No TDS on Professional Fee paid to Offshore CA Firm: ITAT [Read Order]

The Income Tax Appellate Tribunal ( ITAT ) Chennai ruled that, Assessee is not liable to deduct tax at source under Sec.195 of the IT Act, when payment is made to offshore entity for rendering independent professional services.

The Appellant, M/s Sundharam Business Services Ltd. approached the ITAT aggrieved by the order of CIT(A) confirming the action of Assessing Officer is disallowing the legal and consultancy charges paid to M/s. KL Gates and retainer fee paid to M/s. TWB CA for non-deduction of tax at source under Sec..195 of the Income Tax Act. It was the case of the Appellant that the two entities in respect of which disallowance under Sec.195 was made, were offshore entities, and that by virtue of Double Taxation Avoidance Agreement, independent professional services by an individual or a firm of individuals other than a company who is a resident of one of the Contracting States in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless the individual or firm has a fixed base in India. The appellant further submitted that  even professional charges paid to a company of Chartered Accountants is outside the scope of provisions of section 195 of the Act.

Upholding the contention of the Appellant, ITAT held that “on perusal of details filed by the assessee, we find that M/s. KL Gates has rendered professional services in connection with dispute with Tranzact Financial Services and such services are in the nature of independent professional services as defined under Article 14 and hence are outside the scope of definition of royalties as defined u/s.9(1)(vi) of the Act, and thus, outside the scope of provision of section 195 of the Act.”

Further, as regards payment of retainer fee to M/s. TWB CA, it was held, “said payment is covered under Article 7 of DTAA between India and USA because the business profits of an enterprise of one Contracting State shall be taxable only in that State unless the enterprise carries on business in other Contracting State through a permanent establishment situated therein. In this case, evidences filed by the assessee clearly proves that M/s. TWB CA does not have any permanent establishment in India and services are rendered outside India in connection with filing of statutory returns and liaison with statutory authorities. Therefore, said payment is outside the scope of provisions of section 195 of the Act, because it is neither in the nature of royalties as defined u/s.9(1)(vi) of the Act nor in the nature of fess for technical services because the nature of services rendered by the company of accountants does not make available technical knowledge, expertise, skill, know-how or processes to the assessee.”

In the light of the above observations, the Assessing Officer was ordered to delete the additions made towards legal and professional charges paid to M/s. TWB CA and M/s. KL Gates

Further, as regards disallowance of internet charges and professional charges u/s.40(a)(ia) of the Act for non-deduction of tax at source u/s.194J of the Act, as there were factual disputes between parties regarding deduction of tax at source, the Assessing Officer was directed to verify such fact and where upon such verification the Appellant adduces evidence to prove that it had deducted TDS on or before due date specified u/s.139(1) of the Act, then the Assessing Officer is directed to delete disallowance of expenses u/s.40(a)(ia) of the Act  .

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