2013 (2) TMI 603 - AT - Income Tax

TDS on fees for technical services - DTAA between India and UK - whether the agreement entered into by the assessee and Xennia was about purchase for machinery only or it dealt with something more than that ? Held that - Referring to the terms of the agreement clearly prove that Xennia had supplied the technology to the assessee. Not only the assessee was using it, it had the right over the Intellectual Property also. Agreement entered in to by the assessee-company allowed it to file patent application, design application or any such application for intellectual property rights arising out of foreground IP . In these circumstances, the view of FAA is to be agreed that the transaction was not for sale of printer only & it included the technology also. When a particular technology was made available to the assessee by Xennia exclusively, it cannot be said that the agreement was only for sale of printer. Therefore, upholding the order of the FAA, effective Ground of appeal i.e. Ground No.1 decided against the assessee. @ 15% or 10% as prescribed in section 115A(1)(b)(BB)- Perusing the provisions of the Act to be covered u/s. 115A(1)(b)(BB) as per the said provisions, tax on dividends, royalty and technical service fees in case of foreign companies has to be computed in a particular manner, if it is entered in to after a particular date. As neither the AO nor the FAA had any occasion to deal with the issue. Assessee had also not raised it before the FAA. So, in the interest of justice be restored to the file of the AO for the limited purpose of deciding the question of applicability of lower rate of tax for the transaction-in-question - in favour of assessee by way of remand.

Summary

Issues:
1. Whether the payment made by the assessee to Xennia Technology Ltd. is in the nature of royalty or fees for technical services, and if tax deduction at source is applicable.
2. Whether the correct rate of tax deduction at source should be 10% or 15% as per the provisions of the Income-tax Act, 1961.

Analysis:

Issue 1:
The assessee, engaged in manufacturing two and three wheelers, entered into an agreement with Xennia Technology Ltd. for developing inkjet printers and inks. The Assessing Officer (AO) held that the payment made by the assessee to Xennia was for technical services and subject to tax deduction at 15% under the DTAA between India and the UK. The First Appellate Authority (FAA) affirmed this decision, stating that the payment was for technical services and fell under the purview of royalty/fees for technical services as per the Income-tax Act. The FAA distinguished previous cases cited by the assessee, emphasizing the transfer of intellectual property rights in the present case. The Authorized Representative (AR) argued that the payment was for the entire procedure and that the intellectual property existed at the project's conclusion. The Departmental Representative (DR) contended that the agreement was for fees for technical services and that the technical knowledge was proprietary. The tribunal agreed with the FAA, concluding that the agreement involved the purchase of technology in addition to the printer, thus upholding the tax deduction at 15%.

Issue 2:
Regarding the correct rate of tax deduction at source, the tribunal noted that the lower rate of 10% as per Section 115A(1)(b)(BB) of the Act was not considered by the AO or the FAA. The tribunal decided to restore this issue to the AO for determining the applicability of the lower tax rate for the transaction. Consequently, the additional ground raised by the assessee regarding the tax deduction rate was partially allowed in favor of the assessee.

In conclusion, the tribunal partly allowed the appeal filed by the assessee, upholding the tax deduction at 15% for the payment to Xennia as fees for technical services while directing a review of the tax deduction rate to consider the lower rate of 10% as per Section 115A(1)(b)(BB) for the transaction.