2022 (10) TMI 983 - AT - Income Tax

TDS u/s 195 - payment made to its parent company - payment is made by the appellant under cost Sharing agreement with its group wherein the BASF SE who is another member in the pool - Whether payment made by the appellant to BASF SE is payment in the nature of fees for technical services? - HELD THAT - The assessee, on the basis of cost sharing agreement and also in light auditor certificate claimed that payment made to non-resident entity is not liable to be taxed in India and consequently, the assessee need not to deduct TDS in India. We find that although the assessee claims to have reimbursed cost incurred by parent company to provide certain common services without any markup, the said claim of the assessee was not substantiated. Further, if we go through the cost sharing agreement between the assessee and its parent company, the services to be rendered are in the nature of composite services and from the said agreement, it is difficult to ascertain whether they are in the nature of fee for technical services or only reimbursement of cost. Although, the assessee strongly relied upon the certificate issued by the Deloitte GmbH and contended that the payment made to the non-resident is only cost incurred by the parent company without any mark-up, which was not supported by any evidence. Therefore, we are of the considered opinion that the issue needs to be re-examined in light of various averments including cost sharing agreement, certificate issued by the Deloitte GmbH and the provisions of section 9(1)(vii) of the Act read with DTAA between India and Germany. The issue needs to go back to the Assessing Officer for further verification and accordingly, we direct the Assessing Officer to re-examine the issue of applicability of TDS as per section 195 of the Act on payment made to non-resident and decide the issue in accordance with law. Appeals filed by the assessee are allowed for statistical purposes.

Issues Involved:

1. Requirement to deduct tax at source on payments made to BASF SE under section 195(2) of the Income Tax Act.
2. Nature of payment made to BASF SE and whether it constitutes fees for technical services.
3. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Germany.
4. Principle of mutuality in respect of payments made to BASF SE.
5. Re-examination of the issue by the Assessing Officer (AO) based on various evidences and legal provisions.

Detailed Analysis:

1. Requirement to Deduct Tax at Source:
The primary issue revolves around whether the appellant is required to deduct tax at source on payments made to BASF SE, Germany, under section 195(2) of the Income Tax Act. The appellant argued that the payments were made under a Cost Sharing Agreement (CSA) without any mark-up, and hence, there was no income element subject to tax in India. However, the AO directed the appellant to deduct TDS at 10%, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Nature of Payment and Fees for Technical Services:
The appellant contended that the payments made to BASF SE were reimbursements for common services provided on a cost-to-cost basis without any mark-up, and thus, should not be treated as fees for technical services. The CIT(A), however, held that the payments constituted fees for technical services based on the nature of services described in the CSA, which included marketing, legal, technical, and managerial services. The CIT(A) relied on previous orders and the provisions of section 9(1)(vii) of the Act to support this conclusion.

3. Applicability of DTAA between India and Germany:
The appellant argued that under the DTAA between India and Germany, the payments should not be treated as fees for technical services since no technology was made available to the appellant. The CIT(A) did not accept this argument, maintaining that the payments fell within the scope of technical services as defined under Indian tax laws.

4. Principle of Mutuality:
The appellant also invoked the principle of mutuality, asserting that the payments made to BASF SE were within a pool of group companies and should not be taxable. This argument was not upheld by the CIT(A), who focused on the nature of services provided and the requirement to deduct tax at source.

5. Re-examination by the Assessing Officer:
The Tribunal noted that the appellant's claims were not sufficiently substantiated with evidence. It highlighted the need to re-examine the issue in light of the CSA, the auditor's certificate, and the provisions of section 9(1)(vii) of the Act, along with the DTAA between India and Germany. The Tribunal referred to a similar case involving BASF India Ltd., where the issue was remanded to the AO for further verification. The Tribunal directed the AO to re-examine the applicability of TDS under section 195 on the payments made to the non-resident entity and decide the issue in accordance with the law.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine the issue of TDS applicability on payments made to BASF SE under section 195 of the Income Tax Act, considering all relevant evidences and legal provisions, including the DTAA between India and Germany. The decision emphasizes the need for a thorough examination of the nature of payments and the applicable tax laws to determine the correct tax treatment.

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