ITO Vs Macrotech Developer Ltd. (ITAT Mumbai)
Introduction: The intricacies of taxation in the realm of international transactions have become increasingly complex, often requiring careful examination of applicable laws and double taxation avoidance agreements (DTAA). The recent case of ITO vs. Macrotech Developer Ltd. before the Income Tax Appellate Tribunal (ITAT) Mumbai sheds light on the nuanced tax treatment of payments made by the assessee for architectural design consultancy, brokerage services, and reimbursement of expenses. This comprehensive analysis aims to delve into the specifics of the case, exploring the legal framework, arguments presented, and the tribunal’s reasoning.
Background: Macrotech Developer Ltd., a prominent player in the real estate sector engaged in land development and construction, found itself at the center of a tax dispute with the Income Tax Officer (ITO). The dispute arose from the ITO’s order dated July 31, 2018, wherein a demand of Rs. 1,29,23,408 under section 201(1) and interest of Rs. 78,10,519 under section 201(1A) of the Income Tax Act (ITA) was raised. The basis for this demand was the alleged failure of the assessee to withhold tax under section 195 of the ITA concerning payments falling into three categories: Architectural Consultancy and other services, Brokerage payment, and reimbursement of expenses.
Grounds of Appeal:
1. Architectural Design Consultancy Services: The first ground of appeal revolved around payments made to Woha Design Pvt. Ltd. in Singapore for architectural design services. The assessee contended that these payments were not taxable in the hands of the foreign recipient under the provisions of the ITA and the India-Singapore DTAA.
The ITAT closely examined the nature of the services provided by Woha Design Pvt. Ltd. and the relevant clauses of Article 12 (Royalties and Fees for Technical Services) of the India-Singapore DTAA. The tribunal emphasized the ‘make available’ criteria, stating that for services to be categorized as Fees for Technical Services (FTS), the service provider must make available technical knowledge, skill, or processes enabling the recipient to apply the technology independently.
Relying on precedent, including the case of Gera Development (P) Ltd. vs. DCIT, the ITAT concluded that the AO failed to demonstrate how Woha Design Pvt. Ltd. made available any technical knowledge or skill to the assessee. Consequently, the tribunal upheld the findings of the CIT(A) and rejected the levy of demand under section 201(1) and interest under section 201(1A).
2. Brokerage for Sale of Projects: The second ground of appeal dealt with payments made to non-resident brokers for the sale of flats in India. The central argument was that the entire brokerage operation occurred outside India, and payments were made to foreign parties in their overseas bank accounts.
The ITAT scrutinized the applicability of relevant sections of the ITA and the DTAA. It emphasized the lack of evidence presented by the AO to demonstrate how the provisions of Section 5(2) and Section 9(1)(i) of the Act were attracted in the case of the assessee. Additionally, the ‘make available’ clause of the DTAA was discussed in the context of brokerage services.
Citing the decision in CIT vs. Toshoku Ltd. and other relevant judicial pronouncements, the ITAT dismissed the appeal, asserting that the brokerage payments were not taxable in India.
3. Reimbursement of Expenses: The third ground of appeal focused on the reimbursement of expenses incurred by foreign parties. The expenses included travel, meal, hotel stay, and other miscellaneous expenses. The AO argued that these reimbursements should be treated as Fees for Technical Services (FTS) taxable under both the ITA and the DTAA.
The CIT(A) had held that the taxability of reimbursement would depend on the nature of the original transaction. Since FTS, brokerage, and purchase were not taxable in India, no Tax Deducted at Source (TDS) was deductible on reimbursement.
The ITAT, in alignment with the CIT(A) and citing judicial precedents, endorsed the view that reimbursement of expenses takes on the nature of the original transaction. In this case, where the original transactions were not taxable, the ITAT dismissed the appeal, reinforcing that no TDS was deductible on reimbursements.
Legal Framework:
1. Double Tax Avoidance Agreements (DTAA): The case heavily relied on the provisions of the India-Singapore DTAA and the India-UK DTAA. The tribunals examined the relevant clauses related to Royalties and Fees for Technical Services to determine the taxability of payments made for architectural design consultancy services.
2. Section 5(2) and Section 9(1)(i) of the ITA: The ITAT scrutinized these sections to ascertain whether the provisions of the ITA were applicable in the case of the assessee. The AO was required to establish how these sections were attracted, particularly in relation to the payments for brokerage services.
3. Section 195 of the ITA: The provision mandates the deduction of tax at source on payments made to non-residents. The case involved a careful examination of whether the reimbursement of expenses fell within the purview of this section.
Arguments and Analysis:
1. Architectural Design Consultancy Services: The primary contention was that the services provided by Woha Design Pvt. Ltd. did not meet the ‘make available’ criteria as per the India-Singapore DTAA. The tribunal emphasized that the AO failed to demonstrate how Woha Design Pvt. Ltd. made available any technical knowledge or skill to the assessee independently. The precedent in Gera Development (P) Ltd. vs. DCIT was instrumental in establishing that the mere passing of project-specific architectural drawings did not constitute ‘making available’ technical knowledge.
2. Brokerage for Sale of Projects: The central argument here was that the entire brokerage operation occurred outside India, and payments were made to foreign parties in their overseas bank accounts. The ITAT stressed the lack of evidence presented by the AO to establish the applicability of Sections 5(2) and 9(1)(i) of the ITA. Additionally, the tribunal evaluated the ‘make available’ clause in the context of brokerage services and concluded that no technical knowledge or skill was made available to the assessee.
3. Reimbursement of Expenses: The dispute over reimbursement of expenses hinged on whether these reimbursements were in the nature of Fees for Technical Services (FTS). The CIT(A) had held that the taxability of reimbursement depended on the nature of the original transaction. The ITAT concurred, stating that reimbursement takes on the color of the original transaction and, in this case, since the original transactions were not taxable, no TDS was deductible on reimbursements.
Judicial Precedents:
The ITAT referred to several judicial precedents to substantiate its findings:
1. Gera Development (P) Ltd. vs. DCIT: This case established that payments made by an Indian company to a U.S. company for architectural design and drawings could not be deemed as Fees for Technical Services. Mere passing of project-specific architectural drawings without making available technical knowledge did not attract TDS.
2. CIT vs. Toshoku Ltd.: The Supreme Court decision in this case was cited to support the argument that amounts earned for services rendered outside India could not be deemed to be incomes that had either accrued or arisen in India.
3. GE India Technology Centre Private Ltd vs CIT: This case, cited by the assessee, held that reimbursement of expenses for air tickets could not be treated as part of the taxable income of the assessee.
4. DIT (IT)-I vs AP Moller Maersk A S: The Supreme Court, in this case, opined that the communication system set up by the assessee did not constitute technical services. The expenses reimbursed to agents were considered in the nature of a cost-sharing arrangement.
Conclusion:
The ITAT’s detailed analysis and meticulous examination of the provisions of the ITA and the relevant DTAA in the case of ITO vs. Macrotech Developer Ltd. provide valuable insights into the complexities of international taxation. The consistent emphasis on the ‘make available’ criteria for the taxation of Fees for Technical Services, coupled with a nuanced understanding of reimbursement of expenses, reinforces the importance of considering the specifics of each transaction.
The reliance on judicial precedents, particularly those emphasizing that reimbursement takes on the nature of the original transaction, adds clarity to the tax treatment of such payments. This case sets a precedent for real estate developers and businesses engaged in international transactions, highlighting the need for a thorough understanding of the applicable tax laws and treaties to avoid unwarranted tax liabilities. The ITAT’s dismissal of the revenue’s appeals underscores the significance of a well-founded legal argument backed by sound interpretation of the law and relevant precedents.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
All these 5 appeals filed by the revenue and 4 Cross Objection filed by the assesse are directed against the different orders of ld. CIT(A)-57, Mumbai. Since, similar issues and identical facts are involved in these appeals except the variation in the amount, therefore for the sake of convenience all these 5 appeals are adjudicating together by taking ITA No.497/Mum/2022 as a lead case and its finding will be applied as mutatis mutandis to the other 4 appeals.
ITA No. 497/Mum/2022
“1. Whether, on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in treating the remittance made to various non resident entities towards Architectural Design consultancy services, Wind Engineering Consultancy services and Landscape Architectural Consultancy Services as consultancy services when the services provided are make available in nature and come in the purview of Fees for Technical Services as per India Singapore DTAA.
2. Whether, on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in treating the remittance made to LDL UK Ltd. towards marketing services for projects of the assessee company as consultancy services when the services provided come in purview of Fees for Technical Services as per India UK DTAA.”
3. Whether, on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in treating the remittance made to various non resident entities towards. brokerage for sale of projects in India as consultancy services ignoring the fact that the income of the non resident has accrued in India.”
4. Whether, on the fact and circumstances of the case and in law, the Ld. CIT(A) erred in treating the remittance made to various non resident entities for reimbursement of expenses as consultancy services when reimbursement were for services rendered by vendors whose services were in the nature of Fees for Technical Services.”
5. The Appellant prays that the order of the ld CIT(A) on the above ground(s) be set aside and that of the Assessing Officer be restored.
6. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
2. Fact in brief is that assesse is engaged in the business of land development and construction of real estate properties. The AO passed an order dated 31.07.2018 raising demand of Rs.1,29,23,408/- u/s 201(1) and interest of Rs.78, 10,519/- u/s 201(1A) of the Act on account of not withholding tax u/s 195 of the Act pertaining to payment made under the following categories:-
(i) Architectural Consultancy and payment for other services.
(ii) Brokerage payment.
(iii) reimbursement of expenses.
3. During the course of assessment the assesse submitted that such payments were not taxable in the hands of foreign recipients as per the provision of the Act r.w. the provisions of applicable Double Tax Avoidance Agreement (DTAA).
Ground No. 1 & 2: Levy of demand u/s 201/201A of foreign payment towards architectural design consultancy services and other services:
4. During the year under consideration the assesse has made the following remittances to the foreign vendors:
