Fees paid to a foreign company for rendering testing and certification services could not be treated as income deemed to accrue or arise in India under Section 9(1)(vii) of the Income-tax Act
Further since the income did not accrue or arise in India, the question of deducting tax at source does not arise and consequently payment made to the non-resident was not to be disallowed under Section 40(a)(i) of the Act.
Havells India Ltd v. ACIT [ITA No.1300/Del/2010, dated 27 May 2011]
Facts of the case
• The taxpayer paid INR 1.48 million to CSA International (CSA), a US Company for getting witness testing of AC Contactor as part of CB report and KEMA certification. CSA was assigned this job since it had a specialized knowledge and facility for the requisite testing and certification.
• The Assessing Officer (AO) held that fees paid for testing and certification services rendered by CSA were in the nature of making available of technical knowledge, expertise and skill of CSA, rendering such services to be ‘Fees for Included Services” as per Article 12(4)(b) of the India-USA tax treaty (tax treaty).
• The AO observed that irrespective of whether the non-resident is having a business connection in India or not, the payment made by the taxpayer as Fees for Technical Services (FTS) being utilised in business in India would lead to income being deemed to accrue or arise in India. Further the AO held that since tax was not deducted at source under Section 195 of the Act in respect of testing fees paid by the taxpayer, the amount of INR 1.48 million would be disallowed under Section 40(a)(i) of the Act.
• The Commissioner of Income Tax Appeal [CIT (A)] relying on the decision of Cochin Refineries Ltd.2 confirmed the disallowance made by the AO.
2 Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 (Ker)
3 GE India Technology Centre P Ltd v. CIT [2010] 327 ITR 456 (SC)
4 Titan Industries Ltd v. ITO [2007] 11 SOT 206 (Bang)
5 Ishikawajima–Harima Heavy Industries Ltd v. DIT [2007] 158 Taxman 259 (SC)
Taxpayer’s contentions
• The taxpayer contended that it had made exports to the USA and the fees in question had been paid to earn income from the USA, i.e. from a source outside India. Therefore, the fees paid to CSA could not be deemed to accrue or arise in India under Section 9(1)(vii) of the Act and tax was not required to be deducted at source on such payments under Section 195 of the Act.
• The taxpayer relied on the decision of GE India Technology Centre P Ltd3 where it was held that duty to withhold tax did not arise on a mere remittance to a non-resident, unless the remittance consisted of wholly or partly taxable income. Since the fees were payable in respect of services utilised outside India, the said income was not taxable and tax was not required to be deducted at source.
• The taxpayer relying on the decision of Titan Industries Ltd4 contended that provisions of Section 40(a)(i) of the Act had no applicability since services has been utilised outside India for earning an income from a source outside India. Accordingly, the payment was covered in the exception provided in Section 9(1)(vii)(b) of the Act, due to which, there was no need to deduct tax at source under Section 195 of the Act.
• The taxpayer further contended that the CIT(A) had failed to consider the decision of the Supreme Court in Ishikawajimi–Harima Heavy Industries Ltd5 where it had been held that income can be deemed to accrue or arise in India, only if the services were utilised in India as well as rendered in India; that in the taxpayer’s case, neither were the services rendered by CSA in India, nor were they utilised in India.
• The taxpayer further contended that services of CSA did not make available technical know-how to the taxpayer, therefore, it did not amount to FIS under the tax treaty and there was no obligation on the part of the taxpayer to deduct tax under Section 195 of the Act.
Tax department’s contentions
• The tax department contended that testing reports and certifications were obtained from CSA in respect of the manufacturing activity of the taxpayer in India and that the taxpayer did not deduct tax at source while making the payment to CSA.
• The tax department relying on the decision of Cochin Refineries Ltd contended that fees paid to CSA US was in the nature of FTS and it would fall under the definition of FTS within the provisions of Section 9(1)(vii) of the Act and the income was thus taxable in India.
• The tax department contended that the payment was covered as “Fees for Included Services” as referred to in Article 12(4)(b) of the tax treaty as the testing report and certification made available to the taxpayer were in the nature of technical knowledge, expertise and skill made available to the taxpayer. Further the same was utilised in the manufacture and sale of products in the business of the taxpayer in India.
• The tax department contended that if the assessment order was found to be deficient with regards to whether services was utilised in India or not, the matter should be referred to the AO for a fresh decision concerning this aspect of the matter.
Tribunals ruling
• The Tribunal observed that the testing and certification was necessary for the export of the product and was utilised for such export. The said services were rendered and utilised outside India. Therefore, the income fell outside the purview of Section 9(1)(vii) of the Act and did not deem to accrue or arise in India.
• The Tribunal observed that the tax department had failed to prove its contention that the testing and certification were utilised in the taxpayer’s production activity in India. The burden in this regard was entirely on the tax department, which the tax department had failed to discharge.
6 Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum)
Joint Accreditation System of Australia and New Zealand [2010] 326 ITR 487 (AAR)
Diamond Services P Ltd v. Union of India & Others [2008] 304 ITR 201 (Mum)
NQA Quality System Registrar Ltd v. DCIT [2005] 92 TTJ 946 (Del)
ICICI Bank Ltd v. DCIT [2008] 20 SOT 453(Mum)
• The tax department’s argument on remitting the matter to the AO was neither required, nor appropriate to be adopted. The Tribunal observed that it was not possible to remit the matter to the AO since the appellate authority examines whether the assessment had been framed in accordance with law and if the assessment was not framed in accordance with law it was not the responsibility of the authority to start investigation suo moto and in order to fill up the gap which was missing.
Recently, the Delhi Bench of Income-tax Appellate Tribunal (the Tribunal) in case of Havells India Ltd1 (the taxpayer) held that testing fees paid to non-resident company could not be treated as income deemed to accrue or arise in India under Section 9(1)(vii) of the Income-tax Act 1961 (the Act).
Further since the income did not accrue or arise in India, the question of deducting tax at source does not arise and consequently payment made to the non-resident was not to be disallowed under Section 40(a)(i) of the Act.
Havells India Ltd v. ACIT [ITA No.1300/Del/2010, dated 27 May 2011]
Facts of the case
• The taxpayer paid INR 1.48 million to CSA International (CSA), a US Company for getting witness testing of AC Contactor as part of CB report and KEMA certification. CSA was assigned this job since it had a specialized knowledge and facility for the requisite testing and certification.
• The Assessing Officer (AO) held that fees paid for testing and certification services rendered by CSA were in the nature of making available of technical knowledge, expertise and skill of CSA, rendering such services to be ‘Fees for Included Services” as per Article 12(4)(b) of the India-USA tax treaty (tax treaty).
• The AO observed that irrespective of whether the non-resident is having a business connection in India or not, the payment made by the taxpayer as Fees for Technical Services (FTS) being utilised in business in India would lead to income being deemed to accrue or arise in India. Further the AO held that since tax was not deducted at source under Section 195 of the Act in respect of testing fees paid by the taxpayer, the amount of INR 1.48 million would be disallowed under Section 40(a)(i) of the Act.
• The Commissioner of Income Tax Appeal [CIT (A)] relying on the decision of Cochin Refineries Ltd.2 confirmed the disallowance made by the AO.
2 Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 (Ker)
3 GE India Technology Centre P Ltd v. CIT [2010] 327 ITR 456 (SC)
4 Titan Industries Ltd v. ITO [2007] 11 SOT 206 (Bang)
5 Ishikawajima–Harima Heavy Industries Ltd v. DIT [2007] 158 Taxman 259 (SC)
Taxpayer’s contentions
• The taxpayer contended that it had made exports to the USA and the fees in question had been paid to earn income from the USA, i.e. from a source outside India. Therefore, the fees paid to CSA could not be deemed to accrue or arise in India under Section 9(1)(vii) of the Act and tax was not required to be deducted at source on such payments under Section 195 of the Act.
• The taxpayer relied on the decision of GE India Technology Centre P Ltd3 where it was held that duty to withhold tax did not arise on a mere remittance to a non-resident, unless the remittance consisted of wholly or partly taxable income. Since the fees were payable in respect of services utilised outside India, the said income was not taxable and tax was not required to be deducted at source.
• The taxpayer relying on the decision of Titan Industries Ltd4 contended that provisions of Section 40(a)(i) of the Act had no applicability since services has been utilised outside India for earning an income from a source outside India. Accordingly, the payment was covered in the exception provided in Section 9(1)(vii)(b) of the Act, due to which, there was no need to deduct tax at source under Section 195 of the Act.
• The taxpayer further contended that the CIT(A) had failed to consider the decision of the Supreme Court in Ishikawajimi–Harima Heavy Industries Ltd5 where it had been held that income can be deemed to accrue or arise in India, only if the services were utilised in India as well as rendered in India; that in the taxpayer’s case, neither were the services rendered by CSA in India, nor were they utilised in India.
• The taxpayer further contended that services of CSA did not make available technical know-how to the taxpayer, therefore, it did not amount to FIS under the tax treaty and there was no obligation on the part of the taxpayer to deduct tax under Section 195 of the Act.
Tax department’s contentions
• The tax department contended that testing reports and certifications were obtained from CSA in respect of the manufacturing activity of the taxpayer in India and that the taxpayer did not deduct tax at source while making the payment to CSA.
• The tax department relying on the decision of Cochin Refineries Ltd contended that fees paid to CSA US was in the nature of FTS and it would fall under the definition of FTS within the provisions of Section 9(1)(vii) of the Act and the income was thus taxable in India.
• The tax department contended that the payment was covered as “Fees for Included Services” as referred to in Article 12(4)(b) of the tax treaty as the testing report and certification made available to the taxpayer were in the nature of technical knowledge, expertise and skill made available to the taxpayer. Further the same was utilised in the manufacture and sale of products in the business of the taxpayer in India.
• The tax department contended that if the assessment order was found to be deficient with regards to whether services was utilised in India or not, the matter should be referred to the AO for a fresh decision concerning this aspect of the matter.
Tribunals ruling
• The Tribunal observed that the testing and certification was necessary for the export of the product and was utilised for such export. The said services were rendered and utilised outside India. Therefore, the income fell outside the purview of Section 9(1)(vii) of the Act and did not deem to accrue or arise in India.
• The Tribunal observed that the tax department had failed to prove its contention that the testing and certification were utilised in the taxpayer’s production activity in India. The burden in this regard was entirely on the tax department, which the tax department had failed to discharge.
6 Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum)
Joint Accreditation System of Australia and New Zealand [2010] 326 ITR 487 (AAR)
Diamond Services P Ltd v. Union of India & Others [2008] 304 ITR 201 (Mum)
NQA Quality System Registrar Ltd v. DCIT [2005] 92 TTJ 946 (Del)
ICICI Bank Ltd v. DCIT [2008] 20 SOT 453(Mum)
• The tax department’s argument on remitting the matter to the AO was neither required, nor appropriate to be adopted. The Tribunal observed that it was not possible to remit the matter to the AO since the appellate authority examines whether the assessment had been framed in accordance with law and if the assessment was not framed in accordance with law it was not the responsibility of the authority to start investigation suo moto and in order to fill up the gap which was missing.
• The Tribunal further observed that the tax department did not bring anything on record to substantiate its observation of the testing and certification services provided to the taxpayer by CSA having been utilised for the taxpayer’s business activity in India. Accordingly, it was held that fees paid by the taxpayer did not deemed to accrue or arise in India and withholding of tax under Section 195 of the Act was not required and thus disallowance under Section 40(a)(i) of the Act was also not required.
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