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TMI Blog2014 (4) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... n) passed another order on 29.08.2008 in respect of payments made to another company by name "Maximum International Animation Division and Club Exchange, Hongkong ("MI&GE") for financial years 2006-07 and 2007-08. The A.O. instead of raising the demands assessment year/financial year-wise, passed the orders company's-wise to whom the payments were made. 3. Assessee preferred appeals before the CIT(A) accordingly. Ld. CIT(A) disposed of the two appeals in favour of assessee vide order dt 03-12-2009 and accordingly Revenue preferred appeals ITA.No.276 & 277/Hyd/2010. Since, CIT(A) did not dispose of the grounds pertaining to applicability of DTAA with China, assessee preferred a rectification application and CIT(A) considered the same vide his order dated 18.12.2009 and disposed of the matter again in favour of assessee. Therefore, Revenue preferred appeals assessment year wise in ITA.No.594 & 595/Hyd/2013. The Revenue preferred one appeal in ITA.No. 452/Hyd/2011 preferring the appeal assessment year-wise (but only for one year) combining both the companies into one appeal. Assessee raised Cross- objections C.O.No.26 & 27/Hyd/2013. Since the issue is common, these are heard together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es in the other contracting state' is contra distinguished from performance of services in the other contracting state'. 6. The learned CIT(A)-VI erred in facts and law by holding that the provision of Article 17(2) of the Indo-China DTAA will govern the transaction when there was never any issue of making payments to individual artistes which was inferred on a wrong appreciation of facts based on surmises and conjectures. 7. Any other ground that may be urged at the time of hearing". 5. We have heard the learned D.R. and Ld. Counsel in detail and perused the paper book placed on record and various case law relied upon. Before adverting to consideration of the issues under dispute, it will be relevant to consider assessee's business and the nature of payments being made by assessee to the above foreign companies. Assessee company is in the business of production of 2D and 3D animation films for companies like Walt Disney, Columbia, DIC Animation, Stan Lee Media in Holywood, Bardel Animation, Amberwood Entertainment, Nelvana in Canada and Cromosoma, MSL Audio Visuals in Spain, Universal Cartoon Studios LLC, California, Mike Young Productions LLC, California etc. (Overseas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve any business connection or PE in India, the payments are not taxable in India, as it did not arise in India even under the deeming provisions of section 9(1)(vii). 9. It was submitted that assessee has made the payments to HGA, MI/GE as business payments and have a bonafide reason that the amounts are not taxable in India for the following reasons : i. 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. ii. Assessee was permitted by the RBI to make remittances to the payers on the basis of the certificate obtained from the Chartered Accountants opinion and certificate. iii. The foreign concerns namely HGA China and MI/GE, Hongkong are not found to be taxable in India in the relevant assessment years. The belief is later vindicated by the fact that the Department did not initiate any proceedings or issue any notices u/s 142(1) or Sec 148 or Sec 163 of the IT Act to bring to tax their incomes either before or after the orders u/s 201 were passed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 2012. The Demand u/s 201(1) cannot be justified retrospectively. Assessee could not be expected to do the impossible that is to deduct tax when the relevant explanation did not exist in the Act. 10. Ld. Counsel submitted that the Special Bench of the ITAT, Chennai in the case of Prasad Productions vide order dated 09.04.2010 held that "If the payer holds a bonafide opinion that no part of the payment bears income character, he need not enter into the arena of Sec 195 at all'. They also held in para 26 of the order that "The above discussion goes to show that in case of a bonafide belief by the payer that no part of the payment bears income character, it is not mandatory for him to undergo the procedure of sec 195(2) before making any payment to anon-resident'. The Bench concluded in para 35 of the order that "In the final analysis, our answer to the question placed before us is that if assessee has not applied to the Assessing Officer u/ s 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident is chargeable to tax, then he is not under any statutory obligations to deduct tax at source from a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal manner in accordance with the instruction, directions and requests of the company, whether the same involve matters of artistic taste or judgment. d. MIA shall provide basis production update progress production materials. 2. DQE Delivery elements and Schedule (a) The company shall furnish MIA with the following (collectively "Delivery Elements") : 1. BAY Model designs for BG's Key for all characters incidental characters, turnarounds charts and mouth charts. 2. Storyboard with dialogue in English 3. X- sheets 4. Scene list with timing 5. Audio in English (animatics, if any) 6.Color reference for BG, Main and Episodic characters, B/W model designs for BG main and Episodic characters, turnarounds, mouth charts. (b) MIA shall provide the following production work, as the company shall designate (collectively "production materials") 1. Layout Poses/Layout Backgrounds duly cleaned up and Color Backgrounds. 2. Rough animation 3. Animation in-betweens, clean-up duly completed as Line Test on Premier. 4. Scanning, Digital Ink and Paint and Compositing on US Animation. 5. The turnaround time for each episode from Layout to Color Compositing including retake is 9 wee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to production of 'Production Materials' as per its requirement which is made clear by the parties themselves by keeping the provision of production premises, facilities, personnel, materials, services and expertise under the clause-1. Services in the agreement. It is also true that MI/GE used its production premises, facilities, personnel, materials and expertise to provide the service in making the 'Production Materials' as required by DQE. It is common understanding that a service provider cannot provide a service in isolation without requisite facilities, personnel, materials and expertise. So the 'provision of production premises, facilities, personnel, materials and expertise' is only incidental to the 'provision of services' for the creation of the 'Production Materials' as per DQE's requirements. So the predominant nature of contract is for services in connection with creation of "Production Materials" for DQE. Without any ambiguity the service rendered by MI/GE is in the nature of technical services and such services were utilized by DQE to complete its project for its overseas clients. The sum and substance of the case of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is transferred from MI/GE, HGA to DQR-assessee cannot be accepted on the facts. 15. Ld. CIT(A) elaborately discussed and analysed the facts of the case in para 3.1.1 as under : "3.1.1. From the findings of the Asst. Director of Income Tax (International Taxation)-I, Hyderabad, in his order u/s. 201, dated 29.08.2008, in the appellant's case, it is clearly seen that he has not properly appreciated the facts of the case in right perspective. ". 3.1.2. On consideration of the aforesaid observations of the Assessing Officer, it can be seen that there are production facilities and material made available by MI/GE to the appellant, but according to him that alone should not determine the true character of the transaction to decide whether it is supply of goods or supply of services. As per his reading of the Clause No.1 of the agreement, there was delivery or transfer of property, but he felt that the production work or material delivered by MI/GE is not in isolation without requisite facilities, personnel, materials and expertise as according to him such Production Work or Material involved more of services of technical people than that of material and therefore, he treated the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AR of the appellant submitted that this was for the reason that there is no element of any Technical Services involved in production of an animation film. The details of animation films produced by the appellant and supplied to various foreign clients and the TDS particulars for the financial years 2006-07 and 2007- 08 is shown in a chart which is found in the Annexure- II to the Rejoinder filed in the matter of HGA. On a careful examination of the submissions of the earned AR of the appellant, I am of the considered view that the aforesaid two factors substantiate the case of the appellant that 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. Had it been otherwise, the appellant itself would have suffered withholding tax in the hands of its Overseas Clients at one point of time or the other. In the Chart furnished as Annexure-II to the Rejoinder in the matter of HGA, I have noticed that the appellant so far produced from the year 2003-04, a total number of 177 projects and in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the party undertaking the said job. This possibility is more in the international trade because the job is entrusted to a foreign party generally having the expertise, knowledge, technology and experience to execute the said job. However, 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 making any technology available to the other party. Therefore, the payment in question received by the assess-company from the Indian hotels/clients or any part thereof could not be treated as 'fees for included services' within the meaning of paragraph 4(b) of article 12(4) of the Indo-American DTAA nor 'fees for technical services' defined in section 9(1)(vii) read with Explanation 2 thereto of the Act". The learned counsel for the appellant, Mr. V. Prabhakar brought to my notice that this Delhi Bench of Hon'ble ITAT is now upheld by the Hon'ble High Court of Delhi in I.T.A. No.921, 923, & 924 etc., of 2007, Dated 30-01- 2009 in the case of DIT V. Sheraton Internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by MI/GE only in Hong Kong, yet the same were utilized by the appellant in its business in India and as such the Assessing Officer stated that irrespective of the situs of the services, income is deemed to accrue or arise in India in the hands of MI/GE and consequentially the appellant is liable to deduct taxes u/s 195 of the Act. If the Assessing Officer were right in his approach, then assessment proceedings should have been initiated in the hands of MI/GE and treat the payments received by it from the appellant as its income so that more revenue will be generated to the exchequer. However, I was informed by the learned counsel for the appellant that no such efforts were made by the Department in that direction. The contention of the appellant is supported by the aforesaid decisions of Bombay and Karnataka High Courts. Therefore, the action of the Assessing Officer is not legally valid in passing Order u/s 201 in the hands of the appellant". 17. The Ld. CIT(A) also considered the contention raised that the payments made by assessee to MI/GE / HGA falls outside the ambit of section 9(1)(vii) as under : "3.3.1. Lastly, the appellant raised another contention that the payment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007-08 from various Foreign Clients are to the tune of Rs.69,05,40,144/- and Rs.87,99,17,643/- respectively. The appellant has been showing the aforesaid export sales from the Foreign Clients in its Profit & Loss Account (Profit & Loss Account for these periods are placed in the Paper Book (Facts) at Page Nos.35-36 and 41-43 respectively. In the corresponding returns of income for the assessment years 2007-08 and 2008-09 (Page Nos.33-34 and 39-40 respectively) filed by the appellant before the jurisdictional Assessing Officer, it has been claiming exemption u/s 10A of the Act on its export sales/income. Therefore, the learned counsel for the appellant submitted in the alternative that the provisions of Section 9(1)(vii)(b) excludes the present transaction from the ambit of section 9 and by virtue of the exception provided in Sub-clause (b) of Section 9(1)(vii) of the Act, no income had accrued or deemed to have accrued or arisen to MI/GE so to say that it is liable to tax in India and as such the appellant is not liable to deduct tax u/s 195 of the Act. In support of his submission, the learned AR of the appellant relied upon mainly on the provisions of Sub-clause (b) of Section 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried on by a resident outside India; or ii) for the purpose of making or earning any income from any source outside India; These two categories of income relate to outside India. The first category of income doesn't however, refer to any source whereas the second category of income refers to any source outside India. Therefore, I hold that the appellant's business with its Overseas Clients undoubtedly constitute a business carried on by resident outside India, making the appellant to satisfy the first category of income referred to in the sub-clause (b). However, the Assessing Officer laid emphasis only on the second category of income to say that originating cause of the income of the appellant is located in India and as such he held that the appellant is not making or earning income from the source outside India. The Assessing Officer failed to examine the provisions of Sub-clause (b) of Section 9 (l) (vii) of the Act in a proper perspective in the aforesaid manner; ii) Secondly, the appellant obtained 48 and 57 contracts from the Overseas Clients during the financial years 2006-07 and 2007-08 and gave very few episodes of one Overseas Contract viz., Universal Carto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to him, the situs (location) of the source of income is in India because the appellant has its business establishment in India. There is no merit in this finding as the actual viewership of the animation films produced and supplied to the Overseas Clients in fact is located outside India. It is the only source of income to the appellant which is located outside India and for earning this income only it made payments to MI/GE for the Production Work or Material. The Hon'ble Delhi Bench of ITAT while analysing the principle of 'Source of Income' in the case of Lufthansa Cargo India (P) Ltd., V. DCIT (91 ITD 133) held at Page No.166 in Para No.44 by following another decision and the relevant portion is quoted hereunder : "44. Reliance was also placed on recent decision of Delhi Tribunal in the case of Asia Satellite Telecommunications Co. Ltd. V.DCIT (2003) 85 ITD 478, wherein after reviewing the entire case law relating to situs of the 'source of income' in the context of international transactions, it is stated in para 6.28 of the decision :- 6.29 Elaborating the word 'source', it was stated that it may encompass the payer of income or the activity which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I hold that the provisions of Sub-clause (b) to Section 9(1)(vii) (excepts and excludes the payments made by the appellant from the ambit and purview of Section 9 (l) (vii) of the Act as contested alternatively by the appellant". 19. The issue with reference to DTAA was examined by the Ld. CIT(A) vide para 5.2.3 and 5.2.4 vide order under section 154 dated 18.01.2009, as under : 5.2.3. I find from the Written Submissions of the Assessing Officer that he did not deal with the contention of the appellant in detail except saying that he never made any observations in the Order u/s 201 that the payment made by the appellant is only to artistes for rendering services in the production of animation films and as such the contention of the appellant is totally wrong. However, the learned counsel of the appellant vehemently argued that first of all the payments made by the appellant to HGA is not amounting to FTS and in the alternative he contended that even if the Assessing Officer is presumed to be right in his observation that the payment made by the appellant is only to artistes for rendering technical services in production of animation films, the appellant made the payment to them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer also narrated the same in detail in Para No.2.1 of his Order u/s 201at Page Nos. 2-4. On a careful examination of the same, I have no hesitation to hold that the animators engaged by both HGA and the appellant are undoubtedly can be treated as artistes falling under motion picture or television artiste. He further submitted that these animators are qualified with a graduation in Bachelor of Fine Arts in India which course mainly caters to the profession of animation. However, it has to be seen, whether the alternate contention of the appellant that Article 17.2 will come into play to the facts of the appellant's case. It is the case of the appellant that even if the Assessing Officer is presumed to be right in his observation that the payment made by the appellant is only to artistes for rendering technical services in production of animation films, the appellant made the payment to them through HGA and in which case the provisions of Article 17.2 of the DTAA governs the transaction. The Assessing Officer has not specifically made any observation in his Order u/s 201 that the payments are made to artistes. Nonetheless, the appellant drew a presumption from his findings t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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. 2. 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. 3. 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 in question paid by the assessee-company or any part thereof 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". 4. it was never the case of the Assessing Officer that there was Permanent Establishment for MI/GE or HGA in India, instead it was hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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