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.”