Income Tax Appellate Tribunal (‘the ITAT’), Delhi Bench, held that warehousing space charges paid by resident in India to a non-resident would not be treated as fees for technical services as per India – USA DTAA and accordingly, no tax is required to be deducted under section 195 of the IT Act.
M/s Avtech Limited[1] (‘the Assessee’), is in the business of manufacturing and selling of automobile power-trains and power-shift transmissions along with components forming part of heavy-duty power trains.
During the course of assessment proceedings, the Assessing Officer (‘the AO’) noticed that the assessee has not deducted TDS on the payment made to M/s ESG International (‘the Non-Resident’). The AO was of the view that the scope of services under the contract include managerial /technical services and consequently the payment made to the Non-Resident was in the nature of fees for technical services. Therefore, on such services, TDS was required to be made.
Upon filling an appeal against the order of AO, the CIT(A) confirmed the disallowance stating that if the assessee wished to dispute the liability to deduct tax on the ground that the sum paid would not be the income chargeable to tax in case of recipient, an assessee is expected to approach the AO u/s 195(2) of the Act rather than taking the decision himself in respect of an issue for which the jurisdiction has been conferred upon him.
Aggrieved by the order of CIT(A), a further appeal was filed with ITAT, Delhi bench, whereby order was passed in favour of an assessee.
The authorised representative for the assessee submitted that the payment made to the Non-Resident will not be in the nature of fees for technical services as per DTAA as no technology was transferred and hence the ‘make available’ conditions are not complied with. So, there is no requirement of tax deduction in India. Submission in this regards was made as under:
- The moment a remittance is made to non-resident, obligation to deduct tax at source does not arise; it arises only when such remittance is a sum chargeable under section 4, 5 and 9 of the IT Act. It is stated that apart from the above charging provisions sections 90, 91 and DTAA are also relevant as the charging sections are subject to section 90, 91. To support his view, reliance was made upon the decisions by the Hon’ble Supreme Court in GE India Technology Cen (P) Ltd[2].
- Further reliance was placed upon the decision by the Hon’ble Supreme Court in Transmission Corpn of AP ltd[3], whereby it was stated that an approach to make an application to AO u/s 195 of the IT Act is available where payer is in doubt of taxability of the payment in the hands of recipient. In the instant case, the assessee did was not in doubt.
- The Explanation 2 of section 9(1)(vii) defines the fees for technical services means any managerial, technical or consultancy services. Whereas, as per Article 12 of India- USA DTAA, fees for technical services means technical or consultancy services. On the joint reading of Explanation 2 and Article 12 of India-USA DTAA, it is stated that under DTAA the managerial services are missing. Only the technical or consultancy services are given with the conditions of “make available” of technical knowledge, experience or skill.
- As per the scope of work even if the warehouse charges are treated as managerial services under the Income Tax Act, only the technical or consultancy services are prescribed in DTAA. As per section 90(2), the income tax Act or DTAA whichever is more beneficial will be applicable. As the DTAA has restricted meaning of ‘fees for technical services’ as compared to the Income Tax Act, definition as per the DTAA will be applicable in the said case. Meaning thereby that as no managerial services are in DTAA, no income is deemed to accrue or arise in India for The Non-Resident. Reliance was place upon the decision of Delhi High Court in the case of Steria India Ltd[4].
- The “Make Available” conditions, as per USA-DTAA, are not fulfilled for treating the payment made for warehouse charges as fees for technical services. It is stated that there is a continuation of services i.e., the assessee is paying the warehousing charges on yearly basis to the Non-Resident. The Hon’ble Delhi High Court in Bio-Rad Lab (Singapore) Pte Ltd[5] for the proposition that the continued provisioning and rendering of services over a substantial period of time would clearly detract from an assumption that technical or consultancy services had been “made available”.
- Mere rendering of services would not be sufficient for being Technical or consultancy services. It has to be read alongside and in conjunction with “make available”. Both the rending of service and the skill, knowledge and expertise being made available are conditions which must be concurrently and cumulatively satisfied. Mere furnishing of services would not suffice and a liability of tax would be triggered only if the technical or consultancy service were coupled with a transfer of the expertise itself. Reliance was placed upon the decision by Hon’ble Delhi High Court in International Management Group (UK) Ltd[6]. It is submitted that as per the scope of contract as stated [supra] the functions rendered by The Non-Resident includes day to day warehousing operations. In the said case the assessee is utilizing the space for warehousing operation on yearly basis as held in Bio Rad [supra] that the payment made on yearly basis indicates no technology has been transferred.
- The assessee has made payment outside India for business or profession carried on by such person outside India and for the purposes of making or earning any income from any source outside India. The payment for the space utilization of warehouse was made to the Non-Resident for the international operation including the services like loading, unloading of material, inventory management, quality control, insurance. The assessee is utilizing the space for the delivery of material through the warehouse to the overseas customers. There is no business activity in India of the Non-Resident. The space charges were paid outside India for business or profession carried on by assessee for the overseas operations hence no income is deemed to accrue or arise in India. Even under the second exception of section 9(1)(vii)(b) to the taxability of FTS paid by a resident, wherein FTS payable in respect of services utilized for the purpose of making or earning any income from any source outside India is not an income within the ambit of section 9 of the Act. Reliance was placed on following decisions:
- The amendment made in Explanation to section 9 does not nullify the exception provided in section 9(1)(vii)(b). In other words, even where the Non-Resident has provided services outside India and received payment thereof, the payment would not be deemed to accrue or arise in India, if the services provided by the non-resident are utilized by the resident in a business carried on outside India or for the purposes of earning income from any source outside India. He relied on the following judgements :
- International Management Group (UK) Ltd
- IndusInd Bank Ltd[12]
- HCL Singapore Pte. Ltd
[1] Avtech Limited vs ACIT [ITA No. 6332/DEL/2016 [A.Y 2012-13]
[2] GE India Technology Cen (P) Ltd. vs. CIT [2010] 193 Taxmann 234 (SC)]
[3] Transmission Corpn of AP ltd V CIT (1999) 239 ITR 587(SC)
[4] Steria India Ltd (2016) 72 Taxmann 1 (Delhi)
[5] CIT vs. Bio-Rad Lab (Singapore) Pte Ltd 155 Taxmann 646 (Delhi) (2024)
[6] International Management Group (UK) Ltd. V CIT [2024] 164 taxmann 225 (Del)
[7] HCI. Singapore Pte. Ltd. v ACIT [2024] 158 taxmann 45 (Delhi-Tri)
[8] ITO (International Taxation) v. HCL Technologies [2024] 166 taxmann 193 (Delhi- Tri)
[9] QAI India Ltd. v DCIT [2024] 165 Taxmann 118 (Delhi-Tri)
[10] ACTT v. LX Pantos India (P) Ltd [2024] 162 Taxmann 701 (Delhi-In)
[11] Orbit Bearing India (P) Ltd. v. ACIT [2024] 163 Faxmann 112 (Rajkot-Tri)
[12] CIT v IndusInd Bank Ltd. [2019] 106 taxmann 343/264 Taxmann 190/415 ITR 115 (Bom)
