Perpetual transfer of satellite rights of a film for 99 years is a sale; excluded from definition of ‘royalty’

Transfer of satellite right to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definition of 'royalty' under clause (5) of Explanation 2 to section 9(1)(vi).

Facts:

a) The assessee was dealings in film satellite rights by taking them on assignment basis and reassigning to channels.

b) He did not deduct tax at source on purchase of copyright of film as he was of the view that such purchase was neither covered under section 194J nor under section 194C. However, the Assessing Officer held that the payments debited as purchase warranted TDS under section 194J and worked out disallowance under section 40(a)(ia).

c) The CIT(A) allowed the appeal of assessee by holding that the consideration paid did not attract section 194J.

d) On appeal, the Tribunal held that the payments made would fall within the definition of 'royalty' and as the assessee had failed to deduct tax under Section 194J rigour of section 40(a)(i) stood attracted. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) Perusal of the facts and circumstances of the instant case and case of Mrs. K. Bhagyalakshmi v Dy.CIT [2013] 40 taxmann.com 350 (Madras) would show that the substantial question of law raised were the one and same in both the cases.

2) The earlier division bench of this court in case of Mrs. K. Bhagyalakshmi (supra) after considering the perpetual transfer of rights for a period of 99 years [in terms of Section 26 of Copy Right Act and also the definition under clause (5) to Explanation 2 to section 9(1)] held that it was a sale and, therefore, excludible from definition of royalty.

3) Following the decision rendered in the case of Mrs. K. Bagyalakshmi (supra) it was to be held that transfer of satellite right to assessee under an agreement for a period of 99 years would be a sale and excludible from definition of 'royalty'. Therefore, the Tribunal had erred in concluding that the payment made by the assessee was royalty and not sale. - S.P.Alaguvel v. DY. CIT [2014] 52 taxmann.com 231 (Madras)

Short deduction of tax due to application of wrong provision won't lead to sec. 40(a)(ia) disallowance

Facts:

a)The Tribunal held that the assessee had to deduct tax under section 194-I and that the provisions of section 194C were not applicable in respect of transactions entered between the assessee and the contractee.

b)On appeal, the High Court confirmed the order of the Tribunal. However, the High Court restored the matter back to the file of the Tribunal for the limited purposes of applicability of section 40(a)(ia) in respect of short deduction of tax at 2.06% instead of at 10%.

c)On remand, the revenue contended that for the short deduction of TDS there would be disallowance under section 40(a)(ia).

The Tribunal held in favour of assessee as under:

1)In case of Apollo Tyres Ltd. v. Dy. CIT [2013] 35 taxmann.com 593 (Coch.) it was held that section 40(a)(ia) did not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act.

2)There was an obvious omission to include short deduction/lesser deduction in section 40(a)(ia) of the Act. Therefore, in case of short/lesser deduction of tax the entire expenditure could not be disallowed whose genuineness was not doubted by the Assessing Officer.

3)Thus, in view of the decision of this Tribunal in Apollo Tyres (Supra) short deduction of tax could not be a reason or basis for disallowance under section 40(a)(ia). Accordingly, the orders of the lower authorities were to be set aside and the disallowance made under section 40(a)(ia) was to be deleted. - THREE STAR GRANITES (P.) LTD. V. ACIT [2014] 49 taxmann.com 578 (Cochin - Trib.)

Sum paid to NR without deduction of tax would not invite sec. 40(a)(i) disallowance if such sum was capitalized

Where assessee had not claimed payment made to non-resident for providing engineering site services as expenditure but capitalised it and claimed only depreciation thereon, no disallowance could be made under section 40(a)(i).

Facts:

a)The assessee, a non-banking financial company, made payment to non-resident for providing engineering site services but did not deduct tax at the time of payment. The Assessing Officer disallowed the entire payment made by the assessee.

b)The assessee submitted that no disallowance could be made as it had not claimed said payment as expenditure but capitalized it and only depreciation was claimed thereon.

c)On appeal, the CIT(A) upheld order of the Assessing Officer. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The payment made to non-resident for technical services was admittedly taxable in India, therefore, the assessee was bound to deduct tax at source. The assessee could claim the same as expenditure. However, such claim of expenditure could be allowed only in case the assessee deducted the tax at the time of payment.

2)In the instant case, the deduction was not claimed as expenditure while computing the income chargeable to tax. The CIT(A) observed that irrespective of the fact whether the assessee had claimed deduction or not disallowance had to be made since tax was not deducted.

3)Both the authorities had not examined whether the amount paid to the non- resident was deducted while computing the income chargeable to tax or not. The language of section 40 clearly provides that the amount paid to non-resident (on which tax is not deducted) shall not be deducted while computing the income chargeable to tax.

4)Therefore, if the assessee had not deducted the amount (i.e., claimed it as expenditure) while computing the chargeable income, there was no necessity for further disallowance. - Muthoot Finance Ltd. v. ACIT [2014] 49 taxmann.com 580 (Cochin - 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).

Payments to non-resident for his translation services shall not be deemed as 'fees for technical services'

Translation services involving translation of text from one language to another were not technical services and, therefore, payment made by assessee to non-resident translators would not fall within scope of 'fees for technical services’.

Facts:

a)The assessee-company was engaged in the business of providing translation services through Web. During assessment, the AO noted that assessee had not deducted tax at source in respect of payments made to overseas translators.

b)The A.O. held that translation services were technical in nature and the assessee was liable to deduct tax at source on impugned payments. He, accordingly, disallowed such payments made to non-resident translators.

c)On appeal, the CIT(A) upheld the findings of the AO and confirmed the disallowance made under Section 40(a)(i). The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)In the instant case, the assessee was getting the translation of the text from one language to another. The only requirement for translation was the proficiency of the translators in both the languages, i.e., the language from which the text was to be translated and the language in which text was to be translated.

2)The translator was not contributing anything more to the text, which was to be translated. He was not supposed to explain or elaborate upon the meaning of the text. Apart from the knowledge of the language, the translator was not expected to have the knowledge of applied science or the craft or the techniques in respect of the text, which was to be translated.

3)A bare perusal of Explanation 2 to Section 9(1)(vii), which explains "fees for technical service" and the dictionary meaning of the word "technical" made it clear that translation services were not technical services. Therefore, the payment made by the assessee to the non-resident translators would not fall within the scope of "fees for technical services”. Thus, the disallowance made under Section 40(a)(i) was to be deleted. - COSMIC GLOBAL LTD. V. ASSTT. CIT [2014] 48 taxmann.com 365 (Chennai - Trib.)

Sum paid to foreign co. for transmitting bulk SMS was not a 'fee for technical service'; no withholding of taxes

No technical skill was required to render services for transmission of bulk SMS data, thus, payments for said services could not be regarded as 'fee for technical services'.

Facts:

a)  The assessee had made carrier payments to Clickatel (‘NR Company’) for transmission of bulk SMS data without withholding any taxes.

b)  The Assessing Officer disallowed such payments by invoking provisions of section 40(a)(i). On appeal, the CIT(A) deleted  such disallowance. The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)  The nature of services rendered by NR Company was only for transmission of bulk SMS data. No technical skill was required for transmission of such data;

2)  The CIT(A) had rightly held that carrier was a medium for sending bulk SMS and, thus, it could not be considered as technical services.

3)  Since the payments made by assessee to NR Company were not 'fee for technical services,' they were not liable for taxation in India;

4)  Thus, assessee was not required to deduct tax at source while making such payments. The CIT(A) was justified in deleting impugned disallowance.- Dy. CIT v. Velti India (P.) Ltd [2014] 43 taxmann.com 425 (Chennai - Trib.)

No TDS from salary paid to NR working on a foreign ship for less than 90 days as it is exempt under sec. 10(6)(viii)

Payments made to foreigner-crew member of ship who had worked for a period of less than 90 days in India, were not income of employees in India liable to TDS.

Facts:

a)  The assessee entered into a contract with ‘Alfa Crew’, under which Alfa Crew was entitled to receive a fixed fee; salary of crew to be provided by Alfa Crew and handling charge of 5 per cent thereon.

b)  The assessee engaged the crew members as its employees. It withheld taxes on the fixed fees and handling charges yet, it did not withheld taxes on the amount of salary.

c)  The Assessing Officer did not allow deduction of salary by holding that the same was part of the fees for technical services, on which tax was deductible at source but same was not deducted; hence, said amount was specifically not deductible in terms of section 40(a)(i).

d)  Further, the CIT(A) held against the assessee. On appeal to the Tribunal, the assessee succeeded. Thus, aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)  The employees, being foreigners, had earned their salaries while working in India during a period less than 90 days, and those salaries, in view of section 10(6)(viii), were not income of the employees in India. Therefore, the assessee was not liable to deduct taxes on under section 192;

2)  Section 40(a)(i) would not be applicable in the instant case as the payments made were neither royalty nor fees for technical services;

3)  In view of section 10(6)(viii), the payment was not an income for the person, who received the same and, accordingly, was not chargeable under the head salaries. 

4)  Section 192 was applicable only when there was an income chargeable under the head 'salaries' and, as aforesaid, the payment made by the assessee, in the instant case, and the income derived by recipient, was though regarded as salary but never regarded as salary chargeable under this Act. Thus, the salaries were outside the purview of section 192 by reason of section 10(6)(viii). – DIT v. Dolphin Drilling Ltd. [2014] 42 taxmann.com 264 (Uttarakhand)

Sec. 40(a)(i) disallowances based on residential status doesn’t violate non-discrimination clauses of treaties

The Tribunal held as under:

1)  As section 40(a)(i) creates differentiation based on residential status, it does not violate non-discrimination clauses of treaties which forbid discrimination based on nationalities;

2)  A differentiation in treatment due to residential status cannot be covered by the scope of Article 24(1)/ Art. 25(1)/Art. 26(1) as such a differentiation is not due to nationality factor – Dy. CIT v. Gupta Overseas [2014] 42 taxmann.com 42 (Agra - Trib.)