No TDS Liability on Payments Received: Karnataka HC grants relief to IBM Philippines [Read Order]
TDS – Liability – Payments – Received – Karnataka – HC – IBM – Philippine – TAXSCAN
TDS – Liability – Payments – Received – Karnataka – HC – IBM – Philippine – TAXSCAN
The bench of Justice P. S. Dinesh Kumar and T.G. Shivashankare Gowde granted relief to the IBM Philippines. It was decided that the payments received by IBM Philippines shall not be liable for Tax Deduction at Source (TDS) under Section 195 of the Income Tax Act, 1961.
The appeal was preferred by the revenue against the common order passed by the Income Tax Appellate Tribunal. The section 195 of Income Tax Act covers the TDS deductions on transactions/ payments of Non-resident Indians.
The fact is that the Assessee, is a company engaged in the business of information technology services. IBM USA had entered into a global arrangement with Procter and Gamble, USA ('P&G USA) for rendering payroll related services to P&G USA.
In terms of a companion agreement, IBM India had entered into an agreement with P&G India. The services to be rendered by IBM India to P&G India was outsourced to IBM Philippines. In addition, IBM India had also outsourced certain human resource services to IBM Philippines for the project.
The Assessing Officer (AO) has noted that the Assessee paid IBM Business Services, Philippines for payroll services without withholding tax from those payments. The AO came to the conclusion that TDS should have been deducted in accordance with Section 195 of the Income Tax Act of 1961 with regard to payments made to FTS.
According to Section 201 of the Income Tax Act, the Assessee was classified as a "assessee in default." The order was upheld by the Commissioner of Income Tax (Appeals). On appeal before the ITAT, the assessee were not chargeable to tax under the India-Philippines Double Taxation Avoidance Agreements (DTAA) and hence, no tax was required to be deducted.
The bench observed that, as far as the IBM Philippines is concerned, it works like a sub-contractor under IBM India. It earns profit by rendering service to P&G India. It does not provide any technical service to the assessee. Further, IBM Philippines does not have a permanent establishment (PE) in India. Therefore, the income in the hands of IBM Philippines from the assessee is a business income.
Further observed that as per Article 23 of DTAA, the business profit of IBM Philippines shall be taxable in that State only. Moreover, the CIT(A) has also held that the transactions between the assessee and IBM Philippines were in the course of its business and the same has not been disputed by the Revenue.
To Read the full text of the Order CLICK HERE
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