TMI Blog2017 (6) TMI 876X X X X Extracts X X X X X X X X Extracts X X X X ..... ment to non resident for marketing activity as a reimbursement expenses - expenses were part and parcel of technical service related to income earned in India - Held that:- From the agreement, it appears that there is no service rendered by CII to the assessee. The assessee has not received any service and therefore, the question of utilization of service does not arise. The assessee was only to reimbursement expenses incurred by the CII. Therefore, when CII has not rendered any service to the assessee there is no question of treating the concerned expenses as if it is for rendering service by CII to assessee. Therefore, learned Tribunal as such has not committed any error in not treating the same as if it is for providing service by CII to assessee. The provision of Section 9(1) (vi)(vii) shall not have any application as the amount paid is neither Royalty nor fees for technical service (FTS) but is a business income. Therefore, the provision of Section 9 of the Income Tax Act also shall not be applicable as no income arise in India to CII and / or income does not accrue or arise in India. Tribunal has not committed any error in holding that the payment was made towards reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the project to Ms. Naimisha Construction Inc USA. The AO was of the opinion that while making payment to the aforestated foreign companies, no TDS was deducted. 2.2. The aforesaid was found during the survey operation under Section 133 A of the Act on 14.02.2008 which was carried out to verify issue relating to compliance of TDS provisions under Section 195 of the Act with regard to payment to Nonresident and foreign companies. The case was accordingly referred to International Taxation Unit, Ahmedabad. 2.3. During the course of verification of these foreign remittances, the AO observed from the agreement dated 5.6.2000 entered into between assessee and M/s. Naimisha Construction Inc. USA that the services provided by the Non Resident Company were rendered towards providing of architectural, structural engineering designs and drawings services, as mentioned in clause 9 of the said contract. As regards the payments made to M/s. Creative IT Inc. USA, the AO observed that the said payments were made for providing services related to marketing and selling, Projects Office Administration Expenses and Promotional Expenses and to design charges which were paid to employees of M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.489/AHD/2013, the learned Tribunal has dismissed the said appeal preferred by the revenue which has given rise to the present appeal with the aforestated proposed question of law. 3.0. Shri Nitin Mehta, learned counsel has appeared on behalf of the revenue and Shri Tushar Hemani, learned counsel has appeared on behalf of the assessee. 3.1. Shri Nitin Mehta, learned counsel for the Revenue has vehemently submitted that learned Tribunal has materially erred in law and on facts in holding that the payment made towards supply of design and drawings to NonResident (M/s. Naimisha Construction Inc. USA) was outright purchase and therefore, not taxable as Royalty or FTS under Section 9(1) of the Act. Shri Mehta, learned counsel for the revenue has assailed the aforesaid finding and order passed by the learned ITAT in treating payment towards supply of design and drawings on non resident as outright purchased on the following grounds: (1). The Tribunal does not reproduce or rely on any clause of the Agreement between the Assessee and the Nonresident to show that there is anything in the agreement which concludes that this is a simpliciter purchase and sale transaction. The Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased assets. Further it held that the clauses reflected that the seller had transferred its entire rights, title etc.. in the said assets to the asseessee who received the right, title, interest and ownership in the assets from the effective date. In the present case there are neither any clauses in the agreement which suggest that seller is transferring the entire rights and the assessee is getting the ownership of the same from the effective date. (c). In Heubach case, the ITAT held that the payment was not in respect of right to use but for the purchase thereof and no rights in these properties were retained by nonresident. In the present case, the ownership continued to vest with the nonresident Architect and only right to use designs were extended to the asseseee company through the Contractor Naimisha Construction. Accordingly, it was not the case of outright sale wherein all the rights have been transferred by the seller to the purchaser. Thus unlike Heubach case, present is not the case of transfer of all rights absolutely and exclusively but instead its only of providing services by permitting part of right to use on nonabsolute and nonexclusive basis. (3). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor or material or equipment supplier on other projects or for additions to this Project outside the scope of the Work without the specific written consent of the owner and Architect. The Contractor, Subcontractors, Subsubcontractors and material or equipment suppliers are granted a limited license to use and reproduce applicable portions of the Drawings, Specifications and other documents prepared by the Architect appropriate to and for use in the execution of their Work under the Contract Documents. All copies made under this license shall bear the statutory copyright notice, if any, shown on the Drawings, Specifications and other documents prepared by the Architect. Submittal or distribution to meet official regulatory requirements or for other purpose in connection with this project is not to be construed as publication in derogation of the Architect copyright or other reserved rights. (5). From the above reproduced clause, it is very clear that the assessee company was not to own or claim a copyright in the drawings, design, specifications and other documents prepared by the nonresident Architect. Thus the transfer of such designs and drawings by the nonresident Architec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s certain Income to be accrued in India irrespective of the actual situs of income or residential status of the Recipient. It is further submitted that thus for section 9 what is required to be seen is the nature of income, whether the same falls in one of the nature of income stated in that section like in the present case, royalty. It is further submitted that if the income is in the nature of Royalty, then who receives it, where he receives it, what is his residential status, place of actual accrual etc. all are immaterial, as the same shall be deemed to accure in India and thus taxable in India. Accordingly in the present case, whether the Nonresident Architect is a party to the agreement with Assessee or the amount paid is not directly to the said Architect but to Namisha are immaterial, as the nature of income is Royalty falling in section 9 and hence will be taxable in India. It is submitted that the characterisation of Income will not undergo any change whether the same is received by nonresident Architect or Namisha. 3.3. It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that the learned Tribunal has completely disregarded and ignored the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise if it is considered that the transaction is of transfer of rights under designs and drawings than also since they are not transferred exclusively but the same is only transfer of partial rights being right of use, the same is taxable under Article 12(3) as royalty. It is submitted that therefore, the payments made towards supply of designs and drawings are taxable u/s 9(1)(vi) r.w. Article 12 of the India USA DTAA. 3.8. It is further submitted by Shri Mehta, learned counsel for the revenue that the learned Tribunal in its decision has completely disregarded and ignored the terms of contract in holding that the transaction was of an outright purchase. It is submitted that the logic that since the payment is made to Namisha and not to the Architect firm and therefore it shows that Namisha has merely supplied the drawings and there is no element of services is completely disregarding that in today s commercial world, service subcontracting and outsourcing is an absolute reality and the economy of India is thriving on the same. It is submitted that the order of the Tribunal is perverse as it is based on presumptions and assumptions which has no basis in law or in facts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment to a non resident for marketing activity as a reimbursement of expenses especially when expenses were part and parcel of technical service related to income earned in India is concerned, it is vehemently submitted by Shri Nitin Mehta, learned counsel for the revenue that the learned Tribunal has erred in holding that the payment made was towards reimbursement of expenses and not reimbursement of services. From the perusal of the page no 9 of order of CIT (A) for appeal No CIT (A)/XXI/Abd/119,120 121/0809 dated 15.05.08, it is evident that the reimbursement pertained to the salary of the employees, travelling expenses of the emplyee administrative costs etc. It is submitted that thus, the services were being performed by the Creative Inc through its employee and the payment made by the assessee company to Creative Inc was towards rendering of such services in the nature of marketing activity at cost. It is submitted that just because, the reimbursement was made at cost does not imply that services were not rendered by the Creative Inc to the assessee company. It is submitted that the payment made by the assessee company would have assumed the character of reimbursement for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly of design and drawings to a nonresident architect firm was outright purchase and therefore, not taxable as Royalty or FTS under Section 9(1) of the Act. 5.2. For the aforesaid submission, Shri Tushar Hemani, learned advocate for the assessee has heavily relied upon Articles 2, 4, 5 and 9 of the agreement dated 5.6.2000 entered into between the assessee and M/s. Naimisha Construction Inc USA. 5.3. It is vehemently submitted by Shri Tushar Hemani, learned counsel for the assessee that even AO had also observed that assessee had made payment of ₹ 18,72,00,000/to M/s. Naimisha Construction, USA for the purchase of drawings and designing for its infocity project. It is submitted that as such the assessee on the basis of the receipt of drawings and designs from M/s. Naimisha Construction was required to pay ₹ 12,90,03,181/. That out of the said amount, ₹ 12,12,51,821/was remitted in foreign currency after obtaining permission from RBI, which is evident from the ledger account of M/s. Naimisha Construction. It is submitted that however as M/s. Naimisha Construction failed to comply with the agreement in timely manner in sending the complete drawings of the proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Architect, which conclusively proves that there was no services but only supply of designs and drawings from the said M/s. Naimisha Construction Inc. USA to the assessee. It is therefore, submitted that it was merely supply of drawing and designs by M/s. Naimisha Construction Inc. USA to the assessee, which under no circumstances can be said to be provisions of technical service. 5.7. It is further submitted by Shri Tushar Hemani, learned counsel for the assessee that as such there are concurrent findings of facts given by both the learned CIT (A) as well as learned ITAT that the assessee purchased the drawings from M/s. Naimisha Construction Inc. USA and not from the Bob Snow Associates. It is submitted that therefore, in light of such concurrent factual findings by the lower appellate authorities and in absence of perversity being alleged, no question of law much less substantial question of law arise as sought to be contended on behalf of the revenue. For the aforesaid, Shri Tushar Hemani, learned counsel for the assessee has heavily relied upon the discussion and observations made by the learned Tribunal in para 3.9 to 3.12. 5.8. It is further submitted by Shri Tusha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Circular 786 dated 17.02.2000. 5.11. It is further submitted that no income has arisen in India to M/s. Naimisha Construction Inc. USA as the agreement dated 5.6.2000 was signed and sealed in USA, the drawings and designs were in turn purchased by the said Naimisha in USA and the same were sent to the assessee through internet. It is submitted that even the payment to the said party was remitted in foreign currency after obtaining approval from RBI. It is submitted that as submitted herein above, M/s. Naimisha does not have any agent nor it has any permanent establishment in India. It is submitted that therefore, as per the provision of Section 9 of the Act does not accrue or arise in India and therefore, there is no question of tax to be deducted on that income. 5.12. It is further submitted by Shri Hemani, learned counsel for the assessee that in the facts and circumstances of the case learned ITAT has rightly not dealt with the issue arising under the interpretation of DTAA as it has held that the non resident viz. Naimisha is not at all taxable under the Income Tax Act in general and Section 9 in particular. 5.13. It is further submitted by Shri Hemani, learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d nay services at all. It is submitted that assuming while denying that such services are rendered, the assessee has not been passed on the requisite expertise or knowledge so as to ensure that it can independently render such services to others in future. It is submitted that merely because service provider putting technical inputs does not mean make available. In support of his above submissions, Shri Hemani, learned counsel for the assessee has relied upon the following decisions: (1). CIT vs. De Beers India Minerals (P) Ltd reported in (2012) 346 ITR 467 (Kar) (2). DIT vs. Guy Carpenters Co. Ltd reported in (2012) 346 ITR 504 (Del). 5.14. It is further submitted by Shri Hemani, learned counsel for the assessee that even sale proceeds of sale of designs and drawings in the hands of the said Naimisha cannot be treated as Royalty within the meaning of Section 9(1) (vi) of the Act or or Article 12(3) of the IndoUS DTAA. In support of his above submission, he has made following submissions; 5.14.1. It is submitted that Section 90(2) of the Income Tax Act or Articles of DTAA whichever is beneficial to the assessee are to be applied. 5.14.2. It is submitted that the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Creative IT Inc. USA for marketing of Infocity project in USA market. 6.1.2. It is submitted that theses expenses are fully supported by the vouchers. It is submitted that moreover, the Certified Public Accountant of USA as well as CA of India has given certificate to the effect that the expenses are in fact reimbursement. 6.1.3. It is submitted that reimbursement per se does not involve any income element and therefore, no income can be said to be chargeable to tax in India. In support of his above submission, Shri Hemani, learned advocate for the has relied upon the following decisions: (1). CIT vs. Gujarat Narmada Valley Fertilizers Co Ltd reported in 361 ITR 192 (Guj). (2) CIT vs. Tata Engg. and Locomotive Co Ltd reported in (245 ITR 823) (Bom). (3). CIT vs. Industrial Engg. Projects (P) Ltd reported in 202 ITR 1014 (Del). 6.2. It is further submitted by Shri Hemani, learned advocate for the assessee that there is no service rendered by the CII to the assessee. It is submitted that similarly the assessee has not received any services and therefore, the utilization of the services does not arise. It is submitted that the assessee was only to reimburse the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase by the assessee and therefore, the same was taxable under Section 9(1) of the Income Tax Act. It is the case on behalf of the revenue that transfer of such design and drawings by the nonresident ArchitectBob Snow Associates, Florida to M/s. Naimisha and by M/s. Naimisha ultimately to the assessee company was not a outright transfer towards sale, where all rights in the property were transferred by the nonresident to the assessee company. 8.2. However, it is required to be noted that as such M/s. Naimisha got prepared the design and drawings through nonresident ArchitectBob Snow Associates by way of outright sale and thereafter as per the agreement entered into between the assessee and M/s. Naimisha dated 5.6.2000, M/s. Naimisha sold the design and drawings to the assessee. To appreciate whether supply / transfer of design and drawings by M/s. Naimisha to assessee was by way of outright sale or as a Royalty, few clauses in the agreement dated 5.6.2000 are required to be referred to and considered. 8.3. It is required to be noted that the assessee company entered into joint venture undertaking with Government of Gujarat for developing and construction of Informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A Schematic Design Phase 10.00% B Design Development Phase 40.00% C Construction Documents Phase 15.00% D Bidding or Negotiation Phase 15.00% E Final Phase and Specs 20.00% Total 100% As required by the assessee and to meet with the international standard, as per Article 9 of the agreement, M/s. Naimisha was to procure the designs and drawings from one Bob Snow Associates, Architects. Thus, from the aforesaid clauses in the agreement dated 5.6.2000, the Naimisha was to provide the detaile design and drawings for the project without there being any element of services. It is required to be noted that in the said agreement, only the assessee and the M/s. Naimisha are the signatory and not Bob Snow Associates, Architects. Thus, it appears that M/s. Naimisha first procured the plans and designs from Bob Snow Associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.6.2000 at paper Book pages 2520. Complete reading of the agreements and clauses there under under reveals that the assessee had outrightly purchased the complete designs and drawings from the said Naimisha. The said Naimisha in turn purchased the said designs and drawings from one Bob Snow Associates. Architect and became the absolute owner of such designs and drawings together with all the plans and specifications manual, Engineering plans and specifications, site plans, landscape plans and specification. These designs, drawings and other plans and specification were in turned outrightly sold to the assessee. The said Naimisha had sold theres designs, drawings and other plans and specifications to the assessee. These facts are are undisputed. The case of the assessee is that the underlying transaction is of outright purchase of designs and drawings and therefore, the same does not attract provision of Section 9 r.w.s. 195 of the Act. No service much less technical service has been provided by the said Naimisha to the Assessee. It is a case of sale and / or purchase of designs and drawings for the infocity project by the assessee from a non resident Naimisha. This view is suspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Naimisha who in turn supplied it to the assessee and therefore, the payment made by the assessee to M/s. Naimisha was as a Royalty. However, it will be factually incorrect to say that the assesee got / purchased the design and drawings from Bob Snow Associates, Architect. From the material on record, it appears that there was agreement between the assessee and M/s. Naimisha to provide detailed design and drawings for the project of IT Park at Gandhinagar as per the agreement dated 5.6.2000. However, as per the requirement of the assessee the said M/s. Naimisha Construction was required to supply the drawings and design prepared by Bob Snow Associates. Even the payment has been made by assessee to M/s. Naimisha directly for supply of drawings and design as per clause / Article 4.3 of the agreement dated 5.6.2000 and different amounts were required to be paid / paid with respect to different designs and drawings for different components of the project viz. InfotowerI, Infotower II etc. It is required to be noted that even Bob Snow Associates is not signatory to the agreement dated 5.6.2000 and agreement / contract dated 5.6.2000 is between the assessee and M/s. Naimisha o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Full consideration of supply of design and drawing by Naimisha, was by the assessee to M/s. Naimisha. Merely because, the drawings and designs were prepared and / or got prepared by Bob Snow Associates, it cannot be said that Bob Snow Associates supplied the design and drawings to the assessee. On considering clause in the agreement dated 5.6.2000 which was executed between the assessee and M/s. Naimisha which was to provide detail design and drawing for the project, to maintain international standard, the assessee insisted that the drawings and design to be supplied / provided by M/s. Naimisha to assessee must be got prepared by Bob Snow Associates. It was only with a view to maintain international standard and by that it cannot be said that Bob Snow Associates supplied the drawings and design to the assessee directly. There were two different independent transactions between M/s. Naimisha and Bob Snow Associates and between the assessee and M/s. Naimisha (agreement dated 5.6.2000 to provide design and drawings by M/s. Naimisha to assessee). The full sale consideration for providing drawings and design has been made by the assessee to M/s. Naimisha as per the agreement between a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the reveneu that the learned Tribunal has erred in holding that payment made was towards reimbursement of expenses and not reimbursement of services. 10.2. It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that even from the perusal of the order passed by the learned CIT(A), it is evident that the reimbursement pertained to the salary of the employees, travelling expenses of the employee administrative costs etc. It is submitted that thus, the services were being performed by the Creative Inc through its employee and the payment made by the assessee company to Creative Inc was towards rendering of such services in the nature of marketing activity at cost. 10.3. It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that just because the reimbursement was made at cost does not imply that services were not rendered by the Creative Inc to the assessee company. It is submitted that the payment made by the assessee company would have assumed the character of reimbursement for expenses only when the services were rendered by third party for which the payment was initially made by Creative Inc and subsequently reim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that while considering question B, the following facts are required to be appreciated. (1). The assessee company has entered into a joint venture undertaking with Government of Gujarat for developing Information Technology Park at Gandhinagar. (2). The assessee has entered into an agreement with Creative IT Inc., USA for reimbursing marketing expenses of Infocity project in international market. (3). Pursuant to the said agreement, during the year under consideration, the assessee has reimbursed ₹ 3,95,73,033/to Creative IT Inc., USA( CII ) for the expenses of marketing of infocity project in USA Market. (4). The total marketing expenses reimbursed is ₹ 3,82,51,204/out of which ₹ 1,55,73,166/has been treated as project administrative expenditure as differed revenue expenditure and the balance amount of ₹ 2,39,99,867/has been treated as marketing expenses and charged to Profit Loss account. (5). AO applied provisions of Section 195 and held that the assessee ought to have deducted tax at source while making payment. 11.2. It is submitted that there are concurrent findings of fact both by learned CIT(A) and learned ITAT that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween a resident and a non resident but between nonresident to non resident and therefore, provisions of Section 195 have no applications. 11.6. It is further submitted by Shri Tushar Hemani, learned advocate for the assessee that even CII has no business activity or permanent establishment in India. It is neither working through any agent nor it has any branch in India. It is submitted that therefore, the provision of Section 9(1)(vi)(vii) have no application as the amount paid is neither royalty nor fees for technical service (FTS) but is a business income. It is submitted that retrospective explanation to Section 9(2) is also not applicable as the same is applicable only if the income is interest, royalty or FTS. It is submitted that no income arises in India to CII therefore, as per the provision of Section 9 of the Income Tax Act, the income does not accrue or arise in India. It is submitted that therefore, now when the income does not accrue or arise in India there is no question of tax to be deducted on that income. 11.7. It is further submitted that even reimbursement of marketing and administrative expenses in the hands of the said CII cannot be treated as Fees for te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s activity or permanent establishment in India. It is neither working through any agent nor it has any branch in India. Therefore, the provision of Section 9(1) (vi)(vii) shall not have any application as the amount paid is neither Royalty nor fees for technical service (FTS) but is a business income. Therefore, the provision of Section 9 of the Income Tax Act also shall not be applicable as no income arise in India to CII and / or income does not accrue or arise in India. Therefore, considering the aforesaid facts and circumstances, the learned Tribunal has not committed any error in holding that the payment was made towards reimbursement of expenses and not reimbursement of service. We see no reason to interfere with the view taken by the learned Tribunal while holding that the payment in question made was towards reimbursement or expenses and not reimbursement of service. Under the circumstances, the present appeal deserves to be dismissed even with respect to proposed question No.B. 13. In view of the above and for the reasons stated above, present appeal fails. Both the questions are answered against the revenue and in favour of assessee. Present appeal stands dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
