Income-tax : Nature of payment made by assessee to New Zealand company is of liaisoning and coordinating to ensure that blood samples collected by assessee is properly received at US and reports are received in time and as per terms fixed by US Embassy; neither of these services can be termed as services in nature of managerial, technical or consultancy nature; it is also not providing services of technical or other personnel; therefore, it also cannot be said that such services fall within term ‘fee for technical services.’ as contemplated by Article 12 [Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident - Indo - New Zealand DTAA - Article 12 (Royalties & Fees for Technical Services)]
[2011] 10 taxmann.com 123 (Delhi - ITAT)
ITAT, DELHI BENCH ‘D’, NEW DELHI
DCIT
v.
MRO (India) (P.) Ltd.
ITA NO. 3838/DEL/2007
FEBRUARY 11, 2011
ORDER
I.P. Bansal, Judicial Member. - This is an appeal filed by the revenue. It is directed against the order passed by the CIT (A) dated 4th June, 2007 for assessment year 2004-05. Grounds of appeal read as under:-
1. “Whether on the facts and in the circumstances of the case, the ld. CIT(A) was justified in allowing the deduction of Rs. 27,11,280/- towards operating expenses being amount paid/payable of M/s MRO International New Zealand holding that the services in the filed of DNA testing to the prospective Indian immigrants by USA based certified laboratory, are not covered by the provisions of TDS and section 40(a) of Income-tax Act, 1961.
2. Whether on the facts and in the circumstances of the case, the ld. CIT(A) was justified in holding that the impugned services not liable for TDS and not covered under provisions of section 40(a) even though necessary particulars were not filed before the AO. In doing so, CIT(A) has not adjudicated the applicability of section 44AD of Income-tax Act, 1961 relied upon by the AO.
3. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of the hearing.”
2. The assessee company is incorporated in India in the year 2002 with the object of undertaking business in ‘service sector’ ranging from medical testing to tour operators. During the year under consideration it has carried on the activity of providing service in the form of DNA testing to the prospective Indian immigrants for USA Embassy located in Delhi and Mumbai. For this purpose, it had arrived at an understanding with MRO Ltd., New Zealand which has been spelt out in letter issued by them to the assessee dated 29th April, 2002 the copy of which is placed at page 53 of the paper book. The contents of the said letter are as under:-
“Date: 29-4-2002
From:
MRO Ltd. - New Zealand
To:
MRO India Pvt. Ltd.
Sub: Business plan for India operations
Dear Sirs,
As you are aware, MRO International has successfully finalized a long term contract for you whereby you are appointed as the sole authorized representative for Delhi for the purposes of conducting DNA tests for the US Consulate.
The detailed terms of contract are being sent to you. Please organize your facilities in order to provide satisfactory services to the clients.
Initially the US Consulate has agreed to this appointment for only New Delhi but we are also trying to extend this contract for you to Mumbai. The two locations would have their obvious advantages.
As per your request, the MRO group Head Quarters in New Zealand will provide the following services on a regular basis for your business operations: -
1. We shall provide all the necessary data, procedures and documentation formats for the operation of the business.
2. We will pass on all the relevant information on the various DNA labs operating in the USA giving their reliability, capacity, quality of service and charges.
3. Once you short list the DNA Lab, we can negotiate with them in order to obtain the most competitive and economical rates. Simultaneously your concern on the timely delivery of test reports at a very nominal extra cost shall be kept in mind, while finalizing terms with the lab.
4. We shall coordinate with your approved DNA Lab and the US Government in the US for the smooth running of your business and timely deliverables. Our representative office in the US can be approached for any specific issues.
5. All the above services shall be rendered in the US and/or in New Zealand.
6. Our charges for providing the above services shall be @ USD 260 per case. We agree to your special request to grant you a moratorium period of nearly a year in respect of our charges. This is for initial establishment and the stream lining of your business operations. The charges shall be levied starting from 1-4-2003 and are to be settled annually. We trust that this special concession will provide a breather to your operations.
In case you have any queries regarding the above, please inform us.
Thanks
Yours Sincerely,
Chris Andersen
For MRO Ltd. (New Zealand)”
3. Accordingly, during the year under consideration, the assessee had incurred a liability towards MRO New Zealand for paying a sum of Rs. 27,11,280/- on account of services rendered by them to the assessee to facilitate to get the DNA test reports of prospective Indian immigrants required to be submitted to US Embassy for immigration of those persons to United States. The assessee was required to show cause as to why such amount could be allowed to the assessee. Vide submissions made vide letters dated 22nd September, 2006, 18th October, 2006 and 27th October, 2006, it was submitted by the assessee that MRO New Zealand (foreign company) has helped the assessee for establishing its business - procurement of work for US Embassy as well as DNA test laboratory by USA at the most reasonable and discounted basis. These services were rendered outside India and income of the recipient company is not taxable in India. Such payment did not attract the provisions of TDS. Section 40 (a) applies only if the payments made by the assessee are in the nature of (a) royalty; (b) fee for technical services; and (c) other sums chargeable under the Act. It was submitted that the foreign company has rendered liaison and coordination services for the assessee company with DNA diagnostic laboratory at USA and with US Federal Company. The coordination and liaison is required for approval and acceptance of DNA test reports submitted by the assessee company to US Embassy. The foreign company was constantly following up the changes in the immigration laws and obtaining all new regulations on DNA testing, immigration and stipulation of USA immigration office and the identity assessments procedure for prospective immigrants. It was further submitted that all USA immigration offices, for ensuring that the country office for DNA test doing the job-wise rule book, used the term “chain of custody.” The Assessing Officer did not accept such submissions of the assessee as, according to the Assessing Officer, the assessee has not filed number and designation of staff during liaison in USA. It did not give the nature and detail of liaisoning done by MRO International each case wise for 237 cases. The assessee has also paid testing charges of Rs. 46,34,422/- in the nature of reimbursement to DNA Laboratory at USA. The nature of business of the assessee company is to provide specialized service to prospective immigrants to US referred by US Embassy. The assessee’s plea for non-deduction of tax also turned down by the Assessing Officer on the ground that simply if outside party does not have permanent establishment in India even then according to the provisions of Service Tax Act, the service tax is chargeable on number of services which are provided by a person who does not have any fixed establishment or permanent address in India. The Assessing Officer has referred to a Circular issued by Central Board of Excise and Customs and has come to the conclusion that tax was deductible. The Assessing Officer has also mentioned about applicability of provisions of DTAA, sections 9(1) and 40(a) and 195 of the Income-tax Act and, accordingly, he disallowed the amount of Rs. 27,11,280/-.
4. Before CIT (A), the assessee had filed detailed submissions and it was submitted that the payments made by the assessee to MRO New Zealand were neither in the nature of “royalty” nor in the nature of “fee for technical services.” It was submitted that it is also not chargeable to tax under “other sum chargeable under the Act.” A certificate was also produced according to which MRO New Zealand had considered the said amount for the purpose of offering the income in New Zealand. After considering all the submissions of the assessee, learned CIT (A) has recorded a finding that MRO New Zealand does not have PE in India. MRO India has paid to MRO New Zealand a sum of Rs. 27,11,280/- for rendering liaison and coordinating services at USA. The said payment does not fall within the ambit of royalty and fee for technical services. According to section 195, the assessee could be under an obligation to deduct tax at source only if the payment/remittance are a sum chargeable to tax in India. In the absence of liability regarding deduction of tax, section 40 (a) could not be applied, hence, he has deleted the disallowance. The department is aggrieved, hence, in appeal.
5. After narrating the facts, Ld. DR relying upon the observations of the Assessing Officer pleaded that the assessee was required to deduct tax at source from the aforementioned payments. As the tax was not deducted at source, the Assessing Officer had rightly disallowed the said amount under the provisions of section 40 (a) of the Act and, thus, he pleaded that the order of learned CIT (A) should be set aside and that of Assessing Officer should be restored.
6. On the other hand, it was submitted by learned AR that MRO New Zealand does not have permanent establishment in India. The services were rendered by the said concern only outside India for facilitating the obtaining of DNA test report from USA approved laboratories. The amount received by MRO New Zealand were not chargeable to tax in India and those were assessable in New Zealand. It was contended that providing liaisoning and coordinating services at USA can neither be termed as right to use the equipment or experience to bring the same within the ambit of “royalty.” Similarly, it was pleaded that it was also not in the nature of “fee for technical services.” He submitted that the term “fee for technical services” as per para 4 of Article 12 of Indo-New Zealand DTAA means payments of any kind to any person, other than payments to an employee of the persons making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. It was submitted that the services rendered by MRO New Zealand were neither in the nature of managerial nor technical nor consultancy nature. Thus, it was pleaded that learned CIT (A) has rightly held that unless the amount paid by the assessee to MRO New Zealand is chargeable to tax under Indian Income-tax Act, the assessee was not under an obligation to deduct tax at source and, thus, he has rightly held that section 40(a) was not applicable. He submitted that recently Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT 327 ITR 456 (SC) has held that for an obligation to deduct tax at source u/s 195, it is a condition precedent that the amount on which tax is sought to be deducted should be chargeable to tax under Indian Income-tax Act. Thus, it was pleaded by learned AR that learned CIT (A) has rightly deleted the disallowance and his order should upheld.
7. We have carefully considered the rival submissions in the light of the material placed before us. The question that the assessee whether is under an obligation to deduct tax at source has to be considered in the light of the decision of Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT (supra). Now, it has become a settled law that the expression “chargeable under the provisions of the Act” is to be understood as a liability to pay tax under Income-tax Act and unless there is a liability to pay income-tax under the Indian income-tax, it cannot be said that in all cases tax has to be deducted from the payment/remittance made by an assessee in India to a non-resident entity. It has been observed by Hon’ble Supreme Court that one cannot read section 195, as suggested by the department, namely, the moment there is remittance the obligation to deduct tax at source (TAS) arises and if such contention of the department is accepted, that would mean that on mere payment income would be said to arise or accrue in India and such interpretation would mean obliteration of expression “sum chargeable under the provisions of the Act” from section 195 (1). Therefore, to hold that the assessee is under an obligation to deduct tax at source u/s 195, it is necessary that the payment/remission should contain an element of income which is chargeable under the Income-tax Act. Now, therefore, it has to be examined that whether the amount paid by the assessee to MRO, New Zealand is a sum which could be charged to income-tax in their hands in India. The chargeability of tax in India of a resident of New Zealand is governed by the agreement of avoidance of double taxation and prevention of fiscal evasion with New Zealand issued by Notification No. GSR 314 (E) dated 27th March, 1987, as amended by GSR 477 (E) dated 24th April 1988 and GSR 37 (E) dated 12th January, 2000. The assessee has paid liaison and coordination charges to its counterpart at New Zealand and such payment has the possibility of assessment in India under two articles, namely, (i) Article 7 which regulates the business profits; and (ii) Article 12, which regulates income arising out of royalty and fee for technical services.
8. For non applicability of Article 7, it has been the contention of the assessee that unless MRO New Zealand has a PE in India, the Article 7 could not be applied to make the said payment liable for tax in India in the hands of MRO New Zealand. The contention that MRO New Zealand does not have PE was raised by the assessee even before the Assessing Officer. No material has been brought on record by the Assessing Officer to suggest that such contention of the assessee is wrong. Therefore, the applicability of Article 7 is ruled out.
9. Now, coming to Article 12, the term “royalty” has been defined in para 3 of Article 12 and the term “fee for technical services” is described in para 4 of Article 12. Both the paras are reproduced below:-
“3. The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.
4. The term “fees for technical services” as used in this article means payments of any kind to any person, other than payments to an employee of the persons making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.”
10. As it can be seen, ‘royalty’ can constitute only if it is a payment of any kind received as a consideration for use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films, films on video tapes used in connection with television or radio broadcasting and any patent, trade mark, design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. No material has been brought on record to suggest that the payment made by the assessee to MRO New Zealand qualify for any of the work for which the payment could be termed as payment for royalty as per para 3 of Article 12.
11. Similarly, the term “fee for technical services” mean payment of any kind to any person other than payments to an employee or the persons making the payments or to any individual for independent personal services mentioned in Article 14 in consideration for services of managerial, technical or consultancy nature, including the provision of services of technical or other personnel. The nature of payment made by the assessee to MRO New Zealand is of liaisoning and coordinating to ensure that the blood samples collected by the assessee is properly received at US and the reports are received in time and as per the terms fixed by the US Embassy. Neither of these services can be termed as services in the nature of managerial, technical or consultancy nature. It is also not providing the services of technical or other personnel, therefore, it also cannot be said that such services fall within the term ‘fee for technical services.’
12. The Assessing Officer has drawn analogy from service tax provisions which are totally different from the provisions contained in aforementioned agreement of India with New Zealand and cannot be said to apply on the payments made by the assessee to MRO New Zealand. In our opinion, learned CIT (A) has rightly held that the payments made by the assessee to MRO New Zealand were not the payments in the nature of income which could be assessed as chargeable to tax in India in the hands of MRO New Zealand. If it is so, then, the assessee was not under an obligation to deduct tax at source u/s 195 of the Act and, hence, the question of disallowance to be made u/s 40 (a) of the Act does not arise. He has rightly deleted the addition. We confirm his order and the appeal filed by the revenue is dismissed.
13. In the result, the appeal filed by the revenue is dismissed. The order pronounced in the open court on 11.2.2011.
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