2025 (5) TMI 1709 - AT - Income Tax

TDS u/s 195 - Disallowance of business development and marketing expenditure u/s 40(a)(i) for want of TDS - assessee claimed expenses towards Head Office business development expenses - assessee is a branch office/PE of a foreign company located in USA. Whether the payment made by the assessee to the Head Office towards rendering these services falls in the term fee for technical services as per the definition u/s 9(1)(vii) of the Act as well as the definition provided in Article 12 of Indo-US DTAA? - HELD THAT - In the case in hand with limited material available before us and in the absence of the relevant communication if any between the parties we find that when the entire task of identifying choosing projects analysing technical feasibility making technical presentation price negotiations monitoring supervising of the projects are undisputedly technical services rendered by the US Head Office. Since these services were rendered in India therefore falls in the terms of make available as per the Article 12 of Indo-US DTAA. It is not the case of seeking a review or evolution of the proposed projects but the entire services right from selecting the project to the bidding and completion of the projects are provided by the Head Office. Assessee was given another opportunity at the level of DRP to substantiate its claim that the payments do not fall in the ambit of section 195 for deduction of TDS and after considering the remand report the DRP has passed the directions. So far as the order of this Tribunal for the A.Y.2020-21 we find that in the said assessment year the AO made an addition by treating the payment u/s 44C which was disputed by the assessee and claimed that the payment is not for general administrative but it is for technical services and therefore the Tribunal 2024 (10) TMI 1659 - ITAT HYDERABAD held it is evident from the record that since the authorities have taken a stand that salaries and perks to the employees fall u/s 44C of the Act and did not proceed further to verify the evidence in the light of the decisions of Samsung Engg.Co.Ltd. 2010 (11) TMI 840 - ITAT MUMBAI we deem it just and proper to restore this issue to AO to verify this fact and if it is found that such expenses were exclusively attributable to the Indian project not to make any disallowance under section 44C of the Act. Thus the Tribunal remanded the matter to the record of the AO for proper verification of the facts regarding these payments and consequently the said order of the Tribunal would not help the case of the assessee. Accordingly no error or illegality in the impugned order of the AO passed in pursuance to the directions of the DRP. Appeal filed by the assessee is dismissed.

The core legal questions considered by the Tribunal in this appeal revolve around the tax treatment of payments made by the Indian Permanent Establishment (PE) of a foreign company to its Head Office in the USA. Specifically, the issues are:

1. Whether the business development and marketing expenses amounting to Rs. 1,98,77,458 paid to the Head Office constitute "fees for technical services" (FTS) under section 9(1)(vii) of the Income Tax Act, 1961 and Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).

2. Whether the payments made to the Head Office are subject to tax deduction at source (TDS) under section 195 of the Act.

3. Whether the Assessing Officer (AO) was justified in disallowing the claimed expenses under section 40(a)(i) of the Act for failure to deduct TDS.

4. The applicability and interpretation of the "make available" clause under Article 12 of the India-US DTAA in the context of the services rendered by the Head Office.

5. The relevance and impact of prior Tribunal orders and judicial precedents on the present facts.

Issue-wise Detailed Analysis:

Issue 1 & 4: Nature of Payments and Applicability of "Fees for Technical Services" under Section 9(1)(vii) and Article 12 of Indo-US DTAA

The legal framework includes section 9(1)(vii) of the Income Tax Act, which defines "fees for technical services" as any consideration for rendering managerial, technical, or consultancy services, including provision of technical personnel. The India-US DTAA, particularly Article 12, elaborates on royalties and fees for included services, defining "fees for included services" as payments for technical or consultancy services that either are ancillary to the use of property or "make available" technical knowledge, experience, skill, know-how, or processes.

The Tribunal noted that the assessee admitted the technical nature of the services rendered by the Head Office team, which included identifying projects, bidding, technical feasibility analysis, presentations, price negotiations, and supervision of projects in India. The assessee contended that these payments were mere reimbursements for costs incurred by the Head Office and did not involve any element of profit or markup, hence not taxable as FTS under the DTAA.

However, the Tribunal emphasized that the payments were for comprehensive technical services rendered directly to the Indian PE, which fall within the ambit of FTS under section 9(1)(vii). The Tribunal further analyzed the "make available" clause of Article 12(4)(b) of the DTAA, which requires that the services transfer or make available technical knowledge or skills. The Tribunal distinguished the present facts from precedents cited by the assessee, where services were limited to advisory or consultancy roles without transferring enduring technical knowledge.

The Tribunal relied on the remand report and DRP directions, which highlighted that the Head Office team effectively performed all technical and managerial functions necessary for project execution in India, thus "making available" technical knowledge and skills to the Indian PE. This characterization aligns with the DTAA's definition of FTS, making the payments taxable in India.

Issue 2 & 3: Obligation to Deduct Tax at Source under Section 195 and Disallowance under Section 40(a)(i)

Section 195 mandates deduction of tax at source on payments made to non-residents that are chargeable to tax in India. Failure to deduct TDS attracts disallowance of the related expense under section 40(a)(i), as was done by the AO.

The AO and DRP found that the payments to the Head Office were taxable as FTS in India and thus subject to TDS under section 195. The assessee's argument that these payments were reimbursements without profit, and hence not taxable or subject to TDS, was rejected. The Tribunal noted that the gross basis taxation of FTS under the DTAA and section 44DA of the Act negates the contention of the assessee regarding the absence of profit element.

The Tribunal also observed that the assessee failed to produce sufficient documentation or communication clarifying the nature and scope of services and the basis of cost allocation to the Indian PE. The lack of such evidence weakened the assessee's claim and supported the AO's and DRP's conclusion that TDS was required.

Issue 5: Precedents and Prior Orders

The assessee relied on judicial decisions including Bain & Company Inc., Inter Continental Hotels Group, ABB Inc., TPF Getinsa Eurostudios, and De Beers India Minerals, which generally held that payments for technical or consultancy services do not constitute FTS if no technical knowledge or skill is "made available" to the Indian entity.

The Tribunal distinguished these cases on facts, noting that in those precedents, services were advisory or project-specific without transferring enduring technical know-how. In contrast, the present case involved the Head Office team performing the entire gamut of technical and managerial functions for the Indian PE, effectively "making available" the technical expertise in India.

Regarding the Tribunal's own prior order for assessment year 2020-21, the Tribunal had remanded the matter for verification of whether expenses were exclusively attributable to Indian projects and not general overheads under section 44C. However, the present appeal concerned a different issue-taxability and TDS on payments to the Head Office-and thus the prior order did not assist the assessee's case.

Conclusions:

The Tribunal upheld the AO's and DRP's findings that the payments made to the Head Office constituted fees for technical services under section 9(1)(vii) of the Act and Article 12 of the India-US DTAA. Consequently, these payments are taxable in India on a gross basis and subject to TDS under section 195. The failure to deduct TDS justified disallowance of the claimed expenses under section 40(a)(i).

The Tribunal rejected the assessee's contention that the payments were mere reimbursements without profit and not taxable. It also found the absence of adequate evidence or communication to support the assessee's claims. The Tribunal distinguished the precedents relied upon by the assessee on factual grounds, emphasizing the comprehensive nature of technical and managerial services provided by the Head Office team in India.

The Tribunal noted the detailed analysis of the DRP and AO in the remand report, which was duly considered before finalizing the assessment order. The appeal was dismissed, confirming the addition of Rs. 1,98,77,458 to the total income and the consequent demand and penalty proceedings.

Significant Holdings:

"The dispute before us is only whether the payment made by the assessee to the Head Office towards rendering these services falls in the term 'fee for technical services' as per the definition u/s 9(1)(vii) of the Act as well as the definition provided in Article 12 of Indo-US DTAA."

"The services provided by the Head Office by the team of experts and technical personnel and therefore, the complete task of the business operations of the assessee PE, right from identifying the eligible projects, bidding for project, designing, directing, supervising and monitoring of the project activity are undertaken by the designated team."

"The payments made by the India PE to the Head Office are taxable in India as FTS under the DTAA. The Assessee's failure to deduct TDS u/s. 195 warrants the disallowance of the expense u/s. 40(a)(i)."

"The assessee has failed to demonstrate why these payments should be exempt from withholding u/s. 195, as the services rendered clearly qualify as taxable FTS under the DTAA."

"The Tribunal remanded the matter to the record of the AO for proper verification of the facts regarding these payments and consequently, the said order of the Tribunal would not help the case of the assessee."

← Previous Next →