By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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Section 5(1), 9(1)(vii), 195 — Article 12 of India-US DTAA — Payment made to non-resident for product testing and certification — Services utilised by resident in a business or profession carried on or for making or earning income from source outside India — Onus on assessee to prove this fact — Onus discharged — No liability to deduct tax at source.
Facts: Taxpayer (ICO) was engaged in the business of manufacturing electrical products including switchgears, electric fans, cables and wires. It paid to US-based company (USCO), a specialist in product testing and certification for electrical products, for getting its products tested and getting certification. This certification was necessary for enabling ICO to export its products to the USA and European Union (EU).
No tax was deducted at source on the ground that since testing of products was done in a laboratory outside India, no income had accrued or arisen to USCO in India. Further the payment was not in the nature of fees for included services in terms of India- USA DTAA. The Assessing Officer took the view that as the testing and certification of ICO’s products was required to be utilised in the manufacturing activity of ICO, the payment was covered by source rule of section 9(1)(vii) as ‘fees for technical services’ (FTS) and) the services and payments would also be covered under ‘fees for included services’, in terms of Article 12(4)(b) of the DTAA. The expenditure was disallowed u/s. 40(a)(i).
ICO also contended that the service was rendered and utilised outside India. The certification was required to enable ICO to export its products to the USA and EU and such certification was not required for sale of goods in India and the source rule exception u/s. 9(1)(vii)(b) would come into play.
The Assessing Officer rejected these contentions and the order of the AO was confirmed by the CIT(A). On appeal to the Tribunal.
Held:
To seek exemption u/s.9(1)(vii)(b), onus was on ICO to prove that the services were utilised either in a business carried on outside India or for the purposes of making or earning any income from any source outside India.
The AO has not been able to bring anything on record to prove that the services have not been utilised outside India. He has not been able to rebut the representation of the taxpayer that certificates were required only for purposes of export. and that such certificates were utilised for export; and that they were not utilised for its business activities in India. Hence, onus which lies on the assessee was discharged. No tax withholding was required and disallowance u/s. 40(a)(i) was not sustainable.
