2023 (9) TMI 493 - HC - Income Tax

TDS u/s 195 - withholding tax deducted at source (TDS) - AWS India s obligation to withhold and deposit the tax in respect of payments to AWS USA - PE in India or not? - HELD THAT - We are, prima facie, unable to accept that the entire amount payable by AWS India to AWS USA can be considered as revenue attributable to AWS s PE (if any) in India and that no part of it is attributable towards entities overseas. The exercise conducted by the AO of determining the revenue attributable to a PE, which also requires allowance for deduction of material expenses to be made is clearly flawed. It is also settled law that the proceedings u/s 195(2) are only for the purpose of determining the proportion of income chargeable to tax for the limited purpose of determining the withholding of tax. The determination under Section 195(2) of the Act does not constrain the Revenue in any manner from correctly assessing the payee s income chargeable to tax in accordance with the law. It would, prima facie, follow that if there is already a determination in the payee s own case; the AO would normally give due consideration to the same, in considering the application under Section 195(2) - in this case it appears that the AO has proceeded on the exercise of a de novo assessment in proceedings, completely disregarding the orders of the ITAT arising from the assessment proceedings relating to AWS USA s. We also find merit in the Revenue s contention that AWS India had not provided AWS USA s financial information for the preceding years, which may be essential in determining the application under Section 195(2) of the Act. We are unable to appreciate AWS India s response that the entire information related to AWS USA is available on the portal of the Department and thus could be retrieved by the AO. For the purpose of Section 195(2) of the Act, the applicant is required to provide the necessary information. It would not be open for the applicant to refrain from providing the same on the ground that AO may be able to access the same otherwise. Revenue has already issued notices u/s 148 of the Act for re-opening the assessments of AWS USA. As noted ASG has stated that there is substantial information available with the Revenue to assess AWS USA s income as chargeable to tax under the Act. He had also contended that AWS USA had withheld vital information in the assessment proceedings. Revenue now seeks to re-look at AWS USA s assessment and chargeability of its income to tax in India. Considering that the nature of these proceedings is confined to withholding of tax, and that the financial year 2022-23 is already over, this Court had suggested to the parties that without prejudice to their rights and contentions regarding the chargeability of AWS USA s income under the Act, a total of 10% be withheld (less 2% Equalisation Levy that has already been paid) as withholding tax. The impugned order is modified to the aforesaid extent. AWS India shall withhold 8% of payments, payable or paid to AWS USA, for the period in question and deposit the same with the Revenue authorities.

Issues Involved:
1. Determination of appropriate proportion of sum payable to AWS USA chargeable to tax for withholding tax purposes.
2. Examination of AWS USA's Permanent Establishment (PE) status in India.
3. Applicability of Indo-US Double Taxation Avoidance Agreement (DTAA) to AWS USA.
4. Adequacy of information provided by AWS India for tax determination.
5. Dispute over the nature of payments made by AWS India to AWS USA.

Summary of Judgment:

1. Determination of Appropriate Proportion of Sum Payable:
The petitioners challenged the order dated 01.02.2023 by the Assessing Officer (AO) which disposed of AWS India's application under Section 195(2) of the Income Tax Act, 1961. AWS India sought a certificate for nil withholding of tax on reseller fees paid to AWS USA, arguing these payments were not chargeable to tax under the Act or the Indo-US DTAA and were subject to the Equalisation Levy under Section 165A of the Finance Act, 2016.

2. Examination of AWS USA's Permanent Establishment (PE) Status:
The AO concluded that AWS USA had significant infrastructural assets in India, constituting a PE, and thus its income was chargeable to tax. The AO based this on public domain information, assuming AWS USA owned and operated data centres in India. AWS India disputed this, claiming data centres were operated by independent entities on an arm's length basis.

3. Applicability of Indo-US DTAA:
The AO erroneously assumed that the Indo-US DTAA was inapplicable to AWS USA, considering it a Limited Liability Company (LLC) rather than an incorporated entity. The court found this assumption to be ex-facie erroneous, noting that AWS USA is indeed an incorporated entity and entitled to DTAA benefits.

4. Adequacy of Information Provided:
The court noted that AWS India had not provided AWS USA's financial information for preceding years, which was essential for determining the application under Section 195(2) of the Act. AWS India's claim that this information was available on the Department's portal was deemed insufficient.

5. Dispute Over Nature of Payments:
The AO's conclusion that reseller fees paid by AWS India to AWS USA were chargeable as business income under the Act was based on flawed assumptions. The AO failed to determine the proportion of income attributable to the PE as required by the Indo-US DTAA. The court found the AO's exercise of determining revenue attributable to a PE to be flawed and not in line with settled law.

Court's Decision:
The court suggested, and parties agreed, to withhold 10% of payments (less 2% Equalisation Levy already paid) as withholding tax without prejudice to their rights in the assessment proceedings. The impugned order was modified to require AWS India to withhold 8% of payments to AWS USA for the period from 01.11.2022 to 31.03.2023. The withheld tax must be deposited with the Revenue authorities within one week, constituting a full discharge of AWS India's obligation. The petition was disposed of accordingly.

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