Payment made to Foreign Firms for Services Rendered outside India cannot be Subject to TDS u/s 195: ITAT [Read Order]

The two member bench of the Income Tax Appellate Tribunal ( ITAT ), Delhi, has ruled that payments made to foreign firms for services rendered outside India cannot be subject to Tax Deducted at Source ( TDS ) under Section 195 of the Income Tax Act, 1961.

The assessee QAI India Ltd, is engaged in the business of providing workforce development and consulting services to information technology, information technology enabled/BPO and knowledge intensive organizations worldwide. The case of the assessee was selected for scrutiny assessment and disallowances/additions totaling to Rs.2, 34, 44, 308/- were made to the income of the assessee under Section 40(a)(i) of the Income Tax Act on account of non-deduction of tax at source on payments made to Non-Residents.

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The Assessing Officer ( AO ) and Commissioner of Income Tax (Appeals) [ CIT(A) ] disallowed Rs. 7,30,550 under Section 40(a)(i) of the Income Tax Act. This amount includes Rs. 5, 48,090 paid to QAI Singapore Pte. Ltd. and Rs. 91,230 paid to KCS Hong Kong Ltd. The services rendered by these entities were utilized for earning income from outside India, specifically falling under the exclusionary provision of Section 9(1)(vii)(b) of the Income Tax Act.1961

It was noted that the assessee had engaged QAI Singapore Pte. Ltd. and KCS Hong Kong Ltd. to deliver SCAMPIA appraisal services to clients in Vietnam. The services were rendered in Vietnam for the purpose of earning income from sources outside India. Consequently, the payments made to QAI Singapore Pte. Ltd. and KCS Hong Kong Ltd. were for services utilized outside India, aligning with the exclusionary provisions of Section 9(1)(vii)(b) of the Income Tax  Act.

In the case of DCIT vs. M/s Hofincons Infotech and Industrial Services Pvt. Ltd. (2015), ITAT Chennai ruled on 18-08-2014 that payments made for services rendered in Qatar for Nigerian projects were not liable for TDS deduction. The consultancy firm had utilized these services outside India, with the source of income being the Nigerian projects. The CIT (A) held that such payments are fees for technical services and are covered by the exclusion under Section 9(1)(vii) of the Income Tax Act. The Revenue's appeal, pending under Section 260A, did not present any factual distinctions, and thus no different approach was adopted.

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Similarly, in Aqua Omega Services (P.) Ltd. vs. ACIT (2013), ITAT Chennai ruled on 15-01-2013 that payments made to non-resident consultants for Nigerian projects were fees for services utilized outside India. This falls under Section 9(1) (vii)(b) of the Income Tax Act, indicating that the income earned by non-residents cannot be deemed to accrue or arise in India. The assessee believed in good faith that no part of the payment was taxable in India, in line with the Supreme Court decision in GE India Technology Centre Pvt. Ltd. and the Special Bench decision in Prasad Productions Ltd. Thus, the assessee was not liable for non-deduction of tax at source, and Section 40(a)(i) was not applicable. The CIT (A) rightly deleted the addition

According to Section 195 of Income Tax Act, 1961 is concerned with TDS deductions on payments or income of non-resident Indians. This section enumerates provisions that help avoid double taxation and further focus on tax deductions and accompanying rates applicable to business transactions concerning NRIs. TDS on non-residents is deducted either when crediting the concerned party or on the actual payment date.

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Given these facts, the coram of Madumitha Roy (Judicial Member) and Dr. B.R.R Kumar ( Accountant Member ) concluded that the disallowance made by the AO and CIT (A) under Section 40(a)(i) of the Income Tax Act is unwarranted and liable to be deleted.

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