Income Tax Appellate Tribunal - Chennai
Textech International Private ... vs Department Of Income Tax on 12 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI V. DURGA RAO, JUDICIAL MEMBER
I.T.A. No. 1866/Mds/2011
(Assessment Year : 2007-08)
M/s TexTech International Private
The Assistant Commissioner Limited,
of Income Tax, v. STPI Building, Ground Floor,
Company Circle III(2), 5, Rajiv Gandhi Salai, Taramani,
Chennai - 600 034 . Chennai - 600 113.
PAN : AACCT1855H
(Appellant) (Respondent)
Appellant by : Shaji P. Jacob, Addl. CIT
Respondent by : Shri Vikram Vijayaraghavan,
Advocate
Date of Hearing : 12.09.2012
Date of Pronouncement : 11.10.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by the Revenue, its grievance is that CIT(Appeals) deleted a disallowance made by the Assessing Officer under Section 40(a)(i) of Income-tax Act, 1961 (in short 'the Act'). The disallowance was made by the Assessing Officer for a reason that payments were effected by the assessee to one M/s Tex Tech 2 I.T.A. No. 1866/Mds/11 Inc. USA, without deducting tax at source though they were rendering technical services to the assessee. Further as per the Revenue, there was no requirement for a business connection or territorial nexus in view of Explanation introduced under Section 9(2) of the Act, vide Finance Act, 2010 with retrospective effect from 1.6.1976.
2. Facts apropos are that assessee, engaged in the business of e- publishing, had filed its return for the impugned assessment year declaring an income of ` 1,17,56,965/-. During the course of assessment proceedings, it was noted by the Assessing Officer that an outsourcing cost of ` 4,69,91,94/- was charged to the Profit & Loss account. Assessee was required to give details of tax deducted at source on such outsourcing charges paid. Explanation of the assessee was that such outsourcing charges, which were paid to M/s Tex Tech Inc. USA, did not fall within the definition of "technical services". As per assessee, M/s Tex Tech Inc. USA was only a subsidiary company of the assessee and its role was limited to collection of input materials or manuscripts from assessee's customers in USA and scanning such manuscripts and uploading them for the assessee to retrieve them in India. Assessee, thereafter, downloaded such data, did typesetting thereof and then uploaded it back to the subsidiary in USA. The said subsidiary was to download 3 I.T.A. No. 1866/Mds/11 the typeset pages, print such pages, and return it to the ultimate customers. Assessee also mentioned that M/s Tex Tech Inc. USA was receiving certain input materials electronically from the clients, which were also uploaded to the assessee in India and assessee had to do the typesetting work and send it back to M/s Tex Tech Inc. USA, for ultimate delivery to the clients. As per the assessee, the role of its subsidiary in USA was related to production, co-ordination and shipping of materials from the customers to assessee in India and back, and coordinate issues regarding quality, scheduling of delivery etc. M/s Tex Tech Inc. USA was also advising the assessee on business prospects in USA, and monitoring the orders on behalf of assessee's customers in USA. M/s Tex Tech Inc. USA was paid their costs as per bills raised by them for the services rendered by them.
3. Further, as per the assessee, M/s Tex Tech Inc. USA, was not having any branches or offices outside USA and also was not having any permanent establishment in India as defined under the Double Taxation Avoidance Agreement (DTAA) between India and USA. Contention of the assessee was that services rendered by subsidiary in USA were outside India and was not chargeable to tax in India. 4 I.T.A. No. 1866/Mds/11 According to assessee, Section 195 of the Act could not be applied and it was not liable for any deduction of tax at source.
4. However, the Assessing Officer was not impressed by assessee's averments. According to him, assessee's subsidiary in USA was rendering technical services and such services fell within the definition given in Explanation 2 under Section 9(i)(vii) of the Act. Further, as per the A.O., in view of Explanation introduced under Section 9(2) of the Act by Finance Act, 2000 with retrospective effect from 1.6.1996, it was not necessary for an entity abroad to have a business connection or territorial nexus in India. As per the A.O., the subsidiary was rendering substantial service in production, co- ordination and quality control and also uploading hardcopy of manuscripts as also electronic materials to the assessee for processing and preparing typeset pages. In any case, as per the A.O., if the assessee was of the opinion that no tax was required to be deducted at source for the payments effected to the US company, it should have approached Assessing Officer for obtaining a certificate as required under Section 195(2) of the Act or under Section 195(3) of the Act. Having not done so, as per the A.O., assessee invited application of rigours of Section 40(a)(i) of the Act. He, therefore, concluded that assessee had failed to deduct tax at 5 I.T.A. No. 1866/Mds/11 source in accordance with 195 of the Act and relying on Section 40(a)(i), a disallowance of ` 4,69,91,994/- paid to its subsidiary M/s Tex Tech Inc. USA, was made.
5. Before CIT(Appeals), argument of the assessee was that it had three types of agreements with M/s Tex Tech Inc. USA, its subsidiary. One for rendering marketing services, one for Offshore development facilitation services and third one for rendering overseas services. As per the assessee, marketing service was providing support to the customers with regard to billing and payment and also collection of such amounts. As per this agreement, the US subsidiary was required to provide market information as and when required by the assessee. Offshore development facilitation service agreement was for scanning of manuscripts and uploading it to India and also for notifying the assessee through e-mail. Once the assessee had done the typesetting in India and uploaded it back to US subsidiary, they were to download such formatted pages, print the pages and courier it to the ultimate customers. The payments effected as per the second agreement, were for these services. The last one was where assessee had received orders from customers for e-publishing and assessee required its subsidiary in USA to do all the work including 6 I.T.A. No. 1866/Mds/11 preparation of typesetting from manuscripts, printing pages and shipping it back to clients.
6. Submission of the assessee was that none of the above three categories of payments fell within the scope of Article 12 of Indo-US DTAA. Assessee was only making use of the services of its subsidiary in USA which facilitated the business of the assessee. As per the assessee, nothing was 'made available' by the US subsidiary to it and therefore, the payments effected by it to the US subsidiary could not be regarded as fees for technical services. Assessee also distinguished its case from that of facts in Maruti Udyog Ltd. v. ADIT in I.T.A. Nos. 4217, 4219 & 4221/Del/2005 dated 31st August, 2009, relied on by the A.O., by submitting that in the latter case, technical representatives were sent to France, who had received technical knowledge from France, which could be used by them for the benefit of the assessee. In any case, according to assessee, in view of the decision of Hon'ble Apex Court in the case of GE India Technology Centre v. CIT (327 ITR 456), the payments effected to its subsidiary in USA were not subject to withholding tax in India and therefore, there was no failure which would attract Section 40(a)(i) of the Act. 7 I.T.A. No. 1866/Mds/11
7. CIT(Appeals) was appreciative of the above contention of the assessee. According to him, the "make available" clause as contained in Article 12(4)(b) of Indo-US DTAA, was clear that unless technical expertise was made available to an assessee from which it would take advantage, fees paid for services would not be fees for technical services. He, therefore, held that the payments effected did not fall under definition of "fees for technical services" as contained in Indo-US DTAA. In this view of the matter, he held that assessee was not liable for deduction of tax on the payments effected to M/s Tex Tech Inc. USA and deleted the disallowance made under Section 40(a)(i) of the Act.
8. Now before us, learned D.R. submitted that admittedly assessee was doing typesetting in India in accordance with the prescription given by the US company, which incidentally, was its subsidiary. If all the job could be done by the assessee directly, then there was no requirement of a US subsidiary at all. Assessee was receiving orders from its clients and the manuscripts were collected by the US company which did some processing thereon before uploading it to India for typesetting by the assessee. US company was providing technical knowledge for doing the typesetting and also for e-publishing of books. According to him, all the persons employed 8 I.T.A. No. 1866/Mds/11 by the US company were technically qualified and bills raised by the US company on the assessee, were based on hourly rates. Everyone of the persons, employed by the US company, were technical experts, and each of the activity undertaken by the US company on behalf of assessee, were in the nature of technical services. Collection of manuscripts from the clients, co-ordinating the data, uploading it for the assessee to do the typesetting were all technical services. Even the so-called marketing services rendered by the US company were also technical in nature since it involved technical collaboration with the clients, for making out a specific methodology that was to be followed for uploading the final typesetting.
9. Further continuing his argument, learned D.R. stated that all the overseas clients of the assessee were directly billed by the assessee. For the services rendered by the US subsidiary, assessee was paying based on the bills raised by the US subsidiary. Even when work was fully done by the US company, as required by certain clients of the assessee, substantial technical services were rendered by them. Once assessee was given format and specification and also technical instructions, it was possible for the assessee to use such technical knowledge for its other assignments also, giving an 9 I.T.A. No. 1866/Mds/11 enduring benefit to it. Even if it was advisory service given by the US subsidiary, it was nothing but a special service rendered in accordance with three agreements. Relying on the decision of Authority for Advance Rulings in the case of Shell India Markets Pvt. Ltd. (342 ITR 223), learned D.R. submitted that advisory services also, if it involved special technical knowledge, was nothing but technical service. Relying on the decision of AAR in the case of HMS Real Estate Pvt. Ltd. (325 ITR 71), learned D.R. submitted that even an architectural design service rendered was considered as technical service. Learned D.R. pointed out that in this decision, the Authority was concerned with a company in the USA and had gone through the provisions of Indo-American DTAA before holding so. Relying on the decision of AAR in the case of XYZ Ltd. (2012) 69 DTR (AAR) 96, learned D.R. submitted that inspection, testing and certification services were considered to be in the nature of technical services. According to him, even if a part of the amount paid by the assessee to its subsidiary in USA had an element of income which was exigible to tax, then it was duty-bound to approach Assessing Officer for a certificate under Section 195(2) of the Act. In view of the decision of Hon'ble Apex Court in the case of GE India Technology Centre (supra), assessee ought have deducted tax at source, having not 10 I.T.A. No. 1866/Mds/11 applied for a certificate from Assessing Officer on the lines mentioned. Therefore, according to him, assessee had failed to deduct tax at source and invited rigours of Section 40(a)(i) of the Act. Ld. CIT(Appeals) fell in error in deleting the disallowance.
10. Per contra, learned A.R., strongly supporting the order of CIT(Appeals), submitted that the role of the subsidiary in the work done by the assessee was much limited. US subsidiary was only a marketing agent collecting manuscripts from assessee's clients and forwarding it to assessee in India. Assessee was doing all the technical work, including typesetting. US company was there only to collect the manuscripts from the customers, forward it to India, print the pages typeset in India, and forward it to the clients. In some cases, the said US subsidiary was doing whole of the work by itself due to certain specific constraints placed by the clients and in such cases, there was no question of any technical services being made available by them to the assessee. According to him, the invoices raised by the US company would clearly show that there was no rendering of any technical services at all. Learned A.R. placing reliance on the decision of Hon'ble Karnataka High Court in the case of CIT & ITO v. De Beers India Minerals Pvt. Ltd. (2012) 72 DTR 82, argued that no type of technical service was made available by the 11 I.T.A. No. 1866/Mds/11 US subsidiary to the assessee and there was no question of any technical knowledge which enabled the assessee to derive an enduring benefit, being made available to it. Assessee could not utilize the knowledge received from US company for its own benefit. According to him, in view of such specific observation of Hon'ble Karnataka High Court with regard to the term "making available", various decisions of Authority for Advance Rulings, relied on by the learned D.R., had to be ignored. Learned A.R. also relied on the decision of GE India Technology Centre (supra) for arguing that assessee being under a bonafide belief that no tax had to be deducted at source, it could not be fastened with any liability for default of that nature.
11. We have perused the orders and heard the rival submissions. The question here is whether the US company, which incidentally was a subsidiary of the assessee, was rendering any technical services, which warranted a deduction of tax at source, in accordance with Section 195 of the Act. There is no dispute that assessee would be governed by Indo-US DTAA insofar as its dealings with its subsidiary in USA are concerned. In view of decision of Hon'ble Apex Court in the case of Union of India v. Azadi Bachao Andolan And Another (263 ITR 706), an assessee can always take the benefit 12 I.T.A. No. 1866/Mds/11 of Double Taxation Avoidance Agreement, if it is to its advantage. Definition of "technical service" as given in Explanation 2 to Section 9(i)(vii) of the Act and "Fees for included services" given in Article 12.4 of DTAA between USA and India are not pari materia. Assessing Officer had not made any study of the said Article in the DTAA, before fastening on the assessee the liability to deduct tax at source on the payments effected by it. Assessing Officer went by the definition given in Explanation 2 to Section 9(i)(vii) and relying on the Explanation given under Section 9(2) of the Act, held that assessee, irrespective of the fact whether the subsidiary abroad had a place of business in India, was liable to deduct tax at source. Section 9(i)(vii) reads as under:-
"(vii) income by way of fees for technical services payable by--
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance 13 I.T.A. No. 1866/Mds/11 of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2].--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]"
12. It might be true that the services rendered by subsidiary abroad would fall within the above definition, at least prima facie. It might also be true that in view of Explanation provided under Section 9(2) of the Act introduced by Finance Act, 2010 with retrospective effect from 1.6.1976, requirement regarding a residence or place of business or business connection in India for a non-resident is irrelevant for the purpose of determining the tax liability for fees for technical services received by a non-resident outside India. But, as already mentioned by us, if the assessee is able to show that the services rendered by the entity abroad, would not fall within the meaning of "fees for included services" as defined under Article 12.4 of DTAA between USA and India, then definitely it can take advantage of such definition 14 I.T.A. No. 1866/Mds/11 and will be justified in taking a stance that tax was not deductible for payments effected by it to US company. Before testing whether the type of services rendered by the US company to assessee would fall within the definition of "fees for included services" as contained in Article 12.4 of the said DTAA, we have to see the nature of services rendered by the US company to the assessee. The first agreement termed as "Marketing Agreement" placed at paper-book page 22, defines duties of M/s Tex Tech Inc. USA under clause 6 therein, as under:-
"6. Rights and obligations of Y 6.1 Y hereby covenants that 'Y' shall not sell, offer to sell, or promote the Products and/or services outside the overseas market. Y further covenants that Y shall not sell or offer to sell the product and/or services of X to any customer without the knowledge of X. 6.2 Y hereby covenants that Y shall forward to X all inquiries relating to the Products and/or services that Y receive from the customers in the overseas market.
6.3 Y hereby covenants that Y shall finalize the sale price along with discounts, if any, with the customer only after the prior approval and knowledge of X. 6.4 Y shall at its sole expense, promote the sale of the products and/or services of X to the customers from the start date of this Agreement.
6.5 Y hereby covenants that Y shall at its sole expense provide any and all support for customers and/or their staffs with regard to billing and payment collection.15 I.T.A. No. 1866/Mds/11
6.6 Y shall use its best efforts to promote and sell the products for use only to customers in compliance with local laws and regulations.
6.7 Y hereby covenants that Y shall provide market research information as and when requested by X for purpose of X's to understand competitions and market trends in the overseas territory."
It is pertinent to note that "Y" here denotes the US company.
13. The second agreement with US company termed as "Offshore Development (Facilitation) Agreement" placed at paper-book page 37 onwards, gives scope of work in clause 3, which reads as under:-
"3. Scope 3.1 X hereby agrees to process customer materials, prepare instructions, and prepare files to enable Y to carry out e-publishing services and send such files through Internet by way of File Transfer Protocol or upload such files in servers and communicate access mechanisms.
3.2 Y shall use the instructions sent along with the files for carrying out digitization services in respect of manuscripts and books and other materials.
3.3 X will also provide final quality assurance of products delivered by Y prior to shipment to customer.
3.4 X will ship the product to customer either electronically or physically based on customer preference.
3.5 The parties understand that the receipt of the work carried out by X under this Agreement could be received in India at the time of downloads or in cyberpace when the files are placed in a server to facilitate access."16 I.T.A. No. 1866/Mds/11
It is pertinent to note that 'X' denotes the US subsidiary here.
14. The third agreement called "Overseas Services Agreement"
placed at paper-book page 53 onwards gives scope of work of the US company as under:-
"3. Scope 3.1 X hereby agrees to provide services referred to in Para 3.2 and the details of service shall be mutually agreed upon from time to time.
3.2 X using domain expertise, tools and infrastructure, shall carry out the following services:
(i) Receipt of manuscripts and licensed materials from customers.
(ii) Identification of book production requirements.
(iii) Usage of appropriate software tools for carrying out the full book production work in the US.
(iv) Providing customer service.
(v) Performing final quality checks on the processed materials.
(vi) Printing final laser profits and dispatch to customer
locations specified by Y."
In this agreement also, "X" denotes the US company.
15. Now coming to Article 12.4 of DTAA between India and USA, which defines "fees for included services", it reads as follows:-
"4. For the purposes of this article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:17 I.T.A. No. 1866/Mds/11
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-
however,, or processes, or consist of the development and transfer of technical plan or technical design."
It is clear from the above Article that technical or consultancy services will include fees for services only if such services fall within any of the two limbs (a) or (b). Limb (a) is not applicable here since it applies where the payment was in the nature of royalty and the services were ancillary or subsidiary to the royalty. So, here what we have to see is whether limb (b) would be applicable or not. For limb (b) to be applied, it is necessary that the entity abroad makes available technical knowledge, skill, know-how or process to the assessee in India or otherwise, the services rendered by entity abroad should consist of development and transfer of technical plan or technical design. Vis-à-vis first agreement named "Marketing Agreement", it is clear that there was no technical service whatsoever involved in it since no technical knowledge or skill or experience was made available to the assessee, when marketing services were rendered by the entity abroad. Coming to third agreement named "Overseas Services Agreement", scope clearly is one of a turnkey service. The US company has to use its expertise, tools and infrastructure for 18 I.T.A. No. 1866/Mds/11 receiving manuscripts for production of book using its own resource, including servicing the customers and effecting dispatches to customer locations. In other words, whole of the work was done by the US company and when whole of the work was done by US company, for start to finish, we cannot say that assessee was receiving any technical knowledge, skill, know-how or benefit of any technical plan or technical design from them.
16. This leaves us with the second agreement called "Offshore Development (Facilitation) Agreement". The scope of work has been reproduced by us above at para 13. By virtue of clause 3.1, US company has to process customer materials, prepare instructions and prepare files for the assessee to carry out e-publishing services and also has to upload these to the assessee. All these will definitely involve technical know-how, but, still there is no technical knowledge as such made available to the assessee which will give it an enduring benefit. Similar is the case with the type of service mentioned at clause 3.3 also. By virtue of this clause, the entity abroad has to provide quality assurance. This provision of quality assurance might also involve some technical expertise, but, we cannot say that such technology was made available to the assessee by the said entity. The only item now left is the work mentioned in clause 3.2. This 19 I.T.A. No. 1866/Mds/11 clause specifies that the assessee has to use the instructions sent by the entity abroad along with files for carrying out digitization services. If such instructions were in the nature of technical knowledge which imbibed in the assessee any technical expertise, which in turn helped it in its e-publication business, such that an enduring benefit was received by it, then of course, such services will come within the purview of clause (b) of Article 12.4 of Indo-US DTAA mentioned above. A look at the decision of Hon'ble Karnataka High Court in the case of De Beers India Minerals Pvt. Ltd. (supra), will clearly elucidate the meaning of word "make available":-
"What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, 20 I.T.A. No. 1866/Mds/11 skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied."
17. When viewed from the above interpretation given by Hon'ble Karnataka High Court of term "making available", it is clear that except for the work mentioned in clause 3.2 of the second agreement, there was no technical knowledge or service made available by the entity abroad to the assessee in any of the other work. If the instructions sent by the entity abroad were such that it could give a technical expertise to the assessee, which it could use even after the expiry of the contract thereby giving it an enduring benefit in its e-publishing work, then without doubt, it will fall within the meaning of "fees for included services". If this was the case, then assessee was obliged to deduct tax at source on the payments effected by it to the subsidiary in USA, arising out of all the three agreements, if it had not sought a certificate from A.O., as stipulated in Section 195(2). Here, the decision of Hon'ble Apex Court in the case of GE India Technology Centre (supra) becomes relevant. Para 10 of the said decision is reproduced hereunder, for brevity:- 21 I.T.A. No. 1866/Mds/11
"10. In Transmission Corporation case (supra) a non-resident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigibile to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (supra) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount buton the lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India", then it was necessary for him to make an application under s. 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, s. 195(2) is based on the "principle of proportionality". The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such 22 I.T.A. No. 1866/Mds/11 payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions of the I.T. Act, i.e. chargeable under ss. 4, 5 and 9 of the I.T. Act."
18. It is an admitted position that separate invoices were raised by the subsidiary to the assessee, based on the three different agreements, and copies of such invoices have been placed at paper- book page 7 onwards. Thus, three agreements were not a composite one. The scope of work would show that different types of services were rendered by the subsidiary in USA. With regard to the Marketing Agreement, and Overseas Services Agreement, no part thereof was having income element which was chargeable to tax under the provisions of Income-tax Act in India in view of Article 12.4 of DTAA. Therefore, insofar as payments made against bills raised by the non-resident entity of the assessee based on these two agreements, assessee could never be fastened with liability to deduct tax at source. However, for the second agreement, namely, "Offshore Development (Facilitation) Agreement", as already 23 I.T.A. No. 1866/Mds/11 mentioned by us, one of the items of services rendered by the entity abroad could have an element of income chargeable to tax in India, since it could involve making available technical services to the assessee in India. But, this aspect has not been examined meticulously by any of the authorities below. If the services rendered by the entity abroad with regard to the said agreement were such that technical skills were made available to the assessee in India, then of course, Section 195 of the Act will apply. Assessee having not made any application under Section 195(2) of the Act, it could be fastened with a failure to deduct tax at source as specified under Section 195 of the Act. Then of course, rigours of Section 40(a)(i) would be attracted. We are, therefore, of the opinion that the matter requires a re-visit by the A.O. Therefore, we set aside the orders of authorities below and remit the issue insofar as it relates to payments made by the assessee to its subsidiary abroad with regard to "Offshore Development (Facilitation) Agreement" back to the file of the A.O. for consideration afresh in the light of DTAA between India and USA, in accordance with law.
19. In the result, appeal of the Revenue is partly allowed for statistical purposes.
24 I.T.A. No. 1866/Mds/11The order was pronounced in the Court on Thursday, the 11th of October, 2012, at Chennai.
sd/- sd/-
(V.Durga Rao) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 11th October, 2012.
Kri.
Copy to: (1) Appellant
(2) Respondent
(3) CIT(A)-VI, Chennai
(4) CIT-I, Chennai
(5) D.R.
(6) Guard file