TMI Blog2014 (4) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be treated as 'fees for included services' within the meaning of 'fees for technical services' defined in section 9(1)(vii) of the Act". The AO’s attempt to raise demands u/s 201 is not correct - Even explanation-1 to section 9(1) excludes the income pertaining to operations carried out outside India - The foreign parties have not done any activity in India nor they have any PE in India - As there is no liability to deduct tax on the amounts paid u/s 195, it is not correct on the part of AO to raise demands - The AO it seems had issued notice u/s 201 (1) in respect of payments by assessee to TV Arts also and on explanation by the assessee that it was the payments resulted in income from business, the proceedings were dropped - The submission of the assessee that regard to T.V. Arts relied on Article 7 of DTAA between India & Philippines which applies to business income of non-residents i.e T.V. Arts and submitted that tax was not deducted as it was not taxable is accepted - Non-liability to TDS was not because of lack of article for FTS in DTAA, but because of application of Article 7 – the order of the CIT(A) upheld – Decided against Revenue. - ITA.No.276 /Hyd/2010, I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred by the Revenue are extracted as under : 2. The learned CIT(A) erred in facts and law by holding that there was no element of any technical services in the production of animation films. He failed to appreciate that the case of the appellant is different from TV Arts which is covered by Indo-Philipines DTAA where there is no provision of FTS. He relied on the observations of the Hon'ble Delhi Bench of ITAT in the case of Shereton International Inc Vs DDIT (2007) 107 ITD 120 which was delivered in connection with and with reference to 'fees for technical services' as provided under Indo-US DTAA. 3. The learned CIT(A) erred in law by holding that the case laws relied upon by the A.O. in respect of the nature of the transaction between the appellant and Hong Guang Animation Co (HGA) which is a service transaction, will not be helpful under the provisions of the Income Tax Act, 1961 as all the case laws were under sales tax laws, which is totally absurd because the case laws were relied upon only to distinguish 'contract of sale' of goods from 'contract for work or services'. 4. The learned CIT(A)-VI failed to appreciate that the source of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, assessee gave some episodes or part of an episode on sub-contract to foreign sub-contractors or rather outsourced a part of the project out of the orders it received from some of the Overseas Clients. In that process, assessee made payment of Rs.2,10,15,353/- and Rs.55,34,940/- to Maxim International (Animation Division), Hong Kong (which was later renamed as Global Exchange (MI/GE)) as per an agreement on 8th May, 2006 named as Outsourcing Facilities Agreement . By this outsourcing agreement, MI/GE has to provide production work/Production material to assessee by availing the necessary production premises, facilities, personnel, materials, services and expertise, the details of which are mentioned in clause-1 of the agreement, dated 08.05.2006. 6. In the case of HGA, the Ld. CIT(A) in ITA.No.296/2008-09 passed similar order incorporating name of the party to whom it is paid as MI/GE but considering the amounts of HGA. Later on, he passed an order under section 154 on 18.12.2009 incorporating the errors pointed out by assessee. Not only that, the CIT(A) also decided the two issues which were not adjudicated in the order on the application of DTAA, even though the appeal was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench has held Moreover, it was not the case of the revenue that professional fees paid to C of Hongkong was taxable in India and steps had been taken to tax the same. If the receipts are not taxable in the hands of the recipient, their payer is not required to deduct tax at source as per provisions of Sec 195 (PP 136-141 of PB on Case Law). The decision in the case of Crompton Greaves Ltd Vs DCIT (PP 193-204 of PB on CL) in ITA Nos 2210 to 2212/Mum/2000 dt 24-02-2012 is to the same effect. iv. In ACIT Vs Leap International (P) Limited (15 Taxmann.com 251) (Chennai) (PP 38-45 of Case Law - 2), the ITAT followed the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre (P) Ltd Vs CIT 327 ITR 456 and held that tax is not deductible u/s 195(1) as the recipient rendered services of Clearing and Forwarding at Foreign Ports and the payments made were for those services. v. In Ajappa Integrated Projects Management Consultants (P) Limited Vs ACIT (24 Taxmann.com 116 (Chennai) (PP 21-28 of Case Law -2), assessee paid for technical services to persons in Nigeria. Assessee was in the business of consultancy and provision of technical services and getting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts are not covered by provisions of TDS and therefore, raising demand does not arise. Further, the Ld. Counsel relying on the principles laid down by the Hon ble Allahabad High Court in the case of Ramakrishna Vedantakumar 182 ITR 603 submitted that where assessment proceedings are not initiated in the case of PEs, raising demand under section 201(1A) does not arise. Similar proposition was also laid down by the decision of ITAT in the case of Dresser Rand India Pvt. Ltd. vs. ADIT 53 SOT 273 (Mum.) (Tribu.), to submit that provisions of section 195 do not come into play on the facts of the case. 12. We have considered the issue and examined the details, orders placed on record along with the detailed submissions and case law relied upon. There is no dispute with reference to business profile of assessee which the Ld. CIT(A) considered and extracted in the order as under : 2.1 FACTS IN ISSUE : The appellant entered into an Agreement on 8th May, 2006 with Maxim International (Animation Division) which is later renamed as Globe Exchange (MI/GE) titled 'Outsourcing Facilities Agreement' which is placed in the 'Paper Book at Page Nos. 3-12. Admittedly, MI/GE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany without the prior written consent of company. The entire production material of layout posing / key animation/ cleanup in betweening produced by MIA will be the property of the company and dispatched or destroyed as per the written instruction of the company. If the materials are to be destroyed it will be done in the presence of the company representative. If it is to be dispatched it will be courier/ post parcel or such other means to company in Hyderabad, India or other locations as company may hereafter specify in writing. The shipping / freight cost for supply of material shall be borne by the company. 2.2. From the above it is clear that DQE engaged MI/GE to provide production premises, facilities, personnel, materials, services and expertise for the purpose of producing production materials as per DQE's requirements and technical specifications. In substance, MI/GE delivered the production materials as per the 'delivery elements' furnished by DQE. For assignment of this production materials of various episodes required by it for its main production work to its foreign clients, DQE paid a sum of Rs.2,10,15,353/- and Rs.55,34,940/- to MI/GE during the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that assessee furnishes to the foreign sub-contractor (MI/GE), the delivery elements and schedules along with the approval milestones and technical specifications for delivery of the production materials. The foreign sub-contractor (MI/GE) upon completing the work assigned to them sends the scheduled deliverables by uploading the same in the appellant's server and thereafter it edits and makes out the complete animation film as requisitioned by the client and supply them to the foreign client. In substance the foreign sub-contractor provides certain services in respect of animation film making to the appellant, to enable it to complete the production of animation films as per its client's requirement. Under the Outsourcing Facilities Agreement, the assessee engaged the foreign sub-contractor to create 'production materials' (an item of property) required by the appellant to make an animation film/ series/episodes as per its client's requirement. Foreign sub-contractor creates the 'production materials' as per the appellant's requirements and technical specifications with the use of its production premises, facilities, personnel, materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Assessing Officer has no substance on the face of it for the following reasons: i) The appellant engages foreign sub-contractors only when there was acute shortage of men power or when it was to deliver the deliverables to the foreign client within a stipulated time. The Appellant in the regular course of its business, creates the production material on its own and for executing the projects it has all the infrastructure and expertise. It is not as if the appellant is not in a position to execute the project and utilized the technical services of another for creation of such project, but the appellant got the property produced by foreign sub-contractor only when it had no time available with it or when it had acute problem of men-power. It was submitted that during the financial years 2006-07 and 2007-08 it had produced a total number of 48 and 57 animation films respectively and supplied to its Overseas Clients. Out of the aforesaid projects it gave only 5 projects to 2 foreign sub-contractors and out of which substantial payments were made to HGA during the financial years 2005-06 and 2006-07. Only 13 Episodes of one animation film was done by MI/GE during the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly, on a perusal from the Annexure-I to the Rejoinder in the matter of HGA, I have noticed that the appellant itself has done 7 episodes out of a total 13 episodes of one film viz., Curious George and 6 episodes were done by HGA. Further, out of 26 episodes of a film viz., Gloria Wilma Me, HGA produced only 13 episodes and the remaining 13 episodes were done by T V Arts while Background Digital work was done by the appellant. When I enquired with the learned AR of the appellant, whether payments made by it to TV Arts is also under the scrutiny of the Assessing Officer for the purpose of Section 9(1)(vii) read with Section 5(2)(b) of the Act, he submitted that the Assessing Officer examined the same and was convinced that no tax should be deductible as the transaction was covered by Indo-Mauritius Treaty wherein there is no provision for FTS. Therefore, I have no hesitation to hold that there is no technical services involved in the production work or material delivered by MI/GE to the appellant in some episodes or parts of episodes as the same could have been done either by the appellant itself or by T V Arts, Manila or any subcontractor. 3.1.3. The Assessing Officer while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point and applies to the facts of the instant case. He contended that the observations of the Assessing Officer in Para No.2 of his Written submissions are contradictory to say on one hand that the definition of 'Fees for Technical Services' as per Indo-China DTAA is different from the definition of 'Fees for Included Services' as per Indo-USA DTAA so to in conclusion say that the decision of Hon'ble ITAT (Delhi) Bench in the case of Sheraton International Inc. V. DDIT (2007) 107 ITD 120 is not applicable to the facts of the appellant's case. I agree with the submission of the Learned AR of the appellant since the Assessing Officer failed to see that the Hon'ble Delhi Bench in the aforesaid case was dealing with the provisions of Section 9( 1) (vi) and (vii) read with the definition of Fees for Included Services of Indo-USA DTAA. Therefore, the Assessing Officer is not correct in his observations and on the contrary the principles in the decision of the Hon ble Delhi Bench of ITAT are squarely applicable to the facts of the appellant s case . 16. Further interpreting section 9(1)(v) and 9(1)(vi) and 9(1)(vii) learned CIT(A) considered the issue as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exception carved out in Clause (b) thereto for the reason that the payment was in respect of services utilized in the business carried on by it outside India or for the purpose of making or earning income from the source outside India. The learned counsel for the appellant submitted that during the financial years 2006-07 and 2007-08 relevant to the assessment years 2007-08 and 2008-09 it bagged orders from several Overseas Clients including i) Universal Cartoon Studios LLC, California, USA ; ii) Mike Young Productions LLC, California, USA; M/s. DQ Entertainment (International) Pvt. Ltd. Hyderabad. iii) Futurikon, Paris, France; iv) Stranemani SRL, Italy; v) Tutenstein Productions Inc, California, USA etc., for production of the animation films. The details of all the Overseas Clients is shown in the Annexure-II to the Rejoinder filed in the matter of HGA separately. In pursuance of the order from Universal Cartoon Studios LLC, California, USA, the appellant had made an order to MI/GE for production of certain parts/episodes of the animation films. Copy of the Agreement with Universal Cartoon Studio is filed in the Paper Book (Facts) at Page Nos. 13-31. It is submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of i) Titan Industries Ltd. V. ITO, Intl. Taxation, (2007) 11 SOT 206 (Bangalore); and ii) Lufthansa Cargo India (P) Ltd. V DCIT (2004) 91 !TO 133 (Delhi). He filed copies of these decisions in the Paper Book-Legal at Page Nos.70-93. The learned AR of the appellant submitted that the facts of the appellant s case are exactly similar to the facts of the cases in the aforesaid 2 decisions and he submitted that by applying the aforesaid case law, the appeal may be allowed. 3.3.2..... 18. The Ld. CIT(A) further analysed the payments made to assessee vide para 3.3.4 as under : 3.3.4. I have heard the case of the appellant on all the aspects on the last alternate issue raised by it and on a plain reading of the provisions of Section 9(1)(vii)(b), I am of the considered view that the appellant's case falls directly under the exception provided in Sub-clause (b) of Section 9(1)(vii) of the Act for more than one reason. i) Firstly, the main purpose for which the appellant has given the outsourcing of some episodes or parts of episodes to MI/GE, Hong Kong was only for its Overseas Client. On careful examination of the Profit Loss Account and Computation of Total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract with this Overseas Client is filed in the Paper Book-Facts at Page Nos.13-31. On a perusal of the Clause No.14 at Page No.23 relating to jurisdiction for resolving any dispute between the appellant and the Overseas Client, it is clearly mentioned that the jurisdiction of the Courts/Arbitration shall be only 'at such place where the Overseas Client is located. From this it is clearly seen that the contract is made outside India and the source of income is arising only from out of such contract. Therefore, the appellant has shown the sales as export income and returned it in its returns of income for the respective Asst. Years 2007-08 and 2008-09 and claimed exemption on such export income which the Department has been accepting. Therefore, the 3 tests laid down by the Hon'ble Delhi Bench of ITAT in the case of Lufthansa Cargo India (P) Ltd., V. DCIT (91 ITD 133) (Delhi) are satisfied in this case as the following : i) The payer is a non-resident, or ii) The contract with non-resident is made outside India; or iii) The activity yielding income takes place outside India. Thus, there is no merit in the finding of the Assessing Officer to say that the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stated that source could not refer to the payer but only to the activity, which resulted in the income. It was explained that the source is the activity which results into the income. If the source of any income is situated in India then it is irrelevant whether the business carried on by such non-resident is in India or elsewhere : We are agreeable that the source does not refer to the person who makes the payment but it refers to the activities which give rise to the income. In the present context the activity which is resulting into income in the hands of non-resident customers, namely the TV channel, is the ultimate viewership of the programmes transmitted by them through assessee in the footprint areas including India. Therefore the activity which actually produces the income is not the uplinking or downlinking of the signals but of the actual viewership. It is clarified that the above quoted observations were made in the context of a non-resident earning income from a source within India, under section 9(1)(vi)(c), but the principle stated therein is equally applicable to a resident under section 9(1) (vii) (b) of the Act in determining whether income was earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Article 17.2 of the DTAA governs the transaction. Before adverting to the alternative contention of the appellant I extract Article 17.2 of Indo- China DTAA for analyzing and examining the contention of the appellant. Article 17.2 says that - Where income in respect of personal activities exercised by an entertainer or a sportsperson in his capacity as such accrues not to the entertainer or sportsperson himself but to another person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the contracting State in which the activities of the entertainer or sportsperson are exercised'. To understand the contention of the appellant and the meaning of 'entertainer' one has to read Article 17.1 which defines 'Artistes' and also deals with incidence of taxation of their income from their personal activities as such exercised in other Contracting State. Article 17.1 says that Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an entertainer, such as theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from his personal activities as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Production Work/Material of certain episodes of animation films if, amounting to fees for technical services, then such payments are made' to artistes through HGA for rendering services in supplying production material as per the agreement, dated 31-03-2005. In that sense, the learned AR of the appellant argued that Article 17.2 governs the transaction. In this context it is worth considering Article 17.1 which speaks of incidence of taxation of income derived by a resident of a Contracting state as an entertainer/artist, from his personal activities as such exercised in other Contracting State, may be taxed in that other Contracting State. Therefore, if such entertainer/artist exercises any such activities in the other Contracting State, then the amounts received by them shall be taxed in the other Contracting State. This means that if any entertainer/artist comes to India and renders any activity, then the amounts received by them shall be liable to tax in India. The logical conclusion that can be drawn from Article 17.1 to understand Article 17.2 is that if such entertainer/artist exercises any activities in the Contracting State i.e., China, then income in respect of pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were rendered by MI/GE, HGA only in Hong Kong/ China, yet the same were utilized by the assessee in its business in India and as such the Assessing Officer stated that irrespective of the situs of the services, income is deemed to accrue or arise in India in the hands of MI/GE,HGA and consequentially the assessee is liable to deduct taxes u/s 195 of the Act. 5. the assessee's business with its Overseas Clients undoubtedly constitute a business carried on by resident outside India, making the assessee to satisfy the first category of income referred to in the sub-clause (b). However, the Assessing Officer laid emphasis only on the second category of income to say that originating cause of the income of the assessee is located in India and as such he held that the assessee is not making or earning income from the source outside India. The Assessing Officer failed to examine the provisions of Sub-clause (b) of Section 9 (l) (vii) of the Act in a proper perspective in the aforesaid manner; Based on above findings it is clear that assessing officer s attempt to raise demands u/s 201 is not correct. Even explanation-1 to section 9(1) excludes the income pertaining to operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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