Thursday 7 November 2013

Law on taxation of fees for technical services u/s 9(1)(vii) & Article 12 and disallowance u/s 40(a)(i) for failure to deduct TDS explained

Metro& Metro vs. ACIT (ITAT Agra)
 
The assessee paid Rs 52 lakhs towards “leather testing charges” to TUV Product Und Umwelt GmbH, a tax resident of Germany, without deduction of tax at source. The AO & CIT(A) disallowed the expenditure u/s 40(a)(i) on the ground that the assessee had failed to deduct tax at source. Before the Tribunal, the assessee argued that (a) as Article 12 of the India-Germany DTAA does not provide that India “shall” tax fees and royalties, the same cannot be taxed in India; (b) as the services were not rendered by the foreign company in India, the income was not chargeable to tax in India u/s 9(1)(vii); (c) as the services were rendered by an automated process and there was no human intervention, it did not constitute “fees for technical services” as defined in s. 9(1)(vii); (d) as the services were used for a 100% EOU whose products were sold outside India, the “source” of the income was outside India and so the exception in s. 9(1)(vii) (b) applied; (e) disallowance u/s 40(a)(i) was confined to amounts “payable” as at the end of the year as held by the jurisdictional High Court in Vector Shipping in the context of s. 40(a)(ia) and (f) as the taxability of the services was brought in by a retrospective amendment, the disallowance u/s 40(a)(i) could not be made. HELD by the Tribunal:
(a) The argument that as Article 12(1) of the India-German DTAA provides that the source State (“India”) “may” (and not“shall”) tax ‘fees for technical services’, the income is not chargeable to tax in India is not acceptable because the DTAA does not provide for taxation of any income. It allocates the right to tax income amongst the Contracting States. Once it enables the Contracting State to levy tax (by the use of the word “may”), the domestic law of the State come into play. Article 12 of the DTAA permits India to levy tax on fees for technical services and royalty though the rate of tax cannot exceed 10% (Pooja Bhatt 2008 TIOL 558 ITAT Mum referred);
(b) the argument that as the services have been rendered outside India, the fees thereof cannot be assessed u/s 9(1)(vii) is not acceptable in view of the retrospective amendment to s. 9(1) by the Finance Act 2010 (Ashapura Minichem 131 TTJ 291, GVK Industries 332 ITR 130 & Clifford Chance 154 TTJ 537 (Mum) (SB) referred;
(c) the argument that s. 9(1)(vii) does not apply because the entire testing process is automated and does not involve human skills and interplay is not acceptable. While in principle it is correct that if there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii), there is nothing on record to demonstrate the precise process of leather testing adopted by the German company. Further, the wider observations in Siemens(ITAT Mum) that if there is not much human involvement, it cannot be termed as rendering of technical services is not correct. It is a question of presence of or absence of human involvement and not a question of more of, or less of, human involvement (Right Florists 154 TTJ 142, Siemens Ltd, Bharti Cellular 319 ITR 139 (Del) & 330 ITR 239 (SC) referred);
(d) the argument that as the assessee is a 100% EOU, the fees should be considered to have been used for a source of income outside India and therefore not taxable u/s 9(1)(vii)(b) is not acceptable because even though the business is a 100% EOU, it is still a business carried on in India. Even if the entire products are sold outside India, the fact of such export sales by itself does not make the business having been carried outside India. A customer is not the source of income. But if the manufacturing facilities are outside India and the customers are also outside India, the source will be outside India and the exception in s. 9(1)(vii)(b) will apply;
(e) the argument that s. 40(a)(i) applies only to amounts “payable” as at the end of the year and not to amounts already“paid” as held in Merlyin Shipping 136 ITD SB 23 (Vizag) as approved (by the jurisdictional High Court) in Vector Shipping Services is not acceptable because that was in the context of s. 40(a)(ia) and not s. 40(a)(i). S. 40(a)(i) cannot be interpreted in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year;
(f) However, the argument that disallowance u/s 40(a)(i) cannot be made as the amount has been made taxable by the retrospective amendment to s. 9 is acceptable. An assessee cannot be penalized for not performing the impossible task of deducting TDS in accordance with the law which was brought in subsequently (Channel Guide 139 ITD 49 & Sterling Abrasives (Ahd) followed).

No comments:

Taxability of online games

Introduction: 1. Taxability of online winnings before the introduction of section 115BBJ of the Income Tax Act and section 194BA of the Inco...