Ss. 9 40 (a) (i), Article 12 of Indo/US DTAA – Voice call charges to USCO not managerial, technical or consultancy services – USCO having no PE in India – Payment not chargeable to tax section 195, 40 (a) (i) not applicable

Ss. 9 40 (a) (i), Article 12 of Indo/US DTAA – Voice call charges to USCo not managerial, technical or consultancy services – USCo having no PE in India – Payment not chargeable to tax section 195, 40 (a) (i) not applicable

The taxpayer was an Indian company (“ICo”) engaged in providing voice based call centre services to its clients in USA. An American telecom voice service provider (“USCo”) assisted ICo in connecting to the American telecom network in respect of the calls made to USA by ICo, or calls received from USA by ICo.

During the year, ICo had made certain payments to USCo for its services. However, ICo did not withhold tax from these payments since USCo had no PE in India.

According to AO, the payments made by ICo to USCo were in the nature of Fees for Technical Services (FTS) and subject to withholding of tax u/s. 195 of I T Act. Further, since no tax was withheld, the entire expenditure was disallowable u/s. 40(a)(i).

Held:

The Tribunal observed and held as follows. Neither the I T Act nor DTAA has defined the term managerial, technical and consultancy. Hence, dictionary meaning of those terms should be referred to. On the basis of dictionary meanings, payments made to a non-resident in respect of telecom services cannot be termed as FTS.

The Tribunal referred to the following decisions : In CIT v De Beers India Minerals P Ltd [2012] 346 ITR 467 (Karn), services performed using technical knowledge, etc. were not considered as FTS since they were not ‘made available’.

Further, in DCIT v Sandoz (P) Ltd [2012] 137 ITD 326 (Mom), the Tribunal has held that even if payment for advertisement could be assessed as business profits under section 9, in absence of PE in India they could not be charged to tax. In GE India Technology Centre P Ltd v CIT [2010] 327 ITR 456 (SC), Supreme Court has held that the obligation to withhold tax u/s. 195 arises only if the income is chargeable to tax. If income is not chargeable to tax, provisions of section 40(a)(i) do not apply.

Therefore, the Tribunal held that ICo had no obligation to withhold tax on payment made to USCo. Accordingly, the payment cannot be disallowed u/s. 40(a)(i).