Income Tax Appellate Tribunal - Ahmedabad
Marck Biosciences Ltd.,, Ahmedabad vs Income Tax Officer, International ... on 28 March, 2017
ITA No. 203/Ahd/2014 Marck Biosciences Ltd vs. ITO Assessment Year: 2009-10 Page 1 of 8 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD "I" BENCH, AHMEDABAD [Coram: Pramod Kumar AM and Mahavir Prasad JM] ITA No. 203/Ahd/2014 Assessment Year: 2009-10 Marck Biosciences Ltd., ..............................Appellant 5 th Floor, 'Heritage', Nr. Gujarat Vidhyapith, Ashram Road, Ahmedabad-380014 PAN : AABCM 0366 P Vs. Income-Tax Officer, ............................Respondent International Taxation-II, Ahmedabad Appearances by:
SN Divatia for the appellant Dileep Kumar for the respondent Date of concluding the hearing : March 23, 2017 Date of pronouncing the order : March 28, 2017 O R D E R Per Pramod Kumar AM:
1. By way of this appeal, the assessee appellant has called into question correctness of learned CIT(A)'s order dated 04.10.2013, in the matter of tax withholding demands raised under Section 201 r.w.s. 195 of the Income-tax Act, 1961, for the assessment year 2009-10.
2. Grievances raised by the appellant are as follows:-
1. The learned assessing officer has erred in law and in facts in treating professional fees paid to Mahta Partners, LLC USA a non resident to the tune of Rs.60,00,000/- (US $ 1,20,000) as income as 'Royalty' u/s 9(1)(vi) and consequently passing orders under section 201(1) and charged interest u/s 201(1A) and Honourable CIT(A) has erred in law and on facts in confirming the same, disregarding the submissions made by the appellant.ITA No. 203/Ahd/2014
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2. The learned assessing officer has erred in law and in facts in treating professional fees paid to Mahta Partners, LLC USA, a non resident and holding that the said payment requires deduction of Tax at Source U/s 195 / 195 9A) and Honourable CIT(A) has erred in law and on facts in confirming the same, disregarding the submissions made by the appellant.
3. Briefly stated, the relevant material facts are as follows. During the relevant financial period, the assessee made a payment of US $ 1,20,000 to a US based entity by the name of Mehta Partners LLC. This payment was made on account of professional fee for global biopharmaceutical strategic counselling and advisory services rendered by this entity. The assessee did not deduct any tax at source from the payment so made, on the ground that the income embedded therein was not taxable in India in view of the provisions of India USA Double Taxation Avoidance Agreement [(1991) 187 ITR (87) 102]. The Assessing Officer was, however, of the view that the services rendered by the US entity are covered by the definition of royalty under Explanation 2 to Section 9(1)(vi) as also under Article 12 (3)(a) and, accordingly, tax should have been deducted at source @ 10%. On this basis, tax withholding liability under Section 201 r.w.s. 195, amounting to Rs.9,33,306/-, was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. While confirming the stand taken by the Assessing Officer, learned CIT(A), inter alia, observed as follows:-
"From the above discussion and judgment a analogy can be drawn that for the purpose of any information to be royalty to be regarded as knowledge as mentioned in sub clause (iv) of explanation 2 of section 9(1)(vi) following parameters needs to be satisfied:
The knowledge must a propriety knowledge of the person to whom payment is made;
There must be some intellectual values assigned to the information received. Now adverting to the facts of the instant case. The scope of services to be given by MPL to the appellant is mentioned in Paragraphs 1 to 4 of the agreement. The sum and substance of these services is summarized as follows :
(a) Business Promotion;ITA No. 203/Ahd/2014
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(b) Marketing;
(c) Publicity; and
(d) Financial advisory.
The information parted by MPL is one which is gained by its own experience in the field of pharmaceutical industry. The role of MPL, to the extent applicable, was to understand MARCK management's philosophy and priorities:
working closely with the senior management of MARCK, becoming an extension of the management term, providing a perspective Indian pharmaceutical market and assisting MARCK in identifying potential corporate partners, licensing opportunities or acquisition targets; assisting in devising optimal approaches to establishing contact with selected prospective corporate partners or acquisition targets; evaluating and recommending financial and strategic alternatives with respect to a strategic alliance; counseling MARCK with respect to negotiation tactics and strategies; assisting MARCK in conducting detailed negotiations (directly or behind the scenes) with a prospective corporate partner or acquisition target; and assisting in the preparation, implementation and evaluation of post- transaction business plans to advance MARCK's operations. MPL will work closely with Marck Management in advising the long term financial strategic planning and in its goal of enhancing the shareholder's growth capital.
The information relating to Indian Pharmaceutical market parted by MPL pertains to its own experience gained over the period of time. The information has an element of its own commercial and industrial experience and can be termed as royalty under section 9(1)(vi) of the Act Explanation 2 sub-clause (iv). Accordingly it can be said that the income is deemed to accrue arise in India.
Further the wordings of in the definition of royalty are similar in Article 12(3) of the India-USA DTAA. The same discussion holds good for treaty also. Accordingly the remittance made can be termed as royalty under the Act as well as DTAA.
Thus, the remittance to Mehta Partners LLC is covered by the definition of 'Royalties' as per Article 12.3 of India-USA Tax Treaty and the contention of the AO is upheld.
As the payment received by Mehta partners LLC, USA is taxable as 'Royalties' as per the provisions of the IT Act and that of as per DTA between India and USA, appellant should have deducted tax in accordance with the provisions of section 195 of the Act while remitting the sum, which the appellant has failed and therefore the AO has rightly held the appellant as 'assessee in default' within the meaning of section) 201(1) of the Act. The ground of appeal is therefore dismissed."ITA No. 203/Ahd/2014
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4. The assessee is not satisfied with the stand so taken by the CIT(A) as well, and is in further appeal before us.
5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
6. It is only elementary that so far as the cases covered by Double Taxation Avoidance Agreements, entered into by India with the respective jurisdictions, are concerned, the provisions of the Income Tax Act apply only to the extent such provisions are more favourable to the assessee. In other words, in a situation in which an entity fiscally domiciled in the United States is not taxable in India, under the provisions of the applicable DTAA, it is not taxable in India at all. It is in this backdrop that let us begin by looking at relevant provisions in the Indo US DTAA, which have been relied upon by the revenue authorities, as follows:-
ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES
1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :
(a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-
paragraph (b) of this paragraph] :
(i) during the first five taxable years for which this Convention has effect,
(a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and ITA No. 203/Ahd/2014 Marck Biosciences Ltd vs. ITO Assessment Year: 2009-10 Page 5 of 8
(b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and
(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and
(b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.
3. The term "royalties" as used in this Article means :
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.
4. For 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 :
(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-how, or processes, or consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid :
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ;
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;
(c) for teaching in or by educational institutions ;
(d) for services for the personal use of the individual or individuals making the payments ; or ITA No. 203/Ahd/2014 Marck Biosciences Ltd vs. ITO Assessment Year: 2009-10 Page 6 of 8
(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply.
7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.
8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention.
7. The case of the revenue rests on definition of 'royalties' under article 12(3)(a) in the sense that, according to the authorities below, rendition of services by the US entity amounts to parting with the "information concerning industrial, commercial and scientific experience" gained by the US entity over a period of time. ITA No. 203/Ahd/2014
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8. As we have seen a little while earlier, from the extracts reproduced from learned CIT(A)'s order, "the sum and substance of these services is....... (a) business promotion;
(b) marketing; (c) publicity; and (d) financial advisory". These services, under the agreement, are termed as "Strategic and Financial Counselling Services". The payments made by the assessee are thus for rendition of these services and not for use of any information concerning industrial, commercial or scientific information". While characterizing nature of payment what is to be seen is the activity triggering in consideration of which the payment is made. That activity, in the present case, is rendition of services. The fact that in the process of availing these services, the assessee benefits from rich experience of the service provider is wholly irrelevant in the present context. The payment is for rendition of services and not for right to use any information concerning industrial, commercial or scientific experience, in possession of the service provider. In this view of the matter, the authorities below were clearly in error in holding that the impugned payment was covered by the definition of royalty under article 12(3)(a).
9. Coming to the taxability of impugned fees as fees for included services under article 12.4, it is only elementary that such on standalone basis a taxability can arise only when these services "make available" technical knowledge, experience, skill, Know-how or process etc, in the sense that recipient of services is enabled to perform such services, in future, on his own and without any recourse to service provider. It is not, however, the case of the revenue and rightly so, that such a condition is satisfied on the facts of the present case. Learned Departmental Representative fairly accepts that it is not even the case of the authorities below that 'make available' clause is satisfied. ITA No. 203/Ahd/2014
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10. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee. The impugned demand raised under Section 201 r.w.s. 195, accordingly, stand quashed.
11. In the result, the appeal is allowed. Pronounced in the open Court on this 28th day of March, 2017.
Sd/- Sd/-
Mahavir Prasad Pramod Kumar
(Judicial Member) (Accountant Member)
Ahmedabad, the 28 th day of March, 2017
Bt*
Copies to: (1) The appellant
(2) The respondent
(3) Commissioner
(4) CIT(A)
(5) Departmental Representative
(6) Guard File
By order
TRUE COPY
Assistant Registrar
Income Tax Appellate Tribunal
Ahmedabad benches, Ahmedabad
1. Date of dictation: ....Nine pages manuscript of Hon'ble AM attached... 27.03.2017
2. Date on which the typed draft is placed before the Dictating Member: ..28.03.2017.........
3. Date on which the approved draft comes to the Sr. P.S./P.S.: ...28.03.2017....... .
4. Date on which the fair order is placed before the Dictating Member for Pronouncement: .......... 28.03.2017................
5. Date on which the file goes to the Bench Clerk : ... .. 28.03.2017..
6. Date on which the file goes to the Head Clerk : ..................................
7. The date on which the file goes to the Assistant Registrar for signature on the order: ..........................
8. Date of Despatch of the Order: ........................