2017 (6) TMI 876 - HC - Income Tax

TDS u/s 195 - Taxability as royalty or FTS - outright purchase - payment made towards supply of design and drawings to a nonresident architect firm - DTAA - P.E. in India - Held that - Payment has been made by assessee to M/s. Naimisha directly for supply of drawings and design as per clause / Article 4.3 of the agreement dated 5.6.2000 and different amounts were required to be paid / paid with respect to different designs and drawings for different components of the project viz. InfotowerI, Infotower II etc. It is required to be noted that even Bob Snow & Associates is not signatory to the agreement dated 5.6.2000 and agreement / contract dated 5.6.2000 is between the assessee and M/s. Naimisha only. Under the circumstances, the payment made by the assessee towards supply of design and drawings to M/s. Naimisha and the payment made under the agreement dated 5.6.2000 is rightly held to be outright purchase and not as a Royalty taxable under Section 9(1) of the Income Tax Act on which, the TDS was required to be deducted. Decided in favour of the assessee Payment to non resident for marketing activity as a reimbursement expenses - expenses were part and parcel of technical service related to income earned in India - Held that - From the agreement, it appears that there is no service rendered by CII to the assessee. The assessee has not received any service and therefore, the question of utilization of service does not arise. The assessee was only to reimbursement expenses incurred by the CII. Therefore, when CII has not rendered any service to the assessee there is no question of treating the concerned expenses as if it is for rendering service by CII to assessee. Therefore, learned Tribunal as such has not committed any error in not treating the same as if it is for providing service by CII to assessee. The provision of Section 9(1) (vi)(vii) shall not have any application as the amount paid is neither Royalty nor fees for technical service (FTS) but is a business income. Therefore, the provision of Section 9 of the Income Tax Act also shall not be applicable as no income arise in India to CII and / or income does not accrue or arise in India. Tribunal has not committed any error in holding that the payment was made towards reimbursement of expenses and not reimbursement of service. We see no reason to interfere with the view taken by the learned Tribunal while holding that the payment in question made was towards reimbursement or expenses and not reimbursement of service. - Decided in favour of assessee

Issues Involved:
1. Whether the payment made towards the supply of design and drawings to a non-resident architect firm was an outright purchase and not taxable as royalty or fees for technical services (FTS) under Section 9(1) of the Income Tax Act, 1961.
2. Whether the payment to a non-resident for marketing activity was a reimbursement of expenses, especially when expenses were part and parcel of technical service related to income earned in India.

Issue-Wise Detailed Analysis:

1. Payment for Design and Drawings: Outright Purchase or Royalty/FTS

The core issue was whether the payment made by the assessee to a non-resident firm for design and drawings was an outright purchase or should be considered as royalty or FTS under Section 9(1) of the Income Tax Act, 1961. The assessee, engaged in a joint venture with the Government of Gujarat for developing an Information Technology Park, entered into an agreement with M/s. Naimisha Construction Inc., USA for the supply of design and drawings.

The Assessing Officer (AO) contended that the payments made were for technical services and therefore taxable under Section 9(1)(vii) of the Act and Article 12 of the Indo-USA DTAA. However, the CIT(A) and ITAT both held that the payments were for outright purchase of designs and drawings, not for technical services. The tribunal relied on its earlier decision in ITO vs. Heubach Colour Pvt Ltd, where it was held that outright purchase of designs and drawings does not attract provisions of Section 9 r.w.s. 195 of the Act.

The High Court upheld the ITAT's decision, noting that the agreement between the assessee and M/s. Naimisha was for the outright purchase of design and drawings. The court emphasized that the designs and drawings were procured by M/s. Naimisha from Bob Snow Associates, Architects, and then sold to the assessee. The court found that the transaction was a sale of goods and not a provision of services, thus not taxable as royalty or FTS under Section 9(1) of the Act.

2. Payment for Marketing Activity: Reimbursement of Expenses or Technical Service

The second issue was whether the payment to a non-resident for marketing activities was a reimbursement of expenses or a payment for technical services. The assessee had reimbursed Creative IT Inc., USA (CII) for marketing expenses related to the Infocity project. The AO argued that these payments were for technical services and thus taxable under Section 9(1)(vii) of the Act and Article 12 of the Indo-USA DTAA.

The CIT(A) and ITAT found that the payments were reimbursements for expenses incurred by CII, supported by vouchers and certified by accountants in both the USA and India. The High Court upheld this finding, noting that the agreement between the assessee and CII was for reimbursement of expenses and not for the provision of services. The court observed that CII had no business activity or permanent establishment in India, and the payments were for business expenses, not for technical services.

The court concluded that the payments did not constitute income chargeable to tax in India under Section 9 of the Act, and thus, the provisions of Section 195 for TDS were not applicable.

Conclusion:

The High Court dismissed the appeal, answering both questions in favor of the assessee. The court held that the payments for design and drawings were for outright purchase and not taxable as royalty or FTS, and the payments for marketing activities were reimbursements of expenses and not for technical services.

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