No TDS liability of buyer when capital gain arose to NR wasn't taxable due to sec. 54 relief

Where on date of purchase of house property from non-resident vendor, assessee was aware of fact that capital gain was not taxable in vendor's hands due to availability of deduction under section 54, he was not required to deduct tax at source while making payment of sales consideration

Facts:

a)Assessee had purchased a residential property from a non-resident (‘NR’) and made payment to him without deducting tax at source.

b)He argued that that he was not required to deduct tax at source while making payment to NR since NR was eligible to claim relief under section 54 in respect of capital gain arising out of sale of residential property.

c)The Assessing Officer (‘AO’) opined that capital gain tax would be chargeable in the hands of the recipient on sale of the house property. Hence, assessee was required to deduct tax while making payment irrespective of fact that recipient was entitled to deduction under section 54. Consequently, the AO raised demand under section 201 by treating assessee as assessee-in-default.

d)The CIT(A) affirmed the order of AO. The aggrieved assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)The ultimate levy of taxes depends upon many circumstances like exemption, deduction etc. In the instant case assessee did not deduct tax on payment as he was aware that such payment to NR did not require deduction of tax due to availability of Section 54 relief to NR.

2)If facts of the instant case were to be examined in the light of instruction No. 2/2014 dated 26-02-2014, it would indicate that the AO is required to determine the appropriate proportion of the sum chargeable to tax to ascertain the tax liability on which the deductor shall be deemed to be an assessee in default under section 201.

3)The facts on record indicated that from the date of payments, parties were aware that these payments would not be subject to taxes, because of exemption, hence, there was no need to deduct the taxes. Thus, assessee could not be treated as assessee in default under section 201. - A. MOHIUDDIN V. ADIT(INTERNATIONAL TAXATION) [2015] 53 taxmann.com 102 (Bangalore - Trib.)

ITAT allows benefit of second proviso to Sec. 40(a)(ia) in case of payment to NR; Non-discrimination clause invoked

Rigour of disallowance of payment under Section 40(a)(ia) is relaxed in case of payment to resident if recipient pays taxes on such sum and files return of income. It would be contrary to scheme of DTAA and discriminatory if similar relaxation is not allowed under Section 40(a)(i) in case of payment to non-resident without withholding of taxes if such non-resident pays taxes on such sum and files return of income. Relaxation under second proviso to Section 40(a)(ia) is to be read into Section 40(a)(i) as well and it was required to be treated as retrospective in effect in the same manner as second proviso to Section 40(a)(i).

Facts:

a)The AO noted that certain non-resident entities were taxable in India under the provisions of the Income Tax Act (‘IT Act’) as also under the provisions of relevant DTAA as these entities had a PE in India.

b)Thus, in the opinion of the AO, the assessee was required to deduct tax at source from these payments to non-residents, in terms of section 195.

c)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by the recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them under section 139(1).

d)Accordingly, the assessee contended that non-discrimination clause of treaty was applicable on impugned payment made to non-residents.

Held:

1)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them undersection 139(1).

2)However, section 40(a)(i) does not have an exclusion clausesimilar to second proviso to Section 40(a)(ia), so far as payments made to non-residents,without deduction of tax are concerned. Thus, such payments would be disallowable even when the non-resident recipient hastaken into account such payments in computation of his income, has paid taxeson the same and duly filed income-tax return under section 139(1).

3)So far as discrimination to the non-resident taxpayers was concerned, the right comparator would be a resident Indian taxpayer. As we were examining the issue of deduction parity, we had to examine the position of deductibility in respect of a similar payment, i.e., without deduction of tax at source, made to a resident Indian taxpayer.

4)A different treatment to the foreign enterprise per sewas enough to invoke the non-discrimination clause.

5)Therefore, it would be contrary to the scheme of the tax treaties if rigour of disallowance of a payment, on account non-deduction of tax from the related payment, was to be relaxed in the situations in which the resident recipient had taken the said amount into account in computation of income, paid taxes on the income so computed and filed return of income under section 139(1), and yet the rigour of disallowance in respect of payments made, without deduction of tax at source, to the non-residents wasnot relaxed when such non-resident recipient had taken such receipts into account in computation of income, paid taxes on the income so computed and filed return under section 139(1).

Fees paid to consultant-doctors under contract for service would attract sec. 194J TDS and not sec. 192 TDS

Facts:

a)The assessee-company was engaged in the business of running a super specialty hospital. A survey was carried out to ascertain the deduction of tax at source on the amounts paid to doctors engaged as consultants.

b)The assessee-company had been deducting tax at source under section 194J on payment made to doctors by treating them as professionals. The AO applied the provisions of section 192 on payments made to doctors, and raised a demand for an amount under section 201(1) and interest under section 201(1A).

c)On appeal, the CIT(A) set aside the order passed by the AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the terms of appointment of doctors clearly indicated the appointment of professionals for providing consulting services and not their appointment as an employees. The doctors were not precluded from pursuing the professional pursuits elsewhere as long as there was no conflict of interest;

2)Once the doctors achieved some seniority and standing, their remuneration was a percentage of fees collected from patients consulting them. These terms clearly indicated a contract for service and not contract of service.

3)Normally the services rendered by a doctor should be considered as a professional service unless the contracts of service categorically states and the conditions are clearly and indubitably that of employment.

4)The doctors or professional consultants working under contract for rendering professional services and the payments made by the assessee-company to the professional doctors does not constitute salary and, hence, the assessee would not be responsible for deducting tax at source on the said payments treating them as (salaries) in terms of section 192(1).

5)Thus, on perusal of the terms of contract for services entered into with the Doctors, it was to be opined that the services rendered by the them were classifiable as professional services and, therefore, assessee had correctly deducted tax at source from payment to Doctors under section 194J. – DY. CIT V. QUALITY CARE INDIA LTD [2014] 48 taxmann.com 88 (Hyderabad - Trib.)

No liability of bank to withhold tax from cap gains remitted to a non-resident when it was merely acting as broker

Where assessee-bank was only acting as an authorized dealer to brokers of foreign residents in transferring funds in respect of share transactions, which resulted in gains, it was not liable to withhold tax under section 195.

Facts:

a)Individuals (residents of UAE) carried out transactions in shares through brokers and earned short-term capital gains. The assessee-bank made remittances on behalf of brokers in respect of these gains without deduction of tax.

b)According to the AO, the assessee-bank (in capacity as remitter) was to deduct tax at source before making overseas payments under section 195. Subsequently, the AO held that the assessee-bank was a defaulter under section 201 and was liable to pay interest under section 201(1A). On appeal, the CIT(A) reversed the order of AO.

On appeal, the Tribunal held in favour of assessee as under:

1)The ITAT Mumbai Bench in the case of Hongkong & Shanghai Banking Corpn. Ltd.,v. Jt. CIT [2009] 29 SOT 17 had held that capital gains arising to the NRIs residing in UAE were short term capital gains and the bank, which was acting as an authorized dealer, was not liable to deduct tax. Consequently, the AO was not justified in treating the assessee as a defaulter under section 201;

2)In the instant case, the non-residents had earned short-term capital gains and the assessee-bank was only acting as an authorized dealer in transferring the funds on behalf of the broker.

3)Thus, following the order of ITAT Mumbai bench (Supra) it was to be held that assessee-bank was not a person responsible for paying tax within the meaning of section 204 and, therefore, it was not liable to deduct tax at source under section 195. Therefore, assessee-bank could not be treated as a defaulter within the meaning of section 201. – ITO(IT)(TDS) V. ABU DHABI COMMERCIAL BANK [2014] 47 taxmann.com 263 (Mumbai - Trib.)

Sum paid to foreign co. for production of 2D and 3D animated films wasn’t fees for technical service

No element of any technical services was involved in production of animation films, thus, provisions of section 9(1)(vii), would not apply to payments made by assessee to foreign sub-contractors for production of animated films.

Facts:

a)The assessee was engaged in production of 2D and 3D animation films. It had outsourced part of its project on sub-contract to foreign sub-contractors.

b)The assessee had made payments to foreign companies as per agreement, named as 'Outsourcing Facilities Agreement'. The Assessing Officer (‘AO’) held that the payments made to foreign companies were 'fees for technical services' and, thus, said payments were taxable in India.

c)Since the assessee had not made TDS before making aforesaid payments, it was to be treated as assessee-in-default under section 201 and 201(1A). On appeal, the CIT(A), set aside the order of AO. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee:

1)There was no element of any technical services involved in the production of animation films to attract the provision of section 9(1)(vii), read with section 5(2)(b).

2)It is possible that job undertaken by one party for the other party' of supply of any goods or services may involve utilization of the knowledge, information and expertise of the party undertaking the said job.

3)However, just because such expertise, knowledge, technology and experience are possessed by the said party and the same have been utilized for rendering the services, it cannot be said that the services so rendered are in the nature of technical and consultancy services without making any technology available to the other party.

4)Thus, the impugned payment made by the assessee could not be treated as 'fees for technical services'.

5)The foreign parties had not done any activity in India nor they had any permanent establishment in India. As there was no liability to deduct tax on the impugned payments under section 195, the AO was not justified in raising demand on assessee. Thus, the appeal of revenue was to be dismissed.- ADIT (INTERNATIONAL TAXATION) V. DQ ENTERTAINMENT (INTERNATIONAL) (P.) LTD [2014] 45 taxmann.com 17 (Hyderabad - Trib.)