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September 9, 2022

TDS u/s 195 not deductible on payment of training fees

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

TDS u/s 195 not deductible on payment of training fees

Facts and Issue of the Case

The assessee is a company engaged in the business of rendering BPO services. The assessee made payment of 2100 US$ to a non- resident. The non-resident was a tax resident of Hongkong. It is body corporate registered in Hongkong. It is undisputed that there was no Treaty for avoidance of Double Taxation (DTAA) between India and Hongkong during the relevant period i.e., period relevant to Assessment Year 2015-16. The nature of payment made by the assessee to non-resident was fee, training for developing soft skills. The amount payable to non-resident was grossed up and Tax Deducted at Source (TDS) was paid on the grossed up amount. Under section 248 of the Income Tax Act, 1916 (hereinafter called ‘the Act’), the assessee filed an appeal before the CIT(A) contending that the sum paid to the non-resident is not taxable in the hands of the non-resident in India and therefore the assesse should be given the refund of the TDS paid out of its pocket.

Since India does not have a DTAA with Hongkong, the question that arises for consideration is as to whether the payment by the assessee to the non-resident can be regarded as a fee for technical services (FTS) within the meaning of Explanation to section 9(1)(vii) of the Act. Under Sec.5 of the Act, income of a non-resident, if it accrues or arises in India, the same shall be taxable in India. Since the assessee paid taxes on the amounts payable to the non- resident after grossing up and since the assessee has prayed for declaration that payments made to non-resident were not chargeable to tax under the Act, the assessee filed appeal u/s.248 of the Act directly before CIT(A) and hence there will be no order of the AO in such cases. The CIT(A) in the appeal filed by the assessee u/s.248 of the Act, was of the view that the payment in the form of training, fees fall within the ambit of definition of FTS under the Act and is taxable in India.

In this appeal before the Tribunal, the learned Counsel for the assessee filed before us a list of decisions wherein it has been held that payment for training services does not amount to FTS under the Act. In addition to the above, learned Counsel for the assessee placed strong reliance on the decision of the Hon’ble Delhi High Court in the case of Director of Income Tax (International Taxation) Vs. Panalfa Autolectrick Ltd. [2014 49 taxmann.com 412 (Delhi). It was a case where the Court had to decide whether commission paid to a non- resident for procuring export order could be regarded as FTS. The Hon’ble Delhi High Court while rendering its decision that the payment could not be taxed as FTS has referred to OECD Report on e- commerce titled Tax Treaty Charaterization Issues arising from e- commerce, wherein the nature of FTS in the context of has been discussed. It was clarified by the learned Counsel for the assessee that in the present appeal, the training was provided by the non-resident through online. The paper book filed by the assessee contains quotation given by the non-resident. The nature of the service to be provided by the non-resident is described as “Leadership Growth Progress Review” mini survey. The Purchase order given by the assessee to the non-resident has the description of the service as “Fee, Training for Soft Skills” – Leadership Growth Progress Review Mini Survey. Admittedly the non-resident does not have a Permanent Establishment or any presence in India and is a tax resident of Hong Kong. It is thus clear that the nature of services is impart training in developing leadership skills. The business of the Assessee is rendering BPO services and in rendering those services, the leadership skills imparted by the non-resident would not or cannot be used. It is in this context that the OECD Report on e-commerce titled Tax Treaty Charaterization Issues arising from e-commerce, wherein the nature of FTS in the context of has been discussed, becomes relevant.

His submission was that the training in soft skills could not fall either within the term ‘technical, managerial or consultancy services’. He pointed out that the services rendered by non-resident cannot be termed as consultancy service. Learned DR placed reliance on the following decisions and submitted that the services were in the nature of FTS and were rightly brought to tax by the CIT(A). In this regard, he referred to decisions where Tribunal has held that fees paid to non-residents for training services were held to be not taxable under DTAA. According to him, it is implicit in these decisions that the sum paid for providing training services is taxable under the Act, as otherwise, there was no occasion for tribunal to examine taxability under the DTAA, unless it is taxable under the Act.

Observation by the court

The court have carefully considered the rival submissions. At the outset, the court may deal with the argument of the learned DR that the decisions cited by him, implicitly hold that training fees is taxable under the Act. The court do not think that the argument has no any force, because when there is a DTAA between India and the country of which the payee is a tax resident, the taxability has to be analyzed only from the definition of FTS as per the relevant DTAA and the definition in the Act, because irrelevant. Therefore, the fact that the tribunal has examined the payment from the terms of the treaty defining FTS, it does not follow that the Tribunals have held that training fee is taxable under the Act.

The court agree with the contention of the learned counsel for the assessee that the nature of service rendered by the non-resident in the present case is neither in the nature of technical, managerial or consultancy service as defined under the Act. In this regard, the submissions made and the nature of service rendered in the present case, clearly shows that the services rendered by non-resident cannot be termed as technical service for the mere reason that technology is used in providing service. The delivery of a service via technological means does not make the service technical. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, unless that special skill or knowledge is required when the service is provided to the customer. The employees developing leadership skill through service provided by the non-resident do not use such knowledge when they provide BPO service to the customers of the assessee and hence, the services rendered cannot be regarded as technical service. The service cannot be regarded as managerial service because the service rendered by the non-resident does not teach the employees of the assessee how the business has to be run but relates only developing leadership skills and hence the service provided by the non-resident cannot be regarded as managerial services. It cannot be regarded as consultancy service also because provision of advice by someone, such as a professional, who has special qualifications allowing him to do so, would be consultancy service but imparting training in leadership skills cannot be said to be providing advice by a professional.

In the decision cited by the learned counsel for the assessee in the case of Ershisanye Construction Group India (P) Ltd. (supra), the tribunal had to deal with taxability of training fee paid to non-resident, being a tax resident of Republic of China. The definition of FTS under the DTAA between India and China and under the Act was identical. The decisions rendered as above, clearly support the plea of the assessee the sum paid to non-resident cannot be regarded as FTS within the meaning of Sec.9(1)(vii) of the Act and cannot be taxed in the hands of the non-resident in India. Consequently, the assessee would be entitled to grant of refund of taxes paid together with interest thereon as per law. In view of the above conclusion, the question of rate of tax to be deducted on payments made to non-resident in terms of Sec.206AA of the Act becomes academic and hence not adjudicated.


 The appeal by the assessee is allowed by the court.


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