In the absence of a PE in India, TDS is not deductible on non-residents’ business profits.

Facts and Issue of the case

The three appeals by the assessee are directed against the consolidated order dated 23.03.2016 passed by the Commissioner of Income Tax (Appeals)-43 New Delhi (“CIT(A)”) pertaining to the assessment years (“AY”) 2010-11, 2011-12 and 2012-13. Since common issues are involved in them, they were heard together and are being disposed of by this common order. The assessee is an individual. He is proprietor of M/s. Quantum Solutions India which is a contract research organisation and specializes in the area of pharmacovigilance (drug safety) services. From 15CA/CB certificates filed by the assessee, the Ld. Assessing Officer (“AO”) noted that the assessee has remitted amounts to various parties outside India without deducting tax at source. The Ld. AO sought explanation from the assessee. Vide letter dated 22.08.2012 the assessee explained the nature of services rendered by his non-resident Global Business Affiliates (“GBAs”)/ Business Development Associates (“BDAs”). It was pointed out that the GBAs, as per the terms and conditions of the agreement were entitled to fixed compensation and further additional commission on orders procured for the assessee. It was further stated that the nature of services as rendered by non resident agent who is carrying out business activities in other contracting state falls squarely within the scope of Article 7 of the Double Taxation Avoidance Agreement (“DTAA”). As per Article 7 the profits of an enterprise of other State would be taxable in India if there was a Permanent Establishment (“PE”) of such enterprise in India.

The assessee filed appeals before the Ld. CIT(A) on identical grounds challenging the finding of the Ld. AO that the payments made by the assessee to GBAs were in the nature of fees for technical services (“FTS”) and do not fall within the scope of Article 7 of DTAA and that “make available” clause is applicable to the assessee. The Ld. CIT(A), on perusal and consideration of the submissions of the AR of the assessee recorded his findings in para 4.6, 4.7 and 4.8 of his common order dated 23.03.2016. He agreed with the Ld. AO that the impugned payments were in the nature of FTS liable for deduction of tax at source under section 195 of the Act. The Ld. CIT(A), however, accepting the alternate argument of the assessee held that though payments made to the parties located in USA and UK were in the nature of FTS but since services of these payees did not “make available” to the assessee the technology, did not make the assessee able or wiser and get equipped with the knowledge or expertise enabling him to independently apply the technology and in future independently function without support from service provider, the concept of make available was not applicable and such payments qualified to be excluded from the ambit of FTS only on this ground. As regards payment of parties located in countries other than USA and UK (i.e. Switzerland) he held that these payments were in the nature of FTS as the DTAA with Swiss Confederation did not contain the exclusion clause of ‘make available’ and need to suffer tax deduction at source which amounted to Rs. 15,98,506/- and Rs. 27,21,995/- pertaining to assessment year 2010-11 and 2011-12 respectively. For assessment year 2012-13 the Ld. CIT(A) directed the Ld. AO to verify whether payments of Rs. 48,27,260/- were made to the recipient in Switzerland and restrict such amount only for withholding tax. With regard to other payments in all the three years the Ld. CIT(A) held that the assessee need not deduct tax at source. Thus the assesee got part relief in all the three assessment years. Aggrieved, the assessee is in appeal before us.

Observation of the court

Court has heard the Ld. Representatives of the parties and pursued the material on record. The Ld. CIT(A) though has granted part relief in respect of the payments made to GBAs/ BDAs in USA and UK holding it to be FTS but falling under exception clause of ‘make available’ under the respective DTAAs and hence not taxable, the grievance of the assessee before us is that these payments are not at all in the nature of FTS but business profits of the payees which is not taxable in India pursuant to Article 7 ‘Business Profit’ of the respective DTAAs. The assessee has filed detailed written submissions in support of his contention. According to the assessee these payments comprised of commission paid to the business promotion agents located outside India. With a view to expand the scope of its current activities to the overseas markets, showcasing and presenting its profile and locating and identifying further business relating to export of IT enabled services in the field of pharmacovigilance, the assessee engaged services of agents located in USA, UK, Singapore and Switzerland. The agents appointed to propagate sale (of services) and to promote the business of the assessee were designated as GBAs/ (BDAs). The GBAs/ BDAs were entitled to receive a fixed minimum remuneration and in addition thereto percentage of the new contracts got awarded through them as commission.

The assessee executed Master Services Agreement (“MSA”) with the GBAs outlining the terms and conditions and scope of work to be done by the GBAs. From the perusal of the scope of work as envisaged in the MSA it is evident that the GBAs/ BDAs act as a business promotion agents and promote sale (of services) of the assessee for which they are compensated by way of fixed fee and also additional commission. This contention is also supported by the clause 7 of MSA which lays down that all the marketing materials / sale (of services) materials held by the GBA on behalf of the assessee will be returned back immediately at time of termination of the contract. The GBA is appointed only with a view to propagate and solicit business and not to render any managerial, advisory, technical or consultancy services. It is also brought to our notice that no personal interaction ever took place between the assessee and the GBAs and the GBAs were not to suggest or undertake any changes in the functioning pattern of the assessee. GBA is required to strictly function as per business model, and instructions given by the assessee from time to time. GBAs/ BDAs are entitled to receive a minimum stipulated sum as remuneration for services rendered and also additional percentage as further add on in event of any contract getting materialised.

The Ld. AO and the Ld. CIT(A) have referred to the word “consultant” used in the MSA to arrive at the conclusion that the payments made to the GBAs are in the nature of FTS. It is not denied that the payees are referred to as consultant in the MSA, but the issue that needs to be considered is what is the exact nature of services rendered by these GBAs/ BDAs which led the Revenue to conclude that payments for services rendered by the payees fell within the scope of FTS.

In our considered view, examination of the MSA in its entirety reveals that the services rendered by the GBAs/ BDAs are solely for business promotion for which they are compensated by payment of commission on the basis of business solicited for new clients introduced by them and also fixed payment on monthly basis as retainer fee so that they continue to remain connected with the assessee. Further, the nature of payments made to GBAs/ BDAs finds adequate mention in the invoices raised by them and also Form 15CB at the time of making remittance to these parties. The word ‘consultant’ has been too narrowly construed by the income tax authorities to the detriment of the assessee and has been the sole basis of holding that the payments made to GBAs/ BDAs are in nature of FTS. The Ld. AO and the Ld. CIT(A) have referred to only chosen portions of MSA and not gone through the whole agreement to arrive at the exact nature of arrangement and understanding between the assessee and the GBAs/ BDAs. A subjective and complete understanding of the arrangement, conduct, activities undertaken by the GBAs/ BDAs and transaction suitably reveals that the payments to these parties are in respect of promotion of business of the assessee in the overseas territories and for no other reason.

From the facts of the case, nature of business carried out by the assessee, arrangement with the GBAs/ BDAs, nature and scope of services rendered by these GBAs/BDAs discussed above it is obvious that the services rendered by these parties is purely for promotion of sales (of services) and soliciting new clients. The scope of service and the nature of services rendered by these parties have been very illustratively defined in the MSAs with these parties and cannot be subject to any kind of different interpretation. While arriving at his conclusion, the Ld. AO/ CIT(A) failed to appreciate the exact nature of services rendered by GBAs/ BDAs. Just by naming these parties as ‘consultant’ in the MSAs who are actually engaged in carrying out activities for sale promotion and in lieu thereof getting commission cannot be the basis of concluding that the sums paid to these parties are in the nature of FTS and therefore liable to be taxed in India having accrued in India.

In our view the entire payments to the GBAs/ BDAs in all the three assessment years under consideration are not FTS for the reasons that no specialised technical services are rendered to the assessee and that the assessee did not have any personal interaction with these service providers and that these service providers acted within the scope defined in the MSA. The GBAs/BDAs are not paid for rendering any managerial, technical or consultancy services but only for promoting sale on behalf of the assessee and therefore such payments are business income of the payees which squarely falls within the scope of the Article 7 of the respective DTAAs relating to ‘business profits’. It is an undisputed fact that the GBAs/ BDAs located overseas are non-residents and do not have PE in India. Hence, the payments to GBAs/ BDAs being the business profit of the GBAs/ BDAs are not taxable in India in the absence of PE. The assessee is therefore not liable to withhold any tax on such payments. There is plethora of judicial precedents wherein it has been held that commission payments to non- resident agents/ service providers for services like sales promotion, marketing, publicity, procuring sales order etc. are not FTS but business profit in the hands of the service provider to which Article 7 of the DTAA is applicable.

Having held that the payments made to the GBAs/ BDAs are not FTS but business profits not taxable in the hands of GBAs/BDAs in India in the absence of PE by virtue of the Article 7 of the DTAA, no tax is required to be deducted at source on such payments. In the case of GE India Technology Centre Pvt. Ltd. vs. CIT (2010-TMI-77380-SC) the Hon’ble Supreme Court held that obligation under section 195(1) to withhold tax arrives only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making a remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. Thus, the payments made to the GBAs/ BDAs are not subject to any withholding tax, such payments being not chargeable to tax in India. The assessee succeeds in all its three appeals.