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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the Commissioner of Income Tax (Appeals) dated 28.03.2013 and pertains to the assessment year 2009- 10.
Brief facts of the case are that the assessee, i.e., Dorf Ketal Chemicals LLC (hereinafter referred to as DKLLC) is a 100% subsidiary of an Indian Company Dorf Ketal India Pvt. Ltd, (herein after referred to as DKIP). DKLLC has its control and 2 M/s. Dorf Ketal Chemicals LLC management in India and therefore, the DKLLC, apart from being the resident of United States, has also become tax resident in India by virtue of its 100% management and control in India. Thus, DKLLC is a US resident by virtue of its incorporation in that country and is also a resident of India by virtue of its control and management. Therefore, DKLLC is filing its returns of income in India as a resident company. A search & seizure action u/s.132(l) of the Act was carried out on 30.05.2008 at the business premises of M/s. Dorf Ketal Chemicals (I) Pvt. Ltd. and also on the residential premises of the directors of the company. The assessee is wholly owned subsidiary company of M/s. Dorf Ketal Chemicals (1) Pvt. Ltd. since 1998-99 and, therefore, the assessee was also covered u/s. 132(1) of the Act. The assessee is a private limited company engaged in the business of trading of speciality chemicals like fuel, additives and plasticizing. Consequent to the search action, notices u/s.153A of the Act were issued and assessments u/s. 143(3) r.w.s. 153A of the Act were completed for the A.Ys.2003-04 to 2009-10.
DKLLC has acquired certain patents and copy rights from UOP LLC incorporated in USA through certain agreements as stated in para 4 of the assessment
order. Assessee company DKLLC through Intellectual Property & Asset Purchase Agreement (Article 1) has acquired the patents and trade mark, technical information related to manufacture of the products 'UNILINK.' and 'CLEARLINK'. Assessee company DKLLC is in the business of speciality chemicals and by virtue of this acquisition of business of UOP LLC, acquired the patents and trademarks relating to 3 M/s. Dorf Ketal Chemicals LLC plastics, additives business involving UNILINK and CLEARL1NK product lines. The assessee's parent company DKIP stood as a guarantor for this purchase agreements.
The assessee company DKLLC got the products manufactured from DKIP in India.
The Assessing Officer was of the opinion that the patents, trademarks and technology used for manufacture of UNILINK and CLEARL1NK products were utilized in India.
By entering into the above purchase agreements, assessee company DKLLC has acquired certain patents and copy rights including the customer base in USA in the year 2003. As per the terms and conditions of the agreement, assessee company DKLLC had to pay royalty to UOP LLC. The royalty was not paid in lumpsum but the same was determined at a fixed percentage of sales in USA.
During the assessment proceedings, the assessee was asked to explain as to why the payment of royalty debited to the Profit & Loss Account on account of acquisition of trademarks and copy rights from UOP LLC should not be disallowed in view of the provisions of section 40(a)(i) r.w.s. 195 of the Act. In reply, the assessee submitted that the said patents and technical fee payments were only for the business carried out in US and that too mainly for one customer only. It was further submitted that the amount paid by US LLC comes under exception clause of section 9(l)(vi)(b) as the amounts have been paid in US for the business carried out in US and to earn income in US only and therefore, the amount paid as royalty cannot be income by way of royalty in India and shall not be subject to tax in India. It was further submitted that since the payments are covered under exception clause so the provisions of section 4 M/s. Dorf Ketal Chemicals LLC 40(a)(i) do not apply on the payments of royalty made outside India for the purposes of business carried out by the US LLC in US only and as such no TDS liability is attracted in India. Assessee relied upon the decision of Hon'ble Supreme Court in the case of GE India Technology Centre P. Ltd. vs. Commissioner of Income-tax (2010)
312 ITR 426. The assessee further submitted that the above payments have been made on account of yearly usage of copy rights and the benefits are on year to year basis; the amounts have been paid on percentage basis of sales of the products as per agreement UOP LLC. The amount did not have any enduring benefits so the same is of revenue in nature and had been duly claimed as expenses; that the facts of the case are identical with the issue in the case of Modi Revlon Pvt. Ltd. vs. AC1T (2010) 002 ITR (Trib.) 0632 ITAT Delhi Bench have held that agreement for technical collaboration royalty payments towards right to use technical know-how and patents with no asset of enduring benefit transferred in favour of assessee is revenue expenditure; similarly in the case of CIT vs. Dhanrajgiri Raja Narasingiriji (1973) 91 ITR 544 (SC) wherein it has been held that as the property of enduring benefit has not been transferred in favour of the assessee so the amount paid is of revenue in nature.
That in the present case, the nature of expenditure is also of revenue in nature so the same is being charged to profit and loss account; more over the same had been taken as revenue expenditure by the US tax authority so the same can also not be changed in the present proceedings; that there is no adverse finding in the search which could show that the amount was not of revenue in nature.
5 M/s. Dorf Ketal Chemicals LLC 5. However, the Assessing Officer was not in agreement with the above. He held that as per the provisions of section 5 of the I.T. Act, the total income of the resident encompasses within its ambit the global income whether accruing or arising in or outside India, meaning thereby, the resident assessee would be taxed on its global income. That in the present case, by virtue of control and management, the assessee company LLC (India) would be taxed on its global income. That further by provisions of section 5(2)(b), income shall also be taxed in India, if the income is deemed to accrue or arise in India. That therefore, provisions of section 9 also would come into force. The provisions of deemed accrual of income by way of royalty is mentioned in section 9(l)(vi) of the I.T. Act.
The Assessing Officer further observed that as per the provisions of section 9(])(vi)(b), income by way of royally shall be deemed to accrue or arise in India, only in case, the right or property for which the royalty is paid is not utilized for the purpose of business or a profession carried on by such persons outside India or for the purpose of making or earning any income from any source outside India. In other words, taxation in India gets triggered, if the payment of consideration is made by a resident except under a situation, where –
(i) the intellectual property is used for a business carried on outside India or (ii) it is used for earning income from any source outside India.
6 M/s. Dorf Ketal Chemicals LLC 7. During the course of scrutiny proceedings, it was submitted by the assessee company that only contract manufacturing has been done in India. However, to substantiate its claim, no contract manufacturing agreement is submitted. Further, assessee was specifically asked to give the details of cost of manufacture and cost of sale of products. Assessee was also specifically asked to give the details of the top purchasers of the products and the details of sales of these products. However, no details have been provided by the assessee. Therefore, on the basis of information already submitted and as per oral discussion with the Authorised Representative of the assessee, A.O held that the holding company is having full and unconditional access to technical knowhow and information regarding manufacturing procedure and technology and it has been used for the purposes of its manufacture in India. A.O held that, in view of the facts of the case, income of DKLLC (India) is deemed to accrue and arise in India and therefore, the benefit of the exceptions provided in provisions of section 9(l)(vi)(b) is not available to the assessee.
In view of the above, the Assessing Officer held that by virtue of provisions of section 9(l)(vi), payment of royalty by assessee company to UOP LLC constitutes the chargeable income, on which, TDS ought to have been deducted under the provisions of section 195 of the Income Tax Act, 1961, which assessee has apparently failed to do so and therefore, provisions of section 40(a)(i) are clearly attracted in this case.
Accordingly, A.O disallowed the royalty payments debited to the Profit & Loss Account u/s.40(a)(i) r.w.s. 195 of the Act.
7 M/s. Dorf Ketal Chemicals LLC 9. Before the ld. Commissioner of Income Tax (Appeals), it was submitted that the assessee is not only dealing in the UOP products but also dealing in other products for which IPR had been duly acquired in USA. The assessee has furnished the details of products dealt by the assessee in USA which include both UOP products as well as other products and also furnish the details of sales figures of such other products for the period for A.Yrs.2004-05 to 2009-10. It was submitted that the assessee is having substantial business activities in the US and not that it is selling only UOP products which are got manufactured from India on contract basis. The assessee has further submitted that the royalty payments were made on the sales made in USA only.
The ld. Commissioner of Income Tax (Appeals) forwarded the assessee’s response to the Assessing Officer and obtained the remand report. The ld. Commissioner of Income Tax (Appeals) noted that in the remand report, the Assessing Officer relied upon the assessment order. Considering the above, the ld. Commissioner of Income Tax (Appeals) held as under:
9.0 The facts of the case, the grounds of appeal
, the stand taken by the Assessing Officer in the assessment orders & remand report and the submissions made by the assessee have been carefully considered. The assessee is a limited liability company incorporated in USA and also a 100% subsidiary of an Indian, company. By virtue of the shareholding pattern and management control in India, the limited liability company, DKLLC is also treated as a tax resident of India. Therefore, the assessee is assessed to tax as LLC in USA as well as a tax resident in India. Return of income is also filed in India. DKLLC, USA has acquired certain patents and copy rights in USA. By virtue of the patents, trademarks and technology obtained by IP purchase agreements with certain US entities, DKLLC, USA gets the products manufactured from the holding company in India. DKLLC, USA has also got certain customer base in USA. Products manufactured in India by the holding company and supplied to 8. M/s. Dorf Ketal Chemicals LLC DKLLC, USA are sold in USA only and nothing is sold in India, As per the terms and conditions of the agreement, DKLLC has to pay royalty to a company called UOP LLC, USA. The basis of royalty payment is not a lumpsum amount but it is determined as a fixed percentage of the sales made in USA. TDS u/s.195 of the Act was not deducted by the DKLLC (India) on the payments of royalty to UOP LLC. A.O has disallowed the royalty payments by invoking section 40(a)(i) r.w.s. 195 of the Act. During the assessment proceedings, the appellant took a stand that the royalty payment is not liable to TDS since in terms of section 9(vi)(b) of the Act – "income by way of royalty payable by a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services' utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. "
9.1. Royalty payments towards utilization of patents by the assessee i.e. DKLLC (India), which is assessed to tax in India, have been claimed as an allowable business expenditure. The allowabiiity of the said expenditure, in terms of section 40(a)(i) r.w.s. 195 of the Act has been examined. Although the appellant is stated to have been incorporated as a limited liability company in USA, which has entered into requisite agreements with one UOP LLC for utilizing the patents/IPRs, there is a clear business connection with India. The patents have been utilized for the purpose of manufacture of certain products in India. Although the appellant has contended that patents / IPRs were merely made available for the purpose of manufacture of products in India and the holding company which has manufactured the products is only a contract manufacturer, the relationship between the appellant and the holding company is not a relationship of a mere contract manufacturer, The appellant is also a tax resident, for the purpose of Indian Income Tax Act, 1961 and therefore, it has to be seen that the utilization of patents and the manufacturing activity carried out by the holding company is in reality, the business carried on in India. The facts of the case clearly indicate that the appellant has utilized the patents/IPRs in India and the products manufactured with the aid of the patents and IPRs are, in reality, exported to USA. The DKLLC, USA has merely carried out the marketing of the products which are exported by DKLLC (India).
9.2 The above facts clearly highlight that the section 9( l)(vi)(b) of the Act relied upon by the assessee is not applicable. The exception as provided u/s.9(1)(vi)(b) is applicable to cases where the royalty is payable in respect of, any right, property or information used or services utilized for the purpose of a business or profession by such a person outside India or for the purpose of 9 M/s. Dorf Ketal Chemicals LLC earning an income from any source outside India. In the case of the appellant, the patents/IPRs are utilized for a manufacturing activity in India and the rest of the activity has to be viewed as an export of the said products for marketing in USA. Consequently, the appellant's contentions that the patents/IPRs are utilized outside India and the income has been earned from a source outside India are devoid of merits. In view of the above, the disallowances of the royalty payments in terms of section 40(a)(i) r.w.s 195 of the Act are hereby confirmed.
Against the above order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the assessee has obtained the patents and information from US Company abroad and the sales in these cases have also been outside India. Hence, he submitted that the assessee is not liable to royalty. He submitted the fact that the manufacturing is in India with the help of these patents and information is irrelevant.
The assessee has also filed application for additional evidence under Rule 29 of the Income Tax Appellate Tribunal, Rules 1963 which reads as under:
The above referred Appellant is moving this application under Rule 29 of the Rules, to admit the sales invoices, demonstrating that the customers of the Appellant are situated outside India, as additional evidence.
2. The Appellant further submits that the aforesaid additional evidences are produced for the first time before your Honours in view of the following reasons: - The Commissioner of Income-tax (Appeals) ('CIT(A)') vide order dated 28 March 2013 at para 9 has given a finding that the Appellant has also got certain customer base in USA. Further, the products manufactured in India by the Appellant's holding company are sold in USA by the Appellant. - It is also held by the CIT(A) that the basis of royalty payment is not a lumpsum amount but is determined as fixed percentage of sale made in USA. - In order to further substantiate the contention of the Appellant that all its customers are located outside India, the sale are made outside 10 M/s. Dorf Ketal Chemicals LLC India and the sales invoices are also generated and issued outside India, it wishes to submit the aforesaid invoices before your Honours at this stage. 3. The additional evidences which is being now produced first time before the Honourable Tribunal has a direct bearing on the issues involved in the present appeal. 4. The Appellant submits that the Hon'ble Bench has been vested with the discretion to admit the additional evidence under Rule 29 of the Rules. 5. The Appellant prays that your honours may be pleased to admit the additional evidence as the same substantiates the merits of the case and genuine case of the Appellant, this evidence goes to the root of the issues. It is therefore, respectfully submitted that the aforesaid additional evidence may kindly be admitted in the interest of justice and fair play.
In this regard, the ld. Counsel of the assessee placed reliance upon the decision of Hon’ble Apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd. Vs. DIT [2007] 288 ITR 408 (S.C). He further relied upon the decision of Hon’ble Madras High Court in the case of CIT vs. Aktiengesellschaft Kuhnle Kopp and Kausch (2003)
262 ITR 513 (Mad).
Per contra, the ld. Departmental Representative relied upon the order of the Hon’ble Apex Court in the case of GVK Industries v ITO [(2015) 54 taxmann.com 347(SC).
We have heard both the parties and carefully considered the submissions and perused the records. The assessee in this case is a resident of US by virtue of its incorporation in that country, and is also a resident of India by virtue of its control and management. The assessee company is filing its return of income in India as a resident 11 M/s. Dorf Ketal Chemicals LLC company. The assessee is a wholly owned subsidiary of an Indian Company Dorf Ketal India Pvt. Ltd. hereinafter called the holding company. The assessee company has acquired certain patents and copyrights from UOP LLC incorporated in USA. By way of this acquisition, the assessee has acquired the patent and trademark, technical information related to manufacture of the product unilink and clearlink. The assessee’s holding company/parent company stood as a guarantor for this purchase agreement. The assessee company got the products manufactured from its holding company in India. The products manufactured in this regard were sold in the USA.
The assessee company paid royalty to UOP LLC as fixed percentage of sales in USA.
The assessing officer was of the opinion that the payments made to UOP LLC required deduction of tax at source u/s.195 and therefore it attracted the provisions of section 40(a)(i). The assessee's plea in this regard is that the said payment as royalty for patent and technical fee was only for the business carried out in US. It was further submitted that the amount paid is not liable for TDS in terms of section 9(l)(vi)(b).
We find that the above said section reads as under: income by way of royalty payable by a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services' utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India.
We find ourselves in agreement with the ld. Commissioner of Income Tax (Appeals) that the payment does not fall under the exception provided in the above section. Although the assessee is incorporated in USA and it has entered into an 12 M/s. Dorf Ketal Chemicals LLC agreement with the UOP LLC, USA for purchasing, utilizing patent, IPR, etc. there is a clear business connection with India. The said patent/copy right were used by the assessee’s holding company in India for manufacture of the products which were sold in USA. Hence, there is a clear business connection with India, as the patents have been utilized for the purpose of manufacture of products in India. The assessee’s contention that the patents/IPRs were merely made available for the purpose of manufacture of products in India and the holding company which has manufactured the products is only a contract manufacturer has rightly been rejected by the authorities below. The relationship between the assessee and the holding company can by no stretch of imagination be deemed to be a relationship of mere a contract manufacturer. In this regard, it may not be out of place to mention that in the agreement for purchase of IPRs/patent between the assessee company and the UOP LLC, holding company (the Indian company) is guarantor.
Hence, the facts of the case clearly indicate that the assessee company is also a tax resident in India, for the purpose of income tax and, therefore, the facts indicate that the assessee has utilized the patents IPRs in India and the products so manufactured with the aid of patents and IPRs are in reality exported to USA. Hence, the ld. Commissioner of Income Tax (Appeals)’s analogy is correct that DKLLC USA (assessee) has merely carried out the marketing of the products which are exported by the DKLLC India (assessee). Hence, we agree with the ld. Commissioner of Income Tax (Appeals) that the patent/IPRs are utilized for manufacturing activities in India 13 M/s. Dorf Ketal Chemicals LLC and the rest of the activity, i.e., sale in USA has to be viewed in conjunction with this activity and the same cannot be isolated. Hence, the assessee’s contention that the patents, IPRs are utilized outside India and income has been earned from outside India are not sustainable. Hence, the ld. Commissioner of Income Tax (Appeals) is correct in holding that the disallowance of the royalty payment in terms of section 40(a)(ia) r/w s. 195 of the Act is justified.
The reference by the ld. Counsel of the assessee to the decision of Hon’ble Apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) is not applicable on the facts of this case. The said decision was rendered on a totally different facts and even the ratio does not help the case of the assessee. In that case, the issue related to offshore supply and service and the Hon’ble Apex Court was seized with the interpretation of section 9(1)(vii)(c). The Hon’ble Apex Court held that this sales provides that services which are the source of income, i.e., said to be taxed has to be rendered in India as well as utilized in India, to be taxable in India.
Even in this case law, we find that the exposition makes two conditions to be satisfied simultaneously. Firstly, the service has to be rendered in India as well as utilized in India, to be taxable in India. In this case, we find that the technical information and patents, etc. have been acquired from UOP LLC, USA by the assessee which is also filing tax return in India as resident and whose holding company is an Indian entity which had stood guarantor to this acquisition. Moreover, the assessee company also 14 M/s. Dorf Ketal Chemicals LLC has a resident status in India for tax purposes. The said patent/IPRs is utilized for manufacturing in India by the assessee through its return in India as resident and holding company on contract from the assessee company. Hence, the facts of the case fully satisfy both the conditions that the services were rendered in India as well as utilized in India. Similarly the decision of CIT vs. Aktiengesellschaft Kuhnle Kopp and Kausch [2003] 262 ITR 513 (Mad) was also on a different context, not applicable on the facts of this case. It was with reference to the royalty for fee for sending technicians in India and the special engineering fee for work done. Hence, these case laws are distinguishable on facts and hence do not oxygenate the case of the assessee.
In the background of the aforesaid discussion, we confirm the order of the ld. Commissioner of Income Tax (Appeals) in holding that the disallowance of the royalty payment in terms of section 40(a)(ia) has to be confirmed.
In the result, this appeal by the assessee stands dismissed. प"रणामतः "नधा"रती क" अपील खा"रज क" जाती है ।
Order pronounced in the open court on 22.03.2018 (Amarjit Singh) (Shamim Yahya) "या"यक सद"य / Judicial Member लेखा सद"य / Accountant Member मुंबई Mumbai; "दनांक Dated :22.03.2018 व."न.स./Roshani, Sr. PS