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

Sec. 44BB Receipts Are Not Assessable As FTS. S. 234B Interest Verdict Cannot Be Followed: ITAT Mumbai

ADIT vs. Valentine Maritime (Gulf) LLC (ITAT Mumbai)

If the contract falls u/s 44BB, incidental technical services are not assessable as “fees for technical services” u/s 9(1)(vii). Verdict in Alcatel Lucent (Del) on liability of foreign company to pay s. 234B interest cannot be followed in Mumbai
The Tribunal had to consider two questions of law (i) whether a part of the consideration paid for a project involving installation, assembly or the like in connection with the prospecting for, or extraction or production of, mineral oils can be assessed as “fees for technical services” u/s 9(1)(vii) or the entire consideration has to be assessed only u/s 44BB? and (ii) whether in view of the verdict of the Delhi High Court in Alcatel Lucent a foreign company can be held liable for advance-tax and consequent payment of interest u/s 234B? HELD by the Tribunal:
(i) The contract was a composite one and its main purpose was to install offshore pipelines, etc. To achieve this main purpose, the assessee had undertaken various activities which were listed down in the various articles of the contract. Those activities were incidental to the main job and were an integral part of the contract to ensure that all the pipe lines were successfully installed, commissioned, tested and complied with the standards set out in the contract. The argument of the department that the activity relating to providing technical services should be assessed as “fees for technical services” u/s 9(1)(vii) is not acceptable. When a contract consists of a number of terms and conditions, each condition does not form a separate contract. The contract has to be read as a whole. The entire consideration is assessable only u/s 44BB and no part of it is assessable as fees for technical services u/s 9(1)(vii) (Chaturbuj Vallabhdas AIR 1954 (SC) 236, Mitsui Engg. & Ship Building 259 ITR 248 (Del), Jindal Drilling and Industries 320 ITR 104 (Del) & G&T Resources (Europe) Ltd 139 TTJ 568 followed);
(ii) The argument of the department based on Alcatel Lucent USA (Del) that even a foreign company is liable to pay advance tax and consequential interest u/s 234B is not acceptable in view of the contrary decision of the jurisdictional High Court in NGC Network 313 ITR 187 (Bom).

Revenue earned by eBay from its website won't be FTS; its Indian marketing agents won't form its agency PE

a) The assessee, incorporated in Switzerland, operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India;

b) For the purpose, the assessee had entered into marketing support agreements with eBay India and eBay motors, for availing of certain support services in connection with its websites;

c) The Assessing officer concluded that the payments received by the assessee from operations of websites were mainly in the nature of FTS. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motors;

d) On appeal, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The modus operandi of the transactions undertaken through the websites made it clear that the fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as FTS, as the assessee had no role to play in effecting sales and these were in nature of business profits;

2) The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India;

3) First condition provided in Para 5 of treaty refer to that the dependent agent "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee;

4) Second condition provided in Article 5 of treaty refers to the dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee;

5) Third condition applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise. Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee;

6) Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty - eBAY INTERNATIONAL AG V. DY. DIT (2013) 40 taxmann.com 20 (Mumbai - Trib.)

Sum paid to NR to identify potential customers and to conduct market survey abroad held taxable as FTS

Payment made to a foreign company for marketing survey and identifying potential foreign customers for assessee's product was only for consultancy services and it was taxable in India as FTS

Facts:

a) The assessee engaged a foreign company ‘SR’ as marketing agent for South East Asian countries;

b) SR had to study the market situation in South East Asia for the products manufactured by the assessee and it had to market the products of the assessee in those countries;

c) The CIT(A) found that payment made to SR was consultancy charge, therefore, tax had to be deducted. Accordingly, it confirmed the disallowance made by the Assessing Officer. Aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The work of SR was to identify the potential customers and file a report regarding the market strategy and developmental studies;

2) The agreement did not enable SR to market the products of the assessee in South East Asian countries. The company SR only had to do survey and file a report so that the assessee could market its products after considering the report filed by the foreign party;

3) Therefore, the payment made to SR was only consultancy charge. It was not a case of marketing the products in the foreign country. The CIT (A) had rightly confirmed the order of the Assessing Officer. Thus, the order of the lower authority holding assessee liable for TDS was to be confirmed - ENGLISH INDIAN CLAYS LTD. V. ACIT (2013) 39 taxmann.com 50 (Cochin - Trib.)