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TMI Blog2012 (11) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assessment year declaring an income of Rs. 1,17,56,965/-. During the course of assessment proceedings, it was noted by the Assessing Officer that an outsourcing cost of Rs. 4,69,91,94/- was charged to the Profit & Loss account. Assessee was required to give details of tax deducted at source on such outsourcing charges paid. Explanation of the assessee was that such outsourcing charges, which were paid to M/s Tex Tech Inc. USA, did not fall within the definition of "technical services". As per assessee, M/s Tex Tech Inc. USA was only a subsidiary company of the assessee and its role was limited to collection of input materials or manuscripts from assessee's customers in USA and scanning such manuscripts and uploading them for the assessee to retrieve them in India. Assessee, thereafter, downloaded such data, did typesetting thereof and then uploaded it back to the subsidiary in USA. The said subsidiary was to download the typeset pages, print such pages, and return it to the ultimate customers. Assessee also mentioned that M/s Tex Tech Inc. USA was receiving certain input materials electronically from the clients, which were also uploaded to the assessee in India and assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195 of the Act and relying on Section 40(a)(i), a disallowance of Rs. 4,69,91,994/- paid to its subsidiary M/s Tex Tech Inc. USA, was made. 5. Before CIT(Appeals), argument of the assessee was that it had three types of agreements with M/s Tex Tech Inc. USA, its subsidiary. One for rendering marketing services, one for Offshore development facilitation services and third one for rendering overseas services. As per the assessee, marketing service was providing support to the customers with regard to billing and payment and also collection of such amounts. As per this agreement, the US subsidiary was required to provide market information as and when required by the assessee. Offshore development facilitation service agreement was for scanning of manuscripts and uploading it to India and also for notifying the assessee through e-mail. Once the assessee had done the typesetting in India and uploaded it back to US subsidiary, they were to download such formatted pages, print the pages and courier it to the ultimate customers. The payments effected as per the second agreement, were for these services. The last one was where assessee had received orders from customers for e-publishing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch did some processing thereon before uploading it to India for typesetting by the assessee. US company was providing technical knowledge for doing the typesetting and also for e-publishing of books. According to him, all the persons employed by the US company were technically qualified and bills raised by the US company on the assessee, were based on hourly rates. Everyone of the persons, employed by the US company, were technical experts, and each of the activity undertaken by the US company on behalf of assessee, were in the nature of technical services. Collection of manuscripts from the clients, co-ordinating the data, uploading it for the assessee to do the typesetting were all technical services. Even the so-called marketing services rendered by the US company were also technical in nature since it involved technical collaboration with the clients, for making out a specific methodology that was to be followed for uploading the final typesetting. 9. Further continuing his argument, learned D.R. stated that all the overseas clients of the assessee were directly billed by the assessee. For the services rendered by the US subsidiary, assessee was paying based on the bills raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ypesetting. US company was there only to collect the manuscripts from the customers, forward it to India, print the pages typeset in India, and forward it to the clients. In some cases, the said US subsidiary was doing whole of the work by itself due to certain specific constraints placed by the clients and in such cases, there was no question of any technical services being made available by them to the assessee. According to him, the invoices raised by the US company would clearly show that there was no rendering of any technical services at all. Learned A.R. placing reliance on the decision of Hon'ble Karnataka High Court in the case of CIT v. De Beers India Minerals (P.) Ltd., argued that no type of technical service was made available by the US subsidiary to the assessee and there was no question of any technical knowledge which enabled the assessee to derive an enduring benefit, being made available to it. Assessee could not utilize the knowledge received from US company for its own benefit. According to him, in view of such specific observation of Hon'ble Karnataka High Court with regard to the term "making available", various decisions of Authority for Advance Rulings, reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1. - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2]. - For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]" 12. It might be true that the services rendered by subsidiary abroad would fall within the above definition, at least prima facie. It might also be true that in view of Explanation provided under Section 9(2) of the Act introduced by Finance Act, 2010 with retrospective effect from 1.6.1976, requirement regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second agreement with US company termed as "Offshore Development (Facilitation) Agreement" placed at paper-book page 37 onwards, gives scope of work in clause 3, which reads as under:- "3. Scope 3.1 X hereby agrees to process customer materials, prepare instructions, and prepare files to enable Y to carry out e-publishing services and send such files through Internet by way of File Transfer Protocol or upload such files in servers and communicate access mechanisms. 3.2 Y shall use the instructions sent along with the files for carrying out digitization services in respect of manuscripts and books and other materials. 3.3 X will also provide final quality assurance of products delivered by Y prior to shipment to customer. 3.4 X will ship the product to customer either electronically or physically based on customer preference. 3.5 The parties understand that the receipt of the work carried out by X under this Agreement could be received in India at the time of downloads or in cyberpace when the files are placed in a server to facilitate access." It is pertinent to note that 'X' denotes the US subsidiary here. 14. The third agreement called "Overseas Services Agreement" pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service whatsoever involved in it since no technical knowledge or skill or experience was made available to the assessee, when marketing services were rendered by the entity abroad. Coming to third agreement named "Overseas Services Agreement", scope clearly is one of a turnkey service. The US company has to use its expertise, tools and infrastructure for receiving manuscripts for production of book using its own resource, including servicing the customers and effecting dispatches to customer locations. In other words, whole of the work was done by the US company and when whole of the work was done by US company, for start to finish, we cannot say that assessee was receiving any technical knowledge, skill, know-how or benefit of any technical plan or technical design from them. 16. This leaves us with the second agreement called "Offshore Development (Facilitation) Agreement". The scope of work has been reproduced by us above at para 13. By virtue of clause 3.1, US company has to process customer materials, prepare instructions and prepare files for the assessee to carry out e-publishing services and also has to upload these to the assessee. All these will definitely involve techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." 17. When viewed from the above interpretation given by Hon'ble Karnataka High Court of term "making available", it is clear that except for the work mentioned in clause 3.2 of the second agreement, there was no technical knowledge or service made available by the entity abroad to the assessee in any of the other work. If the instructions sent by the entity abroad were such that it could give a technical expertise to the assessee, which it could use even after the expiry of the contract thereby giving it an enduring benefit in its e-publishing work, then without doubt, it will fall within the meaning of "fees for included services". If this was the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions of the I.T. Act, i.e. chargeable under ss. 4, 5 and 9 of the I.T. Act." 18. It is an admitted position that separ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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