THE ACIT CEN CIR-41, MUMBAI V. M/S. ANCHOR HEALTH & BEAUTYCARE P. LTD, MUMBAI

ITA 7164/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54951 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-08-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 18-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P J PARDIWALA
• Keywords: Charitable institution; Permanent establishment
• Section: 143(3)

Judgement Text

ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI A BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) AND SHRI VIJAY PAL RAO (JUDICIAL MEMBER) ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 41, MUMBAI ...APPELLANT VS. ANCHOR HEALTH AND BEAUTY CARE PVT LTD RESP ONDENT 201, INNOVA C WING, MARATHON NEXTGEN OFF G K MARG, OPP PENINSULAR CORPORATE PARK LOWER PAREL (W), MUMBAI 400 013 PAN : AAAC4990N APPEARANCES: P K B MENON, FOR THE APPELLANT P J PARDIWALA, FOR THE RESPONDENT DATE OF HEARING : AUGUST 07, 2011 DATE OF PRONOUNCEMENT : AUGUST 26 , 2011 O R D E R PER PRAMOD KUMAR: 1. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDICA TE IN THIS APPEAL IS WHETHER OR NOT THE CIT(A) WAS JUSTIFIED IN DELETIN G THE IMPUGNED DISALLOWANCE OF RS 11,71,826 UNDER SECTION 40(A)(I ) OF THE INCOME TAX ACT, 1961. THE ASSESSMENT YEAR INVOLVED IS 2004-05, AND THE IMPUGNED ASSESSMENT WAS FRAMED UNDER SECTION 143(3) OF THE A CT. 2. IT IS A RECALLED MATTER. ORIGINALLY, THIS APPEAL WAS DISPOSED OF EX PARTE, THOUGH BY AN ELABORATE AND REASONED ORDER, BY THE LEARNED VICE PRESIDENT IN ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 2 OF 7 SMC BENCH, BUT, UPON THE MATTER HAVING BEEN RECALLE D AT THE INSTANCE OF THE ASSESSEE RESPONDENT, THE APPEAL HAS BEEN TRANSFERRE D TO THIS DIVISION BENCH. THAT IS HOW WE HAVE COME TO BE IN SEISIN OF THE MATTER, AND THAT IS HOW THE APPEAL HAS ONCE AGAIN COME UP FOR HEARING ON MERITS . 3. LET US FIRST TAKE A LOOK AT THE DEVELOPMENTS LEA DING TO THIS LITIGATION BEFORE US. THE ASSESSEE BEFORE US IS ENGAGED IN TH E BUSINESS OF MANUFACTURING AND TRADING OF TOOTH POWDER, TOOTH PA STE, TOOTH BRUSH AND OTHER HEALTH CARE PRODUCTS. DURING THE COURSE OF S CRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS PAID A SUM OF RS 11,71,826 AS ACCREDITATION PANEL FEES TO BRIT ISH DENTAL HEALTH FOUNDATION UK, BUT HAS NOT DEDUCTED TAX AT SOURCE F ROM THE SAME. ON THESE FACTS, WHEN THE ASSESSEE WAS REQUIRED TO SHOW CAUSE AS TO WHY DISALLOWANCE NOT BE MADE UNDER SECTION 40(A)(I) IN RESPECT OF TH E SAID PAYMENT HAVING BEEN MADE WITHOUT DEDUCTION OF TAX AT SOURCE, IT WA S SUBMITTED BY THE ASSESSEE THAT AS THE RECIPIENT OF INCOME WAS NOT LI ABLE TO BE TAXED, IN RESPECT OF THIS INCOME IN INDIA, NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE BY THE ASSESSEE. IT WAS IN EFFECT CONTENDED THAT DISALLOWA NCE UNDER SECTION 40(A)(I) CAN ONLY BE MADE WHEN TAXES ARE DEDUCTIBLE BUT NOT DEDUCTED. HOWEVER, THIS SUBMISSION DID NOT FIND ANY FAVOUR FROM THE ASSESSI NG OFFICER. HE WAS OF THE VIEW THAT THE AFORESAID CONTENTION OF THE ASSESSEE IS NOT CORRECT BECAUSE, AS PER SECTION 195 OF THE INCOME TAX ACT, 1961, TAX HA S TO BE DEDUCTED AT SOURCE WHILE REMITTING THE MONIES OUTSIDE INDIA . HE FURT HER OBSERVED THAT THE ASSESSEE HAS NOT SUBMITTED ANY CERTIFICATE IN PROOF THAT THE AMOUNT IS NOT TAXABLE IN INDIA, AND THAT IN VIEW OF THE ABOVE, THE EXPENDITURE OF RS 11,71,826 IS DISALLOWED UNDER SECTION 40(A)(I), AND , IS ACCORDINGLY ADDED TO THE INCOME OF THE ASSESSEE. AGGRIEVED BY THE DISAL LOWANCE SO MADE, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEA RNED CIT(A) WAS OF THE VIEW THAT AS THE BRITISH DENTAL HEALTH FOUNDATION DID NOT HAVE ANY PERMANENT ESTABLISHMENT AND AS THE AMOUNTS PAID TO THEM COULD ALSO NOT BE ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 3 OF 7 TREATED AS ROYALTIES , THE PAYMENT SO MADE TO THE BDHF COULD NOT INDEED BE TAXED IN INDIA. LEARNED CIT(A) FURTHER NOTED THAT SINCE THE BDHF DID NOT HAVE ANY TAX LIABILITY IN RESPECT OF THESE PAYMENTS , AND THE ASSESSEE DID NOT , THEREFORE, HAVE ANY OBLIGATION TO DEDUCT TAX AT SOU RCE FROM THIS PAYMENT, DISALLOWANCE UNDER SECTION 40(A)(I) WAS NOT SUSTAIN ABLE IN LAW. THE IMPUGNED DISALLOWANCE WAS THUS DELETED. THE ASSESSING OFFICE R IS AGGRIEVED OF THE RELIEF SO GRANTED BY THE CIT(A) AND IS IN APPEAL BEFORE US . 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF A PPLICABLE LEGAL POSITION. 5. WE FIND THAT, AS HELD BY HONBLE SUPREME COURT I N THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT LTD VS CIT (327 ITR 456), TAX DEDUCTION AT SOURCE OBLIGATIONS UNDER SECTION 195(1) ARISE ONLY IF THE PAYMENT IS CHARGEABLE TO TAX IN THE HANDS OF NON-RESIDENT RECIPIENT. THEREFO RE, MERELY BECAUSE A PERSON HAS NOT DEDUCTED TAX AT SOURCE FROM A REMITT ANCE ABROAD, IT CANNOT BE INFERRED THAT THE PERSON MAKING THE REMITTANCE HAS COMMITTED A FAILURE IN DISCHARGING HIS TAX WITHHOLDING OBLIGATIONS BECAUS E SUCH OBLIGATIONS COME INTO EXISTENCE ONLY WHEN RECIPIENT HAS A TAX LIABIL ITY IN INDIA. THE UNDERLYING PRINCIPLE IS THIS. TAX WITHHOLDING LIABILITY OF THE PAYEE IS INHERENTLY A VICARIOUS LIABILITY, ON BEHALF OF THE RECIPIENT, AN D, THEREFORE, WHEN RECIPIENT DOES NOT HAVE THE PRIMARY LIABILITY TO BE TAXABLE I N RESPECT OF INCOME EMBEDDED IN THE RECEIPT, THE VICARIOUS LIABILITY OF THE PAYER CANNOT BUT BE INEFFECTUAL. THIS VICARIOUS TAX WITHHOLDING LIABIL ITY CANNOT BE INVOKED UNLESS PRIMARY TAX LIABILITY OF THE RECIPIENT IS ESTABLISH ED. JUST BECAUSE THE PAYER HAS NOT OBTAINED A SPECIFIC DECLARATION FROM THE RE VENUE AUTHORITIES TO THE EFFECT THAT THE RECIPIENT IS NOT LIABLE TO BE TAXED IN INDIA IN RESPECT OF INCOME EMBEDDED IN PARTICULAR PAYMENT, HOWSOEVER DESIRABLE BE THAT PRACTICE, THE ASSESSING OFFICER CAN NOT PROCEED ON THE BASIS THAT THE PAYER HAD AN ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 4 OF 7 OBLIGATION TO DEDUCT TAX AT SOURCE. HE STILL HAS TO DEMONSTRATE AND ESTABLISH THAT THE PAYEE HAS A TAX LIABILITY IN RESPECT OF TH E INCOME EMBEDDED IN THE IMPUGNED PAYMENT. THAT EXERCISE WAS NOT CARRIED OUT BY THE ASSESSING OFFICER ON THE FACTS OF THIS CASE. THE ASSESSING O FFICER WAS THUS CLEARLY IN ERROR IN PROCEEDING TO INVOKE DISALLOWANCE UNDER SE CTION 40(A)(I) ON THE SHORT GROUND THAT THE ASSESSEE DID NOT DEDUCT TAX A T SOURCE FROM THE FOREIGN REMITTANCE. TO THAT EXTENT, CIT(A) WAS JUSTIFIED IN DELETING THE IMPUGNED DISALLOWANCE. 6. HOWEVER, WHILE ON THIS ISSUE, IT IS ALSO NECESS ARY TO CONSIDER IS WHETHER THE ASSESSEE INDEED HAD AN OBLIGATION TO DE DUCT TAX AT SOURCE FROM THE REMITTANCE OF RS 11,71,826 TO BRITISH DENT AL HEALTH ASSOCIATION UK. 7. THE ASSESSEE HAD MADE THE PAYMENT OF RS 11,71,82 6 TO BRITISH DENTAL HEALTH ASSOCIATION TOWARDS ACCREDITATION PANEL FEES . BDHF IS A UK BASED REGISTERED CHARITABLE INSTITUTION. THIS FOUNDATION IS STATED TO, INTER ALIA, EVALUATE CONSUMER ORAL HEALTH CARE PRODUCTS TO ENS URE THAT MANUFACTURERS' PRODUCT CLAIMS ARE CLINICALLY PROVEN AND NOT EXAGGE RATED AND AN INDEPENDENT PANEL OF INTERNATIONALLY RECOGNISED DEN TAL EXPERTS IS STATED TO STUDY ALL THE CLAIMS CAREFULLY TO MAKE SURE THEY A RE TRUE, AND BACKED UP BY RELIABLE SCIENTIFIC EVIDENCE. AS A RESULT OF THE A CCREDITATION GRANTED BY THE BDHF, THE ASSESSEE IS ALLOWED TO USE THIS FACT OF B DHF APPROVAL IN THE MARKETING OF ITS PRODUCTS. THE QUESTION THAT WE ACT UALLY NEED TO DECIDE IS WHETHER THE AMOUNT SO RECEIVED BY BDHF, IN CONSIDER ATION OF THE ACCREDITATION, CAN BE BROUGHT TO TAX IN INDIA? 8. IT IS NOT EVEN IN DISPUTE THAT BDHF DOES NOT HAV E ANY PERMANENT ESTABLISHMENT IN INDIA, AND THE ASSESSEE HAS ALSO F ILED A CERTIFICATE TO THAT EFFECT AS ISSUED BY THE BDHF. IT IS ALSO NOT IN DIS PUTE THAT THE PROVISIONS OF ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 5 OF 7 THE INDIA UNITED KINGDOM DOUBLE TAXATION AVOIDANCE AGREEMENT (206 ITR STAT 235; INDIA UK TAX TREATY, IN SHORT) APPLY T O THE FACTS OF THIS CASE, AND THAT, THESE PROVISIONS BEING BENEFICIAL TO THE ASSE SSEE VIS--VIS THE PROVISIONS OF THE INCOME TAX ACT, THE TREATY PROVI SIONS WILL APPLY. CONSIDERING THE FACT THAT THE PAYEE DOES NOT HAVE A NY PE IN INDIA, WITHIN MEANINGS OF THAT EXPRESSION UNDER ARTICLE 5 OF INDO UK TAX TREATY, AND THIS ASSERTION HAS NOT BEEN CHALLENGED BY THE REVENUE AU THORITIES, THE INCOME EMBEDDED IN THE ACCREDITATION FEES CANNOT BE BROUGH T TO TAX IN INDIA AS BUSINESS PROFITS UNDER ARTICLE 7. LEARNED DEPARTMEN TAL REPRESENTATIVE ALSO DOES NOT DISPUTE THIS. HIS ONLY DEFENCE IS THAT EVE N IF IT IS NOT TAXED AS BUSINESS PROFITS, IT IS AT LEAST TAXABLE AS ROYALT IES, SINCE THE ASSESSEE DERIVES VALUABLE ADVANTAGE FROM THE ACCREDITATION BY BDHF A ND USE THE SAME AS A MARKETING TOOL. HOWEVER, WE FIND THAT THE SCOPE OF EXPRESSION ROYALTY, FOR THE PURPOSES OF INDIA UK TAX TREATY, IS QUITE RESTR ICTED AS SCOPE AS EVIDENT FROM THE PROVISIONS OF ARTICLE 13(3) AS REPRODUCED BELOW: (3) FOR THE PURPOSES OF THIS ARTICLE, THE TERM ROY ALTIES MEANS: (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATIO N FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERAR Y, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR W ORK ON FILMS, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONN ECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFO RMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXP ERIENCE; AND (B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, OTHER THAN INCOME DERIVED BY AN ENTERPRI SE OF A CONTRACTING STATE FROM THE OPERATION OF SHIPS OR AI RCRAFT IN INTERNATIONAL TRAFFIC. ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 6 OF 7 9. WHILE CLAUSE (B) OF THE DEFINITION OF CLEARLY IN APPLICABLE ON THE FACTS OF THIS CASE AS THIS CLAUSE DEALS WITH THE EQUIPMENT L EASING ONLY, CLAUSE (A) ALSO DOES NOT DEAL WITH A SITUATION IN WHICH THE ACCREDI TATION OR APPROVAL GRANTED BY A RESIDENT IS USED, IN ANOTHER COUNTRY, FOR PROM OTING THE SALES. THIS ACCREDITATION DOES NOT ALLOW THE ACCREDITED PRODUCT TO USE, OR HAVE A RIGHT TO USE, A TRADEMARK, NOR ANY INFORMATION CONCERNING IN DUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE OR, FOR THAT PURPOSE, USE O R RIGHT TO USE OF ANYTHING FALLING IN ANY OTHER CATEGORY OF CLAUSE (A). AN ACC REDITATION OR APPROVAL BY A REPUTED BODY MAY GIVE CERTAIN COMFORT LEVEL TO THE END USERS OF THE PRODUCT, AND THUS MAY CONSTITUTE A USP (I.E. UNIQUE SELLING PROPOSITION) TO THAT EXTENT, BUT IT MAY ALSO BE, THEREFORE, USED FOR THE PURPOSE S OF MARKETING OF THE PRODUCTS, BUT, LEGALLY SPEAKING, THE PAYMENT MADE F OR SUCH AN ACCREDITATION IS NOT COVERED THE DEFINITION OF ROYALTY AS SET O UT IN ARTICLE 13(3) OF INDIA UK TAX TREATY. LEARNED DEPARTMENTAL REPRESENTATIV ES ARGUMENT IS THAT IN SUBSTANCE THE PAYMENT FOR BDHS ACCREDITATION IS NOT HING BUT A ROYALTY TO USE THEIR NAME FOR MARKETING, AND, THEREFORE, THIS PAYM ENT SHOULD BE TREATED AS A PAYMENT OF ROYALTY. WE SEE NO SUBSTANCE IN THIS S IMPLISTIC PLEA. WHEN AN EXPRESSION HAS BEEN DEFINED IN LAW, AND THE IMPUGNE D PAYMENT IS NOT COVERED BY SUCH A SPECIFIC DEFINITION, IT CANNOT BE OPEN TO US TO LOOK AT NORMAL CONNOTATIONS OF THIS EXPRESSION IN BUSINESS PARLANCE. SIMPLY BECAUSE ASSESSEE IS BENEFITED BY THIS ACCREDITATION, AND TH E ASSESSEE USES THE SAME FOR ITS MARKETING PURPOSES, THE CHARACTER OF PAYME NT CANNOT BE CLASSIFIED AS ROYALTY. THE EXPRESSION ROYALTY IS NEATLY DEFIN ED UNDER ARTICLE 13(3) OF INDO UK TAX TREATY, AND UNLESS THE PAYMENT FITS INT O THE DESCRIPTION SET OUT IN ARTICLE 13(3), IT CANNOT BE TERMED AS ROYALTY FO R THE PURPOSES OF EXAMINING ITS TAXABILITY UNDER THE TAX TREATY. IN OUR CONSID ERED VIEW, ON THE FACTS OF THE CASE, THE IMPUGNED REMITTANCE IS IN THE NATURE OF B USINESS PROFITS IN THE HANDS OF THE UK BASED RECIPIENT, AND SINCE THE RECI PIENT ADMITTEDLY DID NOT ITA NO. 7164/MUM/2008 ASSESSMENT YEAR: 2004-05 PAGE 7 OF 7 HAVE ANY PERMANENT ESTABLISHMENT IN INDIA, THE SAME IS NOT TAXABLE IN INDIA. IN OUR CONSIDERED VIEW, THEREFORE, THE RECIPIENT DI D NOT HAVE ANY PRIMARY TAX LIABILITY IN INDIA, AS A COROLLARY THERETO, THE ASS ESSEE DID NOT HAVE TAX WITHHOLDING OBLIGATIONS FROM THIS REMITTANCE. 10. FOR THE FOREGOING REASONS, WE APPROVE THE CONCL USIONS ARRIVED AT BY THE LEARNED CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 11. IN THE RESULT, THE APPEAL IS DISMISSED. PRONOUN CED IN THE OPEN COURT TODAY ON 26 TH DAY OF AUGUST, 2011. SD/- SD/- (VIJAY PAL RAO ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 26 TH _ DAY OF AUGUST, 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. DEPARTMENTAL REPRESENTATIVE, BENCH, MUMBAI 5. GUARD FILE TRUE COP Y BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI