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2025 (5) TMI 1409 - AT - Income TaxTDS u/s 195 - Disallowance u/s 40(a)(i) in respect of payment made to non-resident - Managerial Services or not - Income Taxable in India or not - HELD THAT - We observed that the service agreement submitted before us indicate that the functions performed by the dash enterprises involves correspondence services maintaining client database and review of the communications daily and reply daily. It also involves payment follow up from its customers. In our considered view there is merit in the submissions of the assessee that these services too not partake the nature of managerial services. This submission is supported by the decision of Panalfa Autoelektrik Ltd 2014 (9) TMI 706 - DELHI HIGH COURT and Springer Nature Customer Services Centre GmbH 2023 (7) TMI 618 - DELHI HIGH COURT Findings of ld. CIT (A) relating to DTAA - As observed that the services rendered by Dash Enterprises outside India and compensation paid to them for the services rendered outside India. It is fact on record that the compensation paid to Dash Enterprises is not taxable in India hence the provisions relating to TDS are not applicable. Therefore the case laws relied upon by CIT (A) are distinguishable. Hence we are inclined to allow the grounds raised by the assessee. Accordingly the appeal filed by the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Tribunal in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Nature of Services Rendered by Dash Enterprises and Applicability of Section 40(a)(i) Relevant legal framework and precedents: Section 40(a)(i) of the Act disallows expenditure in the hands of the payer if tax is not deducted at source on payments to non-residents, where such deduction is mandatory under the Act. Section 9(1)(vii) defines income deemed to accrue or arise in India, including fees for technical services (FTS), which includes managerial, technical, or consultancy services. The India-Australia DTAA provides definitions and exemptions, particularly Article 12(3)(g), which excludes certain services from FTS. Precedents cited include the Delhi High Court decisions in DIT vs Panalfa Autoelektrik Ltd and CIT vs Springer Nature Customer Services Centre GmbH, which clarified that managerial services involve activities such as discovering, developing, defining, and evaluating organizational goals and policies, not routine clerical or support functions. Court's interpretation and reasoning: The Tribunal examined the service agreement and invoices submitted by the assessee, which described services such as receiving, sorting, scanning, emailing correspondence, client database management, printing and mailing letters, and advising on returned mail. These activities were characterized as clerical and support services rather than managerial or technical services. Relying on the aforementioned precedents, the Tribunal held that the services did not involve defining or evaluating policies or goals, nor did they involve managerial decision-making or technical expertise. Therefore, these services did not fall within the ambit of 'managerial services' under section 9(1)(vii) of the Act. Key evidence and findings: The service agreement and invoices detailed the nature of services, which were essentially communication and debt collection support functions without any transfer of technology or managerial control. Application of law to facts: Since the services were not managerial or technical, they did not constitute FTS under the Act. Consequently, the obligation to deduct tax under section 195 did not arise, and the disallowance under section 40(a)(i) was unwarranted. Treatment of competing arguments: The Revenue contended that the services were managerial and thus taxable, but the Tribunal found the Revenue's reliance on the lower authorities' findings unconvincing in light of the detailed nature of services and binding judicial precedents. Conclusion: The Tribunal allowed the appeal on this issue, holding that the payments to Dash Enterprises were not for managerial services and thus not subject to TDS or disallowance under section 40(a)(i). Issue 2: Chargeability of Payments under the India-Australia DTAA and Section 195 Relevant legal framework and precedents: Section 195 of the Act requires deduction of tax at source on payments to non-residents only if the income is chargeable to tax in India. Section 90(2) mandates that the provisions of the DTAA, if more beneficial to the taxpayer, override domestic law. Article 12(3)(g) of the India-Australia DTAA excludes payments for services that do not make available technical knowledge, experience, skill, know-how, or processes from being treated as FTS. Judicial precedents include the Supreme Court's decision in Engineering Analysis Centre of Excellence (P) Ltd vs CIT, which distinguished obligations under section 194E from section 195, emphasizing that TDS under section 195 is required only on income chargeable to tax. Court's interpretation and reasoning: The Tribunal observed that the services rendered by Dash Enterprises were performed outside India, and the payments were for clerical and support services related to communication and debt collection. Under Article 12(3)(g), such services do not constitute FTS as they do not transfer technical knowledge or skill. The Tribunal also noted that the CIT(A)'s contrary view that the DTAA or the Act provisions more beneficial to the Revenue should be applied was erroneous and contrary to section 90(2) of the Act, which favors the taxpayer. Key evidence and findings: The factual matrix showed that Dash Enterprises did not provide any technical or managerial expertise but only performed routine correspondence and database management services. The payments were made for services rendered outside India and thus not taxable in India under the DTAA. Application of law to facts: Since the income was not chargeable to tax in India, the obligation to deduct tax under section 195 did not arise, rendering the disallowance under section 40(a)(i) invalid. Treatment of competing arguments: The Revenue relied on the CIT(A)'s findings and earlier decisions, but the Tribunal distinguished those cases on facts and legal principles, emphasizing the correct application of the DTAA and the Supreme Court's guidance. Conclusion: The Tribunal held that the payments to Dash Enterprises were not taxable in India under the DTAA and thus no TDS was required, invalidating the disallowance under section 40(a)(i). Issue 3: Levy of Interest under Sections 234B and 234C Relevant legal framework: Sections 234B and 234C of the Act impose interest for default in payment of advance tax and deferment of advance tax installments respectively. Court's reasoning and findings: The Tribunal noted the grounds raised by the assessee challenging the interest levies but did not elaborate on detailed reasoning in the judgment excerpt. However, since the disallowance was deleted and tax liability reduced, the basis for interest under these sections would also be affected. Conclusion: The Tribunal allowed the appeal on these grounds as well, effectively setting aside the interest levies. 3. SIGNIFICANT HOLDINGS "In our considered view there is merit in the submissions of the assessee that these services too not partake the nature of managerial services. This submission is supported by the decision of Hon'ble Delhi High Court in the case of Panalfa Autoelektrik Ltd (supra) and Springer Nature Customer Services Centre GmbH (supra)." "It is fact on record that the compensation paid to Dash Enterprises is not taxable in India, hence, the provisions relating to TDS are not applicable." "The payments made for such services were not taxable in India under the provisions of the DTAA and the Appellant was, accordingly, not required to deduct tax at source while making the said payments to Dash Enterprises." "The disallowance of Rs. 15,64,901 made under section 40(a)(i) of the Act is unsustainable, unwarranted and deserves to be deleted." Core principles established include:
Final determinations:
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