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Income Tax Appellate Tribunal, ‘C’ BENCH, BENGALURU
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BENGALURU BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA Nos.1229 & 1329/Bang/2016 (Assessment years: 2011-12 & 2012-13) M/s.Bicon Research Ltd. 20th KM, Hosur Road, Electronic City, Hebbagodi, Bengaluru-560100. … Appellant PAN:AADCB 4910 A Vs. Addl. Commissioner of Income-tax, Range-11/ Asst.Commissioner of Income-tax, Circle 2(1)(1) Bengaluru. … Respondent ITA Nos.1250 & 1251/Bang/2016 (Assessment years: 2011-12 & 2012-13) (By the revenue) ***** Assessee by : Shri Padamchand Khincha, CA. Revenue by : Shri R.N.Parbat, CIT(DR). Date of hearing : 20/09/2017 Date of pronouncement : 18/12/2017 O R D E R Per BENCH: These are cross appeals filed by the assessee as well as the revenue directed against the order of the Commissioner of Income- tax(Appeals)-1, Bengaluru [CIT(A)], dated 18/03/2016 for the assessment years 2011-12 and 2012-13.
ITA No.1229/Bang/2016 (Assessment year: 2011-12): 2. Brief facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is wholly owned subsidiary of Biocon Ltd. It is engaged in carrying out research and development of drugs and drug delivery systems including innovative drug initiatives and out-licenses products, processes, patents, technology that arises from the aforementioned research and development. The return of income for the assessment year 2011-12
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 2 was filed on 29/11/2011 declaring income of Rs.91,469/- after claiming exemption of Rs.14,48,36,551/- u/s 10AA of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. Against the said return of income, the assessment was completed by the Addl.CIT, Range-11, Bengaluru, [AO] vide order dated 24/03/2014 passed u/s 143(3) of the Act at total income of Rs.98,05,69,683/-. While doing so, the AO had denied the exemption claimed u/s 10AA of the Act and made addition of Rs.82,65,66,645/- u/s 40(a)(ia) on the payments made to domestic companies without deduction of tax at source, a sum of Rs.84,99,225/- u/s 40(a)(ia) of the Act in respect of payments made to non-resident parties and Rs.5,75,793/- invoking the provisions of section 14A of the Act. The assessee had not deducted tax at source on the payments made to (i) M/s.Biocon Ltd. of Rs.75,15,36,000/- and (ii) M/s.Biocon Biopharmaceuticals Pvt. Ltd. of Rs.40,54,14,000/-. The AO noted that the assessee-company had complied with TDS provisions only on payment of Rs.16,89,43,700/- and the amount of Rs.16,14,39,655/- being the ‘provision made for cost recharge for Mylan Programme’. The contention of the assessee-company was that TDS provisions are not applicable came to be accepted by the AO. The AO held that the balance amount of Rs.82,65,66,645/- paid to Biocon Ltd., and its associated companies for research and development is nothing but job work undertaken by those companies and therefore, under the provisions of section 194C the assessee-company was liable to deduct tax at source. On account of failure to do so, the AO invoked the provisions of section 40(a)(ia) of the Act and disallowed Rs.82,65,66,645/-. The AO also disallowed a sum of Rs.84,99,225/- under the provisions of 40(a)(i) of the Act on the alleged failure of the assessee to deduct tax at source on the payments made to non-resident parties rejecting the contention of the assessee-company that the said payments do not constitute fees for included services under Article 12 of DTAA between India & USA. The AO also made disallowance of a sum of Rs.5,75,793/- under the provisions of sec.14A read with rule 8D, rejecting the contention of the assessee-company that no expenses were incurred by the assessee-company to earn the exempt income. The AO also denied exemption u/s 10AA of the Act primarily on the ground
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 3 that the assessee-company had not provided any services and the assessee-company had not complied with the condition stipulated under sub-section (4) of section 10AA of the Act.
The facts set out by the AO in para.6 of the assessment are extracted hereunder:
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Being aggrieved by the above additions, the assessee-company preferred an appeal before the CIT(A), who, after considering the process undertaken by the assessee-company and the written submissions made by the assessee held vide impugned order that the assessee-company is entitled to the benefit of provisions of section 10AA of the Act. The ld. CIT(A) also held that the undertaking of the assessee company is established under the provisions of Special Economic Zone, hence, the provisions of SEZ Act shall prevail over the provisions of the Income-tax Act. Thus the ld.CIT(A) held that so long as the undertaking the assessee-company enjoys the status of SEZ, the provisions of section 10AA are applicable. Accordingly, the ld.CIT(A) held that the assessee-company is entitled for deduction under the provisions of section 10AA of the Act. The relevant paragraph is as under:
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As regards disallowance of the amount u/s 40(a)(ia) of the Act on payments made to M/s.Biocon Ltd. and M/s.Biocon Pharamaceuticals Pvt. Ltd., the ld.CIT(A) accepted the contention of the assessee- company that the payments made to these companies are in the nature of reimbursement of cost and also in view of the fact that the payees had offered this amount as income in their hands and discharged their tax liability. However, the CIT(A) confirmed the disallowance on account of non-deduction of tax on payments made to overseas parties. As regards disallowance made by the AO u/s 14A, the ld.CIT(A) confirmed the same.
Being aggrieved by the order of the CIT(A) the revenue is in appeal in ITA No.1250/Bang/2016 and the assessee-company is in appeal in ITA No.1229/Bang/2016.
Now, we shall take up the revenue appeal. The revenue raised the following grounds of appeal:
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ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 14 4. The ground Nos.1, 16 and 17 are general in nature and do not require any adjudication.
Ground Nos. 2 to 11 challenge the finding of the ld.CIT(A) holding that the assessee-company is entitled for deduction u/s 10AA of the Act.
The ld.CIT(DR) filed written submissions as under:
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Per contra, the assessee-company also filed written submissions contraverting the submissions made by the ld.CIT(DR). which are as under:
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We heard rival submissions and perused the material on record. The issue in this ground of appeal is whether the assessee-company is entitled for deduction u/s 10AA of the Act. The AO denied the claim holding that the assessee-company had not provided any service. The CIT(A), after considering the submissions made by the assessee held the issue in favour of the assessee-company by holding that once the unit is established under SEZ after obtaining necessary approval, it is not open to the AO to embark upon the enquiry into the process carried
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 35 on by the assessee-company. For better appreciation, the provisions of section 10AA of the Act are extracted below:
“[Special provisions in respect of newly established Units in Special Economic Zones. 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 222 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of— (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the “Special Economic Zone Re-investment Reserve Account”) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2). (2) The deduction under clause (ii) of sub-section (1) shall be allowed only if the following conditions are fulfilled, namely :— (a) the amount credited to the Special Economic Zone Re-investment Reserve Account is to be utilised— (i) for the purposes of acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and (ii) until the acquisition of the machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India; (b) the particulars, as may be specified by the Central Board of Direct Taxes in this behalf, under clause (b) of sub-section (1B) of section 10A have been furnished by the assessee in respect of machinery or plant along with the return of income23 for the assessment year relevant to the previous year in which such plant or machinery was first put to use. (3) Where any amount credited to the Special Economic Zone Re-investment Reserve Account under clause (ii) of sub-section (1),— (a) has been utilised for any purpose other than those referred to in sub- section (2), the amount so utilised; or
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 36 (b) has not been utilised before the expiry of the period specified in sub- clause (i) of clause (a) of sub-section (2), the amount not so utilised, shall be deemed to be the profits,— (i) in a case referred to in clause (a), in the year in which the amount was so utilised; or (ii) in a case referred to in clause (b), in the year immediately following the period of three years specified in sub-clause (i) of clause (a) of sub- section (2), and shall be charged to tax accordingly : Provided that where in computing the total income of the Unit for any assessment year, its profits and gains had not been included by application of the provisions of sub-section (7B) of section 10A, the undertaking, being the Unit shall be entitled to deduction referred to in this sub-section only for the unexpired period of ten consecutive assessment years and thereafter it shall be eligible for deduction from income as provided in clause (ii) of sub-section (1). Explanation.—For the removal of doubts, it is hereby declared that an undertaking, being the Unit, which had already availed, before the commencement of the Special Economic Zones Act, 2005, the deductions referred to in section 10A for ten consecutive assessment years, such Unit shall not be eligible for deduction from income under this section : Provided further that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years referred to above shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone : Provided also that where a Unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone and has completed the period of ten consecutive assessment years referred to above, it shall not be eligible for deduction from income as provided in clause (ii) of sub-section (1) with effect from the 1st day of April, 2006. 24[(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:— (i) it has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 37 undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business, of machinery or plant previously used for any purpose. Explanation.—The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.] (5) Where any undertaking being the Unit which is entitled to the deduction under this section is transferred, before the expiry of the period specified in this section, to another undertaking, being the Unit in a scheme of amalgamation or demerger,— (a) no deduction shall be admissible under this section to the amalgamating or the demerged Unit, being the company for the previous year in which the amalgamation or the demerger takes place; and (b) the provisions of this section shall, as they would have applied to the amalgamating or the demerged Unit being the company as if the amalgamation or demerger had not taken place. (6) Loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, being the Unit shall be allowed to be carried forward or set off. (7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on 25[by the under-taking] : 26[Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years.] (8) The provisions of sub-sections (5) and (6) of section 10A shall apply to the articles or things or services referred to in sub-section (1) as if— (a) for the figures, letters and word “1st April, 2001”, the figures, letters and word “1st April, 2006” had been substituted; (b) for the word “undertaking”, the words “undertaking, being the Unit” had been substituted. (9) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA. Explanation 1.—For the purposes of this section,— (i) “export turnover” means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 38 articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India; (ii) “export in relation to the Special Economic Zones” means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode, whether physical or otherwise; (iii) “manufacture” shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 200527; (iv) “relevant assessment year” means any assessment year falling within a period of fifteen consecutive assessment years referred to in this section; (v) “Special Economic Zone” and “Unit” shall have the same meanings as assigned to them under clauses (za) and (zc)27 of section 2 of the Special Economic Zones Act, 2005. Explanation 2.—For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.]”
The provisions of section 10AA were not inserted by the Finance Act but by Special Economic Zone Act, 2005 w.e.f. 10/02/2006. We are only concerned with sub-sections (1) and (4) of section 10AA. The provisions of sub-section (4) to section 10AA were inserted by the Finance Act, 2007 with retrospective effect from 10/02/2006. The provisions of sub-section (1) prescribe the eligibility conditions of an entrepreneur to claim deduction from profits and gains derived from the unit situated in Special Economic Zone (SEZ). It only prescribes that an unit which is situated in SEZ begins to manufacture or produce articles or things or provide any services which are exported is eligible to claim deduction u/s 10AA of the Act. According to the Assessing Officer, the activity of the assessee-company does not amount to manufacture or production of articles or things or provision of any service whereas the respondent-assessee-company contends that the assessee-company is engaged in business of undertaking research and development activity as a part of it, it acquired certain platform technologies from Biocon Ltd., during the year 2009 pertaining to Monoclonal Anitibodies (MABS) for a consideration of INR 480 million. It was stated that there was an agreement governing this transaction. It was further stated that this
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 39 platform technology was never used at any time by Bicon Ltd., nor was it completely developed nor it could not have used independently or cannot be commercialized on stand-alone basis. Therefore, to further develop and commercialize this platform technology, the assessee- company and Mylar had entered into a development and commercialization agreement. It was stated that the assessee-company had requisite research and development expertise whereas Mylan had the expertise in commercialization of product and Biocon Ltd. had expertise in manufacturing. It was further stated that in the process of carrying out research and development activities, assessee-company had incurred significant cost in respect of research and development activity carries out by the assessee-company. In consideration of these services rendered to Mylan, consideration of US dollars 18 million was received which was recognized as income as revenue in the books of account spread over a period of expected period of services. At this juncture, it is relevant to refer to the provisions of section 10 of the Special Economic Zone Act,2005 which are as under:
“Suspension of letter of approval and transfer of Special Economic Zone in certain cases 10. (1) If, at any time, the Board is of the opinion that a Developer— is unable to discharge the functions or perform the duties imposed on (a) him by or under the provisions of this Act or rules made thereunder; or (b) has persistently defaulted in complying with any direction given by the Board under this Act; or (c) has violated the terms and conditions of the letter of approval; or (d) whose financial position is such that he is unable to fully and efficiently discharge the duties and obligations imposed on him by the letter of approval, and the circumstances exist which render it necessary for it in public interest so to do, the Board may, on application, or with the consent of the Developer, or otherwise, for reasons to be recorded in writing, suspend the letter of approval, granted to the Developer for a whole or part of his area established as Special Economic Zone, for a period not exceeding one year and appoint an Administrator to discharge the functions of the Developer in accordance with the terms and conditions of the letter of approval and manage the Special Economic Zone accordingly. (2) Consequent upon appointment of an Administrator, the management of the Special Economic Zone of the Developer referred to in sub-section (1) shall vest in the Administrator,
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 40 (3) No letter of approval shall be suspended under sub-section (1) unless the Board has given to the Developer not less than three months' notice, in writing, sting the grounds on which it proposes to suspend the letter of approval, and has considered any cause shown by the Developer within the period of that notice, against the proposed suspension. (4) The Board may, instead of suspending the letter of approval under sub-section (1), permit it to remain in force subject to such further terms and conditions as it thinks fit to impose, and any further terms or conditions so imposed shall be binding upon and be complied with by the Developer and shall be of like force and effect as if they were contained in the letter of approval. (5) In case the Board suspends a letter of approval under this section, it shall serve a notice of suspension upon the Developer and fix a date on which the suspension shall take effect. (6) Upon suspension of the letter of approval under sub-section (1), the Special Economic Zone of the Developer referred to in sub-section (5) shall vest in the Administrator under sub-section (2) for a period not exceeding one year or up to the date on which the letter of approval for such Special Economic Zone is transferred, whichever is earlier, in accordance with the provisions contained in sub-sections (7) and (9), as the case may be. (7) Where the Board has given notice for suspension of letter of approval under sub- section (5), the Developer may, after prior approval of the Board, transfer his letter of approval to any person who is found eligible by the Board for grant of such approval. (8) If at any time, it appears to the Board that the purpose of the order appointing the Administrator has been fulfilled or that for any reason it is undesirable that the order of appointment should remain in force, the Board may cancel the order and thereupon the Administrator shall be divested of the management of the Special Economic Zone which shall, unless otherwise directed by the Board, again vest in the person, being the Developer, in whom it was vested immediately prior to the date of appointment of the Administrator. (9) Where the Board suspends the letter of approval, under this Section, in respect of any Developer, the following provisions shall apply, namely:— (a) the Board shall invite applications for transferring the letter of approval of the Developer, whose approval has been suspended and select the person or persons, in accordance with the procedure as may be prescribed, to whom the letter of approval of the Developer in the Special Economic Zone may be transferred;”
Now we shall deal with the reasons assigned by the AO while denying the deduction u/s 10AA of the Act.
The reasons given by the Assessing Officer while denying the deduction u/s 10AA of the Act are as under:
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The primary reason given by the Assessing Officer for denial of deduction u/s 10AA of the Act is that the assessee-company had neither provided any service nor produced any article or thing. We find that the assessee-company had contended before the lower authorities that it provided the services of R&D to Mylan Ltd., It also filed the flow-chart narrating the whole sequence of the process undertaken by the three entities. The Assessing Officer had not controverted the submission made on this behalf. Furthermore, we find that under the provisions of section 10 SEZ Act, 2005 it is the Board constituted under the SEZ Act which is empowered to suspend the letter of approval in specified circumstances. In the present case, undisputedly the assessee- company continued to enjoy the SEZ status even during the year under consideration. Furthermore it is obligatory on the part of the entrepreneur under the provisions of the SEZ Act to submit annual performance report in Form 1 confirming the export of services and investment in Plant & Machinery and the number of employees hired by the entrepreneur etc. All these factors go to show that the assessee- company had carried on the activity. Therefore, this cannot be a valid reason for denial of deduction u/s 10AA of the Act.
The second reason is that the assessee has not produced any articles or things or provided any services. This reason is interlined or part of the first reason assigned by the Assessing Officer. Our findings in respect of reason one given supra, hold goods even in respect of this.
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 42 14. The third reason assigned by the Assessing Officer is that consideration received by the assessee-company is not for research and development services but licensing and development. When the AO had not controverted the activities undertaken by the assessee-company nor chosen to refer to technical expert, it is not open to the AO to come to the conclusion on mere surmises and conjectures. We also observed that from the very observation made by the AO that the assessee- company made some development on the platform technologies. In other words, the AO has not disputed the activity carried on by the assessee. The findings of the Assessing Officer are contradictory to each other.
The fourth reason assigned by the AO is that the assessee- company had acquired platform technology from Biocon Ltd. and failed to fulfill the condition under clause (iii) of sub-section (4) of section 10AA of the Act which provides that the SEZ units should not be formed by splitting up or reconstruction of the existing business or should not be formed by transfer to a new business of Plant & Machinery previously used for any purpose.
In rebuttal, the assessee-company had made submission that platform technology was acquired by the assessee-company from Biocon Ltd., for the purpose of development and commercialization. This platform was never used by Biocon earlier in its business. This is nothing but an intangible asset and can be considered as a plant and machinery in the light of plain provisions of Explanation 2 to section 32(1) of the Act which defines ‘asset’ to mean to include both tangible and intangible assets. Furthermore, under the provisions of SEZ, it is only the Development Commissioner who is empowered to suspend the letter of approval in specified circumstances. The AO or any other authority for that matter is not vested with the power of suspending the letter of approval. Once the Development Commissioner grants the status of SEZ, it is conclusive proof that conditions under sub-section (4) are duly complied with. Therefore, it is not open to the AO to look into this aspect as it is trite law that when a statute requires a thing to be done in certain manner, it shall be done in that manner alone and reliance in
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 43 support of this proposition can be placed on the decision of the Hon’ble Supreme Court in the case of Anirudhsinhji Karansinhji Jadeja vs. State of Gujarat (1995) 5 SCC 302, wherein it was held that if statutory authority has been vested with a jurisdiction, he alone has to exercise it and assumption of jurisdiction by any other authority is not sustainable under law. Furthermore, the provisions of SEZ Act shall over-ride the provisions of Income-tax Act. Even if there is anything in the Income- tax Act which is inconsistent with the SEZ Act, the provisions of SEZ Act shall prevail as it is trite law that the provisions of special Act shall prevail over the normal provisions of the Act. This ratio was followed in the following cases by the co-ordinate bench of Tribunal.
It is undisputed fact that the M/s.Biocon Ltd., also enjoys the SEZ status. Therefore, by selling platform technology to the assessee- company, the motive of tax evasion cannot be attributed to M/s.Biocon Ltd., Furthermore, M/s.Mylan Ltd., also said to be unrelated party. Therefore, it cannot be even imagined that without any value addition by the assessee-company, M/s.Mylan would have paid so much of consideration. In our considered opinion, this factor, should clinch the issue in favour of the assessee-company. Thus viewed from any angle, the assessee-company cannot be denied the benefit of deduction u/s 10AA though the reasoning adopted by the CIT(A) is cryptic. We do not find any reason to interfere with the order of the CIT(A) this issue. The grounds of appeal No.2 to 11 of the revenue are dismissed.
Ground Nos.12 to 15 challenge the finding of the CIT(A) that there was no liability to deduct tax and the provisions of section 40(a)(ia) not applicable on the payment of Rs.82,65,66,645/-. The
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 44 impugned payments are made by the assessee-company to M/s.Biocon Ltd. and M/s.Biocon Pharamaceuticals Ltd. It was stated that these payments were in the nature of reimbursement of actual cost incurred by these companies. It was contended that there was no profit element on these payments and the question of deduction of tax at source does not arise. It was further contended that the payees i.e. M/s.Biocon Ltd. and M/s.Biocon Pharamaceuticals Ltd had already offered this amount as income in their hands and tax due thereon was duly discharged by them and therefore, by virtue of second proviso to section 40(a)(ia), the question of deduction of tax at source does not arise. It was further submitted that the second proviso to section 40(a)(ia) was inserted by the Finance Act,2012 but it was held by the Hon’ble Delhi High Court in the case of CIT vs. Ansal Landmark Township (P) Ltd., (2015) 61 taxmann.com 45 to be declaratory and curative and has retrospective effect from 01/04/2005. Thus it was contended that the provisions of section 40(a)(ia) cannot be invoked in the present case. The ld.CIT(A) accepted the submissions made by the assessee-company and directed deletion of addition made u/s 40(a)(ia).
18.1 Being aggrieved, the revenue is in appeal before us.
18.2 There was no dispute with regard to the contention of the assessee-company that subject payments are merely reimbursement of the cost incurred and no profit element was present. Further there was no dispute that the payees had shown receipts as income in their respective hands and discharged the tax liability. In the light of these facts, we are required to adjudicate whether there is an obligation on the part of the assessee-company to deduct tax at source failure to do shall attract the provisions of section 40(a)(ia) of the Income-tax Act.
18.3 The co-ordinate bench of this Tribunal in the case of M/s.TE Connectivity India Pvt. Ltd. vs. ITO(LTU)(TDS) in ITA No.3/Bang/2015 dated 25/05/2016 (wherein both the Members are parties), after placing reliance on decision of the jurisdiction High Court decision in the case of Karnataka Power Corportion Ltd. vs. DCIT (2016) 383 ITR 599 and its
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 45 earlier decision in the case of M/s. Bosch Ltd. vs. ITO in ITA No.1583/Bang/2014 dated 01/03/2016 held as follows:
“6. We heard the rival submissions and perused material on record. The issue in appeal relates to the liability of the assessee- company to deduct tax at source on provisions made as at the end of the accounting year. The undisputed fact is that the provisions, made at the end of the accounting year are reversed in the beginning of the next year. No payees are identified. The exact amount of liability also cannot be quantified. The provisions are made merely on for Management Information System. In our considered opinion, liability to deduct tax at source does not arise. In identical circumstances, the Hon’ble Tribunal in the case of M/s.Bosch Ltd. vs. ITO in ITA No.1583/Bang/2014 dated 01/03/2016, to which one of us i.e. the Accountant Member is the author of the order, held as follows: “9. The undisputed facts in this case are that he provisions were made at the end of the year and the same were reversed in the beginning of the next accounting year. The short point that arises for our consideration is whether the liability for deduction of tax at source has arisen the moment the amount is credited in the books of accounts. Having regard in the scheme of tax deducted at source, under Chapter- XVII-B of the IT Act, we are of the considered opinion that the liability to deduct tax at source arises only when there is accrual of income in the hands of the payee. We are holding so, keeping in view the ratio laid down by the Hon’ble Apex Court in the case of M/s GE India Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC) wherein the Hon’ble Supreme Court held that if payment is not assessable to tax there is no question of tax at source being deducted. The relevant portion of the judgment is reproduced as under :- “If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words “chargeable under the provisions of the Act” in section 195(1). The said expression in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. One more aspect needs to be highlighted. Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of provisions of Chapter XVII one finds use of different expressions, however, the expression “sum chargeable under the provisions of the Act” is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of “ any sum paid to any resident”. Similarly, sections 194EE and 194F, inter alia, provide for deduction of tax in respect of “ any amount” referred to in the specified provisions. In none of the provisions we find the expression “ sum chargeable under the provisions of the Act”, which as stated
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 46 above, is an expression used only in section 195(1). Therefore this court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the Income tax Officer (TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, section 195 has to be read in conformity with the charging provisions, i.e section 4,5 and 9. This reasoning flows from the words “ sum chargeable under the provisions of the Act” in section 195 (1). The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression “ sum chargeable under the provisions of the Act” from section 195(1). While interpreting a section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging sections of that Act de hors the machinery sections. The Act is to be read as an integrated code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly and Co. (India) (P) Ltd. (2009) 312 ITR 225 the provisions for deduction of TAS which are in Chapter XVII dealing with collection of taxes and the charging provisions of the Income Tax Act form one single integral, inseparable code and, therefore, the provisions relating to TDS apply only to those sums which are “ chargeable to tax” under the Income-Tax Act. It is true that the judgment in Eli Lilly (2009) 312 ITR 225 was confined to section 192 of the Income Tax Act. However, there is some similarity between the two. If one looks at section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “ chargeable under the provisions of the Act”. Which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the Income Tax Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the Income tax Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the Income-tax Act by which a payer can obtain refund. Section 237 read with section 199 implies that only the recipient of the sum i.e. the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 47 payments, the payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “ chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, section 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department, huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that section 195(2) , as interpreted by the High Court would plug the loophole as the said interpretation requires the payer to make a declaration before the Income tax Officer (TDS) of payments made to non-residents. In other words, according to the Department, section 195(2) is a provision by which the payer is required to inform the Department of the remittances he makes to non-residents by which the Department is able to keep track of the remittances being made to non-residents outside India. We find no merit in these contentions. As stated hereinabove, section 195(1) uses the expression “ sum chargeable under the provisions of the Act”. We need to give weightage to those words. Further, section 195 uses the word “payer” and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee-in-default only when he fails to fulfill the statutory obligation under section 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in-default. The above- mentioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the Income Tax Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the Income Tax Act for the said sum as an ‘ expenditure’ . Under Section 40(a)(i), inserted, vide Finance Act, 1988, with effect from April 1, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the Income Tax Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the Income-tax Act. This provision ensures effective compliance with section 195 of the Income tax Act relating to tax deduction at source in respect of payments outside India in respect of royalties, fees or other sums chargeable under the Income Tax Act. In a given case where the payer is an assessee he will definitely claim deduction under the Income-tax Act for such remittance and on inquiry if the Assessing Officer finds that the sums remitted outside India come within the definition of royalty or fees for technical service or other sums chargeable under the Income-tax
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 48 Act then it would be open to the Assessing Officer to disallow such claim for deduction. Similarly, vide the Finance Act, 2008, with effect from April 1, 2008, sub-section (6) has been inserted in section 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from April 1, 2008. It will only apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage. Applicability of the judgment in the case of Transmission Corporation (supra) In Transmission Corporation’s case (1999) 239 ITR 587(SC) a nonresident had entered into a composite contract with the resident party making the payments. The said composite contract not only comprised supply of plant, machinery and equipment in India, but also comprised the installation and commissioning of the same in India. It was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India. It was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India. The only issue raised in that case was whether TDS was applicable only to pure income payments and not to composite payments which had an element of income embedded or incorporated in them. The controversy before us in this batch of cases is, therefore, quite different. In Transmission Corporation case (1999) 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount on the footing that only a portion of the payment made represented ‘ income chargeable to tax in India’ then it was necessary for him to make an application under section 195(2) of the Act to the Income Tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view , section 195(2) is based on the “principle of proportionality””. The said sub section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of ‘income’ chargeable to tax in India. It is in this context that the Supreme Court stated, ‘if no such application is filed, income tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ’sum’ to deduct tax thereon before making payment. He has to discharge the obligation to TDS”. If one reads the observation of the Supreme Court, the words ‘ such sum’ clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the above observations of this court in Transmission Corporation case (1999) 239 ITR 587 (SC) which are put in italics have been completely, with respect misunderstood by the Karnataka High Court to mean that it is not open for the payer to
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 49 contend that if the amount paid by him to the non-resident is not at all ’ chargeable to tax in India’., then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of section 195(1) which in clear terms lay down that tax at source is deductable only from “ sums chargeable” under the provisions of the Income Tax Act, i.e. chargeable under sections 4,5 and 9 of the Income Tax Act.” 10. Now to determine where there was income accrued or not considering the fact that the provisions were made at the year end is reversed in the beginning of the next accounting year goes to show that there was no income accrued. Mere entries in the books of accounts does not establish the accrual of income in the hands of the payee as held by the Hon’ble Supreme Court in the case of CIT Vs M/s Shoorji Vallabhdas & Co. 46 ITR 144 wherein it was held as follows; “ That the subsequent agreement had altered the rate of commission in such a way as to make the income which really accrued to the assessee different from what had been entered in the books of account. This was nota case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lessor remuneration than what had been agreed upon. The assessee had in fact received only the lesser amount in spite of the entries in the account books, and this lesser amount alone was taxable. Income-tax is a levy on income. Though the Income-tax Act, takes into accounts two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a ‘hypothetical income;, which does not materialize. Where income has, in fact, been received and is subsequently, given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account”. Thus, having regard to the ratio laid down by the Hon’ble Apex Court, it cannot be said that income had accrued in the hands of the payee. We, therefore, hold that there was no liability in the hands of the assessee company to deduct TDS, merely on the provisions made at the year end. Hence, the assessee company cannot be treated as ‘assessee in default’ for not deducting tax at source and therefore, we allow the grounds of appeal filed by the assessee company in this regard.”
The Hon’ble High Court of Karnataka in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT (2016) 383 ITR 59(Karn) held that for the purpose of deducting tax at source, the income which finally
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 50 par takes character of income alone is allowable for deduction of income-tax. If the amount is not considered to be income in the hands of the deductee, the provisions of tax deduction at source would not be made applicable. The relevant paragraph of the judgment is as under: “We have examined the applicability of section 194A of the Act to the present case. Section 194A of the Act mandates the tax deductor to deduct "income-tax" on "any income by way of interest other than income by way of interest on securities". The phrase “any income" and "income-tax thereon" if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of be income-tax on that income by wav of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, section 194A(1) of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. In view of the admitted fact that interest being not paid to the payees (suppliers) being reversed in the books of account, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the payees (suppliers). It is true that in the case of Ericsson Communication Limited (supra), the Delhi High Court was dealing with the case of section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the "income chargeable under the Act". Absence of such words "chargeable to tax" under the provisions of section 194A of the Act would not empower the authorities to invoke the provisions of section 201(1) and 201(1A) of the Act ignoring the words ‘any income by way of interest. ” Respectfully following the above order, we hold that the assessee- company is not liable to deduct tax at source as no income has accrued in the hands of the payee.”
18.4 Respectfully following the decisions, we hold that the assessee- company is not under obligation to deduct tax at source on the payments which are not liable to tax in the hands of the payee. Further we find no reason to differ with the reasoning of the CIT(A) that when the second proviso to section 40(a)(ia) is applicable to the facts of the present case there is no obligation to deduct tax at source and consequent disallowance u/s 40(a)(ia) of the Act. Thus, we do not find any reason to interfere with the order of the CIT(A). The grounds No.12 to 15 filed by the revenue are dismissed.
In the result, the appeal filed by the revenue is dismissed.
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 51 ITA No.1299/Bang/2016 (Assessment year 2011-12):
The assessee-company raised the following grounds of appeal:
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 52
Grounds No.1 and 2 are general in nature and do not require any adjudication.
Ground No.3 challenges the confirmation of addition of Rs.84,99,225/-. It is stated that in the ordinary course of its business activity of carrying on research and development activities, the assessee-company availed the services of the following non-resident parties.
The nature of services rendered by the above parties is as under:
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 53
It was contended that by virtue of Article 12 of DTAA with USA country, rendering of any technical consultancy services fell within the ambit of ‘fees for technical services’ and Article 13 of India-UK Tax Treaty, consideration paid for rendering any technical services fell within the ambit of the term ‘fees for technical services’. It is further submitted that any consideration paid towards technical services shall be construed as fees for included services or fees for technical services only when such technical services are made available to the assessee- company. Similarly, in terms of Article 12 of India-USA tax treaty, technical services shall be construed only when such services are made available. Reliance in this regard was placed on the decision of the Hon’ble Karnataka High Court in the case of De beers Minerals vs. OT (2012)(Kar.HC).
We heard rival submissions and perused the material on record. From the description of services rendered by non-resident parties, it is clear that the assessee-company is only entitled to use the annual report given by those parties which does not mean that technology is made available to it. The co-ordinate bench of Tribunal (Delhi) in the case of ITO vs. Nokia India Pvt. Ltd.(59 taxman.com 120) has considered an identical issue wherein, after placing reliance on the
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 54 decision of the the Hon’ble Karnataka High Court in the case of De Beers Ltd.,(supra) held as follows:
We have heard the rival submissions and perused the material on record. The undisputed facts of the case are that the nature of services rendered by Olof Granlund Finland to the assessee respondent company are as under :— (a) Review of systems description, diagrams, cost estimates, building designs etc. (b) Review of preliminary system design and quality control (c) Review of equipment list/selections, lay out proposals, conducting inspections etc. 9. Now we are called upon to examine whether the nature of above services fall within the scope of the 'fees for technical services'. Undisputedly the recipient of the payment is a resident of Finland. And therefore he is entitled to be governed by the provisions of DTAA of India with Finland. The Term fees for technical services was defined in Article 13 in DTAA to the extent relevant to the present case, is reproduced below :— "4. For the purpose of paragraph 2, and subject to paragraph 5, the term 'fees for technical services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-paragraph (a) of paragraph 3 is received: or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in sub-paragraph (b) of paragraph 3 is received : or (c) make available technical knowledge, experience, skill, know- how or processes, or consist of the development and transfer of a technical plan or technical design." In the present case, clauses (a) & (b) would not be applicable given that Olof Granlund is providing consultancy services independent of supply of any property, right or information in respect of which consideration had been received by Olof Granlund. In order to determine whether payments made to Olof Granlund fall under Article 13(4)(c), it is imperative to determine whether these services 'make available' any technical knowledge, experience, skill, etc. to the recipient of the service or involves development and transfer of technical plan or design to the recipient of services. The India-Finland tax treaty does not specifically define the term ' make available'. Accordingly, in absence thereof reliance may be placed on the
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 55 meaning assigned to the said term under the MoU to India-USA Double Taxation Avoidance Agreement (hereinafter referred to as India-US Treaty), which serves as an official guide to interpreting India-US tax treaty and reflects the policies, understanding reached with respect to the application and interpretation of India-USA Treaty. In this regard, it is pertinent to mention the Mumbai Tax Tribunal in the case of Raymond Ltd. (supra), has clarified that meaning of the term 'make available' under India-UK Double Taxation Avoidance Agreement may be inferred from the MoU to India-US Treaty. This equally and expressly follows that the Hon'ble Tribunal has accepted the concept of parallel treaty interpretation. The ITAT held as under: "The MOU appended to the DTAA with USA and the Singapore DTAA can be looked into as aids to the construction of the UK DTAA. They deal with the same subject (fees for technical services, referred to in the US agreement as ''fees for included services''). As noted earlier, it cannot be said that different meanings should be assigned to the US and UK agreements merely because of the MOU despite the fact that the subject-matter dealt with is the same and both have been entered into by the same country on one side (India). The MOU supports the contention of the assessee regarding the interpretation of the words "make available ". The portions of the MoU explaining para 4(b) of the relevant article, which we have extracted earlier in our order while adverting to the contentions of the assessee, fully support its interpretation. Example (4) given in the MOU also supports it. This is of a US company manufacturing wellboard for the assessee using assessee's raw material but using its own Plant. No technical knowledge, experience, skills, plan or design is held to have been made available in such a case. However, in contrast, example (5) is of a US company rendering certain services in connection with modifying the software used by the Indian company to suit particular purpose. A modified computer software programme is supplied by the US company to the Indian company. It is, therefore, held that there is a transfer of a technical plan (i.e., computer software) which the US company has developed and made available to the Indian company. The fees are chargeable. These examples affirm the position taken by the assessee- company before us as to the interpretation of the words "make available". In fact, it has been held by various courts that the principle of parallel treaty interpretation is permissible where language of the two treaties is similarly worded and one treaty clarifies meaning of the terms (or language) used. The above view has been affirmed by the subsequent pronouncements in the following cases: (a) National Organic Chemicals Industries Ltd v. Dy. CIT [2006] 5 SOT 317. (b) CESC v. CIT [2003] 87 ITD 653 (Kol.)(TM). (c) Dy. DIT v Preroy A.G. [2010] 39 SOT 187 (Mum.) (d) Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375 (AAR)
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 56 MEANING OF THE TERM 'MAKE AVAILABLE' Under the MoU to India-US tax treaty, it has been clarified that: "Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product, which embodies technology, shall not per se be considered to make the technology available." In other words, the MoU seeks to clarify that the services are considered to be made available only where the services leads to transfer/imparting of technical knowledge, experience, skill, know-how, or processes to the recipient which enables the recipient to apply the same on his own. Further, on page 790 of Klaus Vogel on Double taxation conventions -Third edition, Vogel comments that the criterion used to distinguish the provision of know-how from rendering advisory services is the concept of imparting. The relevant extract of the commentary has been reproduced below: "Imparting of experience: Whenever the term royalties relates to payments in respect of experience (know-how'), the condition for applying Article 12 is that the remuneration is being paid for 'imparting' such know-how . . . . . . . . . . . in contrast, the criterion used to distinguish the provision of know- how from rendering advisory services is the concept of 'imparting'. An advisor or consultant, rather than imparting his experience, uses it himself (BFH BstBl II 235 (1971),' Ministre des Relations exterieures, Response a M Bockel, 36 Dr. Fisc. Comm. 1956 (1984)). All that he imparts is a conclusion that he draws - inter alia - from his own experience. His obligation to observe secrets, or even his own interest in retaining his 'means of production', will already prevent a consultant from imparting his experience. In contrast to a person using his own know-how in providing advisory services, a grantor of know- how has nothing to do with the use the recipient makes of it. . . . . . The term 'make available' had come for interpretation before Hon'ble Jurisdiction High Court in the case of Guy Carpenter & Co. Ltd. (supra) which held as under :— "9. A plain reading of Article 13(4)(c) of the DTAA indicates that 'fees for technical services' would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which, inter alia, "makes available" technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. According to the Tribunal this "make available" condition has not been satisfied inasmuch as no technical knowledge, experience, skill, know-how, processes, have been made available by the assessee to the insurance companies operating in India. It also does not consist of the development and transfer of any technical plan or technical design.
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 57 10. The Tribunal examined the evidence available on record in order to return a finding on the issue as to whether the payments received by the assessee from the insurance companies operating in India would fall within the expression 'fees for technical services' as appearing in article 13(4)(c) of the DTAA read with section 9(1)(vii) of the said Act. While doing so the Tribunal, inter alia, found that the assessee company was an international re insurance intermediary (broker) and was a tax resident of United Kingdom. Further, that it was a recognized broker by the financial service authority of United Kingdom. It was also an admitted position that the assessee did not maintain any office in India and that it had a referral relationship with J.B. Boda reinsurance (Broker) Pvt. Ltd of Mumbai and that J.B. Boda was duly licenced by the Insurance Regulatory & Development Authority to transact re insurance business in India. 11. The Tribunal also observed as under.— "27. In the illustrative transaction, New India Insurance Co. Ltd. in India has entered into an agreement to reinsure on an Excess Loss basis the catastrophe risk arising from its primary insurance cover in conjunction with lB. Boda and Alsford Page and gems Ltd. (the reinsurance brokers). The terms of the agreement specifies that the assessee in conjunction with J.B. Boda are recognized as intermediary, through whom all communications relating to this agreement shall pass. The terms of the agreement further provides that the assessee will provide all the details of agreed endorsements to the re insurers bye-mail or facsimile and shall submit the slip policy to XIS (Lloyd's processing market) for signing. The assessee will act as a claim administrator and will submit claims advices to relevant market systems. For the services rendered, the assessee along with the other reinsurance brokers acting as an intermediary in the reinsurance process for New India Assurance Co. will be entitled to 10% brokerage. From the role played by the assessee in the re insurance process as discussed above, it is evident to us that the assessee was rendering only intermediary services while acting as an intermediary/facilitator in getting the reinsurance cover for New India Insurance Co. There exists no material or basis on the basis of which, it would be said that the assessee was rendering any kind of technicall consultancy service within the meaning of Article 13 of Indo-UK treaty. The consideration received by the assessee acting as an intermediary in the reinsurance process cannot, by any stretch of imagination, be qualified as a consideration received for rendering any financial analysis related consultancy services, rating agency advisory services, risk based capital analysis etc. as alleged by the A.O." The Tribunal also noted the process by which the transaction takes place. It has been pointed out that the originating insurer in India would contact J.B. Boda/M.B. Boda for placing identified risks/class of risks with international reinsurers. J.B. Boda, in turn, would contact one or more international firm(s) of re insurance broker(s) like the assessee for competitive proposals from the international reinsurer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for competitive proposals. Based on the various offers or proposals given by the international reinsurance brokers, like the assessee, to
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 58 J.B. Boda, the latter would present various options to the originating insurer in India, which would take a final decision in the matter. Based on the decision of the originating insurer in India, the policy terms would then be agreed upon and the risk would be placed with the international reinsurer. It was also pointed out that as per the normal industry practice, the reinsurance premium net of brokerage of 10% as per the policy contract is remitted to the assessee, i.e., reinsurance brokers, for onward transmission to international reinsurers. The intermediation fee which is another word for brokerage is paid separately by the originating insurance in India to J.B. Boda, the international re insurance brokers like the assessee and other intermediaries, based on a mutually agreed ratio which accounts for their relative contribution in the reinsurance process. 12. Based on this manner of transacting, the Tribunal came to a conclusion that the payment received by the assessee could not be regarded as 'fees for technical services'. Further, more, the Tribunal also held that such receipts would not amount to fees for technical services as the "make available" clause contained in article 13(4)( c) had not been satisfied in the facts and circumstances of the present case. 13. In our view, the Tribunal has arrived at these conclusions purely on assessing the factual matrix of the case at hand. The findings are in the nature of factual findings and, therefore, according to us, no substantial question of law arises for our consideration, particularly, because the learned counsel for the Revenue was unable to point out any perversity in the recording of such findings. As such no substantial question of law arises for our consideration. The appeal is dismissed. There shall be no order as to costs." Even Hon'ble Karnataka High Court in the case of De Beers India Minerals (P.) Ltd. (supra) had interpreted the term 'make available' as under :— "22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that It "makes available" to the recipient. Technical knowledge, know-how and the like., The service should be aimed at and result in transmitting technical knowledge, etc. so that the payer of the service could derive an enduring benefit and utilize the knowledge or know how on his own in future without the aid, of the service provider. In other words, to fit into the terminology 'making available', the technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge skills, etc. does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as '"
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 59 fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." In view of the above, it can be concluded that rendering of technical services leads to transfer/imparting of technical knowledge, experience, skill, know- how, or processes to the recipient which enables the recipient to apply the same on his own. In other words, the recipient acquires a means to an end, i.e he acquires the technical knowledge, experience, skills, know-how or processes from the provider which acts as a means and enables him to use the same for achieving a further end. In a service which does not qualify as technical services, the services itself serves as an end for the recipient since he does not acquire any technical knowledge, experience, skill, know-how, or processes from the service provider. In light of the judicial pronouncements highlighted above (which have affirmed the principle of parallel treaty interpretation, especially as regards the meaning of the term 'make available'), considering the interpretation provided in the MoU to India-US tax treaty, services can be said to 'make available' technical knowledge etc., where such technical knowledge is transferred to the person utilizing the service (i.e., the appellant in the instant case) and such person is able to make use of the technical knowledge etc., by himself in his business or for his own benefit and without recourse to the performer of services (i.e. Olof Granlund) in the future. The mere fact that provision of service may require technical knowledge by the person providing the service would not per se mean that knowledge has been made available. The learned assessing officer has in the impugned order accepted the position that recourse should be made to the interpretation provided under the MoU to India-US tax treaty to determine whether payments made by the appellant qualify as FTS under the provisions of India-Finland tax treaty. However, the learned assessing officer has erroneously relied on certain examples provided under the MoU to conclude that payments made by the assessee qualify as FTS under provisions of India-Finland tax treaty. Further, the term 'make available' in the context of consultancy services has been subject matter of consideration before various appellate authorities, which have concurred with the above position. In this regard, the reliance can be made on the following decisions, which are squarely applicable to the case on hand:— ♦ Mckinsey & Co. Inc. v. Asst. DIT [2006] 99 ITD 549 (Mum.) In the above case as well, Mckinsey and Co Inc was engaged in providing strategic consultancy services, the Hon'ble Tribunal has held as under:— "Merely because the assessee have rendered certain consultancy services to the McKinsey India does not by itself can be reason enough to conclude that the consideration (or such consultancy services is taxable in India under art. 12(4)(b) as 'fees for included services".
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 60 ". . . generally speaking technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology and various Benches of the Tribunal have consistently taken that view of the matter." " . . . . . When a patient visits a doctor and doctor advices him to undergo various tests. The patient does so. In the course of performing the scan tests, the scan centre used certain equipment. The scan centre actually provided the service. The patient, is interested in the end result i.e. report of the test and not in technical know-how that is used in the scan report. Such technical knowledge is not passed on to the patient. If the patient requires the scan report again, he would require to get the report done once again and he cannot do it by himself. Technical skill, knowledge, know-how or experience is not passed on, though it is utilized in preparing the report. " The above propositions have been reiterated in the following cases also :— ♦ CESC Ltd. v. Dy. CIT [2005] 275 ITR (AT) 15 (Kol. -Trib.); ♦ Raymond Ltd v. Dy. CIT [2003] 86 ITD 791 (Mum.); ♦ Dy. CIT v. Boston Consulting Group Pte Ltd. [2005] 93 TTJ 293 (Mum. - ITAT); ♦ JT. CIT v. Essar Oil Ltd. [2006] 7 SOT 216 (Mum.) and ♦ National Organic Chemical Industries Ltd v. Dy. CIT [2006] 5 SOT 317 (Mum.) Additionally, it can be seen that under the provisions of Article 13 of India- Finland tax treaty, provision of services shall qualify as FTS where the same consist the development and transfer of a technical plan or technical design to the recipient of the services. For the services to qualify as FTS the provider must itself develop the technical plan or design and then transfers the same to the recipient of the services.....”
In the light of the above position of law, we are of the considered opinion that the assessee-company is not under obligation to deduct tax at source on the payments made to non-resident parties and therefore, the question of consequent disallowance u/s 40(a)(ia) of the Act does not arise. Thus, the grounds of appeal are allowed.
Ground No.4 relates to confirmation of disallowance u/s 14A of the Act. During the previous year relevant assessment year under consideration, the assessee-company had earned dividend income on investment in mutual funds. It is the contention of the assessee-
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 61 company that investments are made out of surplus funds of the assessee-company. Therefore, dividend income earned by the assessee-company is net of the expenditure and there is no expenditure incurred to earn exempt income. Therefore, the question of invoking provisions of section 14A does not arise. Reliance in this regard was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers (P.) Ltd. (233 CTR 42) wherein it has been held that in absence of any nexus between expenditure and earning of tax exempt income, question of invoking 14A does not arise. Reliance in this regard was placed on the following decisions:
(i) Canara Bank vs. ACIT (52 taxmann.com 162)(Kar)(HC) (ii) Subramanya Constructions & Development Co. Ltd. (TS-100- ITAT-2015(Bang)
(iii) Cyber Park Development & Constructions Ltd. vs. DCIT (159 ITD 648)(Bang.Trib) 27. In the present case, there is no dispute that surplus fund far exceeds investments made. Therefore, it should be presumed that investments are made out of surplus funds of the assessee and the question of disallowance on account of interest does not arise.
As regards disallowance of indirect expenditure, in the absence of recording satisfaction as to how claim of the assessee is incorrect, no disallowance can be made. The assessee-company placed reliance on the decision of the co-ordinate bench cited supra and the ratio of the decision is squarely applicable to the facts of the present case. Thus, this ground of appeal is allowed.
In the result, the appeal filed by the assessee is allowed.
ITA No.1251/Bang/2016 (Assessment year: 2012-13): 30. The revenue raised the following grounds of appeal:
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 62
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 63 31. Ground Nos.1, 6 and 7 are general in nature and do not require any adjudication.
Ground Nos.2 to 5 challenge the finding of the ld.CIT(A) that there was no obligation on the part of the respondent-assessee- company to deduct tax at source on the payments made to resident parties which are purely in the; nature of reimbursement of actual cost incurred and the consequent disallowance u/s 40(a)(ia) does not arise. An identical issue was decided in assessee’s own case for assessment year 2011-12 in ITA No.1250/Bang/2016, wherein this issue was decided in favour of the assessee-company by dismissing the revenue appeal. On the parity of same reasoning, the grounds of appeal No.2 to 5 are dismissed.
In the result, the appeal filed by the revenue is dismissed.
ITA No.1329/Bang/2016 (Assessment year: 2012-13): 34. The assessee raised the following grounds of appeal:
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 64
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 65
Ground Nos.1 and 2 are general in nature and do not require any adjudication.
Ground No.3 challenges the fining of the ld.CIT(A) confirming the addition u/s 40(a)(ia) for alleged failure to deduct tax at source on the payments made to non-resident parties. An identical issue was decided in assessee’s own case in ITA No.1229/Bang/2016 (assessee’s appeal) in assessee’s favour. On the parity of same reasoning, this ground of appeal filed by the assessee is allowed.
Ground No.4 challenges the finding of the ld.CIT(A) confirming the addition made u/s 14A of the Act. An identical issue was decided in assessee’s own case in ITA No.1229/Bang/2016 (assessee’s appeal) in assessee’s favour. On the parity of same reasoning, this ground of appeal filed by the assessee is allowed.
In the result, the assessee’s appeal is allowed.
ITA Nos.1229, 1329, 1250 & 1251/Bang/2016 Page 66
In the result, the appeals filed by the revenue in ITA Nos.1250 & 1251/Bang/2016 are dismissed and the appeals filed by the assessee in ITA Nos.1229 & 1329/Bang/2016 are allowed.
Order pronounced in the open court on 18th December, 2017
Sd/- sd/- (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Bengaluru Date : 18/12/2017 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A)- 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Senior Private Secretary Income-tax Appellate Tribunal Bangalore