Tax deduction at source u/s 195 on payment to non-resident towards order procurement services rendered outside India

short overview :  Order procurement services could not be considered as technical or consultancy services as per definition given in relevant Article to DTAA and, therefore, related payments made by assessee were business profits of non-resident and since non-resident was not having PE in India, no taxability arose and assessee was not liable to withhold tax under section 195.

Assessee claimed deduction of payment made to non-resident towards order procurement services rendered outside India. AO disallowed deduction for want of TDS under section 195.

 it is held that Order procurement services could not be considered as technical or consultancy services as per definition given in relevant Article to DTAA and, therefore, related payments made by assessee were business profits of non-resident and since non-resident was not having PE in India, no taxability arose and assessee was not liable to withhold tax under section 195.

Decision: In assessee’s favour.

Distinguished: GVK Industries v. ITO (2015) 54 taxmann.com 347 (SC) : 2015 TaxPub(DT) 605 (SC)Transmission Corporation of AP Limited & Anr. v. CIT (Appeals) (1999) 239 ITR 587 (SC) : 1999 TaxPub(DT) 1403 (SC).

IN THE ITAT, DELHI BENCH

R.K. PANDA, A.M. & SUCHITRA KAMBLE, J.M.

Pure Software (P) Ltd. v. ITO

ITA No. 715/DEL/2016

19 June, 2019

Appellant by: Rakesh Gupta, Somil Aggarwal, Deepesh Garg, and Shubham Sobti, Advocates

Respondent by: Surender Pal, Sr. Departmental Representative

ORDER

Suchitra Kamble, J.M.

This appeal is filed by the assessee against the Order, dated 23-12-2015 passed by Commissioner (Appeals)-7 for assessment year 2012-13.

2. The grounds of appeal are as under :–
3. “That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in making disallowance of Rs. 20,02,770 under section 40(a)(i) of the Act on account of non deduction of TDS on payment made to two non-residents i.e. J2S Inc, USA and Navos B.V.B.A., Belgium and in invoking the provisions of section 195 of the Act.
4. That in any case and in any view of the matter, action of learned Commissioner (Appeals) in confirming the action of learned assessing officer in making disallowance of Rs. 20,02,770 under section 40(a)(i) for non deduction of tax on payment made to two non-residents i.e. J2S Inc, USA and Navos B.V.B.A., Belgium, is bad in law and against the facts and circumstances of the case.
5. That having regard to the facts and circumstances of the case, learned Commissioner (Appeals) has erred in law and on facts in confirming the action of learned assessing officer in treating the “order procurement services” rendered by the non residents and commission/retainer fee as royalty and fees for technical services and ignoring the fact that the order procurement services rendered outside India are not taxable in India.
6. The assessee company is engaged in the business of software development, testing and trainings. The assessee filed its Return of Income on 22-9-2012 for assessment year 2012-13 declaring income of Rs. 14,63,886 as deemed income under section 115JB. The case was taken up by the assessing officer for scrutiny. During the course of scrutiny, the assessing officer asked for the details of Professional Expenses amounting to Rs. 73,99,546. This sum included two payments as follows :–

J2S Inc, USA	Rs. 13,44,524
Navos B.V.B.A, Belgium	Rs. 6,58,242

The assessing officer observed that no tax was deducted at source on these payments under section 195 of the Income Tax Act. Both these parties are non-residents. They have rendered the order procurement services abroad and have no business connection or permanent establishment in India. Since their income was not chargeable under the provisions of Income Tax Act read with section 5 and 9, no tax was deductible under section 195 of the Income Tax Act. Without prejudice to the above, the services rendered by both the above parties are neither royalty nor fees for technical services. In the previous year relevant to assessment year 2012–13, only the retainer fee was paid and no services infact were rendered by the above parties and hence provisions of section 9(l)(vii) will not be attracted. Even otherwise, such services when rendered will fall under the exception clause of sub-clause (b) of clause (vii) of sub-section (1) of section 9 as such service are for the purpose of making or earning any income from the customers outside India. Even then, the assessing officer has considered these payments in the nature of royalties and fees for technical services within the meaning of section 9(1)(vii) of the Income Tax Act and has made disallowance of Rs. 20,02,767 under section 40(a)(i) of the Income Tax Act and assessed the income at Rs. 20,02,767 as against the returned income of Rs. 14,63,886. While arriving at the assessed income of Rs. 20,02,770. The assessing officer also adjusted the brought forward loss of Rs. 30,27,046 as against the assessed brought forward loss of Rs. 42,88,991 of the assessment year 2009-10.

4. Being aggrieved by the assessment order, the assessee field appeal before the Commissioner (Appeals).
5. The learned Authorised Representative submitted that disallowance under section 40(a)(ia) will be applicable when tax deductable at source under Chapter XVII B has not been deducted under Chapter XVII B. The relevant section is section 195 which requires any person to deduct income tax from any payment made to a non-resident when such payment is chargeable under the provisions of the Income Tax Act. Thus, no deduction of tax at source will be applicable when the payment of the non-resident is not taxable in India. The charging section is section 5(2) which states that if any income is received or deem to be received in India in the hands of a non-resident or accrues or arises or is deem to accrue or arise in India to the non-resident, same shall be taxable in India. Explanation 1 to section 5 states that income accruing or arising outside India shall not be deem to be received in India by reason only of the fact that it is taken into account in a balance-sheet prepared in India. In case of the assessee company, two non-resident foreign companies, one by the name of J2S INC, USA and another by the name of NAVOS, Belgium were appointed to locate foreign buyers to whom the assessee company could sale its services. Thus, both the foreign companies rendered order procurement services outside India which is their business activity. Invoices received from the parties also show that services rendered by them were sales procurement services and not fees for technical services or royalties. The learned Authorised Representative submitted that the assessing officer wrongly alleged in Para 2.3 of his order that services rendered by the above parties where from royalties or fee for technical services. It shows that the assessing officer himself was not show as to whether the income received by non residence was royalty or fee for technical services. In Para 2.4 of his order, the assessing officer quoted Article 12 of the DTAA between India and Belgium which has given the definition of both royalty and fees for technical services. The learned Authorised Representative submitted that in a case of assessee company both the foreign parties for rendered or procurement services as their business activity and for which they were paid commission/retainer ship fee. These services can neither be called as technical or Consultancy Services nor as a royalty as per definition given in the relevant Article to DTAA. None of these two companies were having any office or permanent establishment in India. No payment was received by these non-resident parties in India and thus their income was not taxable in India and accordingly sub-section 2 of section 5 was not attracted and consequently section 195 of the Act was not applicable. Even section 9 of the Act is not applicable as the amount received by both the non residence was neither royalty nor fees for technical services as alleged by the assessing officer. The payments were business provides of both the non-resident assessee’s and as per Article 7 of the DTAA between India and USA, business profit shall be taxable only in the contracting state unless the enterprise carries on business in the other contacting states through a permanent establishment situation therein. Both the non-resident assessee’s earn their income from the assessee company as their business income outside India they carrying given any business in India through a permanent establishment and thus their income from the assessee company was covered by Article 7 and was taxable in their respective contracting states and not in India. The learned Authorised Representative submitted that as per provisions of section 90(2) provisions of DTAA shall be applicable with regard to applicability in the hands of non-resident in as held by the Apex Court inAzadi Bachao Andolan (2003) 263 ITR 706 (SC) : 2003 TaxPub(DT) 1429 (SC) according to which the provisions of DTAA over rights income tax in any cases where the DTAA is beneficial to non residence. The learned Authorised Representative relied upon the following judicial decisions

(i) Gama Industries Coimbatur Ltd. v. CIT (2012) 54 SOT 104 (Che. Tri.) : 2013 TaxPub(DT) 0043 (Chen-Trib)

(ii) Grasim Industries Ltd. & ors v. CIT (Appeals) (2011) 332 ITR 276 (Bom) : 2011 TaxPub(DT) 249 (Bom-HC)

(ii) ACIT v. Paradigim Geo Physical (P) Ltd. (2008) 11 DTR 174 (Del. Tri.) : 2010 TaxPub(DT) 0131 (Del-Trib).

6. The learned Authorised Representative further submitted that the assessing officer was not correct in attracting provisions of section 9(1)(vii) by treating the payment as royalty and fees for technical services whereas the fact was that in the previous year relevant to the assessment year 2012-13 only the retainer fee as per the agreement was paid and even no order procurement services in real terms were materialized by the said non-resident and whenever such services were rendered in future. Same will fall in the Explanation Clause of Sub Clause B of Clause (vii) of sub-section 1 of section 9 of the Act on the ground that income will be from the source outside in India. Both the non-resident assessee derived their income as their business activity and his business profit Article 7 of DTAA between India and USA also Article 7 of DTAA between India and Belgium were applicable to determine as to where business income will be taxable. Therefore, none of the provisions of the section 9 of the Act will be applicable in the present case, business income cannot be treated as fees for technical services as alleged by the assessing officer. Even commission income has also been considered as business income as held byAAR in Tele Soft (P) Ltd. (2004) 267 ITR 725 (AAR) : 2004 TaxPub(DT) 1634 (AAR) recently CBDT has issued Circular No. 4/15, dated 26-3-2015 emphasizing legislative intent with regard to section 9 read with section 195 of the Act. Legislative intend is very clear as to section 5 including sub-section 2 of the section 5 wherein it is clearly state that if income does not accrue or arise in India nor is it received in India income in the hands of nonresident will not be taxable in India. In such a situation, neither section 9 is attracted nor section 195 of the Act. Therefore, the learned Authorised Representative submitted that no TDS is required to be deducted on the payments made to non residence by the assessee company and thus question of disallowance under section 40(a)(ia) does not arise.
7. The learned Departmental Representative submitted that the Commissioner (Appeals) as well as the assessing officer was correct in making addition. The learned Departmental Representative submitted that it is evident from the terms of the agreement that consulting services are the running theme in the agreements drawn up with the non-residents. The services provided is in the nature of advisory services based upon the skills of the non-resident. The agreements clearly are in the nature of end to end services beginning with consulting and concluding with invoices being raised by the assessee company on the identified clients. The learned Departmental Representative further submitted that it is only an exercise in semantics under taken by the assessee company to escape the provisions of section 9(1)(vii) of the Act which includes nature of such payments as fees for technical services obligating the assessee to deduct tax as per provisions for section 195(1) of the Act. If it was only an order procurement agreement, it is not understood as to why payments were made subject to TDS as applicable. The learned Departmental Representative relied upon the decision of Hon’ble Apex Court in case ofGVK Industries v. ITO (2015) 54 taxmann.com 347 (SC) : 2015 TaxPub(DT) 605 (SC) as well as the decision of the Hon’ble Supreme Court in case of Transmission Corporation of AP Limited & Anr. v. CIT (Appeals) (1999) 239 ITR 587 (SC) : 1999 TaxPub(DT) 1403 (SC). The learned Departmental Representative also relied on the intention of the parliament relating to the insertion and amendment of section 9 & section 195 of the Act.
8. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note here that in case of the assessee company, two non-resident foreign companies, one by the name of J2S INC, USA and another by the name of NAVOS, Belgium were appointed to locate foreign buyers to whom the assessee company could sale its services. Thus, both the foreign companies rendered order procurement services outside India which is their business activity. Invoices received from the parties also show that services rendered by them were sales procurement services and not fees for technical services or royalties. The contention of the learned Departmental Representative that the services provided is in the nature of advisory services based upon the skills of the non-resident, is contrary to the terms and conditions of the agreements. In the previous year relevant to the assessment year 2012-13 only the retainer fee as per the agreement was paid and no order procurement services in real terms were materialized by the said non-resident. Thus, the Explanation Clause of section 9 (vii) of the Act will not be applicable on the ground that income was from the source outside India. Both the non-resident assessee derived their income as their business activity and their business profit is determined under Article 7 of DTAA between India and USA as well as from Article 7 of DTAA between India and Belgium and will then decide as to where business income will be taxable. Therefore, none of the provisions of the section 9 of the Act will be applicable in the present case, business income cannot be treated as fees for technical services as held by the assessing officer. Therefore, the assessing officer as well as Commissioner (Appeals) was not correct in treating the “order procurement services” rendered by the non-residents and commission/retainer fee as royalty and fees for technical services. The decisions of the Hon’ble Apex Court relied upon by the learned Departmental Representative are factually different as the transactions was between India and Switzerland and not between two different non-resident as is in the present case. The order of the Commissioner (Appeals) is set aside. Thus appeal of the assessee is allowed.
9. In result, appeal of the assessee is allowed.