2022 (9) TMI 469 - AT - Income Tax

TDS u/s 195 - fees received by applicant for services provided to Indian companies - PE in India - assessee offers clinical trial solutions to the biopharmaceutical and generic industry and a part of the trials related services were outsourced by the assessee to Lambda Canada - services were utilised in India for provision of completed package services to its clients in India - action of AO in treating the amount of remittance to Canada as Fees for Technical Services u/s. 9(l)(vii) of the Act and Fees for Included Services under Art. 12 of the India-Canada DTAA - assessee s primary contention was that no taxes were required to be deducted on payments since the same did not qualify as fee for technical services under Article 12 India Canada Tax Treaty since the condition of make available as contained in the India Canada Treaty were not satisfied in the instant facts - HELD THAT - The case of the assessee is directly covered by the case of Anapharm Inc., In re 2008 (9) TMI 27 - AUTHORITY FOR ADVANCE RULINGS where the applicant is a company incorporated in Canada which provides clinical and bioanalytical services to assist pharmaceutical companies around world in development of new drugs or generic copies of drugs already being marketed. The clients pay fees to applicant in lieu of above services The AAR held that fees received by applicant for services provided to Indian companies cannot be considered to be 'fees for included services' within meaning of article 12(4) of the India Canada Treaty. AAR further held that fee paid by Indian companies to applicant in respect of bioequivalence tests conducted by it is in nature of 'business profits' under article 7 of DTAA between India and Canada and same is not taxable in India, as applicant does not have a permanent establishment in India. Determining the applicability of make available clause - From the terms of the Agreement, and copies of invoices produced before us, it does not seem that there is any intention on behalf of Lambda Canada to make available technical knowhow/ technical knowledge to the assessee so that the assessee can deploy similar technology or techniques in future without depending on the provider. In fact, it has been argued as is also evident from the terms of agreement that Lambda India also had similar technology available with it to conduct similar analysis/testing and preparation of feasibility report and the only purpose for entering the agreement was for the reason that the time being the assessee was loaded with excess work and accordingly part of the work was assigned to Lambda Canada - evidently there was no intention between the parties that any technology be made available to the assessee. Accordingly, we are of the considered view that in the instant facts no technology was made available to the assessee in respect of the above payments and hence there was no requirement to deduct tax at source under Article 12 of the India Canada DTAA. Appeal of assessee allowed.

Summary

Issues Involved:
1. Requirement to pay Rs. 25,16,813/- under section 195 read with section 201(1) and interest under section 201(1A) of the Income Tax Act.
2. Treatment of remittance to Lambda Therapeutic Research Inc., Canada as Fees for Technical Services (FTS) under section 9(1)(vii) of the Act and Article 12 of the India-Canada DTAA.
3. Application of section 9(1)(vii) for defining "fees for technical services."
4. Obligation to withhold tax on the remittance.
5. Classification of remittance as business income and its taxability in India.
6. Assessee's status as assessee-in-default under section 201(1) for non-deduction of tax at source.
7. Grossing up of the deductible amount under section 195A.
8. Chargeability of the remittance to tax in India.
9. Adherence to the principles of natural justice and consideration of submissions by lower authorities.

Detailed Analysis:

Issue 1: Requirement to Pay Rs. 25,16,813/-
The assessee contested the requirement to pay Rs. 25,16,813/- as mandated by the AO, which included the sum deductible under section 195 read with section 201(1) and interest under section 201(1A). The AO held the assessee liable for tax deduction on payments made to Lambda Canada, which the assessee argued did not qualify as "fees for technical services" under Article 12 of the India-Canada DTAA.

Issue 2: Treatment as Fees for Technical Services
The AO treated the remittance to Lambda Canada as Fees for Technical Services (FTS) under section 9(1)(vii) and Article 12 of the India-Canada DTAA. The assessee argued that the services did not "make available" technical knowledge as required by the DTAA, thus should not be classified as FTS. The Tribunal referred to the case of Anapharm Inc., where it was held that providing final results without sharing the underlying technology does not constitute "making available" technical knowledge.

Issue 3: Application of Section 9(1)(vii)
The AO and CIT(A) applied section 9(1)(vii) to define "fees for technical services." The Tribunal, however, emphasized the narrower scope of the "make available" clause under Article 12 of the DTAA, which was not satisfied in this case as Lambda Canada did not transfer the technology to the assessee.

Issue 4: Obligation to Withhold Tax
The AO held that the assessee was required to withhold tax while making the remittance to Lambda Canada. The Tribunal disagreed, stating that since the "make available" condition was not met, there was no obligation to deduct tax under Article 12 of the DTAA.

Issue 5: Classification as Business Income
The assessee argued that the remittance should be classified as business income, which is not taxable in India in the absence of a permanent establishment. The Tribunal supported this view, citing the Anapharm Inc. case, where similar services were considered business profits not taxable in India due to the absence of a permanent establishment.

Issue 6: Assessee-in-Default Status
The CIT(A) upheld the AO's decision to treat the assessee as an assessee-in-default under section 201(1) for non-deduction of tax. The Tribunal overturned this, stating that the payments did not qualify as FTS under the DTAA, thus no tax deduction was required.

Issue 7: Grossing Up Under Section 195A
The AO grossed up the deductible amount under section 195A. The Tribunal found this action inappropriate as the primary obligation to deduct tax was not applicable.

Issue 8: Chargeability to Tax in India
Both lower authorities failed to appreciate that the remittance was not chargeable to tax in India. The Tribunal emphasized that the remittance was business income not taxable in India under Article 7 of the DTAA.

Issue 9: Adherence to Natural Justice
The assessee claimed that the lower authorities did not properly consider their submissions, breaching the principles of natural justice. The Tribunal implicitly addressed this by thoroughly reviewing the case and ruling in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal, concluding that the payments to Lambda Canada did not constitute "fees for technical services" under the India-Canada DTAA, and thus, there was no requirement to deduct tax at source. The appeal was allowed, and the assessee was not held liable for the payment of Rs. 25,16,813/- under the contested sections.