2007 (10) TMI 452 - AT - Income Tax

Income deemed to accrue or arise in India - Liability to Deduct tax at source u/s 195 - non-resident in India - remittance towards rating fees - whether the remittance for the services provided by Moody s by providing commercial information falls within the category of ''fees for included services'' defined in article 12 of DTAA with USA? - HELD THAT - For bringing any payment within the definition of fee for included services the non-resident must make available the technical skill, expertise or technical know-how to the assessee, on the basis of which non-resident has prepared or developed the commercial information. Undisputedly in the instant case the technical skill, expertise or technical know-how used in preparing the commercial information was not made available to the assessee and hence the remittance made by the assessee for obtaining such commercial information cannot be called to be the fees for the included services to make it chargeable to tax in India. We have also examined the judgment referred to by the assessee in the case of Raymond Ltd. 2002 (4) TMI 891 - ITAT MUMBAI in which the Tribunal has taken a similar view that although the services rendered by the lead manager and other managers of a foreign company in connection with GDR issue of the assessee company are managerial or consultancy service and falls within the definition of technical services under section 9(1)( vii ) read with Explanation 2 thereto, said payments do not fall within the definition of fees for technical services under article 13 4( c ) of the DTAA with UK which is applicable to the facts of the case and were not taxable in India. Thus, we are of the considered view that remittance made in the instant case are not in the nature of fees for included services as such are not taxable in India. We, therefore, of the view that the assessee cannot be held to be responsible/liable for deduction of tax u/s 195 of the Act. We accordingly, set aside the order of CIT(A). In the result, appeal of the assessee is allowed.

Issues Involved:
1. Liability to deduct tax under section 195 of the Income-tax Act on remittance of US $45,000 towards rating fees to Moody's Investors Service.
2. Classification of the rating fees under the Double Taxation Avoidance Agreement (DTAA) between India and USA - whether as business profits under Article 7 or as royalties and fees for included services under Article 12.
3. Applicability of the "make available" clause under Article 12 of the DTAA and its impact on tax deduction requirements.

Issue-wise Detailed Analysis:

1. Liability to Deduct Tax under Section 195 of the Income-tax Act:
The core issue is whether the remittance of US $45,000 towards rating fees to Moody's Investors Service is taxable in India, thereby necessitating the deduction of tax at source under section 195 of the Income-tax Act. The assessee argued that no tax deduction was required as Moody's activities and the payment were situated outside India. However, the Assessing Officer held that the payment was covered under section 9(1)(vii)(b) of the Act, which deals with fees for technical services, thus requiring tax deduction.

2. Classification under DTAA - Article 7 vs. Article 12:
The assessee contended that the rating fees should be classified as business profits under Article 7 of the DTAA between India and USA, which are not taxable in India in the absence of a permanent establishment. The CIT(A), however, classified the fees under Article 12 as "royalties and fees for included services." The Tribunal examined whether the services provided by Moody's constituted "fees for included services" as defined in Article 12(4) of the DTAA.

3. Applicability of the "Make Available" Clause under Article 12:
The Tribunal scrutinized whether the technical knowledge, experience, skill, know-how, or process was made available to the assessee, as required by Article 12(4)(b) of the DTAA. The assessee argued that the rating services did not transfer any technical expertise or process to them; they merely received commercial information. The Tribunal referred to the Memorandum of Understanding (MOU) concerning fees for included services, which clarifies that the provision of technical input alone does not constitute making technology available unless the recipient can apply the technology independently.

Tribunal's Findings:
1. Liability to Deduct Tax: The Tribunal concluded that Moody's did not carry on any business or profession in India and did not have a permanent establishment in India. Therefore, the business profits earned by Moody's were not taxable in India, and the provisions of section 195 were not applicable.

2. Classification under DTAA: The Tribunal held that the rating fees paid to Moody's did not fall under the definition of "fees for included services" as per Article 12 of the DTAA. The services rendered by Moody's were commercial information services and did not involve the transfer of technical knowledge or expertise to the assessee.

3. "Make Available" Clause: The Tribunal emphasized that for a service to be classified as "fees for included services," the technical knowledge or expertise must be made available to the recipient, enabling them to apply it independently. In this case, Moody's did not make any technical knowledge or expertise available to the assessee; they only provided commercial information.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the order of the CIT(A). It was determined that the remittance of US $45,000 to Moody's Investors Service did not constitute "fees for included services" under Article 12 of the DTAA and was not taxable in India. Consequently, the assessee was not liable to deduct tax under section 195 of the Income-tax Act.

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