2008 (8) TMI 480 - HC - Income Tax

TDS Fees collected to impart distance education on behalf of foreign company - assessee-company has to provide infrastructure like collecting the application forms and forward the same to IITC for the purpose of admission and after approval of admission to collect the tuition fees and remit the same to IITC USA and receive the education materials from IITC and in turn pass on the same to the students admitted by IITC in Bangalore. - In the instant case for the relevant assessment year the assessee has not deducted tax at source. But without deducting the tax at source it had remitted the entire fees collected by it on behalf of the IIT Chicago to the foreign company. - we are of the opinion that there is no necessity for the assessee to deduct the tax at source when a foreign company has not earned any profit or income in India by conducting a trade or business in India.

Summary

Issues:
1. Whether the income received by IIT, Chicago from the assessee can be treated as taxable under the Indian Income-tax Act?
2. Does the distance education imparted by IIT, Chicago through the assessee amount to business or trade and is it liable for tax?
3. Whether the income received by IIT, Chicago falls under the Double Taxation Avoidance Agreement?

Analysis:

Issue 1:
The case involved a dispute regarding the taxability of income received by IIT, Chicago from the assessee under the Indian Income-tax Act. The Revenue challenged the order passed by the Income-tax Appellate Tribunal, contending that any fee collected by the assessee on behalf of IIT, Chicago should be considered as income earned from business. However, the Tribunal held that since IIT, Chicago did not have a permanent establishment in India and the income was earned in the USA, it did not attract tax deduction at the source under section 195 of the Act. The Court agreed with the Tribunal's decision, emphasizing that if a foreign company like IIT, Chicago did not earn any profit or income in India through business activities, there was no requirement for the assessee to deduct tax at the source.

Issue 2:
The next issue revolved around whether the distance education provided by IIT, Chicago through the assessee amounted to business or trade and was thus liable for tax. The senior counsel for the assessee argued that education cannot be treated as a business or commerce, citing relevant judgments. The Court concurred with this argument, stating that imparting education does not constitute business or commerce. Additionally, since IIT, Chicago was not conducting any business in India, the fees collected for educational services in India did not qualify as income from business, further supporting the assessee's position.

Issue 3:
Regarding the application of the Double Taxation Avoidance Agreement, the Tribunal held that the income received by IIT, Chicago did not fall under specific articles of the agreement. The Court, after considering the facts and legal precedents, agreed with the Tribunal's interpretation. The Court also noted the absence of an interim order by the Revenue and subsequent developments where the entire fees collected by the assessee were remitted to IIT, Chicago without tax deduction. While a judgment cited by the senior counsel was discussed, it was found inapplicable to the present case due to the specific circumstances. Consequently, the Court dismissed the appeal in favor of the assessee based on the substantial questions of law framed.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee on all the substantial issues raised, emphasizing the non-taxability of the income received by IIT, Chicago and the educational nature of the services provided.