The Bangalore bench of Income Tax Appellate Tribunal ( ITAT ) has held that payment of sub-contracting charges to subsidiary is liable to Tax Deduction at Source.
The assesse, M/s.Infosys Limited is an Indian company, engaged in the business of development and export of computer software and related services. Infosys Technologies (China) Co. Ltd. (Infosys China/ITCL) is a company incorporated in China. It is a wholly owned subsidiary of the assessee. Pursuant to subcontracting agreement assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, the assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. The assessee’s contention was that the payments were not chargeable to tax under the Act or under the relevant Double Taxation Avoidance Agreement (DTAA).
Giving reliance on the order of the Mumbai bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT the AO rejected the plea of the assessee that it is entitled to the exception of section 9(1)(vii)(b) of the I.T. Act. On appeal, the CIT (A) confirmed the order passed u/s 201(1) and 201(1A) of the Act. The CIT(A) held that the payments made by the assessee to Infosys China is both liable as fees for technical services (FTS) and royalty under the domestic law as well under the relevant DTAA. Aggrieved assessee filed appeal before the Tribunal.
The assessee submitted that the issue is covered in favour of the assessee by the judgment of the Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT. The assessee submitted that the twin conditions as laid down by the Apex Court, i.e., the services being (a) utilized in India, and (b) rendering in India, are not satisfied. Therefore, the provisions of section 9(1)(vii) is not applicable.
The Tribunal observed that the issue of tax deduction at source u/s 195 of the I.T Act on the payment made by the assessee to Infosys China, whether it comes within the purview of section 9(1)(vii) is squarely covered by the order of Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT. The Mumbai Bench of the Tribunal had held that the retrospective amendment to section 9, by the Finance Act, 2010 and substitution of Explanation to the said section, the effect of the judgment of the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT has been negated. It was concluded by the Mumbai Tribunal that it is no longer necessary that, in order to invite taxability u/s 9(1)(vii) of the I.T Act, the services must be rendered in Indian Tax jurisdiction.
The Tribunal held that “according to India-China DTAA, the fees for technical services will be deemed to have been accrued in the tax jurisdiction in which the person making the payment is located”. Thus the Tribunal held that the assessee is liable under the relevant DTAA.
The Coram of Sri George George K and Ms. Padmavathy S by giving reliance to the decisions of Nagarjuna Fertilizers and Chemicals Ltd. v. ACIT, held that “we hold that the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act”.
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