Facts:
The taxpayer was an Indian company (“ICo”) engaged in the business of e-publishing. ICo had an American Subsidiary (USCo”). ICo executed three types of Agreements – Marketing Agreement, Offshore Development Agreement and Overseas Services Agreement – with USCo. The services provided under the respective agreement were as follows.
Marketing Agreement
USCo was to provide support to the customers and also provide market information to ICo.
Offshore Development Agreement
USCo was to scan manuscripts, upload them to India and intimate ICo by e-mail. After ICo had done typesetting in India and uploaded it to USCo, USCo was to download it, print pages and courier it to customers.
Overseas Services Agreement
USCo was to use its expertise, tools and infrastructure for e-publishing and preparation and typesetting of manuscript of printing pages and delivering it to customers. 14 For the aforementioned services, during the year, ICo made certain payments to USCo. ICo did not withhold tax from the same as, according to it, USCo was only a marketing agent and no technical services were ‘made available’ by USCo.
According to AO, USCo was rendering technical services and pursuant to introduction of Explanation u/s. 9(2) of I T Act, business connection or territorial nexus with India was not required. Further, if according to ICo, tax was not required to be withheld, it should have obtained the relevant certificate u/s. 195(2) or (3). Since neither tax was withheld nor certificate was obtained, section 40(a)(i) was attracted and the payment was disallowable.
Held:
The Tribunal observed and held as follows. To constitute FIS under Article 12(4)(b) of India-USA DTAA, it is necessary that technical knowledge, etc should be ‘made available’.
Definition of FTS under Explanation No 2 to section 9(1)(vii) of I T Act is not in pari materia with definition of FIS in Article 12(4) of India-USA DTAA. Services provided by USCo could be FIS only if such services ‘made available’ technical knowledge, etc. The Tribunal considered the scope of services under each Agreement as follows. No technical service was involved in respect of services under Marketing Agreement as no technical knowledge was ‘made available’;
Scope of services under Overseas Services Agreement, clearly indicated that USCo was to use its expertise, tools and infrastructure for receiving manuscripts for production of book using its own resources, including servicing the customers and effecting dispatches to customer locations. In other words, it provided comprehensive services. If entire work was done by USCo, it cannot be said that ICo was receiving any technical knowledge, etc.
As regards Offshore Development Agreement: In terms of Clause 3.1 USCo processed customer materials, prepared instructions and prepared files. Based on these, ICo carried out e-publishing services. Though the services provided by USCo involved technical know-how, they were not FIS as they did not ‘make available’ technical knowledge (which will give enduring benefit) to ICo. In terms of Clause 3.3, USCo was to provide quality assurance. While this too may involve some technical expertise, it cannot be said that USCo ‘made available’ such technology to ICo.
In terms of Clause 3.2, USCo provided files and instructions for carrying out digitalization services to ICo. The instructions would constitute FIS if they resulted in ICo imbibing technical expertise, etc. that gave it an enduring benefit in its e-publication business. Separate invoices were raised by USCo on ICo under three different agreements. Hence, three agreements did not constitute a composite agreement. On the issue of ‘making available’:
Based on this interpretation of the term ‘making available’ in CIT v De Beers India Minerals P Ltd [2012] 346 ITR 467 (Karn), services performed were not FIS since they were not ‘made available’. Income in respect of any service under Marketing Agreement and Overseas Services Agreement was not covered under Article 12(4) of India–USA DTAA. Therefore, ICo had no obligation to deduct tax at source.
One of the services under Offshore Development Agreement could be considered FIS since it could involve ‘making available’ technical knowledge to ICo in which case section 195 of I T Act could apply. As ICo had not applied for lower/nil deduction u/s. 195, section 40(a)(i) could be attracted. Hence, the issue in respect of payments made under Offshore Development Agreement was remitted to AO for reconsideration.
