ITAT: TDS is Not Deductible U/S 195 for Expenses Related to Support Services Paid to a Foreign Company

The expense for the management and marketing support services paid to foreign companies is not levied to tax under Fee for Technical Service (FTS) under the India-Netherlands Double Taxation Avoidance Agreement (DTAA) and therefore TDS is not deductible under section 195 of the Income Tax Act, ITAT Delhi ruled.

Facts About the Case of NTL Lemnis India Pvt Ltd vs ACIT

The taxpayer is committed to the business of import/export, trading, manufacturing, commission agency, consulting, and advising in any way dealing with lighting products and lighting solutions in the fields of home lighting, public lighting, greenhouse lighting, and solar lighting. The company is involved in research and development in the area of lighting products and solutions.

AO remarked that the taxpayer availed a management fee amounting to Rs. 9,85,54,700/ – paid to NTL Lemn is Holding BV and Rs. 1,08,57,200/-. From the range of services, the AO ruled that the type of services considered under the Agreement was that of advisory and consultancy services which shall be counted under the meaning of ‘fee for technical services’ (“FTS”) both under the Income Tax Act 1961 along with the treaty.

Directing to the provisions of section 9(1) and the Explanation to section 9, AO ruled that FTS is liable to be paid via a resident and shall become an income of the non­resident payee supposed to accrue or emerge in India and shall be levied to tax under the provisions of the Income Tax Act.

AO as the taxpayer is unable to deduct tax at source under section 195 on the payments aggregating to Rs. 6,74,32,200/- like FTS incurred through it to a non­resident, it was ruled to be not permissible as deduction under section 40(a)(i) and was disallowed and added back. At a loss of Rs. 4,02,81,460, the assessment was completed.

Closure: It ruled that the amount obtained via NTL Lemn is Holding BV for management and sales marketing support services as non-taxable because of the beneficial provisions of the India-Netherland tax treaty read with the MFN clause and the India-Netherland treaty.

It furnished that as per the subject income has been considered to be non-taxable in the hands of the receiver, no question of deducting tax at source is there under section 195 by the remitter and disallowance under section 40(a)(i).

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Heard the arguments of the ld. DR and the material on record, we hold that the MFN clause of the India-Netherlands Tax Treaty has been rightly interpreted by the ld. CIT(A) and therefore, we refuse to interrupt the order of the ld. CIT(A).