2013 (11) TMI 515 - AT - Income Tax

Tribunal rules in favor of Assessee on taxability of receipts from services under Indo-U.S. DTAA

Harvard Medical International Inc. Versus Dy. Commissioner Income Tax International Taxation–3 (1), Mumbai

Harvard Medical International Inc. Versus Dy. Commissioner Income Tax International Taxation–3 (1), Mumbai - TMI Issues Involved:1. Taxability of the sum of US$ 9,82,500 received by the Assessee from Max India Ltd., Wockhardt Hospitals Ltd., and Sri Ramachandra Medical College & Research Institute.2. Applicability of Permanent Establishment (P.E) in terms of Article-5 r/w Article-7 of Indo-U.S. DTAA.3. Nature of receipts as 'Fees for Included Services' (FIS) under Article 12(4)(b) or as 'Royalty'.4. Taxability of reimbursement of expenses.5. Levy of interest under section 234B of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of the sum of US$ 9,82,500:The Assessee, a non-resident corporation incorporated under the laws of Massachusetts, U.S.A., received US$ 9,82,500 from Max India Ltd., Wockhardt Hospitals Ltd., and Sri Ramachandra Medical College & Research Institute. The Assessee contended that these receipts were not taxable in India due to the absence of a Permanent Establishment (P.E) as per Article-5 r/w Article-7 of Indo-U.S. DTAA. Additionally, it was argued that the receipts were neither 'Fees for Included Services' (FIS) under Article 12(4)(b) nor 'Royalty'.2. Applicability of Permanent Establishment (P.E):The Assessee claimed that it did not have a Permanent Establishment in India, thus the income should not be taxed under Article-7 as 'Business Profits'. The Tribunal upheld this view, stating that since the Assessee does not have a P.E. in India, the incomes arising cannot be taxed under Article-7.3. Nature of Receipts as 'Fees for Included Services' (FIS) or 'Royalty':The Assessing Officer categorized part of the receipts as 'Royalty' and part as 'FIS', leading to an addition of Rs. 4,59,35,280 after converting the amount into INR. However, the Tribunal, after reviewing the agreements and services provided, found that the services rendered to Max India Ltd. and Wockhardt Hospitals Ltd. were purely advisory and did not involve making available any technical knowledge, skill, or experience. This was consistent with previous Tribunal decisions for assessment years 2000-01, 2002-03, and 2003-04. Therefore, these receipts were not taxable as 'FIS' or 'Royalty'.For Sri Ramachandra Medical College & Research Institute, the Tribunal noted that the agreement was similar to those with Max India Ltd. and Wockhardt Hospitals Ltd., and thus, the receipts were not taxable as 'Royalty' or 'FIS'.4. Taxability of Reimbursement of Expenses:The Assessee received US$ 28695.39 as reimbursement of expenses. The Tribunal held that since the primary payments were not taxable as 'FIS' or 'Royalty', the reimbursement of expenses also could not be taxed.5. Levy of Interest under Section 234B:The Tribunal agreed with the Assessee that since the entire amount was subjected to TDS, there was no liability to pay advance tax under section 208. Consequently, the provisions of section 234B were not applicable, and the levy of interest was rightly deleted by the Commissioner (Appeals).Conclusion:The Tribunal allowed the Assessee's appeal, holding that the receipts from Max India Ltd., Wockhardt Hospitals Ltd., and Sri Ramachandra Medical College & Research Institute were not taxable in India as 'FIS' or 'Royalty', and the reimbursement of expenses was also not taxable. The Revenue's appeal was dismissed, and it was confirmed that no interest under section 234B was leviable. The judgment emphasized the importance of the nature of services and the absence of a Permanent Establishment in determining taxability under the Indo-U.S. DTAA.