2012 (11) TMI 675 - AT - Income Tax

Tax Tribunal: Marketing & Overseas Agreements not technical services under DTAA. Offshore Development Agreement under review.

Assistant Commissioner of Income-tax, Company Circle III(2), Chennai Versus TexTech International (P.) Ltd.

Assistant Commissioner of Income-tax, Company Circle III(2), Chennai Versus TexTech International (P.) Ltd. - TMI Issues Involved:1. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961 for payments made to M/s Tex Tech Inc. USA without deducting tax at source.2. Applicability of Section 195 of the Income-tax Act, 1961.3. Interpretation of 'fees for technical services' under Explanation 2 to Section 9(i)(vii) of the Income-tax Act and Article 12.4 of the Indo-US Double Taxation Avoidance Agreement (DTAA).Detailed Analysis:1. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961:The Revenue's primary grievance was the deletion of a disallowance made by the Assessing Officer (A.O.) under Section 40(a)(i) of the Income-tax Act, 1961. The A.O. had disallowed the outsourcing cost of Rs. 4,69,91,994/- paid by the assessee to M/s Tex Tech Inc. USA, a subsidiary company, on the grounds that tax was not deducted at source on these payments. The A.O. asserted that the services rendered by M/s Tex Tech Inc. USA fell within the definition of 'technical services' under Explanation 2 to Section 9(i)(vii) of the Act, and thus, tax should have been deducted at source.2. Applicability of Section 195 of the Income-tax Act, 1961:The assessee contended that the payments to M/s Tex Tech Inc. USA did not fall within the definition of 'technical services' and thus were not subject to tax deduction at source under Section 195 of the Act. The assessee argued that M/s Tex Tech Inc. USA was only involved in collecting input materials, scanning manuscripts, and uploading them for typesetting in India, which did not constitute technical services. The A.O., however, held that the services rendered were technical and that the assessee should have sought a certificate under Section 195(2) or 195(3) if it believed no tax was required to be deducted.3. Interpretation of 'fees for technical services' under Explanation 2 to Section 9(i)(vii) and Article 12.4 of the Indo-US DTAA:The CIT(Appeals) sided with the assessee, stating that the services rendered did not fall under the definition of 'fees for technical services' as per Article 12.4 of the Indo-US DTAA. The CIT(A) emphasized the 'make available' clause in the DTAA, which requires that technical knowledge or expertise must be made available to the assessee for the payments to be considered fees for technical services.The Tribunal analyzed the three agreements between the assessee and M/s Tex Tech Inc. USA:- Marketing Agreement: Involved support services such as billing, payment collection, and market research, which did not constitute technical services.- Offshore Development (Facilitation) Agreement: Involved processing customer materials, preparing instructions, and uploading files for e-publishing. The Tribunal noted that while some services under this agreement might involve technical know-how, they did not necessarily make technical expertise available to the assessee.- Overseas Services Agreement: Involved turnkey services where the US subsidiary handled the entire process from receiving manuscripts to dispatching final products. The Tribunal found that these services did not make technical knowledge available to the assessee.The Tribunal referred to the decision of the Hon'ble Karnataka High Court in the case of De Beers India Minerals (P.) Ltd., which clarified that for services to be considered 'made available,' the technical knowledge must be imparted to and absorbed by the recipient, providing an enduring benefit.Conclusion:The Tribunal concluded that the services under the Marketing Agreement and Overseas Services Agreement did not constitute technical services as per the DTAA. However, for the Offshore Development (Facilitation) Agreement, the Tribunal remitted the issue back to the A.O. to determine if any services rendered under this agreement involved making technical knowledge available to the assessee. If so, the assessee would be liable to deduct tax at source under Section 195, and the disallowance under Section 40(a)(i) would be applicable.Result:The appeal of the Revenue was partly allowed for statistical purposes, with the matter regarding the Offshore Development (Facilitation) Agreement remitted back to the A.O. for fresh consideration in light of the DTAA between India and the USA.