2023 (11) TMI 390 - AT - Income Tax

TDS u/s 195 - disallowances u/s 40(i)(a) - payments made to Dubai Leading Technologies - whether India-UAE DTAA has no clause on Fee for Technical Services? - HELD THAT - We do not find any infirmity in the order of the Ld. CIT(A) and uphold his finding that the payments made to Dubai Leading Technologies cannot be brought to tax under Article 22 in the absence of a specific clause for FTS in the India-UAE DTAA. The impugned payments are in the nature of business income which are not chargeable to tax in India in the absence of a PE of the payee/remittee in India. We further uphold the finding of the Ld. CIT(A) that there is no obligation to deduct tax at source under section 195 of the Act as the impugned payments are not chargeable to tax in India as held by the Hon ble Apex Court in GE India Technology Centre (P) Ltd. 2010 (9) TMI 7 - SUPREME COURT and hence the disallowance made by the Ld. AO under section 40(a)(i) of the Act is erroneous. Disallowance u/s 40(a)(i) - payment made to Brain Point Consultants, UAE - contention of the Revenue is that the impugned payments made by the assessee for rendering marketing and sales support services are in the nature of FTS and in the absence of a specific clause on FTS under the India-UAE DTAA, the impugned payments should be taxed under the provisions of Article 22 on other income which is residuary clause under the India-UAE DTAA - HELD THAT - As abundantly clear that the Ld. CIT(A) after considering the impugned issue in detail has given his finding that invocation of the provisions of section 40(a)(i) of the Act by the Ld. AO is erroneous for the reason that the income of a non-resident agent from provision of marketing and sales support services rendered for overseas client cannot be included under section 5(1) of the Act as the same does not deem to accrue or arise in India based on the decision of Eon Technology P. Ltd. 2011 (11) TMI 20 - DELHI HIGH COURT and further holding that in the absence of a specific clause on FTS under the India-UAE DTAA, provisions of Article 22 on residuary/ other income cannot be invoked based on the decision in the case of Kingfisher Airlines Ltd. 2019 (11) TMI 689 - ITAT BANGALORE we are inclined to uphold the order of the Ld. CIT(A). Accordingly ground No. 2 of the Revenue is dismissed. Disallowance u/s 40(a)(i) - payment made to OIT Managed Services Mauritius - assessee entered into an agreement with OIT Managed Services Mauritius for provision of Amazon Web Service, Hosting Service, Identity and Access Management, Virtual Private Cloud, Virtual Machine Services to the assessee - HELD THAT - Web hosting services availed by the assessee do not constitute royalty or FTS and hence payments made by the assessee to OIT Managed Services Mauritius in consideration of such services are not chargeable to tax in India consequent to which the assessee is not required to withhold any tax on the impugned payments. Having said so, we also hold that the impugned payments are not taxable in India in the absence of any specific clause on FTS in India-Mauritius DTAA for the year under consideration for the reasons recorded in para 8, 8.1, 8.2 and 10 above. Accordingly, ground of the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under section 40(a)(i) of the Act in respect of payment made to Dubai Leading Technologies UAE.
2. Disallowance under section 40(a)(i) of the Act in respect of payment made to Brain Point Consultants, UAE.
3. Disallowance under section 40(a)(i) of the Act in respect of payment made to OIT Managed Services Mauritius.

Summary:

Issue 1: Disallowance under section 40(a)(i) of the Act in respect of payment made to Dubai Leading Technologies UAE
The Revenue contended that payments made to Dubai Leading Technologies for developing an android app constituted "fees for technical services" (FTS) and were taxable under the Income Tax Act due to the absence of a specific FTS clause in the India-UAE DTAA. The assessee argued that the payments were business income not chargeable to tax in India in the absence of a Permanent Establishment (PE) in India. The Tribunal upheld the CIT(A)'s finding that the payments were not taxable under Article 22 of the India-UAE DTAA and were business income not chargeable to tax in India without a PE. Consequently, there was no obligation to deduct tax at source under section 195, making the disallowance under section 40(a)(i) erroneous.

Issue 2: Disallowance under section 40(a)(i) of the Act in respect of payment made to Brain Point Consultants, UAE
The Revenue argued that payments for market survey and analysis services to Brain Point Consultants, UAE, were FTS and taxable under the Income Tax Act due to the absence of a specific FTS clause in the India-UAE DTAA. The assessee contended that the payments were business income not chargeable to tax in India in the absence of a PE. The Tribunal upheld the CIT(A)'s finding that the payments were not FTS and could not be taxed under Article 22 of the India-UAE DTAA. The payments were business income not chargeable to tax in India without a PE, and thus, there was no obligation to deduct tax at source under section 195, making the disallowance under section 40(a)(i) erroneous.

Issue 3: Disallowance under section 40(a)(i) of the Act in respect of payment made to OIT Managed Services Mauritius
The Revenue claimed that payments to OIT Managed Services Mauritius for Amazon Web Services were in the nature of royalty and FTS, taxable under the Income Tax Act due to the absence of a specific FTS clause in the India-Mauritius DTAA. The assessee argued that the payments were not royalty or FTS and were not chargeable to tax in India. The Tribunal upheld the CIT(A)'s finding that the payments for web hosting services were not royalty or FTS, relying on various judicial precedents. The payments were business income not chargeable to tax in India without a PE, and thus, there was no obligation to deduct tax at source under section 195, making the disallowance under section 40(a)(i) erroneous.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s findings that the payments made to Dubai Leading Technologies, Brain Point Consultants, and OIT Managed Services Mauritius were not chargeable to tax in India, and thus, there was no obligation to deduct tax at source under section 195. The disallowances under section 40(a)(i) were held to be erroneous.