Infosys Payments to China Unit Liable for Tax Deduction at Source: ITAT

In a ruling that has ramifications for the outsourcing services sector, the Income Tax Appellate Tribunal (ITAT) has ruled that Infosys Ltd's payments to its Chinese subsidiary towards subcontracting charges were liable to tax deducted at source.

The Bengaluru bench of ITAT has rejected Infosys' submission about non-taxability of the payment due to treaty benefits under India-China Double Tax Avoidance Agreement (DTAA).

^{For assessment years 2011-12 and 2012-13, Infosys had sub-contracted certain work in China to its subsidiary Infosys China. During this period, it paid ₹239 crore to Infosys China without deduction of tax at source.}
The tax department had sought to levy TDS on the payment. In its assessment order, the commissioner income tax (CIT) said that the payment was fees for technical services (FTS) as defined in Section 9FTS under Section 9(1)(vii) and liable for withholding of tax under Section 195. The company challenged the assessment order in ITAT.

It contended that the payments were not chargeable to tax under the Act or under the relevant DTAA.

The ITAT rejected Infosys' plea about non-taxability of the payment. The tribunal, citing a Supreme Court ruling, observed it is no longer necessary that the services must be rendered in India's tax jurisdiction for them to be taxable.

"Merely because the clients are outside India does not mean that the assessee is carrying on business outside India," the court said. It, however, said that TDS is to be deducted at 10% and not at 20% sought to be levied by CIT.