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Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI AMITABH SHUKLA
आदेश / O R D E R PER ABY T. VARKEY, JM: These are appeals preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "the Ld.CIT(A)”), Chennai-16, dated 05.04.2024 for the Assessment Year (hereinafter in short "AY”) 2012-13 & 2013-14 respectively. Both sides agreed that the facts & grounds of appeal are same in both the & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd. :: 2 ::
assessment years and therefore, decision in the lead case for AY 2012-13, would decide the fate of the other.
The main grievance of the assessee in AY 2012-13 is against the action of the Ld.CIT(A) in giving the only part relief to the assessee.
The brief facts are that the assessee is a manufacturer of agricultural tractors and has exported tractors during the relevant previous year. The assessee had appointed distributors for selling the tractors abroad. The tractors sold were subject to warranty. During the relevant previous year, the distributors carried out warranty replacement on the claims made by the customers and the assessee reimbursed the distributor their actual expenses. Since such payments made to distributors (abroad) were without deduction of tax (TDS), the AO asked assessee to justify its action. Pursuant thereto, assessee explained that the payment made was only reimbursement of actual expenditure and that there was no element of profit involved in such payment. Moreover, it was pointed out that the entire work in this regard was carried out and utilized only outside India. In such factual back-drop, the assessee explained that it didn’t deduct tax at source on the said payment.
However, the AO didn’t agree and held that there was an element of income embedded even in reimbursements and therefore, assessee was liable to deduct tax and that assessee was not absolved from the & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd. :: 3 :: responsibility of deducting tax. Further, the AO held that part identification or defect analysis, correction and reporting of warranty constitute “fees for technical services” and hence tax should have been withheld. Thus, AO held that the payment made by the assessee to the warranty service providers is towards a contractual payment for obtaining technical services from the dealers for servicing the tractors and the said receipt needs to be treated as “Fee for Technical Services” as per the Act and the DTAA and are liable to be offered to tax as income in India.
Therefore, AO had demanded Rs.73,79,557/- as tax withheld and charged Rs.70,84,374/- towards interest for non-deduction.
Aggrieved, the assessee preferred an appeal before the Ld.CIT(A)
who reproduced the Tribunal order in the assessee’s own case for AY dated 07.03.2022 on the same issue but held as under:
3.3 In light of the above the payments made by the appellant as reimbursement for the (replacement of parts)as warranty charges cannot be subject to withholding Tax provisions and therefore, the appellant cannot be treated to be in default, with respect to the same. However, the Assessing Officer is directed to ascertain the cost of payments made to the non-residents for repair charges excluding the material cost. The repair charges paid to the non-residents are in the nature of "fees for technical services" and the appellant is duty bound to deduct TDS on the same at the applicable rates as per the provisions of Income Tax Act and the respective DTAA's.
The appellant is directed to provide the details to the Assessing Officer, so that the Assessing Officer can arrive at the correct rate of tax and interest u/s 201(1)/201(1A). And when a charge is paid as "fees for technical services", there is no requirement for the non- resident to have a residence or PE in India, and it is not necessary for the non-resident to render services in India. The explanation as laid down u/s 9(1)(viii) reads as under:
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Explanation: For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non- resident, whether or not,- (i) The non-resident has a residence or place of business or business connection in India; or (ii) The non-resident has rendered services in India.
To the above extent, all the grounds of appeal raised by the appellant are partly allowed Ground of Appeal No.7 is dismissed.
Aggrieved, the assessee is in appeal before this Tribunal.
We have heard both parties and perused the records. It is noted that the assessee is a resident corporate which is engaged in manufacturing of agricultural Tractors. In fulfillment of its responsibility as seller, the assessee extended after sale support in the form of warranty of Tractors and accordingly, the dealers/distributors carried out the obligations of warranty and raised invoices on assessee, which were remitted by assessee on actual cost incurred by them. The payments made to dealers abroad were predominantly towards cost of parts and small portion towards fitment and repair charges. Thus the assessee asserted that the amount reimbursed by it to dealers abroad, was based on actual cost incurred by them, there is no profit element/income accruing in the hands of the dealers abroad on the payment made by assessee. And moreover, since the payments were mere reimbursements, it justified its action of not deducting tax at source (TDS) while making & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd. :: 5 ::
the reimbursement. It was further pointed out that the entire work was carried and utilized outside India and therefore, no Tax was required to be deducted at source. And since the non-resident dealers had no permanent establishment in India, the receipts were not taxable in their hands as per Double Taxation Avoidance Agreement. And that the payments would not fall under ‘fees for technical services’ since there was no rendering of any technical skill, know-how or knowledge involved. Hence, the assessee justified its action for not deducting tax at source. However, the AO didn’t agree and he held that there exists an element of income embedded even in reimbursements and are liable to tax and therefore, the assessee was not absolved from the responsibility of deducting tax. The AO further held that part identification or defect analysis, correction and reporting of warranty constitute “fees for technical services” and hence tax should have been withheld. The AO has held that the payment made by the assessee to the warranty service providers is towards a contractual payment for obtaining technical services from the dealers for servicing the tractors and the said receipt is treated as a “Fee for Technical Services” as
per the Act and the DTAA and are liable to be offered to tax as income in India. Therefore, AO passed order u/s.201(1)/201(1A) of the Act wherein assessee was held to be an assessee in default for want of deducting TDS & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd. :: 6 ::
and demanded Rs.73,79,557/- as tax withheld and charged Rs.70,84,374/- towards interest for non-deduction.
The Ld.CIT(A) followed the decision of this Tribunal in the assessee’s own case for AY 2010-11 [in for AY 2010-11 order dated 07.03.2022] and reproduced the same in his impugned order and agreed to the extent that the payments made by the assessee to the dealers was reimbursement but for the replacement of parts for warranty charges and therefore, can’t be subject to withholding tax provisions. Having held so, the Ld.CIT(A) directed the AO to ascertain cost of payments made to the non-residents for repair charges excluding the material cost. And held that the repair charges paid to the non- residents was in the nature of “fees for technical services” and the assessee was duty bound to deduct TDS on the same. Thus gave part- relief to the assessee.
We don’t countenance the aforesaid action of the Ld.CIT(A) i.e., for deviating from the decision rendered by this Tribunal in the assessee’s own case for AY 2010-11 (supra), unless he points out that there was change in facts or law vis-à-vis that of the present appeals for AY 2012- 13 and AY 2013-14. Before us also, the Ld.DR couldn’t point out any changes in facts or law of the captioned appeals with that of AY 2010-11 (supra). In such a scenario, the Ld.CIT(A) was bound to follow the & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd. :: 7 ::
decision of this Tribunal for AY 2010-11 (supra); and any deviation from it will be breaching the judicial discipline. Having said so, we note that the assessee is a manufacturer of Tractors in India and exports the Tractors abroad/to other countries and sells them in those countries through its dealers. The assessee company also provides warranty to the end customers who purchase the Tractor. The dealers abroad maintains the Tractor sold by them [as per the terms of the warranty promised by the Assessee Company], towards which the dealer companies incurs expenditure. As per the contractual obligation, the assessee company reimburses such expenses incurred by its “dealers abroad”. Thus the assessee company incurs expenditure outside India for the purpose of earning income from source outside India. Therefore by virtue of Section 9(1)(vii)(b) of the Act, the payment made by the assessee company to a person outside India for earning income from any source outside India, the income arising from such payment to the recipient shall be excluded from the deeming provision of Section 9(1) of the Act. Hence we are of the considered view that the assessee company will not be liable to deduct tax U/s.195 of the Act. As held by this Tribunal in M/s Nissan Motors India Pvt Ltd (infra), which ratio was relied upon by this Tribunal in assessee’s own case for AY 2010-11 as under;- & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd.
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Upon careful consideration of material fact, it could be gathered that the assessee is primarily engaged as manufacturer of agricultural tractors. It has sold tractors overseas through non-resident distributors. As part of the sales obligations, the assessee has to provide warranty. This warranty expenditure is incurred by the overseas distributors and the same are later on reimbursed by the assessee. The submissions of Ld. AR are that warranty expenditure is part of overall sales obligations and the expenditure is reimbursed on actual basis. The warranty obligation being part and parcel of sales transactions and therefore, the same could not be held to be ‘fees for technical services’. Another line of argument is that services have been carried as well as utilized outside India and therefore, there is no TDS obligation on the part of the assessee in view of the fact that the payees do not have any permanent establishment in India. Finally, Ld. AR has submitted that no services have been rendered to the assessee rather the technical services, if any, has been rendered to overseas customers by the non-resident distributors. For the same, Ld. AR strongly rely on the decision of this Tribunal in the case of similarly placed assessee i.e., M/s Nissan Motors India Pvt. Ltd. V/s DCIT (ITA No.1854/Mds/2017 dated 21-032018).
After going through the cited decision, we find that similar was the issue in that case. The bench, after considering the provisions of Sec.9(1)(vii)(b) held that payment made by the assessee to a person outside India for earning income from any source outside India would not require tax at source u/s 195 since the income of recipient would be excluded from the deeming provisions of Sec.9(1) of the Act. The relevant observations of the bench were as under: - 4.4 Before us the Ld.AR pointed out the provision of Section 9(1)(vii)(b) of the Act and argued by stating that, the exemption to the provision clearly provides, where any resident pays fees in respect of services for the purpose of making or earning any income from any source outside India, the income arising from such payment to the recipient outside India will not be deemed to be income accruing or arising in India. Further the Ld.AR relied on various decisions to drive his point that tax was not liable to be deductible in the case of the assessee for the payment made towards reimbursement of warranty expenses to sister concerns outside India. The Ld.DR on the other hand relied on the orders of the Ld.Revenue Authorities.
4.5 We have heard the rival submissions and carefully perused the materials on record. The relevant provision of Section 9 of the Act is reproduced herein below for reference:-
“Section 9(1) : The following income shall be deemed to accrue or arise in India:- (i) ------------------ (ii) ….. (iii) …. (iv) ….. (v) ….. (vi) …. (vii) Income by way of fees for technical services payable by -------
(a) -----------------
(b) A person who is resident, except where the fees are payable in respect of services utilized in business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India; or”
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The above provision of Section 9(1)(vii) and the second limb of (b) of the Act, clearly provides that where a resident is liable to pay fees in respect of services utilized in a business or profession carried on by such person for the purpose of making or earning any income from any source outside India, the income arising from such payment shall be excluded from the deeming provision of Section 9(1) of the Act viz., “income accruing or arising in India”. In the case of the assessee, the assessee is a manufacturer of motor cars in India and exports the motor cars to other countries and sells them in those countries through its sister concerns who acts as the dealer of the assessee company. The assessee company also provides warranty to the end customers who purchase the car. The assessee’s sister companies who acts as the dealers of the assessee company maintains the cars sold by them according to the terms of the warranty promised by the Assessee Company, towards which the dealer companies incurs expenditure. As per the contractual obligation, the assessee company reimburses such expenses incurred by its “dealer - sister companies”. Thus the assessee company incurs expenditure outside India for the purpose of earning income from source outside India. Therefore by virtue of Section 9(1)(vii)(b) of the Act, the payment made by the assessee company to a person outside India for earning income from any source outside India, and the income arising from such payment to the recipient shall be excluded from the deeming provision of Section 9(1) of the Act. Hence we are of the considered view that the assessee company will not be liable to deduct tax U/s.195 of the Act. It is pertinent to mention that the decision relied by the Ld.AO in the case SPX India Pvt. Ltd., Vs. CIT supra and Ashok Leyland Ltd., Vs. DCIT supra are not applicable to the facts of the case of the assessee. In the case SPX India Pvt. Ltd., the issue was with respect to deduction of tax at source on the amount reimbursed as ISO audit fee to parent company. In the case of Ashok Leyland Ltd., the company was engaged in the business of manufacture of motor vehicles in India and the issue was with respect to reimbursement of expenditure towards air fare, accommodation and subsistence cost of personal disputed by foreign company. Accordingly the issue is decided in favour of the assessee.
We find that similar are the facts in the present case. The services have been carried as well as utilized outside India. There is nothing on record that any of the payees has any permanent establishment in India. Therefore, as held by the bench, in such a case, there would be no obligation for assessee to deduct tax at source. We also concur with the submissions of Ld. AR that the warranty obligation being part and parcel of sales transactions and therefore, the same could not be held to be ‘fees for technical services’. Therefore, considering the fact of the case, we direct Ld. AO to delete the impugned demand as raised against the assessee.
The appeal stands allowed in terms of our above order.
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Respectfully following the judicial precedent (supra), we hold that sec.9(1)(vii) (b) of the Act, clearly provides that where a resident is liable to pay fees in respect of services utilized in a business or profession carried on by such person for the purpose of making or earning any income from any source outside India, the income arising from such payment shall be excluded from the deeming provision of Section 9(1) of the Act viz., “income accruing or arising in India”. In the case of the assessee,
And moreover, since the services in question have been rendered outside India and there is no evidence on record that any of the payees had permanent establishment in India, there was no obligation for assessee to deduct tax at source in respect of the reimbursement. We also note that warranty obligation being part and parcel of the sales transaction, it couldn’t be termed as “fees for technical services”.
Therefore, demand raised by the AO was unwarranted in the facts of the case, and therefore directed to be deleted.
ITA Nos.1676 & 1680/Chny/2024 (AYs 2012-13 & 2013-14) M/s. Tractors & Farm Equipment Ltd. :: 11 :: for AY 2013-14:
10 Since the facts and law are same/similar in this Appeal, on the reasons stated supra for Appeal of AY 2012-13, we, direct deletion of the impugned demand raised for AY 2013-14 also.
In the result, appeals filed by the assessee are allowed.