The Tribunal held that the assessee incurred expenditure outside India for the purposes of earning income from source outside India; therefore, the amounts are not taxable as fees for technical services.

[Nissan Motors India Pvt. Ltd., ITAT Chennai order]

A. Facts of the case

The assessee is a company incorporated in India and is engaged in business of manufacturing and selling cars in India and abroad. During the proceedings for Assessment Year 2014-15, the Assessing Officer noted that assessee had paid certain sums in nature of reimbursement of warranty expenditure to its sister companies outside India for rendering warranty services through overseas dealers to its car buyers in that country. The assesse had also made payment towards purchase of software licenses to residents of Japan and UK. The Assessing Officer held that re-imbursement of warranty expenditure was fees for technical services and payment for software was royalty, taxable in India. The Assessing Officer further held that the assessee had not deducted tax under section 195 of the Income-tax Act, 1961 (“the Act”) and therefore, the said sums cannot be allowed as deduction under section 40(a)(ia) of the Act. In first appeal, the order of the Assessing Officer was upheld by the Commissioner of Incometax (Appeals). Aggrieved by the order of Commissioner of Income-tax (Appeals), the assessee filed appeal before the Tribunal.  

B. Contentions of the taxpayer

In respect of warranty expenses

  •  The amounts paid to the non-residents are without any margin and are based on actual cost incurred by the non-residents. There is no profit element or income accruing in the hands of the non-resident on the amount paid by the assessee. 
  • Mere repair work cannot be said to be in nature of technical services, and therefore, no liability to pay tax arises in India. 
  • The provisions of Section 9(1)(vii)(b) of the Act provide that where any resident pays fees in respect of services for the purpose of making or earning any income from any source outside India, the income arising from such payments to the recipient outside India will not be deemed to be income accruing or arising in India. 

In respect of software

  •  The payments made by the assessee towards purchase of software from non-residents do not envisage the transfer of any right in the nature of copyright or similar nature in relation to the software. The said payments are purely for purchase of copyrighted article. 
  • The income arising to non-residents towards sale of software to the assessee is in the nature of business income which would be liable to be taxed in India only if there exists a Permanent Establishment in India, and in the case of the assessee, no permanent establishment of non-residents who has supplied software exists in India. 

C. Contentions of the revenue authorities:

In respect of warranty expenses 

  • The reimbursement involving profit/income element is taxable in India and therefore, the assessee was required to deduct tax in India. 
  • The service of a car is a technical service. It requires the service personnel to be technically expert in the field of auto industry. Hence, the payment made by assessee to its sister concerns for offering technical services through the dealers is required to be treated as fees for technical services as per the Act and as per the Double Taxation Avoidance Agreement. 

In respect of software 

  •  The provisions of Clause (v) to Explanation 2 of Section 9(1)(vi) of the Act provide that payment of royalty is nothing but consideration for transfer of all or any rights (including granting of license) in respect of any copyright etc. 
  • Though, the copyright vests with the owner of the software, the license allows the assessee to use the software subject to certain terms and conditions, therefore the payment made towards purchase of software is royalty for usage of software and the income arising out of it is taxable in India.

D. Judgment of the Tribunal

  •  Payment for warranty services

The Tribunal held that Section 9(1)(vii)(b) provides that where the fees is payable by a resident in respect of services utilized in 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, the same is excluded from the deeming provision of section 9(1)(vii) of the Act. The Tribunal held that the assessee incurred expenditure outside India for the purpose of earning income from source outside India; therefore, the fees payable to the nonresidents in respect of warranty services is not taxable in India. 

  •  Payment for purchase of software

The Tribunal held the issue was covered by the judgment of the co-ordinate bench of the Tribunal in DCIT v. Atmel R&D India (P.) Limited wherein the Tribunal had held that the payment for purchase of a copyrighted software did not amount to royalty.

E. Our Comments

  • This order upholds the view that where fees is payable by a resident for purpose of earning income from any source outside India, the same is not taxable under the Act. 
  • However, the key issue which according to us still open to debate is whether the source of income is, in fact, outside India. 
  • The Madras High Court in Commissioner of Income-tax v. Aktiengesellschaft1 (“Aktiengesellschaft”) had held that royalty on export sales paid by a resident cannot be deemed to have accrued or arisen in India since the source of income was the sales outside India. In other words, the source depended on the situs of the customer. Contrary to this stand, the Delhi High Court in Commissioner of Income-tax v. Havells India Limited2 , after discussing Aktiengesellschaft, distinguished between source of income and source of receipt of income. The court held that the situs of the person making payment cannot be said to be source of income. In case of export, where the manufacturing activity is in India and the contract has been concluded in India, the source of income is in India. 
  • Interestingly, the above-mentioned judgments of the Madras High Court and Delhi High Court were not discussed by the Tribunal before arriving at its conclusion.