ITAT rules against Infosys

ITAT rules against Infosys

The Income Tax authorities had held that the payments made to its subsidiary were liable as fees for technical services and royalty

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the payment of sub-contracting charges to subsidiaries is liable to Tax Deduction at Source (TDS).

The assessee, Infosys Limited, an Indian company is engaged in the business of development and export of computer software and related services. Infosys Technologies (China) Co. Ltd. (ITCL), incorporated in China, is a wholly-owned subsidiary of the assessee.

As per the sub-contracting agreement between the two entities, the assessee sub-contracted certain overseas works to Infosys China and made payments for the same. The payments were made without TDS. The assessee contended that the payments were not chargeable to tax under the Income Tax Act or under the relevant India-China Double Taxation Avoidance Agreement (DTAA).

Relying on an earlier case, the assessing officer (AO) rejected the assessees' plea that under the IT Act it was entitled to an exception. The Commissioner of Income Tax (Appeals) also held that the payments made by the assessee to Infosys China were liable as fees for technical services (FTS) and royalty under the Indian law and the DTAA.

Thereafter, Infosys filed an appeal before ITAT. The assessee submitted that the issue was in its favor as per the Supreme Court judgment in an earlier case. It submitted that the conditions – the services were utilized in India and rendered in India, were not satisfactory, hence not applicable.

However, ITAT observed that the TDS on the payment made by the assessee to Infosys China came under the IT Act. It held that according to the DTAA, the fees for technical services would be accrued in the tax jurisdiction in which the person making the payment was located.

The Coram of Judicial Member George George K and Accountant Member Padmavathy S relied on an earlier decision and held, "The applicable TDS on subcontracting charges paid to Infosys China should be considered at 10 percent as per the India-China DTAA instead of 20 percent under the IT Act."