Payroll service not FTS: No TDS Required; High Court

Briefly stated the facts of the case are, Assessee is a company engaged in the business of information technology services. IBM USA had entered into a global arrangement with Procter and Gamble, USA (‘P&G USA’ for short) for rendering payroll related services to P&G USA. In terms of a companion agreement, IBM India had entered into an agreement with P&G India. The services to be rendered by IBM India to P&G India was outsourced to IBM Philippines. In addition, IBM India had also outsourced certain human resource services to IBM Philippines for the project.

In his order dated September 14, 2012 the Assessing Officer has recorded that the Assessee had made payments to IBM Business Services, Philippines for payroll services without deducting tax at source. The AO concluded that in respect of payments made towards FTS TDS ought to have been deducted under Section 195 of the Income Tax Act, 1961 (the Act for short). Assessee was treated as ‘assessee in default’ under Section 201 of the Act. The CIT(A) confirmed AO’s order. Assessee challenged the said order before the ITAT. By the impugned order, the ITAT has allowed the appeal holding that the payments made by the assessee were not chargeable to tax under the India-Philippines DTAA and hence, no tax was required to be deducted. Hence, this appeal by the Revenue.

Shri. K.V Aravind, Learned Senior Standing Counsel for the Revenue, assailing the impugned order submitted that:

• the service rendered by IBM Philippines falls under the category of managerial and consultancy services. Data management is also one of the services rendered and it would fall in the category of ‘technical services’.
• that ITAT has erroneously construed that services rendered by IBM Philippines is in the course of business and the payment received is business profit in the hands of IBM Philippines;
• the ITAT has proceeded to hold that FTS is not defined under DTAA. However, the definition of FTS cannot be applied in view of Section 90 of the Act;
• the ITAT has failed to consider that the services rendered by IBM Philippines are technical in nature as per Explanation 2 to Section 9(1)(vii) of the Act and therefore, the income is deemed to accrue in India under Section 5(2)(b) of the Act;

In substance, Revenue’s case is, the payments made to IBM Philippines is for technical services and cannot be treated as business profits.

High Court:

13. The ITAT has, in our considered view rightly recorded in para 8.1.3 of its order that as per Article 7(1) of Indian Philippines DTAA, the business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Admittedly, there is no permanent establishment of IBM Philippines in India. As per Article 23 of DTAA, the business profit of IBM Philippines shall be taxable in that State only. Further, the CIT(A) has also held that the transactions between the assessee and IBM Philippines were in the course of its business and the same has not been disputed by the Revenue. (See: para 8.1.4)

14. Hence, the payments received by IBM Philippines shall not be liable for TDS under Section 195 of the IT Act. Therefore, assessee cannot be deemed as an ‘assessee in default’.

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