2016 (9) TMI 349 - AAR - Income Tax

Withholding of tax at source under section 195 - Fees for Technical Services - service fee payable by the Applicant to DRL Russia under the Service agreement - India-Russia DTA - Held that - The stand of the Department is based on the assumption that the reports of medical representatives of DRL Russia are sent to India which is being utilized in India for the purpose of brand promotion in Russia. The Department has further assumed that the marketing services for research agreement and marketing services for promotion of goods agreement are interconnected and they together constitute marketing services. According to the Department the marketing research team prepares presentations for the purpose of utilization by medical representatives when they make field visits and such presentations highlight the advantages that brand of DRL India have over other similar products of the competitors. During the course of hearing we repeatedly asked the CIT (IT & TP), Hyderabad, Mr. Singhania, whether he had any evidence to support his assumptions, particularly the fact that reports prepared by the product promotion team were in respect of brand promotion and were utilized in India by the applicant. He could not produce any. It is also noticed that the Department had conducted a survey u/s 133A of the IT Act in the business premises of the applicant but could not find any such evidence and did not even ask any question relating to this aspect in the statements recorded of senior executives. The services rendered by DRL Russia in respect of agreement for promotion of goods cannot be treated as fees for technical services, it is not necessary to go into the argument whether such services will be covered by exception u/s 9(1)(vii)(b) of the Act though the applicant has argued that his case is covered by exception. However, it is suffice to say that the stand and argument of the applicant is completely faulty mainly because the product promotion agreement dated 30.1.2014 cannot be related with distribution agreement dated 16.2.2012 signed two years ago, under which exports were made. Therefore it cannot be said that service fees under product promotion agreement were paid in order to promote its products for enhancing export in Russian market The service fee payable by the applicant to DRL Russia under the agreement for promotion of goods cannot be regarded for the purpose of fees for technical services. The service fee paid by the applicant to DRL Russia is not taxable either under Article 7 or Article 22 of the India-Russia DTAA.

Issues Involved:
1. Classification of service fee as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961.
2. Classification of service fee as FTS under Article 12 of the India-Russia Double Taxation Avoidance Agreement (DTAA).
3. Taxability of service fee under Article 7 of the India-Russia DTAA.
4. Taxability of service fee under Article 22 of the India-Russia DTAA.
5. Applicability of Section 40(a)(i) of the Income-tax Act on the payment made by the Applicant to DRL Russia.

Detailed Analysis:

Issue 1: Classification as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961
The applicant argued that DRL Russia's services were purely promotional and did not involve managerial, technical, or consultancy services. The Department initially agreed but later contended that the services were technical. The ruling emphasized that the services rendered by DRL Russia were executory in nature, involving meetings with doctors and pharmacies, and did not involve managerial, technical, or consultancy services. Therefore, the service fee could not be classified as FTS under Section 9(1)(vii).

Issue 2: Classification as FTS under Article 12 of the India-Russia DTAA
Article 12 of the DTAA defines FTS similarly to the Income-tax Act. The applicant maintained that the services were not managerial, technical, or consultancy in nature and thus did not fall under FTS. The ruling supported this view, stating that the services did not involve any advice or opinion to the applicant and were purely promotional. Consequently, the service fee was not considered FTS under Article 12 of the DTAA.

Issue 3: Taxability under Article 7 of the India-Russia DTAA
The applicant contended that the service fee was business income and, in the absence of a Permanent Establishment (PE) in India, it was not taxable under Article 7. The Department did not provide substantial evidence to refute this. The ruling concluded that the service fee was not taxable under Article 7 as DRL Russia did not have a PE in India.

Issue 4: Taxability under Article 22 of the India-Russia DTAA
The applicant argued that since the service fee was business income, it could not be categorized as "other income" under Article 22. The Department did not present arguments against this. The ruling agreed with the applicant, stating that the service fee was not taxable under Article 22.

Issue 5: Applicability of Section 40(a)(i) of the Income-tax Act
As the service fee was not regarded as FTS and was not taxable under the DTAA, the question of applicability of Section 40(a)(i) did not arise. Therefore, this issue was deemed not applicable.

Conclusion:
The service fee payable by the applicant to DRL Russia under the agreement for promotion of goods was not regarded as Fees for Technical Services under Section 9(1)(vii) of the Income-tax Act or Article 12 of the India-Russia DTAA. The fee was not taxable under Article 7 or Article 22 of the DTAA. Consequently, the provisions of Section 40(a)(i) were not applicable. The ruling was pronounced on April 12, 2016.

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