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Income Tax Appellate Tribunal, B BENCH : BANGALORE
Before: SHRI LAXMI PRASAD SAHU & SHRI SOUNDARARAJAN K.
ORDER PER SOUNDARARAJAN K., JUDICIAL MEMBER
This is an appeal filed by the assessee challenging the order of the NFAC, Delhi dated 10/09/2024 in respect of the A.Y. 2020-21 and raised the following grounds: “
1. The impugned order passed by Honorable Commissioner of Income Tax (appeals), National Faceless Appeal Centre [CIT(A)jis not justified in law and against facts and circumstances of the case.
2. The CIT(A) had failed to appreciate that order of the Assessing officer (AO) is bad in law as he had no reasons to assess an income different from what had been offered by the appellant.
3. The CIT(A) had failed to appreciate thatAO had failed to give proper opportunity before the passing of the impugned order and any order passed in violation of the principles of natural justice would be nullity in law.
4. The CIT(A) had failed to appreciate and accept the explanations given by the appellant during the course of assessment/ appeal proceedings.The AO had failed to appreciate that appellant had duly discharged his duty by responding to the points raised in show cause notice which was simply not accepted without any reason or basis and failed to refute the claims made by the appellant in response to show cause notice.
5. The CIT(A) had contradicted his own statement wherein he had held that Once the DTAA does not recognize any income as Fees for Technical services or royalty then classification of the said income has to be as per the other provisions of the DTAA"and thus should be treated as business profits as per provisions of DTAA between India and Philippines.
6. The CIT(A) had identified the nature of payment as Fees for Technical Services but reasonedAO findings which were only speculation and thus failed tojustify the applicability of deduction of tax at source.
7. The CIT(A) had failed to follow the correct position of law and had erred in sustaining the disallowance u/s 40(a)(i) to the extent of Rs.1,23,24,017/- without appreciating the facts and law applicable to appellant.
8. The CIT(A) had erred in sustaining the addition which was based on the conjectures and surmises, which is bad in law.
9. The CIT(A) ought to have appreciated the various Judicial decisions passed by Jurisdictional Tribunals and Courts,brought to his notice,are in favour of the appellant but had failed to adjudicate on the applicability of same to appellant's case.
10. With prejudice to his right, the appellant prays that CIT(A) had failed to adjudicate the ground raised by the appellant on non-setting off the brought forward business loss.
11. Without prejudice to our right, the appellant prays that CIT(A) had failed to notice the error in computing the tax and interest thereon on the erroneous computation of income.
12. That the appellant craves leave to add to and / or amend, modify or withdraw the grounds outlined above before or at the time of hearing of the appeal. Prayer: On the basis of above Grounds and other Grounds which may be urged at the time of hearing with the consent of the Honourable Tribunal, it is prayed that the order passed be cashed, addition deleted and relief sought is granted.”
The brief facts of the case are that the assessee is a company and filed their return of income on 11/02/2021. The case of the assessee was selected for scrutiny under CASS for verification of brought forward TDS credit claimed as substantially less than the TDS carried forward in the returns of preceding assessment years and commission, royalty on professional fees is paid outside India but no corresponding TDS statement has been filed. The assessee company is engaged in the business of providing professional services in landscape architecture and land use planning. Insofar as the first issue is concerned, the AO had accepted, and insofar as the second issue, the AO had not accepted the claim of the assessee and arrived a conclusion that TDS provisions of section 195 are applicable in respect of the payments made by the assessee to the Site Concepts International Inc, Philippines (SCPH), whether it is termed as royalty or business income or Fees for Technical Services. To arrive such a conclusion, the AO had relied on the stand taken by the assessee that the payments are in the nature of fees for technical services which is not defined in the India – Philippines DTAA and therefore the same is taxable as per the Income Tax Act. The AO had originally classified the said fees as royalty or business profits as per the DTAA between India and Phillipines. To tax the said payments as business profits, there is no PE available in India but the AO on assumptions had arrived a conclusion that there is a PE and therefore the said payments could be treated as Business Profits under Article 7 of the India Philippines DTAA. The AO also treated the same as Royalty under Article 13 of the DTAA. The AO further held that the assessee is availing the design services from SCPH and made payments and therefore the AO had concluded that the design service can be included in the definition of royalty as per DTAA and therefore the same can be taxed in India. The AO had observed that the requirement of PE also satisfied as per the provision of 2(h) of the India – Philippines DTAA and therefore the income is a business income liable to be taxed in India. Finally the AO accepted the claim of the assessee that the payment made to the Philippines company is Fees for Technical Services and held that the DTAA does not have any Article relating to the FTS and therefore liable to be taxed under the provisions of the Income Tax Act and therefore TDS provision u/s 195 will be applicable and therefore non deduction of TDS would attract section 40(a)(i) of the Act.
As against the said order, the assessee filed an appeal before the Ld.CIT(A) and submitted that the payments made to Philippines company could not be taxed as royalty or business income since the requirement to treat the same was not fulfilled. The Ld.CIT(A) had forwarded the submissions made by the assessee to the AO and sought for a remand report. The AO also forwarded the remand report dated 16/07/2024 and extracted the findings given in the assessment order and the grounds of appeal filed by the assessee and finally gave a report that the assessment order is passed in accordance with the provisions of section 40(a)(i) of the Act. The Ld.CIT(A) had also relied on the remand report and came to the conclusion that the AO has established that the subsidiary company of the appellant is having permanent establishment in India and therefore section 195 of the Act would be applicable to the facts of the case and therefore the disallowance made u/s. 40(a)(i) is in order.
As against the said order, the assessee is in appeal before this Tribunal.
5. At the time of hearing, the Ld.AR submitted that the assessee is in the business of landscape architecture and land use planning for which they entered into an agreement with SCPH. The assessee supplied all the details of the area for which the landscape is required and based on the details furnished, the Philippines company would draw the landscaping designs and after deliberations over internet, the concept was finalised and they will forward the drawings through the mail of the assessee which in turn would be used by the assessee for the newly developed projects. The Ld.AR further submitted that the assessee had paid the charges for developing the design and therefore at no stretch of imagination, the payments made to the same would be treated as royalty since no design or patent is owned by the Philippines company which was used by the assessee in India. Infact the entire work is owned by the Assessee. The Ld.AR also submitted that the income could not be also treated as business income of the Philippines company since the said company is not having any permanent establishment in India and the AO had also not made it clear, how the Philippines company is having a permanent establishment in India. The Ld.AR further submitted that the AO had only on assumptions had alleged that the Philippines company is having an AE in India and therefore the income would be treated as business income liable to be taxed under the Indian laws even though there is a DTAA available between India and Philippines. The Ld.AR further submitted that the payments made to the Philippines company could at the best be treated as fees for technical services. Alternatively the Ld AR submitted that when the Philippines company is receiving an income for the work carried out by them in Philippines which was also delivered in Philippines itself by mailing the said drawings, the said income could not be taxed as fees for technical services. The Ld.AR also relied on the Article 23 of the DTAA between India and Philippines which speaks about the other income and therefore the income of the Philippines company could not be taxable in India. The Ld.AR also took us through the order of the Ld.CIT(A) which is not a speaking order but only extracted the remand report and the grounds raised by the assessee and therefore the same is liable to be set aside on this ground alone. The Ld.AR submitted that the amount paid to the Philippines company could not be treated as business income under Article 7 and royalty under Article 13 since the ingredients were not fulfilled to term the income as business income or royalty.
The Ld.DR relied on the order of the AO as well as the Ld.CIT(A) and submitted that the income is taxable under the provisions of the Income Tax Act and therefore the TDS provision 195 would be applicable to the transactions and therefore the AO had rightly disallowed the claim u/s. 40(a)(i) of the Act. The Ld.AR also field a paper book enclosing the copy of the agreement dated 05/06/2017 and the DTAA between India and Philippines and the copies of the DTAA between India and Denmark and DTAA between India and UK and also the orders of the Coordinate Bench of this Tribunal.
We have heard the arguments of both sides and perused the materials available on record.
Insofar as the facts of the present case are concerned, the assessee had engaged the Philippines company for providing landscape designs and drawings for which the assessee had paid the fees to the Philippines company. The assessee had treated the said fees paid to the Philippines company as not taxable in India by relying on the Articles contained in India – Philippines DTAA. The AO had tried to fit the said payments into the royalty or business profits but finally concluded that the same as FTS, but observed that the FTS has not been defined in the DTAA and therefore the same would attract the provisions of Indian Income Tax Act. The AO relied on the fact that the design service is included in the definition of royalty as per the DTAA and therefore the same could also be taxed in India. The AO also treated the said payments as business profits since the Philippines company is having a permanent establishment in India. To establish that the Philippines company is having a permanent establishment in India, the AO had presumed various factors which are not true and for which the AO had no basis to arrive such a conclusion. The AO also observed that the income received by the Philippines company would be termed as fees for technical services but the DTAA has not defined about the FTS and therefore the same should be taxed under the provisions of the Income Tax Act, 1961.
To appreciate the findings of the AO that the fees paid to the Philippines company could be treated as royalty since the design was made available to the assessee, we do not find that the said finding is correct. To attract the provisions of royalty, there should be a design or patent owned by the Philippines company which is used by the assessee for which the payments are made to the Philippines company and then it could be termed as royalty paid to Philippines company. In the present case, there is no such drawings or patents owned by the Philippines company but only based on the details furnished by the assessee company to the Philippines company, the Philippines company draw the landscaping and design and forwarded it to the assessee for execution in their projects. The design and drawings are not a tailor made one but prepared against the specifications given by the assessee and differs from project to project and therefore the payments made to the Philippines company could not be treated as a royalty and therefore on that basis, it could not be taxed under the provisions of the Indian Act. Similarly, the payments made to the Philippines company could not be treated as business profits of the said company as per the DTAA between India and Philippines since the main requirement as per Article 7 of the DTAA between India and Philippines is absent in the present case. The Philippines company does not earn income through a permanent establishment situated in India and therefore the said income could not be treated as business profits liable to be taxed under the Income Tax Act.
Even the Authorities had erred in arriving a conclusion that even, if the payments were made to the Philippines company as fees for technical services, the DTAA does not have any specific Article to deal with the said fees and therefore it should be taxed under the Indian provisions when
“ARTICLE 23 OTHER INCOME Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.”
Therefore if the fees for technical services was not defined under the DTAA, it could not be straightaway taxed under the Indian Income Tax laws when there is an Article 23 available under the DTAA. When we consider the Article 23, the payments made to the Philippines company which was not dealt in the DTAA, the Philippines State alone has a right to tax that income and not the Indian Government. Therefore the findings of the AO as well as the finding of the Ld.CIT(A) is not correct and also not in accordance with the DTAA between India and Philippines. In view of the above said discussion, we concluded that the payments made to the Philippines company could not be taxed in India as business income or royalty or fees for technical services. If there is no Article 23 in the DTAA, the same could be treated as income arose in India and liable to be taxed under the Indian Income Tax laws.
We have also gone through the agreement entered into between the assessee and the Philippines company and in the said agreement, it was clearly mentioned about the various scopes of work to be done by the Philippines company from which we are able to find that, it is a payment made to the Philippines company for designing the landscaping and furnishing the drawings as required by the assessee, in accordance with the location of the project. The finding of the Ld.CIT(A) that, “in the absence of the article dealing with the FTS under the DTAA, the income of the non- resident is liable to tax under the provisions of the domestic law.” is not correct since the said finding is against Article 23 contained in the DTAA between India and Philippines. Therefore the Ld.CIT(A) also not considered
In view of the above discussions made, we are of the view that the income earned by Philippines company is not taxable in India and therefore the said income is not liable for TDS u/s. 195 of the Act. In view of the said finding, we are of the view that the disallowance made u/s. 40(a)(i) of the Act is also not sustainable. We, therefore set aside the orders of the lower authorities and allow the appeal of the assessee by holding that the income is not liable to be taxed under the provisions of the Indian Income Tax Act.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 13th October, 2025.