2020 (8) TMI 120 - AT - Income Tax

TDS u/s 195 - payment made outside as fees for technical services - disallowing expense on the ground of non-deduction of withholding tax on such expenses - HELD THAT - In the case of Pinstorm Technologies (P.) Ltd. 2012 (12) TMI 601 - ITAT MUMBAI it is held that payment made to non-resident for uploading and display of banner advertisement on its portal, in absence of any PE of non-resident in India would not be chargeable to tax in India. In the case of ITO vs. Right Florist 2013 (4) TMI 338 - ITAT KOLKATA it is held that fees for online advertisement could not be considered as fees for technical services in view of provision of tax treaties with U.S.A. We consider that there was no sharing of knowledge or know-how or any technology to the assessee as prescribed in the Article 12 of the DTAA between India and U.SA., therefore, we find substance in the assertion of the assessee that tax was not deducted u/s. 195 of the Act since the payment made was not taxable in India. Accordingly, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of expenses due to non-deduction of withholding tax.
2. Classification of payment as fees for technical services under Section 195 of the Income Tax Act.
3. Applicability of Double Tax Avoidance Agreement (DTAA) between India and USA.

Detailed Analysis:

1. Disallowance of Expenses Due to Non-Deduction of Withholding Tax
The primary issue in the appeal was the disallowance of expenses amounting to ?13,09,739/- due to the non-deduction of withholding tax. The assessee had made payments to ESM-SYS LLC, USA for services related to data promotion, social media management, and general consulting. The Assessing Officer (AO) disallowed these expenses under Section 40(a)(ia) of the Income Tax Act, 1961, citing the assessee's failure to deduct tax at source as required under Section 195 of the Act.

2. Classification of Payment as Fees for Technical Services Under Section 195
The AO classified the payments as fees for technical services, arguing that they fell under the purview of Section 9(1)(vii) of the Act. The AO stated that the services provided by ESM-SYS LLC involved technical or management services, which required tax deduction at source. The AO also noted that the assessee had not furnished the mandatory forms 15CA or 15CB for making such remittances. The AO held that the payments were also in the nature of royalty under Section 9(1)(vi) of the Act, further justifying the need for TDS.

3. Applicability of Double Tax Avoidance Agreement (DTAA) Between India and USA
The assessee argued that the payments were business profits and not fees for technical services or royalties, as defined under the DTAA between India and the USA. The assessee contended that ESM-SYS LLC had no permanent establishment in India, and therefore, the payments were not taxable in India. The CIT(A) dismissed the appeal, holding that the payments were fees for technical services under Explanation 2 to Section 9(1)(vii) of the Act.

During the appellate proceedings, the assessee emphasized that the services provided did not involve the transfer of technical knowledge or know-how, which is a requirement under Article 12 of the DTAA for classifying payments as fees for included services. The assessee referred to various judicial pronouncements supporting their position.

Tribunal's Findings:
The Tribunal reviewed the submissions and material on record, noting that the services provided by ESM-SYS LLC were related to web promotion, social media management, and other similar activities. The Tribunal observed that these services did not involve the transfer of technical knowledge or know-how to the assessee, as required under Article 12 of the DTAA.

The Tribunal cited several judicial pronouncements, including:
- ITO vs. B.A. Research India Pvt. Ltd.
- ITO vs. Cadila Health Care Ltd.
- Mckinsey & Co. Inc. (Philippines) vs. ACIT
- Pinstorm Technologies (P.) Ltd. vs. ITO
- ITO vs. Right Florists (P.) Ltd.
- Yahoo India (P.) Ltd. vs. Deputy CIT

These cases supported the assessee's claim that the payments did not qualify as fees for technical services under the DTAA.

The Tribunal concluded that since there was no sharing of technical knowledge or know-how, the payments were not taxable in India under the DTAA. Consequently, the assessee was not required to deduct tax under Section 195 of the Act. The Tribunal allowed the appeal, reversing the disallowance of expenses.

Conclusion:
The appeal of the assessee was allowed, and the disallowance of ?13,09,739/- was reversed. The Tribunal held that the payments made to ESM-SYS LLC were not fees for technical services under the DTAA between India and the USA, and therefore, no tax deduction at source was required under Section 195 of the Income Tax Act.

Order:
The order was pronounced in the open court on 09-07-2020.