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| DATE: | November 7, 2013 (Date of publication) |
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| Click here to download the judgement (Metro_9_1_vii_40_a_i.pdf) |
Law on taxation of fees for technical services u/s 9(1)(vii) & Article 12 and disallowance u/s 40(a)(i) for failure to deduct TDS explained
The assessee paid Rs 52 lakhs towards “leather testing charges” to TUV Product Und Umwelt GmbH, a tax resident of Germany, without deduction of tax at source. The AO & CIT(A) disallowed the expenditure u/s 40(a)(i) on the ground that the assessee had failed to deduct tax at source. Before the Tribunal, the assessee argued that (a) as Article 12 of the India-Germany DTAA does not provide that India “shall” tax fees and royalties, the same cannot be taxed in India; (b) as the services were not rendered by the foreign company in India, the income was not chargeable to tax in India u/s 9(1)(vii); (c) as the services were rendered by an automated process and there was no human intervention, it did not constitute “fees for technical services” as defined in s. 9(1)(vii); (d) as the services were used for a 100% EOU whose products were sold outside India, the “source” of the income was outside India and so the exception in s. 9(1)(vii) (b) applied; (e) disallowance u/s 40(a)(i) was confined to amounts “payable” as at the end of the year as held by the jurisdictional High Court in Vector Shipping in the context of s. 40(a)(ia) and (f) as the taxability of the services was brought in by a retrospective amendment, the disallowance u/s 40(a)(i) could not be made. HELD by the Tribunal:
(a) The argument that as Article 12(1) of the India-German DTAA provides that the source State (“India”) “may” (and not “shall”) tax ‘fees for technical services’, the income is not chargeable to tax in India is not acceptable because the DTAA does not provide for taxation of any income. It allocates the right to tax income amongst the Contracting States. Once it enables the Contracting State to levy tax (by the use of the word “may”), the domestic law of the State come into play. Article 12 of the DTAA permits India to levy tax on fees for technical services and royalty though the rate of tax cannot exceed 10% (Pooja Bhatt 2008 TIOL 558 ITAT Mum referred);
(b) the argument that as the services have been rendered outside India, the fees thereof cannot be assessed u/s 9(1)(vii) is not acceptable in view of the retrospective amendment to s. 9(1) by the Finance Act 2010 (Ashapura Minichem 131 TTJ 291, GVK Industries 332 ITR 130 & Clifford Chance 154 TTJ 537 (Mum) (SB) referred;
(c) the argument that s. 9(1)(vii) does not apply because the entire testing process is automated and does not involve human skills and interplay is not acceptable. While in principle it is correct that if there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii), there is nothing on record to demonstrate the precise process of leather testing adopted by the German company. Further, the wider observations in Siemens (ITAT Mum) that if there is not much human involvement, it cannot be termed as rendering of technical services is not correct. It is a question of presence of or absence of human involvement and not a question of more of, or less of, human involvement (Right Florists 154 TTJ 142, Siemens Ltd, Bharti Cellular 319 ITR 139 (Del) & 330 ITR 239 (SC) referred);
(d) the argument that as the assessee is a 100% EOU, the fees should be considered to have been used for a source of income outside India and therefore not taxable u/s 9(1)(vii)(b) is not acceptable because even though the business is a 100% EOU, it is still a business carried on in India. Even if the entire products are sold outside India, the fact of such export sales by itself does not make the business having been carried outside India. A customer is not the source of income. But if the manufacturing facilities are outside India and the customers are also outside India, the source will be outside India and the exception in s. 9(1)(vii)(b) will apply;
(e) the argument that s. 40(a)(i) applies only to amounts “payable” as at the end of the year and not to amounts already “paid” as held in Merlyin Shipping 136 ITD SB 23 (Vizag) as approved (by the jurisdictional High Court) in Vector Shipping Services is not acceptable because that was in the context of s. 40(a)(ia) and not s. 40(a)(i). S. 40(a)(i) cannot be interpreted in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year;
(f) However, the argument that disallowance u/s 40(a)(i) cannot be made as the amount has been made taxable by the retrospective amendment to s. 9 is acceptable. An assessee cannot be penalized for not performing the impossible task of deducting TDS in accordance with the law which was brought in subsequently (Channel Guide 139 ITD 49 & Sterling Abrasives (Ahd) followed).
“….DTAA does not provide that India “shall” tax fees and royalties..”
If perceptively considered and insightfully examined, one may wish to pinpoint following:
“…the source will be outside India and the EXCEPTION in s. 9(1)(vii)(b) will apply.” (BOLD supplied)
Likewise, also this does not bring out properly the real bone of contention. Wishing to spare self from the hassle of attempting to elaborate, one may conveniently invite pointed attention to the eminent recorded speech of no less a personality tgan the retired CJI, S H Kapadia. That is at a conference convened on the topic of international Taxation. His illuminating address, expertly elucidating the implications, in proper light, of sub-sections of section 9, wprt the haunting controversies raised, wrongly so, based on DTAAs, is available for hearing on this website itself. Any day worth hearing, more so remembering, for enlightement and guidance.
To add: The retired CJI’s referred speech is that @ “See the Video of the presentation at the firm.moneycontrol.com. …..See also Chief Justice Kapadia’s presentation”
(Note for the Administrator:
Some portion of the comment posted , immediately following the line opening, “If perceptively considered..” is found omitted (may be, a technical error). For sake of completeness, will you mind rectifying it.)
No personality is bigger than the first principles of law.
Unless we rise above this idol worshiping, and stop bothering about what judicial officers say other than in binding judicial precedents, the majesty of law itself could be under a serious threat.
No help forthcoming as requested for ; don’t know why so! Hence, to self complete the intended mission>
Adding-on : In the referred missing portion of the posted comment , it was simply pointed out that, – as argued but wrongly so, in one’s conviction, – on which there could conceivably be no second view even remotely possible, – it is highly illogical rather patently absurd to suggest that , it is the applicable DTAA, NOT the domestic law, which needs to be looked into for adjudicating on any such question as herein; that is, whether or not a given income is eligible to taxation in India. To dilate, -as the nomenclature itself unequivocally signifies, a tax treaty is entered into primarily to fulfil the basic and the only objective of avoidance of double taxation of same income in both countries. By any stretch of argument or imagination, It is not but too late in the day to even suggest that a given income , even if not clearly taxable as per the domestic law of both countries, the DTAA should nonetheless come to help the Revenue of either country to bring it to tax, howsoever unlawful, or farfetched or fallacious, that be. To one’s understanding, this is one of the viewpoints rightly put forth and sufficiently stressed, with the rare advantage of his life-long experience in the field of law practice, so also in his wisdom, by the NOW RETIRED CJI in his referred Speech.
CAUTION: Any such passionate attempt, especially by one totally retired from active tax practice years ago, to first put in, on top of it to go, out of gratis, that one or more extra miles, is WHOLLY AND EXCLUSIVELY aimed at striving and driving home one’s own independent but well considered points of view on any topic on hand. Of course, that entirely depends on whether or not the reader-recipient, of any such feedback , well-meaning and –intended at that, is reasonably equipped so as to receive it, to its last minute detail, precisely and exactly on the same wavelength. As otherwise, the inevitable consequence is the irritant of distortion /disturbance.
In all sincerity and earnestness , humbly recommend, – in order to intimately know, if so minded also appreciate in proper light, as to why , despite all sincere efforts on the part of anyone , still things invariably go wrong / haywires , thereby inevitably posing a grave threat to not just the law, but to both ‘law and order’, – one should remember, and worth keep reminding self, of many useful hints / advice the renowned legal luminary, Nani A Palkhivala has offered from the viewpoint of ‘common good’ (public interest !). Ref. his related mind-teasing and thought – provoking published articles and speeches in the Book –WE. THE PEOPLE (Part IV-15,17), the other Book being., -We, the Nation THE LOST DECADEES.
For benefit of those truly and earnestly desiring to try and accomplish ‘self-improvement’, in the form of professional efficiency, again sincerely recommend to, look up the not-so-difficult -to – read and assimilate useful hints as collated, and to be found, in the published write-up on the website of Taxguru, sub.- Section 194 IA.
A Correction > On the fifth line from top, to more appropriately read, – ‘exigible’, in place of ‘eligible’.