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TMI Blog2017 (6) TMI 876X X X X Extracts X X X X X X X X Extracts X X X X ..... w in holding the payment to a nonresident for marketing activity as reimbursement of expenses especially when expenses were part and parcel of technical service related to income earned in India ? 2.0. The facts leading to the present Appeal in nutshell are as under: 2.1. That the assessee companyM/ s. Creative Infocity Ltd, Gandhinagar, a subsidiary company of M/s. Creative IT Inc. USA, entered into joint venture undertaking with Government of Gujarat for developing and construction of "Information Technology Park" at Gandhinagar, a project work awarded to it by the Government of Gujarat. That while carrying out the said construction project work, the assessee entered into contract agreement with NonResident Companies viz. M/s. Naimisha Construction, Florida, USA and M/s Creative IT Inc. USA, for providing design and drawings and for marketing and selling services respectively. That during the AY 200304 to 200607, the assessee made payments to aforestated foreign companies towards technical services etc. including purchase of designs and drawings of the project to Ms. Naimisha Construction Inc USA. The AO was of the opinion that while making payment to the aforestated foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act shall not be applicable. However, the AO did not accept the same and made the addition of the payment made to M/s. Naimisha Construction Inc. USA. On an appeal on interpretation of agreement entered into between the assessee and M/s. Naimisha Construction Inc. USA and other agreement entered into by the assessee, the learned CIT(A) accepted the case on behalf of the assessee that payment was made to M/s. Naimisha Construction Inc. USA towards supply of design and drawings by way of outright purchase and it was not towards technical services and therefore, Section 9 of the Income Tax Act shall not be applicable. Consequently, learned CIT(A) deleted the addition made by the AO which was made applying Section 9 of the Income Tax Act r/w Section 195 of the Act. 2.4. Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A), revenue preferred appeal before the learned ITAT and by impugned judgment and order and relying upon its earlier decision in the case of ITO vs. M/s. Heubach Colour Pvt Ltd in ITA No.489/AHD/2013, the learned Tribunal has dismissed the said appeal preferred by the revenue which has given rise to the present appeal with the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide agreement dated 3132007. The Seller had sold, assigned, conveyed and transferred to assessee its entire right, title, interest and ownership in the asset. It was accordingly agreed that pursuant to effective date, the seller shall cease to have right, title, interest and ownership in the asset. Similarly assessee would have right title, interest and ownership in the asset." (emphasis supplied) (a). It can be seen that Heubach had purchased entire business from Colour Ltd. including all its capital assets, which included its intangible assets like goodwill, trademark and technical knowhow. Like present case, in Heubach case there is no specific issue of supply of design and drawings much less when the same is designed specifically for Assessee. Further unlike Heubach case, in the present case there is no purchase of the entire business with existing assets by the Assessee. (b). In Heubach case, the tribunal clearly found that the agreements had clauses reflecting that the Payee is the owner of the purchased assets. Further it held that the clauses reflected that the seller had transferred its entire rights, title etc.. in the said assets to the asseessee who received the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifications and other documents prepared by the Architect are instruments of the Architects service through which the work to be executed by the Contractor is described. The Contractor may retain one contract record set. Neither the Contractor nor any subcontractor, subsubcontractor or material or equipment supplier shall own or claim a copyright in the Drawings, Specifications and other documents prepared by the Architect, and unless otherwise indicated the Architect shall be deemed the author of them and will retain all common law, statutory and other reserved rights, in addition to the copyright. All copies of them, except the Contractors record set shall be returned or suitably accounted for to the Architect, on request upon completion of the Work. The Drawings, Specifications and other documents prepared by the Architect and copies thereof furnished to the Contractor, are for use solely with respect to this Project. They are not to be used by the Contractor or any Subcontractor, Subsubcontractor or material or equipment supplier on other projects or for additions to this Project outside the scope of the Work without the specific written consent of the owner and Architect. The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r process or trade mark or similar property ; Even though M/s Naimisha Construction Inc USA, obtained the designs from M/s Bob Snow and Associates, Architect and in turn provided such designs to the assessee company, it is clear from the above reproduced clause 1.3 that the ownership rights were never transferred to the assessee company and hence it is not the case of outright sale. 3.2. It is further submitted by Shri Mehta, learned counsel for the revenue that Section 5 of Income Tax Act provides taxability of a nonresident based on 4 criteria, (a) receive within India or (b) deemed to receive within India or (c) accrued within India or (d) deemed to accrue within India. Criteria (a) and (b) which are based on the location of the receipt of the Income is not applicable here. While criteria (c) and (d) relate the location of the accrual of the income. It is submitted that in present case criteria (d) is applicable as section 9 of IT Act, based on the nature of the income deems certain Income to be accrued in India irrespective of the actual situs of income or residential status of the Recipient. It is further submitted that thus for section 9 what is required to be seen is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present the payment made by the assessee company is taxable u/s 195 of the Act. It is submitted that even such payments are also found to be taxable under India -US DTAA under Article 12 of the India USA DTAA. It is submitted that as per the USDTAA, if the nature of income falls under Article 12 than irrespective of the status or location of the accrual of such income, the same shall be taxable in the country of Source, which in the present case is India. 3.6. It is further submitted by Shri Mehta, learned counsel for the revenue that once it is established that such payments are taxable under the domestic law as per the discussion made above, the next step is to examine the taxability of such payments under India USA DTAA. It is submitted that such payments are also found to be taxable under India -US DTAA as "Fee for Included Services" under Article 12 of the t India USA DTAA. 3.7. It is further submitted by Shri Mehta, learned counsel for the revenue that even otherwise if it is considered that the transaction is of transfer of rights under designs and drawings than also since they are not transferred exclusively but the same is only transfer of partial rights being right of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue that the Explanation introduced by Finance Act 2010, w.e.f. 1/06/1976 is merely clarificatory in nature and undertaken under Sovereign powers and is conclusively determinative of taxability of Income in India. It is submitted that this is enough for the purposes of the scope of section 195, which only decides the prime facie taxablility in India and not conclusively holds the Non resident taxable in India, which would be decided at the time of assessment. 3.13. It is submitted by Shri Mehta, learned counsel for the revenue that since the payment is held to be in the nature of royalty under IT Act as well as under India USA DTAA, the Article 15 pertaining to 'Independent Personal Services' is of no relevance. Making above submissions, it is requested to answer proposed question no. A in favour of revenue and against the assessee. 4. Now, so far as proposed question B i.e. Whether learned ITAT has erred in law and on facts in holding that the payment to a non resident for marketing activity as a reimbursement of expenses especially when expenses were part and parcel of technical service related to income earned in India is concerned, it is vehemently submitted by Shri Nitin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursement is nothing but payment for services rendered by it. In support of his above submission, Shri Mehta, learned counsel for the revenue has heavily relied upon the following decisions: (1). CSC Technology Singapore Pvt Ltd vs. ADIT (2012) 50 SOT 399 (Delhi). (2). Ashok Layland Ltd vs. DCIT (2008) 119 TTJ 716 (Chennai). (3). Cochin Refineries Ltd vs. Commissioner of Income Tax (1996) 222 ITR 534. Making above submissions and relying upon above decisions, it is requested to answer the proposed question No.B in favour of Revenue and against the assessee. 5.0. Present appeal is vehemently opposed by Shri Tushar Hemani, learned counsel for the respondentassessee. 5.1. It is vehemently submitted by Shri Tushar Hemani, learned counsel for the respondentassessee that in the facts and circumstances of the case, learned Tribunal has not committed any error either in law and / or on facts in holding that payment made towards supply of design and drawings to a nonresident architect firm was outright purchase and therefore, not taxable as Royalty or FTS under Section 9(1) of the Act. 5.2. For the aforesaid submission, Shri Tushar Hemani, learned advocate for the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, in absence of the same, thereafter it is not open for the revenue to challenge the aforesaid issue in the present appeal. 5.5. Shri Hemani, learned counsel for the assessee ha also relied upon the decision of the Hon'ble Supreme Court in the case of Union of India vs. Kaumudini Narayan Dalal reported in 249 ITR 375 (SC) as well as in the case of Union of India vs. Satish Panalal Shah reported in 249 ITR 221 (SC). 5.6. It is further submitted by Shri Hemani, learned counsel for the assessee that as such the revenue proceeded on the wrong understanding and / or on the wrong premises that assessee got the concerned drawings from "Bob Snow & Associates, Architect" whereas the fact is that assessee has purchased such drawings from M/s. Naimisha Construction Inc. USA. It is submitted that as such and in fact M/s. Naimisha Construction Inc. USA also got the drawings from Bob Snow & Associates, Architect, which conclusively proves that there was no services but only supply of designs and drawings from the said M/s. Naimisha Construction Inc. USA to the assessee. It is therefore, submitted that it was merely supply of drawing and designs by M/s. Naimisha Construction Inc. USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very of the designs and drawings are through internet, payment is made through banking channel out of India, no part of the income in the hands of the said M/s. Naimisha Construction Inc. USA can be said to have accrued in India. 5.9.4. It is submitted that moreover the said M/s. Naimisha Construction Inc. USA has no permanent Establishment in India. It is submitted that on conjoint reading of Sections 4 and 5 of the Act would leave no doubt that the said transaction of purchase of designs and drawings is not taxable in India. 5.10. It is further submitted as such M/s. Naimisha Construction Inc. USA has no business activity or permanent establishment in India. It is submitted that it is neither working through any agent nor it has any branch in India. On non applicability of Section 195 of the Act, in the present case, learned counsel for the assessee has relied upon the CBDT's Circular 786 dated 17.02.2000. 5.11. It is further submitted that no income has arisen in India to M/s. Naimisha Construction Inc. USA as the agreement dated 5.6.2000 was signed and sealed in USA, the drawings and designs were in turn purchased by the said Naimisha in USA and the same were sent to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. It is further submitted that even if supply of designs and drawings are to be treated as fees for included services, the term "make available" must have the element of technology which can be applied by the persons acquiring it. 5.13.3. It is submitted that technology can be said to be made available only when the person acquiring the service is enabled to apply the technology independently. It is submitted that accordingly, the following twin conditions need to be fulfilled so as to ensure that the services are made available. It is submitted that the services must be rendered and the services are imparted and absorbed by the receiver in such a manner that the receiver can render similar services to other in future without being dependent upon the service provider. 5.13.4. It is further submitted that in the present case, the assessee has not been rendered nay services at all. It is submitted that assuming while denying that such services are rendered, the assessee has not been passed on the requisite expertise or knowledge so as to ensure that it can independently render such services to others in future. It is submitted that merely because service provider putting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny perversity being alleged, it cannot be said that any question of law much less substantial question of law arise. 6.1. Shri Hemani, learned counsel for the assessee has heavily relied upon the decisions in the case of GE India Technology Center P. Ltd vs. CIT & Another reported in 327 ITR 456 @ 460 (SC) and in the case of Transmission Corporation of India reported in 239 ITR 587(SC) in support of his submission that in the present case revenue wrongly invoked the provision of Section 195 of the Act, as there is no income chargeable to tax in the hands of the payee in India. In support of his submission that no income is chargeable to tax in the hands of the payee in India, Shri Tushar Hemani, learned advocate for the assessee has made following submissions: 6.1.1. It is submitted that agreement is for reimbursement of expenses incurred by the said Creative IT Inc. USA for marketing of Infocity project in USA market. 6.1.2. It is submitted that theses expenses are fully supported by the vouchers. It is submitted that moreover, the Certified Public Accountant of USA as well as CA of India has given certificate to the effect that the expenses are in fact reimbursement. 6.1.3. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions, it is requested to answer the question no. B in faovur of assessee and against the revenue. Making above submissions and relying upon the above decisions, it is requested to dismiss the present appeal. 7.0. Heard the learned advocates for the respective parties at length. Question A: 8.0. Question No.A posed for the consideration of this Court is whether in the facts and circumstances of the case, the payment made by the assessee towards supply of design and drawings to a non resident architect firm (M/s. Naimisha Construction, USA) was outright purchase and not taxable as Royalty or FTS under Section 9(1) of the Income Tax Act ? 8.1. It is the case on behalf of the revenue that the supply of design and drawings to the assessee by M/s. Naimisha Construction, USA was by way of Royalty and not was outright purchase by the assessee and therefore, the same was taxable under Section 9(1) of the Income Tax Act. It is the case on behalf of the revenue that transfer of such design and drawings by the nonresident ArchitectBob Snow & Associates, Florida to M/s. Naimisha and by M/s. Naimisha ultimately to the assessee company was not a outright transfer towards sale, where all ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractor as provided below and elsewhere in the contract documents. Sr Stage/ Progress of Work % age A Schematic Design Phase 10.00% B Design Development Phase 40.00% C Construction Documents Phase 15.00% D Bidding or Negotiation Phase 15.00% E Final Phase and Specs 20.00% Total 100% As required by the assessee and to meet with the international standard, as per Article 9 of the agreement, M/s. Naimisha was to procure the designs and drawings from one Bob Snow Associates, Architects. Thus, from the aforesaid clauses in the agreement dated 5.6.2000, the Naimisha was to provide the detaile design and drawings for the project without there being any element of services. It is required to be noted that in the said agreement, only the assessee and the M/s. Naimisha are the signatory and not Bob Snow Associates, Architects. Thus, it appears that M/s. Naimisha first procured the plans and designs from Bob Snow Associates, Architects on making full consideration and thereafter supplied the same to the assessee as outright sale. Therefore, it cannot be said that the supply of design and drawings by M/s. Naimisha to assessee was not outright sale and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings from one Bob Snow & Associates. Architect and became the absolute owner of such designs and drawings together with all the plans and specifications manual, Engineering plans and specifications, site plans, landscape plans and specification. These designs, drawings and other plans and specification were in turned outrightly sold to the assessee. The said Naimisha had sold theres designs, drawings and other plans and specifications to the assessee. These facts are are undisputed. The case of the assessee is that the underlying transaction is of outright purchase of designs and drawings and therefore, the same does not attract provision of Section 9 r.w.s. 195 of the Act. No service much less technical service has been provided by the said Naimisha to the Assessee. It is a case of sale and / or purchase of designs and drawings for the infocity project by the assessee from a non resident Naimisha. This view is suspended by the Hon'ble the Supreme Court in the case of Scientific Engg. 1 louse (P) Ltd v. CIT (1986) 157 ITR 86 wherein it was held that designs and drawings are assets so they can be independently sold and purchased without any element of services. 3.10. Moreover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the material on record, it appears that there was agreement between the assessee and M/s. Naimisha to provide detailed design and drawings for the project of IT Park at Gandhinagar as per the agreement dated 5.6.2000. However, as per the requirement of the assessee the said M/s. Naimisha Construction was required to supply the drawings and design prepared by "Bob Snow & Associates. Even the payment has been made by assessee to M/s. Naimisha directly for supply of drawings and design as per clause / Article 4.3 of the agreement dated 5.6.2000 and different amounts were required to be paid / paid with respect to different designs and drawings for different components of the project viz. InfotowerI, Infotower II etc. It is required to be noted that even "Bob Snow & Associates is not signatory to the agreement dated 5.6.2000 and agreement / contract dated 5.6.2000 is between the assessee and M/s. Naimisha only. Under the circumstances, the payment made by the assessee towards supply of design and drawings to M/s. Naimisha and the payment made under the agreement dated 5.6.2000 is rightly held to be outright purchase and not as a Royalty. We are in complete agreement with the view tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. On considering clause in the agreement dated 5.6.2000 which was executed between the assessee and M/s. Naimisha which was to provide detail design and drawing for the project, to maintain international standard, the assessee insisted that the drawings and design to be supplied / provided by M/s. Naimisha to assessee must be got prepared by Bob Snow Associates. It was only with a view to maintain international standard and by that it cannot be said that Bob Snow Associates supplied the drawings and design to the assessee directly. There were two different independent transactions between M/s. Naimisha and Bob Snow Associates and between the assessee and M/s. Naimisha (agreement dated 5.6.2000 to provide design and drawings by M/s. Naimisha to assessee). The full sale consideration for providing drawings and design has been made by the assessee to M/s. Naimisha as per the agreement between assessee and M/s. Naimisha dated 5.6.2000. 8.9. Under the circumstances and in the facts and circumstances of the case, it cannot be said that the learned Tribunal has committed any error in holding that the payment made towards supply of design and drawings by assessee to M/s. Naimisha wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned CIT(A), it is evident that the reimbursement pertained to the salary of the employees, travelling expenses of the employee administrative costs etc. It is submitted that thus, the services were being performed by the Creative Inc through its employee and the payment made by the assessee company to Creative Inc was towards rendering of such services in the nature of marketing activity at cost. 10.3. It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that just because the reimbursement was made at cost does not imply that services were not rendered by the Creative Inc to the assessee company. It is submitted that the payment made by the assessee company would have assumed the character of reimbursement for expenses only when the services were rendered by third party for which the payment was initially made by Creative Inc and subsequently reimbursed by the assessee company. 10.4. It is submitted that in the present case the services are being rendered by the Creative Inc itself as evident from the nature of payment viz salary cost, travelling cost etc and hence such payments were towards reimbursement for services at cost. It is submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative IT Inc., USA for reimbursing marketing expenses of Infocity project in international market. (3). Pursuant to the said agreement, during the year under consideration, the assessee has reimbursed Rs. 3,95,73,033/to Creative IT Inc., USA("CII") for the expenses of marketing of infocity project in USA Market. (4). The total marketing expenses reimbursed is Rs. 3,82,51,204/out of which Rs. 1,55,73,166/has been treated as project administrative expenditure as differed revenue expenditure and the balance amount of Rs. 2,39,99,867/has been treated as marketing expenses and charged to Profit & Loss account. (5). AO applied provisions of Section 195 and held that the assessee ought to have deducted tax at source while making payment. 11.2. It is submitted that there are concurrent findings of fact both by learned CIT(A) and learned ITAT that the concerned amount is reimbursed. It is submitted that therefore, in light of such concurrent factual finding by the lower appellate authorities and in absence of perversity being alleged, it is not open for the Department to raise this question of law which is concluded by the findings given by the lower authorities. 11.3. It is further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as any branch in India. It is submitted that therefore, the provision of Section 9(1)(vi)(vii) have no application as the amount paid is neither royalty nor fees for technical service (FTS) but is a business income. It is submitted that retrospective explanation to Section 9(2) is also not applicable as the same is applicable only if the income is interest, royalty or FTS. It is submitted that no income arises in India to CII therefore, as per the provision of Section 9 of the Income Tax Act, the income does not accrue or arise in India. It is submitted that therefore, now when the income does not accrue or arise in India there is no question of tax to be deducted on that income. 11.7. It is further submitted that even reimbursement of marketing and administrative expenses in the hands of the said CII cannot be treated as Fees for technical Service as per Section 9(1)(vii) or as "Fees for included services" within the meaning of Article 12(4) (b)of the IndoUS DTAA. 11.8. It is further submitted that even reimbursement of marketing and administrative expenses in the hands of the CII cannot be treated as Royalty within the meaning of Section 9(1)(vi) or Article 12(3) of the IndoUS ..... X X X X Extracts X X X X X X X X Extracts X X X X
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