TDS will be at the rate of force and not 20% in absence of PAN in grossing up

Apex Court has given two important judgement regarding a case.

•  The grossing up of the amount should be done at the rates in force for the financial year in which such  income is payable and not at 20%, as specified under section 206AA.
•  Charges for prevention repairs are fees for technical services.
  Grossing up means To increase a net amount to include deductions, such as taxes, that would be  incurred by the receiver. Full judgement and the case is as follows.
• The amount paid net of taxes to non-resident should be grossed up at the rates in force for the relevant financial years and not at the rates at which the tax is to be withheld by the payer.
•  Where German non-residents provided services of preventive maintenance, such services were not mere repairs since they involved providing technical assistance to assessee, and, therefore, clearly fell within the purview of 'FTS', chargeable to tax in India in view of Explanation 2 to section 9(1)(vii).

In the instant case, the assessee entrusted AMCs to foreign suppliers of machinery and equipment for preventive maintenance and repairs. According to the assessee, such payments represented business receipts and, thus, were not chargeable to tax in India in absence of PE. However, out of abundant caution, the assessee deducted the tax at the rate of 20% before making the payments to the foreign entities as per section 195, read with section 206AA. On appeal, the CIT(A) concluded that the payments constituted 'FTS' as per Explanation to section 9(2) and, accordingly, the assessee was liable to withhold tax at 20% as the NRs doesn't have PAN. Moreover, it held that the grossing up should be done at rate of 20% and not at the rate in force.

On appeal, the Tribunal held partly in favour of assessee as under:

1)         Repair service rendered by the non-residents included its assistance in analyzing and solving technical problems and dysfunctions by locating and mending the cause of the dysfunction by providing telephonic advice, analysis and assistance to the operator and for preventive maintenance. Therefore, these services would clearly fall within the purview of definition of 'FTS';

2)         Such services were not mere repairs but were towards preventive maintenance which clearly showed that recipients were providing technical assistance and services to the assessee in India. Accordingly, the assessee was liable to deduct tax at source from payment made for such AMCs;

3)          As regards grossing up, section 195A provides that the income should be increased at the rates in force for the financial years and not at the rates at which the tax is to be withheld by the assessee (at 20% in present case);

4)          Apex Court in G.E India Technology Centre Pvt. Ltd. [2010] 7 taxmann.com 18 (SC) had held that while interpreting a section, one should give due weightage to every word used in that section. Accordingly, it was opined that the grossing up of the amount should be done at the rates in force for the financial year in which such income is payable and not at 20%, as specified under section 206AA - BOSCH LTD. v. ITO[2012] 28 taxmann.com 228 (Bangalore - Trib.)