When paying a non-resident who has no PE in India for services provided outside of India, TDS is not deductible

Fact and issue of the case

The brief facts of the case are that, the assessee company is mainly engaged in manufacturing of turbo chargers and components for engine application in passenger cars, commercial vehicles, off highway vehicles and industrial engines. The appellant had filed its return of income for the assessment years 2015-16 & 2016-17 u/s. 139 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). The assessment have been completed u/s. 143(3) of the Act for both assessment years and determined total income at Rs. 131,71,35,131/- for assessment year 2015-16 and Rs. 126,56,63,825/- for assessment year 2016-17, by inter alia, making various additions including additions towards disallowance of deduction claimed u/s. 80IC of the Act, disallowance of weighted deduction claimed u/s. 35(2AB) of the Act, excess depreciation on UPS and disallowance of expenditure relatable to exempt income u/s. 14A of the Act and also additions u/s. 40(a)(i) of the Act towards logistic service payment for non-deduction of TDS u/s. 195 of the Act. The assessee carried the matter in appeal before the CIT(A), and the ld. CIT(A) vide their combined order dated 07.08.2019 has partly allowed appeal filed by the assessee, where he had deleted additions made towards disallowance u/s. 40(a)(i) of the Act for both assessment years, but confirmed additions made towards disallowance u/s. 80IC of the Act, deduction u/s. 35(2AB) of the Act, excess depreciation on UPS and disallowance u/s. 14A r.w.r. 8D of the Income-tax Rules, 1962 (hereafter referred to as “the IT Rules, 1962). Aggrieved by the Ld. CIT(A) order, the assessee as well as revenue are in appeal before us.

The first issue that came up for our consideration from assessee’s appeal for both assessment years is disallowance of deduction claimed u/s. 80IC of the Act. The facts with regard to the impugned dispute are that, the assessee has claimed deduction u/s. 80IC of the Act in respect of profit derived from Rudrapur, Uttarakhand unit. The assessee claims that the unit has been carrying on business of production/manufacture of turbocharger and parts thereof. The raw material (components) as input under goes various operations and finally emerged as a turbocharger. The turbochargers and parts of turbochargers sold as a final product from unit is totally different from the input components and is distinct object by itself with different structure. The entire process of production/manufacture in the unit falls within the definition of manufacture as defined u/s. 2(29BA) of the Act, and thus, the assessee has rightly claimed deduction u/s. 80IC of the Act. The AO however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the assessee has not satisfied the conditions prescribed under provisions of section 80IC of the Act, to be eligible for claiming deduction under the said section. Therefore, disallowed deduction claimed u/s. 80IC of the Act.

The Ld. Counsel for the assessee submitted that, this issue is covered by the decision of the ITAT, Chennai Benches in assessee’s own case for assessment years 20 11-12 to 20 14- 15 in ITA Nos. 190 to 193/Chny/2018, where under identical set of facts, the Tribunal has set aside the issue to the file of the AO to re-consider the claim of deduction u/s. 80IC of the Act, in light of various averments made by the assessee.

The ld. DR, on the other hand submitted that in earlier years, the issue has been set aside to the file of the AO for further verification and thus, for these years also, the issue may be set aside to the file of the AO for further verification and to decide eligibility of the assessee for claiming deduction u/s. 80IC of the Act.

Observation by the Tribunal

The tribunal has heard both the parties, perused materials available on record and gone through orders of the authorities below. At the time of hearing, the Counsel for the assessee as well as the DR present for the revenue, fairly agreed that this issue is covered in favour of the assessee by the decision of ITAT, Chennai benches in assessee’s own case for assessment years 2006-07 to 2009-10 in ITA No. 203 to 205/Chny/2014, where, under identical set of facts, the Tribunal held that payment made to non-resident without deducting the tax at source u/s. 195 of the Act, does not come under the provisions of section 9(1)(vii) of the Act and consequently, assessee need not to deduct TDS u/s. 195 of the Act and thus, question of disallowance of said payment u/s. 40(a)(i) of the Act does not arise. The relevant findings of the Tribunal are as under:

The AO held that the payments were made for managerial services and taxable u/s. 9(1)(vii) of IT Act. Since the assessee failed to deduct the tax at source u/s. 195 of the IT Act, disallowed the payments u/s.40(a)(i) of IT Act. The Ld. CIT(A) deleted the addition finding that the services rendered by non-resident do not fall under managerial or technical services within the meaning of IT Act and the services are rendered outside India and non-resident party has no permanent establishment or business connection in India. Accordingly, relying on the decision of the Hon’ble Apex Court in G.E. Technological Centre Pvt. Ltd., the Ld. CIT(A) allowed the appeal of the assessee. During the appeal, the Ld.AR argued that the services were rendered by the non-resident are liasoning services but not the managerial and technical services. Further, argued that even if the services rendered outside India are to be taxable, it is taxable as business profits in which case, only the profits required to be brought to tax if there is a permanent establishment or business connection in India. Since the assessee has no permanent establishment, the application of Sec. 9(1)(vii) and Sec. 195 has no application. The assessee also relied on the following decisions:

. Brakes India Ltd. V. DCIT (LTU) (266/Mds/2012) (Chennai)

. Sun Micro Systems India (P) Ltd (125 ITD 196) (Bang)

. E. Technology Centre Pvt. Ltd., Vs. CIT (327 ITR 456)

We heard the rival submissions and perused the material placed on record. The assessee has produced the copy of the agreement before the Ld. CIT(A). The Ld. CIT(A) examined the Explanation of the assessee and the document placed before the CIT and concluded that the services rendered by the non-resident do not fall under the category of technical or managerial services. Ld. CIT(A) further stated that the services are rendered outside India and there is no permanent establishment or business connection to the non-resident in India. This fact has not been disputed by the Revenue. The profits of the services rendered outside India cannot be taxed in India unless the non-resident has permanent establishment/or business connection in India as envisaged in Sec. 9(1) of IT Act. The Ld. CIT(A) deleted the addition relying on the decision of the Hon’ble Apex Court in the case of GE Technological Centre Pvt. Ltd. v. CIT 327 ITR 456. The findings and conclusions arrived in earlier ground in respect of payment made to M/s. Biggleswade Ltd., are squarely applicable to this ground also. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) and the same is upheld. The Revenue’s appeal on this issue for the A.Ys 2007-08, 2008-09 and A. Y 2009-10 are dismissed.”

In this view of the matter and consistent with the view taken by the co-ordinate bench in assessee’s own case for earlier years, we are of the considered view that there is no error in reasons given by the Ld. CIT(A) to delete additions made towards disallowance of payment made to non-resident service provider u/s. 40(a)(i) of the Act for non-deduction of tax at source u/s. 195 of the Act and thus, we are inclined to uphold the findings of the Ld. CIT(A) and dismiss the appeal filed by the revenue for both the assessment years.

In the result, appeals filed by the assessee for both the assessment years are treated as partly allowed for statistical purposes and the appeals filed by the revenue for both the assessment years are dismissed. Order pronounced in the court on 02nd December, 2022 at Chennai.

Read the full order from here

When-paying-a-non-resident-who-has-no-PE-in-India-for-services-provided-outside-of-India-TDS-is-not-deductible-1