9911796707
TMI Blog2022 (4) TMI 1489X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, we shall adjudicate first IT(IT)A No.4/Bang/2014 pertaining to assessment year 2011-2012. IT(IT)A No.4/Bang/2014 (Asst.Year 2011-2012) 3. The grounds raised read as follows:- "1.1 The order passed by the learned Commissioner of income tax (Appeals) - IV, Bangalore [learned CIT(A)] is bad in law and liable to be quashed. 2.1 The learned CIT(A) has erred in concluding that there was no violation of principles of natural justice in passing the order passed under section 201 (1) of the Income tax Act, 1961 [Act]. 2.2 The order passed by the learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore without providing sufficient and proper opportunity of hearing, without allowing the appellant to rebut I submit explanation in respect of the conclusions drawn from examination of the senior employee of appellant, is against the principles of natural justice, bad in law and hence liable to be quashed. 3.1 The learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore has erred in concluding that payments made to M/s Infosys Technologies (China) Company Ltd [overseas subsidiary] amounting to Rs.239,93,89,985/- resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT(A) that the reimbursement of expenses is liable for deduction tax at source under section 195 is incorrect, bad in law and liable to be quashed. 9.1 Assuming without admitting that the payments made to overseas subsidiary were chargeable to tax in India, the learned CIT(A) has erred in concluding that the said payments are liable for TDS at the rate of20% as per section 206AA of the IT Act, 1961 9.2 The learned CIT(A) has erred in not appreciating that (i) Overseas subsidiary was not required to obtain PAN under the provisions of the Income tax Act, 1961 and consequently there was no requirement to furnish its PAN under section 206AA; (ii) Section 206AA does not override the Double Taxation Avoidance Agreements an or section 90 of the Income tax Act; (iii) in any case, the TDS rate as per section 206AA cannot exceed the rate at which the income is chargeable to tax in the hands of non-resident. 9.3 In any case and without prejudice, despite having called for and obtained the PAN of overseas subsidiary during the appellate proceedings, the learned CIT(A) erred in concluding that the impugned payments were liable for TDS at 20% under section 206AA of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said payments were made without deduction of tax at source. The assessee's contention was that the payments were not chargeable to tax under the Act or under the relevant Double Taxation Avoidance Agreement (DTAA). 5. The assessee, however, received order u/s 201(1) and 201(1A) of the I.T.Act (order dated 31.03.2013 for assessment year 2011-2012) whereby the Assessing Officer held that the assessee to be an `assessee in default' for not deducting tax at source u/s 195 of the I.T.Act. The A.O. held that the payments made to Infosys China is liable for tax deduction u/s 9(1)(vii) of the I.T.Act, as fees for technical services (FTS). The A.O. while concluding, placed heavy reliance on the order of the Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT reported in (2010) 40 SOT 220 (Mum.). The A.O. also rejected the plea of the assessee that it is entitled to the exception of section 9(1)(vii)(b) of the I.T.Act (refer page 26 to 36 of the A.O.'s order passed u/s 201(1) and 201(1A) of the Act). 6. Aggrieved, the assessee filed an appeal to the first appellate authority. The CIT(A) confirmed the order passed u/s 201(1) and 201(1A) of the Act. The CIT(A) held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos. 2 & 3/Bang/2014 - dated 25.5.2016 ITAT Bangalore bench [Page 1072 to 1086 of compilation filed on 9.12.2021] Paras 11 to 13 * OGE to IT AT order passed on 27.12.2017 for AY 2009-10 & 2010-11 [page 1088 to 1091 of compilation filed on 9.12.2021] Paras 4 to 8 * Qualcomm Incorporated v ADIT [2015] 56 taxmann.com 179 (Delhi Trib) [Page 910 of compilation filed on 17.3.2017 - Para 67 * Circular No 1/2011 dated 6.4.2011 explaining the provisions of Finance Act 2010 - page 1093 of the compilation filed on 9.12.2021] [Para 5.1] * Device Driven (India) P Ltd v CIT [2021] 126 taxmann.com 25 Kerala High Court [Page 1140 to 1150 of compilation filed on 9.12.2021] [Paras 23 to 30] * PCIT v MotifIndiaInfotech P Ltd [2018] 409 ITR 178 (Guj) [Page 1119 to 1126 of compilation filed on 19.1.2022] Para 7 to 11 * Ashapura Minichem Ltd v ADIT [2010] 131 TTJ 291 Mumbai Trib [Page 854 to 868 of compilation filed on 17.3.2017] Para 5, Para 19 * The ITAT Mumbai Bench in Deloitte Haskins & Sells v ACIT [2017] 79 taxmann.com 175 Para 17 * Announcement 19 issued on 16th March 20111 by the State Administration of Taxation, China on the treatment of technical fees under the India-China DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India *and consequently not liable for TDS under section 195. Non applicability of section 206AA * Without prejudice, for AY 2011-12, the. learned AO has computed TDS under section 195 at 20% by invoking section 206AA for the reason that PAN of Infosys China is not available. [refer page 106 of the order passed under section 201 (1)&(1 A) for AY 2009-10 to AY 2011-12] The learned CIT(A) called for the PAN of Infosys China and the same was submitted on 27.9,2013. [Page 363 to 366 of paper book] However, the learned CIT(A)has not allowed any relief on this issue. * Ground No 9.1 to 9.3 before the Tribunal challenges the applicability of section 206AA. * DTAA overrides section 206AA - Decisions relied on - Nagarjuna Fertilizers and Chemicals Ltd v ACIT [2017] 78 taxmann.com 264 (Para 33) Hyderabad Special bench. * Danisco India P Ltd v UOl [2018] 90 taxmann.com 295 (Delhi). Thus, assuming without admitting that the TDS is applicable on sub contracting charges paid to Infosys China, the rate of TDS should be considered as 10% as per the India - China DT AA and not at 20% as per section 206AA. * It may be noted that while passing the order under section 201(1)&(1A) for AY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Private Limited, the said judgement is not applicable to the facts and circumstances of the present case as the services rendered by Infosys China have been utilised by the assessee in India before exporting the software Wherefore it is respectfully prayed that this Hon'ble Tribunal may be pleased to confirm the order passed u/s 201 of the act and order of CIT(A) and dismissed the appeal filed by the assessee in the interest of Justice and equity." 9. We have heard rival submissions and perused the material on record. We are of the view that the issue of tax deduction at source u/s 195 of the I.T.Act on the payment made by the assessee to Infosys China, whether it comes within the purview of section 9(1)(vii) is squarely covered by the order of Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT (supra). The Mumbai Bench of the Tribunal had held that the retrospective amendment to section 9, by the Finance Act, 2010 and substitution of Explanation to the said section, the effect of the judgment of the Hon'ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT reported in (2007) 288 ITR 408 (SC) has been negated (The Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a as is attributable to services performed in India, the Assessing Officer opined that the total fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon'ble Bombay High Court, it was, inter alia, contended by the assessee that "the place of utilization of service is not relevant but place of performance of the service is what 6 (supra) would be determinative (of taxability)........" and reliance was placed on Hon'ble Supreme Court's judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT7 Their Lordships noted that the taxability is to be determined under section 9(1)(vii) of the Act, and observed as follows : "The apex court had occasion to consider the above question in the case of Ishikawajima Harima [2007] 288 ITR 408 (SC), wherein, while interpreting the provisions of section 9(1)(vii)(c) of the Act, the Supreme Court held as under (page 444) : "Section 9(1)(vii)(c) of the Act states that 'a person who is a nonresident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y not have much relevant in determining whether the income of the nonresident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof. With the above understanding of law laid down by the apex court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c) which clearly states...where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India". It is thus, evident that section 9(1)(vii)(c), read in its plain, envisages the fulfillment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously. 8. It is thus clear that the judgment of Hon'ble Bombay High Court rests on the legal premises that, under section 9(1)(vii), "se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties of fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein; and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, provides that, "Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that ContractingState, a political subdivision a local authority thereof or a resident of that Contracting State". In other words, irrespective of the situs of technical services having been rendered, according to this treaty provision, the fees for technical services will be deemed to have accrued in the tax jurisdiction in which person making the payment is located. That is a typical manifestation of the source rule that we have discussed earlier in this order in the context of domestic law provisions, and which, in principle, requires taxability of an income in the tax jurisdiction in which it is sourced. Normally, the source of an income is the country in which person making the payment is located. There could, of course, be situations in which a payment related to business or profession being carried out in one country is being made by a resident of another country who is carrying out such business or profession in the first country. In these situations, even though the payment is not received from a resident of the first country, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that Chinese tax treaties, which do not generally have 'fees for technical services' clause, have a 'place of performance test', or negation of source rule, in several tax treaties. We are urged to recognize this underlying principle in Chinese tax treaties. It is also pointed out that this phenomenon is not unique to Chinese tax treaties. Our attention is invited to India Israel tax treaty11 which provides, under Article 13(5), that 'fees for technical services' will be deemed to arise in a contracting state only when services are rendered in that state and the payer is resident of that state. A reference is then made to India Saudia Arabia tax treaty in which a specific provision for taxability of 'fees for technical services' is said to be altogether absent, which, according to the learned counsel, shows that it is not at all necessary that the source rule must extend to all payments for fees for technical services. 17. We are unable to see any merits in this line of arguments either. Whether a particular income is to be covered by the benefits of a tax treaty or not is essentially a decision at the level of the Government and it depends on several considerations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession 'fees for technical services' will render Article 12(6) meaningless. When we put this proposition to the learned counsel for the assessee, he could not point out any situations in which, in such a situation, Article 12(6) will have any application but then he added that merely because a provision will be rendered infructuous, he should not be shy of giving the treaty a correct lit eral interpretation. We donot think that will be a correct approach for us. In the case of Hindalco Industries Ltd Vs ACIT14 this Tribunal had an occasion to set out the principles on the basis of which tax treatiesare tobe interpretated. Summarzing these principles, and speaking through one of us (i.e. the Accountant Member), this Tribunal has observed as follows: The school of thought emerging from the above discussions 14 94 ITD 242 ITA No. 2508/Mum/08 Assessment year 200809 Page 28 of 31 leads us to conclude that the principles governing interpretation of tax treaties can be broadly summed up as follows : * A tax treaty is an agreement and not taxing statute, even though it is an agreement about how taxes are to be imposed. The principles adopted in the interpretation of statutory legislatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services are used in the other contracting state. Therefore, the technical services in question are clearly covered by Article 12(4) of the treaty. This position is further clarified, and is specifically covered by the deeming fiction under Article 12(6) as well. The impugned payment to the Chinese company, therefore, is covered by the scope of "fees for technical services" within meanings assigned to that expression under Article 12 of the Indian China tax treaty, and is taxable in India as such. 20. For the detailed reasons set out above, we are of the considered view that the impugned payment was taxable in India under the provisions of the Indian Income Tax Act, 1961, as also under the provisions of the applicable India China tax treaty. The tax withholding liability of the appellant, under section 195, being in the nature of vicarious liability, therefore, did extend to deduction of tax at source from the payment of US $ 1,000,000 made to the Chinese company. We, therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter." 9.2 The learned AR had sought to distinguish the above order of the Tribunal. We shall consider each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion concerning industrial, commercial or scientific experience. 4. The term ''fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State/ but does not include payment for activities mentioned in paragraph 2(k ) of Article 5 and Article 15 of the Agreement. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein and the right, property or contract in respect of which the royalties or fees for the technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Royalties or fees for technical services shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 12(4) and 12(6) have to be read harmoniously but not antagonistically by applying well accepted and well settled canons of construction of statutes i.e. doctrine of harmonious construction. As Article 12(6) deems that the payment arises in the country of payer, thereby attracting provisions of Article 12(2) of the Indo-China treaty. Therefore, in the absence of any distinguishing factor, we are constrained to follow the ruling of Mumbai ITAT in the case of Ashapura Minichem Limited v. ADIT (supra). 9.4 The learned AR had sought to claim the benefit of exception provided u/s 9(1)(vii)(b) of the I.T.Act, which includes the payment by a resident for services utilized in a business carried on by such person outside India or for the purpose of earning any income from any source outside India. This plea of the learned AR is not legally tenable. First, for the purpose of taxation, the assessee is different from its subsidiary in China, i.e., Infosys China. The assessee had submitted that it has procured the contracts from overseas clients and the same is sub-contracted to Infosys China. Given the above background, the assessee is now trying to portray that the activities carried ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first exception either, because in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilized in a business carried on outside India. Therefore, we cannot also approve of the Tribunals conclusion in para 29 of its order to the extent it seems to suggest that the assessee satisfies the condition necessary for bringing its case under the first exception. Be that as it may, as we have already pointed out, since the source of income from the export sales cannot be said to be located or situated outside India, the case of the assessee cannot be brought under the second exception provided in the Section 14. Mr. Vohra, learned counsel for the assessee, however, contended that income arose not only from the manufacturing activity but also arose because of the sales of the products and if necessary a bifurcation of the income should be made on this basis and that portion of the income which is attributable to the export sales should qualify for the second excepti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exception of section 9(1)(vii)(b) of the Act. The relevant observation of the AO in this regard reads as follows:- "2. It is claimed by Infosys that only onsite work in China is subcontracted by Infosys to ITCL. This is based on the assumption made by Infosys Limited that only work pertaining to clients located in China is outsourced to ITCL. In the submission dated 24th October 2011 at page 18 of Annexure V it is claimed that the Infosys subcontracts work to ITCL only in respect of customers in China. It is also claimed that ITCL provides software development services on behalf of Infosys to customers in China. It is also claimed that the entire software development and other incidental and ancillary activities is carried out in China. Therefore, it is stated that services of ITCL are utilized by Infosys in a business carried on by Infosys outside India. 2.1 There is no basis at all to this claim. This is not factually correct. Annexures to the submission dated March 22nd 2012 given the details of those customers of Infosys Limited whose projects are outsourced to ITCL. In FY 2008-09 only in respect of one customer from China, the work has been outsourced to ITCL. None of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is claimed by Infosy that only onsite work in China is sub-contracted by Infosys to ITCL. This is based on the assumption made by Infosys Limited that only work pertaining to clients located in China is outsourced to ITeL. In the submission dt. 24.10.2011 at page 18 of Annexure V it is claimed that the Infosys sub-contracts work to ITCL only in respect of customers in China. It is also claimed that ITCL provides software development services on behalf to Infosys to customers in China. It is also claimed that the entire software development and other incidental and ancillary activities is carried out in China. Therefore it is stated that services of ITCL are utilized by Infosys in a business carried on by Infosys outside India. 2.1 There is no basis at a/l to this claim. This is not factually correct. Annexures to the submission dt. March 22"d 2012 gives the details of those customers of Infosys Limited whose projects are outsourced to ITCL in FY 2008-09 only in respect of one customer from China, the work has been outsourced to ITCL None of the customers are from China for the FY 2009-10 whose work has been outsourced to ITCL. Similar is the case for FY 2010-11 where there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record. The relevant ground with regard to the above issue are grounds 9.1 to 9.3. The Special Bench of the Tribunal in the case of Nagarjuna Fertilizders and Chemicals Ltd. v. ACIT reported in (2017) 78 taxmann.com 264 had held if rate of tax applicable under DTAA is lower than 20% tax rate prescribed u/s 206AA of the Act, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN. Further, the Hon'ble Delhi High Court in the case of Danisco India P. Ltd. v. UOI reported in (2018) 90 taxmann.com 295 (Delhi) had held that provisions of DTAA override section 206AA of the Act. In view of the above cited judicial pronouncements, we hold that the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act. It is also to be noted that while passing the order u/s 201(1) and 201(1A) of the Act for assessment year 2012-2013, the Assessing Officer has calculated TDS liability at 10% as per the Indo-China DTAA. Therefore, ground 9.1 to 9.3 is allowed. 9.10 In the result, the appeal filed by the assessee for assessment year 2011-2012 is partly a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
