2008 (9) TMI 414 - AT - Income Tax

Disallowance u/s. 40(a)(i) - non-deduction of TDS u/s 195 - Payment to Non- resident - Fees For Technical Services - data processing charges - business of providing consultancy services - CIT(A) upheld the findings of the AO that data processing charges paid by the assessee are in the nature of fees for technical services and its deduction to the assessee deserves to be disallowed by virtue of s. 40(a)(i) of the Act because assessee failed to deduct tax on source while making the payment. HELD THAT - In the present case, Dr. Hutarew Partner, is not maintaining any server for everybody that anyone can feed the data and get the solution. The solutions are being provided on the specific needs of the customers. The information supplied by the German company is specific which can help the assessee in finalizing its design. Such specific client based information cannot be equated with the standard services provided by a telecommunication company. As far as the second fold of submission is concerned since an Explanation has been appended with cl. (vii) of s. 9(1) of the Act, this Explanation is applicable with retrospective effect. According to this Explanation, if services have been used by the assessee within India, then it is immaterial whether the non-resident has a residence or place of business or business connection in India, if the services are used in India and payment made to non-resident then that sum would be included in the income, which will be deemed to have accrued to the non-resident, therefore, there is no merit in this fold of submission also. We find that the provisions of s.195(2) are not provisions of convenience which the assessee may use or may not use. If a person wants to make payments to a non-resident and those payments are not explicitly declared exempt by the provisions of the IT Act, the person making the payments has to deduct tax at source and he can free himself of the liability to deduct tax source only if he gets the concurrence of the AO under sub-s. (2) of s.195. If the person making the payments has not fulfilled his obligations under the provisions of sub-s. (1), (2) or (3) of s. 195, as the case may be, then he has to face the consequences of the provisions of the IT Act, 1961. We find that from the next year, assessee has started deducting tax on such type of payments at its own. In the result, the appeal filed by the assessee is dismissed.

Summary

Issues Involved:

1. Whether the data processing charges paid by the assessee are in the nature of fees for technical services under Section 9(1)(vii) of the Income Tax Act.
2. Whether the deduction of data processing charges should be disallowed under Section 40(a)(i) due to the failure to deduct tax at source.
3. Whether the license fees paid by the assessee are in the nature of royalty under Section 9(1)(vi) of the Income Tax Act and subject to tax deduction at source.

Issue-wise Detailed Analysis:

1. Nature of Data Processing Charges:
The primary issue is whether the data processing charges paid by the assessee to Dr. Hutarew & Partner, Germany, qualify as fees for technical services under Section 9(1)(vii) of the Income Tax Act. The assessee argued that the data processing charges do not involve the transfer of technology and are merely payments for information, not technical services. The assessee relied on the decision in Dy. CIT v. Parasrampuria Synthetics Ltd. and Skycell Communications Ltd. v. Dy. CIT to support this claim. However, the tribunal noted that the data processing involved specialized services provided by using sophisticated software, which constitutes technical services. The tribunal distinguished the present case from Skycell Communications Ltd., stating that the services provided by Dr. Hutarew & Partner were specific and client-based, unlike the standard services provided by a telecommunication company.

2. Disallowance Under Section 40(a)(i):
The assessing officer disallowed the deduction for data processing charges under Section 40(a)(i) because the assessee failed to deduct tax at source while making the payment. The tribunal upheld this disallowance, emphasizing that according to the Explanation added by the Finance Act, 2007, with retrospective effect from 1-6-1976, the situs of the utilization of the services determines the tax jurisdiction. Since the services were utilized in India, the income is deemed to accrue or arise in India, making it subject to tax deduction at source.

3. Nature of License Fees:
The assessing officer also disallowed the deduction for license fees paid to Dr. Hutarew & Partner, Germany, treating it as royalty under Section 9(1)(vi) of the Income Tax Act. The assessee contended that it had been deducting TDS on the license fees. However, the tribunal did not provide a detailed analysis on this point, as the primary focus was on the data processing charges. The tribunal upheld the assessing officer's decision to disallow the deduction for both data processing charges and license fees due to the failure to deduct tax at source.

Conclusion:
The tribunal dismissed the appeal filed by the assessee, affirming the disallowance of deductions for data processing charges and license fees under Section 40(a)(i) due to the failure to deduct tax at source. The tribunal emphasized that the services provided by Dr. Hutarew & Partner, Germany, were technical in nature and utilized in India, making them subject to tax deduction at source under the Income Tax Act.