CASE LAW

2016-TII-216-ITAT-AHM-INTL

ADI FINECHEM LTD Vs ITO: AHMEDABAD ITAT (Dated: August 30, 2016)

Income tax - Sections 4, 9(1)(vii), 195, 201(1) & 201(1A)

Keywords - certification process - FTS - fee for technical services - overseas remittances - royalty - use of trademark & withholding tax liability

Whether overseas payments made for certification process not involving any royalty component u/s. 9(1)(vi) of the I-T Act, does not attract withholding tax liability u/s 195 - YES: ITAT

Whether it is open to the Revenue Authorities to raise demand u/s 201(1) & 201(1A), for not complying with TDS obligation u/s 195, on such abovementioned overseas remittances - NO: ITAT

Whether once it is held that the assessee's remittances do not invite application of withholding tax provision since the same are not chargeable to tax in India, no further application of Indo-US DTAA provisions are warranted - YES: ITAT

The assessee is engaged in the business of manufacturing chemicals. During the subject year, it had remitted three sums of US$ 21120, US $9160, and US $ 2600 equivalent to Rs. 9,42,163/-, Rs. 4,27,112/- and Rs. 1,19,730/-; respectively to a US based payee M/s. 'Orthodox Union' without withholding any tax u/s. 195. The AO accordingly issued it a show cause notice seeking to effect recovery u/s. 201(1) and 201(1A) thereby treating the above payments as fee for technical services. In response, the assessee produced the relevant 'Kashruth' certificate issued by its payee containing a caution note that 'placing OU logo on products not listed constitutes an authorized use of the symbol which is registered trademark'. This made the AO to form an opinion that the impugned payments amounted to 'royalty'. He issued another show cause notice quoting sections 201 and 201(1A) for treating the above payments as royalty u/s. 9(1)(vi) explanation 2. He observed that the kosher foods in question were foods confirming to jewish customary law not containing any forbidden supplement as per their rituals followed. He opined that assessee's payee M/s. Orthodox Union was one of the oldest orthodox jewish organization best known for kosher food preparation supervision service. And that its symbol was found on labels of many commercial and consumer food products. The AO took into account Article 13(3) of the Indo-US DTAA prescribing details of items covered by the royalty clause to be also including consideration paid/received for the use of or right to use any trademark. He observed that the above stated trademark in question was symbol of assessee's payee in the nature of an intellectual property increasing sale of the certified products in question. He accordingly concluded that assessee's payments hereinabove were in the nature of royalty and its failure in not deducting any withholding tax thereupon can within the four corners of section 195 so as to make section 201(1) and 201(1A) exigible. All this resulted in the impugned demand of Rs. 5,86,097/-.

Having heard the parties, the Tribunal held that,

+ there can hardly be any dispute in view of Apex court judgment in GE India Technology Centre vs. CIT, wherein it was held that an obligation to deduct withholding tax arises only in case when the payment to a foreign company is chargeable to tax in India. The dispute between both the parties in present case is qua treatment of assessee's remittances to its US based payees M/s. Orthodox Union in lieu of obtaining certification of its products to be confirming to jewish rituals thereby not involving any forbidden ingredients in preparation procedure. It is noticed from the payees certificate that the same contains a declaration of assessee's products having qualified the necessary procedure so as to be consumed as kosher foods. There is nothing more than that indicating specific usage of payee's logo therein except the above stated stipulation barring non-display of 'OU' logo on unlisted products. This stipulation is a negative covenant forbidding use of logo. There is no material on record that the payees in question has in any way received the impugned payments for anything more than that of issuing kosher certificate. Rather it does not charge any sum for permitting logo usage. The instant case in these facts is an instance of payments made for certification process not involving any royalty component u/s. 9(1)(vi) so as to attract section 195;

+ it is found that that Bombay high court in M/s. Diamond Services International Ltd. vs. Union of India, had an occasion to consider an identical question as to whether a diamond grading lab certification process amounted to fee for technical services or royalty under the provisions of the act or not. Their lordships negated application of both the terms by observing that: "....The grading report by GIA is a statement of fact as to the characteristics of the diamond. Does this report amount to transfer of any industrial or commercial experience of GIA to the petitioner or to an agent of the petitioner. The report gives the attributes of the diamond and includes an analysis of the diamond's dimensions, clarity, colour, polish, symmetry and other characteristics. There is nothing on record before us to show that GIA through its grade report assigns or transfers any industrial or commercial experience to its customers. Therefore, the question would be whether the grading report would amount to any transfer of any experience by GIA to the clients. The term "experience" is not defined either under the Act or under the DTAA and consequently we shall have to consider the normal dictionary meaning....The grading certificate which is issued does not involve any transfer of commercial interest to the party paying or getting the right to use the experience of GIA. There is also no transfer of any skill or knowledge of GIA to the customers in the issuance of grading reports. The payments received is not the one for the use or the right to use experience, but is instead one for the application of experience to a certain factual situation i.e. GIA shall apply its expertise to the diamonds submitted by the clients and determine its true feature. For that purpose we may consider the expression "use" as defined in various dictionaries. The nature of the transaction between GIA and its client does not invest the party making payment with any right as regards the use of the cumulated experience of GIA. The payment in question does not involve a payment for the use or the right to use the industrial, commercial or scientific experience of GIA. The activity of grading or certification is merely the application of this knowledge/experience in a professional stream as applicable to a particular diamond or set of diamonds which are offered for certification or grading. The definition of royalty under the DTAA under Article 12(3) as defined therein, that uses the expression "or for information concerning industrial, commercial or scientific experience". There is no parting of information concerning industrial, commercial or scientific experience by GIA when it issues the grading certificate. Under Sub-clause (4) the payments received must be in consideration for services of managerial, technical or consultancy nature. That could include to the application or enjoyment of the right, property or information. This is not the case here. Neither is it making available technical knowledge, experience, skill, etc., to enable the person acquiring the service to apply the technology contained therein....";

+ this Tribunal has kept in mind the above extracted reasoning to conclude that assessee's payee has not received the impugned remittance(s) for having parted with any industrial, commercial or scientific experience in former's favour so as to constitute any royalty u/s. 9(1)(vi). The impugned demand raised by both the lower authorities u/s. 201(1) and 201(1A) is accordingly directed to be deleted. Further, once it is held that the assessee's remittances do not invite application of withholding tax provision since the same are not chargeable to tax in India, Indo-US DTAA application aspect is rendered academic.

Assessee's appeal allowed