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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Shri Amarjit Singh
PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This assessee’s appeal for A.Y. 2013-14, arises from order of the CIT(A)-4, Ahmedabad dated 01-12-2017, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The solitary ground of appeal of the assesse is against the decision of ld. CIT(A) in confirming the action of the assessing officer in disallowing
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expenses amounting to Rs. 13,09,739/- on the ground of non-deduction of withholding tax on such expenses.
All the grounds of appeal of the assesse are inter-connected to the same issue against the decision of ld. CIT(A) in confirming the aforesaid disallowance in treating the payment made outside as fees for technical services by invoking section 195 of the Act, therefore, for the sake of convenience all the grounds of appeal of the assessee on this issue are adjudicated together as under:-
The fact in brief is that assessee has filed return of income on 18th
Sep, 2013 declaring income of Rs. 9,94,745/-. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the Act on 5th Sep, 2014. During the course of assessment, the assessing officer noticed that assessee has made payment amounting to Rs. 13,09,739/- to ESM-SYS- LLC, USA for obtaining the services of data promotion, social media management and general consulting. On query, the assessee explained that ESM-SYS-LLC was managing and overseeing the various on page and off page activities which drive traffic to a specific website. The assessing officer was of the view that the payments made by the assessee were in the nature of payment for technical or management services or execution of contract on which TDS was liable to be made u/s. 195 of the Act. The assessing officer has stated that sub-section 1 to section 195 makes it obligatory for every person in India to deduct tax at source @ specified in the relevant financial act. The Assessing Officer further stated that assessee had not complied with any of the provisions contained in sub-section (1),(2),
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(3) of section 195, therefore, it was liable to be held as assessee in default and such expenses incurred without TDS were liable to be disallowed u/s. 40(a)(ia) of the I.T. Act. The assessing officer also stated that assessee has also not furnished any forms 15CA or 15CB which were mandatory to be filed for making remittances. After query made by the assessing officer, the assessee explained that payments made to ESM-SYS-LLC were in the nature of services provided for site promotion activities. The assessee has also submitted copies of article no. 7 of agreement for avoidance of double taxation of income with USA and article no.12 for ready reference to the assessing officer. The assessee explained that nature of services availed was not in the nature of technical services or royalty but it was in the nature of business profit and further ESM-SYS-LLC, USA had no permanent establishment in India, therefore, the same was not taxable in India and accordingly, provisions of section 195 of the income tax act did not apply. The assessing officer has not agreed with the submission of the assessee and stated that the hiring of server and providing of web hosting services were in the nature of technical services and the payment made by the assessee was for technical services in terms of section 9 sub-section (1)(vii) of the Act which represented income deemed to accrue or arise income of the recipient. The assessing officer has also stated that the payment made to the non- resident also fall within the ambit of section 9(1)(vi) of the act as these were in the nature of royalty as defined in explanation 2 to section 9(1)(vi) of the Act. Therefore, the assessing officer held that assessee was liable to deduct tax at source from the payment made by it to the ESM-SYS-LLC u/s. 195 being payment towards obtaining technical and consultancy services which were utilized by the assessee and its client in India. Accordingly, the I.T.A No. 350/Ahd/2018 A.Y. 2013-14 Page No 4 M/s. Esm Sys Pvt. Ltd. vs. ITO
expenses of Rs. 13,09,739/- towards such payment on which no TDS was made was disallowed u/s. 40(a)(ia) of the Act.
Aggrieved assessee has filed appeal before the ld. CIT(A). The Ld. CIT(A) has dismissed the appeal of the assessee holding the payment made is a fee for technical services and squarely covered under the Explanation 2 to section 9(1)(vii) of the Act.
During the course of appellate proceedings before us, the ld. counsel has submitted paper book containing copies of document and submission made before the lower authorities. The ld. counsel has contended that the various provisions of Indo-USA double taxation (DTAA) was not considered by the lower authorities. He has further referred page no. 74 to 88 of the paper book comprising detail of written submission made before the ld. CIT(A) during the course of appellate proceedings in which it was submitted that the assessee was engaged in the business of web designing services, social media management etc. It was also submitted that ESM- SYS-LLC has provided services which was in the nature of site promotion activities i.e. data storage, data security, bandwidth provision space monitoring etc. It is also submitted that equipment/servers used for providing such services were located outside India and these equipments were not owned by ESM-SYS-LLC. It is also submitted that such payment made was in the nature of business income and since there was no permanent establishment in India, therefore, tax was not required to be withheld. The ld. counsel has also contended that the services provided by the assessee not covered by the definition fees for technical services as the I.T.A No. 350/Ahd/2018 A.Y. 2013-14 Page No 5 M/s. Esm Sys Pvt. Ltd. vs. ITO
payee has not made available any technology or know-how to the payer. It is further stated that the payee has never made available any technical expertise/experience/skill/know-how to the assessee so as to enable assessee to apply the same technical expertise/experience/skill/know-how for carrying out such activities on its own. The ld. counsel has also referred page no. 52 to 73 of the paper book comprising copies of Indo-USA Double Tax Avoidance Agreement (DTAA) and contended that as per Article 12, the payment cannot be considered as fees for included service as technical knowledge or know-how are not made available. The ld. counsel has also placed reliance on various judicial pronouncements in the cases of ITO vs. B.A. Research India Pvt. Ltd. (TS-6184-ITAT-2015(Ahmedabad)-O], ITO vs. Cadila Health Care Ltd. [TS-5220-ITAT-2017(Ahmedabad)-O], Mckinsey & Co. Inc. (Philippines) vs. ACIT [2006] 99 ITD 549 (MUM.), Pinstorm Technologies (P.) Ltd. vs. ITO [2012] 24 taxman.com 345 (Mumbai), ITO vs. Right Florists (P.) Ltd. [2013] 32 taxman.com 99 (Kolkata-Trib) and Yahoo India (P.) Ltd. Vs. Deputy CIT [2011] 11 taxman.com 431 (Mumbai). On the other hand, the ld. departmental representative has contented that the payment made by the assessee was of the nature of technical services rendered by the payee and placed reliance on the order of assessing officer and ld. CIT(A).
We have heard both the sides and perused the material on record. The assessee was engaged in the business of web designing SEO services, Social Media Management, Bulk SMS, email management, Website Advertising, Online Video Management, Mobile Application Designing. During the year under consideration, the assessee has made payment amounting to Rs.
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13,09,739/- to ESM SYS LLC, USA for obtaining the services of Web Promotion etc. The assessee has explained that payer has provided services which were in the nature of site promotional activity i.e. bandwidth provisions, data storage and web hasting services using the servers located in USA. There was no sharing of knowledge or know-how or any technology to the assessee during the provision of Web Hosting Services. The assessee has also referred Article 12 of the Indo-USA Double Tax Avoidance Agreement at the time of assessment and appellate proceedings stating payment cannot be considered as fees for included services as technical knowledge or know-how are not made available. The lower authorities have rejected the submission of the assessee stating that payment made to payer was for rendering technical services which was sustained by the ld. CIT(A) holding that payment made was a fee for technical services and squarely covered under the explanation 2 to section 9(1)(vii) of the Act. It is discerned from the material on record that the assessee had obtained the services of web promotion, social media management from the ESMAY LLC, USA and they have used many techniques such as web content development, search engine optimization to increase the site traffic. The entire transaction has taken place on internet through virtual server. Servers were located worldwide outside not under the control of payer and it was used for hiring of space for domain hosting and display of advertisement on the server located worldwide. The assessee had made payment of Rs. 13,09,739/- to ESM SYS LLC, USA through normal banking channel for carrying out above referred nature of services. Section 195 of the Income Tax Act requires to deduct TDS on payment made to non-
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resident on the sum chargeable under the provision of the Act as prescribed in section 195 of the Act. The definition of “fee” for Technical Services as provided in Explanation 2 to Section 9(1)(vii) is reproduced hereunder:- "Explanation 2.—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"."
However, section 90(1) of the I.T. Act facilitates entering into an agreement with the Government of any country outside India for the avoidance of double taxation of income under the Act and under the corresponding law in force in that country. Since the payee is the resident of U.S.A. and the Government of India has entered into Double Tax Avoidance Agreement (DTAA) with the Government of United State of America therefore the taxability of the impugned payment of Rs. 13,09,739/- should be determined in view of the provisions of the Income Tax Act and the provisions of the DTAA. However, the provisions of section 90(2) of the Act provide where the Central Government has entered into an agreement outside India, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. The provisions of section 90(2) of the Income Tax Act is reproduced as under:- “”90. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub- section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”
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The definition of “fee” for included services as provided under Article 12(4) of the Double Tax Avoidance Agreement between India and U.SA. is reproduced as under:- "
For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." [Emphasis Supplied]”
To cover the services in the definition of “fee” for included services according to the above cited Article 12 of the DTAA, it is required to satisfy either of the following two conditions:- “i) Services are ancillary and subsidiary to the application of right for which royalty is paid; or ii) Services make available technical knowledge, experience, skill, know-how, or processes etc. or if it consists of development and transfer of any technical plan or technical design.” In the light of the above facts and legal provisions, it is observed that ld. CIT(A) has dismissed the appeal of the assessee in a general manner holding that services provided is covered by definition of fee for technical services as per the provision of explanation 2 to section 9(1)(vii) of the Act and without any reasons stated that he did not agree with the submission of that assessee for not to deduct tax as per Article 12 of the DTAA. We observed that the enormous written submission, provisions of the DTAA and judicial pronouncements referred by the assessee were not controverted. It is implicit from the Article 12(4) of the DTAA as cited above that services which are technical in nature can be said to be “fee for included services” only when it has made available technical knowledge or skill to the recipient of services. Similar rulings and observations were made in the following judicial pronouncements:- (i) ITO vs. B.A. Research India Pvt. Ltd. (TS-6184-ITAT-2015(Ahmedabad)-O]
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(ii) ITO vs. Cadila Health Care Ltd. [TS-5220-ITAT-2017(Ahmedabad)-O] (iii) Mckinsey & Co. Inc. (Philippines) vs. ACIT [2006] 99 ITD 549 (MUM.) (iv) Pinstorm Technologies (P.) Ltd. vs. ITO [2012] 24 taxman.com 345 (Mumbai) (v) ITO vs. Right Florists (P.) Ltd. [2013] 32 taxman.com 99 (Kolkata-Trib) (vi) Yahoo India (P.) Ltd. Vs. Deputy CIT [2011] 11 taxman.com 431 (Mumbai)
In the case of Pinstorm Technologies (P.) Ltd. vs. ITO, it is held that payment made to non-resident for uploading and display of banner advertisement on its portal, in absence of any PE of non-resident in India would not be chargeable to tax in India. In the light of the facts and judicial findings as elaborated supra, we consider that there was no sharing of knowledge or know-how or any technology to the assessee as proscribed in the Article 12 of the DTAA between India and U.SA., therefore, we find substance in the assertion of the assessee that tax was not deducted u/s. 195 of the Act since the payment made was not taxable in India. Accordingly, the appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 09-07-2020 (MADHUMITA ROY) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 09/07/2020
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आदेश क" ""त"ल"प अ"े"षत / Copy of Order Forwarded to:-
Assessee
Revenue
Concerned CIT
CIT (A)
DR, ITAT, Ahmedabad
Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील"य अ"धकरण, अहमदाबाद