"Ignorantia juris non excusat" (Ignorance of the law excuses no one)
Introduction
The Income Tax Appellate Tribunal (ITAT) Kolkata, in its judgment dated 30th January 2025, provided critical clarifications on tax deduction at source (TDS) obligations under Section 195 of the Income Tax Act, 1961. The case involved payments made by the assessee, Hartaj Sewa Singh, to a foreign entity, Star Consortium Pvt. Ltd. (SCPL), Singapore. The Tribunal examined whether these payments constituted "Fees for Technical Services" (FTS) or "Royalty" under the Act and the India-Singapore Double Taxation Avoidance Agreement (DTAA).
This guidance note simplifies the ruling’s impact and references key judicial precedents to help businesses and tax professionals navigate similar cases efficiently.
Key Takeaways from the ITAT Ruling
1. No TDS under Section 195 if Income is Not Taxable in India
Key Case Reference: GE India Technology Centre Pvt. Ltd. vs. CIT (327 ITR 456)
- The ITAT reiterated that TDS under Section 195 applies only if the income is chargeable to tax in India.
- The Supreme Court in GE India Technology ruled that a payer is not liable to deduct TDS if the payment is not taxable in India under the DTAA.
- Since SCPL had no Permanent Establishment (PE) in India and the payment was neither FTS nor Royalty, no TDS obligation arose.
2. Payment Did Not Qualify as FTS under Section 9(1)(vii) and DTAA
Key Case Reference: CIT vs. De Beers India Minerals Pvt. Ltd. (346 ITR 467)
- The “Make Available” test determines whether a payment qualifies as FTS under Article 12 of the India-Singapore DTAA.
- The Tribunal held that SCPL’s consultancy services did not “make available” any technical knowledge or skill that the recipient could use independently.
- The Karnataka High Court in De Beers India held that unless the recipient gains the ability to apply the knowledge without further assistance, the payment does not qualify as FTS.
3. No Royalty Element in the Payment
Key Case Reference: DIT vs. Ericson AB (343 ITR 370)
- The Assessing Officer (AO) argued that the payment was for intellectual property rights, making it taxable as Royalty.
- The ITAT ruled that financial advisory services, which do not involve technology transfer or know-how, do not constitute Royalty.
- In Ericson AB, the Delhi High Court clarified that consultancy fees do not constitute Royalty unless linked to intellectual property rights.
4. No Permanent Establishment (PE) – No Taxability under Article 7
Key Case Reference: Morgan Stanley & Co. Inc. vs. DIT (292 ITR 416)
- The Tribunal concluded that SCPL did not have a PE in India, making its business profits taxable only in Singapore.
- The Supreme Court in Morgan Stanley ruled that a foreign company’s income is not taxable in India unless it has a PE in India under the DTAA.
5. Disallowance under Section 40(a)(i): Unjustified
Key Case Reference: Prudential Assurance Co. Ltd. vs. DIT (349 ITR 336)
- The Tribunal found that the original assessment order did not disallow the payment.
- The Delhi High Court in Prudential Assurance held that disallowance under Section 40(a)(i) is unwarranted if the income is not taxable in India.
6. Rejection of Revenue’s Appeal – Application of CBDT Circular 5/2024
- The Tribunal emphasized that the Revenue must adhere to monetary thresholds for appeals unless there is a substantial question of law.
- The rejection of the Revenue’s appeal reinforces the importance of fiscal discipline in tax litigation.
Implications for Businesses and Taxpayers
1. Cross-Border Payments & TDS Compliance
- Before deducting TDS under Section 195, businesses must first verify if the payment is taxable in India under the DTAA.
- This ruling confirms that advisory services alone do not qualify as FTS if they do not “make available” technical knowledge.
2. Importance of “Make Available” Test
- Taxpayers should carefully assess whether the service enables them to use technical expertise independently before categorizing it as FTS.
3. Permanent Establishment (PE) Considerations
- Foreign service providers without a PE in India cannot be taxed on business profits in India.
- Businesses engaging non-resident consultants must examine DTAA provisions to avoid unnecessary TDS deductions.
4. Risk Mitigation in Tax Litigation
- The Revenue often classifies consultancy payments as Royalty or FTS to impose TDS.
- Citing landmark cases—as seen in this ITAT ruling—can help businesses defend against wrongful tax demands.
5. Application of CBDT Circulars in Tax Appeals
- The Tribunal’s decision reinforces that tax appeals must adhere to CBDT’s prescribed monetary thresholds.
Conclusion
The ITAT Kolkata ruling in ITO (International Taxation) vs. Hartaj Sewa Singh clarifies the taxability of payments to foreign entities under Section 195 and the DTAA. Businesses engaging foreign consultants or service providers must:
✅ Evaluate DTAA provisions before deducting TDS.
✅ Apply the “Make Available” test for classifying services as FTS.
✅ Verify the absence of a PE before determining taxability.
✅ Maintain detailed documentation to prevent litigation risks.
By referencing landmark judicial precedents, taxpayers can navigate cross-border tax matters confidently and avoid disputes due to misinterpretation of tax laws.
“Legality is not about what you know; it’s about knowing where to look.”
