2014 (4) TMI 160 - AT - Income Tax

Withholding Tax (TDS) u/s 195 - FTS u/s 9(1)(vii) - Levy of demand u/s 201 and 201(1A) of the Act Payments made to foreign companies Held that - The payments received by it from foreign clients for exactly the similar work executed by it have not been subjected to withholding tax nor was it called upon to file its return by the several countries from the residents of which assessee received payments for services rendered by it -there was no element of any Technical Services in the production of animation films nor in the production of a part or certain episodes of an animation film so to attract the provision of Section 9(1) (vii) read with Section 5(2)(b) of the Act - just because such expertise, knowledge, technology and experience is possessed by the said party and the same has been utilized for rendering the services, it cannot be said that the services so rendered are in the nature of technical and consultancy services without making any technology available to the other party - The payment paid by the assessee-company or any part could not be treated as fees for included services within the meaning of fees for technical services defined in section 9(1)(vii) of the Act . The AO s attempt to raise demands u/s 201 is not correct - Even explanation-1 to section 9(1) excludes the income pertaining to operations carried out outside India - The foreign parties have not done any activity in India nor they have any PE in India - As there is no liability to deduct tax on the amounts paid u/s 195, it is not correct on the part of AO to raise demands - The AO it seems had issued notice u/s 201 (1) in respect of payments by assessee to TV Arts also and on explanation by the assessee that it was the payments resulted in income from business, the proceedings were dropped - The submission of the assessee that regard to T.V. Arts relied on Article 7 of DTAA between India & Philippines which applies to business income of non-residents i.e T.V. Arts and submitted that tax was not deducted as it was not taxable is accepted - Non-liability to TDS was not because of lack of article for FTS in DTAA, but because of application of Article 7 the order of the CIT(A) upheld Decided against Revenue.

Issues Involved:
1. Levy of demands under Section 201 and 201(1A) on payments made to foreign companies.
2. Classification of payments as 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act.
3. Applicability of Double Taxation Avoidance Agreement (DTAA) with China and Hong Kong.
4. Determination of the source of income and its taxability in India.
5. Applicability of Article 17 of the Indo-China DTAA.

Issue-wise Detailed Analysis:

1. Levy of Demands under Section 201 and 201(1A):
The primary issue in these appeals was the levy of demands under Section 201 and 201(1A) on the payments made by the assessee to foreign companies in the financial years 2005-06 and 2006-07. The ADIT (Intl. Taxation) raised demands against payments made to "Hong Guang Animation Co. Ltd., China (HGA)" and "Maximum International Animation Division and Club Exchange, Hongkong (MI&GE)". The orders were passed company-wise rather than assessment year/financial year-wise.

2. Classification of Payments as 'Fees for Technical Services':
The Revenue contended that the payments made to HGA and MI&GE fell under 'fees for technical services' as defined under Section 9(1)(vii) of the Income Tax Act. The CIT(A) held that there was no element of technical services in the production of animation films. The CIT(A) observed that the production materials delivered by MI/GE were based on the delivery elements furnished by the assessee and did not involve any technical services as defined under the Act. The CIT(A) also noted that the payments made were in the course of business activities and did not have any business connection or PE in India.

3. Applicability of DTAA with China and Hong Kong:
The CIT(A) considered the applicability of the DTAA with China and Hong Kong. It was observed that the payments made to HGA and MI&GE were not taxable in India under the DTAA provisions. The CIT(A) referred to Article 17 of the Indo-China DTAA, which governs the taxation of income derived by artistes and entertainers. The CIT(A) concluded that the payments made to HGA were for services rendered by animation experts, who could be considered as motion picture or theatre artistes, and thus, the income was taxable only in China.

4. Determination of the Source of Income and its Taxability in India:
The CIT(A) analyzed the source of income and its taxability in India. It was observed that the assessee's business with its overseas clients constituted a business carried on by a resident outside India. The CIT(A) held that the payments made to MI&GE and HGA fell under the exception provided in Section 9(1)(vii)(b) of the Act, as the payments were made for services utilized in a business carried on outside India or for earning income from a source outside India. The CIT(A) also noted that the foreign companies did not have any PE in India, and thus, the payments were not taxable in India.

5. Applicability of Article 17 of the Indo-China DTAA:
The CIT(A) examined the applicability of Article 17 of the Indo-China DTAA, which deals with the taxation of income derived by entertainers and artistes. The CIT(A) concluded that the payments made to HGA were for services rendered by animation experts, who could be classified as motion picture or theatre artistes. Therefore, the income was taxable only in China, and the provisions of Article 17.2 of the Indo-China DTAA governed the transaction.

Conclusion:
The Tribunal upheld the findings of the CIT(A) and dismissed the Revenue's appeals. It was held that the payments made to HGA and MI&GE were not taxable in India as 'fees for technical services' under Section 9(1)(vii) of the Act. The Tribunal agreed that the payments fell under the exception provided in Section 9(1)(vii)(b) and were governed by the DTAA provisions. The cross-objections raised by the assessee were treated as academic and dismissed. The order pronounced in the open court on 28.03.2014.

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