2016 (11) TMI 1358 - AT - Income Tax

TDS u/s 195 - nature of payment made - reimbursement of expenses or payment towards product development fees to assessee - Double Taxation Avoidance Agreement - falling under the ambit of the term FTS - non deduction of tds - assessee treated as assessee in default under Section 201(1) and 201(1A) - Held that - The payment in question were made by the assessee in respect of research and development and operation towards clinical trial carried out by the Malaysian subsidiary of the assessee. As per the tripartite Memorandum of Understanding (MOU) between the assessee, its Malaysian subsidiary and Cipla, it was agreed upon between the parties that Cipla would make the payment towards product development fees to assessee to be utilized by it for its clinical trial, research and development and operational expenditure in India as well as in Malaysia. There is no dispute that as per the MOU between the parties, the cost of R & D as well as clinical trials undertaken by the assessee and its Malaysian subsidiary was to be borne by Cipla and in turn outcome of the R & D as well as clinical trials will be belonging to Cipla. Thus the outcome product of the R & D as well as clinical trials would not belong to the assessee or its subsidiary but the Cipla had the right over the same. Therefore the Cipla has right to acquire the outcome in the shape of technical information, technology documentation, know how and process involved in all clinical R&D. Though the assessee has reimbursed the expenses to its subsidiary however in case the payment is considered as tax for technical services then the element of profit becomes irrelevant as the gross payment is taxable. Thus it is clear under Article 13(3) of DTAA in question there is no clause of make available and the terms FTS means payment of any kind in consideration for rendering of managerial, technical or consultancy services/provision for services by technical or other personnel. Conducting clinical trials & R&D is clearly a service which is technical in nature therefore providing the outcome of the research to Cipla through the assessee clearly falls under the ambit of the term FTS as per the Article 13 of the DTAA between India & Malaysia. Thus, we do not find any error or infirmity in the orders of the authorities below in holding that the payment in question is FTS and consequently the assessee was liable to deduct tax at source under Section 195 of the Act. - Decided against assessee

Summary

Issues Involved:
1. Whether the reimbursement costs should be treated as technical fees.
2. Whether the payments made to a Malaysian company towards reimbursement of expenses are taxable under the Double Taxation Avoidance Agreement (DTAA) as technical fees.
3. Whether the assessee is liable as an 'assessee in default' under Section 201(1) and 201(1A) read with Section 195 of the Income Tax Act, 1961 for not deducting tax at source.

Issue-wise Detailed Analysis:

1. Treatment of Reimbursement Costs as Technical Fees:
The assessee argued that the reimbursement of expenses to its Malaysian subsidiary, SRM, Malaysia, was not in the nature of Fees for Technical Services (FTS) but mere reimbursement of actual costs. The Assessing Officer (AO) treated these reimbursements as FTS, taxable in India, and held the assessee liable for not deducting tax at source under Section 195 of the Income Tax Act. The AO's stance was based on the interpretation that the payments were for technical services rendered by the subsidiary, which required tax deduction at source. The CIT (Appeals) upheld this view, emphasizing that the payments were indeed FTS under both the Income Tax Act and the Indo-Malaysian DTAA.

2. Taxability under DTAA:
The assessee contended that the payments were not taxable under the DTAA as technical fees because the services were utilized for business carried out outside India. The Tribunal, however, noted that the payments were for clinical trials and R&D activities conducted by the Malaysian subsidiary, which were technical in nature. The Tribunal referenced Article 13 of the Indo-Malaysian DTAA, which defines FTS as payments for managerial, technical, or consultancy services. The Tribunal concluded that the services provided by the Malaysian subsidiary fell within this definition, making the payments taxable in India.

3. Liability as 'Assessee in Default':
The Tribunal upheld the AO's decision that the assessee was liable as an 'assessee in default' under Section 201(1) and 201(1A) for failing to deduct tax at source. The Tribunal rejected the assessee's reliance on various judicial precedents, noting that the facts of those cases were distinguishable. The Tribunal emphasized that under the DTAA, the gross payment for technical services was taxable, and the absence of a Permanent Establishment (PE) in India did not exempt the payments from tax deduction obligations.

Conclusion:
The Tribunal dismissed the appeals of the assessee, affirming the AO's and CIT (Appeals)'s decisions. The Tribunal held that the payments made to the Malaysian subsidiary were indeed FTS under the Income Tax Act and the Indo-Malaysian DTAA, and the assessee was obligated to deduct tax at source. The Tribunal's decision was based on a thorough examination of the tripartite agreement, the nature of the services provided, and the relevant tax provisions. The Tribunal also referenced the decision of the Hyderabad Bench in a similar case, reinforcing the view that the payments were taxable as FTS.

Order Pronouncement:
The order was pronounced in the open court on the 16th day of September, 2016.