Before us, the learned DR has not disputed the nature of services rendered by the concerned service providers to the assessee. He, however, has contended that for providing the said services, managerial skill was also required and even the knowledge of local law was also used by the concerned service provider. In our opinion, merely because some managerial skill is required to render the services, it would not make the services to be managerial services as envisaged in Explanation 2 to section 9(1)(vii).
Similarly, the requirement of knowledge of local laws on the part of the service providers to render the services such as obtaining the permissions for shooting from the local authorities or for arranging insurance of the crew members and shooting equipments would not change the basic nature of the services which otherwise are commercial services as held by the learned CIT(Appeals).
In the case of UPS SCS (Asia Ltd.) (2012) 18 taxmann.com. 302 (Mum.), services rendered as per the terms of the relevant agreement were in the nature of freight and logistic services such as, transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services outside India in respect of export consignment of M and the fees paid by M of such services was held to be taxable in India by the Revenue authorities as “fees for technical services” u/s 9(1)(vii) being in the nature of managerial, technical or consultancy services. The Tribunal, however, held that it was too much to categorize such restricted services as managerial services. It was also held by the Tribunal that there was nothing like giving any consultancy worth the name and, therefore, payment in lieu of freight and logistic services could not be ranked as consultancy services. In the case of Parasrampuria Synthetics Ltd. 20 SOT 248 cited by the learned counsel for the assessee, the assessee had made certain payment to contractor in respect of inspection and maintenance support, fabrication of water line, thermal insulation/erection etc. and it was held by the Tribunal that such payment could not be treated as fees for technical services merely because the services were rendered by using technical knowledge when technology or technical knowledge of the person rendering the services was not made available to the assessee. In the case of Tata Iron and Steel Co. Lt. 34 SOT 83 (Mum.), it was held by the Tribunal that the management commission, selling commission, underwriting commission etc. in respect of GDR issue was not income by way of fees for technical services because although the lead managers had rendered technical, managerial or consultancy services for bringing out the GDR issue, such services are not made available to the assessee inasmuch as it only derived the benefit of the technical services provided by the lead managers without getting any technical knowledge, experience or skill in its possession for use as its own. It was held that such commission in respect of GDR issue paid to the lead managers, therefore, was in the nature of business profit and since the non-resident lead manager was having no PE in India, the same was outside the ambit of tax in India as per Article 7 of DTAA.
Keeping in view the ratio of the various decisions of the coordinate benches of this Tribunal discussed above and having regard to the nature of the services rendered by the overseas service providers to the assessee as spelt out in the relevant agreements, we are of the view that the said services cannot be treated as technical services within the meaning given in Explanation 2 to section 9(1)(vii). We are in agreement with the learned CIT(Appeals) that the said services rendered outside India by the overseas service providers in connection with making logistic arrangement are in the nature of commercial services and the amount received by them from the assessee for such services constitutes their business profit which is not chargeable to tax in India in the absence of any PE in India of the said service providers. The assessee, therefore, was not liable to deduct tax at source from the said payments and the AO was not justified in treating the assessee as in default u/s 201. Ground No. 3 to 6 of the Revenue’s appeal are accordingly dismissed.
IN THE ITAT MUMBAI BENCH ‘L’
Yash Raj Films (P.) Ltd.
v.
Income-tax Officer (International Taxation)
IT APPEAL NOs. 4856 & 4882 (MUM.) OF 2008 and 2113 (mum.) of 2009
[ASSESSMENT YEARs 2005-06 & 2006-07]
DECEMBER 20, 2012
ORDER
P.M. Jagtap, Accountant Member – Out of these three appeals, two appeals being ITA No. 4856/Mum/2006 and 4882/Mum/2008 are cross appeals for assessment years 2006-07 whereas the third appeal is the appeal filed by the Revenue for assessment year 2005-06. Since some common and interlinked issues are involved in these appeals, they have been heard together and are being disposed of by this single composite order.
2. First we shall take up the cross appeals for assessment year 2007-08 which are directed against the order of learned CIT(Appeals)-31, Mumbai dated 29-05-2008.
3. The relevant facts of the case giving rise to these appeals are that the assessee is a Company incorporated in India. It is engaged in the business of production of films. The shooting of films are often held outside India for which payments are made in foreign exchange to various overseas services providers. During the year under consideration, such payments were made to five parties aggregating to Rs. 18,77,84,736/-. On verification, the AO noticed that the tax at source was not deducted by the assessee from the said payments as required by the provisions of section 195 of the Act. He, therefore, required the assessee to offer its explanation in the matter. In reply, it was submitted by the assessee that the said payments were made on account of shooting expenses which involved arrangement for transport, getting permission for shooting, hotel accommodation etc. It was contended that the said payments constituted business profits of the overseas companies and since they had no permanent establishment in India during the year under consideration, no tax was required to be deducted at source from the said payments as the business profits of the non resident companies was not chargeable to tax in India as per Article 7 of the relevant DTAAs. It was also contended on behalf of the assessee that in the services availed from the overseas companies, no element of technical services was involved. It was also contended that the amounts in question paid by the assessee to the overseas companies not being chargeable to tax in India, there was no requirement of making any application u/s 195(2) to the AO for availing any benefit or concession in the tax to be deducted at source.
4. The above submissions made on behalf of the assessee were not found acceptable by the AO. According to him, the assessee was liable to deduct tax at source from the impugned payments made to non residents as per the provisions of section 195(1) and if it wanted to come out of the said law on the ground that the said payments were chargeable to tax in India, the assessee ought to have made an application to the AO u/s 195(2). He held that it was thus not open to the assessee to make payments to the non residents by taking an unilateral decision that the said payments are not sums chargeable to tax in India without taking the concurrence of the AO as provided in section 195(2). The AO then proceeded to examine as to whether the said payments made by the assessee to the non residents were in the nature of fees for technical services as defined in Explanation 2 to section 9(1)(vii) and on such examination, he recorded the following findings in the assessment order :
“(i) Payments made to Hybrid Enterprises:
The assessee has made total payment of GBP 26,912 equivalent of Rs.17,67,927/- to the said non resident for shooting of their The film titled ‘Dhoom-2′. The copies of invoices raised by the remittee shows that the payment is for the life casting, make up and prosthetic design and creation for the film ‘Dhoom-2′ with Hritic Roshan and Aishwarya Rai which includes three prosthetic design and 10 toned down characters with wigs and teeth work. Thus, the services provided by Hybrid Enterprises are clearly in the nature of payments for ‘fees for technical services as envisaged in Section 9(1)(vii) r.w. Explanation-2.
(ii) Payments made to Grupa Filmova Sp. Zoo of Poland :
The assessee has made total payments as under:
| 03-11-2005 | 1,35,500 | Film ‘Fanna’ |
| 16-12-2005 | 13,65,000 | -do- |
| 06-01-2006 | 1,59,25,000 | -do- |
| 03-02-2006 | 1,45,20,000 | do- |
| 22-02-2006 | 73,70,748 | -do- |
| 23-02-2006 | 12,10,000 | -do- |
| 23-02-2006 | 21,95,000 | -do- |
| 22-03-2006 | 3,14,996 | -do- |
| 04-01-2006 | 1,57,50,000 | ‘Salam Namaste’ |
As per the copy of agreement furnished, it is seen that the said remittee is the provider and also engaged in production of films. As per Article 2 of the said agreement, the service provider has provided all technical and service elements for shooting of film in Poland. This included arranging of extras, arranging for the police and security, arranging for locations restoration, providing services of local line producer, location manager, contracting locations and obtaining all necessary licenses/permits etc. for the shooting of the films. Thus, the services provided are in the nature of technical services.
(iii) Payment made to Utopia Films:
The assessee has made total payments of Rs.3,28,06,004/- during Funancial Year 2005-06 to this remittee for production services for the film titled ‘Dhoom-2′ for shooting at Rio de Janwiro. The payments are made for arranging of extras, arranging for locations, providing all technical services for shooting of film and providing of services of local line producers, casting director etc. For shooting of film at Rio de Janeiro. As per the copy of agreement, the remittee was to provide production service with local crew, transport, working meals, locations, casting model/actors, equipment, including coordinating necessary licenses and permits as specified in the estimated budget. The services provided by the remittee are therefore, of the nature of fees for technical services as per detinition given in Explanation-2 to section 9(1)(vii) of the I.T. Act, 1961.
(iv) Payment made to OAKRIDGE Productions :
The assessee has made total payments of Rs.6,19,30,119/- for shooting of film titled ‘Niel & Nikki’ at Canada. The remittee company was to provide services similar to those mentioned above in connection with shooting of their film at Canada.
(v) Payments to M/s Ramar Media Pvt. Ltd.
The total payment of Rs.3,24,93,414/- for shooting of film titled ‘Salam Namaste’. The nature of service rendered but the remittee to the assessee company are similar to those mentioned in above mentioned cases.”
5. On the basis of above findings recorded by him, the AO came to the conclusion that the total payments amounting to Rs. 18,77,84,736/- made by the assessee were in the nature of fees for technical services as per the provisions of section 9(1)(vii) read with Explanation 2 thereto. He held that the concerned payees had provided technical services in connection with shooting of the films which in many cases had also made available the technical knowledge to the assessee company. Accordingly, he held that the payments made by the assessee to the non resident parties were in the nature of fees for technical services and represented income of the said parties chargeable to tax in India being income deemed to accrue or arise in India. He held that the assessee thus was liable to deduct tax at source from the said payments as per the provisions of section 195 and the assessee having failed to make such deduction, the AO treated it as the assessee in default in respect of tax of Rs. 5,26,73,614/- so deductible as per the provisions of section 201. He also held the assessee as liable to pay interest at the rate of 12% per annum in respect of the said tax payment as per the provisions of section 201(1A) by an order passed u/s 201 and 201(1A) of the Act on 15-03-2007.
6. Against the order of the AO passed u/s 201 and 201(1A), an appeal was preferred by the assessee before the learned CIT(Appeals). During the course of appellate proceedings before the learned CIT(Appeals), elaborate submissions were made on behalf of the assessee in respect of each and every payment made to non resident parties in the light of relevant agreements entered into with the said parties as well as the relevant articles of the DTAA to show that the payments made to the said parties were not in the nature of fees for technical services chargeable to tax in India but the same represented business profits of the said non resident parties which were not chargeable to tax in India. The submissions made by the assessee in this regard as discussed by the learned CIT(Appeals) in his impugned order are reproduced below :
“2.15 PARTY NO 1 : Payment to Hybrid Enterprises UK GBP 26912. The appellant explained that the service Provider M/s Hybrid is a company incorporated in UK and has provided the services of ‘make up’ for the main protagonists of the movie. The appellant stated that the service is provided during shoot outside India and the make up crew of the service provider has not come to India for providing any such services nor does the service provider have any permanent establishment (P.E.) in India. The appellant sated that there is nothing ‘technical’ in these services. The appellant furnished the agreement with the overseas service provider. The payment relates to the service of make up etc provided by the service provider. The appellant stated that such a payment does not tantamount to ‘technical services’. However the AO held that the services provided by Hybrid Enterprises are in nature of payments for fees for technical services as envisaged in section 9(1)(vii) r.w. Explanation 2.
2.16 The appellant stated that the party to whom the payments are made by the appellant is a resident of UK, hence entitled to the application of the relevant clauses of the Indo UK treaty. The appellant stated that the A.O. has not taken cognizance of the Double Taxation Avoidance Agreement with the India UK Treaty and has not examined the applicability thereof. The appellant stated that it is clear that if provisions of DTAA are beneficial to the assessee, the same should prevail over the provisions of I. T. Act.
2.17 The appellant referred to the India UK treaty where the ‘Fees for Technical Services’ is defined in Article 12 as under:
“4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or
5. The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid:
(a) for services that are ancillary and subsidiary, as well as inextricably and linked, to the sale of property, other than property described in paragraph 3(a) of this Article;
(e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention. “
2.18 The appellant argued that the ‘make up services’ are not included as a part of fees for technical services as per the Double Tax A voidance Agreement between India and UK Further, no technology is provided to the Appellant by the overseas party. In this regard the appellant also discussed whether the said services would qualify as Independent personal services under Article 15 of the India UK DTAA. The said article 15 states as follows:
Independent personal services – Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State. Such income may also be taxed in the other Contracting State if such services are performed in that other State and if:
(a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year .. or
(b) he, or the partnership, has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities ..
but in each case only so much of the income as is attributable to those services.
2. For the purposes of paragraph I of this Article an individual who is a member of a partnership shall be regarded as being present in the other State during days on which, although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State.
3. The term “professional services” includes independent, scientific, literary, artistic, educational or teaching activities as well as the independent activities or physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
2.19 The appellant stated that as per the above explanation, the fees paid to individual can at the most be treated as fees for independent personal services but cannot be held to be taxable in India as the conditions stipulated in the said article 15 are not fulfilled. Thus in view of the said circumstances the appellant stated that the AO has wrongly considered the services of make up as fees for Technical Services and has also erred in not considering the applicability of the India – U.K. DTAA
2.20 PARTY NO 2: Payment to Utopia Films Brazil of Rs. 3.28 Crores . The appellant stated that the payment was made for the services utilized in the shooting of the film ‘Dhoom 2′ which was shot in abroad. The appellant stated that payments are made for arranging extras, arranging for locations and other related activities.
2.21 The appellant produced before me the agreement with Mis Utopia films, the relevant clauses of which are reproduced below:-
1 Production Service Company will provide production service with local crew, transport, working meals, locations, casting, models/actors, equipment, including coordinating necessary licenses and permits
2. Production Service Company agrees to provide full local insurance for local crew/ talent/equipment /vehicle/ locations per .local laws and requirements.
2.22 The appellant submitted that the Movie Dhoom 2 was shot on the location of Brazil.
The appellant stated that the overseas company only provided the said team from India, the transport, meal, accommodation Insurance and other day to day requirement during the stay of 45 days for period of shooting as in order to successfully shoot it was necessary to have the support of a local company. The appellant argued that these service providers, provide services outside India, and do not come to India for the same nor do they have any permanent establishment ( P.E. ) in India. The AR argued that the payments made to overseas service providers for shooting films abroad are not in the nature of fees for technical services. The appellant stated that the overseas company has not rendered any technical or consultancy services and that none of the concerned payments could be treated as fees for technical services as they were payments for arranging for extras, arranging police security in foreign locations, arranging necessary permissions, arranging make up of stars etc. The appellant stated that since these are not in the nature of fees for technical services and since none of the recipients had a P.E. in India, the same are in the nature of ‘business profits’ and hence cannot be taxed in India. The AR thus argued that as a consequence, no tax was required to be deducted at source as no one from the ‘production service company’ M/s Utopia has visited India, or provided any services from overseas to India. M/s Utopia has provided only local service in their home country.
2.23 The appellant further argued that M/s Utopia is a resident of Brazil, due to which the relevant clauses of the Indo Brazil treaty would be applicable and that if provisions of DTAA are beneficial to the assessee, the same should prevail over the provisions of I.T. Act. The appellant stated that the DTAA with Brazil does not have a separate article for Fees for Technical Services; hence the activity of M/s Utopia would fall under the Article 7 relating to ‘Business Profit.’ Article 7 reads as follows
ARTICLE 7: Business profits -
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so ‘much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
2.24 On the other hand the AO came to the conclusion that as per the agreement, the services provided by the overseas company are nature of fees for technical services as per definition given in Explanation 2, to section 9(I)(vii). The Authorized Representative argued that these services do not amount to ‘Technical services’ as envisaged under Explanation 2, to section 9(1)(vii). The AR also argued that the overseas company UTOPIA Films, does not have any permanent establishment or offices in India, nor has the AO this fact. Hence this amount cannot be chargeable to tax in India under the head business profits also. Hence, as per the appellant the AO has wrongly considered the services of make up as fees for Technical Services and has also erred in ignoring the applicability of the India Brazil DTAA.
2.25 PARTY NO 3 : Payment to Oakbridge Production – Canada of Rs. 6.19 Crores The appellant stated that the payment was made for services required during the making of ‘Neal N Nikki’ film. The payments are made to the overseas service provider for arranging extras arranging for locations and other activities in the foreign location where the film was shot. The agreement with M/s Oakbridge Productions was for providing services of local crew, transport, working meals, locations, casting, models/actors, equipment, including coordination of necessary licenses and permits. The appellant stated that the services provided by Mis Oakbridge Productions are not at all in the nature of fees for technical services. The Movie Neal N Nikki was totally shot on the location of Canada . The AR argued that these service providers, provide services outside India, and also they do not have any permanent establishment (P.E.) in India. Moreover, the services are not rendered in India. Thus the AR argued that the remittances made to overseas service providers for shooting films abroad are not in the nature of ‘fees for included services’ as envisaged in Article 12 of the India Canada DTAA as the services so rendered do not ‘make available’ technical knowledge, experience, skill, know how or processes or consist of development and transfer of technical plan or technical design. Such services would thus fall under Article 7 ‘business profit’. The appellant stated that if provisions of DTAA are beneficial to the assessee, the same should prevail over the provisions of I. T. Act. Therefore, the appellant pleaded that none of the concerned payments could be treated as fees for technical services as they were payments for arranging for extras, arranging police security in foreign locations, arranging necessary permissions, arranging make up of stars etc. Since these are not in the nature of fees for technical services and since none of the recipients have a P.E. in India, the same are in the nature of ‘business profits’ and hence cannot be taxed in India. As a consequence, no tax was required to be deducted at source.
2.26 The appellant argued that that M/s Oakbridge Productions is a resident of Canada, due to which the relevant clauses of the India Canada treaty would be applicable. The DTAA with Canada has a separate article for Fees for Included Services’ which states as follows:
ARTICLE 12
4. For the purposes of this Article, ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding paragraph 4, ‘fees for included services’ does not include amount paid:
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 5(a);
Hence the AO has wrongly considered the services of make up as fees for Technical Services and has also erred in making no reference to India Canada DTAA .
2.27 On the other hand the AO came to the conclusion that as per the agreement, the services provided by the overseas party are in the nature of ‘fees for technical services’ as per definition given in Explanation 2, to section 9(1)(vii) (the AO mentioned that these services are similar to services provided by Utopia Films). However, the appellant argued that under no circumstances, it can be understood that these services make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. Hence these payments do not fall under the clause of ‘fees for included services’. The AR further argued that as M/s Oakbridge Productions do not have any permanent establishment (P.E.) in India hence Article 7 of the India Canada DTAA would not be applicable too. Hence the AR argued that since these payments are not in the nature of ‘fees for included services’ and since the same are in the nature of ‘business profits’; they cannot be taxed in India as none of the recipients have a P.E. in India as a consequence of which, no tax was required to be deducted at source.
2.28 PARTY NO 4 Payment to M/s Rowmar Media – Australia of Rs. 3.25 Crores.
The appellant stated that the total payment to Mis ROWMAR MEDIA is for services obtained from the said service provider during the shooting of the film ‘SALAAM NAMASTE’. The payments were made for arranging extras, arranging for locations and other incidental activities. The film was shot in Australia. The agreement with M/s ROWMAR MEDIA is for services identical to those provided by other overseas companies discussed in the preceding paras i.e. providing of food, transport, accommodation, and other extras required in the movie. Hence the service provided by the ROWMAR MEDIA is not at all in the nature of fees for technical services.
2.29 The appellant also stated that the DTAA with Australia does not have a separate article for fees for technical services, hence the activity of ‘Rowmar Media will fall under the Article 7 ‘business profit’ which reads as follows:
“1. The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State bill only so IIIl1ch of them as is attributable to :
(a) that permanent establishment, or
(b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on, through that permanent establishment. “
2.30 On the other hand the AO came to the conclusion that as per the agreement, the services provided by the overseas party are in the nature of fees for technical services as per definition given in Explanation 2, to section 9(1)(vii) (he mentioned that these services are similar to those mentioned in above mentioned cases). The appellant stated that none of the concerned payments could be treated as fees for technical services as they were payments for arranging for extras, arranging police security in foreign locations, arranging necessary permissions, arranging make up of stars etc. The appellant stated that the overseas company ROWMAR MEDIA does not have any permanent establishment or office in India; hence no amount can be chargeable to tax in India. As a consequence, no tax was required to be deducted at source. The appellant also stated that if provisions of DTAA are beneficial to the assessee, the same should prevail over the provisions of I.T. Act. The AR further argued that the AO has wrongly considered the service of make up as fees for Technical Services and has also erred in making no reference to India Australia DTAA.
2.31 PARTY NO.5 : Payment to Grupa Filmova – Polant Rs. 5.88 Crores
The appellant stated that the Film FANAA was produced in the Poland. The AR stated that M/s GRUPA FILMOWA being the service provider is a company engaged in business of production of films and Advertisement Films. The payments were made to Mis Grupa Filmova for arranging extras arranging for locations, providing of Police Security, obtaining all local necessary permission and other activities. These kind of services provided by the GRUPA FILMOWA is not at all in the nature of fe~s for technical services as alleged by AO.
2.32. The appellant also referred to the DTAA with the POLAND which has a separate article 13 for’ Fees for Technical Services; the same is reproduced as follows:
“ARTICLE 13
(a) 4.
4 The term “fees for technical services” as used in this article means payments of any amount to any person other than payments to an employee of a person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.
2.33 The appellant stated that the Second half of the Movie FANAA was extensively totally shot on the location of Poland. The overseas company only provided the team from India the transport, meal, accommodation insurance and other day to day requirement during the stay of shooting. The appellant further stated that these service providers, provide services outside India, and they do not have any permanent establishment (P.E.) in India and none of the services are rendered in India. The AR submitted that the remittances made to overseas service providers for shooting films abroad are not in the nature of fees for technical services. Since these services are not in the nature of fees for technical services and since such services would qualify for being ‘business profit’ they cannot be taxed in India as none of the recipients have a P.E. in India. As a consequence, no tax was required to be deducted at source. The appellant also stated that if provisions of India Poland DT AA are beneficial to the assessee, the same should prevail over the provisions of I. T. Act.
2.34 On the other hand the AO came to the conclusion that as per the agreement, the services provided by the overseas party are in the nature of fees for technical services. The appellant submitted that the AO has wrongly considered the services of make up as fees for Technical Services and has also erred in making no reference to INDIA POLAND DTAA.”
Based on the above submissions, it was contended on behalf of the assessee before the learned CIT(Appeals) that the impugned payments made by it to the non resident parties not being chargeable to tax in India, it was not required either to deduct tax at source from the said payments or to move an application u/s 195(2) before the AO seeking any concession in the matter of such TDS.
7. The learned CIT(Appeals) found merit in the submissions made on behalf of the assessee. According to him, the impugned payments made by the assessee to various service providers were nothing but for rendering services in order to make logistic arrangement to facilitate the assessee to shoot its films abroad. He noted from the relevant agreements between the assessee company and the said non residents that the service provided by them were of the following nature ;
(i) Arrangement for shooting locations,
(ii) obtaining necessary permits for the assessee
(iii) arrangement for shipping and custom clearances.
(iv) arranging for “extras”, shooting equipment, meals, transport etc.
(v) rendering help in obtaining VISAS.
(vi) arranging for make-up of casts and
(vii) coordinating necessary licenses.
8. The learned CIT(Appeals) held that the above services were in the nature of purely commercial services and the amounts paid for such services would fall in the category of business profit taxable in India only if the foreign service providers had a permanent establishment in India. On perusal of the relevant agreements entered into by the assessee with the service providers, he held that the service provided by them were in the form of making logistic arrangement for the assessee and there was no consultancy services that could be said to be provided by them to the assessee. He held that the said services were purely of commercial nature and could not be termed as technical services or managerial services. He held that the foreign services providers in the case of the assessee thus were remunerated for their efforts and time spent in making logistic arrangement for the assessee and they had nothing to do with rendering of any technical, managerial or consultancy services to the assessee. He held that the entire payments made by the assessee to the foreign service providers thus were not in the nature of fees for technical services within the meaning of Explanation 2 to section 9(1)(vii) and the same were not chargeable to tax in India. He held that the assessee, therefore, was neither required to make an application to the AO u/s 195(2) or to deduct tax at source from the payments made to the overseas service providers. Having held that the payments in question made by the assessee to the overseas service providers were not chargeable to tax in India as per the domestic law, the learned CIT(Appeals) treated the other issues raised by the assessee regarding applicability of DTAAs as academic and did not adjudicate upon the same. Aggrieved by the order of the learned CIT(Appeals), the Revenue and assessee both are in appeal before the Tribunal.
9. The common issue raised in ground No. 1 and 2 of the Revenue’s appeal is that the learned CIT(Appeals) erred in holding that the assessee was not required to make an application u/s 195(2). As agreed by the learned representatives of both the sides, this issue is squarely covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of GE India Technology Centre P. Ltd. v. CIT 327 ITR 456 wherein it was held that if the relevant payment does not contain the element of income taxable in India, the payer cannot be made liable to make an application u/s 195(2). Respectfully following this decision of Hon’ble Apex Court, we dismiss ground No. 1 and 2 of Revenue’s appeal.
10. In ground No. 3 to 6, the Revenue has challenged the action of the learned CIT(Appeals) in holding that the payments made by the assessee to the overseas service providers are not in the nature of “fees for technical services” chargeable to tax in India.
11. The learned DR, at the outset, invited our attention to page 21 of the AO’s order to show that the payments were made by the assessee to M/s Hybrid Enterprises, for casting, make up and prosthetic design. He contended that going by the nature of these services, it becomes clear that technical expertise was required to render the same. He submitted that similarly the payments were made by the assessee to M/s Grupa Filmvo S.P. 200 of Polond for arranging of Extras, arranging for the Police and securities, arranging for location, providing services of local line producer, location manager etc. He submitted that the element of managerial capacity was involved in the rendering of all these services and the service providers were required to use their managerial skills for providing the said services. He submitted that similarly for obtaining of the licenses and permits for the shooting of the films, knowledge of local law was required. Relying on the decision of Mumbai Bench of ITAT in the case of DDIT v. TISCO 34 SOT 83, he contended that legal services provided are held to be in the nature of fees for technical services by the Tribunal He also filed copies of invoices raised by the overseas service providers on the assessee and submitted that going by the description of services given therein, it cannot be said that the nature of services rendered by them was purely of making logistic arrangement. He contended that the payments made by the assessee to all the overseas service providers thus were in the nature of fees for technical services within the meaning of Explanation 2 to section 9(1)(vii) as rightly held by the AO and the same being chargeable to tax in India, the assessee was required to deduct tax at source from the said payments.
12. The learned counsel for the assessee, on the other hand, submitted that the payments in question were made by the assessee to the overseas service providers basically for providing services in connection with logistic arrangements made outside India. He submitted that for the purpose of shooting the films abroad, some local agency is required to help the production work. He invited our attention to the copy of one of the agreements entered into by the assessee placed at page No.1 to 7 of his paper book and submitted that going by the scope of services defined therein, it becomes clear that the services were rendered in connection with providing logistic and coordinating activities. He contended that rendering of such services at the most may include management skill which is entirely different from managerial services referred to in Explanation 2 to section 9(1)(vii). He submitted that the entire production unit including technicians go abroad for shooting of the films and along with main equipment and what they require and avail from the local companies there is the help for arranging and coordinating the logistic. He contended that the assessee is in the business of film production for last 50 years and has shot the films abroad on regular basis, but no such order u/s 201/201(1A) has been passed in its case for any other year. He also took us through the other agreements between the assessee company and overseas service providers to contend that the services rendered by the overseas service providers as specified therein are mainly in connection with logistic arrangements and they are not in the nature of technical, managerial or consultancy services within the meaning of Explanation 2 to section 9(1)(vii). He also contended that neither the AO nor the learned CIT(Appeals) has examined this issue with reference to the Double Tax Avoidance Agreement entered into by India with the respective countries. He submitted in this regard that the treaty between India and Australia do not have any technical service clause and in the absence of the same, the amount in question would be business profit which is not chargeable to tax in India in the hands of the overseas parties from the said countries without there being any PE of that parties in India.
13. In support of the case of the assessee on this issue, the learned counsel for the assessee relied on the decision of coordinate bench of this Tribunal in the case of URS-SCS (Asia) Ltd. v. ADIT 18 Taxmann.com. 302 (copy filed) and submitted that a similar issue involving similar facts and circumstances has been decided therein in favour of the assessee. He also relied on the decision of ITAT in the case of Dy. CIT v. Parasrampuria Synthetics 20 SOT 248 (Delhi) and in the case of Stock Engineers & Contractors 27 SOT 452 (Mum.).
14. We have considered the rival submissions and also perused the relevant material on record. It is observed that the assessee company in the present case is engaged in the business of production of films, the shooting of which is often done outside India. For shooting the films outside India, its production unit goes abroad and the services required in connection with the work of shooting abroad are availed from the various overseas service providers. During the year under consideration, the assessee had paid a total amount of Rs. 18,77,84,736/- to five such overseas service providers for the services availed in connection with the shooting of different films which mainly included arranging for extras, arranging for the security, arranging for locations, arranging for the accommodation of cast and crew, arranging for necessary permissions from local authorities, arranging for makeup of the stars, arranging for insurance cover etc. The AO held that these services provided by the concerned overseas service providers were in the nature of technical services and the payments made by the assessee for such services being in the nature of the fees for technical services within the meaning given in Explanation 2 to section 9(1)(vii), the amounts so paid were chargeable to tax in the hands of the concerned overseas service providers in India. He held that the assessee, therefore, was liable to deduct tax at source from the said payments as required by the provisions of section 195 and since the assessee had failed to do so, he held the assessee to be in default u/s 201 of the Act and also levied interest u/s 201(1A). A perusal of the assessment order passed by the AO, however, shows that he has not given any cogent reasons or basis in support of its conclusion that the services provided by the concerned overseas service providers were in the nature of fees for technical services.
15. The learned CIT(Appeals), on the other hand, has discussed the nature of services rendered by each of the five service providers in the light of agreements entered into by the assessee with them and finally summarized the nature of such services in paragraph No. 4.11 of his impugned order as under :
“On a careful consideration of the agreements entered into by the appellant with various service providers, and the material on record, the payments made by the appellant to various service providers is nothing but a payment for service for making logistics arrangement for the appellant to facilitate the shooting of films abroad. In all the t it is seen that the services to be provided by the service provider was of the following nature:
i. Arranging for shooting locations
ii. Obtaining necessary permits for the appellant.
iii. Arranging shipping & custom clearances
iv. Arranging for ‘extras’, shooting equipment, meals, transport etc. if required
v. Rendering help in obtaining visas
vi. Arranging for makeup of casts, if required
vii. Coordinating necessary licenses.
Keeping in view the nature of services rendered by the overseas service providers to the assessee as mentioned above, the learned CIT(Appeals) has come to a conclusion that they are purely commercial services falling in the category of logistic arrangement services, the payments for which would constitute business profits of the concerned overseas service providers. He held that since the said service providers had no permanent establishment in India during the year under consideration, the business profit was not taxable in India in their hands as per the relevant Article of applicable DTAAs.
16. It is observed that the learned CIT(Appeals) has also considered the issue relating to applicability of Explanation 2 to section 9(1)(vii) relied upon by the AO giving the definition of the term “fees for technical services” and held in this regard that the services rendered by the overseas providers in connection with logistic arrangements were not in the nature of managerial, technical or consultancy services. He held that the said services partook the character of commercial services and could not be termed as technical, managerial or consultancy services. After having perused the terms and conditions of the relevant agreements entered into by the assessee with the concerned service providers and keeping in view the nature of services rendered by the said providers to the assessee, we find ourselves in agreement with the conclusion arrived at by the learned CIT(Appeals).
17. Before us, the learned DR has not disputed the nature of services rendered by the concerned service providers to the assessee. He, however, has contended that for providing the said services, managerial skill was also required and even the knowledge of local law was also used by the concerned service provider. In our opinion, merely because some managerial skill is required to render the services, it would not make the services to be managerial services as envisaged in Explanation 2 to section 9(1)(vii). Similarly, the requirement of knowledge of local laws on the part of the service providers to render the services such as obtaining the permissions for shooting from the local authorities or for arranging insurance of the crew members and shooting equipments would not change the basic nature of the services which otherwise are commercial services as held by the learned CIT(Appeals).
18. In the case of UPS SCS (Asia Ltd.) (2012) 18 taxmann.com. 302 (Mum.), services rendered as per the terms of the relevant agreement were in the nature of freight and logistic services such as, transport, procurement, custom clearance, sorting, delivery, warehousing and picking up services outside India in respect of export consignment of M and the fees paid by M of such services was held to be taxable in India by the Revenue authorities as “fees for technical services” u/s 9(1)(vii) being in the nature of managerial, technical or consultancy services. The Tribunal, however, held that it was too much to categorize such restricted services as managerial services. It was also held by the Tribunal that there was nothing like giving any consultancy worth the name and, therefore, payment in lieu of freight and logistic services could not be ranked as consultancy services. In the case of Parasrampuria Synthetics Ltd. 20 SOT 248 cited by the learned counsel for the assessee, the assessee had made certain payment to contractor in respect of inspection and maintenance support, fabrication of water line, thermal insulation/erection etc. and it was held by the Tribunal that such payment could not be treated as fees for technical services merely because the services were rendered by using technical knowledge when technology or technical knowledge of the person rendering the services was not made available to the assessee. In the case of Tata Iron and Steel Co. Lt. 34 SOT 83 (Mum.), it was held by the Tribunal that the management commission, selling commission, underwriting commission etc. in respect of GDR issue was not income by way of fees for technical services because although the lead managers had rendered technical, managerial or consultancy services for bringing out the GDR issue, such services are not made available to the assessee inasmuch as it only derived the benefit of the technical services provided by the lead managers without getting any technical knowledge, experience or skill in its possession for use as its own. It was held that such commission in respect of GDR issue paid to the lead managers, therefore, was in the nature of business profit and since the non-resident lead manager was having no PE in India, the same was outside the ambit of tax in India as per Article 7 of DTAA.
19. Keeping in view the ratio of the various decisions of the coordinate benches of this Tribunal discussed above and having regard to the nature of the services rendered by the overseas service providers to the assessee as spelt out in the relevant agreements, we are of the view that the said services cannot be treated as technical services within the meaning given in Explanation 2 to section 9(1)(vii). We are in agreement with the learned CIT(Appeals) that the said services rendered outside India by the overseas service providers in connection with making logistic arrangement are in the nature of commercial services and the amount received by them from the assessee for such services constitutes their business profit which is not chargeable to tax in India in the absence of any PE in India of the said service providers. The assessee, therefore, was not liable to deduct tax at source from the said payments and the AO was not justified in treating the assessee as in default u/s 201. Ground No. 3 to 6 of the Revenue’s appeal are accordingly dismissed.
20. In its cross appeal for assessment year 2006-07, assessee has raised the following grounds :
1. On the facts and under the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in not adjudicating the ground if appeal no. 4 relating to applicability of provisions of Double Tax Avoidance Agreement for payments made to Non Resident companies.
2. On the facts and under the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in not adjudicating the issue relating to payments made to party of Polond of Rs.5.88 crores.
21. As regards ground No. 1, it is observed that the issue raised therein has become academic as a result of our decision rendered above while disposing of Revenue’s appeal upholding the decision of the learned CIT(Appeals) that the payment made by the assessee to overseas service providers are not chargeable to tax in India as per the domestic law. Ground No. 1 of the assessee’s appeal is accordingly dismissed.
22. As regards ground No.2, the learned counsel for the assessee has not pressed the same saying that the issue therein has become infructuous. Ground No. 2 of assessee’s appeal is accordingly dismissed as not pressed.
23. As regards Revenue’s appeal for assessment year 2005-06 being ITA No. 2113/Mum/2009 which is directed against the order of learned CIT(Appeals) Central-V, Mumbai dated 05-01-2009, it is observed that the solitary issue involved therein relating to taxability of payment made by the assessee to overseas service providers in India is similar to the one involved in Revenue’s appeal for assessment year 2006-07 which has been decided by us in the foregoing portion of this order. Following our decision rendered in assessment year 2006-07, we uphold the impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue and dismiss this appeal of the Revenue.
24. In the result, all the three appeals are dismissed.
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