Assistant Commissioner of Income-tax, Central Circle 41, Mumbai v. Anchor Health and Beauty Care (P.) Ltd
The assessee was engaged in the business of manufacturing and trading of tooth powder, tooth paste, tooth brush and other health care products. During the impugned assessment year it had made payment to a British Dental Foundation 'B' towards accreditation panel fees. The Foundation was a UK based registered charitable institution. The foundation was stated to, inter alia, evaluate consumer oral health care products to ensure that manufacturers' product claim were clinically proven and not exaggerated. As a result of the accreditation granted by the Foundation, the assessee was allowed to use that fact of approval in the marketing of its products. Assessing Officer observed that the payment made by assessee to the Foundation, was in nature of royalty and assessee was obliged to deduct the tax at source from the same, which was not deducted by the assessee.
He further observed that 'the assessee had not submitted any certificate in proof that the amount was not taxable in India', and that 'in view of the above, the expenditure was disallowed under section 40(a)(i), and, was accordingly added to the income of the assessee. On appeal, Commissioner (Appeals) deleted the addition made by Assessing Officer holding that the Foundation, did not had any permanent establishment in India and the amount paid to them could not be treated as royalty.
On revenue's appeal:
CASES REFERRED TO
GE India Technology Centre (P.) Ltd. v. CIT  327 ITR 456/193 Taxman 234 (SC) (para 5).
Pramod Kumar, Accountant Member. - The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in deleting the impugned disallowance of Rs. 11,71,826 under section 40(a)(i) of the Income-tax Act, 1961. The assessment year involved is 2004-05, and the impugned assessment was framed under section 143(3) of the Act.
2. It is a recalled matter. Originally, this appeal was disposed of ex parte, though by an elaborate and reasoned order, by the learned Vice President in SMC bench, but, upon the matter having been recalled at the instance of the assessee respondent, the appeal has been transferred to this division bench. That is how we have come to be in seisin of the matter, and that is how the appeal has once again come up for hearing on merits.
3. Let us first take a look at the developments leading to this litigation before us. The assessee before us is engaged in the business of manufacturing and trading of tooth powder, tooth paste, tooth brush and other health care products. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has paid a sum of Rs. 11,71,826 as accreditation panel fees to British Dental Health Foundation UK, but has not deducted tax at source from the same. On these facts, when the assessee was required to show cause as to why disallowance not be made under section 40(a)(i) in respect of the said payment having been made without deduction of tax at source, it was submitted by the assessee that as the recipient of income was not liable to be taxed, in respect of this income in India, no tax was required to be deducted at source by the assessee. It was in effect contended that disallowance under section 40(a)(i) can only be made when taxes are deductible but not deducted. However, this submission did not find any favour from the Assessing Officer. He was of the view that the aforesaid contention of the assessee "is not correct because, as per section 195 of the Income-tax Act, 1961, tax has to be deducted at source while remitting the monies outside India" . He further observed that "the assessee has not submitted any certificate in proof that the amount is not taxable in India", and that "in view of the above, the expenditure of Rs. 11,71,826 is disallowed under section 40(a)(i), and, is accordingly added to the income of the assessee". Aggrieved by the disallowance so made, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) was of the view that as the British Dental Health Foundation did not have any permanent establishment and as the amounts paid to them could also not be treated as 'royalties' , the payment so made to the BDHF could not indeed be taxed in India. Learned CIT(A) further noted that since the BDHF did not have any tax liability in respect of these payments, and the assessee did not , therefore, have any obligation to deduct tax at source from this payment, disallowance under section 40(a)(i) was not sustainable in law. The impugned disallowance was thus deleted. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
5. We find that, as held by Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT  327 ITR 456/193 Taxman 234, tax deduction at source obligations under section 195(1) arise only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. The underlying principle is this. Tax withholding liability of the payee is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, the Assessing Officer cannot proceed on the basis that the payer had an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. That exercise was not carried out by the Assessing Officer on the facts of this case. The Assessing Officer was thus clearly in error in proceeding to invoke disallowance under section 40(a)(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance. To that extent, CIT(A) was justified in deleting the impugned disallowance.
6. However, while on this issue, it is also necessary to consider is whether the assessee indeed had an obligation to deduct tax at source from the remittance of Rs. 11,71,826 to British Dental Health Association UK.
7. The assessee had made the payment of Rs. 11,71,826 to British Dental Health Association towards accreditation panel fees. BDHF is a UK based registered charitable institution. This Foundation is stated to, inter alia, "evaluate consumer oral health care products to ensure that manufacturers' product claims are clinically proven and not exaggerated" and "an independent panel of internationally recognised dental experts" is stated to "study all the claims carefully to make sure they are true, and backed up by reliable scientific evidence". As a result of the accreditation granted by the BDHF, the assessee is allowed to use this fact of BDHF approval in the marketing of its products. The question that we actually need to decide is whether the amount so received by BDHF, in consideration of the accreditation, can be brought to tax in India?
8. It is not even in dispute that BDHF does not have any permanent establishment in India, and the assessee has also filed a certificate to that effect as issued by the BDHF. It is also not in dispute that the provisions of the India United Kingdom Double Taxation Avoidance Agreement (206 ITR Stat 235; 'India UK tax treaty', in short) apply to the facts of this case, and that, these provisions being beneficial to the assessee vis-à-vis the provisions of the Income-tax Act, the treaty provisions will apply. Considering the fact that the payee does not have any PE in India, within meanings of that expression under Article 5 of Indo UK tax treaty, and this assertion has not been challenged by the revenue authorities, the income embedded in the accreditation fees cannot be brought to tax in India as business profits under Article 7. Learned Departmental Representative also does not dispute this. His only defence is that even if it is not taxed as business profits, it is at least taxable as 'royalties', since the assessee derives valuable advantage from the accreditation by BDHF and use the same as a marketing tool. However, we find that the scope of expression 'royalty', for the purposes of India UK tax treaty, is quite restricted as scope as evident from the provisions of Article 13(3) as reproduced below:
"(3) For the purposes of this Article, the term 'royalties' means:
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
9. While clause (b) of the definition of clearly inapplicable on the facts of this case as this clause deals with the equipment leasing only, clause (a) also does not deal with a situation in which the accreditation or approval granted by a resident is used, in another country, for promoting the sales. This accreditation does not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience - or, for that purpose, use or right to use of anything falling in any other category of clause (a). An accreditation or approval by a reputed body may give certain comfort level to the end users of the product, and thus may constitute a USP (i.e. unique selling proposition) to that extent, but it may also be, therefore, used for the purposes of marketing of the products, but, legally speaking, the payment made for such an accreditation is not covered the definition of 'royalty' as set out in Article 13(3) of India UK tax treaty. Learned Departmental Representative's argument is that in substance the payment for BDHS accreditation is nothing but a royalty to use their name for marketing, and, therefore, this payment should be treated as a payment of royalty. We see no substance in this simplistic plea. When an expression has been defined in law, and the impugned payment is not covered by such a specific definition, it cannot be open to us to look at normal connotations of this expression in business parlance. Simply because assessee is benefited by this accreditation, and the assessee uses the same for its marketing purposes, the character of payment cannot be classified as 'royalty'. The expression 'royalty' is neatly defined under Article 13(3) of Indo UK tax treaty, and unless the payment fits into the description set out in Article 13(3), it cannot be termed as 'royalty' for the purposes of examining its taxability under the tax treaty. In our considered view, on the facts of the case, the impugned remittance is in the nature of business profits in the hands of the UK based recipient, and since the recipient admittedly did not have any permanent establishment in India, the same is not taxable in India. In our considered view, therefore, the recipient did not have any primary tax liability in India, as a corollary thereto, the assessee did not have tax withholding obligations from this remittance.
10. For the foregoing reasons, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
11. In the result, the appeal is dismissed.