Interest fee

The training fees paid to the professional trainer do not correspond to the fees for technical services, no deductible TDS: ITAT

The Bangalore Bank of the The Income Tax Appeals Tribunal (ITAT) has ruled that TDS is not deductible on training fees paid to professional trainers because they are not fees for technical services.

The two-member bench headed by NV Vasudevan (Vice Chairman) and Chandra Poojari (Accounting Member) observed that the nature of the service rendered by the non-resident is neither in the nature of a technical, managerial or of advice. The nature of the service rendered clearly shows that services rendered by non-residents cannot qualify as technical services for the simple reason that technology is used to provide the service. The provision of a service by technological means does not render the service technical.

The caller/reviewed is a company in the business of providing BPO services. The assessee made a payment of $2,100 to a non-resident, namely Stakeholder Centered Coaching (International Ltd.), referred to as the “non-resident”. The non-resident was a tax resident of Hong Kong. It is a legal entity registered in Hong Kong. There was no Double Taxation Avoidance Treaty (DTAA) between India and Hong Kong in the 2015-16 tax year. The nature of the payment made by the assessee to the non-resident was a fee for training to develop soft skills. The amount payable to a non-resident was grossed up and withholding tax (TDS) was paid on the grossed up amount.

The assessee appealed to the CIT(A) claiming that the amount paid to the non-resident is not taxable in the hands of the non-resident in India. Therefore, the assessee should receive a refund of the TDS paid out of their own pocket.

The issue raised was whether the payment by the assessee to the non-resident could be considered compensation for technical services (TSF) within the meaning of the explanation of Article 9(1)(vii).

The assessee argued that payment for training services does not qualify as FTS under the Income Tax Act.

The assessee argued that the technology used to provide a service does not indicate whether the service is technical in nature. Similarly, the provision of a service by technological means does not render the service technical. Special skills or knowledge can be used to develop or create inputs for a service business. Charges for the provision of a service will not, however, be a technical charge unless special skills or knowledge are required when the service is provided to the customer. Employees developing leadership skills through the service provided by the non-resident do not use this knowledge when providing BPO service to clients of the assessee and therefore the services rendered cannot be considered a technical service. The service cannot be considered a management service because the service rendered by the non-resident does not teach the employees of the assessee how the business should be run, but is only concerned with the development of leadership skills, and therefore the service provided by the non-resident cannot be considered a management service. It cannot be considered as an advisory service because the provision of advice by a person with special qualifications would be an advisory service, but the imparting of leadership skills training cannot be considered as the provision of professional advice.

The department argued that the services were in the nature of FTS. Fees paid to nonresidents for training services were found to be non-taxable under the DTAA.

ITA noted that the service cannot be considered a management service because the service rendered by the non-resident does not teach the assessee’s employees how the business should be run, but is only concerned with the development of leadership skills. The service provided by the non-resident cannot be considered a management service.

The tribunal held that the sum paid to a non-resident cannot be considered an FTS within the meaning of Article 9(1)(vii) and cannot be taxed in the hands of the non-resident in India. Therefore, the assessee would be entitled to grant a refund of taxes paid as well as interest in accordance with the law.

Case title: M/s. Infosys BPO Limited versus DCIT

Reference: IT(IT)A n°989/Bang/2017

Date: 01.09.2022

Counsel for the Appellant: CA Padam Chand Khincha

Counsel for the Respondent: Addl. CIT(DR) KR Narayana

Click here to read/download the order