2017-TII-06-HC-ALL-INTL

CIT Vs HONDA SIEL CARS INDIA LTD: ALLAHABAD HIGH COURT (Dated: December 21, 2016)

Income Tax - Sections 37

Keywords - technical knowhow - royalty - revenue expenditure - overseas payment - capital expenditure

M/s Honda SeilCars India is a joint venture Company. M/s HMCL, Japan who held about 99% share of joint venture company/subsidiary company i.eAssessee, entered into an agreement with HSCIL/Assessee wherein a licence was granted by HMCL, Japan to an indivisible, nontransferable and exclusive right and licence to manufacture, use and sell the products and the licensed parts within the territory under the intellectual property rights by using knowhow, and technical information. It also provided that licneseei.e HSCIL/Assessee may grant sublicences with a prior written consent of licensor. It also provided that to sale or export any products and parts, to any place outside territory of India, prior consent of licensor would be required. A consideration/lump sum fee agreed between parties was 30.5 million U.S Dollar, payable in five continuous equal installments by licensee to licensor and payment thereof was to commence from third year after commencement of commercial production. Besides, licensee was also liable to pay royalty of 4%, both on internal and exports, subject to taxes. Assessee filed a return declaring loss. Later on revised return was filed. Assessment was completed under section 143(3) after making addition. CIT(A) partly allowed assessee'sappeal. Subsequently, a notice under section 148 was issued for the reason that Assessee made payment of royalty to HMCL, Japan and claimed deduction, treating the same as 'Revenue Expenditure'. A.O was of the opinion that income has escaped assessment since, it was a capital expenditure. Ultimately assessment order was passed treating it a 'Capital Expenditure' and not 'Revenue Expenditure'.

On appeal, the HC held that,

Whether overseas payment made towards 'technical knowhow' & 'royalty' can be treated as 'revenue expenditure, when it was incurred for enduring benefit of its business - NO: HC

+ there was no existing business for improvising whereof "Technical Knowhow Agreement" was executed between HMCL, Japan and HSCIL (Assessee). In fact no company for such production existed. A joint venture company, with aim and objective to establish a unit for manufacture of automobiles and parts thereof was brought into existence by HMCL, Japan and Seil India in the form of HSCIL. As already noticed, HMCL, Japan (Foreign Company) held about 99% shares of joint venture and, therefore, for all purposes had absolute control over newly incorporated joint venture company. After incorporation of joint venture, in the manner aforesaid, HMCL, Japan (Foreign Company) and newly incorporated joint venture company entered into an agreement, i.e., "Technical Knowhow Agreement" for technical collaboration. Technical collaboration included, not only transfer of technical information, but, complete assistance, actual, factual and on the spot, for establishment of plant, machinery etc. so as to bring into existence manufacturing unit for the Products. The agreement also provided for continuous assistance at every stage;

+ one of the test that, a completely new plan with a complete new process with new technology for manufacture of product was brought into existence is satisfied. Technical knowhow was not made for betterment of existing product. Similarly second condition, whether it was improvisation of existing business or new business is also answered by reiterating that a new business was set up with so called technical knowhow for which payments were agreed. Though period of technical collaboration for payment of technical knowhow and royalty is mentioned in terms of 'tenure' but a close scrutiny of agreement shows that in case of termination of agreement, joint venture itself would come to an end and there may not be any further continuance of manufacture of product with technical knowhow of foreign collaboration. Virtually, life of manufacture of product in the plant and machinery, established with assistance of foreign company is coextensive and there is no distinction whatsoever. The agreement admittedly is framed in a manner so as to give a colour of licence for a limited period having no enduring nature but a close scrutiny of agreement shows otherwise;

+ expenditure in the form of "Technical Knowhow" fee and 'Royalty' for enduring benefit of business. It was not only for running the business but for bringing the business into existence and then for running and sustaining it. The agreement was crucial for setting up plant and machinery for manufacturing the project and major stockholder was foreign company i.e. HMCL Japan. Without said agreement, the business in question could not have been started or run or continue to run and with the end of the agreement business will also come to halt. The expenditure in question is nothing but "Capital Expenditure" and not "Revenue Expenditure", hence, not deductible under section 37 of Act 1961. Assessee had obtained advantage of enduring benefit by payment of lum sum fee, though in installments. Both the payments to foreign company are in respect of a benefit which is not only of enduring nature but for the purpose of acquiring of an asset and hence a 'Capital Expenditure' and not 'Revenue Expenditure'.

Revenue's Appeals allowed

2017-TII-21-ITAT-MAD-INTL

DCIT Vs FORD INDIA LTD: CHENNAI ITAT (Dated: January 31, 2017)

Income Tax - Sections 9(1)(vii), 195 & 201 - India-Thailand DTAA - Article 22, India-UK DTAA - Article 13(4)

Keywords - Non-resident - TDS - Foreign remittance - fees for technical services - PE - reimbursement of expenses - installation and commissioning charges - managerial services - professional services - processing fees - advisory fees - annual licence fees

A) The AO noticed that the assessee had remitted certain sums to Thailand based entities without any deductions of tax at source. Assessing Officer was of the view that since the Indo Thai tax treaty did not have any specific provision for the taxation of fees for technical services, to that extent the provisions of Section 9(1)(vii) are applicable and accordingly, the assessee ought to have withheld tax at source from these payments. CIT(A) held that since the related tax treaty does not have any specific provision for taxation of fees for technical services, and since these amounts are not taxable in India as business profits under the said treaty, the income embedded in these payments for fees for technical services is not taxable in India.

B) The assessee made foreign remittances to Ford Motor FIPL USA and Ford Motor FIPL Ltd UKas reimbursement of expenses under the cost sharing arrangement for regular preventive maintenance. The Assessing Officer noted that the payment was made towards " plant fire protection engineering services ". Assessing Officer held that the assessee should have deducted tax at source as these amounts were taxable as fees for technical services under section 9(1)(vii), and, even there was any doubt, the assessee should have filed an application u/s 195(2). CIT(A) deleted the impugned tax withholding demands.

C) The assessee company made remittances, on account of installation and commissioning charges for different machineries and equipment. Assessing Officer observed that "the payment is not towards the cost of any machinery as it is only for providing the services of installation and commissioning after the supply of machinery". He further observed that "a purchase contract terminates when the goods are delivered and the installation/ commissioning takes place after the goods are purchased, and technical skills of the individuals are utilized by the FIPL to install the machinery and its successful functioning, without imparting the technical knowledge of the functioning of the machinery, the same cannot operated by FIPL and put to use for production". Assessing Officer also observed that " only because the supplier has agreed to undertake installation of the machinery, the payments cannot taken as towards sale of machinery". Assessing Officer held that "the payments made fall under the category ‘fees for technical services' as per Explanation 2 to Section 9(1)(vii), which prevails over the treaty where it is defined the services are inexplicably and essentially linked to the supply of goods". It was thus concluded that the assessee had an obligation to deduct tax at source from these payments and, accordingly, a tax withholding demand under section 201 r.w.s 195, was raised on the assessee. CIT(A) held that "appellant is under an obligation to deduct tax at source in respect of payments made in connection with installation/ erection of machinery etc as installation is ancillary and subsidiary to use equipment or enjoyment of the right for such use".

D) The assessee made payment to Mr Steve Lazenby, proprietor of Lazeny Construction Safety Services UK and to Mr Joe Oszvart USA, for services rendered by them. Assessing Officer was of the view that since these payments are in the nature of fees for technical services, and since, in any event, the assessee did not file residency certificates of these entities, the assessee ought to have deducted tax at source.

E) The Assessee made a payment to Ford Espana Spain towards payment of data processing charges. The case of the assessee was that in view of the protocol to  India Spain Double Taxation Avoidance Agreement, ‘make available' requirement is to be read into the provisions for taxation of fees for technical services, and that rendition of data processing services do not make available any technical knowledge, skill etc. The Assessing Officer held that ‘protocol is not about incidence of taxability but about rate of tax' and also on the ground that, for the purpose of applying protocol benefits, only treaties entered subsequent to the signing of Indo Spanish tax treaty are to be taken into account.

F) The assessee had made a payment of advisory fees, for arranging finance, to Deutsche Bank Singapore. The Assessing Officer was of the view that this payment is in the nature of fees for technical services under section 9(1)(vii) and the assessee, therefore, ought to have deducted tax at source from the said remittance.

G) The Assessee made payment to MDIT Inc for installation and extended support of change management software system, which was in the nature of off the shelf software. The payment was in respect of annual licence fees for products in the nature of software. Assessing Officer held that the payment is made towards annual fees and towards software support services which is continuously provided to the company for utilizing technical knowledge by way of licence fees and the same is imparted to the company by technically qualified persons, the technical skill is provided to the company in installing software and for maintaining the same without break which falls under the category "fees for technical services' as per section 9(1)(vii) of the Income Tax Act. It was held that the assessee should have deducted tax at source from the remittances made to the above parties at 10% of the amount paid.

On appeal, the ITAT held that,

Whether overseas remittances warrants withholding tax liability, where such remittances are in the nature of FTS and the recipients did not have a PE in India - NO: ITAT

+ there is no dispute that there is no specific provision for taxation of fees for technical services in India Thailand tax treaty. There is also no dispute that Fuji Asia Co Ltd Thailand and Auto Alliance Co Ltd Thailand did not have any permanent establishments in India. An income is of such a nature as, on satisfaction of conditions specified in the related provision, could be taxed under any of these specific treaty provisions, cannot be covered by this residuary clause. It is not the fact of non taxability under the operative articles (i.e. article 6 to 21) which leads to taxability under residuary clause in article 22, but the fact of income of that nature being covered by those articles which can lead to taxability under article 22. Article 22 does not apply to items of income which can be taxed in any situations under article 6-21 whether or not such an income is actually taxable under these articles. The nature of income earned by the recipientswas in the regular course of their business. In the event of these entities satisfying the conditions regarding existence of permanent establishment in India, the amounts so received by these entities would have been taxable as business income. The income in question is thus clearly dealt with by article 7 read with article 5 and the reason why it has not been taxed is that the entities concerned did not have permanent establishments in India. Clearly, therefore, the income in question is covered by the provisions of the Indo Thai tax treaty but is not taxable as the recipients did not have a PE in India. Thus, article 22 cannot be pressed into service in respect of the said income. There is no specific taxability provision, under India Thailand tax treaty with respect to taxability of fees for technical services;

+ even though the remittances in question are in the nature of fees for technical services in the hands of Thai entities, the income embedded in these remittances is not taxable in India in the hands of these entities, in terms of the provisions of Indo Thai tax treaty. It is only elementary that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, " the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee ". In the case of  Motorola Inc. vs. Dy. CIT 2005-TII-10-ITAT-DEL-SB- INTL , Tribunal observed that " DTAA is only an alternate tax regime and not an exemption regime " and, therefore, " the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA ". Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either;

Whether reimbursement of expenses under cost sharing arrangement for regular preventive maintenance, requires TDS deduction, when the services provided by non residents did not involve any transfer of technology for purpose of enabling performance - NO: ITAT

+ it is at best a case of payment of fees for technical services but then it is not even the case of the Assessing Officer that by rendition of these services, there was any transfer of technology in the sense that the recipient of service was enabled to render this service on his own without recourse to the service provider. The recipient of these amounts are based in USA and UK and are entitled to the benefits of  India UK DTAA. There is also no dispute that in both of these treaties, there is ‘make available' requirement in the article dealing with taxation of fees for technical services. The amounts in question were not taxable as fees for technical services under the provisions of the respective tax treaties. When the amounts are not taxable under the provisions of the respective tax treaties, there cannot be any occasion to deal with the provisions of the Income Tax Act;

Whether assessee can be held liable to deduct TDS on remittances made on account of managerial services, if the expression 'managerial services' is outside the ambit of 'FTS' - NO: ITAT

+ so far as Indo UK and Indo US tax treaties are concerned, the article dealing with fees for technical services has ‘make available' clause which provides that in order to trigger taxability as fees for technical service under the related treated provision, simply the rendition of a technical service is not sufficient, and, in addition, there has to be a transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. Coming to the  India Sweden Double Taxation Avoidance Agreement, while it has its FTS clause on the classical model i.e. without make available clause, but, by the virtue of MFN (most favoured nation) clause in the protocol appended to the Indo Swedish tax treaty, the make available clause stands imported into the treaty provision. Under the protocol provision, therefore, in case India limits its taxation of fees for technical services to a lower rate or narrower scope with any OECD country, the same lower rate or narrower scope is to apply in respect of Indo Swedish tax treaty as well. It is not even a condition precedent that such a treaty should be a subsequent treaty or that any further steps are required to be taken by the contracting states;

++ the definition of "fee for technical services" occurring in Article 13(4) of the Indo-UK DTAA clearly excludes managerial services. What is being provided by Steria France to the Petitioner in terms of the Management Services Agreement is managerial services. Once the expression 'managerial services' is outside the ambit of ‘fee for technical services', then the question of the Petitioner having to deduct tax at source from payment for the managerial services, would not arise. It is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The amounts in question were not taxable as fees for technical services under the provisions of the respective tax treaties. It is notanybody's case that by rendering installation and commissioning services, the recipient of such services is enabled to perform the same task next time without recourse to the service provider. So far as treaties with make available clause are concerned, the payments made for installation and commissioning charges, for that reason alone, cannot be taxed as fees for technical services. The income embedded in these payments are thus not taxable as FTS, and it is not even the case of the revenue that the installation period crossed the PE installation threshold limit. These amounts cannot be taxed as business profits either. There is no other treaty provision under which these amounts can be brought to tax in India under the respective tax treaty. When the amounts are not taxable under the provisions of the respective tax treaties, there cannot be any occasion to deal with the provisions of the Income Tax Act. The related disallowance deleted;

Whether payments made for professional services can be taxed as 'fees for technical services' - NO: ITAT

Whether payments made for the professional services can be taxed as independent personal services - NO: ITAT

+ it is seen that the Coordinate bench in the case of  ITO Vs Susanto Purnamo - 2016-TII-196-ITAT-AHM-INTL held that the services rendered by the assessee are in the nature of professional services but then since the conditions set out in article 15(1) are admittedly not satisfied on the facts of this case, the taxability under article 15 does not arise. By the virtue of exclusion clause in article 12(5)(e), which provides that the income from professional services rendered by an individual or group of individuals (other than a company) cannot be subjected to tax under article 15, the consideration for these services cannot be taxed under article 12(4) either. Revenue's case for taxability under article 12(4) is thus clearly unsustainable in law and on the facts of this case. The AO is therefore directed to delete the tax withholding demand so far as US based recipient is concerned. Even in the case of the UK based person, the payments made for the professional services cannot be taxed as fees for technical services, and these payments cannot be taxed as independent personal services either as the conditions set out in Section 15(2) are not satisfied. The Assessing Officer will delete this tax withholding demand as well;

Whether liability to deduct TDS would arise on account of data processing fees, where it does not enable the recipient of service to perform the same service again on its own without recourse to the service provider - NO: ITAT

+ in the Indo Spanish DTAA, vide article 12(4), the term " fees for technical services " is defined as " payments of any kind to any person other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (Independent Personal Services), in consideration for the services of a technical or consultancy nature, including the provision of services of technical or other personne l" and this definition is wide enough to cover the data processing charges. By the virtue of the protocol clause, in case India enters into any DTAA, coming into force after 1st January 1990, with any OECD Member State which provides for a lower rate or narrower scope than the provisions in the Indo Spanish DTAA, the same rate or the same scope will apply to Indo Spanish DTAA as well;

++ this protocol clause does not require any additional steps to be taken by the contracting states to give effect to such lower scope of the fees for technical services. As for the nature of data processing fees, it does not enable the recipient of service to perform the same service again on its own without recourse to the service provider. The ‘make available' clause is thus clearly not satisfied. It cannot also be treated as payment for use of equipment as the payment is for processing of data as a service package and not for the control and use of the equipment on which data is processed. Accordingly, the tax withholding demand in respect of this payment must also stand deleted;

Whether TDS deduction is warranted on payment of advisory fees for arranging finance, if the recipient did not had any PE in India and the services were simply consultancy services which did not involve any transfer of technology - NO: ITAT

+ this issue is covered, in favour of the assessee, by a coordinate bench decision in the case of  DCIT Vs Andaman Food Products Pvt Ltd - 2012-TII-67-ITAT-KOL-INTL   wherein it was held that GMPL did not have any permanent establishment in India, and with the legal principle laid down in the applicable tax treaty that, in the absence of the PE of GMPL, its business profits could not be taxed in India. The taxability under the source state under Article 7 of the applicable tax treaty, therefore, clearly fails. The services were simply consultancy services which did not involve any transfer of technology. The amounts received by the GMPL could not be taxed as 'fees for technical services either. Unless there is a transfer of technology involved in technical services extended by Singapore company, the 'make available' clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 12(4) of India Singapore tax treaty.Article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges on is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. The income from consultancy services, which cannot be taxed under article 7, 12 or 14 because conditions laid down therein are not satisfied, cannot be taxed under article 23 either. It is also only elementary that when recipient of an income does not have the primary tax liability in respect of an income, the payer cannot have vicarious tax withholding liability either. Following the same, this tax withholding demand must also, therefore, stand deleted;

Whether assessee is liable to deduct TDS on annual licence fees paid for products in the nature of software, where the services concerned did not result in any transfer of technology - NO: ITAT

+ the Jurisdictional High Court in the case of  CIT VsVinzas Solutions India Pvt Ltd - 2017-TIOL-170-HC-MAD-IT , held that these payments are not taxable as royalty even under the provisions of the Income Tax Act. In any event, under the provisions of the Indo US tax treaty, the use of copyrighted article cannot result in taxation of consideration for the same as royalty. As for the support services, this is not, and cannot be, anyone's case that these services resulted in any transfer of technology and thus satisfied the make available clause in FTS taxation provisions under the Indo US tax treaty. The authorities below have simply proceeded to apply the domestic law, in respect of FTS, without any regard to the overriding treaty provisions. In view of the same, Assessing Officer directed to delete the tax withholding demand in respect of these payments as well.

Revenue's appeals dismissed