Akber Basha, A.M. :
These two appeals by the Revenue are directed against the common order passed by the CIT(A)-II, Hyderabad, dt. 5th Feb., 2007 for the asst. yrs. 2005-06 and 2006-07, and they arise out of the orders dt. 31st March, 2006 and 6th April, 2006 respectively passed by the AO under section 201(1) r/w section 195 and section 201(1A) of the IT Act, 1961 ('the Act'). Since common issues are involved, both these appeals are being disposed of by this common order for the sake of convenience.
2. Facts of the case in brief are that M/s IIC Systems (P) Ltd., is a company incorporated in India and it is a subsidiary of Indotronix International Corporation, USA. The assessee and IBM Global Services India (P) Ltd, Bangalore entered into a contract w.e.f. 1st Jan., 2004 for providing software personnel for the projects of IBM across the globe including USA. The assessee in turn has entered into a contract on 2nd Jan., 2004 with M/s Apollo Consulting Services Corporation, USA (ACSC) for producing (sic-procuring) software personnel in USA for the projects of IBM in USA. As per the arrangement, whenever IBM, Bangalore issued work authorization/purchase order, the assessee in turn issued a work order/purchase order on ACSC, USA who procured the required personnel and deployed them on the projects of IBM, USA. For the services rendered, ACSC used to raise an invoice on the assessee on monthly basis and in turn the assessee raised invoice on IBM. The payments due to ACSC, USA is remitted in US dollars. However, such remittances have been made without deduction of tax at source. The AO was of the view that since the remittances to ACSC were made for supply of software professiorials for executing the onsite work in USA in connection with the contract between the assessee and IBM Global Services (India) (P) Ltd., the amounts credited to the account of or remitted to ACSC, are in the nature of fees for technical services covered under section 9(l)( vii)(b) of the Act. Accordingly, the AO issued a show-cause notice to the assessee proposing to treat it as an 'assessee in default' for non-deduction of tax on the remittances amounting to Rs. 14,05,09,382 for assessment year 2005-06 and Rs. 14,22,41,612 for assessment year 2006-07. Not convinced with the objections of the assessee in response thereto, the AO held the view that the arrangement of the assessee with ACSC is not a simple arrangement for supply of personnel to execute the contracts of IBM in USA, since according to him the agreement by the assessee with IBM, placed heavy responsibilities on the assessee. According to the AO, income by way of fee for technical services shall be deemed to accrue or arise in India, if the payer is a resident, with the only exceptions being (a) the fees are payable in respect of services utilised in a business or profession carried on by the payer outside India or (b) the fees are payable for the purpose of making or earning any income from any source outside India. The AO held that the present case does not fit into either of the two exceptions since the fees paid by the assessee company was for earning income in India. Dealing with the contentions of the assessee basing on the Indo-US DTAA, the AO, though admitted that the recipient, i.e., ACSC, USA is entitled to be taxed either under IT Act or the Indo-US treaty whichever is beneficial to them, he did not accept the argument of the assessee that the payment made by the assessee was not covered either under para (a) or para (b) of art. 12 of DTAA. The AO also rejected the contention of the assessee that while making payment to the non-resident, it has complied with the procedure laid down in CBDT Circular No. 10 of 2002 [(2002) 177 CTR (St) 41], observing that the liability of the assessee company is not dependent on the assessment of the recipient and further that if the assessee company was of the view that the payments made to the non-resident are not taxable in India, it would have approached the Department under section 195(2) of the Act, and the assessee has not taken recourse to such action. The AO further concluded that the payments by the assessee company to ACSC, USA are covered by section 9(l)( vii)(b) of the Act, and at the same time, they also fall within the provisions of para 4(b) of article 12 of Indo-US DTAA. In view of the same, the AO held that the assessee was liable to deduct tax as per section 195 of the Act for the remittances made to ACSC, USA. He therefore, concluded that for the aforesaid default, the assessee was liable to be treated as an assessee in default as per section 201(1) in respect of tax which it has failed to deduct. Accordingly, a demand of Rs. 1,97,97,968 and Rs.' 2,23,07,041 was raised under section 201(1) for asst. yrs. 2005-06 and 2006-07 respectively. Similarly, demand of Rs. 30,47,003 and Rs. 14,91,755 under section 201 (1A) was raised for asst. yrs. 2005-06 and 2006-07 respectively, vide orders of the AO dt. 31st March, 2006 and dt. 6th April, 2006 respectively passed for those years.
3. On appeal, the CIT(A), after elaborate consideration of the matter concluded that the payments made by the assessee to ACSC, USA would not be chargeable to tax in India in view of the provisions of DTAA between India and USA, and consequently holding that the assessee company cannot be fastened with the liability for deduction of tax at source under section 195 of the Act, annulled the orders of the AO, and directed the demands raised under sections 201(1) and 201(1A) to be deleted.
4. Aggrieved by the order of the CIT(A), Revenue preferred the present appeals before us.
5. The learned Departmental Representative submitted that the remittances made by the assessee company to ACSC comes under the ambit of 'fees for included services' as defined in art. 12 of the Indo-US DTAA agreement. All the ingredients necessary for bringing the transactions within the scope of art. 12(4) were present. The CIT(A) simply ignored the billing procedure, which would prove that the remittances were not akin to recruitment fee. The software professionals deployed are required to develop software products which would become the property of the IBM, USA. Hence, the CIT(A) was not correct in holding that the condition regarding making available of technical knowledge, skill, experience etc . contained in para 4(b) of art. 12 of the DTAA was not satisfied. As per the remand report submitted by the AO dt. 20th Dec, 2006 to the CIT(A), the AO brought to his notice the extract of MoU between India and USA, but the same was not considered by the CIT(A). The CIT(A) heavily relied on the fact that the remittances were made on specified unit price, per hour, per man basis ignoring the fact that such payments can also fall within the scope of 'fee for included services'. It is a fact that a person acquiring the services shall also include his agent, nominee or transferee. The CIT(A) did not appreciate the fact that the IBM, USA would be in a position to apply the technology developed by the software professionals and also in possession of the software developed and thus the test of 'some sort of durability and permanency of the results of the rendering of services' mentioned in the case of Raymond Ltd. v . Dy. CIT [2003] 80 TTJ (Mumbai) 120 : [2003] 86 ITD 791 (Mumbai) are satisfied. The CIT(A) did not appreciate the fact that the IBM, USA would be in a position to apply the technology developed by the software professionals and therefore, the test mentioned in the case of McKinsey & Co., Inc. v. Asstt. Director of IT [2006] 99 TTJ (Mumbai) 857 : [2006] 6 SOT 186 (Mumbai) is satisfied. Referring to para 3.6 of the remand report by AO, it is, submitted that as per the agreement between the IIC and ACSC, USA, the ACSC is concerned with the services to be performed by the technical personnel supplied by it. The ultimate beneficiary of the technology transfer is immaterial since the person acquiring the service shall be deemed to include his agent, nominee or transferee. In the case under consideration, the IBM; USA is the ultimate transferee of the services rendered by the personnel of the Apollo, USA although the agreement for such services is. with the assessee company, It is also submitted that Mr. Babu Rao Mandava is the chairman for assessee and the President for ACSC. Referring the page No. 97 of the paper book filed by the assessee, it is submitted that the scope of work mentioned in the technical services agreement between IBM Global and the assessee includes software development. Referring to the appellate order of the first appellate authority dt. 27th Dec, 2007 passed in the case of ACSC, Mumbai for the assessment year 2004-05 which is placed at the pp. 116 to 121 in the paper book of the assessee, it is submitted that ACSC supplied the manpower to IBM India in USA in terms of the base agreement and as a sub-contractor of the assessee under the contractual arrangement arising out of the agreement between IBM and the assessee and agreement between the assessee and the ACSC. It is also submitted that the first appellate authority in that case observed that as per the scope of work between the IBM and the assessee herein, the assessee will provide software support development activities including software development, testing etc. He also produced a copy of a write-up downloaded from an internet website of the assessee company, to demonstrate that the assessee company's activities include software development. He also placed reliance on the decision of jurisdictional High Court in the case of Elkem Technology v . Dy. CIT [2001] 169 CTR (AP) 49 : [2001] 250 ITR 164 (AP) and the decision of the Hon'ble Authority for Advance-Rulings in AT & S India (P) Ltd., In re [2006] 287 ITR 421 (AAR). He also submitted that the CIT(A) was not correct in observing that the AO relied on the agreement between the assessee company and IBM, since according to him, the AO in fact has relied more on the agreement between the assessee and the ACSC. In any event, he submitted that the agreement between the assessee company and IBM and assessee company and ACSC should not be viewed in isolation, He therefore submitted that the impugned order of the CIT(A) should be set aside and the orders of the AO for both the years; should be restored.
6. The learned counsel for the assessee on the other hand, reiterating the contentions urged before the lower authorities, submitted that the assessee company in contract with IBM for providing software personnel, in turn, entered into contract with ACSC. Whenever IBM issues work orders when personnel are required, assessee in turn issues work orders on ACSC. The assessee company and ACSC raises bills on hourly basis for supplying personnel in terms of the respective contracts. The said services are akin to those of a recruitment agency and the AO simply relied on the agreement between the assessee and the IBM and not between the assessee and the ACSC. So as to fasten the TDS provisions to an assessee, what has to be seen is whether there is any element of technical services to be rendered by the assessee in terms of the agreement, and if there is no such element present, the TDS provisions are not attracted. The payments remitted to ACSC are on the basis of the agreement between the assessee and the ACSC and not on the basis of the agreement between the assessee and the IBM. While there is application of independent skill for selection of personnel by the ACSC, the same at the same time does not amount to making available the technology. The personnel selected for working on the sites become employees of the assessee since expenditure on salary are met by the assessee company, and in such circumstances, the services rendered by those employees become the services of the assessee to the clients of IBM and not the services of the ACSC to the assessee. The agreement between the assessee and the ACSC and agreement between the assessee and IBM do not define the product to be developed. The clause 12 of the agreements of the assessee company with ACSC/IBM refer to supply of personnel only. All the purchase order, work order, invoice, etc. 'indicate only supply of personnel. In support of this contention, he took us through the copies of the work order, invoice, purchase order, etc. placed in the paper book. The orders of the AO, he submitted, do not speak anything about the software developed and made available to the IBM. No technology or skill or design were made available by the ACSC or assessee company, so as to invoke art. 12(4)(b) of the DTAA. The services of the ACSC for which the payment has been made by the assessee company is only for the placement and recruitment services and not by way of fees for 'included services' falling under art. 12(4)(b ) of the DTAA. Hence payments made to ACSC are not chargeable in view of DTAA and consequently, the provisions of section 195 of the Act are not applicable. In this regard, he placed reliance on the following decisions :
(a) Asian Development Services v . CIT [1999] 239 ITR 713 (Ker);
(b)McKinsey & Co., Inc. v . Asstt. Director of IT (supra);
(c) Tekniskil (Sendirian) Berhard v . CIT [1996] 222 ITR 551 (AAR);
(d)C.E.S.C. Ltd. v . Dy. CIT [2003] 87 ITD 653 (Kol)(TM);
(e)NQA Quality Systems Registrar Ltd. v . Dy. CIT [2005] 2 SOT 249 (Delhi);
(e)National Organic Chemical Industries Ltd. v . Dy. CIT [2006] 5 SOT 317 (Mumbai).
7. We have considered the rival submissions arid perused the material available on record. There is no dispute with regard to the facts of the case and the only dispute involved in these matters relate to the nature of the payments made, so as to determine whether, the TDS provisions are attracted or not. Thus, the primary question that arises is whether the payments in question made by the assessee to the ACSC, were by way of fee for technical services or merely by way of payment for supply of personnel. The next question is whether the payments in question can be considered as fee for 'included service' or not. The ultimate question that arises is whether the payments in question are taxable as business profit in the hands of the recipient as per art. 7 of the DTAA between India and USA. Before we go into the main issue, we may note that the CIT(A) clearly held that the liability to deduct tax at source under section 195 of the Act is dependent upon the taxability of the income in the hands of the recipient. When the payment made by the, assessee company is not chargeable to tax as per the provisions of IT Act in the hands of the recipient, or as per the provisions of DTAA between India and USA, the question of liability to deduct tax does not arise. We are impliedly fortified in this behalf by the ratio of the decision of the apex Court in the case of Hindustan Coca Cola Beverage (P) Ltd. v. CIT [2007] 293 ITR 226 (SC), wherein it was held, that when the recipient has already paid the taxes, the provisions of section 201(1) of the Act are not attracted. That being so, as per the ratio of the said decision, when no tax is liable to be paid by the recipient, the, provisions of section 195 are not attracted and the assessee has no obligation to deduct tax at source: Explanation to section 9(1), which defines the scope of the term 'technical services' has provided for two exceptions. The first exception relates to the fees for technical services payable for services utilised in a business carried on by the payer outside India and the second exception relates to fees for technical services payable for earning any income from any source outside India. It is true, as observed by the CIT(A) that in the case under consideration the payer is a resident in India and the payment is being made in connection with earning of income by the assessee company from a source inside India and to this extent; the exceptions provided in section 9(1) do not apply to the case of the assessee., Since the payments are made by a person, who is a resident for the purposes of making or earning income from a source inside India, the remittances can come within the ambit of fee for technical services. However, in terms of DTAA between India and USA, it needs to be examined whether the said remittances are payments made by the assessee company to the ACSC falling within the definition of 'fee for included services' as per art. 12(4) of the DTAA, since the provisions of DTAA, as held by the apex Court in the cage of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), shall prevail over the provisions of the IT Act, to the extent the same are beneficial to the assessee. The CIT(A) after elaborate discussion with regard to the various aspects of the matter, in the light of the contentions of the assessee, came to the conclusion that so far as DTAA between India and USA is concerned, consultancy services which are not technical in nature, cannot be treated as 'fee for included services'. We also notice that the fact that in the instant case the agreement of the assessee with ACSC is only for manpower supply or supply of technical personnel and it is well accepted even by the AO in para 2 of the impugned orders passed under section 201(1) r/w section 195 of the Act. The DTAA between India and USA also clarifies that the provision of services may require technical input by a person providing the person (sic—service), which does not per se mean that technical knowledge or skill are made available to the person purchasing the service. Similarly, use of the product which embodies technology shall not per se be considered to make the technology available and rendering of the service must enable the payer to apply such technology. Moreover, even if there is a transfer of developed work, software etc., it is not the ACSC but the assessee who transfers the right. It appears that neither the assessee company nor the ACSC are engaged in computer programming activity, which is evident from paras 1 and 2 of the orders of the AO and even the developed work never belonged to the assessee company or the ACSC as referred by the AO in his orders. In the circumstances, as correctly held by the CIT(A), the question of treating the payments as 'fees for included service' would not arise at all. The orders of the AO fastening the liability to TDS on the assessee are based on the agreement between the assessee and the IBM in order to determine the nature of the services rendered by the ACSC to the assessee. We agree with the CIT(A) that what was required to be looked into is whether there is an element of technical services in the agreement between the assessee and the ACSC, which gives rise to income that can be brought to tax in India. It is because the payments remitted by the assessee to ACSC flows from the agreement between the assessee and ACSC and not from the agreement between the assessee and IBM. In our considered view, the primary services rendered by the ACSC to the assessee is akin to recruitment and placement service rather than making available any technology, plan, design, etc. One important aspect we noticed is that the final product or result on account of deployment of technical personnel by the assessee through the ACSC is not predetermined by the ACSC or the assessee. The Department has not brought anything on record to show that any product was developed by the assessee company and transferred to IBM. No specific project or product is defined before hand, for which services of personnel have been provided by the assessee through ACSC. The CIT(A) has also gone through a number of copies of the purchase order, work order, invoice etc, before, coming to the conclusion that what is ordered through the purchase order is certain amount of manpower at a specified unit price per hour. No detail as to what work is to be done is mentioned even in the work order issued by the assessee. Thus, neither the agreement nor the invoice refer to any technical services rendered or any product or software developed for IBM. All the agreements, invoices and related documents produced before us lead to the fact that the payments have been made only for supply of manpower for certain amount of hours and nothing more. Since there is no technology, skill, experience, technical plan, design, etc . had been made available either by the assessee. or the ACSC, as held by the CIT(A), invoking the provisions of art. 12(4)(b) of the DTAA for treating the payments as chargeable to tax in India, is not justified. In our view, the CIT(A) was justified in holding that the services rendered by the ACSC for which remittances in question have been made by the assessee are akin to those of a recruitment or placement agency, and would not come within the purview of 'fee for inducted services' within the meaning of art. 12(4)(b) of the DTAA between India and USA. Even if the payments would constitute fees for technical services under section 9(l)( vii) of the IT Act, in view of section 90(2) of the Act, the Indian company has option to be governed by the provisions of the tax treaty, if the same are more beneficial to it. Accordingly, the payments so made by the assessee company to ACSC will not be chargeable to tax in India, in view of the provisions of the DTAA between India and USA. We are also Supported in this behalf by the view taken by the Department, vide order of the CIT(A)-XXXI, Mumbai dt. 27th Dec, 2007, a copy of which is filed by the assessee at pp. 116 to 141 of the paper book with regard to the taxability of similar receipts in the case of the recipient involved in these very matters, viz. ACSC for the asst: yr. 2004-05. In the absence of any appeal preferred by the Department, that view taken by the CIT(A) in that order appears to have become final. Even though the learned Departmental Representative tried to bring forth certain points of distinctions between the payments made by the assessee in the present case and the receipts considered for the assessment year 2004-05 in the above case of ACSC by referring to the relevant agreements, we find no merit in the arguments of the learned Departmental Representative based on the same. Further, we are in agreement with the elaborate reasoning given by the CIT(A) in the impugned order, and consequently we find no justification to interfere with the same. As for the case law relied on by the learned Departmental Representative, we find that the same, is clearly distinguishable in as much as in the present case the remittances made are purely for supply of manpower since the services rendered by the ACSC are akin to those of a recruitment or placement agency, and there is no involvement of any technical services. For this very reason, we find that the other arguments advanced by the learned Departmental Representative, like a common person, Baburao Mandava, being the President for ACSC and the chairman of the assessee, and reliance on the write-up from the internet website and ruling of the AAR, are devoid of any merit. In this view of the matter, we uphold the impugned order of the CIT(A) and reject the grounds of the Revenue in both the appeals.
8. In the result, both the appeals of the Revenue are dismissed.