In a groundbreaking ruling, the Income Tax Appellate Tribunal (ITAT) Delhi has declared that expenses incurred for management and marketing support services paid to foreign entities are not subject to tax under the Fee for Technical Service (FTS) clause of the India-Netherlands Double Taxation Avoidance Agreement (DTAA). Consequently, Tax Deducted at Source (TDS) is not applicable under section 195 of the Income Tax Act.
NTL Lemnis India Pvt Ltd vs ACIT: Unveiling the Case
NTL Lemnis India Pvt Ltd, engaged in diverse business activities ranging from import/export to consulting and manufacturing of lighting products, found itself under scrutiny by the Assessing Officer (AO). The AO noted payments totaling ₹ 9,85,54,700 and ₹ 1,08,57,200 made to NTL Lemn is Holding BV for management fees. Citing the nature of services provided, the AO categorised them as advisory and consultancy services falling under the ambit of FTS, both as per domestic law and the treaty.
Referring to section 9(1) and its Explanation, the AO concluded that FTS income should be taxed in India and thus, the taxpayer should have deducted TDS under section 195 on payments totaling ₹ 6,74,32,200. Failure to do so resulted in disallowance under section 40(a)(i), leading to a substantial loss for the taxpayer.
Verdict and Conclusion
However, ITAT’s verdict reshaped the narrative. It determined that payments made to NTL Lemn is Holding BV for management and sales marketing support services were exempt from taxation, courtesy of the favourable provisions within the India-Netherlands tax treaty, coupled with the Most Favoured Nation (MFN) clause.
With the income deemed non-taxable in the hands of the recipient, the necessity for TDS deduction under section 195 evaporated, nullifying any disallowance under section 40(a)(i). Upholding the interpretation of the MFN clause by the ld. Commissioner of Income Tax (Appeals), the ITAT refused to overturn the decision, marking a significant win for taxpayers navigating cross-border transactions.
In light of this precedent-setting ruling, it becomes imperative for taxpayers and tax professionals to scrutinise treaty provisions meticulously to harness potential exemptions and deductions, thereby optimising tax efficiency in international transactions.
