2018 (11) TMI 1119 - AT - Income Tax

TDS liability on Reimbursement of Salary paid to the seconded employees - FTS - nature of payment in the form of reimbursement made by IBM India to IBM oversees entities - TDS liability u/s 192 or 195 - India-UAE DTAA provision applicability - Held that - Article 24(1) of the India- Philippines DTAA, which is similar to Article 25(1) of the India-UAE Treaty, does not confer a right to invoke the provisions of domestic laws for classification or taxability of income which is governed by Article 6 to 23 of the India-Philippines Treaty and that Article 24(1) operates in the field of computation of doubly taxed income and tax thereon in accordance with the domestic laws of each contracting state and is not part of Articles 6 to 23 which deal with the classification of income into different heads. Even where royalties and fees for technical services receive separate treatment under a DTAA, it is the Article relating to computation of business income that would apply where such royalties or fees arise in the course of business carried on by the recipient. The Tribunal came to the conclusion that receipts were in the course of business of the Assessee and were therefore business income falling within Article 7 of the DTAA and would therefore not fall within the ambit of Article 23(1) of the DTAA. Since IBM Philippines did not have Permanent Establishment (PE) in India, the receipt was not chargeable to tax in India. As IBM Philippines received the monies in the course of their business and did not have PE in India and therefore the receipt in question cannot be brought to tax under Article 7 of DTAA as well. In the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India. Consequently, we hold that there is no merit in the appeals by the revenue on this issue. Regarding rate of tax at which TDS has to be deducted in the event of the non-resident payee not obtaining Income Tax PAN in India has been settled by a Special Bench ITAT Hyderabad in the case of Nagarjuna Fertilizers & Chemicals and Another Vs. ACIT (2017 (3) TMI 81 - ITAT HYDERABAD) it is held that the non-obstante clause contained in machinery provision of section 206AA of the Act was required to be assigned restrictive meaning and same could not be read so as to override even relevant beneficial provisions of Treaties, which override even charging provisions of the Income Tax Act by virtue of section 90(2) of the Act. Therefore, an Assessee could not be held liable to deduct tax at higher of rates prescribed in section 206AA in case of payments made to non-resident persons having taxable income in India in spite of their failure to furnish Permanent Account Numbers. There is, therefore, no merit in appeals by the revenue on this issue also. - Decided against revenue

Summary

Issues Involved:
1. Whether reimbursements made by IBM India to IBM Overseas entities constitute Fees for Technical Services (FTS) and are taxable in India.
2. Whether IBM India should have deducted tax at source on reimbursements made to IBM Overseas entities.
3. Whether the absence of a specific clause for FTS in the DTAA between India and Philippines affects the taxability of such payments.
4. Whether the rate of tax for TDS should be higher in the event of the non-resident payee not having a PAN in India.

Detailed Analysis:

1. Reimbursements as Fees for Technical Services (FTS):
The DCIT concluded that reimbursements made by IBM India to IBM Overseas entities for the salary of seconded employees should be classified as FTS under Section 9(1)(vii) of the Income-tax Act and relevant DTAA provisions. The DCIT noted that the seconded employees possessed technical skills and provided managerial/consultancy services, which were integral to IBM India's business development. Therefore, the reimbursements were deemed FTS, taxable in India.

2. Tax Deduction at Source (TDS) on Reimbursements:
The DCIT held that IBM India failed to deduct tax at source on these reimbursements, treating IBM India as an 'assessee-in-default' under Section 201(1) of the Act. The DCIT argued that the reimbursements were not merely salary payments but included compensation for technical services, thus requiring TDS under Section 195. The CIT(A) confirmed this view for most points but ruled in favor of IBM India on specific aspects, leading to the revenue's appeal.

3. Absence of FTS Clause in India-Philippines DTAA:
The CIT(A) ruled that payments to IBM Philippines, in the absence of an FTS clause in the DTAA, should be taxed under Article 23(1) (Other Income) of the DTAA, which stipulates taxation only in the recipient's country of residence (Philippines). The Tribunal upheld this, referencing a prior decision (IBM India Pvt. Ltd. Vs. DDIT), concluding that Article 24(1) of the DTAA did not override Article 23(1) and that the payments were not taxable in India due to the absence of a Permanent Establishment (PE) in India.

4. Rate of Tax for TDS in Absence of PAN:
The Tribunal referred to the Special Bench ITAT Hyderabad decision in Nagarjuna Fertilizers & Chemicals Vs. ACIT, which held that Section 206AA's non-obstante clause should not override beneficial treaty provisions. Consequently, IBM India was not required to deduct tax at the higher rate prescribed in Section 206AA for payments to non-residents without a PAN, provided the payments were covered under a DTAA.

Conclusion:
The Tribunal dismissed the revenue's appeals, affirming that:
1. Reimbursements to IBM Overseas entities did not constitute FTS taxable in India under the respective DTAAs.
2. IBM India was not required to deduct tax at source on these reimbursements.
3. Payments to IBM Philippines were not taxable in India due to the absence of an FTS clause in the DTAA and no PE in India.
4. Higher TDS rates under Section 206AA did not apply when treaty benefits were available, even if the non-resident did not have a PAN.

The judgment emphasizes the importance of DTAA provisions and clarifies the tax treatment of cross-border reimbursements and TDS obligations.