The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has determined that the Fee for Technical Service (FTS) and interest income received from the joint venture Indian company must be taxed by the directive issued by the Tax Deduction at Source Officer, as per Section 195 of the Income Tax Act, 1961.
The taxpayer in question, Foundation Co. of Canada Ltd., is a non-resident corporation established under Canadian laws. This entity is primarily involved in the field of construction and infrastructure development.
In 1993, the taxpayer entered into a joint venture (JV) with Continental Construction Limited, an Indian entity, to execute the Nathpajhakri Hydroelectric Project. The JV is assessed for tax in India under the status of an Association of Persons.
The profit-sharing ratio between the joint venture partners stands at 45:55. In the assessment year under consideration, the JV disbursed a financial commitment fee of Rs. 32,78,54,377, as well as a fee for technical know-how amounting to Rs. 37,78,54,377.
The taxpayer, unfortunately, did not file any income returns. The Assessing Officer subsequently became aware of the aforementioned payments made to the taxpayer. Since no income return had been submitted by the taxpayer, the Assessing Officer initiated the reopening of the assessment under Section 147 of the Income-tax Act, 1961.
Numerous notices have been issued to the taxpayer, inviting their participation in the assessment proceedings. Regrettably, the taxpayer failed to respond to these notices. Consequently, the Assessing Officer moved to conclude the assessment under Section 144 of the Act to the most promising of their judgment.
Dissatisfied with the ruling, the taxpayer appealed to the Commissioner of Income Tax (Appeals) or CIT(A). During the proceedings before the CIT(A), the taxpayer argued that the Joint Venture (JV) had deducted tax on the payments for the technical know-how fee and financial commitment fee at rates of 10% and 15%, respectively. This deduction was by an order issued by the Tax Deduction at Source (TDS) Officer under Section 195 of the Income Tax Act. Consequently, the taxpayer expressed a willingness to declare the income, subject to settling the tax liability at the rates specified in the TDS order to bring closure to the matter.
The CIT(A) upheld the taxpayer’s claim. Subsequently, the revenue, feeling aggrieved by this decision, appealed to the tribunal. The tribunal noted that the JV had disbursed Rs. 32,78,54,377 as a financial commitment charge and Rs. 37,15,00,000 as a technical know-how cost.
Under Section 195 of the Income Tax Act, the JV sought guidance from the TDS Officer regarding the applicable TDS rates for these payments. The TDS Officer had issued an order under Section 195, specifying a 10% deduction rate for the technical know-how fee and a 15% rate for the financial commitment fee.
Additionally, as the taxpayer is a resident of Canada and eligible for advantages under the India-Canada Double Taxation Avoidance Agreement (DTAA), the tribunal, Dr. B.R.R. Kumar (Accountant member) and Saktijit Dey (Vice-President) after a thorough examination of the case stated the TDS Officer furnished an order under section 195 of the Income Tax Act mandating the payer to deduct tax at the rates of 10% and 15%, respectively, considering such condition.
In light of this, the tribunal dismissed the revenue’s appeal. Ananya Kapoor represented the taxpayer as Counsel, while Vizay B. Vasanta appeared as counsel on behalf of the revenue.
| Case Title | M/s. Foundation Co. Canada Ltd Vs. DCIT |
| Citation | ITA No.7809/Del/2018 |
| Date | 10.10.2023 |
| Assessee by | Ms. Ananya Kapoor, Advocate Sh. Vibhu Jain, Advocate |
| Department by | Sh. Vizay B. Vasanta, CIT(DR) |
| Delhi ITAT | Read Order |