Gujarat H.C : The payment made towards supply of design and drawings to a non-resident architect firm was outright purchase and not taxable as royalty or FTS under Section 9(1) of the Income Tax Act, 1961

High Court Of Gujarat

CIT vs. Creative Infocity Ltd.

Section  9, 195

Assessment year 2004-05

M.R. Shah And B.N. Karia, JJ.

Tax Appeal No. 96 Of 2017

April  25, 2017

JUDGMENT

M.R. Shah, J. – Feeling aggrieved and dissatisfied with the impugned judgment and order dated 21.09.2016 passed by the learned Income Tax Appellate Tribunal, Ahmedabad (hereinafter referred to as the “ITAT”) passed in ITA No.4124/AHD/2008 for AY 2004-05, by which, the learned ITAT has dismissed the said appeal preferred by the Revenue, the Revenue has preferred present appeal with the following proposed question of law:

“A. Whether Hon’ble ITAT has erred in facts and in law in holding that the payment made towards supply of design and drawings to a non-resident architect firm was outright purchase and not taxable as royalty or FTS under Section 9(1) of the Income Tax Act, 1961 ?

B. Whether Hon’ble ITAT has erred in facts and in law in holding the payment to a non-resident for marketing activity as reimbursement of expenses especially when expenses were part and parcel of technical service related to income earned in India ?”

2. The facts leading to the present Appeal in nutshell are as under:

2.1 That the assessee company- M/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 Non-Resident 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 2003-04 to 2006-07, 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 companies, no TDS was deducted.

2.2 The aforesaid was found during the survey operation under Section 133 A of the Act on 14.02.2008 which was carried out to verify issue relating to compliance of TDS provisions under Section 195 of the Act with regard to payment to Non-resident and foreign companies. The case was accordingly referred to International Taxation Unit, Ahmedabad.

2.3 During the course of verification of these foreign remittances, the AO observed from the agreement dated 5.6.2000 entered into between assessee and M/s. Naimisha Construction Inc. USA that the services provided by the Non Resident Company were rendered towards providing of architectural, structural engineering designs and drawings services, as mentioned in clause 9 of the said contract. As regards the payments made to Creative IT Inc. USA, the AO observed that the said payments were made for providing services related to marketing and selling, Projects Office Administration Expenses and Promotional Expenses and to design charges which were paid to employees of M/s. Creative IT Inc. USA, towards their salary, travel expenses, etc. Therefore, the AO was of the opinion that since the payment made towards aforesaid services rendered by both the aforestated foreign companies were taxable as defined in Section 9(1)(vii) of the Income Tax Act as well as Article 12 of the Indo-USA DTAA, the assessee was required to deduct tax at source as per Section 195 of the Income Tax Act. Therefore, since the assessee made aforesaid payment to the aforesaid foreign companies without deducting tax at source, the AO passed order under Section 201(1) and 201(1A) r/w Section 195 of the Act raising demands of Rs.5,61,60,000/- Rs.51,97,003/-, Rs.56,99,339/- and Rs. 67,86,682/- for the AYs 2003-04 to 2006-07 respectively. However, it was the case on behalf of the assessee which was not accepted by the AO that income of the aforesaid foreign companies viz. M/s. Naimisha Construction , Florida. USA and M/s. Creative IT Inc. USA was not taxable in India as they were not having permanent establishment in India. It was also the case on behalf of the assessee that the assessee made payment to M/s Naimisha Construction Inc. USA towards outright purchased design and drawings as per agreement dated 5.6.2000 and no service much less technical services has been provided by M/s. Naimisha and therefore, Section 9 of the 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 (International Taxation) v. Heubach Colour (P.) Ltd. [2015] 54 taxmann.com 377/69 SOT 173 (Ahd. – Trib.), the learned Tribunal has dismissed the said appeal preferred by the revenue which has given rise to the present appeal with the aforestated proposed question of law.

3. Shri Nitin Mehta, learned counsel has appeared on behalf of the revenue and Shri Tushar Hemani, learned counsel has appeared on behalf of the assessee.

3.1 Shri Nitin Mehta, learned counsel for the Revenue has vehemently submitted that learned Tribunal has materially erred in law and on facts in holding that the payment made towards supply of design and drawings to Non-Resident (M/s. Naimisha Construction Inc. USA) was outright purchase and therefore, not taxable as Royalty or FTS under Section 9(1) of the Act. Shri Mehta, learned counsel for the revenue has assailed the aforesaid finding and order passed by the learned ITAT in treating payment towards supply of design and drawings on non resident as outright purchased on the following grounds:

(1). The Tribunal does not reproduce or rely on any clause of the Agreement between the Assessee and the Non-resident to show that there is anything in the agreement which concludes that this is a simpliciter purchase and sale transaction. The Tribunal simply reproduces its earlier judgment in Heubach Colour (P.) Ltd’s case (supra) and based on it holds that it is outright purchase without analysing the agreements or its clauses in the present case.

(2). The Tribunal fails to appreciate that the facts of this case are different from the facts in the case of Heubach Colour (P.) Ltd.’s case (supra). To appreciate the facts of Heubach case, part of certain paras are reproduced below.

“2. …During the year A.Y. 2007-08, assessee had acquired Avecia Business from Colour Ltd. (hereinafter referred as “CL”). … The stand of assessee before Assessing Officer was that payment is for outright purchase of capital assets being intangibles in the form of goodwill, trademark and technical know-how.

5. ….Its case is that the transactions are not for royalty as defined in section 9(l)(vi) of the Act. Complete reading of the agreements and clauses there under reveal that assessee had purchased goodwill, trademark and technical knowhow from Colour Ltd, outright. M/s. Colour Limited (“seller”) was the owner of manufacturing processes, formulae, trade secrets, technology, analytical techniques, testing procedures, processes and all documents and literature pertaining to the manufacturing. The knowhow relating to the business was purchased by assessee vide agreement dated 31-3-2007. 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 know-how. Like present case, in Heubach Colour (P.) Ltd.’s case (supra) 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 Colour (P.) Ltd.’scase (supra) case, in the present case there is no purchase of the entire business with existing assets by the Assessee.

(b) In Heubach Colour (P.) Ltd.’s case (supra) 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 assessee who received the right, title, interest and ownership in the assets from the effective date. In the present case there are neither any clauses in the agreement which suggest that seller is transferring the entire rights and the assessee is getting the ownership of the same from the effective date.

(c) In Heubach Colour (P.) Ltd.’s case (supra) case, the ITAT held that the payment was not in respect of right to use but for the purchase thereof and no rights in these properties were retained by non-resident. In the present case, the ownership continued to vest with the non-resident Architect and only right to use designs were extended to the asseseee company through the Contractor Naimisha Construction. Accordingly, it was not the case of outright sale wherein all the rights have been transferred by the seller to the purchaser. Thus unlike Heubach Colour (P.) Ltd.’s case (supra) case, present is not the case of transfer of all rights absolutely and exclusively but instead its only of providing services by permitting part of right to use on non-absolute and non exclusive basis.

(3) The Tribunal failed to appreciate that the nature of Income under dispute is for payment made for providing designs and drawings for Assessee’s specific project of construction of Infotower, Twonship, Club & Resorts, Commercial Mall and all common area improvements for the complex and thus they are nothing but Architectural Services provided by the contractor M/s Namisha Constrution INC (hereinafter referred to as “Namisha” or “the Contractor”) by utilising the services of the Non-resident Architect Bob Snow Associates. As per Article 2, the Contractor shall be responsible to execute the entire Work described in the Contract Documents.

(4) The Present is the case of the work being done by the Architect firm which is routed through the contractor Naimisha to the assessee company and is not the case of the outright sale. This is further clear because the ownership was not at all transferred to the assessee company. As per Article-9 of the agreement dated 05th June 2000 executed between the assessee company and non-resident-M/s Naimisha Construction Inc, the “General Conditions of the Contract for Construction A1A Document A201 1987 Edition” formed the part of the general conditions of such agreement. The clause 1.3 from the said Edition is reproduced as under:

“1.3. Ownership and Use of Architects Drawings Specifications and other Documents:

1.3.1. The Drawings, Specifications 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 sub-contractor, sub-subcontractor 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, Sub-subcontractor 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 Contractor, Subcontractors, Sub-subcontractors and material or equipment suppliers are granted a limited license to use and reproduce applicable portions of the Drawings, Specifications and other documents prepared by the Architect appropriate to and for use in the execution of their Work under the Contract Documents. All copies made under this license shall bear the statutory copyright notice, if any, shown on the Drawings, Specifications and other documents prepared by the Architect. Submittal or distribution to meet official regulatory requirements or for other purpose in connection with this project is not to be construed as publication in derogation of the Architect copyright or other reserved rights.”

(5). From the above reproduced clause, it is very clear that the assessee company was not to own or claim a copyright in the drawings, design, specifications and other documents prepared by the non-resident Architect. Thus the transfer of such designs and drawings by the non-resident Architect to Namisha and by Namisha ultimately to the assessee company was not an outright transfer towards sale where all rights in the property were transferred by the non-resident to the assessee company. As per the above reproduced clause 1.3 of the AIA document which formed part of the agreement dated 05th June 2000, it is clear that the ownership in such designs and drawings have not been transferred to the assessee company. Rather only certain rights in respect of such property in the nature of designs and drawings have been transferred wherein the assessee company has been granted a limited license to use and reproduce applicable portions of the designs, drawings, specifications and other documents prepared by the non-resident architect appropriate to and for use in the execution of their project. Accordingly, the payments made by the assessee company very clearly fall within the definition of royalty provided vide Explanation 2 of section 9(1)(vi) of the IT Act and are thus taxable in India.

‘Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or 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 non-resident 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 nature of income, whether the same falls in one of the nature of income stated in that section like in the present case, royalty. It is further submitted that if the income is in the nature of Royalty, then who receives it, where he receives it, what is his residential status, place of actual accrual etc. all are immaterial, as the same shall be deemed to accure in India and thus taxable in India. Accordingly in the present case, whether the Non-resident Architect is a party to the agreement with Assessee or the amount paid is not directly to the said Architect but to Namisha are immaterial, as the nature of income is Royalty falling in section 9 and hence will be taxable in India. It is submitted that the characterisation of Income will not undergo any change whether the same is received by non resident Architect or Namisha.

3.3 It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that the learned Tribunal has completely disregarded and ignored the terms and object of contract in holding that contract involved purchase of designs and drawings. From the discussion made above, it is crystal clear that this was not the case of “transfer of all rights in property” leading to sale but was the case of “transfer of certain rights in respect of the property”. It is submitted that the payment made towards such transfer was thus taxable as Royalty under the IT Act. There is no clause pointed out either by the Tribunal or by the Assessee which shows that there is any element of sale of all rights but on the contrary the Revenue has clearly pointed out the aforesaid clause which states that its only certain rights which have been received by the Assessee in the said drawings and designs.

3.4 It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that clause 5 relating to the progress of payments, makes it clear that the payment cannot be said to be for outright sale, as the payment is not based on the completed goods but is dependent upon stage/progress of work and phase of project. Had it been a simpliciter purchase and sale transaction, there would not have been any consideration for stage/progress of work as the purchaser would only be concerned with the completed product, which is not the case here.

3.5 Making above submission, it is vehemently submitted by Shri Mehta, learned counsel for the revenue that in the 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 US-DTAA, 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 use, the same is taxable under Article 12(3) as royalty.

It is submitted that therefore, the payments made towards supply of designs and drawings are taxable u/s 9(1)(vi) r.w. Article 12 of the India USA DTAA.

3.8 It is further submitted by Shri Mehta, learned counsel for the revenue that the learned Tribunal in its decision has completely disregarded and ignored the terms of contract in holding that the transaction was of an outright purchase. It is submitted that the logic that since the payment is made to Namisha and not to the Architect firm and therefore it shows that Namisha has merely supplied the drawings and there is no element of services is completely disregarding that in today’s commercial world, service sub-contracting and outsourcing is an absolute reality and the economy of India is thriving on the same. It is submitted that the order of the Tribunal is perverse as it is based on presumptions and assumptions which has no basis in law or in facts.

3.9 It is further submitted by Shri Mehta, learned counsel for the revenue that the cases of GE India and Transmission Corporation, relied upon by the Assessee are not applicable as in the present case, there is income which is taxable in India, unlike in those cases where there was no income found to be taxable in India. On the contrary these judgments and various others judgments hold that in a TDS proceedings like in section 195, it should be prime facie found that the Income is taxable in India and it is only during the assessment proceedings that it would be conclusively found whether the Income is ultimately taxable in India or not. Liability u/s 195 is not final and is subject to the ultimate assessment.

3.10 It is further submitted by Shri Mehta, learned counsel for the revenue that the reliance on concept “make available clause” is totally misplaced as the payment is made for technical plan or design falls within the category of development and transfer of a technical plan or technical design.

3.11 It is further submitted by Shri Mehta, learned counsel for the revenue that the case of Dy. CIT v. Erricson is not applicable to the facts of the present case as in this case there is no element of purchase and sale. It is submitted that in fact as per the agreement itself it is case of at best, transfer of certain rights of use.

3.12 It is submitted by Shri Mehta, learned counsel for the revenue 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 Mehta, learned counsel for the revenue that the learned Tribunal has erred in holding that the payment made was towards reimbursement of expenses and not reimbursement of services. From the perusal of the page no 9 of order of CIT (A) for appeal No CIT (A)/XXI/Abd/119,120&121/08-09 dated 15.05.08, it is evident that the reimbursement pertained to the salary of the employees, travelling expenses of the emplyee 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. It is submitted 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. It is submitted that however, 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 that the choice of nomenclature is immaterial in determining the tax liability and the actual nature of such payment has to be ascertained. It is submitted that in the present case, it is clear that the payment is made towards rendering of marketing services for which M/s Creative Inc has been reimbursed at Cost. Such payments are thus taxable u/s 9(1)(vii) of the IT Act r.w. Article 12 of the India USA DTAA as fee for technical service.

4.1 It is further submitted by Shri Nitin Mehta, learned counsel for the Revenue that the Tribunal disregarded the agreement between the Assessee and Cretaive IT Inc USA and Nimisha, where it is clearly mentioned that Creative IT Inc USA, is a developer. It is not an unrelated party to this project and has certain role to play as a developer. It is submitted that thus the services which are provided by it may be at cost or at higher or lower its cost. It is submitted that the fact remains that the amount received by under the nomenclature of 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 (P.) Ltd. v. Asstt. DIT (International Taxation) [2012] 50 SOT 399/19 taxmann.com 123 (Delhi)

(2) Ashok Layland Ltd. v. Dy. CIT [2009] 120 ITD 14 (Chennai)

(3) Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 (Ker.)

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. Present appeal is vehemently opposed by Shri Tushar Hemani, learned counsel for the respondent- assessee.

5.1 It is vehemently submitted by Shri Tushar Hemani, learned counsel for the respondent- assessee 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 non-resident 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 has heavily relied upon Articles 2, 4, 5 and 9 of the agreement dated 5.6.2000 entered into between the assessee and M/s. Naimisha Construction Inc USA.

5.3 It is vehemently submitted by Shri Tushar Hemani, learned counsel for the assessee that even AO had also observed that assessee had made payment of Rs.18,72,00,000/- to M/s. Naimisha Construction, USA for the purchase of drawings and designing for its infocity project. It is submitted that as such the assessee on the basis of the receipt of drawings and designs from M/s. Naimisha Construction was required to pay Rs. 12,90,03,181/-. That out of the said amount, Rs. 12,12,51,821/- was remitted in foreign currency after obtaining permission from RBI, which is evident from the ledger account of M/s. Naimisha Construction. It is submitted that however as M/s. Naimisha Construction failed to comply with the agreement in timely manner in sending the complete drawings of the project after the payment of Rs. 12,13,51,821/-, provision of Rs.5,54,40,000/- was reversed by debiting the party’s account and crediting the work in progress account leaving a closing balance of Rs. 78,51,360/- as on 31.3.2006. It is submitted that therefore, total Rs. 12,31,51,821/-was the final amount paid to M/s. Naimisha Construction Inc. USA towards purchase of design and drawings. It is submitted that even assessee also obtained certificate from the Chartered Accountant wherein it is clearly stated that no amount of tax is required to be deducted from the payment made. It is submitted that despite the above, AO did not accept the submission of the assessee and held that the payment made to M/s. Naimisha Construction Inc. USA was liable for TDS u/s 195 of the Act. It is submitted that the aforesaid has been rightly reversed by the learned CIT(A) and learned ITAT.

5.4 It is further submitted by Shri Hemani, learned counsel for the assessee that as such issue involved is squarely and directly covered by the decision of the Tribunal in the case of Heubach Colour (P) Ltd.’s case (supra) wherein a view is taken that the transaction of outright purchase of designs and drawings does not attract provisions of Section 9 r.w.s. 195 of the Act. It is submitted that the aforesaid decision of the Tribunal has attained the finality as the revenue has not challenged ratio laid down in the said decision. It is submitted that therefore, 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 v. Kaumudini Narayan Dalal [2001] 249 ITR 219/117 Taxman 375 as well as in the case ofUnion of India v. Satish Panalal Shah [2001] 249 ITR 221/117 Taxman 373 (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 to the assessee, which under no circumstances can be said to be provisions of technical service.

5.7 It is further submitted by Shri Tushar Hemani, learned counsel for the assessee that as such there are concurrent findings of facts given by both the learned CIT (A) as well as learned ITAT that the assessee purchased the drawings from M/s. Naimisha Construction Inc. USA and not from the Bob Snow & Associates. It is submitted that therefore, in light of such concurrent factual findings by the lower appellate authorities and in absence of perversity being alleged, no question of law much less substantial question of law arise as sought to be contended on behalf of the revenue.

For the aforesaid, Shri Tushar Hemani, learned counsel for the assessee has heavily relied upon the discussion and observations made by the learned Tribunal in para 3.9 to 3.12.

5.8 It is further submitted by Shri Tushar Hemani, learned counsel for the assessee that even otherwise the revenue wrongly invoked the provision of Section 195 of the Income Tax Act inasmuch as there is no income chargeable to tax in the hands of the payee in India. In support of his above submission, Shri Hemani, learned counsel for the assessee has heavily relied upon the decisions of the Hon’ble Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 and in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587/105 Taxman 742 (SC).

5.9 In support of his above submission, the provision of Section 195 of the Act shall not be applicable as no income chargeable to tax in the hands of payee in India has arisen. Shri Hemani, learned counsel for the assessee has made following submissions:

5.9.1 It is submitted that no service much less technical service has been provided by the said M/s. Naimisha Construction Inc. USA to the assessee. It is submitted that it is a case of supply and/or purchase of designs and drawings for the Infocity Project by the assessee from a non-resident M/s. Naimisha Construction Inc. USA.

5.9.2 It is submitted that Hon’ble Supreme Court in the case Scientific Engg. House (P.) Ltd. v. CIT [1986] 157 ITR 86/[1985] 23 Taxman 66 has held that designs and drawings are assets so they can be independently sold and purchased without any element of services.

5.9.3 It is submitted that since the agreement to purchase is executed in USA, delivery 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 assessee through internet. It is submitted that even the payment to the said party was remitted in foreign currency after obtaining approval from RBI. It is submitted that as submitted herein above, M/s. Naimisha does not have any agent nor it has any permanent establishment in India. It is submitted that therefore, as per the provision of Section 9 of the Act does not accrue or arise in India and therefore, there is no question of tax to be deducted on that income.

5.12 It is further submitted by Shri Hemani, learned counsel for the assessee that in the facts and circumstances of the case learned ITAT has rightly not dealt with the issue arising under the interpretation of DTAA as it has held that the non resident viz. Naimisha is not at all taxable under the Income Tax Act in general and Section 9 in particular.

5.13 It is further submitted by Shri Hemani, learned counsel for the assessee that sale proceeds of sale designs and drawings in the hands of the said Naimisha 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) of the Indo -US DTAA. In support of his above submission, he has made following submissions:

5.13.1 It is submitted that Section 90(2) of the Act or Articles of DTAA whichever is beneficial to the assessee are to be applied in the present case. It is submitted that the issue is directly covered by the decision of the Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 wherein it was held that in order to attract provisions of Section 9(1)(vii), the services must be utilized and rendered in India. It is submitted that for TDS liability the law as existing when the obligation to TDS arises has to be considered. It is submitted that TDS obligation cannot be created retrospectively after the payment is made and transaction is over.

5.13.2 It is submitted that as per Section 9(1)(vii), technical service has to be rendered by the receipeint to the payer. It is submitted that in the present case, no service let alone, technical service has been rendered by the Naimisha to the assessee. It is submitted that the said payment can be subjected to withholding tax, Indo-underlying technology. It is submitted that in the present case there is no rendering or making available technology which can be applied by the 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 technical inputs does not mean make available. In support of his above submissions, Shri Hemani, learned counsel for the assessee has relied upon the following decisions:

(1) CIT v. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214 (Kar.)

(2) DIT v. Guy Carpenters & Co. Ltd. [2012] 346 ITR 504/207 Taxman 121/20 taxmann.com 807 (Delhi).

5.14 It is further submitted by Shri Hemani, learned counsel for the assessee that even sale proceeds of sale of designs and drawings in the hands of the said Naimisha cannot be treated as Royalty within the meaning of Section 9(1) (vi) of the Act or or Article 12(3) of the Indo-US DTAA. In support of his above submission, he has made following submissions;

5.14.1 It is submitted that Section 90(2) of the Income Tax Act or Articles of DTAA whichever is beneficial to the assessee are to be applied.

5.14.2 It is submitted that the words “model” and “design” have to take colour from the other words surrounding them, such as, patent, invention, secret formula or process or trademark, which are all species of intellectual property. These two words cannot therefore, refer to drawings and designs which are sold outright, without the seller retaining any proprietary rights over them. It is submitted that model or design, in order to be roped in by the provision, should be a specie of intellectual property in the same manner as a patent or invention or secret formula or process or a trademark.

5.14.3 It is submitted that outright purchase of designs and drawings could not be treated as royalty. In support of his above submission, learned advocate for the assessee has relied upon the decision in the case of DIT v. Ericsson A.B [2011] 16 taxmann.com 371/[2012] 204 Taxman 192/343 ITR 470 (Delhi).

Making above submissions and relying upon the above decisions, it is requested to answer the question no. A in faovur of assessee and against the revenue.

6. Now, so far as proposed question B i.e. Whether Hon’ble ITAT has erred in facts and in law in holding the payment to a non resident for marketing activity as reimbursement of expenses especially when expenses were part and parcel of technical service related to income earned in India is concerned, it is submitted that as such there are concurrent findings of facts given by the learned CIT(A) as well as learned ITAT that the concerned amount is reimbursement. It is submitted that therefore, in absence of any 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 Centre (P.) Ltd. (supra) and in the case of Transmission Corpn. of A.P. Ltd. (supra) 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 It is submitted that reimbursement per se does not involve any income element and therefore, no income can be said to be chargeable to tax in India. In support of his above submission, Shri Hemani, learned advocate for the has relied upon the following decisions:

(1) CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. [2014] 361 ITR 192/217 Taxman 114/35 taxmann.com 638 (Guj.)

(2) CIT v. Tata Engg. & Locomotive Co. Ltd. [2000] 245 ITR 823/[2001] 114 Taxman 141 (Bom.).

(3) CIT v. Industrial Engg. Projects (P.) Ltd. [1993] 202 ITR 1014 (Delhi) .

6.2 It is further submitted by Shri Hemani, learned advocate for the assessee that there is no service rendered by the CII to the assessee. It is submitted that similarly the assessee has not received any services and therefore, the utilization of the services does not arise. It is submitted that the assessee was only to reimburse the expenses incurred by the CII.

6.2.1 It is submitted that when the actual expenditure was incurred, it was not a transaction between a resident and a non resident but between non resident to non resident and therefore, the provision of Section 195 have no applications.

6.3 Shri Hemani, learned counsel for the assessee has further submitted that the said CII has no business connection or permanent establishment in India. In support of his above submission, Shri Hemani, learned advocate for the assessee has made following submissions:

6.3.1 It is submitted that CII has no business activity or permanent establishment in India, It is neither working through any agent nor it has any branch in India.

6.3.2 It is submitted that provisions 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.

6.3.3 It is submitted that the 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 the assessee relies on the CBDT’s Circular No. 786 dated 17.02.2000 on the applicability of Section 195.

6.3.4 It is submitted that no income arises in India to CII therefore, as per the provision of Section 9 of the, the income does not accrue or arise in India. It is submitted that now when the income does not accrue or arise in India there is no question of tax to be deducted on that income.

Making above submissions and relying upon the above decisions, 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. Heard the learned advocates for the respective parties at length.

Question A:

8. 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 non resident Architect- Bob 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 rights in the property were transferred by the non-resident to the assessee company.

8.2 However, it is required to be noted that as such M/s. Naimisha got prepared the design and drawings through non resident Architect- Bob Snow & Associates by way of outright sale and thereafter as per the agreement entered into between the assessee and M/s. Naimisha dated 5.6.2000, M/s. Naimisha sold the design and drawings to the assessee. To appreciate whether supply/transfer of design and drawings by M/s. Naimisha to assessee was by way of outright sale or as a Royalty, few clauses in the agreement dated 5.6.2000 are required to be referred to and considered.

8.3 It is required to be noted that the assessee company entered into joint venture undertaking with Government of Gujarat for developing and construction of “Information Technology Park” at Gandhinagar. It appears that for developing IT Park of international standard the assessee company entered into agreement dated 5.6.2000 with M/s. Naimisha for supply of design and drawings of the project. As per Article 2 of the agreement, the contractor was to provide detailed design and drawings for the construction of Info-tower, Township, Club and Resort, Commercial Mall and common area improvements for the complex. Article 4 provides for contract price i.e. US Dollars Four Million ($4,000,000). Article 5 provides a schedule of payment which also seems to be linked with the progress of drawings and designs, which is as under:

“4.3. Unit prices, if any, are as follows:

A Development of Mater Plan for Infocity Project $ 2,00,000

B Designs & Drawings for Infotower-I $ 8,69,000

C Designs & Drawings for Infotower-II $ 5,00,000

D Designs & Drawings for Township $ 7,50,000

E Designs & Drawings for Theme Club & Resort $ 3,50,000

F Designs & Drawings for Infrastructure $ 2,50,000

G Designs & Drawings for Hostel $ 1,50,000

H Designs & Drawings for Hospital $ 1,60,000

I Designs & Drawings for Hotel $ 2,20,000

J Designs & Drawings for Commercial Mall $ 1,76,000

K Designs & Drawings for international School $ 1,25,000

L Designs & Drawings for Entertainment Park $ 2,50,000

Total $ 4,000,000
5.1 Based upon Applications for payment submitted by the Contractor and Certificates for Payment issued by the Developer, the Owner shall make progress payments on account of the Contract sum to the Contractor 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 the payment was made to M/s. Naimisha as Royalty.

8.4 At this stage, it is required to be noted that initially the assessee made provision for payment of Rs. 18,72,00,000/- to M/s. Naimisha Construction for supply/purchase of design and drawings for infocity project. That thereafter, assessee on the basis of receipt of drawings and designs from M/s. Naimisha Construction, was required to pay Rs. 12,90,03,181/-, out of which Rs. 12,12,51,821/- was remitted in foreign currency after obtaining permission from RBI. It appears that M/s. Naimisha failed to comply with the agreement in timely manner in sending the complete drawings of the project after the payment of Rs.12,13,51,821/-, provision of Rs. 5,54,40,000/- was reversed by debiting the party’ account and crediting the work in progress account leaving a closing balance of Rs. 78,51,360/- as on 31.3.2006. Thus, a total sum of Rs. 12,13,51,821/- is the final amount paid to M/s. Naimisha Construction towards purchase of design and drawings. As no income in the hands of M/s. Naimisha Construction had arisen, as per Section 9 of the Income Tax Act, the assessee did not deduct the TDS under Section 195 of the Act.

8.5 There are concurrent findings both by learned CIT(A) as well as learned Tribunal holding that (1) the assessee has purchased drawings from M/s. Naimisha Construction and not from Bob Snow & Associates; (2) that the payment made by the assessee towards supply of design and drawings to M/s. Naimisha was outright purchase and therefore, not taxable as Royalty. The aforesaid aspect has been considered in detail by the learned Tribunal in para 3.9 to 3.12 . Para 3.9 to 3.12 of the order passed by the learned Tribunal reads as under:

“3.9. In this background, we find that the assessee company has entered into a joint venture undertaking with Government of Gujarat for developing information Technology Part at Gandhinagar. For developing such IT Park of international standard the assessee company purchased designs and drawings of the project from one M/s. Naimisha Cosntruction Inc USA (“Naimisha” for short) as per the tri-party agreement dated 5.6.2000 at paper Book pages 25-20. Complete reading of the agreements and clauses there under under reveals that the assessee had outrightly purchased the complete designs and drawings from the said Naimisha. The said Naimisha in turn purchased the said designs and drawings 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) Ltdv. 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, since the agreement to purchase is executed in USA delivery of the designs and drawings were through internet, payment was made though banking channel out of India, no part of the income in the hands of the said Nimisha can be said to have accrued or arisen in India. Finding of CIT(A) that the said Naimisha does not have any permanent establishment in India has not been controverted therefore in absence of permanent establishment. No income can accrue or arise in the hands of the said Naimisha. Co-joint reading of Section 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. It is therefore, held that purchase of designs and drawings by the assessee from the said Naimisha is a transaction of purchase and/or supply of goods. As a result, applicability of Section 9 is ruled out.

3.11. One may be conscious of the retrospective amendment in Section 9. However, the retrospective explanation added to Section 9 would be applicable only if the payment is in the nature of FTS or Royalty which is not the case in the facts of the present case. Moreover, in absence of any corresponding amendment in the DTAA, the amendment in the Act would not have any impact on the taxability of the transaction impugned. It may be recalled that this Hon’ble ITAT is concerned with appeal u/s 201(1A) of the Act dealing with TDS obligations of the assessee. Retrospective amendment cannot be invoked to make an assessee liable for TDS on the payment made much prior to the date of such amendment. For this proposition, support can be had from the decision of coordinate bench in the case of Pankaj A Shah vs. ITO (ITA No.3065/AHD/2010 dated 27.06.2014).

3.12. We find that the whole issue is directly and squarely covered by the decision of coordinate bench in the case of ITO (IT)v. M/s. Heubach Colour Pvt Ltd [2015] 54 taxmann.com 377 (Adh-Trib) Supra.”

8.6 It appears that the learned AO proceeded on the footing that the assessee got the concerned drawings from “Bob Snow & Associates, Architect” and that “Bob Snow & Associates supplied the same to the M/s. Naimisha who in turn supplied it to the assessee and therefore, the payment made by the assessee to M/s. Naimisha was as a Royalty. However, it will be factually incorrect to say that the assesee got/purchased the design and drawings from “Bob Snow & Associates, Architect. From 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. Infotower-I, 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 taken by the learned Tribunal in holding that the payment made towards supply of design and drawings to a non resident was outright purchase and therefore, not taxable as Royalty under Section 9(1) of the Income Tax Act.

8.7 Once it is held that the transaction between the assessee and M/s. Naimisha for supply of design and drawings was outright purchase, as held by the learned Tribunal in the case of Heubach Colour (P.) Ltd. (supra), the said transaction does not attract provision of Section 9 r/w Section 195 of the Act. At this stage, it is required to be noted that the decision of the Tribunal in the case of Heubach Colour (P.) Ltd. (supra) has attained the finality and revenue has not challenged the ratio laid down in the said decision. As observed and held by the Hon’ble Supreme Court in the case of Satish Panalal Shah (supra) and Kaumudini Narayan Dalal (supra) , where the department has accepted the decision of the High Court in case of one assessee and no appeal has been filed against the said order, thereafter it would not be open for the department to challenge its correctness in case of other assessee without just cause.

8.8 Even otherwise, independently considering Section 9 r/w Section 195 of the Act only in case of the payment to non resident made as a Royalty or FTS, such income is chargeable to tax under Section 9(1) of the Act and on such payment the payee/assessee was required to deduct the TDS under Section 195 of the Act and failure to deduct TDS on such payment, same is required to be included in the income of the assessee. Under the circumstances, when it is found that the payment made by the assessee towards supply of design and drawings to M/s. Naimisha was outright purchase and the payment was not towards Royalty for using the said design and drawings, it cannot be said that the same was chargeable to tax under Section 9 of the Act, on which, the TDS was required to be deducted. As observed herein above, as such nothing is on record that ownership right and/or copyright of the design and drawing supply by M/s. Naimisha, retained with M/s. Naimisha. Full consideration of supply of design and drawing by Naimisha, was by the assessee to M/s. Naimisha. Merely because, the drawings and designs were prepared and/or got prepared by Bob Snow Associates, it cannot be said that Bob Snow Associates supplied the design and drawings to the assessee. 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 was outright purchase and not taxable as Royalty or FTS under Section 9(1) of the Act. Therefore, it cannot be said that any income had accrued in favour of any non resident companies.

8.10 Once it is held that there is no income chargeable to tax in the hands of payee in India, the provision of Section 195 of the Act shall not be applicable. In the case of GE India Technology Centre (P.) Ltd (supra), the Hon’ble Supreme Court has observed and held that Section 195(2) is not a mere provision to provide information to ITO (TDS) so that department can keep track of remittances being made to non residents outside India; rather it gets attracted to cases where payment made is a composite payment in which certain proportion of payment of payment has an element of “income” chargeable to tax in India and prayer seeks a determination of appropriate proportion of sum chargeable.

Now, so far as submission made on behalf of the revenue on interpretation of India-US DTAA is concerned, at the outset, it is required to be noted that India-US DTAA shall be applicable only in a case where it is found that such income is taxable under Section 9 in the hands of non resident. Under the circumstances, as such learned Tribunal has rightly not dealt with same in detail and it is held that recipient non resident viz. M/s. Naimisha is not at all taxable under the Income Tax Act in general and under Section 9 in particular. Even the learned counsel for the revenue has also not made any elaborate submission on the above.

9. In view of the above and for the reasons stated above, Question No.A is answered in favour of the assessee and against the revenue.

10. Now, so far as proposed question No. B is concerned, it is vehemently submitted by Shri Nitin Mehta, learned counsel for the revenue that the learned ITAT has erred in law and on facts in holding that payment to non resident for marketing activity as a reimbursement expenses is especially when expenses were part and parcel of technical service related to income earned in India.

10.1 It is vehemently submitted by Shri Nitin Mehta, learned counsel for the reveneu that the learned Tribunal has erred in holding that payment made was towards reimbursement of expenses and not reimbursement of services.

10.2 It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that even from the perusal of the order passed by 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 that the choice of nomenclature is immaterial in determining the tax liability and the actual nature of such payment has to be ascertained. It is further submitted that in the present case, it is clear that the payment is made towards rendering of marketing services for which M/s Creative Inc has been reimbursed at Cost. It is submitted that therefore, such payments are thus taxable u/s 9(1)(vii) of the IT Act r.w. Article 12 of the India USA DTAA as fee for technical service.

10.5 It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that the learned Tribunal has disregarded the agreement between the Assessee and Cretaive IT Inc USA and Nimisha, where it is clearly mentions that Creative IT Inc USA, is a developer. It is submitted that it is not an unrelated party to this project and has certain role to play as a developer. It is submitted that thus the services which are provided by it may be at cost or at higher or lower its cost. It is submitted that however the fact remains that the amount received by under the nomenclature of reimbursement is nothing but payment for services rendered by it.

10.6 It is further submitted by Shri Nitin Mehta, learned counsel for the revenue that the learned Tribunal has failed to appreciate that as per catena of decisions if the payments to non residents, claimed as reimbursement, are in connection with rendering of technical services then such expenditure could be said to have been incurred for earning FTS. In support of his above submission, he has heavily relied upon the decision of the Cochin Refineries Ltd.’s case (supra)

Making above submissions, it is requested to allow the present appeal and held the question no. B in favour of revenue and against the assessee.

11. Shri Tushar Hemani, learned counsel for the assessee has vehemently submitted that in the facts and circumstances of the case, learned Tribunal has not committed any error in holding the payment to a non resident marketing activities as reimbursement expenses.

11.1 It is submitted that while considering question B, the following facts are required to be appreciated.

(1) The assessee company has entered into a joint venture undertaking with Government of Gujarat for developing Information Technology Park at Gandhinagar.

(2) The assessee has entered into an agreement with Creative 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 submitted by Shri Tushar Hemani, learned counsel for the assessee that in the present case the revenue has 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 above submission, he has heavily relied upon the decision in the case of GE India Technology Centre (P.) Ltd. (supra)

11.4 It is further submitted by Shri Tushar Hemani, learned counsel for the assessee that as such no income is chargeable to tax in India because its a reimbursement of the marketing and project office expenses. It is submitted that the agreement is for reimbursement of expenses incurred by the said Creative IT Inc., USA for marketing of Infocity project in USA market. It is submitted that these expenses are fully supported by the vouchers. 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. Copy of the debit notes with summary of each month and certificates established that it has nothing to reimbursement of expenses incurred by Creative IT Inc., USA. It is further submitted that reimbursement per se does not involve any income element and therefore, no income can be said to be chargeable to tax in India. In support of his above submission, he has relied upon the following decisions.

A. Gujarat Narmada Valley Fertilizers Co Ltd’s case (supra).

B. Tata Engg. & Locomotive Co Ltd’s case (supra)

C. Industrial Engg. Projects (P.) Ltd.’s case (supra).

11.5 It is further submitted that as such there is no service rendered by the CII to the assessee. Similarly, the assessee has not received any certificate and therefore, the utilization of the services does not arise. The assessee was only to reimburse the expenses incurred by the CII. It is submitted that when the actual expenditure was incurred, it was not a transaction between a resident and a non resident but between non-resident to non resident and therefore, provisions of Section 195 have no applications.

11.6 It is further submitted by Shri Tushar Hemani, learned advocate for the assessee that even CII has no business activity or permanent establishment in India. It is neither working through any agent nor it has 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 Indo-US 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 Indo-US DTAA.

Making above submissions and relying upon the above decisions, it is requested to dismiss the present appeal and held the question No.B against the revenue and in favour of the assessee.

12. Heard the learned advocates for the respective parties at length. Proposed question B is whether learned ITAT has erred in facts and in law in holding the payment to a non resident for marketing activity as reimbursement of expenses.

12.1 There are concurrent findings by the learned CIT(A) as well as learned ITAT that the concerned amount is reimbursed and cannot be said to be any amount paid to CII for rendering any service to the assessee. The finding of fact recorded by the both the lower appellate authorities are on appreciation of facts and considering the material on record, more particularly, agreement entered into between the assessee and CII. It is not alleged that finding of fact recorded by the lower appellate authorities are perverse and/or contrary to the evidence on record.

12.2 From the agreement, it is assessee and the CII, it appears that the agreement is for reimbursement of expenses incurred by the CII for marketing Infocity Project in USA Market. The expenses incurred by CII are fully supported by the vouchers and certified by the Certified Public Accountant of USA as well as CA of India certifying that the said expenses are in fact reimbursement.

12.3 From the agreement, it appears that there is no service rendered by CII to the assessee. The assessee has not received any service and therefore, the question of utilization of service does not arise. The assessee was only to reimbursement expenses incurred by the CII. Therefore, when CII has not rendered any service to the assessee there is no question of treating the concerned expenses as if it is for rendering service by CII to assessee. Therefore, learned Tribunal as such has not committed any error in not treating the same as if it is for providing service by CII to assessee.

12.4 It also appears that CII has no business activity or permanent establishment in India. It is neither working through any agent nor it has any branch in India. Therefore, the provision of Section 9(1) (vi)(vii) shall not have any application as the amount paid is neither Royalty nor fees for technical service (FTS) but is a business income. Therefore, the provision of Section 9 of the Income Tax Act also shall not be applicable as no income arise in India to CII and/or income does not accrue or arise in India. Therefore, considering the aforesaid facts and circumstances, the learned Tribunal has not committed any error in holding that the payment was made towards reimbursement of expenses and not reimbursement of service. We see no reason to interfere with the view taken by the learned Tribunal while holding that the payment in question made was towards reimbursement or expenses and not reimbursement of service. Under the circumstances, the present appeal deserves to be dismissed even with respect to proposed question No.B.

13. In view of the above and for the reasons stated above, present appeal fails. Both the questions are answered against the revenue and in favour of assessee. Present appeal stands dismissed.

[Citation : 397 ITR 165]