2012 (11) TMI 675 - AT - Income Tax

Technical or Consultancy Service Deduction of TDS u/s 195 - Whether US company, which incidentally was a subsidiary of the assessee, was rendering any technical services, which warranted a deduction of tax at source, in accordance with Section 195 of the Act Held that - Technical or Consultancy Service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. In other words, payment of consideration would be regarded as fee for technical included services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. The scope of work would show that different types of services were rendered by the subsidiary in USA. With regard to the Marketing Agreement, and Overseas Services Agreement, no part thereof was having income element which was chargeable to tax under the provisions of Income-tax Act in India in view of Article 12.4 of DTAA. Therefore, insofar as payments made against bills raised by the non-resident entity of the assessee based on these two agreements, assessee could never be fastened with liability to deduct tax at source. However, for the second agreement, namely, Offshore Development (Facilitation) Agreement , one of the items of services rendered by the entity abroad could have an element of income chargeable to tax in India, since it could involve making available technical services to the assessee in India. If the services rendered by the entity abroad with regard to the said agreement were such that technical skills were made available to the assessee in India, then of course, Section 195 of the Act will apply. Assessee having not made any application under Section 195(2) of the Act, it could be fastened with a failure to deduct tax at source as specified under Section 195 of the Act. Then of course, rigours of Section 40(a)(i) would be attracted - Orders of authorities are set aside and remit the issue insofar as it relates to payments made by the assessee to its subsidiary abroad with regard to Offshore Development (Facilitation) Agreement back to the file of the A.O. for consideration afresh in the light of DTAA between India and USA, in accordance with law - In the result, appeal of Revenue is partly allowed for statistical purposes.

Summary

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.