2019 (1) TMI 692 - AT - Income Tax

TDS u/s 195 - payments made to non-residents for professional fees - disallowance u/s 40(a)(i) - payment has been made to various limited liability partnership firms - withholding tax - DTAA - Held that - In absence of not making available, the technical knowledge to the assessee, in view of the Article 13 of the respective DTAAs, the payment for services cannot be held as fee for technical services under the provisions of the respective DTAAs. We do not find any error in the order of the Ld. CIT(A) on this issue. CIT(A) has further observed that Article 13 of DTAAs provisions defining Fee for Technical Services being more favourable to the assessee as compared to the provisions of section 9(1)(vii) of the Act which has defined Fee for Technical Services, and thus the assessee was having option of choosing more favourable provisions of the DTAAs. CIT(A) is in accordance with the established legal position on the issue . CIT(A) in view of the decision of Van Oord ACZ India (P) Ltd versus CIT (2010 (3) TMI 167 - DELHI HIGH COURT) has held that the sum payable to the nonresidents was not chargeable to income tax in their hands and thus the assessee was not liable for deduction of tax at source on such payment under the provisions of section 195 and no disallowance under section 40(a)(i) could be made. Order of the Ld. CIT(A) on the issue in dispute is well reasoned - Decided against revenue Addition to interest paid for delayed deposit of service tax - claim not allowable u/s 37(1) - Held that - The interest paid on service tax is not penal in nature but compensatory in nature and thus it cannot be disallowed under provisions of section 37(1) of the Act. Further, disallowance of interest for delayed payment of Income-tax has been specifically mentioned under section 40(a)(ii) of the Act, whereas no such interest on service tax has been specified for disallowance. Accordingly, the finding of the Ld. CIT(A) on the issue in dispute is well reasoned - Decided against revenue

Issues Involved:
1. Deletion of addition of ?1,41,08,805/- under Section 40(a)(i) of the Income-tax Act, 1961.
2. Applicability of Article 15 (Independent Personal Services) of DTAA to Limited Liability Partnership firms.
3. Applicability of the latest explanation to Section 9 of the Income-tax Act.
4. Deletion of addition of ?57,148/- for interest paid on delayed deposit of service tax under Section 37(1) of the Income-tax Act.

Detailed Analysis:

1. Deletion of Addition of ?1,41,08,805/- under Section 40(a)(i):
The revenue challenged the deletion of ?1,41,08,805/- by the CIT(A) on the grounds that the assessee failed to deduct tax at source on payments made to foreign firms. The assessee argued that the payments were for services rendered outside India, covered by Article 15 (Independent Personal Services) of respective DTAA, and thus not taxable in India. The CIT(A) upheld the assessee's claim, stating that the professional services were taxable in the country of residence of the service provider and not in India, as there was no fixed base or presence in India. The Tribunal found no error in CIT(A)'s reasoning and upheld the deletion.

2. Applicability of Article 15 (Independent Personal Services) of DTAA to LLPs:
The revenue contended that Article 15 of the DTAA applies only to individuals and not to Limited Liability Partnership (LLP) firms. The CIT(A) analyzed the DTAA provisions and concluded that Article 15 applies to both individuals and partnership firms, including LLPs. The Tribunal agreed with CIT(A)'s detailed analysis, noting that the DTAA with countries like the UK, USA, Netherlands, and France explicitly includes partnerships and LLPs under Article 15. Therefore, the payments to LLPs were correctly considered under Article 15 and not as Fee for Technical Services under Article 13.

3. Applicability of the Latest Explanation to Section 9:
The revenue argued that the explanation to Section 9(i)(vii) of the Income-tax Act, effective from 01/06/1976, should apply, deeming the services rendered by non-residents as accruing in India. The CIT(A) rejected this argument, emphasizing that the DTAA provisions, being more favorable to the assessee, take precedence over the Act. The Tribunal upheld this view, agreeing that the services rendered did not make available any technical knowledge to the assessee, thus not qualifying as Fee for Technical Services under Article 13 of the DTAA.

4. Deletion of Addition of ?57,148/- for Interest on Delayed Deposit of Service Tax:
The revenue contended that interest on delayed deposit of service tax is not allowable under Section 37(1) of the Act. The CIT(A) allowed the deduction, stating that the interest paid on service tax is compensatory, not penal, and not specifically disallowed under any provision of the Act. The Tribunal agreed with CIT(A), noting that while interest on delayed payment of income tax is disallowed under Section 40(a)(ii), no such disallowance applies to interest on service tax.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The professional fees paid to non-resident LLPs were correctly not subjected to tax deduction at source under Section 195, and the interest on delayed service tax deposit was rightly allowed as a deduction under Section 37(1). The judgment affirmed the precedence of DTAA provisions over the Income-tax Act when more favorable to the assessee.

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