Dy. DIT, Hyderabad V. M/s DQ Entertainment (International) Private Ltd, Hyderabad

ITA 276/HYD/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5558 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 1 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-05-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 19-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ADAGIRI
• Assessee Lawyers: V RAGHAVENDRA RAO
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Bonafide belief; Deemed to accrue or arise in india; Permanent establishment
• Section: 142(1); 201(1); 148; 154

Judgement Text

1 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.276 /HYD/2010 FINANCIAL YEARS 2005-2006 & 2006-2007 AND ITA.NO. 277/HYD/2010 FINANCIAL YEARS 2006-2007 & 2007-2008 ADIT (INTERNATIONAL TAXATION-I) HYDERABAD VS. M/S. DQ ENTERTAINMENT (INTERNATIONAL) P. LTD. HYDERABAD PAN AABCD 1845L (APPELLANT) (RESPONDENT) ITA.NO.452/HYD/2011 ASSESSMENT YEAR 2007-2008 DDIT (INTERNATIONAL TAXATION)-I HYDERABAD VS. M/S. DQ ENTERTAINMENT (INTERNATIONAL) P. LTD. HYDERABAD PAN AABCD 1845L (APPELLANT) (RESPONDENT) ITA.NO.594, 595/HYD/2013 ASSESSMENT YEARS 2006-2007 & 2007-2008 DDIT (INTERNATIONAL TAXATION) HYDERABAD VS. M/S. DQ ENTERTAINMENT (INTERNATIONAL) P. LTD. HYDERABAD PAN AABCD 1845L (APPELLANT) (RESPONDENT) 2 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. CROSS OBJECTION NO. 26 & 27/HYD/2013 ARISING OUT OF ITA.NO.594, 595/HYD/2013 ASSESSMENT YEARS 2006-2007 & 2007-2008 M/S. DQ ENTERTAINMENT (INTERNATIONAL) P. LTD. HYDERABAD PAN AABCD 1845L VS. DDIT (INTERNATIONAL TAXATION)-I, HYDERABAD (APPELLANT) (RESPONDENT) FOR REVENUE : MR. B. YADAGIRI FOR ASSESSEE : MR. V. RAGHAVENDRA RAO DATE OF HEARING : 26.02.2014 DATE OF PRONOUNCEMENT : 28.03.2014 ORDER PER BENCH : THESE ARE REVENUE APPEALS AND CROSS-OBJECT IONS BY ASSESSEE FOR ASSESSMENT YEARS 2006-2007 AND 2007 -2008. THERE ARE MULTIPLE APPEALS ON THE ORDERS BY THE CIT (A)-VI, HYDERABAD. 2. THE ISSUE IN ALL THESE APPEALS IS WITH REFERENC E TO LEVY OF DEMANDS UNDER SECTION 201 AND 201(1A) ON TH E PAYMENTS MADE BY ASSESSEE TO FOREIGN COMPANIES IN T WO FINANCIAL YEARS I.E., FINANCIAL YEARS 2005-06 AND 2 006-07 RELEVANT FOR ASSESSMENT YEARS 2006-07 AND 2007-08. THE ADIT (INTL. TAXATION) RAISED THE DEMAND VIDE HIS ORDER D ATED 31.07.2008 AGAINST PAYMENTS MADE TO CHINESE COMPANY KNOWN AS HONG GUANG ANIMATION CO. LTD., CHINA (IN SHORT HGA) COMMONLY FOR BOTH THE FINANCIAL YEARS. THE A DIT (INTL. TAXATION) PASSED ANOTHER ORDER ON 29.08.2008 IN RES PECT OF PAYMENTS MADE TO ANOTHER COMPANY BY NAME MAXIMUM 3 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. INTERNATIONAL ANIMATION DIVISION AND CLUB EXCHANGE, HONGKONG (MI&GE) FOR FINANCIAL YEARS 2006-07 AND 2007-08. THE A.O. INSTEAD OF RAISING THE DEMANDS ASSESSMENT YEAR/FINANCIAL YEAR-WISE, PASSED THE ORDERS COMPANY S-WISE TO WHOM THE PAYMENTS WERE MADE. 3. ASSESSEE PREFERRED APPEALS BEFORE THE CIT(A) ACCORDINGLY. LD. CIT(A) DISPOSED OF THE TWO APPEALS IN FAVOUR OF ASSESSEE VIDE ORDER DT 03-12-2009 AND ACCORDINGLY R EVENUE PREFERRED APPEALS ITA.NO.276 & 277/HYD/2010. SINCE, CIT(A) DID NOT DISPOSE OF THE GROUNDS PERTAINING TO APPLIC ABILITY OF DTAA WITH CHINA, ASSESSEE PREFERRED A RECTIFICATION APPLICATION AND CIT(A) CONSIDERED THE SAME VIDE HIS ORDER DATED 18.12.2009 AND DISPOSED OF THE MATTER AGAIN IN FAVO UR OF ASSESSEE. THEREFORE, REVENUE PREFERRED APPEALS ASSE SSMENT YEAR WISE IN ITA.NO.594 & 595/HYD/2013. THE REVENU E PREFERRED ONE APPEAL IN ITA.NO. 452/HYD/2011 PREFER RING THE APPEAL ASSESSMENT YEAR-WISE (BUT ONLY FOR ONE YEAR) COMBINING BOTH THE COMPANIES INTO ONE APPEAL. ASSESSEE RAISE D CROSS- OBJECTIONS C.O.NO.26 & 27/HYD/2013. SINCE THE ISSUE IS COMMON, THESE ARE HEARD TOGETHER AND DECIDED BY THI S COMMON ORDER. 4. IN THE COURSE OF PRESENT APPEAL, THE REVENUE HA S PREFERRED REVISED GROUNDS OF APPEAL AND FOR THE SAK E OF RECORD, THE REVISED GROUNDS OF APPEAL COMMONLY PREFERRED BY THE REVENUE ARE EXTRACTED AS UNDER : 2. THE LEARNED CIT(A) ERRED IN FACTS AND LAW BY HOLDI NG THAT THERE WAS NO ELEMENT OF ANY TECHNICAL SERVICES IN T HE PRODUCTION OF ANIMATION FILMS. HE FAILED TO APPRECI ATE THAT THE CASE OF THE APPELLANT IS DIFFERENT FROM TV ARTS WHICH IS COVERED BY INDO-PHILIPINES DTAA WHERE THERE IS NO 4 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. PROVISION OF FTS. HE RELIED ON THE OBSERVATIONS OF THE HON'BLE DELHI BENCH OF ITAT IN THE CASE OF SHERETON INTERNATIONAL INC VS DDIT (2007) 107 ITD 120 WHICH WAS DELIVERED IN CONNECTION WITH AND WITH REFERENCE TO 'FEES FOR TECHNICAL SERVICES' AS PROVIDED UNDER INDO-US DTAA. 3. THE LEARNED CIT(A) ERRED IN LAW BY HOLDING THAT THE CASE LAWS RELIED UPON BY THE A.O. IN RESPECT OF THE NATU RE OF THE TRANSACTION BETWEEN THE APPELLANT AND HONG GUANG ANIMATION CO (HGA) WHICH IS A SERVICE TRANSACTION, WILL NOT BE HELPFUL UNDER THE PROVISIONS OF THE INCOME T AX ACT, 1961 AS ALL THE CASE LAWS WERE UNDER SALES TAX LAWS , WHICH IS TOTALLY ABSURD BECAUSE THE CASE LAWS WERE RELIED UPON ONLY TO DISTINGUISH 'CONTRACT OF SALE' OF GOOD S FROM 'CONTRACT FOR WORK OR SERVICES'. 4. THE LEARNED CIT(A)-VI FAILED TO APPRECIATE THAT THE SOURCE OF INCOME WILL BE WHERE THE ORIGINATING CAUSE IS LO CATED AND SINCE IN THE INSTANT CASE, THE ACTIVITIES/ SERV ICES/ WORKS TO COMPLETE THE PRODUCTION OF ANIMATION FILMS ARE PERFORMED BY THE APPELLANT WITHIN THE INDIAN TERRIT ORY IN ITS BUSINESS PREMISES/FACILITIES WITH ITS PERSONNEL IN INDIA, THE PROJECT (ORIGINATING CAUSE) YIELDING INC OME IS CARRIED OUT IN INDIA AND AS SUCH, THE SOURCE OF INC OME IN RESPECT OF ITS EARNINGS IS LOCATED WITHIN INDIA, AN D THOUGH THE SERVICES WERE RENDERED BY HGA IN CHINA, THE SER VICES IN QUESTION WERE UTILIZED BY THE APPELLANT IN ITS ' BUSINESS OF PRODUCTION OF ANIMATION FILMS/SERIES' IN INDIA A ND THE CONSIDERATION WAS PAID FROM THE PAYER (APPELLANT) B ASED IN INDIA AND THE INCOME IS DEEMED TO ACCRUE OR ARIS E IN INDIA AS PER SECTION 9(1)(VII) OF THE ACT. 5. THE LEARNED CIT(A)-VI FAILED TO APPRECIATE THE FACT THAT THE PLACE WHERE THE SERVICES ARE MADE AVAILABLE TO RECI PIENT IS CONSIDERED AS PLACE WHERE THE SERVICES ARE PROVIDED AND THE MEANING OF 'PROVISION OF SERVICES IN THE OTHER CONTRACTING STATE' IS CONTRA DISTINGUISHED FROM PERFORMANCE OF SERVICES IN THE OTHER CONTRACTING ST ATE'. 6. THE LEARNED CIT(A)-VI ERRED IN FACTS AND LAW BY HOL DING THAT THE PROVISION OF ARTICLE 17(2) OF THE INDO-CHI NA DTAA WILL GOVERN THE TRANSACTION WHEN THERE WAS NEVER AN Y ISSUE OF MAKING PAYMENTS TO INDIVIDUAL ARTISTES WHI CH WAS INFERRED ON A WRONG APPRECIATION OF FACTS BASED ON SURMISES AND CONJECTURES. 5 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 7. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING. 5. WE HAVE HEARD THE LEARNED D.R. AND LD. COUNSEL IN DETAIL AND PERUSED THE PAPER BOOK PLACED ON RECO RD AND VARIOUS CASE LAW RELIED UPON. BEFORE ADVERTING TO C ONSIDERATION OF THE ISSUES UNDER DISPUTE, IT WILL BE RELEVANT TO CONSIDER ASSESSEES BUSINESS AND THE NATURE OF PAYMENTS BEIN G MADE BY ASSESSEE TO THE ABOVE FOREIGN COMPANIES. ASSESSEE C OMPANY IS IN THE BUSINESS OF PRODUCTION OF 2D AND 3D ANIMATIO N FILMS FOR COMPANIES LIKE WALT DISNEY, COLUMBIA, DIC ANIMATION , STAN LEE MEDIA IN HOLYWOOD, BARDEL ANIMATION, AMBERWOOD ENTERTAINMENT, NELVANA IN CANADA AND CROMOSOMA, MSL AUDIO VISUALS IN SPAIN, UNIVERSAL CARTOON STUDIOS L LC, CALIFORNIA, MIKE YOUNG PRODUCTIONS LLC, CALIFORNIA ETC. (OVERSEAS CLIENTS). ASSESSEE GETS ORDERS FROM THESE COMPANIES FOR PRODUCTION OF ANIMATION FILMS AT THEIR REQUISIT ION OF SCHEDULED DELIVERABLES. DURING THE FINANCIAL YEARS 2006-07 & 2007-08, ASSESSEE GAVE SOME EPISODES OR PART OF AN EPISODE ON SUB-CONTRACT TO FOREIGN SUB-CONTRACTORS OR RATHER OUTSOURCED A PART OF THE PROJECT OUT OF THE ORDERS IT RECEIVED F ROM SOME OF THE OVERSEAS CLIENTS. IN THAT PROCESS, ASSESSEE MADE P AYMENT OF RS.2,10,15,353/- AND RS.55,34,940/- TO MAXIM INTERN ATIONAL (ANIMATION DIVISION), HONG KONG (WHICH WAS LATER RE NAMED AS GLOBAL EXCHANGE (MI/GE)) AS PER AN AGREEMENT ON 8 TH MAY, 2006 NAMED AS OUTSOURCING FACILITIES AGREEMENT. B Y THIS OUTSOURCING AGREEMENT, MI/GE HAS TO PROVIDE PRODUCT ION WORK/PRODUCTION MATERIAL TO ASSESSEE BY AVAILING TH E NECESSARY PRODUCTION PREMISES, FACILITIES, PERSONNE L, MATERIALS, SERVICES AND EXPERTISE, THE DETAILS OF WHICH ARE ME NTIONED IN CLAUSE-1 OF THE AGREEMENT, DATED 08.05.2006. 6 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 6. IN THE CASE OF HGA, THE LD. CIT(A) IN ITA.NO.296/2008-09 PASSED SIMILAR ORDER INCORPORATI NG NAME OF THE PARTY TO WHOM IT IS PAID AS MI/GE BUT CONSID ERING THE AMOUNTS OF HGA. LATER ON, HE PASSED AN ORDER UNDER SECTION 154 ON 18.12.2009 INCORPORATING THE ERRORS POINTED OUT BY ASSESSEE. NOT ONLY THAT, THE CIT(A) ALSO DECIDED TH E TWO ISSUES WHICH WERE NOT ADJUDICATED IN THE ORDER ON THE APPL ICATION OF DTAA, EVEN THOUGH THE APPEAL WAS ALLOWED IN THE FIR ST INSTANCE ON OTHER REASONS, AS DISCUSSED IN THE ORDER DATED 3 1.02.2009. WE HAVE CONSIDERED ALL THE ORDERS TOGETHER. 7. THE LEARNED D.R. REFERRING TO THE ORDERS OF THE A.O. REITERATED THE CONTENTIONS OF THE A.O. THAT TH E PAYMENTS MADE TO THE TWO COMPANIES DO FALL UNDER FEES FOR T ECHNICAL SERVICES AND REFERRED TO ELABORATE DISCUSSION MA DE BY THE A.O. IN THE ASSESSMENT ORDER. HE ALSO RELIED ON THE ORDER TO SUPPORT THE ASSESSING OFFICERS CONTENTION THAT PAY MENTS MADE ARE INDEED COVERED BY THE PROVISIONS OF THE I.T. AC T AND SINCE ASSESSEE HAS NOT MADE TDS BEFORE MAKING THE PAYMENT , DEMANDS UNDER SECTION 201 AND 201(1A) WERE RAISED C ORRECTLY. 8. LD. COUNSEL IN REPLY, HOWEVER, SUBMITTED THAT T HE A.O. RAISED THE DEMANDS UNDER SECTION 201(1) READ W ITH SECTION 195 AS HE HAS CONSIDERED THAT THE PAYMENTS MADE BY ASSESSEE TO HGA AND MI/GE ARE TOWARDS FEES FOR TEC HNICAL SERVICES WHEREAS ASSESSEES CONTENTION WAS THAT TH ESE PAYMENTS ARE MADE IN THE COURSE OF BUSINESS ACTIVI TY AND AS THEY DO NOT HAVE ANY BUSINESS CONNECTION OR PE IN I NDIA, THE PAYMENTS ARE NOT TAXABLE IN INDIA, AS IT DID NOT AR ISE IN INDIA EVEN UNDER THE DEEMING PROVISIONS OF SECTION 9(1)(V II). 7 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 9. IT WAS SUBMITTED THAT ASSESSEE HAS MADE THE PAYMENTS TO HGA, MI/GE AS BUSINESS PAYMENTS AND HAV E A BONAFIDE REASON THAT THE AMOUNTS ARE NOT TAXABLE IN INDIA FOR THE FOLLOWING REASONS : I. THE PAYMENTS RECEIVED BY IT FROM FOREIGN CLIENTS FOR EXACTLY THE SIMILAR WORK EXECUTED BY IT HAVE NOT BEEN SUBJECTED TO WITHHOLDING TAX NOR WAS IT CALLED UPON TO FILE ITS RETURN BY THE SEVERAL COUNTRIES FROM THE RESIDENTS OF WHICH ASSESSEE RECEIVED PAYMENTS FOR SERVICES RENDERED BY IT. II. ASSESSEE WAS PERMITTED BY THE RBI TO MAKE REMITTANCES TO THE PAYERS ON THE BASIS OF THE CERTIFICATE OBTAINED FROM THE CHARTERED ACCOUNTANTS OPINION AND CERTIFICATE. III. THE FOREIGN CONCERNS NAMELY HGA CHINA AND MI/GE, HONGKONG ARE NOT FOUND TO BE TAXABLE IN INDIA IN THE RELEVANT ASSESSMENT YEARS. THE BELIEF IS LATER VINDICATED BY THE FACT THAT THE DEPARTMENT DID NOT INITIATE ANY PROCEEDINGS OR ISSUE ANY NOTICES U/S 142(1) OR SEC 148 OR SEC 163 OF THE IT ACT TO BRING TO TAX THEIR INCOMES EITHER BEFORE OR AFTER THE ORDERS U/S 201 WERE PASSED. THE BONAFIDES OF THE BELIEF IS ALSO VINDICATED BY THE DECISION IN THE CASE OF TITAN INDUSTRIES LTD VS ITO (2007) (11 SOT 206, 210, WHEREIN THE HON'BLE BANGALORE BENCH HAS HELD 'MOREOVER, IT WAS NOT THE CASE OF THE REVENUE THAT PROFESSIONAL FEES PAID TO C OF HONGKONG WAS TAXABLE IN INDIA AND STEPS HAD BEEN TAKEN TO TAX THE SAME. IF THE RECEIPTS ARE NOT TAXABLE IN THE HANDS OF THE RECIPIENT, THEIR PAYER IS NOT REQUIRED TO DEDUCT TA X AT SOURCE AS PER PROVISIONS OF SEC 195' (PP 136-141 OF PB ON CASE LAW). THE DECISION IN THE CASE OF CROMPTON GREAVES LTD VS DCIT (PP 193-204 OF PB ON CL) IN ITA NOS 2210 TO 2212/MUM/2000 DT 24-02-2012 IS TO THE SAME EFFECT. IV. IN ACIT VS LEAP INTERNATIONAL (P) LIMITED (15 TAXMANN.COM 251) (CHENNAI) (PP 38-45 OF CASE 8 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. LAW - 2), THE ITAT FOLLOWED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD VS CIT 327 ITR 456 AND HELD THAT TAX IS NOT DEDUCTIBLE U/S 195(1) AS THE RECIPIENT RENDERED SERVICES OF CLEARING AND FORWARDING AT FOREIGN PORTS AND THE PAYMENTS MADE WERE FOR THOSE SERVICES. V. IN AJAPPA INTEGRATED PROJECTS MANAGEMENT CONSULTANTS (P) LIMITED VS ACIT (24 TAXMANN.COM 116 (CHENNAI) (PP 21-28 OF CASE LAW -2), ASSESSEE PAID FOR TECHNICAL SERVICES TO PERSONS IN NIGERIA. ASSESSEE WAS IN THE BUSINESS OF CONSULTANCY AND PROVISION OF TECHNICAL SERVICES AND GETTING INCOME THEREFROM. ASSESSEE HAD NO BRANCH IN NIGERIA. ON THESE FACTS THE ITAT HELD THAT THE PROVISIONS OF EXCEPTION IN 9(I)(VII)(B) AR E APPLICABLE AND THAT ASSESSEE'S BELIEF THAT NO TAX WAS DEDUCTIBLE WAS BONAFIDE AND THE DECISIONS IN THE CASES OF PRASAD PRODUCTIONS (SB) (SUPRA) AND OF GE INDIA TECHNOLOGY CENTRE (SUPRA) APPLY. VI. ACCORDING TO SUPREME COURT DECISION IN THE CASE OF ISHIKAJAWA HARIMA HEAVY INDUSTRIES VS CIT (288 ITR 408), AS THE SERVICES WERE NOT RENDERED OR UTILIZED IN INDIA, THE INCOME OF N-R IS NOT TAXABLE. THE EXPLANATIONS IN SEC BY FINANCE ACT 2007 DID NOT MAKE ANY CHANGE TO THE SUPREME COURT DECISION BECAUSE THE EXPLANATION BECOMES APPLICABLE WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN THE FIRST INSTANCE. WHILE SC HELD THAT THE INCOME CANNOT BE DEEMED TO ACCRUE OR ARISE UNLESS SERVICES WERE RENDERED IN INDIA AND UTILIZED IN INDIA. THE EXPLANATION COULD NOT OVERCOME THE SC JUDGEMENT. IN ANY CASE, THE INCLUSION OF TECHNICAL SERVICES UNDER EXPLANATION IN SEC 9 WAS INSERTED IN SEC 195 ONLY BY FINANCE ACT 2012. THE DEMAND U/S 201(1) CANNOT BE JUSTIFIED RETROSPECTIVELY. ASSESSEE COULD NOT BE EXPECTED TO DO THE IMPOSSIBLE THAT IS TO DEDUCT TAX WHEN THE RELEVANT EXPLANATION DID NOT EXIST IN THE ACT. 9 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 10. LD. COUNSEL SUBMITTED THAT THE SPECIAL BENCH O F THE ITAT, CHENNAI IN THE CASE OF PRASAD PRODUCTIONS VIDE ORDER DATED 09.04.2010 HELD THAT 'IF THE PAYER HOLDS A BONAFIDE OPINION THAT NO PART OF THE PAYMENT BEARS INCOME CHARACTER, HE NEED NOT ENTER INTO THE ARENA OF SEC 195 AT ALL'. THEY ALSO HELD IN PARA 26 OF THE ORDER THAT 'THE ABOVE DISCUSSION GOES TO SHOW THAT IN CASE OF A BONAFIDE BELIEF BY THE PAYER THAT NO PART OF THE PAYMENT BEA RS INCOME CHARACTER, IT IS NOT MANDATORY FOR HIM TO UNDERGO THE PROCEDURE OF SEC 195(2) BEFORE MAKING ANY PAYMENT TO ANON-RESIDENT'. THE BENCH CONCLUDED IN PARA 35 OF THE ORDER THAT 'IN THE FINAL ANALYSIS, OUR ANSWER TO THE QUESTION PLACED BEFORE US IS THAT IF ASSESSEE HAS N OT APPLIED TO THE ASSESSING OFFICER U/ S 195(2) FOR DEDUCTION OF TAX AT A LOWER OR NIL RATE OF TAX UNDER A BONA F IDE BELIEF THAT NO PART OF THE PAYMENT MADE TO THE NON-RESIDENT IS CHARGEABLE TO TAX, THEN HE IS NOT UNDER ANY STATUTORY OBLIGATIONS TO DEDUCT TAX AT SOURCE FROM ANY PART OF THE PAYMENTS'. 11. RELYING ON THE ABOVE DECISION, IT WAS THE SUBMISSION THAT SINCE ASSESSEE HAD BONAFIDE BELIEF THAT FOR THE REASONS STATED ABOVE THE AMOUNTS ARE NOT COVERED BY PROVISIONS OF TDS AND THEREFORE, RAISING DEMAND DOE S NOT ARISE. FURTHER, THE LD. COUNSEL RELYING ON THE PRIN CIPLES LAID DOWN BY THE HONBLE ALLAHABAD HIGH COURT IN THE CAS E OF RAMAKRISHNA VEDANTAKUMAR 182 ITR 603 SUBMITTED THAT WHERE ASSESSMENT PROCEEDINGS ARE NOT INITIATED IN T HE CASE OF PES, RAISING DEMAND UNDER SECTION 201(1A) DOES NOT ARISE. SIMILAR PROPOSITION WAS ALSO LAID DOWN BY THE DECIS ION OF ITAT 10 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. IN THE CASE OF DRESSER RAND INDIA PVT. LTD. VS. ADIT 53 SOT 273 (MUM.) (TRIBU.), TO SUBMIT THAT PROVISIONS OF S ECTION 195 DO NOT COME INTO PLAY ON THE FACTS OF THE CASE. 12. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DETAILS, ORDERS PLACED ON RECORD ALONG WITH THE DET AILED SUBMISSIONS AND CASE LAW RELIED UPON. THERE IS NO D ISPUTE WITH REFERENCE TO BUSINESS PROFILE OF ASSESSEE WHIC H THE LD. CIT(A) CONSIDERED AND EXTRACTED IN THE ORDER AS UND ER : 2.1 FACTS IN ISSUE : THE APPELLANT ENTERED INTO AN AGREEMENT ON 8 TH MAY, 2006 WITH MAXIM INTERNATIONAL (ANIMATION DIVISION) WHICH IS LATER RENAMED AS GLOB E EXCHANGE (MI/GE) TITLED 'OUTSOURCING FACILITIES AGREEMENT' WHICH IS PLACED IN THE 'PAPER BOOK AT PA GE NOS. 3-12. ADMITTEDLY, MI/GE HAD NO PERMANENT ESTABLISHMENT IN INDIA NOR IT HAD ANY BUSINESS CONNECTION WITH ANY PERSON IN INDIA. THE CLAUSES WHICH ARE GERMANE TO THE ISSUE ARE CLAUSE NOS. 1 AN D 2 OF THE AGREEMENT WHICH ARE REPRODUCED HEREUNDER TO UNDERSTAND THE SCOPE OF THE CONTRACT. 1. SERVICES A. COMPANY HEREBY ENGAGES THE MIA TO PROVIDE PRODUCTION PREMISES, FACILITIES, PERSONNEL, MATERIALS, SERVICES AND EXPERTISE (HEREINAFTER COLLECTIVELY CALLED 'PRODUCTION WORK') AS MORE SPECIFICALLY SET FORTH BELOW FOR THE PURPOSE OF PRODUCING PRODUCTION MATERIALS FOR THE FOLLOWING PROJECTS: I. MONKEY KID 13 EPISODES OF 11 MINUTES EACH AND SUCH OTHER PROJECTS AS REQUESTED BY COMPANY FROM TIME TO TIME. B. MIA SHALL PROVIDE THE SERVICES REQUESTED BY THE COMPANY ON A FIRST PRIORITY BASIS AND SHALL SCHEDULE ITS OPERATIONS AS PER THE PRODUCTION SCHEDULE THAT SHALL BE PROVIDED BY THE COMPANY. 11 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. C. MIA SHALL DEVOTE ITS BEST EFFORTS, TALENTS AND ABILITIES IN CONNECTION WITH THE PERFORMANCE OF ITS SERVICES HEREUNDER AND SHALL RENDER SERVICES IN A COMPETENT, PROFESSIONAL MANNER IN ACCORDANCE WITH THE INSTRUCTION, DIRECTIONS AND REQUESTS OF THE COMPANY, WHETHER THE SAME INVOLVE MATTERS OF ARTISTIC TASTE OR JUDGMENT. D. M IA SHALL PROVIDE BASIS PRODUCTION UPDATE PROGRESS PRODUCTION MATERIALS. 2. DQE DELIVERY ELEMENTS AND SCHEDULE (A) THE COMPANY SHALL FURNISH MIA WITH THE FOLLOWING (COLLECTIVELY DELIVERY ELEMENTS) : 1. BAY MODEL DESIGNS FOR BG'S KEY FOR ALL CHARACTERS INCIDENTAL CHARACTERS , TURNAROUNDS CHARTS AND MOUTH CHARTS. 2. STORYBOARD WITH DIALOGUE IN ENGLISH 3. X- SHEETS 4. SCENE LIST WITH TIMING 5. AUDIO IN ENGLISH ( ANIMATICS , IF ANY) 6. COLOR REFERENCE FOR BG, MAIN AND EPISODIC CHARACTERS, B/W MODEL DESIGNS FOR BG MAIN AND EPISODIC CHARACTERS, TURNAROUNDS, MOUTH CHARTS. (B) MIA SHALL PROVIDE THE FOLLOWING PRODUCTION WORK, AS THE COMPANY SHALL DESIGNATE ( COLLECTIVELY 'PRODUCTION MATERIALS') 1. LAYOUT POSES/LAYOUT BACKGROUNDS DULY CLEANED UP AND COLOR BACKGROUNDS. 2. ROUGH ANIMATION 3. ANIMATION IN-BETWEENS, CLEAN-UP DULY COMPLETED AS LINE TEST ON PREMIER. 12 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 4. SCANNING, DIGITAL INK AND PAINT AND COMPOSITING ON US ANIMATION. 5. THE TURNAROUND TIME FOR EACH EPISODE FROM LAYOUT TO COLOR COMPOSITING INCLUDING RETAKE IS 9 WEEKS. THE PRODUCTION MATERIALS DELIVERED BY MIA SHALL NOT VARY FROM THE DELIVERY ELEMENTS AS FURNISHED BY THE COMPANY WITHOUT THE PRIOR WRITTEN CONSENT OF COMPANY. THE ENTIRE PRODUCTION MATERIAL OF LAYOUT POSING / KEY ANIMATION/ CLEANUP IN BETWEENING PRODUCED BY MIA WILL BE THE PROPERTY OF THE COMPANY AND DISPATCHED OR DESTROYED AS PER THE WRITTEN INSTRUCTION OF THE COMPANY. IF THE MATERIAL S ARE TO BE DESTROYED IT WILL BE DONE IN THE PRESENCE OF THE COMPANY REPRESENTATIVE. IF IT IS TO BE DISPATCHED IT WILL BE COURIER/ POST PARCEL OR SUCH OTHER MEANS TO COMPANY IN HYDERABAD, INDIA OR OTHER LOCATIONS AS COMPANY MAY HEREAFTER SPECIFY IN WRITING. THE SHIPPING / FREIGHT COST FOR SUPPLY OF MATERIAL SHALL BE BORNE BY THE COMPANY. 2.2. FROM THE ABOVE IT IS CLEAR THAT DQE ENGAGED MI/GE TO PROVIDE PRODUCTION PREMISES, FACILITIES, PERSONNEL, MATERIALS, SERVICES AND EXPERTISE FOR THE PURPOSE OF PRODUCING 'PRODUCTION MATERIALS' AS PER DQE'S REQUIREMENTS AND TECHNICAL SPECIFICATIONS. IN SUBSTANCE, MI/GE DELIVERED THE 'PRODUCTION MATERIALS' AS PER THE 'DELIVERY ELEMENT S' FURNISHED BY DQE. FOR ASSIGNMENT OF THIS PRODUCTION MATERIALS OF VARIOUS EPISODES REQUIRED BY IT FOR ITS MAIN PRODUCTION WORK TO ITS FOREIGN CLIENTS, DQE PAID A SUM OF RS.2,10,15,353/- AND RS.55,34,940/- TO MI/GE DURING THE FINANCIAL YEARS 2006-07 AND 2007-08 RESPECTIVELY. HOWEVER, FOR THE JOB EXECUTED BY MI/GE DURING THE FINANCIAL YEAR 2007-08, THE REVENUE WAS ALREADY BOOKED/RECEIVED BY DQE DURING THE FINANCIAL YEAR 2006-07 ITSELF.. 13. AS STATED BY LD DR, AO CONSIDERED THE AGREEMEN T AS SERVICE AGREEMENT ON THE FOLLOWING ANALYSIS. 13 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 'THERE IS NO DOUBT THAT AS PER THE CONTRACT, MI/GE DELIVERED CERTAIN PROPERTY (TERMED AS 'PRODUCTION MATERIALS') TO DQE . BUT THE PROPERTY (PRODUCTION MATERIAL) WAS NOT AVAILABLE OFF THE SHELF WITH THE FOREIGN SUB-CONTRACTOR. INDEED, THE PROPERTY (PRODUCTION MATERIAL) WAS CRESTED BY MI/GE, ON REQUEST FROM DQE AS PER THE 'DELIVERY ELEMENTS' FURNISHED BY DQE AND TECHNICAL SPECIFICATIONS AND APPROVAL MILESTONES. SO THE SUBSTANCE OF THE CONTRACT IS NOT SUPPLY OF GOODS BU T SUPPLY OF SERVICES. IT IS TRUE THAT DQE ENGAGED MI/ GE TO PROVIDE PRODUCTION PREMISES, FACILITIES, PERSONN EL, MATERIALS, SERVICES AND EXPERTISE IN CONNECTION WIT H PRODUCTION OF 'PRODUCTION MATERIAL', BUT SUBSTANCE REMAINS THAT DQE ENGAGED MI/GE TO PROVIDE CERTAIN SERVICES IN RELATION TO PRODUCTION OF 'PRODUCTION MATERIALS' AS PER ITS REQUIREMENT WHICH IS MADE CLE AR BY THE PARTIES THEMSELVES BY KEEPING THE PROVISION OF PRODUCTION PREMISES, FACILITIES, PERSONNEL, MATERIA LS, SERVICES AND EXPERTISE UNDER THE CLAUSE-1. SERVICES IN THE AGREEMENT. IT IS ALSO TRUE THAT MI/GE USED ITS PRODUCTION PREMISES, FACILITIES, PERSONNEL, MATERIA LS AND EXPERTISE TO PROVIDE THE SERVICE IN MAKING THE 'PRODUCTION MATERIALS' AS REQUIRED BY DQE. IT IS COMMON UNDERSTANDING THAT A SERVICE PROVIDER CANNOT PROVIDE A SERVICE IN ISOLATION WITHOUT REQUISITE FACILITIES, PERSONNEL, MATERIALS AND EXPERTISE. SO THE 'PROVISION OF PRODUCTION PREMISES, FACILITIES, PERS ONNEL, MATERIALS AND EXPERTISE' IS ONLY INCIDENTAL TO THE 'PROVISION OF SERVICES' FOR THE CREATION OF THE 'PRODUCTION MATERIALS' AS PER DQE'S REQUIREMENTS. SO THE PREDOMINANT NATURE OF CONTRACT IS FOR SERVICES IN CONNECTION WITH CREATION OF 'PRODUCTION MATERIALS' FOR DQE. WITHOUT ANY AMBIGUITY THE SERVICE RENDERED BY MI/GE IS IN THE NATURE OF TECHNICAL SERVICES AND SU CH SERVICES WERE UTILIZED BY DQE TO COMPLETE ITS PROJE CT FOR ITS OVERSEAS CLIENTS. THE SUM AND SUBSTANCE OF THE CASE OF THE A.O. IS TH AT THE TRANSACTIONS BETWEEN ASSESSEE AND THOSE TWO COMPANI ES IS A SERVICE TRANSACTION. HE WAS OF THE VIEW THAT ASSESS EE FURNISHES TO THE FOREIGN SUB-CONTRACTOR (MI/GE), THE DELIVER Y ELEMENTS AND SCHEDULES ALONG WITH THE APPROVAL MILESTONES AN D 14 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. TECHNICAL SPECIFICATIONS FOR DELIVERY OF THE PRODUC TION MATERIALS. THE FOREIGN SUB-CONTRACTOR (MI/GE) UPON COMPLETING THE WORK ASSIGNED TO THEM SENDS THE SCHEDULED DELIVERABLES BY UPLOADING THE SAME IN THE APPELLANT'S SERVER AND THEREAFTER IT EDITS AND MAKE S OUT THE COMPLETE ANIMATION FILM AS REQUISITIONED BY THE CLIENT AND SUPPLY THEM TO THE FOREIGN CLIENT. IN SUBSTANCE THE FOREIGN SUB-CONTRACTOR PROVIDES CERTAIN SERVICES IN RESPECT OF ANIMATION FILM MAKING TO THE APPELLANT, TO ENABLE IT TO COMPLETE THE PRODUCTION OF ANIMATION F ILMS AS PER ITS CLIENT'S REQUIREMENT. UNDER THE OUTSOURC ING FACILITIES AGREEMENT, THE ASSESSEE ENGAGED THE FORE IGN SUB-CONTRACTOR TO CREATE 'PRODUCTION MATERIALS' (AN ITEM OF PROPERTY) REQUIRED BY THE APPELLANT TO MAKE AN ANIMATION FILM/ SERIES/EPISODES AS PER ITS CLIENT'S REQUIREMENT. FOREIGN SUB-CONTRACTOR CREATES THE 'PRODUCTION MATERIALS' AS PER THE APPELLANT'S REQUIREMENTS AND TECHNICAL SPECIFICATIONS WITH THE USE OF ITS PRODUCTION PREMISES, FACILITIES, PERSONNEL, MAT ERIALS, SERVICES AND EXPERTISE. NO PROPERTY HAS BEEN TRANSF ERRED FROM THE VENDOR (FOREIGN SUB-CONTRACTOR) TO THE CUS TOMER (DQE). UPON CREATION OF THE 'PRODUCTION MATERIALS' BY THE VENDOR (FOREIGN SUBCONTRACTOR) AS PER CLIENT'S (DQE ) REQUIREMENTS AND TECHNICAL SPECIFICATIONS, THE 'PRODUCTION MATERIALS' BECOME THE PROPERTY OF THE C LIENT (DQE). OBSERVING SO, THE ASSESSING OFFICER HELD THA T THE TRANSACTION BETWEEN DQE AND MI/GE IS IN THE NATURE OF A SERVICE TRANSACTION AND FEES PAID WAS FEE FOR TEC HNICAL SERVICES.. 15 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 14. WHAT THE A.O. HAS MISSED IN THIS CHAIN OF BUSINESS TRANSACTIONS IS THAT THE WORK OBTAINED FRO M THE TWO FOREIGN CONTRACTORS WAS IN-TURN SUPPLIED TO THE FOREIGN CLIENT LIKE UNIVERSAL CARTOON STUDIOS ETC. ASSESSEE GOT TH E WORK FOR EXECUTION FROM THE FOREIGN COMPANY AND IN THE PROCE SS GAVE PART OF THE WORK TO BE EXECUTED BY THE TWO FOREIGN COMPANIES. ASSESSEE IS NOT OWNING ANY PRODUCTION MATERIAL AS T HE SAME BELONG TO ITS PRINCIPLE CONTRACTOR LIKE UNIVERSAL CARTOON STUDIOS. THE LOGIC OF THE A.O. THAT ASSESSEE HAS OW NERSHIP IN THE PRODUCTION MATERIAL WHICH IS TRANSFERRED FROM M I/GE, HGA TO DQR-ASSESSEE CANNOT BE ACCEPTED ON THE FACTS. 15. LD. CIT(A) ELABORATELY DISCUSSED AND ANALYSED THE FACTS OF THE CASE IN PARA 3.1.1 AS UNDER : 3.1.1. FROM THE FINDINGS OF THE ASST. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)-I, HYDERABAD, IN HIS ORDER U/S. 201, DATED 29.08.2008, IN THE APPELLANTS CASE, IT IS CL EARLY SEEN THAT HE HAS NOT PROPERLY APPRECIATED THE FACTS OF T HE CASE IN RIGHT PERSPECTIVE. '. 3.1.2. ON CONSIDERATION OF THE AFORESAID OBSERVATIO NS OF THE ASSESSING OFFICER, IT CAN BE SEEN THAT THERE AR E PRODUCTION FACILITIES AND MATERIAL MADE AVAILABLE B Y MI/GE TO THE APPELLANT, BUT ACCORDING TO HIM THAT A LONE SHOULD NOT DETERMINE THE TRUE CHARACTER OF THE TRANSACTION TO DECIDE WHETHER IT IS SUPPLY OF GOODS OR SUPPLY OF SERVICES. AS PER HIS READING OF THE CLAUS E NO.1 OF THE AGREEMENT, THERE WAS DELIVERY OR TRANSFER OF PROPERTY, BUT HE FELT THAT THE PRODUCTION WORK OR M ATERIAL DELIVERED BY MI/GE IS NOT IN ISOLATION WITHOUT REQU ISITE FACILITIES, PERSONNEL, MATERIALS AND EXPERTISE AS ACCORDING TO HIM SUCH PRODUCTION WORK OR MATERIAL INVOLVED MORE OF SERVICES OF TECHNICAL PEOPLE THAN THAT OF MATERIAL AND THEREFORE, HE TREATED THE TRANSACTION AS SERVICE TRANSACTION. THE LEARNED COUNSEL FOR THE APPELLANT CONTENDED THA T THE REASONING OF THE ASSESSING OFFICER HAS NO SUBST ANCE 16 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. ON THE FACE OF IT FOR THE FOLLOWING REASONS: I) THE APPELLANT ENGAGES FOREIGN SUB-CONTRACTORS ON LY WHEN THERE WAS ACUTE SHORTAGE OF MEN POWER OR WHEN IT WAS TO DELIVER THE DELIVERABLES TO THE FOREIGN CLIE NT WITHIN A STIPULATED TIME. THE APPELLANT IN THE REGU LAR COURSE OF ITS BUSINESS, CREATES THE PRODUCTION MATE RIAL ON ITS OWN AND FOR EXECUTING THE PROJECTS IT HAS ALL THE INFRASTRUCTURE AND EXPERTISE. IT IS NOT AS IF THE A PPELLANT IS NOT IN A POSITION TO EXECUTE THE PROJECT AND UTI LIZED THE TECHNICAL SERVICES OF ANOTHER FOR CREATION OF SUCH PROJECT, BUT THE APPELLANT GOT THE PROPERTY PRODUCED BY FORE IGN SUB-CONTRACTOR ONLY WHEN IT HAD NO TIME AVAILABLE W ITH IT OR WHEN IT HAD ACUTE PROBLEM OF MEN-POWER. IT WAS SUBMITTED THAT DURING THE FINANCIAL YEARS 2006-07 A ND 2007-08 IT HAD PRODUCED A TOTAL NUMBER OF 48 AND 57 ANIMATION FILMS RESPECTIVELY AND SUPPLIED TO ITS OVERSEAS CLIENTS. OUT OF THE AFORESAID PROJECTS IT GAVE ONLY 5 PROJECTS TO 2 FOREIGN SUB-CONTRACTORS AND OU T OF WHICH SUBSTANTIAL PAYMENTS WERE MADE TO HGA DURING THE FINANCIAL YEARS 2005-06 AND 2006-07. ONLY 13 EPISODES OF ONE ANIMATION FILM WAS DONE BY MI/GE DURING THE FINANCIAL YEARS 2006-07 AND 2007-08. THE DETAILS OF SUCH PROJECTS AND THE EARNINGS MADE/EXPENDITURE INCURRED THEREOF TOWARDS COST OF PRODUCTION ARE FURNISHED IN THE PAPER BOOK (FACTS) AT PAGE NO.1. EVEN OUT OF THE OUTSOURCED PROJECTS, THE APPELLANT ITSELF PRODUCED 12 EPISODES IN ADDITION T O COMPLETION OF B ACKGROUND AND DIGITAL WORK. AN EXTRACT OF THE TOTAL EPISODES OF EACH ANIMATION FILM WHICH WAS GIVEN TO FOREIGN SUB-CONTRACTORS AND THE NUMBER OF EPISODES EXECUTED BY DQE IS FURNISHED IN THE ANNEXURE-I TO THE REJOINDER FILED IN THE MATTER OF HGA. THEREFORE, IT IS SUBMITTED THAT THERE WAS NO ELEMEN T OF TECHNICAL SERVICES INVOLVED IN THE PROJECTS PRODUCE D BY THE FOREIGN SUB-CONTRACTORS OR MI/GE. II) THE APPELLANT HAS BEEN IN THE BUSINESS OF PRODU CTION OF ANIMATION FILMS SINCE 2001 AND IT COULD EFFECTIV ELY PRODUCE THE FILMS FROM THE YEAR 2003 AND ONWARDS. EVER SINCE THE APPELLANT STARTED SUPPLYING ITS PROD UCTS / DELIVERABLES TO THE FOREIGN CLIENTS WHO ARE MORE THAN 175 SPREADING ACROSS THE WORLD IN MORE THAN 14 COUNTRIES, NO WITHHOLDING TAX/TDS WAS EVER DEDUCTED BY ANY FOREIGN CLIENT TILL DATE. THE LEARNED AR OF THE 17 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. APPELLANT SUBMITTED THAT THIS WAS FOR THE REASON TH AT THERE IS NO ELEMENT OF ANY TECHNICAL SERVICES INVOL VED IN PRODUCTION OF AN ANIMATION FILM. THE DETAILS OF ANIMATION FILMS PRODUCED BY THE APPELLANT AND SUPPLIED TO VARIOUS FOREIGN CLIENTS AND THE TDS PARTICULARS FOR THE FINANCIAL YEARS 2006-07 AND 200 7- 08 IS SHOWN IN A CHART WHICH IS FOUND IN THE ANNEXU RE- II TO THE REJOINDER FILED IN THE MATTER OF HGA. ON A CAREFUL EXAMINATION OF THE SUBMISSIONS OF THE EARNED AR OF THE APPELLANT, I AM OF THE CONSIDERED VIEW THAT THE AFORESAID TWO FACTORS SUBSTANTIATE THE CAS E OF THE APPELLANT THAT THERE WAS NO ELEMENT OF ANY TECHNICAL SERVICES IN THE PRODUCTION OF ANIMATION F ILMS NOR IN THE PRODUCTION OF A PART OR CERTAIN EPISODES OF AN ANIMATION FILM SO TO ATTRACT THE PROVISION OF SECTI ON 9(1) (VII) READ WITH SECTION 5(2)(B) OF THE ACT. HAD IT BEEN OTHERWISE, THE APPELLANT ITSELF WOULD HAVE SUFFERED WITHHOLDING TAX IN THE HANDS OF ITS OVERSEAS CLIENT S AT ONE POINT OF TIME OR THE OTHER. IN THE CHART FURNIS HED AS ANNEXURE-II TO THE REJOINDER IN THE MATTER OF HGA, I HAVE NOTICED THAT THE APPELLANT SO FAR PRODUCED FRO M THE YEAR 2003-04, A TOTAL NUMBER OF 177 PROJECTS AN D IN NONE OF ITS PROJECTS OR FILMS, WITHHOLDING TAX WAS DEDUCTED BY ANY OF ITS OVERSEAS CLIENTS. SIMILARLY, ON A PERUSAL FROM THE ANNEXURE-I TO THE REJOINDER IN THE MATTER OF HGA, I HAVE NOTICED THAT THE APPELLANT IT SELF HAS DONE 7 EPISODES OUT OF A TOTAL 13 EPISODES OF O NE FILM VIZ., CURIOUS GEORGE AND 6 EPISODES WERE DONE BY HGA. FURTHER, OUT OF 26 EPISODES OF A FILM VIZ., GL ORIA WILMA & ME, HGA PRODUCED ONLY 13 EPISODES AND THE REMAINING 13 EPISODES WERE DONE BY T V ARTS WHILE BACKGROUND & DIGITAL WORK WAS DONE BY THE APPELLANT . WHEN I ENQUIRED WITH THE LEARNED AR OF THE APPELLAN T, WHETHER PAYMENTS MADE BY IT TO TV ARTS IS ALSO UNDE R THE SCRUTINY OF THE ASSESSING OFFICER FOR THE PURPO SE OF SECTION 9(1)(VII) READ WITH SECTION 5(2)(B) OF THE ACT, HE SUBMITTED THAT THE ASSESSING OFFICER EXAMINED THE S AME AND WAS CONVINCED THAT NO TAX SHOULD BE DEDUCTIBLE AS THE TRANSACTION WAS COVERED BY INDO-MAURITIUS TREAT Y WHEREIN THERE IS NO PROVISION FOR FTS. THEREFORE, I HAVE NO HESITATION TO HOLD THAT THERE IS NO TECHNICAL SE RVICES INVOLVED IN THE PRODUCTION WORK OR MATERIAL DELIVER ED BY MI/GE TO THE APPELLANT IN SOME EPISODES OR PARTS OF EPISODES AS THE SAME COULD HAVE BEEN DONE EITHER BY THE 18 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. APPELLANT ITSELF OR BY T V ARTS, MANILA OR ANY SUB- CONTRACTOR. 3.1.3. THE ASSESSING OFFICER WHILE EXAMINING THE IS SUE IGNORED MANY ASPECTS OF THE TRANSACTION FROM A PRAC TICAL POINT OF VIEW. THESE KIND OF INTERNATIONAL TRANSACT IONS INVARIABLY REQUIRE SOME AMOUNT OF SERVICE TO MAKE T HE PRODUCTION WORK OR MATERIAL REQUIRED BY INDIAN PART IES BUT THAT ALONE SHOULD NOT DETERMINE THE ENTIRE TRANSACTION AS SUPPLY OF SERVICES ON THE SIMPLE TES T OF SOME SKILLED/SEMI-SKILLED OR UNSKILLED WORKERS WERE ENGAGED BY THE FOREIGN PARTY IN MAKING SUCH PRODUCT ION WORK DELIVERED BY IT TO THE APPELLANT. IN THIS CONT EXT THE OBSERVATIONS OF THE HON'BLE DELHI BENCH OF INCOME T AX APPELLATE TRIBUNAL IN THE CASE OF SHERATON INTERNAT IONAL INC. V. DDIT (2007) 107 ITD 120=293 ITR(A.T.) 0068 IS CRUCIAL AND WORTH FOR CONSIDERATION AS A GUIDING FA CTOR. THE HON'BLE BENCH WHILE INTERPRETING THE MEANING OF 'FEES FOR TECHNICAL SERVICES U/S 9(1)(VII) OF THE A CT, HAS RIGHTLY HELD IN PARAGRAPH NOS. 84 & 85 THAT 'IN REALITY, IT IS ALWAYS POSSIBLE THAT JOB UNDERTA KEN BY ONE PARTY FOR THE OTHER PARTY' OF SUPPLY OF ANY GOODS OR SERVICES MAY INVOLVE UTILIZATION OF THE KNOWLEDGE, INFORMATION AND EXPERTISE OF THE PARTY UNDERTAKING THE SAID JOB. THIS POSSIBILITY IS MORE IN THE INTERNATIONAL TRADE BECAUSE THE JOB IS ENTRUSTE D TO A FOREIGN PARTY GENERALLY HAVING THE EXPERTISE, KNOWLEDGE, TECHNOLOGY AND EXPERIENCE TO EXECUTE THE SAID JOB. HOWEVER, JUST BECAUSE SUCH EXPERTISE, KNOWLEDGE, TECHNOLOGY AND EXPERIENCE IS POSSESSED BY THE SAID PARTY AND THE SAME HAS BEEN UTILIZED FO R RENDERING THE SERVICES, IT CANNOT BE SAID THAT THE SERVICES SO RENDERED ARE IN THE NATURE OF TECHNICAL AND CONSULTANCY SERVICES MAKING ANY TECHNOLOGY AVAILABLE TO THE OTHER PARTY. THEREFORE, THE PAYMEN T IN QUESTION RECEIVED BY THE ASSESS-COMPANY FROM THE INDIAN HOTELS/CLIENTS OR ANY PART THEREOF COULD NOT BE TREATED AS 'FEES FOR INCLUDED SERVICES' WITHIN THE MEANING OF PARAGRAPH 4(B) OF ARTICLE 12(4) OF THE INDO-AMERICAN DTAA NOR 'FEES FOR TECHNICAL SERVICES ' DEFINED IN SECTION 9(1)(VII) READ WITH EXPLANATION 2 THERETO OF THE ACT'. 19 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. THE LEARNED COUNSEL FOR THE APPELLANT, MR. V. PRABH AKAR BROUGHT TO MY NOTICE THAT THIS DELHI BENCH OF HON'B LE ITAT IS NOW UPHELD BY THE HON'BLE HIGH COURT OF DEL HI IN I.T.A. NO.921, 923, & 924 ETC., OF 2007, DATED 30-01- 2009 IN THE CASE OF DIT V. SHERATON INTERNATIONAL I NC. (2009) 313 ITR 267. THE CASE RELIED UPON BY THE LEARNED COUNSEL IS DIRECTLY TO THE POINT AND APPLIE S TO THE FACTS OF THE INSTANT CASE. HE CONTENDED THAT TH E OBSERVATIONS OF THE ASSESSING OFFICER IN PARA NO.2 OF HIS WRITTEN SUBMISSIONS ARE CONTRADICTORY TO SAY ON ONE HAND THAT THE DEFINITION OF 'FEES FOR TECHNICAL SER VICES' AS PER INDO-CHINA DTAA IS DIFFERENT FROM THE DEFINI TION OF 'FEES FOR INCLUDED SERVICES' AS PER INDO-USA DTA A SO TO IN CONCLUSION SAY THAT THE DECISION OF HON'BLE I TAT (DELHI) BENCH IN THE CASE OF SHERATON INTERNATIONAL INC. V. DDIT (2007) 107 ITD 120 IS NOT APPLICABLE TO THE FACTS OF THE APPELLANT'S CASE. I AGREE WITH THE SUBMISSION OF THE LEARNED AR OF THE APPELLANT SINCE THE ASSESSING OFFICER FAILED TO SEE THAT THE HON'BLE DE LHI BENCH IN THE AFORESAID CASE WAS DEALING WITH THE PROVISIONS OF SECTION 9( 1) (VI) AND (VII) READ WIT H THE DEFINITION OF FEES FOR INCLUDED SERVICES OF INDO-US A DTAA. THEREFORE, THE ASSESSING OFFICER IS NOT CORRE CT IN HIS OBSERVATIONS AND ON THE CONTRARY THE PRINCIPLES IN THE DECISION OF THE HONBLE DELHI BENCH OF ITAT ARE SQUARELY APPLICABLE TO THE FACTS OF THE APPELLANTS CASE. 16. FURTHER INTERPRETING SECTION 9(1)(V) AND 9(1)( VI) AND 9(1)(VII) LEARNED CIT(A) CONSIDERED THE ISSUE AS UN DER : 3.2.4. I FIND FORCE IN THE SUBMISSION AND CONTENTI ON OF THE LEARNED COUNSEL OF THE APPELLANT ON THIS ISSUE AND THE ARGUMENT OF THE ASSESSING OFFICER HAS NO LEGS T O STAND IN THE LIGHT OF THE LEGAL POSITION. THE PROVI SIONS OF SECTION 9 ITSELF IS A LEGAL FICTION AND THE EXPLANA TION INSERTED BY THE FINANCE ACT, 2007 MERELY CLARIFIES THE EXISTING LAW. THE SUBSTANCE OF THE AMENDMENT WAS ON LY A CLARIFICATION TO THE EXISTING LAW IN SECTION 9(1) (V), (VI) AND (VII) TO THE EFFECT THAT WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER THE AFORESAID CLAUSE S, SUCH INCOME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT, REGARDLESS OF WHETHER THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINE SS OR BUSINESS CONNECTION IN INDIA. THUS, THE DEPARTMENT 20 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. NEED NOT ESTABLISH ANY TERRITORIAL NEXUS BETWEEN TH E INCOME DEEMED TO ACCRUE OR ARISE TO THE NON-RESIDEN T UNDER THE SAID CLAUSES AND THE TERRITORY OF INDIA. IN THE PRESENT CASE, IT WAS NEVER THE CASE OF THE ASSESSIN G OFFICER THAT THERE WAS PERMANENT ESTABLISHMENT FOR MI/GE IN INDIA, INSTEAD IT WAS HIS CASE THAT THOUGH SERVICES WERE RENDERED BY MI/GE ONLY IN HONG KONG, YET THE SAME WERE UTILIZED BY THE APPELLANT IN ITS BUSINESS IN INDIA AND AS SUCH THE ASSESSING OFFICER STATED THAT IRRESPECTIVE OF THE SITUS OF THE SERVIC ES, INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA IN THE HANDS OF MI/GE AND CONSEQUENTIALLY THE APPELLANT IS LIABLE TO DEDUCT TAXES U/S 195 OF THE ACT. IF THE ASSESSING OFFICER WERE RIGHT IN HIS APPROACH, THEN ASSESSMENT PROCEEDINGS SHOULD HAVE BEEN INITIATED I N THE HANDS OF MI/GE AND TREAT THE PAYMENTS RECEIVED BY IT FROM THE APPELLANT AS ITS INCOME SO THAT MORE RE VENUE WILL BE GENERATED TO THE EXCHEQUER. HOWEVER, I WAS INFORMED BY THE LEARNED COUNSEL FOR THE APPELLANT T HAT NO SUCH EFFORTS WERE MADE BY THE DEPARTMENT IN THAT DIRECTION. THE CONTENTION OF THE APPELLANT IS SUPPO RTED BY THE AFORESAID DECISIONS OF BOMBAY AND KARNATAKA HIGH COURTS. THEREFORE, THE ACTION OF THE ASSESSING OFFICER IS NOT LEGALLY VALID IN PASSING ORDER U/S 2 01 IN THE HANDS OF THE APPELLANT. 17. THE LD. CIT(A) ALSO CONSIDERED THE CONTENTION RAISED THAT THE PAYMENTS MADE BY ASSESSEE TO MI/GE / HGA FALLS OUTSIDE THE AMBIT OF SECTION 9(1)(VII) AS UND ER : 3.3.1. LASTLY, THE APPELLANT RAISED ANOTHER CONTEN TION THAT THE PAYMENT MADE BY THE APPELLANT TO MI/GE FAL LS OUTSIDE THE AMBIT OF SECTION 9( L)(VII) IN VIEW OF THE EXCEPTION CARVED OUT IN CLAUSE (B) THERETO FOR THE REASON THAT THE PAYMENT WAS IN RESPECT OF SERVICES UTILIZE D IN THE BUSINESS CARRIED ON BY IT OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING INCOME FROM THE SOURCE OUTSIDE INDIA. THE LEARNED COUNSEL FOR THE APPELLAN T SUBMITTED THAT DURING THE FINANCIAL YEARS 2006-07 A ND 2007-08 RELEVANT TO THE ASSESSMENT YEARS 2007-08 AN D 2008-09 IT BAGGED ORDERS FROM SEVERAL OVERSEAS CLIE NTS INCLUDING I) UNIVERSAL CARTOON STUDIOS LLC, CALIFOR NIA, USA ; II) MIKE YOUNG PRODUCTIONS LLC, CALIFORNIA, U SA; 21 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. III) FUTURIKON, PARIS, FRANCE; IV) STRANEMANI SRL, ITALY; V) TUTENSTEIN PRODUCTIONS INC, CALIFORNIA, USA ETC. , FOR PRODUCTION OF THE ANIMATION FILMS. THE DETAILS OF A LL THE OVERSEAS CLIENTS IS SHOWN IN THE ANNEXURE-II TO THE REJOINDER FILED IN THE MATTER OF HGA SEPARATELY. IN PURSUANCE OF THE ORDER FROM UNIVERSAL CARTOON STUDI OS LLC, CALIFORNIA, USA, THE APPELLANT HAD MADE AN ORD ER TO MI/GE FOR PRODUCTION OF CERTAIN PARTS/EPISODES O F THE ANIMATION FILMS. COPY OF THE AGREEMENT WITH UNIVERS AL CARTOON STUDIO IS FILED IN THE PAPER BOOK (FACTS) A T PAGE NOS. 13-31. IT IS SUBMITTED THAT THE APPELLANT HAS BEEN DOING BUSINESS OUTSIDE INDIA AND IT HAS BEEN EARNIN G INCOME FROM THE SOURCE OUTSIDE INDIA FROM THESE OVERSEAS CLIENTS. DETAILS OF REVENUE EARNINGS FROM THESE OVERSEAS CLIENTS IS SHOWN IN A TABULATION AT PAGE NO.1 OF THE PAPER BOOK (FACTS). THE LEARNED AR OF THE APPELLANT WHILE SUBMITTING SO, ALTERNATIVELY CONTENDED THAT EVEN IF THE ASSESSING OFFICER IS PRESUMED TO BE RIGHT IN HOLDING THAT THE APPELLANT MADE PAYMENT TOWARDS FEES FOR TECHNICAL SERVICES TO MI/G E, THE APPELLANT MADE THE PAYMENT ONLY IN RESPECT OF SERVICES UTILIZED IN A BUSINESS CARRIED ON BY IT OU TSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING INCO ME FROM THE SOURCE OUTSIDE INDIA. IT WAS REPRESENTED T HAT THE INCOME EARNED BY THE APPELLANT IS IN FOREIGN EXCHANGE AND IT HAS BEEN CLAIMING EXEMPTION U/S 10A OF THE ACT ON ITS INCOME FROM FOREIGN EXPORTS. PROJ ECT WISE SALES FROM THE OVERSEAS CLIENTS FOR THE FINANC IAL YEARS 2006-07 AND 2007-08 IN A TABULATION IS PLACED IN THE PAPER BOOK (FACTS) AT PAGE NOS.32, 37(APRIL, 20 07) AND 38 (FOR 11 MONTHS) RESPECTIVELY. TOTAL EXPORT S ALES FOR THE FINANCIAL YEARS 2006-07 AND 2007-08 FROM VARIOUS FOREIGN CLIENTS ARE TO THE TUNE OF RS.69,05,40,144/- AND RS.87,99,17,643/- RESPECTIVEL Y. THE APPELLANT HAS BEEN SHOWING THE AFORESAID EXPORT SALES FROM THE FOREIGN CLIENTS IN ITS PROFIT & LOSS ACCOUNT (PROFIT & LOSS ACCOUNT FOR THESE PERIODS AR E PLACED IN THE PAPER BOOK (FACTS) AT PAGE NOS.35-36 AND 41-43 RESPECTIVELY. IN THE CORRESPONDING RETURNS OF INCOME FOR THE ASSESSMENT YEARS 2007-08 AND 2008-09 (PAGE NOS.33-34 AND 39-40 RESPECTIVELY) FILED BY TH E APPELLANT BEFORE THE JURISDICTIONAL ASSESSING OFFIC ER, IT HAS BEEN CLAIMING EXEMPTION U/S 10A OF THE ACT ON I TS EXPORT SALES/INCOME. THEREFORE, THE LEARNED COUNSEL FOR THE APPELLANT SUBMITTED IN THE ALTERNATIVE THAT THE 22 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. PROVISIONS OF SECTION 9(1)(VII)(B) EXCLUDES THE PRE SENT TRANSACTION FROM THE AMBIT OF SECTION 9 AND BY VIRT UE OF THE EXCEPTION PROVIDED IN SUB-CLAUSE (B) OF SECTION 9(1)(VII) OF THE ACT, NO INCOME HAD ACCRUED OR DEEM ED TO HAVE ACCRUED OR ARISEN TO MI/GE SO TO SAY THAT IT I S LIABLE TO TAX IN INDIA AND AS SUCH THE APPELLANT IS NOT LIABLE TO DEDUCT TAX U/S 195 OF THE ACT. IN SUPPORT OF HIS SUBMISSION, THE LEARNED AR OF THE APPELLANT RELIED UPON MAINLY ON THE PROVISIONS OF SUB-CLAUSE (B) OF SECTI ON 9(L)(VII) OF THE ACT ITSELF AND ALSO RELIED UPON 2 BENCH DECISIONS OF !TAT IN THE CASES OF I) TITAN INDUSTRI ES LTD. V. ITO, INTL. TAXATION, (2007) 11 SOT 206 (BANGALOR E); AND II) LUFTHANSA CARGO INDIA (P) LTD. V DCIT (2004 ) 91 !TO 133 (DELHI). HE FILED COPIES OF THESE DECISIONS IN THE PAPER BOOK-LEGAL AT PAGE NOS.70-93. THE LEARNED AR OF THE APPELLANT SUBMITTED THAT THE FACTS OF THE APPEL LANTS CASE ARE EXACTLY SIMILAR TO THE FACTS OF THE CASES IN THE AFORESAID 2 DECISIONS AND HE SUBMITTED THAT BY APPLYING THE AFORESAID CASE LAW, THE APPEAL MAY BE ALLOWED. 3.3.2..... 18. THE LD. CIT(A) FURTHER ANALYSED THE PAYMENTS MADE TO ASSESSEE VIDE PARA 3.3.4 AS UNDER : 3.3.4. I HAVE HEARD THE CASE OF THE APPELLANT ON A LL THE ASPECTS ON THE LAST ALTERNATE ISSUE RAISED BY IT AN D ON A PLAIN READING OF THE PROVISIONS OF SECTION 9(1)(VII )(B), I AM OF THE CONSIDERED VIEW THAT THE APPELLANT'S CASE FALLS DIRECTLY UNDER THE EXCEPTION PROVIDED IN SUB-CLAUSE (B) OF SECTION 9(1)(VII) OF THE ACT FOR MORE THAN ONE R EASON. I) FIRSTLY, THE MAIN PURPOSE FOR WHICH THE APPELLAN T HAS GIVEN THE OUTSOURCING OF SOME EPISODES OR PARTS OF EPISODES TO MI/GE, HONG KONG WAS ONLY FOR ITS OVERSEAS CLIENT. ON CAREFUL EXAMINATION OF THE PROFIT & LOSS ACCOUNT AND COMPUTATION OF TOTAL INCOME FILED BY TH E APPELLANT BEFORE THE INCOME TAX AUTHORITIES FOR THE FINANCIAL YEARS 2006-07 AND 2007-08 WHICH ARE RELEVANT TO THE ASST. YEARS 2007-08 AND 2008-09 RESPECTIVELY, I COULD SEE THAT THE SOURCE OF INCOME DERIVED BY THE APPELLANT IS ONLY FROM ITS OVERSEAS CLIENTS. SUB-CLAUSE (B) OF SECTION 9(L)(VII) IS REP RODUCED 23 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. HEREUNDER FOR READY REFERENCE: '{VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY - (E) THE GOVERNMENT; OR (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES A RE PAYABLE IN RESPECT OF SERVICES UTILIZED IN 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; .... ' ON A PLAIN AND SIMPLE READING OF THE AFORESAID EXCEPTION OR EXCLUSION, IT IS VERY CLEAR THAT IF AN Y FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BU SINESS CARRIED ON BY A RESIDENT OUTSIDE INDIA OR FOR THE P URPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA, SUCH FEES SHALL BE EXCLUDED FROM THE PURVIEW OF FTS. THERE ARE 2 CATEGORIES OF INCOME REFERRED TO IN THE SUB-CLAUSE (B) VIZ., I) IN A BUS INESS CARRIED ON BY A RESIDENT OUTSIDE INDIA; OR II) FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; THESE TWO CATEGORIES OF INCOM E RELATE TO OUTSIDE INDIA. THE FIRST CATEGORY OF INCO ME DOESN'T HOWEVER, REFER TO ANY SOURCE WHEREAS THE SECOND CATEGORY OF INCOME REFERS TO ANY SOURCE OUTS IDE INDIA. THEREFORE, I HOLD THAT THE APPELLANT'S BUSIN ESS WITH ITS OVERSEAS CLIENTS UNDOUBTEDLY CONSTITUTE A BUSINESS CARRIED ON BY RESIDENT OUTSIDE INDIA, MAKING THE APPELLANT TO SATISFY THE FIRST CATEGORY OF INCO ME REFERRED TO IN THE SUB-CLAUSE (B). HOWEVER, THE ASS ESSING OFFICER LAID EMPHASIS ONLY ON THE SECOND CATEGORY O F INCOME TO SAY THAT ORIGINATING CAUSE OF THE INCOME OF THE APPELLANT IS LOCATED IN INDIA AND AS SUCH HE HELD T HAT THE APPELLANT IS NOT MAKING OR EARNING INCOME FROM THE SOURCE OUTSIDE INDIA. THE ASSESSING OFFICER FAILED TO EXAMINE THE PROVISIONS OF SUB-CLAUSE (B) OF SECTION 9 (L) (VII) OF THE ACT IN A PROPER PERSPECTIVE IN THE AFO RESAID MANNER; II) SECONDLY, THE APPELLANT OBTAINED 48 AND 57 CONT RACTS FROM THE OVERSEAS CLIENTS DURING THE FINANCIAL YEAR S 2006-07 AND 2007-08 AND GAVE VERY FEW EPISODES OF ONE OVERSEAS CONTRACT VIZ., UNIVERSAL CARTOON STUDI OS 24 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. LLC, CALIFORNIA, USA TO MI/GE FOR SUB-CONTRACT. COP Y OF THE CONTRACT WITH THIS OVERSEAS CLIENT IS FILED IN THE PAPER BOOK-FACTS AT PAGE NOS.13-31. ON A PERUSAL OF THE CLAUSE NO.14 AT PAGE NO.23 RELATING TO JURISDIC TION FOR RESOLVING ANY DISPUTE BETWEEN THE APPELLANT AND THE OVERSEAS CLIENT, IT IS CLEARLY MENTIONED THAT THE JURISDICTION OF THE COURTS/ARBITRATION SHALL BE ONL Y 'AT SUCH PLACE WHERE THE OVERSEAS CLIENT IS LOCATED. FR OM THIS IT IS CLEARLY SEEN THAT THE CONTRACT IS MADE O UTSIDE INDIA AND THE SOURCE OF INCOME IS ARISING ONLY FROM OUT OF SUCH CONTRACT. THEREFORE, THE APPELLANT HAS SHOW N THE SALES AS EXPORT INCOME AND RETURNED IT IN ITS RETUR NS OF INCOME FOR THE RESPECTIVE ASST. YEARS 2007-08 AND 2008-09 AND CLAIMED EXEMPTION ON SUCH EXPORT INCOME WHICH THE DEPARTMENT HAS BEEN ACCEPTING. THEREFORE, THE 3 TESTS LAID DOWN BY THE HON'BLE DELHI BENCH OF ITAT IN THE CASE OF LUFTHANSA CARGO INDIA (P) LTD., V. D CIT (91 ITD 133) (DELHI) ARE SATISFIED IN THIS CASE AS THE FOLLOWING : I) THE PAYER IS A NON-RESIDENT, OR II) THE CONTRACT WITH NON-RESIDENT IS MADE OUTSIDE INDIA; OR III) THE ACTIVITY YIELDING INCOME TAKES PLACE OUTS IDE INDIA. THUS, THERE IS NO MERIT IN THE FINDING OF THE ASSES SING OFFICER TO SAY THAT THE ORIGINATING CAUSE OF THE IN COME OF THE APPELLANT IS LOCATED IN INDIA AND ALSO THAT THE APPELLANT IS NOT MAKING OR EARNING INCOME FROM THE SOURCE OUTSIDE INDIA; III). THIRDLY, THE CONTRACTS SEEN BY ME ARE ALL ENT ERED INTO BY THE APPELLANT OUTSIDE INDIA MAKING IT EXPOSED TO THE RESPECTIVE FOREIGN LAW. THEREFORE, AS PER THE AFORE SAID GOVERNING LAWS OF THE FOREIGN COUNTRIES IT HAS TO B E VIEWED THAT THE CONTRACT ITSELF IS THE 'SOURCE OF INCOME' IN TERMS OF THE DECISION OF THE HON'BLE SUP REME COURT IN THE CASE OF KUNWAR TRIVIKRAM NARAIN SINGH V. STATE OF U.P. (57 ITR 29). THE ASSESSING OFFICER HAS NOT CONSIDERED THESE ASPE CTS BEFORE ARRIVING AT HIS FINDING THAT ORIGINATING CAU SE OF THE INCOME OF THE APPELLANT IS LOCATED IN INDIA WHE N 25 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. FACTUALLY ORIGINATING CAUSE OF THE INCOME OF THE APPELLANT IS LOCATED OUTSIDE INDIA FROM THE RESPECT IVE LOCATIONS WHERE THE CONTRACTS WERE MADE ; IV) FOURTHLY, THE ASSESSING OFFICER HELD THAT LOCAT ION OF THE SOURCE OF INCOME IN RESPECT OF THE FOREIGN EXCH ANGE EARNINGS BY THE APPELLANT IS LOCATED WITHIN INDIA A S THE SOURCE OF INCOME WILL BE WHERE THE ORIGINATING CAUS E IS LOCATED. ACCORDING TO HIM, THE SITUS (LOCATION) OF THE SOURCE OF INCOME IS IN INDIA BECAUSE THE APPELLANT HAS ITS BUSINESS ESTABLISHMENT IN INDIA. THERE IS NO ME RIT IN THIS FINDING AS THE ACTUAL VIEWERSHIP OF THE ANIMAT ION FILMS PRODUCED AND SUPPLIED TO THE OVERSEAS CLIENTS IN FACT IS LOCATED OUTSIDE INDIA. IT IS THE ONLY SOURC E OF INCOME TO THE APPELLANT WHICH IS LOCATED OUTSIDE IN DIA AND FOR EARNING THIS INCOME ONLY IT MADE PAYMENTS T O MI/GE FOR THE PRODUCTION WORK OR MATERIAL. THE HON' BLE DELHI BENCH OF ITAT WHILE ANALYSING THE PRINCIPLE O F 'SOURCE OF INCOME' IN THE CASE OF LUFTHANSA CARGO I NDIA (P) LTD., V. DCIT (91 ITD 133) HELD AT PAGE NO.166 IN PARA NO.44 BY FOLLOWING ANOTHER DECISION AND THE RELEVANT PORTION IS QUOTED HEREUNDER : '44. RELIANCE WAS ALSO PLACED ON RECENT DECISION OF DELHI TRIBUNAL IN THE CASE OF ASIA SATELLITE TELECOMMUNICATIONS CO. LTD. V.DCIT (2003) 85 ITD 478, WHEREIN AFTER REVIEWING THE ENTIRE CASE LAW RELATING TO SITUS OF THE 'SOURCE OF INCOME' IN THE CONTEXT OF INTERNATIONAL TRANSACTIONS, IT IS STATED IN PARA 6.28 OF THE DECISION :- 6.29 ELABORATING THE WORD 'SOURCE, IT WAS STATED T HAT IT MAY ENCOMPASS THE PAYER OF INCOME OR THE ACTIVITY WHICH GIVES RISE TO THE INCOME. TO BE MORE PRECISE IT WAS STATED THAT SOURCE COULD NOT REFER TO THE PAYER BUT ONLY TO THE ACTIVITY, WHICH RESULTED IN THE INCOME. IT WAS EXPLAINED THAT THE SOURCE IS THE ACTIVITY WHICH RESULTS INTO THE INCOME. IF THE SOURCE OF ANY INCOME IS SITUATED IN INDIA TH EN IT IS IRRELEVANT WHETHER THE BUSINESS CARRIED ON BY SU CH NON-RESIDENT IS IN INDIA OR ELSEWHERE : 'WE ARE AGREEABLE THAT THE SOURCE DOES NOT REFER TO THE PERSON WHO MAKES THE PAYMENT BUT IT REFERS TO THE 26 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. ACTIVITIES WHICH GIVE RISE TO THE INCOME. IN THE PR ESENT CONTEXT THE ACTIVITY WHICH IS RESULTING INTO INCOME IN THE HANDS OF NON-RESIDENT CUSTOMERS, NAMELY THE TV CHANNEL, IS THE ULTIMATE VIEWERSHIP OF THE PROGRAMM ES TRANSMITTED BY THEM THROUGH ASSESSEE IN THE FOOTPRI NT AREAS INCLUDING INDIA. THEREFORE THE ACTIVITY WHICH ACTUALLY PRODUCES THE INCOME IS NOT THE UPLINKING O R DOWNLINKING OF THE SIGNALS BUT OF THE ACTUAL VIEWER SHIP. ' IT IS CLARIFIED THAT THE ABOVE QUOTED OBSERVATIONS WERE MADE IN THE CONTEXT OF A NON-RESIDENT EARNING INCOM E FROM A SOURCE WITHIN INDIA, UNDER SECTION 9(1)(VI)( C), BUT THE PRINCIPLE STATED THEREIN IS EQUALLY APPLICABLE TO A RESIDENT UNDER SECTION 9(1) (VII) (B) OF THE ACT IN DETERMINING WHETHER INCOME WAS EARNED FROM A SOURCE OUTSIDE INDIA. LASTLY, IT IS SUBMITTED THAT IT IS INDISPUTABLE THAT PAYMENTS TO THE NON-RESIDENT HAVE BEEN MADE FOR OVERHAUL REPAIRS FOR EARNING INCOME FROM THE ACTIVITY OF WET-LEASING. THERE IS THEREFOR E A DIRECT NEXUS BETWEEN THE PAYMENTS AND THE EARNING OF INCOME FROM SOURCES OUTSIDE INDIA.' AND SIMILAR TO THE FACTS OF THE ABOVE CASE, IN THE INST ANT CASE ALSO THE PRINCIPLE STATED THEREUNDER IS EQUALL Y APPLICABLE IN DETERMINING THE POINT THAT THE INCOME WAS EARNED FROM A SOURCE OUTSIDE INDIA; AND V) LASTLY, IT IS AN ADMITTED FACT THAT THE PAYMENTS MADE BY THE APPELLANT TO MI/GE, HONG KONG WERE ALL IN CONNECTION WITH THE CONTRACT IT HAD WITH THE OVERSE AS CLIENT DURING THE FINANCIAL YEARS 2006-07 AND 2007- 08. DETAILS OF THE PAYMENTS MADE BY THE APPELLANT TO MI/GE FOR THE PROJECT AND THE REVENUE EARNINGS EARN ED BY IT FROM THE OVERSEAS CLIENT ON THAT PARTICULAR P ROJECT IS SHOWN IN A TABULATION AT PAGE NO.1 OF THE PAPER BOOK-FACTS. IT COULD BE SEEN FROM THIS FACT SHEET T HAT THERE IS A DIRECT NEXUS BETWEEN THE PAYMENTS MADE B Y THE APPELLANT TO MI/GE AND THE AMOUNTS RECEIVED OR RECEIVABLE FROM THE OVERSEAS CLIENT AND THEREFORE, I HOLD THAT THE PROVISIONS OF SUB-CLAUSE (B) TO SECTI ON 9(1)(VII) (EXCEPTS AND EXCLUDES THE PAYMENTS MADE B Y THE APPELLANT FROM THE AMBIT AND PURVIEW OF SECTION 9 (L) (VII) OF THE ACT AS CONTESTED ALTERNATIVELY BY THE APPELLANT. 27 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 19. THE ISSUE WITH REFERENCE TO DTAA WAS EXAMINED BY THE LD. CIT(A) VIDE PARA 5.2.3 AND 5.2.4 VIDE ORDE R UNDER SECTION 154 DATED 18.01.2009, AS UNDER : 5.2.3. I FIND FROM THE WRITTEN SUBMISSIONS OF THE ASSESSING OFFICER THAT HE DID NOT DEAL WITH THE CONTENTION OF THE APPELLANT IN DETAIL EXCEPT SAYING THAT HE NEVER MADE ANY OBSERVATIONS IN THE ORDER U/S 201 THAT THE PAYMENT MADE BY THE APPELLANT IS ONLY TO ARTISTES FOR RENDERING SERVICES IN THE PRODUCTION O F ANIMATION FILMS AND AS SUCH THE CONTENTION OF THE APPELLANT IS TOTALLY WRONG. HOWEVER, THE LEARNED CO UNSEL OF THE APPELLANT VEHEMENTLY ARGUED THAT FIRST OF AL L THE PAYMENTS MADE BY THE APPELLANT TO HGA IS NOT AMOUNTING TO FTS AND IN THE ALTERNATIVE HE CONTENDE D THAT EVEN IF THE ASSESSING OFFICER IS PRESUMED TO B E RIGHT IN HIS OBSERVATION THAT THE PAYMENT MADE BY T HE APPELLANT IS ONLY TO ARTISTES FOR RENDERING TECHNIC AL SERVICES IN PRODUCTION OF ANIMATION FILMS, THE APPE LLANT MADE THE PAYMENT TO THEM THROUGH HGA AND IN WHICH CASE THE PROVISIONS OF ARTICLE 17.2 OF THE DTAA GOV ERNS THE TRANSACTION. BEFORE ADVERTING TO THE ALTERNATIV E CONTENTION OF THE APPELLANT I EXTRACT ARTICLE 17.2 OF INDO- CHINA DTAA FOR ANALYZING AND EXAMINING THE CONTENTI ON OF THE APPELLANT. ARTICLE 17.2 SAYS THAT - 'WHERE INCOME IN RESPECT OF PERSONAL ACTIVITIES EXERCISED BY AN ENTERTAINER OR A SPORTSPERSON IN HIS CAPACITY AS SUCH ACCRUES NOT TO THE ENTERTAINER OR SPORTSPERSON HIMS ELF BUT TO ANOTHER PERSON, THAT INCOME MAY, NOTWITHSTANDING THE PROVISIONS OF ARTICLES 7, 14 AND 15, BE TAXED IN THE CONTRACTING STATE IN WHICH THE ACTIVITIES OF THE ENTERTAINER OR SPORTSPERSON ARE EXERCISED'. TO UNDERSTAND THE CONTENTION OF THE APPELLANT AND THE MEANING OF 'ENTERTAINER' ONE HAS TO READ ARTICLE 17.1 WHICH DEFINES 'ARTISTES' AND ALSO DEALS WITH INCIDENCE OF TAXATION OF THEIR INCOME FROM THE IR PERSONAL ACTIVITIES AS SUCH EXERCISED IN OTHER CONTRACTING STATE. ARTICLE 17.1 SAYS THAT 'NOTWITHSTANDING THE PROVISIONS OF ARTICLES 14 AND 15, INCOME DERIVED BY A RESIDENT OF A CONTRACTING STATE AS AN ENTERTAINER, SUCH AS THEATRE, MOTION PICTURE, RADIO OR TELEVISION ARTISTE, OR A MUSICIAN, OR AS A SPORTSPERSON, FROM HIS PERSONAL ACTIVITIES AS 28 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. SUCH EXERCISED IN OTHER CONTRACTING STATE, MAY BE TAXED IN THAT OTHER CONTRACTING STATE'. 5.2.4. BEFORE GOING INTO THE APPLICABILITY OR OTHER WISE OF THESE ARTICLES, ONE HAS TO SEE WHETHER ANIMATORS ENGAGED BY EITHER HGA OR THE APPELLANT IN THEIR BUSINESSES ARE ARTISTES OR ENTERTAINERS AS MENTIONED THEREIN. THE TERM ENTERTAINER IS ILLUSTRATED IN ART ICLE 17.1 SUCH AS THEATRE, MOTION PICTURE, RADIO OR TELEVISIO N ARTISTE OR A MUSICIAN. I ENQUIRED WITH THE COUNSEL FOR THE APPELLANT UNDER WHICH' CATEGORY, THE ANIMATORS SHOU LD FALL FOR CONSIDERATION. THE LEARNED COUNSEL SUBMITT ED THAT THE NATURE OF THE BUSINESS OF THE APPELLANT IS PRODUCTION OF ANIMATION FILMS. PRODUCTION OF THESE FILMS ARE DONE BY ANIMATORS BY DRAWING VARIOUS PICTURES L IKE CAT AND MOUSE IN MICKY-MOUSE CARTOON SHOW WHICH WOULD BE TELECAST ON TELEVISION OR THEATRES AND ALS O THEY DRAW VARIOUS PICTURES DEPENDING UPON THE STORY AND BACK GROUND DESIGN AS PER THE REQUIREMENT OF THE OVERSEAS CLIENT. IN THIS CONTEXT HE BROUGHT TO MY N OTICE A BRIEF NARRATION OF THE PRODUCTION OF AN ANIMATION FILM BY THE APPELLANT AT PARA 1.1 OF HIS SYNOPSIS OF FAC TS AND ALSO SUBMITTED THAT THE ASSESSING OFFICER ALSO NARRATED THE SAME IN DETAIL IN PARA NO.2.1 OF HIS O RDER U/S 201AT PAGE NOS. 2-4. ON A CAREFUL EXAMINATION O F THE SAME, I HAVE NO HESITATION TO HOLD THAT THE ANIMATORS ENGAGED BY BOTH HGA AND THE APPELLANT ARE UNDOUBTEDLY CAN BE TREATED AS ARTISTES FALLING UNDE R MOTION PICTURE OR TELEVISION ARTISTE. HE FURTHER SU BMITTED THAT THESE ANIMATORS ARE QUALIFIED WITH A GRADUATIO N IN BACHELOR OF FINE ARTS IN INDIA WHICH COURSE MAINLY CATERS TO THE PROFESSION OF ANIMATION. HOWEVER, IT HAS TO BE SEEN, WHETHER THE ALTERNATE CONTENTION OF THE APPELLANT THAT ARTICLE 17.2 WILL COME INTO PLAY TO THE FACTS OF THE APPELLANT'S CASE. IT IS THE CASE OF TH E APPELLANT THAT EVEN IF THE ASSESSING OFFICER IS PRE SUMED TO BE RIGHT IN HIS OBSERVATION THAT THE PAYMENT MAD E BY THE APPELLANT IS ONLY TO ARTISTES FOR RENDERING TEC HNICAL SERVICES IN PRODUCTION OF ANIMATION FILMS, THE APPE LLANT MADE THE PAYMENT TO THEM THROUGH HGA AND IN WHICH CASE THE PROVISIONS OF ARTICLE 17.2 OF THE DTAA GOV ERNS THE TRANSACTION. THE ASSESSING OFFICER HAS NOT SPECIFICALLY MADE ANY OBSERVATION IN HIS ORDER U/S 201 THAT THE PAYMENTS ARE MADE TO ARTISTES. NONETHELESS , THE APPELLANT DREW A PRESUMPTION FROM HIS FINDINGS 29 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. THAT THE PAYMENT MADE BY IT TO HGA FOR PRODUCTION WORK/MATERIAL OF CERTAIN EPISODES OF ANIMATION FILM S IF, AMOUNTING TO FEES FOR TECHNICAL SERVICES, THEN SUCH PAYMENTS ARE MADE' TO ARTISTES THROUGH HGA FOR RENDERING SERVICES IN SUPPLYING PRODUCTION MATERIAL AS PER THE AGREEMENT, DATED 31-03-2005. IN THAT SENSE, THE LEARNED AR OF THE APPELLANT ARGUED THAT ARTICLE 17.2 GOVERNS THE TRANSACTION. IN THIS CONTEXT IT IS WORT H CONSIDERING ARTICLE 17.1 WHICH SPEAKS OF INCIDENCE OF TAXATION OF INCOME DERIVED BY A RESIDENT OF A CONTRACTING STATE AS AN ENTERTAINER/ARTIST, FROM HIS PERSONAL ACTIVITIES AS SUCH EXERCISED IN OTHER CONTRACTING STATE, MAY BE TAXED IN THAT OTHER CONTRACTING STATE. THEREFORE, IF SUCH ENTERTAINER/A RTIST EXERCISES ANY SUCH ACTIVITIES IN THE OTHER CONTRACT ING STATE, THEN THE AMOUNTS RECEIVED BY THEM SHALL BE TAXED IN THE OTHER CONTRACTING STATE. THIS MEANS TH AT IF ANY ENTERTAINER/ARTIST COMES TO INDIA AND RENDERS A NY ACTIVITY, THEN THE AMOUNTS RECEIVED BY THEM SHALL B E LIABLE TO TAX IN INDIA. THE LOGICAL CONCLUSION THAT CAN BE DRAWN FROM ARTICLE 17.1 TO UNDERSTAND ARTICLE 17.2 IS THAT IF SUCH ENTERTAINER/ARTIST EXERCISES ANY ACTIV ITIES IN THE CONTRACTING STATE I.E., CHINA, THEN INCOME IN R ESPECT OF PERSONAL ACTIVITIES EXERCISED BY AN ENTERTAINER/ ARTIST IN HIS CAPACITY AS SUCH ACCRUES NOT TO THE ENTERTAINER/ARTIST HIMSELF BUT TO ANOTHER PERSON I. E., HGA, THAT INCOME MAY BE TAXED IN THE CONTRACTING STATE I.E., CHINA IN WHICH THE ACTIVITIES OF THE ENTERTAINER/ARTIST ARE EXERCISED. IN VIEW OF THIS, I FIND THERE IS SUBSTANCE IN THE CONTENTION OF THE APPELLA NT ON THE INFERENCES DRAWN BY IT FROM THE FINDINGS OF THE ASSESSING OFFICER. THEREFORE, THE APPELLANT IS RIGH T IN ITS ALTERNATE CONTENTION THAT EVEN IF THE ASSESSING OFF ICER IS PRESUMED TO BE RIGHT IN HIS OBSERVATION THAT THE PAYMENT MADE BY THE APPELLANT TO HGA IS ONLY FOR RENDERING TECHNICAL SERVICES IN PRODUCTION OF ANIMA TION FILMS, THEN IT HAS TO BE UNDERSTOOD THAT THE APPELL ANT MADE THE PAYMENT TO ENTERTAINERS/ARTISTES WHO ARE ORGANIZED BY HGA AND IN WHICH CASE THE PROVISIONS O F ARTICLE 17.2 OF THE DTAA GOVERNS THE TRANSACTION. THEREFORE, THE APPELLANT SUCCEEDS ON THIS ISSUE. IN THE RESULT THE APPEAL FILED BY THE APPEAL IS ALLOWED ON ALL THE GROUNDS RAISED BY IT. 30 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 20. AFTER CONSIDERING THE DETAILED ORDER PASSE D BY LD. CIT(A) WE AGREE WITH THE FINDINGS THAT : 1. THE PAYMENTS RECEIVED BY IT FROM FOREIGN CLIENTS FOR EXACTLY THE SIMILAR WORK EXECUTED BY IT HAVE NOT BEEN SUBJECTED TO WITHHOLDING TAX NOR WAS IT CALLED UPON TO FILE ITS RETURN BY THE SEVERAL COUNTRIES FROM THE RESIDENTS OF WHICH ASSESSEE RECEIVED PAYMENTS FOR SERVICES RENDERED BY IT. 2. THERE WAS NO ELEMENT OF ANY TECHNICAL SERVICES IN THE PRODUCTION OF ANIMATION FILMS NOR IN THE PRODUCTION OF A PART OR CERTAIN EPISODES OF AN ANIMATION FILM SO TO ATTRACT THE PROVISION OF SECTION 9(1) (VII) READ WITH SECTION 5(2)(B) OF THE ACT. 3. JUST BECAUSE SUCH EXPERTISE, KNOWLEDGE, TECHNOLOGY AND EXPERIENCE IS POSSESSED BY THE SAID PARTY AND THE SAME HAS BEEN UTILIZED FOR RENDERING THE SERVICES, IT CANNOT BE SAID THAT THE SERVICES SO RENDERED ARE IN THE NATURE OF TECHNICAL AND CONSULTANCY SERVICES WITHOUT MAKING ANY TECHNOLOGY AVAILABLE TO THE OTHER PARTY. THE PAYMENT IN QUESTION PAID BY THE ASSESSEE-COMPANY OR ANY PART THEREOF COULD NOT BE TREATED AS 'FEES FOR INCLUDED SERVICES' WITHIN THE MEANING OF 'FEES FOR TECHNICAL SERVICES' DEFINED IN SECTION 9(1)(VII) OF THE ACT'. 31 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. 4. IT WAS NEVER THE CASE OF THE ASSESSING OFFICER THAT THERE WAS PERMANENT ESTABLISHMENT FOR MI/GE OR HGA IN INDIA, INSTEAD IT WAS HIS CASE THAT THOUGH SERVICES WERE RENDERED BY MI/GE, HGA ONLY IN HONG KONG/ CHINA, YET THE SAME WERE UTILIZED BY THE ASSESSEE IN ITS BUSINESS IN INDIA AND AS SUCH THE ASSESSING OFFICER STATED THAT IRRESPECTIVE OF THE SITUS OF THE SERVICES, INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA IN THE HANDS OF MI/GE,HGA AND CONSEQUENTIALLY THE ASSESSEE IS LIABLE TO DEDUCT TAXES U/S 195 OF THE ACT. 5. THE ASSESSEE'S BUSINESS WITH ITS OVERSEAS CLIENTS UNDOUBTEDLY CONSTITUTE A BUSINESS CARRIED ON BY RESIDENT OUTSIDE INDIA, MAKING THE ASSESSEE TO SATISFY THE FIRST CATEGORY OF INCOME REFERRED TO IN THE SUB-CLAUSE (B). HOWEVER, THE ASSESSING OFFICER LAID EMPHASIS ONLY ON THE SECOND CATEGORY OF INCOME TO SAY THAT ORIGINATING CAUSE OF THE INCOME OF THE ASSESSEE IS LOCATED IN INDIA AND AS SUCH HE HELD THAT THE ASSESSEE IS NOT MAKING OR EARNING INCOME FROM THE SOURCE OUTSIDE INDIA. THE ASSESSING OFFICER FAILED TO EXAMINE THE PROVISIONS OF SUB-CLAUSE (B) OF SECTION 9 (L) (VII) OF THE ACT IN A PROPER PERSPECTIVE IN THE AFORESAID MANNER ; BASED ON ABOVE FINDINGS IT IS CLEAR THAT ASSESSING OFFICERS ATTEMPT TO RAISE DEMANDS U/S 201 IS NOT CORRECT. EV EN EXPLANATION-1 TO SECTION 9(1) EXCLUDES THE INCOME PERTAINING TO OPERATIONS CARRIED OUT OUTSIDE INDIA. THE 32 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. FOREIGN PARTIES HAVE NOT DONE ANY ACTIVITY IN INDIA NOR THEY HAVE ANY PE IN INDIA. AS THERE IS NO LIABILITY TO D EDUCT TAX ON THE AMOUNTS PAID U/S 195, IT IS NOT CORRECT ON T HE PART OF AO TO RAISE DEMANDS. THE AO IT SEEMS HAD ISSUED NOTICE U/S. 201 (1) IN RESPECT OF PAYMENTS BY ASSES SEE TO TV ARTS ALSO AND ON EXPLANATION BY THE ASSESSEE THAT IT WAS THE PAYMENTS RESULTED IN INCOME FROM BUSINESS, THE PROCEEDINGS WERE DROPPED. THE ASSESSEE, IN ITS REPLY IN REGARD TO T.V. ARTS RELIE D ON ARTICLE 7 OF DTAA BETWEEN INDIA & PHILIPPINES WHICH APPLIES TO BUSINESS INCOME OF NON-RESIDENTS I.E T.V . ARTS AND SUBMITTED THAT TAX WAS NOT DEDUCTED AS IT WAS NOT TAXABLE. THIS WAS ACCEPTED. NON-LIABILITY T O TDS WAS NOT BECAUSE OF LACK OF ARTICLE FOR FTS IN DTAA, AS PRESUMED IN THE APPELLATE ORDER, BUT BECAUSE OF APPLICATION OF ARTICLE 7. THE GROUNDS OF APPEAL IS THEREFORE CLEARLY UNTENABLE. WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUNDS RAISED BY REVENUE . 21. THE REVENUE APPEALS ARE ACCORDINGLY DISMISSED. 22. COMING TO THE CROSS OBJECTIONS 26 & 27/HYD/2013 IN ITA.NO.594 & 595/HYD/2013, THE ASSESSEE HAS RAISED THE FOLLOWING CROSS OBJECTIONS : 1. THE REVENUE CANNOT TAKE ADVANTAGE OF THE OMISSIONS BY INADVERTENCE OF CIT(A) TO DEAL WITH GROUND BY RELYING ON TECHNICALITIES. 2. THE PROVISIONS OF ARTICLE 17, PARAGRAPH 1 AND PARAGRAPH 2 OF THE DTAA BETWEEN INDIA & CHINA 33 ITA.NO.276 & 277/HYD/2010, ITA.452/HYD/2011, 594 & 595/HYD/2013 & C.O. 26 & 27/HYD/2013 M/S. DQ ENTERTAINMENT (INTERNATIONAL) PVT. LTD. HYD ERABAD. ARE APPLICABLE TO THE FACTS OF THE CASE BECAUSE THE PAYMENTS WERE MADE TO HGA TOWARDS SERVICES RENDERED BY ANIMATION EXPERTS BEING ENTERTAINER WHO COME UNDER THE DESCRIPTION OF MOTION PICTURE OR THEATRE ARTISTES. THE A.O. ERRED IN NOT APPLYING THOSE ARTICLES OF DTAA. ON APPLYING ARTICLE 17, THE INCOME FROM PAYMENTS ARE TAXABLE ONLY IN CHINA. 22.1. THE CROSS OBJECTIONS ARE ACADEMIC IN NATURE AS THESE CONTENTION WAS ALREADY CONSIDERED IN REVENUE APPEALS. THEREFORE THE CROSS OBJECTION ARE TREATED AS ACADEM IC AND ACCORDINGLY TREATED AS DISMISSED. 23. IN THE RESULT, ALL APPEALS BY REVENUE AND CROSS OBJECTIONS BY ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.03.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATED 28 TH MARCH, 2014 VBP/- COPY TO : 1. DDIT (INTERNATIONAL TAXATION)-I, 6 TH FLOOR, C BLOCK, I.T. TOWERS, AC GUARDS, HYDERABAD. 2. M/S. DQ ENTERTAINMENT (INTERNATIONAL) PRIVATE LT D. 644, AURORA COLONY, ROAD NO.3, BANJARA HILLS, HYDERA BAD 34. 3. CIT(A)-VI, 6A, I.T. TOWERS, A.C GUARDS, HYDERABAD 500 004. 4. DIRECTOR OF INCOME TAX (INTL. TAXATION), 6 TH FLOOR, R.P. BHAVAN, 14/3 NRUPATHUNGA ROAD, BANGALORE 560 001. 5. D.R. ITAT, A BENCH, HYDERABAD.