Payments Made To Overseas Company For Services Utilized Abroad Exempt From TDS Under Section 195: Delhi ITAT

Payments Made To Overseas Company For Services Utilized Abroad Exempt From TDS Under Section 195: Delhi ITAT

The Income Tax Appellate Tribunal (ITAT) New Delhi ruled that a taxpayer company is not liable to deduct tax at source under Section 195 of the Income Tax Act when it utilizes services from a company outside India and makes payments to them overseas.

Section 195 of the Income Tax Act mandates the deduction of tax at source on certain payments made to non-residents, including interest, royalty, fees for technical services, and other taxable sums in India.

The Bench, comprising B.R.R. Kumar (Accountant Member) and Sudhir Kumar (Judicial Member), noted that except in cases where the fees are paid for services utilized in a business conducted outside India by the assessee or for the purpose of earning income from a source outside India, the taxpayer must deduct tax on technical fees paid to non-residents.

In the case at hand, the taxpayer company, engaged in software development, made payments to Everest Global Inc. without deducting tax at source under Section 195. The Assessing Officer (AO) contended that the taxable event occurred when the taxpayer paid royalty amounting to Rs. 54,65,508/- to Everest Global Inc. and thus disallowed the deduction under Section 40(a)(i).

The Tribunal observed that Everest Global Inc. did not have a permanent establishment in India, and the services were provided from outside India to the taxpayer. According to the agreement between the taxpayer and Everest Global Inc., the services were utilized for project work, with the source of income situated outside India and payments made overseas.

The ITAT emphasized that the payment for technical services was made with the purpose of earning income from a source outside India, falling under the exception provided in Section 9(1)(vii)(b). Therefore, the income earned by Everest Global Inc. could not be deemed to accrue or arise in India, and the fees for technical services were not taxable.

Consequently, considering that the work order was issued outside India for earning income from a foreign source, the ITAT concluded that the payments made fell within the exception provided under Section 9(1)(vii)(b). Therefore, the ITAT overturned the AO's addition and allowed the taxpayer's appeal.