is not applicable. - Decided in favor of assessee.

Summary

Issues Involved
1. Applicability of DTAA between India and USA over the Income Tax Act provisions.
2. Taxability of management fees paid to UST Global in the absence of a permanent establishment in India.
3. Requirement of withholding tax under Section 195 for payments made to UST Global.
4. Inclusion of management services under "Fee for included services" in the India-USA DTAA.
5. Definition of "make available" under the India-USA DTAA.
6. Validity of the Appellate Tribunal's factual findings.

Detailed Analysis

1. Applicability of DTAA between India and USA over the Income Tax Act provisions:
The appellant contended that the DTAA provisions, being more beneficial, should override the Income Tax Act as per Section 90(2). The court examined the DTAA and found that the services provided by UST Global did not qualify as "fees for included services" under Article 12 of the DTAA. The Memorandum of Understanding (MOU) clarified that technology must be made available to the Indian company, which was not the case here. Consequently, the DTAA provisions, which were more beneficial, were applicable.

2. Taxability of management fees paid to UST Global in the absence of a permanent establishment in India:
The court noted that business profits of a US company, without a permanent establishment in India, would be taxable only in the USA as per Article 7 of the DTAA. The management fees paid did not fall under "fees for included services" as defined in the DTAA, thus not taxable in India.

3. Requirement of withholding tax under Section 195 for payments made to UST Global:
The court held that since the payments did not qualify as "fees for included services" under the DTAA, there was no obligation on the appellant to withhold tax under Section 195 of the Income Tax Act. The non-compliance of Section 195(1) could not be alleged against the appellant.

4. Inclusion of management services under "Fee for included services" in the India-USA DTAA:
The court found that the services provided by UST Global, including management, financial, legal, public relations, treasury, and risk management services, did not transfer any technical knowledge or technology to the appellant. Therefore, these services did not fall under "fees for included services" as per the DTAA, which requires the transfer of technology or know-how.

5. Definition of "make available" under the India-USA DTAA:
The court emphasized that technology is considered "made available" only when the recipient can apply it independently. The services provided by UST Global did not enable the appellant to apply any technical knowledge or technology independently, thus not meeting the "make available" criterion under the DTAA.

6. Validity of the Appellate Tribunal's factual findings:
The court found that the Tribunal had incorrectly interpreted the provisions of the DTAA. The services availed by the appellant were not technical or consultancy services as defined under the DTAA. Therefore, the Tribunal's findings were erroneous and perverse.

Conclusion
The court concluded that the services provided by UST Global did not fall under the definition of "fees for included services" as per the DTAA. Consequently, the payments made to UST Global were not taxable in India, and there was no requirement for the appellant to withhold tax under Section 195. The orders of the lower authorities were set aside, and the Income Tax Appeals were allowed, with parties bearing their respective costs.