CONFERENCECALL SERVICES INDIA PVT LTD.,BANGALORE vs. ACIT, CHENNAI

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER

During the year under consideration the assessee had incurred operation cost of �2,21,63,895/- towards connectivity services. The Assessing Officer disallowed a sum of �33,91,949/- and �1,46,48,969/- by invoking provisions of Section 40(a)(i) and u/s.40(a)(ia) of the Act respectively. Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) confirmed the disallowances. Against this, the assessee is in appeal before us.

It stated that payments in respect of carriage cost, data variable cost etc., do not have income element and therefore, the withholding tax liability does not rise. Without prejudice to the interest of Revenue, the ld. Authorised Representative submitted that short deduction of TDS cannot be a reason for disallowance. He relied on the following judgments.

I.T.A.Nos.484 & 1057/Mds/2014 :- 4 -:

(i) CIT vs. Vector Shipping Services (P) Ltd. in CC No.8068/2014 (SC) (SLP) (ii) CIT vs. Vector Shipping Services (P) Ltd (2013) 357 ITR 642 (All) (iii) ACIT vs. Eskay Designs in dt 9.12.2013. (iv) ITO vs. Theekathir Press in ITA No.2076/Mds/2012,dt. 18.9.2013

payment to a non- resident finds that only a particular portion is chargeable, then obviously he has been given a right in terms of sub-section (2), which the assessee has called a beneficial section. There was no dispute in whether that section is called a beneficial section or a machinery provision because for working out the amount of tax to be deducted on a particular portion of sum chargeable, that provision is absolutely necessary. As per sub-section (2), whenever a person responsible for paying any sum chargeable to tax considers that whole of such sum would not be income chargeable in the case of recipient, he may make an application to the Assessing Officer to determine the appropriate portion of such sum so chargeable and upon such determination, tax would be deducted under sub-section (1) only ,on that proportion of sum which is so chargeable, which means that the person responsible for making payment, etc cannot himself decide what is the appropriate proportion which is chargeable to tax. The expression ‘by general or special order' and the 'appropriate proportion' in this sub-section are key words to understand the meaning in the sense that there may be situations where only one particular portion of such sum is taxable in case of a similar assessee and the income- tax authorities may make a general "order that in the case of such type of assessees a particular proportion of the sum has to be considered as income chargeable to tax and tax can be deducted accordingly. It seems that the Central Board of Direct Taxes has already issued a circular in respect of advertisement income earned by non-resident TV channels, etc., where a proportion of income has been fixed to be considered as income. But there can be situations which can be generalized and the proportion of the sum can be determined on a general basis. In all other situations, where 'appropriate proportion’ is required to be determined, the assessee has to go before the taxing authorities and get such "appropriate proportion" of the same on which tax is to be deducted, determined and accordingly deduct tax. Therefore, wherever a general situation exists a general order is passed by the Department in the form of circular etc. No such circular has been issued by the CBDT, which means such parties must apply under section 195(2) for special order so as to get the "appropriate proportion" determined. Also the word "appropriate proportion" is significant. If the payer of such sum was to decide the proportion of amount which was chargeable, then there was no need to use the words "appropriate proportion". The use of these words clearly suggests that somebody needs to determine such appropriate proportion after considering all the facts and circumstances of the case. Naturally this somebody cannot be the assessee him-required self. Therefore, assessee is to come before the income- tax authorities in the form of application under I.T.A.Nos.484 & 1057/Mds/2014 :- 7 -: section 195(2) and make a claim that only a particular proportion is chargeable and the appropriateness of the same is to be decided by the Assessing Officer and only after that, such sum is to be determined. This clearly shows the requirement of application of mind by the taxing authorities and, therefore, this sum cannot be decided by the payer of such sum, whatever may be the circumstances. If such appropriate proportion was to be decided by the payer or the assessee, then section 195(2) will become redundant. It has been observed that the provision of section 195(1) is for "tentative deduction" which means, the initial assumption should be that the tax has to be deducted on the whole of the amount because same is subject to regular assessment and it was specifically pointed out that the rights of the parties were not in any manner adversely affected, because wherever the assessee had any doubt that tax is to be deducted on the lower proportion, then such assessee had the option to make an application under section 195(2). Even the recipient of such payment can make an application to the Assessing Officer that he may be allowed to receive the payment without any deduction of tax. We would again reiterate that though sub-section (2) of section 195 is of beneficial nature definitely and is an optional one, but it does not mean that if the assessee chooses not to take the benefit, then he should be allowed to get away without deduction of tax at source, because the assessee has some other logic. How income has to be computed or tax is to be deducted etc., these things have been clearly laid down in Chapter IV and Chapter XVII-B and it is the prerogative of the tax authorities to determine these things as per the provisions of the Act and not the prerogative of the assessee, except in case of tax to be deducted under section 192 in case of salaries, where the average rate of tax has to be deducted depending upon the income of the assessee, otherwise tax has to be deducted on the rates specified. We have already clarified in the initial portion of the order that the provisions regarding computation of income and tax cannot be mixed up and confused with the provisions regarding deduction of tax at source. We fail to understand, what prevented the assessee from making an application under section 195(2) and claim the so-called benefits under section 44BB. We are at a loss to understand how the assessee sitting in his own office can take such a decision that whatever payments it was making to the non-residents ultimately would be covered under section 44BB, even when such non-resident had never filed any return. We think, by adopting this course of action, the assessee tried to decide everything on his own ignoring all statutory provisions’’.

I.T.A.Nos.484 & 1057/Mds/2014 :- 8 -:

Being so, this issue is squarely covered by the above order. Taking a consistent view, we are inclined to hold that the assessee is liable to deduct TDS for payment made to foreign service provider. However, if there is short deduction of TDS then the payment cannot be disallowed as short deduction is different from no deduction of TDS. Accordingly, the Assessing Officer is directed to segregate the short deduction and no deduction of TDS on the payments made to foreign provider and he has disallowed only payment where there is no deduction of TDS.

Accordingly, this ground is partly allowed.

In this appeal, the first ground is with regard to disallowance u/s.40(a)(i) of the Act. The facts of the case are that during the year under consideration, the assessee company had paid management fees to its group companies InterCall Inc, InterCall Singapore Pvt. Ltd. I.T.A.Nos.484 & 1057/Mds/2014 :- 10 -: and InterCall Australia Pvt. Ltd. The assessee claims that such services ere not taxable under the relevant tax treaty as the same had not satisfied the ‘make available’ test. As per the relevant tax treated, the services availed from service provider would constitute ‘’Fees for Technical Services’’ only if such services pass the ‘’make available’’ test. Technical knowledge experience, skill etc should be considered to have been ‘make available' when the person acquiring the service is enabled to apply the same knowledge, technology, etc. independently. The service recipient should be able to make use of the knowledge, by itself in its business for its benefit and without the recourse to the service provider in future. In other word the recipient of the services can independently provide it to others. The assessee claims to be only utilising the services of the service provider and not in a position to provide similar service to third parties independently. The assessee is not learning or gaining knowledge, skill set while receiving the said services. Thus, the 'made available' test of the tax treaty has not been satisfied as the assessee is not enabled to independently perform such services. The Assessing Officer had giving following reasons for the disallowance.

I.T.A.Nos.484 & 1057/Mds/2014 :- 11 -:

7.1 The management services are provided by the associated enterprises for the business activity of the assessee. As per Section 9, which is a deeming provision, to determine an income that has accrued or arisen in India. As per Section 9(1)(vii) which brings in deemed income by way of ‘’fees for technical services’’ wherein, the sum is paid by a resident except to a person outside India for the purpose of making or earning any income from any source outside India. In the present case, the payment is made by a resident for the purpose of services utilized in the business or profession carried on by a person in India and for earning an income from such source in India. Further, as per Explanation(2) to Section 9(1)(vii) fee for technical services means any consideration for rendering of any managerial, technical or consultancy services including the provision of services or technical of other personal. Therefore, the management fees paid by the assessee to the non resident falls within the definition of fee for technical services as provided in Explanation 2 to Section 9(1)(vii). Since the amount received by the non residents as a deemed income as per section 9 r.ws.

5. Section 195 is applicable in this case. Therefore, there is a failure on the part of the assessee to deduct tax and hence, expenditure claimed by the assessee warrants disallowance u/s.40(a)(i) of the Act. The submission of the assessee that the relevant tax treaty between the countries provides that fee for technical services would constitute only if it fails within the make- available test is not acceptable. Section 90 provides for relief to an assessee as per the DTAA entered into by India with other countries. As per the provisions of the Income Tax Act, if an income is taxable in India as well as in the taxes paid in other country, then to that extent the relief is, given to the assessee and the payment is taxed accordingly. In the present case, it was clear that the management fee paid by the assessee fall within the definition of fee for technical services as provided in section 9(1)(vii). Hence, the income accrued to a non-resident on management fee received is an income in India. The make available test need not be applied in this case since any managerial services rendered by the non-resident will fall within the definition of ‘’fee for technical services’’. Therefore, the claim of the assessee was not accepted.

Thus, the assessee is in appeal before us.

Assessing Officer with reference to the relevant DTAA. Accordingly the findings of the DRP is confirmed.

No.484/Mds/2014 is partly allowed for statistical purposes and is dismissed.

Order pronounced on Friday, the 17th day of July, 2015, at Chennai.