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