2019 (6) TMI 992 - AT - Income Tax

TDS u/s 195 - non deduction of TDS on payment made to two non-residents i.e. J2S Inc, USA and Navos B.V.B.A., Belgium - income accrue or arise in India - DTAA between India and USA and DTAA between India and Belgium - CIT(A) treating the order procurement services rendered by the non-residents and commission/retainer fee as royalty and fees for technical services - HELD THAT - In case of the assessee company, two non-resident foreign companies, one by the name of J2S INC, USA and another by the name of NAVOS, Belgium were appointed to locate foreign buyers to whom the assessee company could sale its services. Thus, both the foreign companies rendered order procurement services outside India which is their business activity. Invoices received from the parties also show that services rendered by them were sales procurement services and not fees for technical services or royalties. The contention of the DR that the services provided is in the nature of advisory services based upon the skills of the non-resident, is contrary to the terms and conditions of the agreements. In the previous year relevant to the AY 2012-13 only the retainer fee as per the agreement was paid and no order procurement services in real terms were materialized by the said non-resident. Thus, the Explanation Clause of Section 9 (vii) of the Act will not be applicable on the ground that income was from the source outside India. Both the non-resident assessee derived their income as their business activity and their business profit is determined under Article 7 of DTAA between India and USA as well as from Article 7 of DTAA between India and Belgium and will then decide as to where business income will be taxable. Therefore, none of the provisions of the Section 9 of the Act will be applicable in the present case, business income cannot be treated as fees for technical services as held by the AO. AO as well as CIT(A) was not correct in treating the order procurement services rendered by the non-residents and commission/retainer fee as royalty and fees for technical services. Transactions was between India and Switzerland and not between two different non-resident as is in the present case. The order of the CIT(A) is set aside. - Decided in favour of assessee.

Summary

Issues:
Disallowance of payment to non-residents under section 40(a)(i) for non-deduction of TDS, classification of services as royalty or technical fees, applicability of Section 9(1)(vii).

Analysis:
1. The appeal was filed against the order passed by CIT(A)-7 for Assessment Year 2012-13, challenging the disallowance of payment to non-residents under section 40(a)(i) for non-deduction of TDS. The Assessing Officer observed that no tax was deducted at source on payments made to two non-residents, J2S Inc, USA, and Navos B.V.B.A., Belgium, for order procurement services rendered abroad. The Assessing Officer treated these payments as royalties and fees for technical services, resulting in disallowance of ?20,02,770 under section 40(a)(i).

2. The assessee contended that the payments made to non-residents were for order procurement services, not royalties or technical services. The non-residents had no business connection in India, and their income was not taxable in India. The assessee argued that Section 195 was not applicable as the income did not accrue or arise in India. The AR relied on judicial decisions and provisions of Double Taxation Avoidance Agreement (DTAA) to support the contention that TDS was not required on these payments.

3. The CIT(A) and Assessing Officer considered the payments as fees for technical services, obligating the assessee to deduct tax under Section 195(1) of the Act. However, the Tribunal found that the services provided by non-residents were order procurement services, not technical services or royalties. The agreements showed that the services were related to sales procurement, and the income derived was from business activities outside India. Therefore, the provisions of Section 9 were not applicable, and the payments were not subject to TDS.

4. The Tribunal noted that the decisions cited by the DR were factually different from the present case involving non-residents from the USA and Belgium. The Tribunal set aside the order of the CIT(A) and allowed the appeal of the assessee. The Tribunal concluded that the payments made to non-residents for order procurement services were not subject to TDS under Section 195, and the disallowance under section 40(a)(i) was unwarranted.

5. In conclusion, the Tribunal ruled in favor of the assessee, holding that the payments made to non-residents for order procurement services were not taxable in India and did not require TDS deduction. The Tribunal emphasized that the services provided by the non-residents were business activities outside India, and therefore, the disallowance under section 40(a)(i) was incorrect.