TMI Blog2017 (9) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ial to show human involvement in the activities explained by the assessee. From the above facts it is observed that the assessee is merely using the technology provided by the parent company and no managerial, consultancy and technical services are provided by the parent company. Therefore, we are of the considered opinion that the payment made is not for FTS and the decisions cited in the above cases relied upon by the Ld.AR are squarely applicable in the assessee’s case and we agree with the assessee that the payment was for reimbursement of expenses and in reimbursement of expenses, no tax is deductible u/s.195 of IT Act as held by this Tribunal in Cairn Energy Pvt. Ltd. v. Assistant Commissioner of Income tax [2009 (2) TMI 259 - ITAT CHENNAI]. Accordingly, we delete the addition made by the AO and set-aside the orders of lower authorities. The assessee’s appeal on server maintenance charges is allowed. In respect of testing and development charges, the payment was made to Hutchinson Italy for the services rendered in the Vendor location in Italy. For establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. The explanation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. For that the Commissioner of Income Tax (Appeals) failed to appreciate that in the instant case the appellant had deducted tax at source in respect of the payment of professional charges and corporate maintenance charges. 9. For that the Commissioner of Income Tax (Appeals) erred in upholding the (disallowance of the server maintenance charges ₹ 7,32,960/- u/s.40(a)(i). 10. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of the testing and development charges of ₹ 16,20,432/- u/s.40(a)(i). 11. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the payments made towards service maintenance charges and the testing and development charges are not technical fees payable outside India. 12. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the appellant is not liable to deduct tax at source on the payments made towards server maintenance charges as the said payment was in the nature of reimbursement of actual cost and there was no profit element resulting in income in the hands of the parent company. 13. For that the Commissioner of Income Tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e went on appeal before the Ld.CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO. Therefore, the assessee filed appeal before this Tribunal. 6.0 During the appeal, the Ld.AR of the assessee made two fold arguments. Firstly the AR argued that as per the provisions of the 40(a)(i) of the Act, prior to amendment the word used in section was tax has not been paid or deducted and according to the Ld.AR the disallowance u/s.40(a)(i) is applicable only in the case, where the tax has not been paid or deducted under Chapter-XVII-B of Income Tax Act. In assessee s case, the assessee has deducted the TDS but paid to the Government of India account in the subsequent year. According to the Ld.A.R, the assessee has complied with the statute by deducting the tax and hence the disallowance u/s.40(a)(i) does not arise. 6.1 The second argument of the assessee on this ground is that the assessee is covered by the DTAA and the Ld.AR invited our attention to the provisions of DTAA between India, Germany and UK more specifically to Article-24 of the Indo-German Treaty and Article-26 of the Indo-UK Treaty and argued that both the treaties have provided for the nondiscrimination c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the previous year in which such tax has been paid or deducted. Explanation.-For the purposes of this sub-clause, - ( A) royalty shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; ( B) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; The appellant contends that the section prescribes disallowance only in those instances where tax has not been paid or deducted under Chapter XVII B. The appellant has also drawn attention to the amended Section: Similarly, after the amendment the relevant Sec.40(a)(i) reads as under: Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 47[38], the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession ,- ( a ) in the case of any assessee- 48[( i )49 50any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- ( A ) outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the same conditions are or may be subjected. Article 26 of the DTAA between India and UK: ARTICLE 26 - Non-discrimination-2: The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. The impugned payments under consideration are payments made to German/UK nationals. It is the contention of the appellant that both treaties provide that nationals of one of the treaty countries will not be subjected to taxes in the other country which are more burdensome on these foreign nationals than on the residents of that other country. It is the submission of the appellant that the provisions for disallowance for non-deduction of tax at source did not apply to domestic payments in the year under appeal. It is therefore the contention of the appellant that such disallowance cannot be made applicable to the nondomestic payments as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the IT Act, 1961. It reads thus: 8.17 We therefore hold that in view of the provision of art. 26(3) of DTAA, the AO cannot seek to invoke the provisions of s.40(a)(i) of the Act for deduction while-computing the profits and gains of business or profession. A similar view was taken by Tribunal Delhi Bench in the case of International India (P) Ltd. (supra). To sum up, the payments made on account of rentals for hosting of websites on servers are not in nature of interest or royalties or fee for technical services or other sum chargeable to tax in India. CBDT has revised the procedure for deduction of tax at source on remittances made out of the country. The provisions of DTAA are also in favour of the assessee. Accordingly, the assessee was not required to deduct tax at source under s.195 of the Act while making payments outside India. We decide this issue in favour of the assessee. In Para No.8.16 of the Order cited, the Co-ordinate Bench held that similar payments in residents does not attract the disallowance in the event of non-deduction of tax at source. Thus, taxing the amount u/s.40(a)(i) for non-deduction of tax at source on similar amounts tantamount to disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er maintenance and testing and development charges there is no human involvement and thus the payment cannot be held as Fee for technical services. 12.0 The nature of the services rendered by the parent company in respect of Server maintenance and testing and development charges were elaborately discussed by the Ld.CIT(A) in his Order which is extracted as under: Server maintenance : The appellant has submitted that the payments are not in the nature of fees for technical services. These payments were only towards cost of server maintenance shared by the appellant. The server belongs to the parent company of the appellant and is based in Germany. All the activities of the parent company as well as its subsidiaries based around the world (including the appellant) were routed through this server. The server enabled the administration of the Hyperion ERP across all the entities in the group. The activities included periodical data back-up, software up-gradation and renewal, inter-office communications like Messenger and communicator, etc., mail and user ID creation within the server and related backup, internet and intranet, anti-virus kits and trouble-shooting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment. Therefore, the appellant submitted that the payment was not made for technical services falling within the meaning of technical services envisaged in the DTAA between India and Italy or u/s 9(1)(vii) of the Income tax Act. The charges paid could only be considered as business profits of the non-resident. The appellant further pointed out that Article 7 of the DTAA between India and Italy provides that the business income of a resident of one country arising from another country is chargeable to tax in the other country only if the entity has a Permanent Establishment in that country, and that too income is chargeable only to the extent of profits attributable to that Permanent Establishment. Hutchison Italy did not have a Permanent Establishment in India to which income from these testing and development activities could be attributed. Hence by virtue of the treaty, there was no income chargeable to tax in India. The appellant has relied on the decision of the Delhi Bench of the Income Tax Appellate Tribunal in Lufthansa Cargo India (P) Ltd. v Deputy Commissioner Income tax [2004] 91 lTD 133 (Del), the decision of the Bangalore Bench of Income Tax Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent charges, the Ld.AR argued that the payment was not in the nature of FTS hence the TDS u/s 195 is not applicable. Further the payments are covered by the DTAA between India and Italy and according to the treaty unless the payee has Permanent Establishment(PE) in India the business profits are not taxable u/s 9(1)(vii) of IT Act. Thirdly the Amendment to Explanation-2 of Section 9(2) was made by Finance Act, 2007 with retrospective effect from 1976 and the assessee cannot presume and deduct the tax at source. 15.0 The server maintenance charges are paid for usage of intranet, internet, mail data backup, etc., located at Germany. The Server is administered by parent company and the activities support the periodical data backup, Software upgradation and renewal, Inter-office communication like Messenger and communicator etc., The main thrust of the argument of the assessee is that there is no element of human involvement in case of server maintenance the machines are used for all the above activities. The output of the technology is used by the assessee and it was submitted that the it was like using the internet from the Google website or using the telephone. 15.1 The fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the said Explanation the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services . The word technical is preceded by the word managerial and succeeded by the word consultancy . Since the expression technical services is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on the Interpretation of Statutes (Twelfth Edition) in the following words (page 289) : Where two or more words which are susceptible of analogous meaning are coupled together, nosicutur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general. This would mean that the word technical would take colour from the words managerial and consultancy , between which it is sandwiched. The word managerial has been defined in the Shorter Oxford English Dictionary, Fifth Edition as : of pertaining to, or characteristic of a manager, esp. a professional manager of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 9(1)(vii) of the said Act. This is so because the expression technical services takes colour from the expressions managerial services and consultancy services which necessarily involve a human element or, what is now a days fashionably called, human interface This principle has been reiterated several times by various Courts and the Tribunals as have been highlighted by the learned Counsel during the course of hearing. Thus, one has to see whether any kind of human interface or human involvement is there for providing technical services by the PTL in this case. 15 . The Hon'ble Judge in the case of Skycells Communications Ltd. (Supra) while interpreting the word fees for technical services as defined in Explanation 2 to section 9(1)(vii) has made a very important observation: 5. In the modern day world, almost every facet of one's life is linked to science and technology in as much as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as technical service for the purpose of section 194J of the Act. 7. The use of the internet and the world wide web is increasing by leaps and bounds, and there are hundreds of thousands, if not millions, of subscribers to that facility. The internet is very much a product of technology, and without the sophisticated equipment installed by the internet service providers and the use of the telephone fixed or mobile through which the connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r from the words managerial and consultancy , between which it is sandwiched. The word managerial has been defined in the Shorter Oxford English Dictionary, Fifth Edition as: of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc. The word manager has been defined, inter alia, as: a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization etc.; a person controlling the activities of a person or team in sports, entertainment, etc. It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression manager and consequently managerial service has a definite human element attached to it. To put it bluntly, a machine cannot be a manager. 14. Similarly, the word consultancy has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of server maintenance charges was the usage of various activities mentioned above and no human interface is involved. According to the assessee, usage services are utilized by the parent company and the subsidiary companies alone and no third party was allowed any usage or access. It was also emphasized that only actual costs are recovered by the parent company from group constituents and there was no profit element. The AO and Ld.CIT(A) did not bring any material to show human involvement in the activities explained by the assessee. From the above facts it is observed that the assessee is merely using the technology provided by the parent company and no managerial, consultancy and technical services are provided by the parent company. Therefore, we are of the considered opinion that the payment made is not for FTS and the decisions cited in the above cases relied upon by the Ld.AR are squarely applicable in the assessee s case and we agree with the assessee that the payment was for reimbursement of expenses and in reimbursement of expenses, no tax is deductible u/s.195 of IT Act as held by this Tribunal in Cairn Energy Pvt. Ltd. v. Assistant Commissioner of Income tax [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the DTAA (and not by article -7) which reads as under: ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services. 3. The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the other provisions of this Convention. 16.5 The assessee submitted that the services are rendered outside India and to tax the income under section 9(1)(vii) of IT act in the year under consideration the services should have been rendered in India and utilized in India. The explanation to section 9(2) was introduced in 2007 with effect from 1976 and the Assessment year under consideration is 2003-04 assessee cannot predict the amendment and deduct the TDS which is an impossible task. 16.6 The payment was made for FTS and it is taxable as per the IT Act and also as per the DTAA as per our discussion in the preceding paragraphs of this order. However, the services are rendered outside India and utilized in India. As per the decision of Hon ble Supreme Court relied upon by the Ld.AR in the case of Ishikawajima-Harima Heavy Industries Ltd v/s DIT (2007) (288 ITR 408), clarified that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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