2011 (11) TMI 507 - AT - Income Tax

Appeal allowed: Remittance not taxable as Fees for Technical Services

The Tribunal allowed the appeal ITA No.2811/M/2003, determining that the remittance was a reimbursement of expenses and not taxable as Fees for Technical ... Fees for technical services - reimbursements of expenses incurred for conducting market research to non resident deemed as fees for technical services – liability of TDS – assessee treated as agent of non- resident - Held that:- There was only a reference to the use of some of the aspects of LDV's product in the existing product of the assessee subject to certain change. This was only a business plan. The content of the note refers to market research and market research on acceptability of possible market for LDV products. Thus what was done was only market research. Also from research report of LDV's office at UK it was found that there was availability of Niche market for high Mini Buses and Vans in India. We fail to see how the CIT(A) based on the note referred to in his order can conclude that LDV provided technical assistance in improving the quality of Assessee's mini bus and move fully engineered minibus Payment in question was a reimbursement of expenses and was not in the nature of FTS as contended by the revenue. The law is well settled that in respect of reimbursement of expenses there is no obligation to deduct tax at source. Since the remittances by the assessee are not chargeable to tax in the hands of the Non- resident. Consequently the assessment of the sum in question in the hands of the assessee as agent of non-resident is held to be not correct - in favor of assessee. Issues Involved:1. Whether the assessee was correctly treated as an agent of a non-resident under Section 163 of the Income Tax Act, 1961.2. Whether the remittance made by the assessee to LDV Ltd. for market research was taxable as 'Fees for Technical Services' (FTS) under the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and the UK.3. Whether the remittance was a reimbursement of expenses and therefore not subject to tax deduction at source.4. Whether the assessee was liable to interest under Section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Treatment of Assessee as Agent of Non-Resident under Section 163:The appeal ITA No.7021/M/02 pertains to the proceedings under Section 163 of the Income Tax Act, where the assessee was treated as an agent of the non-resident, LDV Ltd. The Tribunal concluded that since the remittance in question was not taxable, the assessment of the sum in the hands of the assessee as an agent of LDV was incorrect. Consequently, the assessee's treatment as an agent of the non-resident did not require further adjudication.2. Taxability of Remittance as Fees for Technical Services (FTS):The primary contention was whether the remittance made by the assessee to LDV Ltd. for market research constituted 'Fees for Technical Services' under the Income Tax Act and the DTAA between India and the UK. The CIT(A) had held that the payment was part of fees for rendering technical services by LDV, referencing a note by the Executive Vice President of the assessee which discussed the strategic fit between the assessee and LDV, including technical assistance in improving the quality of their minibus.However, the Tribunal disagreed, stating that the market research was solely for assessing the acceptability and potential market for LDV products in India. The Tribunal emphasized that the payment was for market research and did not involve the transfer of technical knowledge, experience, skill, know-how, or processes. The Tribunal referred to the definition of FTS under Article 13(4) of the DTAA, which requires that technical knowledge must be 'made available' to the recipient. The Tribunal concluded that the market research did not 'make available' any technical knowledge to the assessee, and thus, the payment could not be classified as FTS.3. Reimbursement of Expenses:The Tribunal held that the remittance made by the assessee to LDV was a reimbursement of expenses incurred for conducting market research and was not in the nature of FTS. The Tribunal cited several judgments, including CIT v. Siemens Aktiongesellschaft, ABB Ltd., Inre, and ITO (Intl. Taxation) v. Prasad Production Ltd., which established that reimbursement of expenses does not attract tax deduction at source. Therefore, the remittance was not subject to tax deduction at source.4. Liability to Interest under Section 234B:Since the remittance was determined to be a reimbursement of expenses and not taxable, the Tribunal held that there was no liability to charge interest under Section 234B of the Act. The additional ground raised by the assessee regarding non-resident status and payments subject to TDS was deemed unnecessary for consideration.Conclusion:The Tribunal allowed the appeal ITA No.2811/M/2003, concluding that the remittance was a reimbursement of expenses and not taxable as FTS. Consequently, the appeal ITA No.7021/M/2002 was dismissed as infructuous. The Tribunal's decision emphasized that the remittance did not involve the transfer of technical knowledge and was not subject to tax deduction at source or interest under Section 234B.