Article 7(1) of India-USA DTAA; Section 9(1)(i), 40(a)(i), 195 of the Act –Support services obtained from an associate entity in USA under a service agreement- Services were rendered within India as well as from outside India – payments for services rendered from outside India not subject to withholding as there was no involvement of PE in India while rendering such services.

10.  TS-190-ITAT-2018(Mum)

DCIT vs. Transamerica Direct Marketing
Consultants Pvt. Ltd.

ITA No. : 1978/MUM/2015

A.Y. : 2010-11

Date of Order: 19^th
March, 2018

Article
7(1) of India-USA DTAA; Section 9(1)(i), 40(a)(i), 195 of the Act –Support
services  obtained from an associate
entity in USA under a service agreement- Services were rendered within India as
well as from outside India – payments for services rendered from outside India
not subject to withholding as there was no involvement of PE in India while
rendering such services.

Taxpayer,
a resident company, is engaged in the business of direct marketing activities
as well as providing management, scientific, technical and advisory consultancy
services in India. It obtained bundle of support services such as information
support system, marketing and new business development, new product
development, actuarial services, accounting support services, internal audit
etc. from its associated entity in U.S.A (FCo). The services were rendered
by FCo both from outside India as well as within India.

While
making payments for services, Taxpayer withheld taxes only on the amount
pertaining to services rendered within India on the basis that FCo had a
service PE w.r.t such activities and thus profits were taxable in India under
Article 7(1) of the India-US DTAA. However, no withholding was made on payments
made for services received from outside India on the basis that such services
could not be attributed to the Service PE of FCo in India and the payments were
also not in the nature of Fees for Included Services (FIS) as defined under the
treaty. Accordingly, such amounts were not claimed to be taxable in India.

The
AO disallowed the payments attributable to services rendered from outside India
on the basis that such services were also taxable in India since the recipient
(being beneficiary) of the services is located in India.

Aggrieved,
the Taxpayer appealed before CIT(A).

The
CIT(A) placed reliance on the decisions in cases of Ishikawajima-Harima
Heavy Industries Ltd. vs. DIT (228 ITR 408 (SC)), WNS North America Inc.(ITA
No. 8621/Mum/2010) and Morgan Stanley & Co. (292 ITR 416) to conclude
that payments made for services, not in the nature of FIS, rendered by the FCo
from outside India were not taxable in India and hence no disallowance is
needed for alleged failure to withhold tax. Aggrieved, AO appealed before the
Tribunal.

Held

–       As per beneficiary test laid down by AO,
if the service recipient is in India, the payments for such services are
taxable in India. However, such test is relevant for the purpose of evaluating
the taxability of ‘fees for technical services’ in the hands of non-resident
recipient u/s. 9(1)(vii) of the Act. Whereas, in this case, the amount paid to
FCo under the service agreement is in the nature of ‘business profits’ which is
taxable under Article 7 of DTAA.

– Reliance placed by CIT(A) on the case of WNS
North America Inc.(ITA No. 8621/Mum/2010), later approved by Bombay HC, was
correct where on similar facts, Mumbai ITAT had held that the amount received
for services rendered outside India cannot be said to accrue or arise in India
or deem to accrue or arise in India. Even the existence of a service PE in
India would not impact the taxability of offsite services if there is no
involvement of the PE in rendering of such services.

– Services rendered by the employees of FCo
deputed to India are attributable to the service PE in India. However, services
rendered by the employees from outside India, are not attributable to the PE in
India and thus, not liable to be taxed in India.