Setback to Infosys: ITAT confirms demand of TDS on subcontracting charges paid to it’s Chinese Subsidiary

The assessee is an Indian company, engaged in the business of development and export of computer software and related services. Infosys Technologies (China) Co. Ltd. (hereinafter referred to as `Infosys China’ or `ITCL’ for the sake of brevity) is a company incorporated in China. It is a wholly owned subsidiary of the assessee. Pursuant to sub- contracting agreement dated 01.10.2005 and 01.08.2011, the assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, the assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. The assessee’s contention was that the payments were not chargeable to tax under the Act or under the relevant Double Taxation Avoidance Agreement (DTAA).

Proceedings up to CIT(A)

The assessee, however, received order u/s 201(1) and 201(1A) of the I.T.Act (order dated 31.03.2013 for assessment year 2011-2012) whereby the Assessing Officer held that the assessee to be an `assessee in default’ for not deducting tax at source u/s 195 of the I.T.Act. The A.O. held that the payments made to Infosys China is liable for tax deduction u/s 9(1)(vii) of the I.T.Act, as fees for technical services (FTS).

The A.O. while concluding, placed heavy reliance on the order of the Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT reported in (2010) 40 SOT 220 (Mum.). The A.O. also rejected the plea of the assessee that it is entitled to the exception of section 9(1)(vii)(b) of the I.T.Act (refer page 26 to 36 of the A.O.’s order passed u/s 201(1) and 201(1A) of the Act).

Aggrieved, the assessee filed an appeal to the first appellate authority. The CIT(A) confirmed the order passed u/s 201(1) and 201(1A) of the Act. The CIT(A) held that the payments made by the assessee to Infosys China is both liable as FTS and royalty under the domestic law as well under the relevant DTAA.

Aggrieved by the order of the CIT(A), the assessee has filed this appeal before the Tribunal.

Contention of Department

The learned Standing Counsel, on the other hand, had made elaborate argument contending that the assessee is liable both under the domestic law as well as under the relevant DTAA for non-deduction of tax for payment made to Infosys China.

ITAT Order:

9.7 In the light of the above order of the Tribunal, which had followed the dictum laid down by the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra), we restore the issue of taxability with regard to subcontracting charges paid on 01.05.2010, to the files of the AO. The AO is directed to take a decision in accordance with law after affording a reasonable opportunity of being heard to the assessee.

9.8 Another alternate contention of the assessee is that for assessment year 2011-2012, the AO has computed TDS u/s 195 of the I.T.Act at the rate of 20% by invoking section 206AA of the Act for the reason that PAN of Infosys China was not available. Before the CIT(A) the same was submitted on 27.09.2013. However, the CIT(A) did not allow any relief on this issue.

9.9 We have heard rival submissions and perused the material on record. The relevant ground with regard to the above issue are grounds 9.1 to 9.3. The Special Bench of the Tribunal in the case of Nagarjuna Fertilizders and Chemicals Ltd. v. ACIT reported in (2017) 78 taxmann.com 264 had held if rate of tax applicable under DTAA is lower than 20% tax rate prescribed u/s 206AA of the Act, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN. Further, the Hon’ble Delhi High Court in the case of Danisco India P. Ltd. v. UOI reported in (2018) 90 taxmann.com 295 (Delhi) had held that provisions of DTAA override section 206AA of the Act. In view of the above cited judicial pronouncements, we hold that the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act. It is also to be noted that while passing the order u/s 201(1) and 201(1A) of the Act for assessment year 2012-2013, the Assessing Officer has calculated TDS liability at 10% as per the Indo-China DTAA. Therefore, ground 9.1 to 9.3 is allowed.

9.10 In the result, the appeal filed by the assessee for assessment year 2011-2012 is partly allowed.

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