2009 (8) TMI 130 - AT - Income Tax

TDS u/s 195 - Payment in nature of technical or consultancy services - DTAA between India and France - Payments for testing charges - evaluation of cars manufactured - conducting impact tests on instrument panels fitted in the cars - As per work order UTAC was to carry out the tests on three models namely Maruti 800 Maruti Omni and Maruti Gypsy. M/s UTAC was to carry out 12 impact tests for each model. AO was of the view that UTAC had the expertise and the skill to perform the tests which are required to be made as per s. 9(1)(vii). Fees for technical services meant any consideration for the rendering of any managerial technical or consultancy services. He was of the opinion that UTAC rendered technical services and therefore AO directed the assessee to deduct tax @ 10 per cent from the payments being made at the time of remittance to UTAC. CIT(A) held that testing charges paid were fee for technical services within the meaning of s. 9(1)(vii) and art. 13 of DTAA between India and France as the same were paid in consideration for services of technical nature. HELD THAT - We find that it is an unambiguous legal position that by the virtue of s. 90(2) of the Act where the Central Government has entered into an agreement with the Government of any country outside India under sub-s. (1) for granting relief to tax or as the case may be avoidance of double taxation then in relation to the assessee to whom such agreement applies the provisions of this Act shall apply only to the extent they are more beneficial to that assessee. Thus provisions of such DTAAs override the provisions of the IT Act 1961 to the extent these agreements are more favourable to the assessee. It may be noted that art. 13(4) of DTAA between India and France excludes payment to an employee of the person making the payment and to any individual for independent personal services mentioned in art.15. On the other hand Expln. 2 to s. 9(1)(vii) excludes the consideration for any construction assembly mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . There is no dispute that UTAC France does not fall in the category of persons excluded under art. 13(4) of the treaty or Expln. 2 to s. 9(1)(vii). After exclusion of such persons the definition of expression fee for technical services will be the same under both the provisions. In other words the expression fee for technical services under provisions of art. 13(4) of the Indo-French treaty as well as Expln. 2 to s. 9(1)(vii) would mean the payment made to any person in consideration of a managerial technical or consultancy services. One of the discernible common factors in Indian DTAA with UK USA and Switzerland is that in all these treaties fees for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property is outside the scope of fees for technical services liable to separate treatment under the respective DTAA. The scope of expression fees for technical services in these treaties appears to be far more restricted than the scope of the same expression in Indo-French DTAA which broadly defines fees for technical services as to mean payments in consideration for services of a managerial technical or consultancy nature. Therefore whereas payments for all kinds of technical services are to be treated as fees for technical services for the purpose of art. 13(4) of Indo-French DTAA such payments cannot be treated as to be in the nature of fees for technical services under respective articles in Indo-UK Indo-US and Indo-Swiss DTAA in case the same constitutes fees for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property . Therefore scope of fees for technical services is much more restricted in Indo-UK Indo-US and Indo-Swiss DTAAs vis-a-vis the DTAA that India has entered into with France. Hence in all these DTAAs fees for technical services will not include the fees received for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of a property. It is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein as protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA are therefore required to be read with the protocol clauses and are subject to the provisions contained in such protocol. Examined in the light of DTAAs between India and UK USA and Switzerland we find that in the case before us the assessee had not purchased any property from UTAC France. Therefore none of the fees i.e. impact testing fees or fee paid for test reports is ancillary and subsidiary as well as inextricably and essentially linked to the sale of a property. The impact tests to be conducted by UTAC were purely technical in nature. After carrying out the impact tests in above manner testing reports were submitted to assessee which were utilised for the purposes of modification of the products. This in our considered opinion will amount to rendering of technical services/information in the form of impact testing reports by UTAC France to the assessee. Accordingly the amounts paid by the assessee to UTAC would be in nature of technical or consultancy services. The contention of assessee that testing reports are similar to blood reports prepared by a pathological laboratory this in our considered opinion is not correct. The payment of blood reports is made by the patient and medicine is prescribed by doctor. In this case the patient as well as doctor are interested in diagnosis of disease and its cure. But in the case of assessee the testing reports have helped the assessee not only to identify the deficiency but also removal of defect in the product which ultimately led to development of product of specified quality. Hence both are not comparable. Whether the payment made will be taxable in India under art. 13(4) of the treaty read with Expln. 2 to s. 9(1)(vii) of the Act? HELD THAT - The test reports have been used by the assessee inIndiain manufacturing of cars. There is no dispute about this fact. It has been laid down in Steffen Robertson Kirsten Consulting Engineers Scientists 1997 (10) TMI 393 - ADVANCE RULING AUTHORITY that the statutory test for determining the place of their accrual is not the place where the services for which the payments are being made are rendered but the place where the services are utilised. Therefore the payments made to UTAC are chargeable to tax in India. Therefore we are of the considered opinion that UTAC France had provided technical services to the assessee and those technical services were used in India in product development of desired specifications and hence payments for such technical services are liable to be taxed in India. Therefore the assessee was liable to deduct tax at source u/s. 195(2). Accordingly we do not find any reasons to interfere with the findings of the learned CIT(A) who upheld the order of the AO directing the assessee to deduct tax at source.

Summary

Issues Involved:
1. Nature of payments made by the assessee to UTAC, France.
2. Applicability of Section 195(2) of the Income-tax Act.
3. Interpretation of "fees for technical services" under Section 9(1)(vii) of the Income-tax Act and Article 13 of the DTAA between India and France.
4. Maintainability of appeals under Section 248 of the Income-tax Act.
5. Taxability of payments under the DTAA and the Income-tax Act.

Detailed Analysis:

1. Nature of Payments Made by the Assessee to UTAC, France:
The primary issue was whether the payments made by the assessee to UTAC, France, for conducting impact tests on cars were in the nature of technical services. The assessee argued that the payments were not for technical services as defined under Section 9(1)(vii) of the Income-tax Act, asserting that no technical knowledge or expertise was transferred. However, the Assessing Officer and the CIT (Appeals) held that the services provided by UTAC were technical in nature, as they involved expertise and skill in conducting impact tests, which are managerial, technical, or consultancy services as per the definition.

2. Applicability of Section 195(2) of the Income-tax Act:
The Assessing Officer directed the assessee to deduct tax at source under Section 195(2) of the Income-tax Act, which pertains to payments made to non-residents. The assessee contended that these payments were not subject to tax deduction at source as they were not for technical services. The Tribunal upheld the Assessing Officer's directive, confirming that the payments were for technical services and thus subject to tax deduction under Section 195(2).

3. Interpretation of "Fees for Technical Services" under Section 9(1)(vii) of the Income-tax Act and Article 13 of the DTAA between India and France:
The Tribunal examined the definition of "fees for technical services" under both the Income-tax Act and the DTAA. It noted that Article 13(4) of the DTAA defines "fees for technical services" similarly to Explanation 2 to Section 9(1)(vii) of the Act, which includes managerial, technical, or consultancy services. The Tribunal also considered the protocol to the Indo-French DTAA, which requires interpreting the term in the context of other treaties with OECD members. However, it concluded that the payments to UTAC were for technical services as they involved significant technical expertise and were used for product development in India.

4. Maintainability of Appeals under Section 248 of the Income-tax Act:
The Tribunal addressed whether the appeals were maintainable under Section 248, which allows an assessee to appeal against an order directing tax deduction at source. It was clarified that the assessee had deducted and paid the tax but sought a declaration that no tax was deductible. The Tribunal held that the appeals were maintainable under Section 248.

5. Taxability of Payments under the DTAA and the Income-tax Act:
The Tribunal discussed the taxability of the payments under the DTAA and the Income-tax Act. It was established that the services provided by UTAC were utilized in India, making the payments taxable in India under Article 13(4) of the DTAA and Explanation 2 to Section 9(1)(vii) of the Act. The Tribunal concluded that the payments were indeed for technical services, and the assessee was liable to deduct tax at source.

Conclusion:
The Tribunal upheld the orders of the CIT (Appeals) and the Assessing Officer, confirming that the payments made by the assessee to UTAC, France, were for technical services and were subject to tax deduction at source under Section 195(2) of the Income-tax Act. The appeals filed by the assessee were dismissed.