Section 9(1)(vii), 40(a)(i) of I T Act – Article 12 of India-Germany DTAA – (i) if no human intervention is involved in any services, they will not be considered “technical” services; (ii) source of income can be said to be outside India only if manufacturing facilities are outside India and the customers are also outside India; (iii) as, on facts, withholding of tax was not applicable at the time when charges were paid, section 40(a)(i) cannot be invoked.
Facts:
The taxpayer was a 100% EOU partnership firm engaged in the business of manufacture and export of leather goods. During the relevant assessment year, the taxpayer made certain payments to a German company (“FCo”) towards leather testing charges without withholding tax from the payments. Before the AO, the taxpayer contended that since FCo had not carried out any testing operations in India, income could not be said to accrue or arise in India and hence, the taxpayer was not liable to withhold tax from the payments.
According to the AO, the payments constituted fees for technical services in terms of Explanation to section 9(1)(vii) of the Act and hence, the taxpayer was liable to withhold tax from the payments. Since the taxpayer had not withheld tax, applying section 40(a)(i), the AO disallowed the payments. CIT(A) confirmed the order of the AO.
Before the Tribunal, the taxpayer contended that: the entire testing process was automated; since it was a 100% EOU, the source of income was outside India; and hence, the payment did not fall within the ambit of section 9(1)(vii).
Held:
(i) Taxability u/s. 9(1)(vii) and under Article 12(4) of India-Germany DTAA
As per the taxpayer, the entire testing process was automated though this aspect was not examined by the authorities below. Since the terms “managerial” and “consultancy”, which respectively precede and succeed the term “technical” in Explanation 2 to section 9(1)(vii), the term “technical” would also be construed to involve human element. It is well settled that when no human intervention is involved in any services, they will not fall within the ambit of section 9(1)(vii). The question is not of more or less of human involvement but of presence or absence of human involvement.
(ii) Services utilised for income from source outside India
Even if the business is being carried on by a 100% EOU, it is a business carried on in India, and hence, it is not covered by the exception in section 9(1)(vii)(b) “where the fees are payable in respect of services utilized for the purpose of making or earning any income from any source outside India”. That exception will not apply merely because the user of services is a 100% EOU but only if the manufacturing facilities are outside India and the customers are also outside India.
(iii) Disallowance u/s. 40(a)(i)
Though the retrospective amendment is termed merely clarificatory, in view of Supreme Court’s judgment in Ishikwajima Harima Heavy Industries Ltd. vs. DIT (288 ITR 708) and in view of the fact that services were rendered outside India even if utilised in India, leather testing fees were not taxable in India in the light of the legal position as it prevailed at that point of time. Hence, at the time when the taxpayer made payments, it was not required to withhold tax and it became taxable in India only as a result of the retrospective amendment in section 9(1), the said payment cannot be disallowed by invoking section 40(a)(i). Hence, on facts, disallowance u/s. 40(a)(i) cannot be invoked.
