TMI Blog2019 (2) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiaries. - Decided in favour of assessee - I.T.A No. 1812/Kol/2017 - - - Dated:- 5-12-2018 - Shri S.S.Godara, JM Hon ble Shri M.Balaganesh, AM For the Appellant : Shri Robin Chowdhury, Addl. CIT For the Respondent : Shri Arvind Agarwal, Advocate ORDER PER M.BALAGANESH, AM 1. This appeal by the Revenue arises out of the order of the Learned Commissioner of Income Tax(Appeals)-8, Kolkata [in short the ld CIT(A)] in Appeal No.8/10172/2013- 14 dated 15.05.2017 against the order passed by DCIT, Circle-5, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 19.03.2013 for the Assessment Year 2010-11. 2. At the outset, there is a delay of 2 days in filing the appeal by the revenue. Due to the concession given by the ld AR, the same is hereby condoned and appeal of the revenue is hereby admitted for adjudication. 3. The only issue to be decided in this appeal is as to whether the payments made by the assessee to its UK and Singapore Subsidiaries would fall within the ambit of 'Fees for Technical Services' and if so whether the disallowance u/s 40(a)(i) of the Act could be made in the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pulating the terms and conditions. It is submitted that the assessee has deducted TDS on payments made on account of research services. With regard to marketing services, as per the agreement, the assessee was to reimburse the cost incurred by the Singapore company and in addition was to pay a mark-up of 29% on cost for the marketing services provided by the Singapore company. 3.1 The details of payments made to B K Securities Ltd, U.K. are as below:- M/s. Batlivala Karani Securities (India) P. Ltd. DETAILS OF PAYMENTS MADE TO B K SECURITIES LTD. U.K. ON ACCOUNT OF MARKETING SUPPORT SERVICES Sr. No. Period Nature of expenses Amount Remarks 1. 01.04.2007 to 30.09.2007 Lumpsum payment of 18,000 pounds per month as per agreement dated 15.11.2006 96,88,845 There is no dispute on this payment 2. 01.10.2007 to 31.03.2008 (i) Reimbursement of actual expenses as per agreement dated 01.10.2007 1,07,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee ought to have deducted tax at source irrespective of the fact whether the payment is taxable in the hands of non-resident in India, the Assessing Officer has relied upon the decision of Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587/105 Taxman 742 (SC) . 4.1 Before the CIT(A), it was submitted that the subsidiaries only rendered marketing support services which were not covered in the definition of fees for technical services as defined under Explanation to S. 9(1)(vii) of the Act. It was contended that TDS is required to be deducted on the income element accruing in the hands of non-resident. It was submitted that the assessee has deducted TDS on the mark-up fee charged to its subsidiaries but has not deducted TDS on the reimbursement of expenses. It was submitted that the subsidiaries incur certain expenditure on behalf of the assessee which are reimbursed by the assessee at cost. It was submitted that such reimbursement does not give rise to income in the hands of the subsidiaries as a result no TDS is required to be deducted on the amount paid as reimbursement. In order to support the said contention, reliance was placed on the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, Indonesia, Hong Kong and any other jurisdiction or a combination of any such jurisdictions. For the services rendered by Singapore company and which the assessee utilized for reinforcing its overall business operations, the service provider was to be paid service fees; and in addition granted reimbursement of the expenditure incurred. The relevant clauses from this writing for resolving the disputed issue are reproduced below for the sake of convenience :- REIMBURSEMENT OF EXPENSES AND SERVICE FEE 5.1 In consideration of the Business Services to be rendered by THE SERVICE PROVIDER under this Agreement THE SERVICE RECIPIENT agrees to reimburse all costs and expenses incurred by THE SERVICE PROVIDER with the prior consent of THE SERVICE RECIPIENT in providing the Business Services and reflected in the books and records of THE SERVICE PROVIDER. 5.2 Additionally, THE SERVICE RECIPIENT agrees to pay a Service Fee equal to 29% of the costs and expenses reimbursed in accordance with 5.1 above. It was submitted that the subsidiary operates exclusively in respective place of origin in Singapore. No part of the activities takes place in India nor the services t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of payments already made in F.Y. 2007-08. (e) In any case, payment falls within the exception provided u/s 9(1)(vii)(b) of the Act as the same is made for earning income from a source outside India. (f) In any case, TDS provisions are not applicable to payments which are in the nature of reimbursement of expenses. (g) Since for all the above reasons, payments are not liable to tax in India, there is no TDS obligation u/s 195 of the Act as laid down by the Hon'ble Apex Court in the case of GE India Technology Cen. (P) Ltd. (supra) (h) In any case, at the most, this is a case of short deduction and not nondeduction and hence, disallowance cannot be made u/s 40(a)(i) of the Act. 9. The learned AR argued that the payments made to Subsidiaries do not fall within the definition of fees for technical services as per the provisions of the Act or the DTAA between India Singapore vide Article 12(4) and India UK treaty vide Article 13(4). He stated that as per India Singapore treaty, fees for technical services are defined as under:- 4. The term 'fees for technical services' as used in this Article means payments of any kind to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or processes. In the present case, as is evident from the facts stated hereinabove, no technical services are being made available to the assessee by its foreign subsidiaries. As a result, even assuming without admitting that the payment is 'fees for technical services' under the Act, the payments made by assessee to its subsidiary companies would not fall within the definition of 'fees for technical services' under the DTAA since there is no technical knowledge made available to the assessee. Instead the subsidiary is only providing marketing services to the assessee. It was submitted that it would also be relevant to state that as per Section 90(2) of the Act, if the Central Government has entered into a Double Taxation Avoidance Agreement with the Government of any country outside India, then in relation to the assessee to whom such agreement applies, the provisions of Income-tax Act would apply only to the extent they are more beneficial to the assessee i.e. if the treaty provisions are more beneficial to the assessee, it will prevail over the provisions of the Income-tax Act. It was submitted that, in the present case, treaty between India and Singapore is more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the treaty with Singapore and UK (pages 45-51 of PB) and copies of various judgments relied upon in support of various contentions addressed by the Learned AR (pages 52 to 127 of PB) . 12.1 We find that the moot question to be decided in this appeal is as to whether the payments made by the assessee to its foreign subsidiaries would fall under the ambit of 'fees for technical services' as per the DTAA. We find from the Article 12 of Singapore Treaty and Article 13 of the UK Treaty defining the term 'fees for technical services' , the consideration paid for rendering of managerial, technical or consultancy services would be covered under the said definition only if such services make available any technical knowledge, experience, know-how, or processes. The nature of services rendered by the subsidiaries to the assessee were in respect of simple marketing services of introducing foreign institutional investors to invest in the capital markets in India so that the assessee would improve its business and income in India. We find that no technical service is being made available to the assessee by its subsidiaries and as a result, the payments made to subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Computer software development. Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas : 1. Bio-technical services ; 2. Food processing ; 3. Environmental and ecological services ; 4. Communication through satellite or otherwise ; 5. Energy conservation ; 6. Exploration or exploitation of mineral oil or natural gas ; 7. Geological surveys ; 8. Scientific services ; and 9. Technical training. The following examples indicate the scope of the conditions in paragraph 4(b) : Example 3 Facts : A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.S. contractors work with the technicians in the Indian firm f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are the fees paid by the Indian company for included services ? Analysis : The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company. Example 7 Facts : The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services ? Analysis : The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and qualifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skills etc. to the person utilizing the services. These words are which make available . The normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skills etc. from the person rendering the services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the rendering of services is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard in Explanation 2 to section 195(1) of the Act with effect from 1.4.1962 was inserted by the Finance Act 2012. The obligation to deduct tax at source has to be complied only as per the law that it prevails on the date of payment. Admittedly the payment in question was made by the assessee to its Subsidiaries prior to the Finance Act 2012. It is not possible to fasten an obligation to deduct tax at source on the basis of a retrospective amendment to the law as has been laid down by the Co-ordinate Bench decision of this Tribunal in the case of Dy. CIT v. Subhotosh Majumder [2016] 65 taxmann.com 42/156 ITD 708 (Kol. - Trib.) wherein it was held that :- The tax deductor is not expected to know how the law will change in future. A retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect. The tax withholding obligations from payments to non-residents, as set out in section 195, require that the person making the payment 'at the time of credit of such income to the account payee or at the time of payment thereof in cash or by the issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the aforesaid findings, we have no hesitation in directing the learned AO to delete the disallowance made u/s 40(a)(i) of the Act in respect of payments made to foreign subsidiaries. In view of the above conclusion, the other propositions advanced by the Learned AR before us are not taken up for consideration. Accordingly, the Ground Nos. 1 2 raised by the assessee for the Asst Year 2008-09 are allowed. 13. We find that the facts for the Asst Year 2009-10 in respect of the impugned issue are exactly similar except variance in the mark-up of 10% instead of 29% in respect of payments made to Singapore Subsidiary. Hence the decision rendered in Asst Year 2008-09 would apply with equal force for the Asst Year 2009-10 also in respect of this issue. Accordingly, the Ground Nos 1 2 raised by the assessee for the Asst Year 2009- 10 are allowed. 5. We find that the ld CITA had placed reliance on the aforesaid order of this tribunal and granted relief to the assessee by observing that there are no change in facts for the year under consideration when compared to that in earlier years i.e Asst Years 2008-09 and 2009-10. The revenue could not controvert the same befo ..... 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