2020 (3) TMI 971 - HC - Income Tax

TDS u/s 195 - expenditure incurred for service procured for a future business to be carried on by the petitioner in Indonesia - amount which was paid by engaging services of the aforesaid law firm was for the purpose of making or earning any income from any source outside India within the meaning of Section 9(1)(vii)(b) - HELD THAT - To attract exception under Section 9(1)(vii)(b) of the Income Tax Act, 1961, the service should be utilized in India. Any payment by way of fees and technical service to a non-resident by an resident is an income deemed to have accrued or arisen in India and is thus liable to tax. The expression Fees for Technical Service has been defined in Explanation 2 to Section 9(1)(vii)(b) of the Income Tax Act, 1961. The expression Technical Service and Consultancy Service also have not been defined in the Act. The Technical Service would include any service in connection with the engineering service as it is associated with the service provided by the person technically qualified in the field of engineering. The Consultancy Service is again very wide, it can include the service of every nature. From the scope of work undertaken, it is evident that the Indonesian law firm has provided consultancy services. In this case, the Indonesian firm has provide Consultancy Service . Therefore, I am of the view that it is not open for the petitioner to state that the said service fell within exception provided in Section 9(1)(vii)(b) of the Income Tax Act, 1961 or outside the Explanation 2 to said Section. If the service utilized by the petitioner abroad was for preexisting business in Indonesia, the petitioner could have legitimately stated that the service provided was utilized for a business of profession carried out outside India or for the purpose of making or earning any income from any source from outside India. There is no source that is existing in Indonesia. In this case, there was a mere proposal for acquiring the insurance business in privately or Indonesian Insurance Policy. The service of the said law firm was sought for a range of service which are approval consultancy service. Therefore, the issue as to whether the petitioner was entitled to the benefit of any Clause in the said Double Taxation Avoidance Agreement as notified in Notification No.GSR 77(E), dated 04.02.1988, is left open. It is for the petitioner to file appropriate application before the 2nd respondent within a period of thirty days from the date of receipt of a copy of this order. Writ Petition is dismissed with the above observations

Summary

Issues Involved:
1. Validity of the impugned order dated 17.02.2011.
2. Taxability of consultancy services rendered by a non-resident firm.
3. Applicability of Section 9(1)(vii)(b) of the Income Tax Act, 1961.
4. Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and Indonesia.
5. Deduction of tax at source under Section 195 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Impugned Order:
The petitioner challenged the impugned order dated 17.02.2011, passed by the first respondent, which culminated from a revision petition under Section 264 of the Income Tax Act. The petitioner argued that the services rendered by the Indonesian law firm were for generating income outside India and should not be subject to tax deduction in India. However, the court upheld the impugned order, stating that the services were utilized in India, thus taxable under Indian law.

2. Taxability of Consultancy Services Rendered by a Non-resident Firm:
The petitioner engaged an Indonesian law firm for acquiring an insurance business in Indonesia and sought an exemption from deducting tax on payments made to the firm. The second respondent rejected the application, categorizing the services as "consultancy services" falling under "Fees for Technical Services" as per Section 9(1)(vii)(b) of the Income Tax Act. The court agreed with this categorization, noting that the services provided included managerial, technical, and consultancy aspects, making them taxable in India.

3. Applicability of Section 9(1)(vii)(b) of the Income Tax Act, 1961:
The petitioner argued that the fees payable fell within the exception under Section 9(1)(vii)(b), as the services were utilized for a business carried out outside India. However, the court ruled that the services were utilized in India, as the petitioner did not have any existing business in Indonesia. The court emphasized that the exception applies only if the services are utilized for a business or profession carried out outside India or for earning income from a source outside India, which was not the case here.

4. Interpretation of Double Taxation Avoidance Agreement (DTAA) Between India and Indonesia:
The petitioner referred to the DTAA between India and Indonesia, particularly Article 12(3)(b), which defines "fees for technical services." The court noted that the DTAA in force during the period in dispute was notified vide Notification No.GSR 77(E), dated 04.02.1988, and not the one produced by the petitioner. The court left the issue of the petitioner's entitlement to benefits under the DTAA open, allowing the petitioner to file an appropriate application before the second respondent.

5. Deduction of Tax at Source Under Section 195 of the Income Tax Act, 1961:
The court analyzed Section 195, which mandates tax deduction at source for payments made to non-residents if the income is chargeable under the Act. The court referred to the Supreme Court's decision in G.V.K. Industries Ltd. Vs. Income Tax Officer, which clarified that the source rule applies, meaning the income is chargeable where the payer is located. The court concluded that the services provided by the Indonesian firm were taxable in India, and the petitioner was liable to deduct tax at source as per Section 195.

Conclusion:
The court dismissed the writ petition, upholding the impugned order and confirming the taxability of the consultancy services rendered by the Indonesian law firm under Indian law. The petitioner was allowed to seek benefits under the relevant DTAA by filing an appropriate application within thirty days.