By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Section 9, 195 of the Act – on facts, as the source of income was outside India, exception carved in section 9(1)(vii)(b) of the Act applied and the payments made for services was not chargeable.
Facts:
The taxpayer was engaged in the production of 2D and 3D animation films for various clients. During the relevant years, the taxpayer entered into ‘Outsourcing Facilities Agreement’ for outsourcing some episodes or part of episodes to two sub-contractors – a Hong Kong entity and a Chinese entity. Under the agreement, both the entities were to provide production work/Production material to taxpayer by availing the necessary production premises, facilities, personnel, materials, services and expertise.
According to the taxpayer: the payment was made to the sub-contractors in the course of business; the subcontractors did not have any ‘business connection’ or PE in India; the income did not arise under the deeming provision of section 9(1)(vii) of the Act; and hence the payments were not taxable in India.
According to the AO since the production material was specifically created by sub-contractors for the taxpayer, the substance of contract was not supply of goods but was provisioning of services. Hence, the payments were FTS u/s. 9(1)(vii) of the Act and therefore, the taxpayer should have withheld the tax.
Held:
The production of animation films or part of certain episodes did not have any element of technical services. Delhi Tribunal3 as also Delhi HC4 held that utilisation of knowledge, information and expertise of party undertaking a job of another party is no reason to treat the services rendered as technical or consultancy services
• Section 9(1)(vii)(b) of the Act carves out an exception in case of resident utilising services in business carried on outside India or earning income from a source outside India. As per decision of Supreme Court5, contract is to be considered the source of income and since, as per the contract with the overseas clients, the jurisdiction was of the courts/arbitration at the place where overseas client was located (subjecting the taxpayer to foreign laws), ‘source of income’ was outside India. The viewership of the animation films was also located outside India.
• Thus, there was a direct nexus between the payments and earning of income from source outside India. Therefore, exception in section 9(1)(vii)(b) will be applicable and there was no liability to withhold tax u/s. 195.
