IBM Philippines not liable for TDS under IT Act: Karnataka HC

The High Court of Karnataka has ruled that IBM Philippines ”shall not be liable for TDS under Section 195 of the Income Tax Act.” It has therefore dismissed four appeals filed by the IT Department against IBM India Private Limited.

The appeals were in relation to four different assessment years starting from 2008-09. All the four appeals were filed in 2014 and were disposed of on January 16, 2023.

IBM USA had a global arrangement with Procter and Gamble, USA for rendering payroll related services. In a companion agreement, IBM India entered into a pact with P&G India. IBM India outsourced this work as well as some human resource services to IBM Philippines.

The IT Department’s Assessing Officer in 2012 recorded that IBM India had not deducted tax at source in payments made to IBM Philippines. Therefore, IBM India was ‘assesse in default’. Both the Assistant Commissioner of Income Tax and Commissioner of Income Tax confirmed it.

The company challenged this before the Income Tax Appellate Tribunal (ITAT). The ITAT allowed the company’s appeal and held that the payments by IBM India was not chargeable to tax under the India-Philippines Double Tax Avoidance Agreement (DTAA).

The IT Department challenged this before the High Court. Justice PS Dinesh Kumar and Justice TG Shivashankare Gowda heard the four appeals filed by the Director of Income Tax and Deputy Director of Income Tax against IBM India.

The High Court said that, ”The said work has been outsourced to IBM Philippines. IBM Philippines is carrying out the work described in the agreement between IBM India and P&G India. Hence, IBM Philippines was not rendering any technical service and therefore, the income in the hands of IBM Philippines is a business income.” The High Court also upheld the ITAT as per the DTAA, business profit of IBM Philippines is taxable only in that State. ”The ITAT has, in our considered view rightly recorded in its order that as per Article 7(1) of India Philippines DTAA, the business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein”.

”Since there was no permanent establishment of IBM Philippines in India, the business profit of IBM Philippines shall be taxable in that State only,” the High Court said.

Dismissing the four appeals, the High Court said, ”The payments received by IBM Philippines shall not be liable for TDS under Section 195 of the IT Act. Therefore, assessee cannot be deemed as an assessee in default.”