No Sec. 40(a)(i) TDS Disallowance For Income Made Taxable Under Retrospective Law: ITAT Hyderabad

Infotech Enterprises Limited vs. ACIT (ITAT Hyderabad)

No sec. 40(a)(i) TDS disallowance for amounts made taxable due to retrospective amendment. Also, concept of “business connection” u/s 9(1)(i) & “fees for technical services” u/s 9(1)(vii) explained


The assessee entered into an agreement with its Associated Enterprises (AEs) outside India pursuant to which it sub-contracted some of the work that it had obtained from its customers. The assessee incurred an expenditure of Rs.19 crore towards “technical consultancy charges” paid to the said AEs. The AO & DRP held that the assessee was “habitually securing orders” for the AEs from India and that there was a ‘business connection’ between the assessee and the AEs under Explanation 2 to s. 9(1)(i). Alternatively, it was held that the amount was assessable as “fees for technical services” u/s 9(1)(vii). As the assessee had not deducted TDS u/s 195, the expenditure was disallowed u/s 40(a)(i).

On appeal by the assessee to the Tribunal HELD allowing the appeal:

(i) The facts show that the assessee secured orders from customers for its own benefit and only parceled out a portion of the work to the AEs. The Explanation to s. 9(1)(i) can be invoked only when the Indian company secures orders for the benefit of non-resident. As the assessee has not canvassed / secured any orders for its non resident subsidiaries, s. 9(1)(i) cannot be invoked. Also, the foreign subsidiaries do not work exclusively for the assessee and they obtain orders on their own from other foreign parties and also sub contract the work to the assessee depending on exigencies. Further, no operations have been undertaken by foreign subsidiaries in India and no engineers have been deputed by them to India and even they do not have permanent establishment in India. Even under the DTAA, no income is assessable to tax in India. CBDT Circular No. 29 dated 27.3.1969 is inapplicable to the present case;

(ii) As regards “fees for technical services”, the payments made to the subsidiaries may be construed as “fees for technical services”. However this is only due to the retrospective amendment by Finance Act 2010. Prior to that, Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC) had held that s. 9(1)(vii) could be invoked only where the services were rendered in India and utilized in India. At the time of the payment Ishikawajima-Harima was the law of the land and the assessee was of the bona fide belief that TDS was not necessary on the said payments of fees for technical services. S. 40(a)(i) cannot apply to disallow payments which become taxable subsequently due to a retrospective legislation. Further, some of the payments do not satisfy the “make available” test in the DTAA as held in De Beers India Minerals

Note: The judgement also considers the question whether sum paid for acquiring license of software is taxable as “royalty” and the transfer pricing implications of a loan given to the AE and guarantee fee paid to the AE