2014 (2) TMI 933 - AT - Income Tax

Assessee prevails as remittance for Design Documentation not subject to withholding tax

Deepak Fertilizers and Petrochemicals Corporation Limited Versus DDIT, (Int. Tax) -I, Pune

The Tribunal ruled in favor of the assessee, stating that the remittance for acquisition of Process Design Documentation was not liable for withholding ... Whether the amount paid for acquisition of Process Design Documentation is fee for technical services - assessee had pleaded that the impugned portion of the consideration is for the supply of drawings, designs and detailed engineering services for the erection of the 'plant' for the manufacture of the licensed products and, therefore, the same constitutes a 'plant' and in terms thereof no income accrues in India to the foreign collaborator. - Held that:- The learned Departmental Representative has not referred to any incriminating material or evidence to demonstrate that the bifurcation made out in the supplementary agreements was with any mala fide intentions - Assessee is not liable to make such payment on such deduction of tax on said amount of remittance - Decided in favour of assessee. Issues:1. Taxability of remittance to foreign collaborator for acquisition of Process Design Documentation.2. Categorization of payment as 'fees for technical services' and 'consultancy services' under Income Tax Act.3. Applicability of withholding tax on the remittance made to the foreign collaborator.4. Interpretation of the agreement terms and nature of services provided by the foreign collaborator.Issue 1: Taxability of RemittanceThe appeal was filed against the order of the Commissioner of Income Tax regarding the taxability of the remittance made to a foreign collaborator for the acquisition of Process Design Documentation. The agreement between the assessee and the foreign collaborator involved payment on a net of tax basis. The contention was whether the remittance constituted fees for technical services and was thus liable for withholding tax in India.Issue 2: Categorization of PaymentThe Assessing Officer categorized the payment under two components: license fee and basic engineering cost with technical assistance. The revenue authorities argued that the payment for basic engineering and technical assistance did not involve the purchase of know-how, as the intellectual rights remained with the foreign collaborator. The services provided included technical assistance for erection, mechanical completion of the plant, and personnel training, which were deemed essential for plant performance. Consequently, the payment was considered 'fees for technical services' and 'consultancy services' under section 9(1)(vii) of the Income Tax Act.Issue 3: Withholding Tax ApplicabilityThe Commissioner of Income Tax (Appeals) held that the remittance was taxable under section 9(1)(vii) as services were rendered in India, and thus, withholding tax was applicable. The appellant had already paid tax on the remittance but denied liability to deduct tax. The decision was based on the nature of services provided and the applicability of tax laws to such payments.Issue 4: Interpretation of Agreement TermsThe Tribunal analyzed a similar case involving a foreign collaborator and the nature of remittance for technical services. The Tribunal emphasized that the consideration for technical know-how and engineering services was crucial in determining tax liability. The Tribunal found no merit in the revenue's argument against the bifurcation of consideration and upheld the plea of the assessee regarding the nature of payment for technical services.In conclusion, the Tribunal allowed the appeal, ruling in favor of the assessee, stating that the remittance for acquisition of Process Design Documentation was not liable for withholding tax in India. The decision was based on the interpretation of the agreement terms, nature of services provided, and the applicability of tax laws to such transactions.