2019 (5) TMI 1591 - AT - Income Tax

TDS u/s 195 - disallowance of payments made outside India u/s 40(a)(i) - render services for handling all operations including co-ordinating with Indian teams for maintaining, rectifying problems testing, upgrading/supporting customers, content providers, etc., at Uganda - independent personnel services or professional services - DTAA provisions - HELD THAT - As held that article 14 of the Double Taxation Avoidance Agreement is more specific as it applies specifically to professional services provided by the individual resident whereas article 12 provides for residents of foreign countries and therefore article 12 is broader in scope and general in nature compared to article 14 of the Double Taxation Avoidance Agreement. We hold that in the facts of present case, the services received by the assessee from these three persons is covered by article 14 and therefore, the same cannot be included in article 12 because as per article 12(3)(b), it is specifically provided that the term 'fees for technical services does not include payments for services mentioned in articles 14 and 15 of this convention. In the present case, article 14 is applicable and therefore, the receipt of these three persons cannot be considered under article 12(3)(b) and as a consequence, the same is taxable in the country of resident, i. e., Uganda and therefore, no TDS was deductible u/s 195 and consequently, disallowance u/s 40(a)(i) is not justified

Summary

Issues Involved:
1. Disallowance of payments made outside India under section 40(a)(i).
2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Uganda.
3. Classification of the nature of services under Article 12 and Article 14 of the DTAA.

Issue-wise Detailed Analysis:

1. Disallowance of payments made outside India under section 40(a)(i):
The primary issue in this appeal is the disallowance of ?13,92,346 under section 40(a)(i) of the Income-tax Act, 1961. The Assessing Officer (AO) concluded that the payments made outside India to residents of Uganda were liable for TDS under section 195 and consequently liable for disallowance under section 40(a)(i). The Commissioner of Income-tax (Appeals) [CIT(A)] confirmed this action, leading to the present appeal by the assessee.

2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and Uganda:
The CIT(A) based his decision on Article 12 of the DTAA between India and Uganda, which deals with "Royalties and fees for technical services." As per Article 12(3)(b), the term "fees for technical services" includes managerial, technical, or consultancy services but excludes services mentioned in Articles 14 and 15 of the Convention. The CIT(A) did not discuss Article 14, which pertains to "Independent personal services."

3. Classification of the nature of services under Article 12 and Article 14 of the DTAA:
The assessee argued that the services rendered by the Ugandan residents were of a personal nature and should be classified under Article 14, which deals with "Independent personal services." According to Article 14, such income is taxable only in the contracting state (Uganda) unless the individual has a fixed base in India or stays in India for 183 days or more. The Tribunal noted that the CIT(A) did not consider Article 14 and relied solely on Article 12 and section 9(1)(vii) of the Income-tax Act.

The Tribunal referred to the case of Poddar Pigments Ltd. v. Asst. CIT, where it was held that Article 14 is more specific and applies to individual professional services, whereas Article 12 is broader and general. The Tribunal concluded that the services rendered by the Ugandan residents fall under Article 14, which is more specific and applicable in this case. Consequently, the income in question is taxable in Uganda, and no TDS was deductible under section 195.

Conclusion:
The Tribunal held that Article 14 of the DTAA is applicable, and the payments made to the Ugandan residents for professional services are not taxable in India. Therefore, the disallowance under section 40(a)(i) is not justified. The appeal filed by the assessee was partly allowed, and the disallowance of ?13,92,346 was deleted.

Order:
The appeal filed by the assessee is partly allowed. The disallowance under section 40(a)(i) is deleted. The order was pronounced in the open court.