2014 (11) TMI 404 - AT - Income Tax

Fees for technical services Indo-US DTAA - payment made to Netherlands Company M/s. NDDO Oncology BV for conducting pre-clinical research studies - Whether the payments are to be treated as fees for technical services under Article 12 of the DTAA or as business profits in terms of Article 7 of DTAA with USA and considered in those cases that the payments are in the nature of business receipts to be considered under Article 7 of the DTAA Held that - as rightly pointed out by the Ld. CIT(A), the DTAA between USA and India, Canada and India are entirely different with DTAAs of UK and Netherlands. These issues were clearly analysed by Ld. CIT(A) in the order. Assessee company is also silent on the enquiry made by Ld. CIT(A) with reference to transfer of knowledge as detailed in paras 26 and 28 of the order. Nothing was brought on record by assessee to counter the findings of Ld. CIT(A) and simply relied on the Coordinate Bench decision in the case of Dr. Reddy Laboratories 2013 (11) TMI 304 - ITAT HYDERABAD , which we notice that the facts are different. The payments made are taxable as fee for technical services. Since assessee has not deducted tax on the said payments, AO is correct in raising the demands u/s 201 and 201(1A). - Decided against assessee.

Issues Involved:
1. Application of Double Taxation Avoidance Agreements (DTAA)
2. Classification of payments as "fees for technical services"
3. Taxability of business income earned by foreign parties
4. Application of Section 9(1)(vii) and Section 5(2)(b) of the IT Act
5. Condonation of delay in filing the appeal
6. Relevance of agreements with foreign entities
7. Determination of tax liability under Section 201 and 201(1A)
8. Distinction between business income and fees for technical services
9. Transfer of technical know-how and intellectual property rights
10. Applicability of legal provisions and previous judgments

Detailed Analysis:

1. Application of Double Taxation Avoidance Agreements (DTAA):
The assessee argued that the payments made to foreign entities should be considered under the provisions of the relevant DTAA with the UK and Netherlands. The assessee contended that the payments did not qualify as "fees for technical services" under the DTAA, and thus, should not be taxed in India.

2. Classification of Payments as "Fees for Technical Services":
The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] classified the payments made to M/s. Simbec Research Ltd. and M/s. NDDO Oncology BV as "fees for technical services" under Section 9(1)(vii) of the IT Act and the respective DTAAs. The agreements indicated that the foreign entities provided technical know-how and intellectual property rights to the assessee, which constituted technical services.

3. Taxability of Business Income Earned by Foreign Parties:
The assessee claimed that the payments represented business income of the foreign parties, which should not be taxed in India as per Article 7 of the DTAA. The AO and CIT(A) rejected this argument, stating that the payments were "fees for technical services" and thus taxable in India.

4. Application of Section 9(1)(vii) and Section 5(2)(b) of the IT Act:
The AO applied Section 9(1)(vii) and Section 5(2)(b) of the IT Act, which define the taxability of fees for technical services and income accruing or arising in India. The CIT(A) upheld this application, noting that the payments to foreign entities were taxable as fees for technical services.

5. Condonation of Delay in Filing the Appeal:
The assessee filed a revised form for the year 2002-03 and a fresh appeal for A.Y. 2003-04 with a delay of 3656 days. The Tribunal condoned the delay and admitted the appeal considering the facts of the case.

6. Relevance of Agreements with Foreign Entities:
The agreements between the assessee and the foreign entities were scrutinized. The agreements indicated that the foreign entities provided technical services, including the transfer of technical know-how and intellectual property rights, which were classified as fees for technical services.

7. Determination of Tax Liability under Section 201 and 201(1A):
The AO quantified the shortfall in tax deduction and interest under Section 201 and 201(1A) of the IT Act. The CIT(A) upheld this determination, stating that the assessee was liable for the consequences of failing to deduct tax at source.

8. Distinction between Business Income and Fees for Technical Services:
The Tribunal distinguished the present case from the case of Dr. Reddy Laboratories, where payments to contract research organizations were considered business income. In the present case, the payments were made to independent research entities, and the agreements indicated the transfer of technical know-how, classifying the payments as fees for technical services.

9. Transfer of Technical Know-How and Intellectual Property Rights:
The agreements with M/s. Simbec Research Ltd. and M/s. NDDO Oncology BV included clauses that transferred technical know-how and intellectual property rights to the assessee. This transfer constituted technical services, making the payments taxable in India.

10. Applicability of Legal Provisions and Previous Judgments:
The Tribunal considered the applicability of legal provisions and previous judgments, including the case of Dr. Reddy Laboratories. The Tribunal upheld the CIT(A)'s findings, distinguishing the facts of the present case and confirming the taxability of the payments as fees for technical services.

Conclusion:
The Tribunal dismissed the appeals of the assessee, upholding the CIT(A)'s findings that the payments made to foreign entities were taxable as fees for technical services under Section 9(1)(vii) of the IT Act and the respective DTAAs. The assessee's arguments regarding the classification of payments as business income and the applicability of previous judgments were rejected. The Tribunal confirmed the tax liability under Section 201 and 201(1A) of the IT Act.

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