ACIT, CHENNAI V. M/s. TexTech International Private Limited, CHENNAI

ITA 1866/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64457 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-09-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 18-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Double taxation relief; Bonafide belief; Retrospective amendment; Permanent establishment; Advance ruling; Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 1866/MDS/2011 (ASSESSMENT YEAR : 2007-08) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(2), CHENNAI - 600 034 . (APPELLANT) V. M/S TEXTECH INTERNATIONAL PRIVATE LIMITED, STPI BUILDING, GROUND FLOOR, 5, RAJIV GANDHI SALAI, TARAMANI, CHENNAI - 600 113. PAN : AACCT1855H (RESPONDENT) APPELLANT BY : SHAJI P. JACOB, ADDL. CIT RESPONDENT BY : SHRI VIKRAM VIJAYARAGHAVAN, ADVOCATE DATE OF HEARING : 12.09.2012 DATE OF PRONOUNCEMENT : 11.10.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANC E IS THAT CIT(APPEALS) DELETED A DISALLOWANCE MADE BY THE ASS ESSING OFFICER UNDER SECTION 40(A)(I) OF INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER FOR A REASON THAT PAYMENTS WERE EFFECTED BY THE ASSESSEE TO ONE M/S TEX TECH I.T.A. NO. 1866/MDS/11 2 INC. USA, WITHOUT DEDUCTING TAX AT SOURCE THOUGH TH EY WERE RENDERING TECHNICAL SERVICES TO THE ASSESSEE. FURTHER AS PER THE REVENUE, THERE WAS NO REQUIREMENT FOR A BUSINESS CONNECTION OR TERRITORIAL NEXUS IN VIEW OF EXPLANATION INTRODUCED UNDER SECTI ON 9(2) OF THE ACT, VIDE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FR OM 1.6.1976. 2. FACTS APROPOS ARE THAT ASSESSEE, ENGAGED IN THE BUSINESS OF E- PUBLISHING, HAD FILED ITS RETURN FOR THE IMPUGNED A SSESSMENT YEAR DECLARING AN INCOME OF ` 1,17,56,965/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE ASSESSI NG OFFICER THAT AN OUTSOURCING COST OF ` 4,69,91,94/- WAS CHARGED TO THE PROFIT & LOSS ACCOUNT. ASSESSEE WAS REQUIRED TO GIVE DETAILS OF TAX DEDUCTED AT SOURCE ON SUCH OUTSOURCING CHARGES PAID. EXPLANATI ON OF THE ASSESSEE WAS THAT SUCH OUTSOURCING CHARGES, WHICH W ERE PAID TO M/S TEX TECH INC. USA, DID NOT FALL WITHIN THE DEFINITI ON OF TECHNICAL SERVICES. AS PER ASSESSEE, M/S TEX TECH INC. USA WAS ONLY A SUBSIDIARY COMPANY OF THE ASSESSEE AND ITS ROLE WAS LIMITED TO COLLECTION OF INPUT MATERIALS OR MANUSCRIPTS FROM A SSESSEES CUSTOMERS IN USA AND SCANNING SUCH MANUSCRIPTS AND UPLOADING THEM FOR THE ASSESSEE TO RETRIEVE THEM IN INDIA. A SSESSEE, THEREAFTER, DOWNLOADED SUCH DATA, DID TYPESETTING THEREOF AND T HEN UPLOADED IT BACK TO THE SUBSIDIARY IN USA. THE SAID SUBSIDIARY WAS TO DOWNLOAD I.T.A. NO. 1866/MDS/11 3 THE TYPESET PAGES, PRINT SUCH PAGES, AND RETURN IT TO THE ULTIMATE CUSTOMERS. ASSESSEE ALSO MENTIONED THAT M/S TEX TE CH INC. USA WAS RECEIVING CERTAIN INPUT MATERIALS ELECTRONICALL Y FROM THE CLIENTS, WHICH WERE ALSO UPLOADED TO THE ASSESSEE IN INDIA A ND ASSESSEE HAD TO DO THE TYPESETTING WORK AND SEND IT BACK TO M/S TEX TECH INC. USA, FOR ULTIMATE DELIVERY TO THE CLIENTS. AS PER THE ASSESSEE, THE ROLE OF ITS SUBSIDIARY IN USA WAS RELATED TO PRODUC TION, CO-ORDINATION AND SHIPPING OF MATERIALS FROM THE CUSTOMERS TO ASS ESSEE IN INDIA AND BACK, AND COORDINATE ISSUES REGARDING QUALITY, SCHEDULING OF DELIVERY ETC. M/S TEX TECH INC. USA WAS ALSO ADVIS ING THE ASSESSEE ON BUSINESS PROSPECTS IN USA, AND MONITORING THE OR DERS ON BEHALF OF ASSESSEES CUSTOMERS IN USA. M/S TEX TECH INC. USA WAS PAID THEIR COSTS AS PER BILLS RAISED BY THEM FOR THE SERVICES RENDERED BY THEM. 3. FURTHER, AS PER THE ASSESSEE, M/S TEX TECH INC. USA, WAS NOT HAVING ANY BRANCHES OR OFFICES OUTSIDE USA AND ALSO WAS NOT HAVING ANY PERMANENT ESTABLISHMENT IN INDIA AS DEFINED UND ER THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA A ND USA. CONTENTION OF THE ASSESSEE WAS THAT SERVICES RENDER ED BY SUBSIDIARY IN USA WERE OUTSIDE INDIA AND WAS NOT CHARGEABLE TO TAX IN INDIA. I.T.A. NO. 1866/MDS/11 4 ACCORDING TO ASSESSEE, SECTION 195 OF THE ACT COULD NOT BE APPLIED AND IT WAS NOT LIABLE FOR ANY DEDUCTION OF TAX AT S OURCE. 4. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED BY ASSESSEES AVERMENTS. ACCORDING TO HIM, ASSESSEES SUBSIDIARY IN USA WAS RENDERING TECHNICAL SERVICES AND SUCH SERVI CES FELL WITHIN THE DEFINITION GIVEN IN EXPLANATION 2 UNDER SECTION 9(I)(VII) OF THE ACT. FURTHER, AS PER THE A.O., IN VIEW OF EXPLANATION IN TRODUCED UNDER SECTION 9(2) OF THE ACT BY FINANCE ACT, 2000 WITH R ETROSPECTIVE EFFECT FROM 1.6.1996, IT WAS NOT NECESSARY FOR AN ENTITY A BROAD TO HAVE A BUSINESS CONNECTION OR TERRITORIAL NEXUS IN INDIA. AS PER THE A.O., THE SUBSIDIARY WAS RENDERING SUBSTANTIAL SERVICE IN PRO DUCTION, CO- ORDINATION AND QUALITY CONTROL AND ALSO UPLOADING H ARDCOPY OF MANUSCRIPTS AS ALSO ELECTRONIC MATERIALS TO THE ASS ESSEE FOR PROCESSING AND PREPARING TYPESET PAGES. IN ANY CAS E, AS PER THE A.O., IF THE ASSESSEE WAS OF THE OPINION THAT NO TA X WAS REQUIRED TO BE DEDUCTED AT SOURCE FOR THE PAYMENTS EFFECTED TO THE US COMPANY, IT SHOULD HAVE APPROACHED ASSESSING OFFICER FOR OBT AINING A CERTIFICATE AS REQUIRED UNDER SECTION 195(2) OF THE ACT OR UNDER SECTION 195(3) OF THE ACT. HAVING NOT DONE SO, AS PER THE A.O., ASSESSEE INVITED APPLICATION OF RIGOURS OF SECTION 40(A)(I) OF THE ACT. HE, THEREFORE, CONCLUDED THAT ASSESSEE HAD FAILED T O DEDUCT TAX AT I.T.A. NO. 1866/MDS/11 5 SOURCE IN ACCORDANCE WITH 195 OF THE ACT AND RELYIN G ON SECTION 40(A)(I), A DISALLOWANCE OF ` 4,69,91,994/- PAID TO ITS SUBSIDIARY M/S TEX TECH INC. USA, WAS MADE. 5. BEFORE CIT(APPEALS), ARGUMENT OF THE ASSESSEE WA S THAT IT HAD THREE TYPES OF AGREEMENTS WITH M/S TEX TECH INC. US A, ITS SUBSIDIARY. ONE FOR RENDERING MARKETING SERVICES, ONE FOR OFFSH ORE DEVELOPMENT FACILITATION SERVICES AND THIRD ONE FOR RENDERING O VERSEAS SERVICES. AS PER THE ASSESSEE, MARKETING SERVICE WAS PROVIDING S UPPORT TO THE CUSTOMERS WITH REGARD TO BILLING AND PAYMENT AND AL SO COLLECTION OF SUCH AMOUNTS. AS PER THIS AGREEMENT, THE US SUBSID IARY WAS REQUIRED TO PROVIDE MARKET INFORMATION AS AND WHEN REQUIRED BY THE ASSESSEE. OFFSHORE DEVELOPMENT FACILITATION SERVIC E AGREEMENT WAS FOR SCANNING OF MANUSCRIPTS AND UPLOADING IT TO IND IA AND ALSO FOR NOTIFYING THE ASSESSEE THROUGH E-MAIL. ONCE THE AS SESSEE HAD DONE THE TYPESETTING IN INDIA AND UPLOADED IT BACK TO US SUBSIDIARY, THEY WERE TO DOWNLOAD SUCH FORMATTED PAGES, PRINT THE PA GES AND COURIER IT TO THE ULTIMATE CUSTOMERS. THE PAYMENTS EFFECTE D AS PER THE SECOND AGREEMENT, WERE FOR THESE SERVICES. THE LAS T ONE WAS WHERE ASSESSEE HAD RECEIVED ORDERS FROM CUSTOMERS FOR E-P UBLISHING AND ASSESSEE REQUIRED ITS SUBSIDIARY IN USA TO DO ALL T HE WORK INCLUDING I.T.A. NO. 1866/MDS/11 6 PREPARATION OF TYPESETTING FROM MANUSCRIPTS, PRINTI NG PAGES AND SHIPPING IT BACK TO CLIENTS. 6. SUBMISSION OF THE ASSESSEE WAS THAT NONE OF THE ABOVE THREE CATEGORIES OF PAYMENTS FELL WITHIN THE SCOPE OF ART ICLE 12 OF INDO-US DTAA. ASSESSEE WAS ONLY MAKING USE OF THE SERVICES OF ITS SUBSIDIARY IN USA WHICH FACILITATED THE BUSINESS OF THE ASSESSEE. AS PER THE ASSESSEE, NOTHING WAS MADE AVAILABLE BY T HE US SUBSIDIARY TO IT AND THEREFORE, THE PAYMENTS EFFECTED BY IT TO THE US SUBSIDIARY COULD NOT BE REGARDED AS FEES FOR TECHNICAL SERVICE S. ASSESSEE ALSO DISTINGUISHED ITS CASE FROM THAT OF FACTS IN MARUTI UDYOG LTD. V. ADIT IN I.T.A. NOS. 4217, 4219 & 4221/DEL/2005 DATED 31 ST AUGUST, 2009, RELIED ON BY THE A.O., BY SUBMITTING THAT IN THE LA TTER CASE, TECHNICAL REPRESENTATIVES WERE SENT TO FRANCE, WHO HAD RECEIV ED TECHNICAL KNOWLEDGE FROM FRANCE, WHICH COULD BE USED BY THEM FOR THE BENEFIT OF THE ASSESSEE. IN ANY CASE, ACCORDING TO ASSESSE E, IN VIEW OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE V. CIT (327 ITR 456), THE PAYMENTS EFFECTED TO ITS SUBSIDIARY IN USA WERE NOT SUBJECT TO WITHHOLDING TAX IN INDIA AND THEREFORE, THERE WAS NO FAILURE WHICH WOULD ATTRACT SECTION 40 (A)(I) OF THE ACT. I.T.A. NO. 1866/MDS/11 7 7. CIT(APPEALS) WAS APPRECIATIVE OF THE ABOVE CONTE NTION OF THE ASSESSEE. ACCORDING TO HIM, THE MAKE AVAILABLE C LAUSE AS CONTAINED IN ARTICLE 12(4)(B) OF INDO-US DTAA, WAS CLEAR THAT UNLESS TECHNICAL EXPERTISE WAS MADE AVAILABLE TO AN ASSESS EE FROM WHICH IT WOULD TAKE ADVANTAGE, FEES PAID FOR SERVICES WOULD NOT BE FEES FOR TECHNICAL SERVICES. HE, THEREFORE, HELD THAT THE P AYMENTS EFFECTED DID NOT FALL UNDER DEFINITION OF FEES FOR TECHNICAL SE RVICES AS CONTAINED IN INDO-US DTAA. IN THIS VIEW OF THE MATTER, HE HELD THAT ASSESSEE WAS NOT LIABLE FOR DEDUCTION OF TAX ON THE PAYMENTS EFF ECTED TO M/S TEX TECH INC. USA AND DELETED THE DISALLOWANCE MADE UND ER SECTION 40(A)(I) OF THE ACT. 8. NOW BEFORE US, LEARNED D.R. SUBMITTED THAT ADMIT TEDLY ASSESSEE WAS DOING TYPESETTING IN INDIA IN ACCORDAN CE WITH THE PRESCRIPTION GIVEN BY THE US COMPANY, WHICH INCIDEN TALLY, WAS ITS SUBSIDIARY. IF ALL THE JOB COULD BE DONE BY THE AS SESSEE DIRECTLY, THEN THERE WAS NO REQUIREMENT OF A US SUBSIDIARY AT ALL. ASSESSEE WAS RECEIVING ORDERS FROM ITS CLIENTS AND THE MANUSCRIP TS WERE COLLECTED BY THE US COMPANY WHICH DID SOME PROCESSING THEREON BEFORE UPLOADING IT TO INDIA FOR TYPESETTING BY THE ASSESS EE. US COMPANY WAS PROVIDING TECHNICAL KNOWLEDGE FOR DOING THE TYP ESETTING AND ALSO FOR E-PUBLISHING OF BOOKS. ACCORDING TO HIM, ALL T HE PERSONS EMPLOYED I.T.A. NO. 1866/MDS/11 8 BY THE US COMPANY WERE TECHNICALLY QUALIFIED AND BI LLS RAISED BY THE US COMPANY ON THE ASSESSEE, WERE BASED ON HOURLY RA TES. EVERYONE OF THE PERSONS, EMPLOYED BY THE US COMPANY , WERE TECHNICAL EXPERTS, AND EACH OF THE ACTIVITY UNDERTA KEN BY THE US COMPANY ON BEHALF OF ASSESSEE, WERE IN THE NATURE O F TECHNICAL SERVICES. COLLECTION OF MANUSCRIPTS FROM THE CLIEN TS, CO-ORDINATING THE DATA, UPLOADING IT FOR THE ASSESSEE TO DO THE TYPES ETTING WERE ALL TECHNICAL SERVICES. EVEN THE SO-CALLED MARKETING S ERVICES RENDERED BY THE US COMPANY WERE ALSO TECHNICAL IN NATURE SIN CE IT INVOLVED TECHNICAL COLLABORATION WITH THE CLIENTS, FOR MAKIN G OUT A SPECIFIC METHODOLOGY THAT WAS TO BE FOLLOWED FOR UPLOADING T HE FINAL TYPESETTING. 9. FURTHER CONTINUING HIS ARGUMENT, LEARNED D.R. ST ATED THAT ALL THE OVERSEAS CLIENTS OF THE ASSESSEE WERE DIRECTLY BILL ED BY THE ASSESSEE. FOR THE SERVICES RENDERED BY THE US SUBSIDIARY, ASS ESSEE WAS PAYING BASED ON THE BILLS RAISED BY THE US SUBSIDIA RY. EVEN WHEN WORK WAS FULLY DONE BY THE US COMPANY, AS REQUIRED BY CERTAIN CLIENTS OF THE ASSESSEE, SUBSTANTIAL TECHNICAL SERV ICES WERE RENDERED BY THEM. ONCE ASSESSEE WAS GIVEN FORMAT AND SPECIF ICATION AND ALSO TECHNICAL INSTRUCTIONS, IT WAS POSSIBLE FOR TH E ASSESSEE TO USE SUCH TECHNICAL KNOWLEDGE FOR ITS OTHER ASSIGNMENTS ALSO, GIVING AN I.T.A. NO. 1866/MDS/11 9 ENDURING BENEFIT TO IT. EVEN IF IT WAS ADVISORY SE RVICE GIVEN BY THE US SUBSIDIARY, IT WAS NOTHING BUT A SPECIAL SERVICE RE NDERED IN ACCORDANCE WITH THREE AGREEMENTS. RELYING ON THE DE CISION OF AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF SHELL INDIA MARKETS PVT. LTD. (342 ITR 223), LEARNED D.R. SUBMITTED THAT ADV ISORY SERVICES ALSO, IF IT INVOLVED SPECIAL TECHNICAL KNOWLEDGE, W AS NOTHING BUT TECHNICAL SERVICE. RELYING ON THE DECISION OF AAR IN THE CASE OF HMS REAL ESTATE PVT. LTD. (325 ITR 71), LEARNED D.R. SU BMITTED THAT EVEN AN ARCHITECTURAL DESIGN SERVICE RENDERED WAS CONSID ERED AS TECHNICAL SERVICE. LEARNED D.R. POINTED OUT THAT IN THIS DEC ISION, THE AUTHORITY WAS CONCERNED WITH A COMPANY IN THE USA AND HAD GON E THROUGH THE PROVISIONS OF INDO-AMERICAN DTAA BEFORE HOLDING SO. RELYING ON THE DECISION OF AAR IN THE CASE OF XYZ LTD. (2012) 69 D TR (AAR) 96, LEARNED D.R. SUBMITTED THAT INSPECTION, TESTING AND CERTIFICATION SERVICES WERE CONSIDERED TO BE IN THE NATURE OF TEC HNICAL SERVICES. ACCORDING TO HIM, EVEN IF A PART OF THE AMOUNT PAID BY THE ASSESSEE TO ITS SUBSIDIARY IN USA HAD AN ELEMENT OF INCOME W HICH WAS EXIGIBLE TO TAX, THEN IT WAS DUTY-BOUND TO APPROACH ASSESSIN G OFFICER FOR A CERTIFICATE UNDER SECTION 195(2) OF THE ACT. IN VI EW OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (SUPRA), ASSESSEE OUGHT HAVE DEDUCTED TAX AT SOURCE , HAVING NOT I.T.A. NO. 1866/MDS/11 10 APPLIED FOR A CERTIFICATE FROM ASSESSING OFFICER ON THE LINES MENTIONED. THEREFORE, ACCORDING TO HIM, ASSESSEE H AD FAILED TO DEDUCT TAX AT SOURCE AND INVITED RIGOURS OF SECTION 40(A)(I) OF THE ACT. LD. CIT(APPEALS) FELL IN ERROR IN DELETING THE DISA LLOWANCE. 10. PER CONTRA, LEARNED A.R., STRONGLY SUPPORTING T HE ORDER OF CIT(APPEALS), SUBMITTED THAT THE ROLE OF THE SUBSID IARY IN THE WORK DONE BY THE ASSESSEE WAS MUCH LIMITED. US SUBSIDIA RY WAS ONLY A MARKETING AGENT COLLECTING MANUSCRIPTS FROM ASSESSE ES CLIENTS AND FORWARDING IT TO ASSESSEE IN INDIA. ASSESSEE WAS D OING ALL THE TECHNICAL WORK, INCLUDING TYPESETTING. US COMPANY WAS THERE ONLY TO COLLECT THE MANUSCRIPTS FROM THE CUSTOMERS, FORWARD IT TO INDIA, PRINT THE PAGES TYPESET IN INDIA, AND FORWARD IT TO THE C LIENTS. IN SOME CASES, THE SAID US SUBSIDIARY WAS DOING WHOLE OF TH E WORK BY ITSELF DUE TO CERTAIN SPECIFIC CONSTRAINTS PLACED BY THE C LIENTS AND IN SUCH CASES, THERE WAS NO QUESTION OF ANY TECHNICAL SERVI CES BEING MADE AVAILABLE BY THEM TO THE ASSESSEE. ACCORDING TO HI M, THE INVOICES RAISED BY THE US COMPANY WOULD CLEARLY SHOW THAT TH ERE WAS NO RENDERING OF ANY TECHNICAL SERVICES AT ALL. LEARNE D A.R. PLACING RELIANCE ON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT & ITO V. DE BEERS INDIA MINERALS PVT. LTD. ( 2012) 72 DTR 82, ARGUED THAT NO TYPE OF TECHNICAL SERVICE WAS MADE A VAILABLE BY THE I.T.A. NO. 1866/MDS/11 11 US SUBSIDIARY TO THE ASSESSEE AND THERE WAS NO QUES TION OF ANY TECHNICAL KNOWLEDGE WHICH ENABLED THE ASSESSEE TO D ERIVE AN ENDURING BENEFIT, BEING MADE AVAILABLE TO IT. ASSE SSEE COULD NOT UTILIZE THE KNOWLEDGE RECEIVED FROM US COMPANY FOR ITS OWN BENEFIT. ACCORDING TO HIM, IN VIEW OF SUCH SPECIFIC OBSERVAT ION OF HONBLE KARNATAKA HIGH COURT WITH REGARD TO THE TERM MAKIN G AVAILABLE, VARIOUS DECISIONS OF AUTHORITY FOR ADVANCE RULINGS, RELIED ON BY THE LEARNED D.R., HAD TO BE IGNORED. LEARNED A.R. ALSO RELIED ON THE DECISION OF GE INDIA TECHNOLOGY CENTRE (SUPRA) FOR ARGUING THAT ASSESSEE BEING UNDER A BONAFIDE BELIEF THAT NO TAX HAD TO BE DEDUCTED AT SOURCE, IT COULD NOT BE FASTENED WITH A NY LIABILITY FOR DEFAULT OF THAT NATURE. 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THE QUESTION HERE IS WHETHER THE US COMPANY, WHICH INCIDENTALLY WAS A SUBSIDIARY OF THE ASSESSEE, WAS RENDERING ANY TECHNICAL SERVICES, WHICH WARRANTED A DEDUCTION OF TAX AT SOU RCE, IN ACCORDANCE WITH SECTION 195 OF THE ACT. THERE IS NO DISPUTE T HAT ASSESSEE WOULD BE GOVERNED BY INDO-US DTAA INSOFAR AS ITS DEALINGS WITH ITS SUBSIDIARY IN USA ARE CONCERNED. IN VIEW OF DECISI ON OF HONBLE APEX COURT IN THE CASE OF UNION OF INDIA V. AZADI B ACHAO ANDOLAN AND ANOTHER (263 ITR 706), AN ASSESSEE CAN ALWAYS T AKE THE BENEFIT I.T.A. NO. 1866/MDS/11 12 OF DOUBLE TAXATION AVOIDANCE AGREEMENT, IF IT IS TO ITS ADVANTAGE. DEFINITION OF TECHNICAL SERVICE AS GIVEN IN EXPLA NATION 2 TO SECTION 9(I)(VII) OF THE ACT AND FEES FOR INCLUDED SERVICE S GIVEN IN ARTICLE 12.4 OF DTAA BETWEEN USA AND INDIA ARE NOT PARI MAT ERIA. ASSESSING OFFICER HAD NOT MADE ANY STUDY OF THE SAI D ARTICLE IN THE DTAA, BEFORE FASTENING ON THE ASSESSEE THE LIABILIT Y TO DEDUCT TAX AT SOURCE ON THE PAYMENTS EFFECTED BY IT. ASSESSING O FFICER WENT BY THE DEFINITION GIVEN IN EXPLANATION 2 TO SECTION 9(I)(V II) AND RELYING ON THE EXPLANATION GIVEN UNDER SECTION 9(2) OF THE ACT, HE LD THAT ASSESSEE, IRRESPECTIVE OF THE FACT WHETHER THE SUBSIDIARY ABR OAD HAD A PLACE OF BUSINESS IN INDIA, WAS LIABLE TO DEDUCT TAX AT SOUR CE. SECTION 9(I)(VII) READS AS UNDER:- ( VII ) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYA BLE BY ( A ) THE GOVERNMENT ; OR ( B ) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PROFE SSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA ; OR ( C ) A PERSON WHO IS A NON-RESIDENT, WHERE THE FEES AR E PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PROFE SSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOSES OF MAKI NG OR EARNING ANY INCOME FROM ANY SOURCE IN INDIA : [ PROVIDED THAT NOTHING CONTAINED IN THIS CLAUSE SHALL APPLY IN RELATION TO ANY INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PA YABLE IN PURSUANCE I.T.A. NO. 1866/MDS/11 13 OF AN AGREEMENT MADE BEFORE THE 1ST DAY OF APRIL, 1 976, AND APPROVED BY THE CENTRAL GOVERNMENT.] [ EXPLANATION 1. FOR THE PURPOSES OF THE FOREGOING PROVISO, AN AGREEMENT MADE ON OR AFTER THE 1ST DAY OF APRIL, 19 76, SHALL BE DEEMED TO HAVE BEEN MADE BEFORE THAT DATE IF THE AGREEMENT IS MADE IN ACCORDANCE WITH PROPOSALS APPROVED BY THE CENTRAL G OVERNMENT BEFORE THAT DATE.] EXPLANATION [ 2 ] . FOR THE PURPOSES OF THIS CLAUSE, 'FEES FOR TECHNIC AL SERVICES' MEANS ANY CONSIDERATION (INCLUDING ANY LU MP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SE RVICES OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MINING OR LIKE PROJECT UNDE RTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD 'SALARIES'.] 12. IT MIGHT BE TRUE THAT THE SERVICES RENDERED BY SUBSIDIARY ABROAD WOULD FALL WITHIN THE ABOVE DEFINITION, AT LEAST PR IMA FACIE. IT MIGHT ALSO BE TRUE THAT IN VIEW OF EXPLANATION PROVIDED U NDER SECTION 9(2) OF THE ACT INTRODUCED BY FINANCE ACT, 2010 WITH RETROS PECTIVE EFFECT FROM 1.6.1976, REQUIREMENT REGARDING A RESIDENCE OR PLAC E OF BUSINESS OR BUSINESS CONNECTION IN INDIA FOR A NON-RESIDENT IS IRRELEVANT FOR THE PURPOSE OF DETERMINING THE TAX LIABILITY FOR FEES F OR TECHNICAL SERVICES RECEIVED BY A NON-RESIDENT OUTSIDE INDIA. BUT, AS ALREADY MENTIONED BY US, IF THE ASSESSEE IS ABLE TO SHOW THAT THE SER VICES RENDERED BY THE ENTITY ABROAD, WOULD NOT FALL WITHIN THE MEANIN G OF FEES FOR INCLUDED SERVICES AS DEFINED UNDER ARTICLE 12.4 OF DTAA BETWEEN USA AND INDIA, THEN DEFINITELY IT CAN TAKE ADVANTAG E OF SUCH DEFINITION I.T.A. NO. 1866/MDS/11 14 AND WILL BE JUSTIFIED IN TAKING A STANCE THAT TAX W AS NOT DEDUCTIBLE FOR PAYMENTS EFFECTED BY IT TO US COMPANY. BEFORE TEST ING WHETHER THE TYPE OF SERVICES RENDERED BY THE US COMPANY TO ASSE SSEE WOULD FALL WITHIN THE DEFINITION OF FEES FOR INCLUDED SERVICE S AS CONTAINED IN ARTICLE 12.4 OF THE SAID DTAA, WE HAVE TO SEE THE N ATURE OF SERVICES RENDERED BY THE US COMPANY TO THE ASSESSEE. THE FI RST AGREEMENT TERMED AS MARKETING AGREEMENT PLACED AT PAPER-BOO K PAGE 22, DEFINES DUTIES OF M/S TEX TECH INC. USA UNDER CLAUS E 6 THEREIN, AS UNDER:- 6. RIGHTS AND OBLIGATIONS OF Y 6.1 Y HEREBY COVENANTS THAT Y SHALL NOT SELL, OFF ER TO SELL, OR PROMOTE THE PRODUCTS AND/OR SERVICES OUTSIDE THE OVERSEAS MARKE T. Y FURTHER COVENANTS THAT Y SHALL NOT SELL OR OFFER TO SELL TH E PRODUCT AND/OR SERVICES OF X TO ANY CUSTOMER WITHOUT THE KNOWLEDGE OF X. 6.2 Y HEREBY COVENANTS THAT Y SHALL FORWARD TO X AL L INQUIRIES RELATING TO THE PRODUCTS AND/OR SERVICES THAT Y RECEIVE FROM TH E CUSTOMERS IN THE OVERSEAS MARKET. 6.3 Y HEREBY COVENANTS THAT Y SHALL FINALIZE THE SA LE PRICE ALONG WITH DISCOUNTS, IF ANY, WITH THE CUSTOMER ONLY AFTER THE PRIOR APPROVAL AND KNOWLEDGE OF X. 6.4 Y SHALL AT ITS SOLE EXPENSE, PROMOTE THE SALE O F THE PRODUCTS AND/OR SERVICES OF X TO THE CUSTOMERS FROM THE START DATE OF THIS AGREEMENT. 6.5 Y HEREBY COVENANTS THAT Y SHALL AT ITS SOLE EXP ENSE PROVIDE ANY AND ALL SUPPORT FOR CUSTOMERS AND/OR THEIR STAFFS WITH REGA RD TO BILLING AND PAYMENT COLLECTION. I.T.A. NO. 1866/MDS/11 15 6.6 Y SHALL USE ITS BEST EFFORTS TO PROMOTE AND SEL L THE PRODUCTS FOR USE ONLY TO CUSTOMERS IN COMPLIANCE WITH LOCAL LAWS AND REGULATIONS. 6.7 Y HEREBY COVENANTS THAT Y SHALL PROVIDE MARKET RESEARCH INFORMATION AS AND WHEN REQUESTED BY X FOR PURPOSE OF XS TO UN DERSTAND COMPETITIONS AND MARKET TRENDS IN THE OVERSEAS TERR ITORY. IT IS PERTINENT TO NOTE THAT Y HERE DENOTES THE U S COMPANY. 13. THE SECOND AGREEMENT WITH US COMPANY TERMED AS OFFSHORE DEVELOPMENT (FACILITATION) AGREEMENT PLACED AT PAP ER-BOOK PAGE 37 ONWARDS, GIVES SCOPE OF WORK IN CLAUSE 3, WHICH REA DS AS UNDER:- 3. SCOPE 3.1 X HEREBY AGREES TO PROCESS CUSTOMER MATERIALS, PREPARE INSTRUCTIONS, AND PREPARE FILES TO ENABLE Y TO CARRY OUT E-PUBLIS HING SERVICES AND SEND SUCH FILES THROUGH INTERNET BY WAY OF FILE TRA NSFER PROTOCOL OR UPLOAD SUCH FILES IN SERVERS AND COMMUNICATE ACCESS MECHANISMS. 3.2 Y SHALL USE THE INSTRUCTIONS SENT ALONG WITH TH E FILES FOR CARRYING OUT DIGITIZATION SERVICES IN RESPECT OF MANUSCRIPTS AND BOOKS AND OTHER MATERIALS. 3.3 X WILL ALSO PROVIDE FINAL QUALITY ASSURANCE OF PRODUCTS DELIVERED BY Y PRIOR TO SHIPMENT TO CUSTOMER. 3.4 X WILL SHIP THE PRODUCT TO CUSTOMER EITHER ELEC TRONICALLY OR PHYSICALLY BASED ON CUSTOMER PREFERENCE. 3.5 THE PARTIES UNDERSTAND THAT THE RECEIPT OF THE WORK CARRIED OUT BY X UNDER THIS AGREEMENT COULD BE RECEIVED IN INDIA AT THE TIME OF DOWNLOADS OR IN CYBERPACE WHEN THE FILES ARE PLACE D IN A SERVER TO FACILITATE ACCESS. I.T.A. NO. 1866/MDS/11 16 IT IS PERTINENT TO NOTE THAT X DENOTES THE US SUB SIDIARY HERE. 14. THE THIRD AGREEMENT CALLED OVERSEAS SERVICES A GREEMENT PLACED AT PAPER-BOOK PAGE 53 ONWARDS GIVES SCOPE OF WORK OF THE US COMPANY AS UNDER:- 3. SCOPE 3.1 X HEREBY AGREES TO PROVIDE SERVICES REFERRED TO IN PARA 3.2 AND THE DETAILS OF SERVICE SHALL BE MUTUALLY AGREED UPON FR OM TIME TO TIME. 3.2 X USING DOMAIN EXPERTISE, TOOLS AND INFRASTRUCT URE, SHALL CARRY OUT THE FOLLOWING SERVICES: (I) RECEIPT OF MANUSCRIPTS AND LICENSED MATERIALS FROM CUSTOMERS. (II) IDENTIFICATION OF BOOK PRODUCTION REQUIREMENTS. (III) USAGE OF APPROPRIATE SOFTWARE TOOLS FOR CARRYING OU T THE FULL BOOK PRODUCTION WORK IN THE US. (IV) PROVIDING CUSTOMER SERVICE. (V) PERFORMING FINAL QUALITY CHECKS ON THE PROCESSED MA TERIALS. (VI) PRINTING FINAL LASER PROFITS AND DISPATCH TO CUSTOM ER LOCATIONS SPECIFIED BY Y. IN THIS AGREEMENT ALSO, X DENOTES THE US COMPANY. 15. NOW COMING TO ARTICLE 12.4 OF DTAA BETWEEN INDI A AND USA, WHICH DEFINES FEES FOR INCLUDED SERVICES, IT READ S AS FOLLOWS:- 4. FOR THE PURPOSES OF THIS ARTICLE, FEES FOR INC LUDED SERVICES MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUG H THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES: I.T.A. NO. 1866/MDS/11 17 (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYM ENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL, KNOW- HOWEVER,, OR PROCESSES, OR CONSIST OF THE DEVELOPME NT AND TRANSFER OF TECHNICAL PLAN OR TECHNICAL DESIGN. IT IS CLEAR FROM THE ABOVE ARTICLE THAT TECHNICAL O R CONSULTANCY SERVICES WILL INCLUDE FEES FOR SERVICES ONLY IF SUCH SERVICE S FALL WITHIN ANY OF THE TWO LIMBS (A) OR (B). LIMB (A) IS NOT APPLICABLE H ERE SINCE IT APPLIES WHERE THE PAYMENT WAS IN THE NATURE OF ROYALTY AND THE SERVICES WERE ANCILLARY OR SUBSIDIARY TO THE ROYALTY. SO, HERE W HAT WE HAVE TO SEE IS WHETHER LIMB (B) WOULD BE APPLICABLE OR NOT. FOR L IMB (B) TO BE APPLIED, IT IS NECESSARY THAT THE ENTITY ABROAD MAK ES AVAILABLE TECHNICAL KNOWLEDGE, SKILL, KNOW-HOW OR PROCESS TO THE ASSESSEE IN INDIA OR OTHERWISE, THE SERVICES RENDERED BY ENTITY ABROAD SHOULD CONSIST OF DEVELOPMENT AND TRANSFER OF TECHNICAL PL AN OR TECHNICAL DESIGN. VIS--VIS FIRST AGREEMENT NAMED MARKETING AGREEMENT, IT IS CLEAR THAT THERE WAS NO TECHNICAL SERVICE WHATSOEVE R INVOLVED IN IT SINCE NO TECHNICAL KNOWLEDGE OR SKILL OR EXPERIENCE WAS MADE AVAILABLE TO THE ASSESSEE, WHEN MARKETING SERVICES WERE RENDERED BY THE ENTITY ABROAD. COMING TO THIRD AGREEMENT NAMED OVERSEAS SERVICES AGREEMENT, SCOPE CLEARLY IS ONE OF A TURN KEY SERVICE. THE US COMPANY HAS TO USE ITS EXPERTISE, TOOLS AND INFR ASTRUCTURE FOR I.T.A. NO. 1866/MDS/11 18 RECEIVING MANUSCRIPTS FOR PRODUCTION OF BOOK USING ITS OWN RESOURCE, INCLUDING SERVICING THE CUSTOMERS AND EFFECTING DIS PATCHES TO CUSTOMER LOCATIONS. IN OTHER WORDS, WHOLE OF THE WORK WAS DONE BY THE US COMPANY AND WHEN WHOLE OF THE WORK WAS DONE BY US COMPANY, FOR START TO FINISH, WE CANNOT SAY THAT AS SESSEE WAS RECEIVING ANY TECHNICAL KNOWLEDGE, SKILL, KNOW-HOW OR BENEFIT OF ANY TECHNICAL PLAN OR TECHNICAL DESIGN FROM THEM. 16. THIS LEAVES US WITH THE SECOND AGREEMENT CALLED OFFSHORE DEVELOPMENT (FACILITATION) AGREEMENT. THE SCOPE O F WORK HAS BEEN REPRODUCED BY US ABOVE AT PARA 13. BY VIRTUE OF CL AUSE 3.1, US COMPANY HAS TO PROCESS CUSTOMER MATERIALS, PREPARE INSTRUCTIONS AND PREPARE FILES FOR THE ASSESSEE TO CARRY OUT E-PUBLI SHING SERVICES AND ALSO HAS TO UPLOAD THESE TO THE ASSESSEE. ALL THES E WILL DEFINITELY INVOLVE TECHNICAL KNOW-HOW, BUT, STILL THERE IS NO TECHNICAL KNOWLEDGE AS SUCH MADE AVAILABLE TO THE ASSESSEE WHICH WILL G IVE IT AN ENDURING BENEFIT. SIMILAR IS THE CASE WITH THE TYPE OF SERV ICE MENTIONED AT CLAUSE 3.3 ALSO. BY VIRTUE OF THIS CLAUSE, THE ENT ITY ABROAD HAS TO PROVIDE QUALITY ASSURANCE. THIS PROVISION OF QUALI TY ASSURANCE MIGHT ALSO INVOLVE SOME TECHNICAL EXPERTISE, BUT, WE CANN OT SAY THAT SUCH TECHNOLOGY WAS MADE AVAILABLE TO THE ASSESSEE BY TH E SAID ENTITY. THE ONLY ITEM NOW LEFT IS THE WORK MENTIONED IN CLA USE 3.2. THIS I.T.A. NO. 1866/MDS/11 19 CLAUSE SPECIFIES THAT THE ASSESSEE HAS TO USE THE I NSTRUCTIONS SENT BY THE ENTITY ABROAD ALONG WITH FILES FOR CARRYING OUT DIGITIZATION SERVICES. IF SUCH INSTRUCTIONS WERE IN THE NATURE OF TECHNICA L KNOWLEDGE WHICH IMBIBED IN THE ASSESSEE ANY TECHNICAL EXPERTISE, WH ICH IN TURN HELPED IT IN ITS E-PUBLICATION BUSINESS, SUCH THAT AN ENDU RING BENEFIT WAS RECEIVED BY IT, THEN OF COURSE, SUCH SERVICES WILL COME WITHIN THE PURVIEW OF CLAUSE (B) OF ARTICLE 12.4 OF INDO-US DT AA MENTIONED ABOVE. A LOOK AT THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF DE BEERS INDIA MINERALS PVT. LTD. (SUPRA), WILL CLEARLY ELUCIDATE THE MEANING OF WORD MAKE AVAILABLE:- WHAT IS THE MEANING OF MAKE AVAILABLE. THE TECHN ICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NA TURE THAT IT MAKES AVAILABLE TO THE RECIPIENT TECHNICAL KNOWLE DGE, KNOW-HOW AND THE LIKE. THE SERVICE SHOULD BE AIMED AT AND R ESULT IN TRANSMITTING TECHNICAL KNOWLEDGE, ETC., SO THAT THE PAYER OF THE SERVICE COULD DERIVE AN ENDURING BENEFIT AND UTILIZ E 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 ENO UGH THAT THE SERVICES OFFERED ARE THE PRODUCT OF INTENSE TECHNOL OGICAL EFFORT AND A LOT OF TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE PROVIDER HAVE GONE INTO IT. THE TECHNICAL KNOWLEDG E 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 FA CT THAT THE PROVISION OF THE SERVICE THAT MAY REQUIRE TECHNICAL KNOWLEDGE, I.T.A. NO. 1866/MDS/11 20 SKILLS, ETC., DOES NOT MEAN THAT TECHNOLOGY IS MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANI NG OF PARAGRAPH (4)(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE T HE TECHNOLOGY AVAILABLE. IN OTHER WORDS, PAYMENT OF CONSIDERATIO N WOULD BE REGARDED AS FEE FOR TECHNICAL INCLUDED SERVICES O NLY IF THE TWIN TEST OF RENDERING SERVICES AND MAKING TECHNICAL KNO WLEDGE AVAILABLE AT THE SAME TIME IS SATISFIED. 17. WHEN VIEWED FROM THE ABOVE INTERPRETATION GIVEN BY HONBLE KARNATAKA HIGH COURT OF TERM MAKING AVAILABLE, IT IS CLEAR THAT EXCEPT FOR THE WORK MENTIONED IN CLAUSE 3.2 OF THE SECOND AGREEMENT, THERE WAS NO TECHNICAL KNOWLEDGE OR SERV ICE MADE AVAILABLE BY THE ENTITY ABROAD TO THE ASSESSEE IN A NY OF THE OTHER WORK. IF THE INSTRUCTIONS SENT BY THE ENTITY ABROA D WERE SUCH THAT IT COULD GIVE A TECHNICAL EXPERTISE TO THE ASSESSEE, W HICH IT COULD USE EVEN AFTER THE EXPIRY OF THE CONTRACT THEREBY GIVIN G IT AN ENDURING BENEFIT IN ITS E-PUBLISHING WORK, THEN WITHOUT DOUB T, IT WILL FALL WITHIN THE MEANING OF FEES FOR INCLUDED SERVICES. IF TH IS WAS THE CASE, THEN ASSESSEE WAS OBLIGED TO DEDUCT TAX AT SOURCE ON THE PAYMENTS EFFECTED BY IT TO THE SUBSIDIARY IN USA, ARISING OU T OF ALL THE THREE AGREEMENTS, IF IT HAD NOT SOUGHT A CERTIFICATE FROM A.O., AS STIPULATED IN SECTION 195(2). HERE, THE DECISION OF HONBLE A PEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (SUPRA) BECOMES RELEVANT . PARA 10 OF THE SAID DECISION IS REPRODUCED HEREUNDER, FO R BREVITY:- I.T.A. NO. 1866/MDS/11 21 10. IN TRANSMISSION CORPORATION CASE (SUPRA) A NON- RESIDENT HAD ENTERED INTO A COMPOSITE CONTRACT WITH THE RESI DENT PARTY MAKING THE PAYMENTS. THE SAID COMPOSITE CONTRACT N OT ONLY COMPRISED SUPPLY OF PLANT, MACHINERY AND EQUIPMENT IN INDIA, BUT ALSO COMPRISED THE INSTALLATION AND COMMISSIONING O F THE SAME IN INDIA. IT WAS ADMITTED THAT THE ERECTION AND COMMI SSIONING OF PLANT AND MACHINERY IN INDIA GAVE RISE TO INCOME TA XABLE IN INDIA. IT WAS, THEREFORE, CLEAR EVEN TO THE PAYER THAT PAY MENTS REQUIRED TO BE MADE BY HIM TO THE NON-RESIDENT INCL UDED AN ELEMENT OF INCOME WHICH WAS EXIGIBILE TO TAX IN IND IA. THE ONLY ISSUE RAISED IN THAT CASE WAS WHETHER TDS WAS APPLI CABLE ONLY TO PURE INCOME PAYMENTS AND NOT TO COMPOSITE PAYMENTS WHICH HAD AN ELEMENT OF INCOME EMBEDDED OR INCORPORATED IN TH EM. THE CONTROVERSY BEFORE US IN THIS BATCH OF CASES IS, TH EREFORE, QUITE DIFFERENT. IN TRANSMISSION CORPORATION CASE (SUPRA ) 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 WHI CH WAS EXIGIBLE TO TAX IN INDIA. IT WAS HELD THAT IF THE PAYER WANTED TO DEDUCT TAS NOT ON THE GROSS AMOUNT BUTON THE LESSER AMOUNT, ON THE FOOTING THAT ONLY A PORTION OF THE PAYMENT MADE REPRESENTED INCOME CHARGEABLE TO TAX IN INDIA, THEN IT WAS NE CESSARY FOR HIM TO MAKE AN APPLICATION UNDER S. 195(2) OF THE A CT TO THE ITO(TDS) AND OBTAIN HIS PERMISSION FOR DEDUCTING TA S AT LESSER AMOUNT. THUS, IT WAS HELD BY THIS COURT THAT IF TH E PAYER HAD A DOUBT AS TO THE AMOUNT TO BE DEDUCTED AS TAS HE COU LD APPROACH THE ITO(TDS) TO COMPUTE THE AMOUNT WHICH WAS LIABLE TO BE DEDUCTED AT SOURCE. IN OUR VIEW, S. 195(2) IS BASE D ON THE PRINCIPLE OF PROPORTIONALITY. THE SAID SUB-SECTI ON GETS ATTRACTED ONLY IN CASES WHERE THE PAYMENT MADE IS A COMPOSITE PAYMENT IN WHICH A CERTAIN PROPORTION OF PAYMENT HA S AN ELEMENT OF INCOME CHARGEABLE TO TAX IN INDIA. IT IS IN T HIS CONTEXT THAT THE SUPREME COURT STATED, IF NO SUCH APPLICATION I S FILED, INCOME-TAX ON SUCH SUM IS TO BE DEDUCTED AND IT IS THE STATUTORY OBLIGATION OF THE PERSON RESPONSIBLE FOR PAYING SUC H SUM TO DEDUCT TAX THEREON BEFORE MAKING PAYMENT. HE HAS T O DISCHARGE THE OBLIGATION TO TDS. IF ONE READS THE OBSERVATI ON OF THE SUPREME COURT, THE WORDS SUCH SUM CLEARLY INDICAT E THAT THE OBSERVATION REFERS TO A CASE OF COMPOSITE PAYMENT W HERE THE PAYER HAS A DOUBT REGARDING THE INCLUSION OF AN AMO UNT IN SUCH I.T.A. NO. 1866/MDS/11 22 PAYMENT WHICH IS EXIGIBLE TO TAX IN INDIA. IN OUR VIEW, THE ABOVE OBSERVATIONS OF THIS COURT IN TRANSMISSION CORPORAT ION CASE (SUPRA) WHICH IS PUT IN ITALICS HAS BEEN COMPLETELY , WITH RESPECT, MISUNDERSTOOD BY THE KARNATAKA HIGH COURT TO MEAN T HAT IT IS NOT OPEN FOR THE PAYER TO CONTEND THAT IF THE AMOUNT PA ID BY HIM TO THE NON-RESIDENT IS NOT AT ALL CHARGEABLE TO TAX I N INDIA, THEN NO TAS IS REQUIRED TO BE DEDUCTED FROM SUCH PAYMENT. THIS INTERPRETATION OF THE HIGH COURT COMPLETELY LOSES S IGHT OF THE PLAIN WORDS OF S. 195(1) WHICH IN CLEAR TERMS LAYS DOWN THAT TAX AT SOURCE IS DEDUCTIBLE ONLY FROM SUMS CHARGEABLE UN DER THE PROVISIONS OF THE I.T. ACT, I.E. CHARGEABLE UNDER SS. 4, 5 AND 9 OF THE I.T. ACT. 18. IT IS AN ADMITTED POSITION THAT SEPARATE INVOIC ES WERE RAISED BY THE SUBSIDIARY TO THE ASSESSEE, BASED ON THE THREE DIFFERENT AGREEMENTS, AND COPIES OF SUCH INVOICES HAVE BEEN P LACED AT PAPER- BOOK PAGE 7 ONWARDS. THUS, THREE AGREEMENTS WERE N OT A COMPOSITE ONE. THE SCOPE OF WORK WOULD SHOW THAT DIFFERENT T YPES OF SERVICES WERE RENDERED BY THE SUBSIDIARY IN USA. WITH REGAR D TO THE MARKETING AGREEMENT, AND OVERSEAS SERVICES AGREEMEN T, NO PART THEREOF WAS HAVING INCOME ELEMENT WHICH WAS CHARGEA BLE TO TAX UNDER THE PROVISIONS OF INCOME-TAX ACT IN INDIA IN VIEW OF ARTICLE 12.4 OF DTAA. THEREFORE, INSOFAR AS PAYMENTS MADE AGAIN ST BILLS RAISED BY THE NON-RESIDENT ENTITY OF THE ASSESSEE BASED ON THESE TWO AGREEMENTS, ASSESSEE COULD NEVER BE FASTENED WITH L IABILITY TO DEDUCT TAX AT SOURCE. HOWEVER, FOR THE SECOND AGREEMENT, NAMELY, OFFSHORE DEVELOPMENT (FACILITATION) AGREEMENT, AS ALREADY I.T.A. NO. 1866/MDS/11 23 MENTIONED BY US, ONE OF THE ITEMS OF SERVICES RENDE RED BY THE ENTITY ABROAD COULD HAVE AN ELEMENT OF INCOME CHARGEABLE T O TAX IN INDIA, SINCE IT COULD INVOLVE MAKING AVAILABLE TECHNICAL S ERVICES TO THE ASSESSEE IN INDIA. BUT, THIS ASPECT HAS NOT BEEN E XAMINED METICULOUSLY BY ANY OF THE AUTHORITIES BELOW. IF T HE SERVICES RENDERED BY THE ENTITY ABROAD WITH REGARD TO THE SAID AGREEM ENT WERE SUCH THAT TECHNICAL SKILLS WERE MADE AVAILABLE TO THE ASSESSE E IN INDIA, THEN OF COURSE, SECTION 195 OF THE ACT WILL APPLY. ASSESSE E HAVING NOT MADE ANY APPLICATION UNDER SECTION 195(2) OF THE ACT, IT COULD BE FASTENED WITH A FAILURE TO DEDUCT TAX AT SOURCE AS SPECIFIED UNDER SECTION 195 OF THE ACT. THEN OF COURSE, RIGOURS OF SECTION 40( A)(I) WOULD BE ATTRACTED. WE ARE, THEREFORE, OF THE OPINION THAT THE MATTER REQUIRES A RE-VISIT BY THE A.O. THEREFORE, WE SET ASIDE THE O RDERS OF AUTHORITIES BELOW AND REMIT THE ISSUE INSOFAR AS IT RELATES TO PAYMENTS MADE BY THE ASSESSEE TO ITS SUBSIDIARY ABROAD WITH REGARD T O OFFSHORE DEVELOPMENT (FACILITATION) AGREEMENT BACK TO THE F ILE OF THE A.O. FOR CONSIDERATION AFRESH IN THE LIGHT OF DTAA BETWEEN I NDIA AND USA, IN ACCORDANCE WITH LAW. 19. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. I.T.A. NO. 1866/MDS/11 24 THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 11 TH OF OCTOBER, 2012, AT CHENNAI. SD/- SD/- (V.DURGA RAO) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 11 TH OCTOBER, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-VI, CHENNAI (4) CIT-I, CHENNAI (5) D.R. (6) GUARD FILE