TDS – Payment to non-resident – Effect of amendment to section 195 by F. A. 2012 with retrospective effect from 01/04/1962 – No change in condition precedent for application of section 195 – Income arising to non-resident must be taxable in India

49. Principal CIT vs. Motif India Infotech (P) Ltd.; 409
ITR 178 (Guj) Date of order: 16^th October, 2018 A. Y. 2009-10 Sections 9(1) and 195 of ITA 1961

TDS – Payment to non-resident – Effect of amendment to
section 195 by F. A. 2012 with retrospective effect from 01/04/1962 – No change
in condition precedent for application of section 195 – Income arising to
non-resident must be taxable in India

The assessee was a company engaged in software development. It provided
software related services to its overseas clients. In the course of assessment
proceedings for the A. Y. 2009-10, the Assessing Officer found that the assesse
had made payment of Rs. 5.51 crore to a foreign based company towards fees for
technical services without deducting tax at source. The assessee argued that
the payment received by the non-resident was not taxable and that therefore,
there was no requirement for deducting tax at source while making such payment.
However, the Assessing Officer disallowed the expenditure relying on section
40(a)(i) of the Act holding that the tax was deductible at source.

The Commissioner (Appeals) accepted the assessee’s claim and held in
favour of the assessee observing that there was no dispute that the services
were in the nature of technical services, but would be covered under the
Explanation clause contained in section 9(1)(vii)(b) of the Act. He was of the
opinion that the services were utilised outside India in a business or
profession carried outside India, or for the purpose of earning any income
outside India. This was upheld by the Tribunal.

On appeal by the Revenue, the Gujarat High Court upheld the decision of
the Tribunal and held as under:

“i)   In the case of GE India
Technology Centre P. Ltd. Vs. CIT; 327 ITR 456 (SC), the ratio laid down by the
Supreme Court was that mere remittance of money to a non-resident would not
give rise to the requirement of deducting tax at source, unless such remittance
contains wholly or partly taxable income. After the judgment was rendered, the
Legislature amended section 195 by inserting Explanation 2 by the Finance Act,
2012, but with retrospective effect from 01/04/1962. The Explanation provides
that for removal of doubts, it is clarified that the obligation to comply with
sub-section (1) of section 195, and to make deduction as provided therein
applies and shall be deemed to have always applied to all persons, resident or
non-resident, whether or not the non-resident person has a residence or place
of business or business connection in India; or any other presence in any
manner whatsoever in India. Mere requirement of permanent establishment in
India was thus done away with. Nevertheless, the basic principle that
requirement of deduction of tax at source would arise only in a case where the
payment made to a non-resident was taxable, still remains.

ii)   The Commissioner (Appeals)
and the Tribunal had accepted the assessee’s factual assertion that the
payments were for technical services provided by a non-resident, for providing
services to be utilised for serving the assessee’s foreign clients. Clearly,
the source of income namely the assessee’s customers were the foreign based
companies.

iii)  We are fortified in the view
by a judgment of the Karnataka High Court in the case of CIT Vs. ITC Hotels;
(2015) 233 Taxman 302 (Karn), in which it was held that where the recipient of
income of parent company is not chargeable to tax in India, then the question
of deduction of tax at source by the payer would not arise.

iv)  In the result, the tax appeal
is dismissed.”