ITAT: Income Earned by Non-Resident Service Provider with no Permanent Establishment in Inda is not Taxable

ITAT: Income Earned by Non-Resident Service Provider with no Permanent Establishment in Inda is not Taxable

The Income Tax Appellate Tribunal (ITAT), Delhi while upholding the findings of the Commissioner of Income Tax (Appeals) held that the payments made by the Red Ice Production Pvt. Ltd. (assessee) to the non-resident service providers were not taxable in India and thus no disallowance under section 40(a)(ia) of the Income Tax Act, 1961 (the Act) was called for on account of non-deduction of tax at source.

In the present case, the assessee is a company engaged in the business of making ad films.

The Revenue was aggrieved by the deletion by the Commissioner of Income Tax (Appeals) [CIT(A)], of disallowance of Rs. 1,58,85,633 on account of expenses paid/remitted abroad without withholding of tax on such payments.

The division member bench of G.S. Pannu (President) and Astha Chandra (Judicial Member), while going through the facts noted that the services received by the assessee by list of non-resident service providers were on account of ad film production line services like arranging for shooting locations; obtaining necessary permits for the appellant; arranging shipping and custom clearances; arranging for extras, shooting equipment, meals, transport etc., rendering help in obtaining visas; arranging for makeup of casts; coordinating necessary licenses which were required to shooting of ad films in their respective countries and that none of the non-residents have a Permanent Establishment (PE) in India.

These services thus, essentially involve making logistic arrangement for the assessee outside India. The services were rendered and utilized outside India and the payments for these services were also received outside India, the bench noted.

Therefore, the bench observed, “The payments made by the assessee to the foreign service providers are thus not in the nature of Fee for Technical Services (FTS) within the meaning of explanation 2 to section 9(1)(i) of the Act and not chargeable to tax in India. The assessee characterized these services as ‘contract work’ under section 194C of the Act and therefore it is to be treated as business income of the non-resident which is not taxable in India in the absence of a Permanent Establishment (PE) in India of the said service providers in terms of Article 7 of the relevant Double Taxation Avoidance Agreement (DTAA) between India and the respective countries of the non-resident service providers.”

Resultantly, the ITAT agreed with the findings of the Ld. CIT(A) that services provided by the non-resident service providers were not in the nature of managerial technical or consultancy services within the meaning of explanation 2 to section 9(1)(vii) of the Act. These were to be characterized as contract work under section 194C of the Act and thus partakes the nature of business income which is not taxable in India in the absence of a business connection or PE of the non-resident service provider in India, the ITAT opined.

The bench concluded by ruling that the payments made to the non-resident service providers by the assessee were not chargeable to tax in India and thus no disallowance under section 40(a)(ia) of the Act was called for on account of non-deduction of tax at source and dismissed the appeal.