Income Tax Appellate Tribunal - Bangalore
Jindal Tractebal Power Company Limited vs Dy. Commissioner Of Income Tax (Tds) on 10 June, 2005
Equivalent citations: [2007]106ITD227(BANG), [2007]291ITR125(BANG), (2007)106TTJ(BANG)1011
ORDER
Deepak R. Shah, Accountant Member
1. All these appeals by assesses are directed against the orders of learned Commissioner of Income Tax (Appeals)-IV, Bangalore Dt.21.1.1999 & 27.1.1999.
2. The appeals before learned CIT(A) were filed against order under Section 201(1) of the Income Tax Act, 1961 (the Act) as rectified under Section 154 for Asst. Years 1996-97 and 1997-98. The appeal for Asst. Year 1998-99 is arising pursuant to suo motto application made by the assessee under Section 248 of the Act as the Assessing Officer has directed the assessee to deduct tax at source under Section 195 which the assessee has deducted but still denying its liability to deduct the tax under Section 195. The A.O. and learned CIT(A) held that the payment made by the assessee to M/s. Raytheon-Ebasco Overseas Limited (REOL), USA is towards fees for technical services. These fees are chargeable to tax In India under Section 9(1)(vii) of the Act. Accordingly the assessee was required to deduct tax as required under Section 195 of the Act. The assessee having failed to deduct such tax under Section 195 was treated as the assessee in default under Section 201 of the Act.
3. Facts:
The appellant is in the process of setting up a power plant at Toranagallu, Bellary District, Karnataka. The appellant entered into an agreement dt.20.9.95 with REOL, a company incorporated in USA for setting up the said power plant. The agreement provided thus:
Whereas the Employer (Jindal Tractebel Power Company Limited - JTPCL) requires that certain Scope of Supply should be provided and executed by the Contractor (Raytheon-Ebasco Overseas Limited - REOL) namely offshore equipment supply and related services as more particularly described in Schedule 3 setting out the Scope of Supply and has appointed to act as the Engineer Tata Consulting Engineers for the purposes thereof and has accepted a Tender by the Contractor for the provision and execution of such Scope of Supply in the fixed lump sum amount (which shall not be subject to any adjustment (except in accordance with the terms of the contract) of US $ 77,395,000 (hereinafter called 'the Contract Price') Schedule 3 - Describing the scope of supply provides as under:
1. Project Management
2. Project Support Services including, but not limited to procement, cost/scheduling, quality assurance and start-op support.
3. Project Engineering (conceptual). Engineering Management.
4. Supply of Mechanical equipment including, but not limited to coal conveyor, traveling tripper, metal detector, etc
5. Supply of Electrical Equipment including, but not limited to diesel generators, 415 V, Switchgear. etc
6. Supply of I & C equipment including, but not limited to distributed controls, CRTs, etc
7. Supply of Civil/Building equipment and miscellaneous equipment including, but not limited to Elevator. Cranes and hoists, etc
8. Project insurance requirements.
9. Scope of supply includes start-up, essential and recommended spare parts, ocean freight and export services.
The total consideration of U.S. $ 77.395 million was bifurcated by the assessee as under:
a) Supply of Equipment and Essential Spares : US $ 26.612,342
b) Technical Services : US $ 28,270.000
c) Start-up Services A Turnkey Responsibility : US $ 22,512,658 This was subsequently reduced to U.S. $ 58 million. For Asst. Year 1996-97, the A.O. found that the amount credited/paid towards technical services and start up services amounted to Rs.l0,30,71.531. The tax liability thereon @ 20% was determined as Rs. 2,06,14,308. After reducing the tax remitted of Rs. 20,18,071, a demand of Rs. 1.85,96,235 was raised. For Asst. Year 1997-98, the assessee credited/paid a sum of Rs. 99,82,22,212 towards technical services and start up services. The A.O. determined the liability of TDS (c) 15% being a sum of Rs. 14.98,95,332. For Assi. year 1998-99. the assessee deducted a sum of Rs. 19,69,45,279 as advised by the Assessing Officer while remitting the payment to REOL Hence the A.O. has not treated the assessee as the assessee in default under Section 201(1) of the Act. However the assessee subsequently suo motto filed appeal under Section 248 to the Appellate Commissioner to hold that the assessee was not required to deduct tax at source and claim the refund of the tax deducted and paid to the Government.
4. Learned CIT(A) considered the relevant orders of Assessing Officer as well as the submission by learned Counsel for assessee. She also perused the agreement between the assesses and REOL She concluded that since the services have been utilized for a business situated in India, the payment of technical services is taxable in India as provided under Section 9(1)(vii) of the Act. Section 9(1)(vii) will apply regardless of the fact that there is no business connection between the non-resident and Indian Enterprise. She also perused the provision of Double Tax Avoidance Agreement (DTAA) with USA. During the appellate proceedings, learned CIT(A) asked certain details relating to project cost, cost of machinery, cost of erection work, cost of supervision charges and amount of customs duty paid The appellant filed reply Dt.l8.1.1999. Learned CIT(A) observed that the questions were answered in vague manner. Learned CIT(A) in this regard observed thus:
The appellant filed a reply dt.18.1.1999 vide which each of the questions were answered in a vague manner. The earlier cost of the project vis-a-vis REOL amounted to US $ 77,395,000. However, this amount was revised on a latter date to US $ 58,458,000. With regard to the total value of equipment supplied by the REOL the same was initially mentioned to be US $ 26,612,342. However, it is stated that the same has been revised to US $ 27,03,464. With regard to the total cost of erection work and the total cost of supervision charges the appellant has conveniently stated that the Contract entered into with REOL being composite innature. It would not be possible for JTPCL to segregate these items. With regard to the customs duties which have been paid on imported equipment supplied by REOL it is stated that till date equipment value at US $ 24,598,084 has arrived in India on which customs duties have been paid.
Thus the appellant cannot take the stand that the technical services were tendered from outside India because in such a case it would mean that these services related to the supply of equipment, machinery and spares. If this was the situation the appellant/REOL would have had to pay customs duty on the entire amount envisaged in the Contract. The rate of customs duty is higher than the rate of income tax. Therefore, it is clear as to why the appellant have avoided taking this and paying customs duty on the entire Contract value. This is because they have admitted that they have paid customs duties only on US $ 24,598.034. Thus, while paying Customs Duties the appellant have taken one stand to avoid payment, whereas in the I.T. proceedings they are trying to link the technical services with supply of equipment.
Accordingly learned CIT(A) concluded that as per assessee's own admission they have paid fees for technical services. She held that Articles 12(1), 12(2) and 12(4) of the DTAA between India and USA be applied. As per Article 12(4)(b), the amount paid by assessee is chargeable to tax in India. The assessee is in further appeal before us.
5. Learned senior counsel Shri Joseph Velapalli submitted that provision of Section 195 can be invoked only when the amount paid to the nonresident is chargeable to tax under the I.T. Act In India. The chargeability of the sum is stated to be under Section 9(1)(vii) of the Act. He submitted that the words 'fees for technical services" are defined in Explanation 2 in Section 9(1)(vii). As per said section fees for technical services will not include consideration for any construction, assembly, mining or like projects undertaken by the recipients. Thus though the amount paid is 'fees for technical services' the same is outside the scope of Explanation 2 to Section 9(1)(vii). For this proposition he relied upon the following decisions:
i) ITO v. National Mineral Development Corporation 44 TTJ 8
ii) CIT v. NLC 243 ITR 459
iii) CIT v. Mitsui Engineering 238 ITR 248
iv) CIT v. Sundwiger Emfg & Co. and Ors. 262 ITR 110(mad)
v) CIT v. Energomach Exports 232 ITR 448 (AP).
5.1 Shri Velapaili further submitted that even if the amount is treated as chargeable to tax in India under Section 9(1)(vii), as per provision of DTAA between India and USA, the amount is not chargeable to tax in India. If the amount under DTAA is not chargeable to tax in India, the provision of DTAA will override the provision of the Income Tax Act. Hence the assesses is not required to deduct tax under REOL For this proposition he relied upon the following decisions:
i) Union of India v. Azadi Bachao Andolan 263 ITR 706 (SC)
ii) CIT v. VAL Kulandagan Chettiar (6) SCC 235.
He also relied upon the following decisions for proposition that the fees paid by the assessee to REOL is not chargeable to tax in India and accordingly no TDS was required to be deducted.
i) Deputy Commissioner of Income-tax v. T.T.C. Limited 76 TTJ 323(Col)
ii) Pro-quip Corporation v. CIT 255 ITR 354 AAR
iii) Lucent Technologies Hindustan Ltd. v. ITO 82 TTJ 163
iv) Andrew Yule and Co. Ltd v. CIT 207 ITR 899 (Cal) 5.2 Shri Velapalil thereafter submitted that even if the amount is treated as "fees for included services as per Article 12(4) of DTAA, as per Article 12(5), the fee for services that ore ancillary and subsidiary as well as inextrricable essentially linked to the sale of property, such fees are not to be treated as fees for included services under Article 12(4)." The assessee had supplied the equipments and the services rendered are inextricably and essentially linked to the sale of this machinery and hence the same are not to be considered as 'fees for included services' under Article 12(4) of the Double Taxation Avoidance Agreement.
6. Learned special counsel for revenue Sri E. R. Indrakumar strongly supported the orders of learned CIT(A). He invited our attention to order under Section 201 for Asst. Year 1996-97. From this order it is seen that the assessee at first instance deducted the tax. However, the tax was not deducted on the entire amount. Thus it is not correct on the part of assessee to say that tax is not deductible under Section 195. For Asst. Year 1997-98, it was found that the assessee has credited the sum payable to REOL towards technical services. Only during survey conducted at the premises of assessee on 17.12.1997, it was found that the tax was not deducted. Thus though the assessee was having knowledge of relevant provision of TDS yet failed to deduct the tax at source. This is evident even from the correspondence between the assessee and the REOL Dt.29.7.96 placed at page Nos. 4 6 5 of the paper book filed by the revenue. He invited our attention to the approval granted by Reserve Bank of India (RBI) for engagement of foreign technical services. The RBI granted approval by its letter dt.27.3.96 in following terms:
Approval for engagement of foreign technical Services.
1. With reference to you letter No. Nil dt. 9thOctober, 1995, we advise that we have no objection to your engaging the services of technicians from M/s. Raytheon Ebasco Overseas Ltd., USA for a period from 20.9.95 to 20.7.98 on the terms advised to us provided they come to India on valid employment/business/entry visa/self deputed to India.
2. Please note that our approval for meeting the expenses should not be construed as approval for tax exemption for which purpose if required, you may kindly approach the concerned authorities.
3. Please arrange to deposit with RBI or SBI 5% csss under the Head of Account "0045-Other Taxes and Duties on Commodities and Services - 198 - Receipt under Research and Development Cess Act, 1986" on ail payments made in connection with the deputation of technical personnel to India, including payments made locally in Indian Rupees towards their passage fare, local living expenses etc. as per Research and Development Cess Act, 1986. The provision would be applicable if foreign technicians ore deputed to India.
4. This approval is not valid if the foreign national mentioned above come to India without valid employment/business/entry visa(supra) You are advised to approach Ministry of Home Affairs for clearance if the foreign nationals stay in India exceeds three months.
5. We are agreeable to your paying the total technical/project management, etc service charges of U5$ 282,70,000 as per the terms of contract subject to taxes. You may approach us for remittance through Authorised Dealer with necessary documents viz. original approval, original invoice duly accepted and approved for payment, NOC from Income Tax Authorities, A-2 Form in duplicate and certificate from Authorised Dealers regarding visa, passport details, nature, purpose and duration of the foreign nationals stay in India, deputed to India.
(emphasis supplied)
6. You are further advised to incur airfare/local living expenses in respect of the foreign nationals in Indian Rupees only.
7. You are also advised to ensure compliance of conditions stipulated vide Government of India, Ministry of Industry, Department of Industrial Development, Secretariat for Industrial Approvals letter No. FC(II) 721/94/948(94) dt.5th January, 1995.
From the aforesaid letter also it is clear that the payment was made for availing the technical services of the foreign expert for proposed power plant. From the said letter also it is clear that the services of technical firm are provided in India. Even in the letter of assessee dt.29.7.96 addressed to REOL, M/s. REOL has also mentioned part of the payment is not linked to the supply of machinery. The relevant portion of said letter by appellant is extracted herein:
Dear Mr. Harbert Lee, Sub : Withholding tax and payments to REOL Ref : Your letter TPP-RE/JT-0008 dated July 8,1996.
With reference to the above, our observations are as follows:
Your contention that the rate of withholding tax is 15% and that the same is applicable only for "included services not inextricably linked to the supply of equipments" appears to be correct. However, it is subject to confirmation from the Indian Income-Tax authorities.
As an enclosure to your letter No.TPP-RB/JT-1261 dt. June 5, 1996 you had furnished a list of services identifying items not inextricably linked to the supply of equipments, totaling to US $ 4,721,132. We have not yet received any confirmation from TCE about the correctness and completeness of this list.
You must have received a copy of RBI's letter No. EC.BT.PERTAlN/005/02.02/J-125/95-96 dt. 27th March, 1996 which stipulates the conditions and procedure, for making payment of US $ 28.270,000 to REOL for the services. As and when payment is to be released, we will have to approach RBI for approval with the documents listed in the RSI's letter dt.27.3.96. You may refer to the RBI's letter and ensure that all the documents are made available to us along with your monthly bills, so that there mil be no delay in obtaining RBI's approval.
As can be seen from RBI's letter dt. 27th March, 1996, one of the pre-conditions for RBI approval is NOC from Income tax authorities. The Income tax authorities will issue HOC after being satisfied that the tax deduction is in order. At that stage, if they ask for any clarification, we will revert to you. As an alternative, we can apply to the Income tax department under Section 195(2) of the Income Tax Act or you can apply to the department under Section 195(3) of the Act, for clarification and confirmation about the income which is subject to deduction of tax. It will be better if you make the application under Section 195(3), as you will be in a better position to technically convince the income tax department as to how out of the total amount of US $ 28,270,000 payable for services, only US $ 4,721,132 is subject to withholding tax.
6.1 Shri Indrakumar submitted that these materials came to the light only during the survey. This shows the view of the assessee that the payment is made for technical Services but only at the instance of payee the appellant has not deducted the tax. The appellant is liable to deduct tax under the tax laws of India and he cannot be guided by the submission of payee for deducting or otherwise for the sum deductible. When the payer and payee both believe that the amount is paid for fees for technical services which is chargeable to tax in India then it cannot be said that the tax is not deductible on part of the sum. The assessee is not required to compute the total income of the payee but has to deduct the tax at the rates provided in Section 195. As per Section 195, the tax is to be deducted on "for sum chargeable under the provisions of the Act" at the rates in force. Thus what is to be seen is whether the sum is chargeable to tax or not and not to carve out the portion of total income therein. If the assessee is of opinion that whole of such sum is not chargeable, under Section 195(2) he may make an application to the A.O. to determine the appropriate portion of the sum so chargeable. Even under Section 195(3), the recipient of the sum may also apply to the A.O. to receive the sum without deduction of tax. There are appropriate rules framed for making an application and grant of certificate under Section 195(3). Rule 29B is prescribed in this regard. The application has to be made in Form No.l5D and Certificate is to be issued in form No.15E. Since neither the assessee made any application under Section 195(2) nor payee has made application under section 195(3) as provided under relevant rules, the appellant is supposed to deduct tax at the rates in force on the amount paid The assessee has mentioned right from inception that he is being paid a sum of US $ 28.27 million is being paid towards technical/project management service charges. Even the payee also acknowledged that whole of the sum is not inextricably linked to supply of equipment. Thus the only course left open to the assessee is to deduct tax at source. The assessee is not to assess the total income. He submitted that changeability is different than quantification. He invited our attention to the decision of Hon'ble Supreme Court in the case of A.V. Fernandes v. State of Kerala 8 STC 561 wherein at pages 573 and 574, Hon'ble Supreme Court observed thus:
Reliance was placed in support of this position on the observations of this Court in Messrs. Chatturam Horilram Ltd CIT, Bihar & Orissa:
As has been pointed out by the Federal Court in Chatturam v. CIT, Bihar (quoting from the judgment of Lord Dunedin in Whitney v. Commissioners of Inland Revenue) there are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which -determines what persons in respect of what property arc liable. Next, there is the assessment. Liability does not depend on assessment. That, ex-hypothesi, has already been fixed. But assessment particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.
The appellant, however, forgets that the three stages in the imposition of a tax which are laid down here predicate, in the first instance, a declaration of liability as the starting point. If there is a liability to tax, imposed under the terms of the taxing statute, then follow the provisions in regard to the assessment of such liability. If there is no liability to tax there cannot be any assessment either. Sales or purchases in respect of which there is no liability to tax imposed by the statute cannot at all be included in the calculation of turnover for the purpose of assessment and the exact sum which the dealer is liable to pay must be ascertained without any reference whatever to the same.
There is a broad distinction between the provisions contained in the statute in regard to the exemptions of tax or refund or rebate of tax on the one hand and in regard to the non-liability to tax or non-imposition of tax on the other. In the former case, but for the provisions as regards the exemptions or refund or rebate of tax, the sales or purchases would have to be included in the gross turnover of the dealer because they are prima facie Viable to tax and the only thing which the dealer is entitled to in respect thereof is the deduction from the gross turnover in order to arrive at the net turnover on which the tax can be imposed. In the latter case, the sales or purchases are exempted from taxation altogether. The Legislature cannot enact a law imposing or authorizing the imposition of tax. If they are thus not liable to tax, no tax can be levied or imposed on them and they do not come within the purview of the Act at all. The very fact of their non-liability to tax is sufficient to exclude them from the calculation of the gross turnover as well as the net turnover on which sales tax can be levied or imposed.
He also relied upon the decision of Hon'ble Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. v. Ganapat Rai Hira Lal 33 ITR 245 wherein Hon'ble Supreme Court held thus:
Persons who are bound under the Indian Income tax Act, 1922 to make deduction of income tax at the time of making payment of any income, profits or gains are not concerned with the ultimate result of the assessment of the person to whom the payment is made.
Similar view has been taken by Hon'ble Supreme Court in the case, of Associated Cement Companies Limited v. CIT 201 ITR 435. The head note in the said case is extracted herein:
Deduction of tax at source - payments to contractors "for carrying out any work" - Provision for deduction as income tax from payments - is not restricted to payments in relation to works contracts - Person responsible for payment - Has to deduct from entire sum paid or credited and not merely income component of the sum - No right or duty to determine whether part of sum paid constitutes income of contractor - Income Tax Act, 1961, 5.l94C(1).
6.2 Shri Indrakumar further submitted that for Asst. Year 1998-99, the Assessing Officer has directed the assessee to deduct the Sum. The assessee has deducted the sum. The assesses has also issued necessary certificate for deduction of tax at source. Once the amount is deducted and paid to the credit of Government, it is for the payee to claim the credit in its assessment under the Act and the payer cannot demand refund of taxes deducted. The certificate of deduction is placed at page 407 of the paper book filed by the assessee. The appellant has given details of services rendered by REOL which in the terms of appellant himself is for following:
i) Providing engineering and design work relating to conceptualization of the power plant.
ii) Providing material based on over all design including specific requirements of the power plant.
iii) Providing quotations based on specifications developed by REOL for the power plant.
iv) Supplying drawing review to enable integration of the equipment to be supplied into the over all power plant design.
v) Undertaking documentation of the design etc. The services ore further split under the headings technical services, start-up services and overall responsibility.
All these services amounts to fees for technical services as per Section 9(1)(vii) read with Exp. 2 thereto. Where the fees ore payable in respect of services utilized in India, the sum is chargeable to fax in, India. These sums is deemed to accrue arise in India irrespective of the residential status of the recipient. Even under Article 12(4) of the Double Taxation Avoidance Agreement between India and USA, once the technical or consultancy services which make available the technical knowledge, experience, skill, etc, the sum can be charged in the contracting state. The fees are not ancillary and subsidiary as well as inextricably and essentially linked to sale of property. Hence Article 12(5) of the Double Taxation Avoidance Agreement will have no application in the present set of facts. He also invited our attention to the decision of Hon'ble, Karnataka High Court in AEG Aktiengesllschaft v. CIT 267 ITR 209 which was extensively relied upon for the proposition laid therein. He lastly submitted that under Section 9(1)(vii), what is to be seen is the place whether the services are utilized and not the places from where the services are rendered so as to charge the same to fax in India. Since the services are utilized in India, the amount is chargeable to tax in India under Section 9(1)(vii) of the Act. For this proposition he relied upon the decision of Authority of Advance. Ruling in Steffen, Robertson and Kristen Consulting Engineers and Scientist v. CIT 230 ITR 206.
6.3 In reply Sri Velapalli submitted that the case laws relied by learned D.R. will not apply in the present set of facts. In the present case what is to be interpreted is Section 9(1)(vii) read with section in Exp. 2 thereto as well as provision of Article 12(4) and 12(5) of the Double Taxation Avoidance Agreement between India and USA. He fairly submitted that -
i) No doubt the amount is considered as technical services and start up services are fees for technical services under Section 9(1)(vii) of the Act, yet the same is not chargeable to tax in India for the reason that under Article 12(4), the technical plan or technical design is not made available to the assessee.
ii) Even if it is chargeable to tax under Article 12(4), yet under Article 12(5), such fees for included services does not include amount paid for services which arc ancillary and subsidiary as well as inextricably and essentially linked to the sale of property. Since the services are inextricable linked to the sale of property the same is not chargeable to tax by invoking Article 12(4) of the Double Taxation Avoidance Agreement.
7. We have heard both the counsels at length. We have also considered the facts, arguments advanced, the material in the paper book to which our attention was drawn as well as case laws cited. In this case, the assesise is held as assessee in default under Section 201 for failure to deduct tax as required under Section 195 of the Act. Section 195 provides as under:
Section 195:
(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" words "or dividends" omitted by Finance (No. 2) Act, 1991, with effect from 1.10.91 shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force:
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of Clause (23D) of Section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode:
Provided further that no such deduction shall be made in respect of any dividends referred to in Section 115-0.
From 1.6.2002 : The second proviso is omitted by the Finance Act, 2002, with effect from June 1, 2002.
Explanation - For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account' or 'Suspense account' or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than interest on securities and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, [ by general or special order], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under Sub-section (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules made under Sub-section (5), any person entitled to receive any interest or other sum on which income tax has to be deducted under Sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under that Sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under Sub-section (1).
As per the A.O., the income is chargeable to tax in India but the Section 9(1)(vii) of the Act being the fees for technical services. Exp. 2 to Section 9(1)(vii) defines the words " fees for technical services." The relevant section and Explanation thereto provides as under:
Section 9(1) : The following incomes shall be deemed to accrue or arise in India -
(i) ...
(ii) ...
(iii) ...
(iv) ...
(v) ...
(vi) ...
(vii) income by way of fees for technical services payable by -
a) the Government; or
b) a person who is a resident, except where the fees are, payable in respect of services utilized in a 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; or
c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2 : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken By the recipient or consideration which would be income of the recipient chargeable under the head "Salaries."
7.1 It is the contention of Shri Velapalli that even if the income is chargeable under the Income Tax Act, 1961, the provision of Double Taxation Avoidance Agreement with USA will override the provision of income Tax Act. If the provision of Double Taxation Avoidance Agreement is beneficial, the same will override the provision of I.T. Act. Article 12 is required to be interpreted. Article 12 of Double Taxation Avoidance Agreement between India and USA reads as under:
Article 12 : Royalties and fees for included services.
(1) Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of That State: but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:
(emphasis supplied)
a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included Services as defined in this article (other than services described in sub-paragraph (b) of this paragraph):
(i) during the first five taxable years for which this Convention has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political subdivision or o public sector company ; and (B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases: and
(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and
b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3 (b) of this article, 10 per cent of the gross amount of the royalties or fees for included services.
(3) ...
(4) For 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 amounts 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 3 (a).
(b) ...
(c) ...
(d) ...
(e) ...
7.2 We agree with the contention of ld. Shri Velapalli that provision of Section 195 will be attracted only when the amount paid is chargeable to tax under the provisions of the Act. We shall therefore examine whether the same is chargeable under Section 9(1)(vii) of the Act as held by ld. CIT(A). Section 9(1) deems certain income as accruing or arising in India. Clause (vii) of Section 9(1) provides that income by way of fees for technical services payable by a person who is a resident as deemed to accrue or arise in India. Looking to the scope of work in the agreement Dt.20.9.95, it is clear that the amount paid by way of technical services and start up services and turnkey responsibility are in the nature of fees for technical services. From the letter issued by RBI to the assessee for approval of engagement of foreign technical services, it is clear that the amount paid is for technical/project management Services. Even the declaration filed before Customs Authority also mentions payment towards technical services. To this extent it is also agreed by ld. Counsel for assesses that the amount paid is "fees for technical services." Thus to that extent there is no dispute. The assessee himself has bifurcated between supply of equipment and technical services, start up services. Only such technical services and start up services had been subjected to TDS provision. The contention raised on behalf of assessee is that even though the amount paid is " fees for technical services" yet the amount paid is for any construction, assembly, mining or like project. We are not agreeable to the contention of learned Counsel for assessee. The amount is paid for technical services. Start up services and turnkey responsibility for setting up of power plant. Thus it is not for any construction project, assembly or any mining project. Also the project is not undertaken by the recipient but by the appellant who is payer. The amount is paid by way of fees for technical services by the assessee who is resident in India. The fees are not payable in respect of services utilized in a business by the assessee outside India. The amount is also not paid for the purpose of making or earning any income from any source outside India Hence at first instance the amount is chargeable as fees for technical services under Section 9(1)(vii) of the Act.
7.3 We shall now examine whether the provision of DTAA will take out the income received by the non-resident from the chargeability provision. Article 12 of DTAA between India and USA provides that fees for included services arising in any contracting state and paid to a resident of other contracting state may also be taxed in the contracting state in which they arise according to the laws of that state at the rates prescribed in Article 12(2) of the DTAA. Article 12(4) defines the words "Fees for included services." As per this clause, the payments for rendering technical services or consultancy services, if such services make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of technical plan or technical design can be changed to tax in India. In the present case it is seen that the payee REOL is one of the world leader in setting up the power plant based on corex gas. REOL was required to chose certain supplier and machinery and approve the machinery itself. The agreement also provides that REOL was to provide certain services as narrated in para 6.2 above. From the above agreement it is clear that REOL has made available its technical knowledge, experience, know-how or processes to the assessee in setting up the power plant. Thus under Article 12(4)(b), the payment is "fees for included services" and accordingly as per Article 12(2), it can be charged in India as the same are arising in India. According to the Income Tax Act, 1961, it is chargeable under Section 9(1)(vii) of the Act. Hence reading both the provisions of Sections 9(1)(vii) of the Act as well as Article 12(2) read with Article 12(4). the amount paid by assessee to REOL is chargeable to tax in India.
7.4 We shall now examine whether under Article 12(5) the amount paid will be taken out from the meaning of words "fees for included services." As per Article 12(5)(a) when the services are ancillary and subsidiary as well as inextricable and essentially linked to the sale of property, then the amount paid for services will not fall within the definition of "fees for included services." In the present cast it is seen that the fees are not only in respect of machinery sold by REOL to the assessee but encompassing whole of the power plant. Even as per the assessee's own version, the cost sheet of power plant project is as under:
A CONTRACTORS U5$ Rupees
1. BHEL 102,356,844 3,562,018,171
18,507,692 644,067,682
2. REOL 58,458,000 2,034,338,400
3. BEI 21,099.899 734,276,485
4. EOI 40,622,284 1,414,003,483
Total Project Cost 241,054,719 8,388,704,221
B. REOL US$ Rupees Percentage in
relation to
total project.
1. Supply of Equipment 27.013.464 940,068,547 11%
2. Technical Services 14,484,500 504,060,600 6%
3. Start up/Overall rsp. 16.959.856 590,202,989 7%
Total Contract Price 58.457,820 2,034,332,136
From the above it is clear that the technical services and start up/turnkey responsibility services is not only in respect of equipment supplied by REOL but its technical services is also to be applied to equipment supplied by other contractors including REOL The services therefore cannot be considered as ancillary and subsidiary as well as inextricably and essentially linked to the sale of property by REOL alone. The technical services, start up services and turnkey responsibility services takes care of the entire project. The assessee was asked to furnish the declaration made before Customs authority while paying amount for technical services, start up services. These details were sought by learned CIT(A) as well as by this Bench during the course of hearing. The assessee was also asked to produce the invoices raised by REOL in respect of technical Services, start up services. The assessee has not produced these details. The reason is best known to the assessee. In absence of these details, we are constrained to take adverse view against the assessee. On the basis of facts furnished and as available on record, we hold that the amount paid for technical services and start up services, etc are fees for technical services under Section 9(1)(vii) of the Act and as fees for included services under Article 12(4)(b) of the DTAA. The amount paid cannot be considered as for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property. Thus Article 12(5)(a) will not be applicable in the present set of facts and hence the amount paid will be considered as fees for included services as defined in Article 12(4)(b) of the DTAA.
8. We shall also discuss the case laws relied upon by learned Counsel for assessee. The first decision relied is the case of ITO v. National Mineral Development Corporation Limited. In the said case, the non-resident collaborator agreed to supply the conveyor belt and also agreed to assemble them and enact them at the Site and maintain them with guaranteed performance for five years. A consolidated sum of DM 1,07,000 was payable towards supervision, erection and commissioning charges apart from cost of conveyor belt amounting to DM 25,70,400. The Tribunal held that erecting a conveyor belt is a form of construction. It was in this circumstances, it was held that erecting a conveyor belt is a form of construction and hence as per Exp. 2 outside the scope of fees for technical services. In the present case it is seen that the technical services, start up services and turnkey responsibility is not only in respect of equipment supplied but encompassing the entire power project. Accordingly the said decision will not help the case of assessee.
8.1 The next decisions relied by learned Counsel for assessee are CIT v. Neyveli Lignite Corporation Limited 243 ITR 459 and CIT v. Mitsui 259 ITR 248. In both the cases the issue relates to the payment made by assessee to foreign supplier for design and engineering equipment. The question before Hon'ble High Court is whether the amount paid is royalty or not. In the present case before us the question is whether the amount paid is fees for technical services under Section 9(1)(vii) or not and not whether the amount is royalty. Hence this case is not applicable to the present set of facts.
8.2 The next case relied by learned Counsel for assessee is CIT v. VMFC 260 ITR 110. In the said case, the non-resident supplier had supplied the cutting and polishing machine and the employees of non-resident had come to India in connection with commissioning of the machine. The pre-amble to the contract was supply of capital equipment which Stated that "inspection testing, road/rail worthy backing, sale, delivery and furnishing performance guarantee etc In view of the terms of contract Hon'ble High Court held that services rendered by experts and payments made towards same were part and parcel of Same consideration and could not be severed and treated as business income. The expenses of technicians could not be viewed in isolation from main contract and hence it was held that the payment made on daily basis was part and parcel of construction and purchase of machinery. We are unable to appreciate the relevance of said decision to the facts of present case. The payee REOL has not supplied the entire power plant along with technical services but has merely procured certain machineries from different manufacturers. The REOL has been instrumental in conceptualizing the power plant, rendering various technical services as well as start up services in relation to the whole of the power plant, the machineries in relation to which were supplied by various contractors. Thus in the present case the technical services are different and identifiable and is not in relation to the machinery procured and supplied by REOL. This case will accordingly not be of any asistance to the assessee.
8.3 The next decision relied upon is that of CIT v. Energomach Exports 232 ITR 448 (Kar.) The head-note in the said case read as under
An Indian company entered into an agreement with the assessee, which was a foreign company, for supply of equipment for being installed at a hydro-electric project of the Indian company on January 30, 1974. The Indian company also entered into a supplemental agreement on the same day with the assessee-company to depute its experienced engineers to supervise the installation of the equipment at the dam site. In accordance with the supplementary agreement, the assessee-company agreed to provide technical assistance and advice to the Indian company in the erection and commissioning of the equipment as well as in the training of engineers of the Indian company. The technical personnel Supervised the actual erection of the equipment Supplied by the assessee-company at the dam site and did other jobs laid down under the contract. For the work done by the technical personnel, the Indian company paid a certain sum of money to the assessee company during the relevant accounting period the assessee-company during the relevant accounting period. The assessee-company contended before the Assessing Officer that the amount received from the Indian company was not assessable to tax under Section 9 of the Income Tax Act, 1961, for the assessment year 1980-81, as there was no business connection between the Indian company and the assessee-company. The Assessing Officer rejected the contention of the assessee-company and held that it was liable to pay tax. On appeal to the appellate authority, the assessee-company contended that the liability would arise at the most under Section 9(1)(vii) of the Act, but by virtue of the proviso thereto, the assessee-company was not liable to pay tax as the proviso provided that all transactions which were covered by an agreement prior to April 1, 1976, were not governed by Section 9(1)(vii) of the. Act. The appellate authority accepted the contention of the assessee-company and held that the assessee-company was not liable to pay tax. The Tribunal affirmed the order of the appellate authority. On a reference:
Held, that the assessee-company (foreign company) had no share or interest in the management of the Indian company. The assessee-company had sold the machinery to the Indian company and, for installation of the said machinery and plant supplied technical personnel and technical services until the machinery started functioning and production. Thereafter, the services of the technical personnel in the Indian company ceased and the Indian company was not responsible to the assessee-company. Except to complete the terms of the agreement entered into for the purchase of machinery, there was no other interest of the assessee-company in the Indian company. Therefore, it could not be said that there was any business connection between the assessee-company and the Indian company nor that the salary and other expenses paid to the technical personnel of the assessee-company amounted to receipt arising from a business connection.
From the aforesaid decision, it is seen that even though the assessee company has contended that the amount paid will be covered under Section 9(1)(vii) but only by virtue of proviso thereto the company was not liable to deduct tax as the transaction was covered by agreement prior to 1.4.1976 and hence under provide to Section 9(1)(vii), the liability did not arise. In the present case, it is undisputed thing that Exp.1 to Section 9(1)(vii) is not applicable. Thus this case will not help the assessee in any manner.
8.4 The other two cases relied by learned Counsel for assessee are -
i) CIT v. P.V.A.L. Kulandagan Chettiar .
ii) UOI v. Azadi Bachao Andolan 263 ITR 706 (SC) In both these cases, it was held that if the provision of Double Taxation Avoidance Agreement is favourable to the payee, the same will override the provision of the Act. We entirely agree with the submission made by learned Counsel for assessee. However we have examined the provision of the Act as well as provision of Double Taxation Avoidance Agreement and concluded that even under the provision of Double Taxation Avoidance Agreement, the amount paid is fees for included services under Article 12(4) of the DTAA.
8.5 The other decision in following cases relied by learned Counsel for assessee also will not apply to the present set of facts, learned Counsel for assessee relied on -
i) Deputy Commissioner of Income-tax v. I.T.C. Limited 76 TTJ 323 (Cal.)
ii) Pro-quip Corporation v. CIT 255 ITR 354 AAR
iii) Lucent Technologies Hindustan Ltd v. ITO 82 TTJ 163 (Bang)
iv) UHDE Gmbh v. Deputy Commissioner of Income-tax 57 TTJ 447 (Mum)
v) Maharashtna State Electricity Board v. Depury Commissioner of Income-tax 83 TTJ 325 (Mum) We have perused all these decisions. We find that the facts in all these cases are quite different than the facts in the present case before us.
In the case of I.T.C Limited (supra), the assessee purchased certain machinery from UK based company. The UK company deputed the technicians in connection with installation and commissioning of machines. In such a situation, it was held that the services are ancillary and subsidiary as well as inextricable and essentially linked to the sale of property. Similar is not the case before us.
The case of Pro-quip Corporation rendered by Authority of Advance Ruling (AAR) will also does not apply to the present set of facts. In the said case, the non-resident supplier supplied certain engineering drawings and designs. The consideration was for supply of engineering drawings and designs and not for rendering any technical services. The present case is not for supplying any engineering drawings and designs but rendering technical services and start up services for power plant as a whole and not specific to any machinery.
In the case before Hon'ble Bangalore benches of the Tribunal, Lucent Technologies Hindustan Ltd. (supra), the payment was treated as royalty in respect of sale of computer equipment. The case was not in respect of fees for technical services and hence The same cannot be applied to the present set of facts.
The decision of Hon'ble Mumbai Bench of ITAT in the case of UHDE Gmbh (supra) was with reference to having a permanent establishment in India When the amount is considered as fees for technical services under Section 9(1)(vii) of the Act, the income is deemed to accrue or arise in India whether or not the payee has permanent establishment in India Thus the said case will also have no application to the case before us.
In the case before ITAT, Mumbai in the case of Maharashtra State Electricity Board (supra), the Tribunal held that Article 15 of DTAA between India and UK in respect of provision of professional services will override the provision of Article 13 of DTAA relating to fees for technical services. In the case before us, there is no dispute between the parties that only article invoked is Article 12(4) read with Article 12(5) of the DTAA Thus the decision of Mumbai Tribunal have no relevance to the facts of present case.
9. We shall now deal with the decisions relied by learned special counsel for revenue Sri Indrakumar. In the case of Ganapat Rai Hira Lal (supra), though the asscssee is not required to compute the income of payee yet it is settled law that the provision of Section 195 can be invoked only when the amount is chargeable to tax in India.
9.1 Shri Indrakumar has relied upon Calcutta High Court in the case of John Patterson & Co. (India) Limited v. ITO & Ors. 36 ITR 449. In the said case it was held thus:
No arrangement or agreement privately arrived at between an employer and an employee can affect or alter or modify the statutory liability of the employer under Section 18(2) of the Income Tax Act, 1922 to deduct tax at source at the appropriate rates from payments to the employee.
In the light of above observation Shri Indrakumar Submitted that the appellant do believe that the amount paid is fees for technical services but only at the instance of payee, the assessee has stopped deduction of taxes. We agree with the submission made by Shri Indrakumar. Once the assessee forms an opinion that the amount paid is 'fees for technical services', it should have deducted tax at Source and should not have stopped deduction only at the instance of payee. By deducting taxes at source, the rights of parties as regards the taxability of the sum are in no way effected. The payee can claim credit of of the tax deducted in its own assessment. The payee can still claim that the amount is not chargeable to tax in India. However, the opinion of payee do not determine whether the tax should be deducted under Section 195 or not. Similar view has been held by Hon'ble Supreme Court in the case of Associated Cement Companies Limited v. CIT 201 ITR 435 relied by learned Counsel for revenue.
9.2 Shri Indrakumar relied upon the decision of U.B. Limited v. ACIT 211 ITR 256 for the proposition that the liability to deduct tax wise in respect of the payment made. The liability arise as soon as the entry is made in the books of account or the payment is made. The said case is not of relevance to the present case before us as in said cast assessee is not disputing the liability to deduct the same as deductible under Section 195.
9.3 Shri Indrakumar relied upon the decision of Hon'ble Karnataka High Court in AEG Aktiengesllschaft v. CIT 267 ITR 209. In the said case it was held thus:
Held, that technical services rendered vary depending upon the nature of the work undertaken and the nature of the services received. If the parties have treated certain Services as technical services and remuneration has been fixed for the said services, it is not open to the assessee, at a later stage to contend that the remuneration received was not by way of "fees for technical services" rendered. In the agreement entered into between the assessee and M, "engineering fee" was separately set out. If all the authorities below had, on consideration of the claim of the assessee and reading of the agreement as a whole, recorded a finding that the remuneration received by the assessee was by way of "fees for technical services" rendered there was no justification to take a different view. The provision contained in Clause (6) of article VHA of the amended Double Taxation Avoidance Agreement entered into between India and Germany, is similar to the provisions contained in Section 9(1)(vii). therefore, the asstssee could not take assistance from the provisions contained in Section 9(1)(i). The technical service rendered could not be given a restricted meaning to be understood only as oral advice given. It could be in the nature of preparation of designs and drawings. So long as the parties have treated it as technical advice, the parties are. bound by it and when the question of liability to pay tax arises, the assessee cannot be permitted to turn around and say that the supply of designs, drawings, etc are part of plant and machinery and must be added to cost. Since, the contract in question dealt with the execution of several works, merely because a provision was made for security deposit/guarantee or provision for levy of liquidated damages for execution of the project, that would not support the contention that the payments were not made for rendering technical services. The engineering fees paid to the assessee were for technical Services as contemplated under Section 9(1)(vii) They were assessable in India.
We find that the facts before us are more or less similar. Considering the facts of the present case, we held that the amount paid by way of technical services and start up services are independent supply of equipment. We also found that the amount paid is fees for technical services as defined in Exp. 2 to Section 9(1)(vii) of the Act. The appellant is therefore required to deduct tax under Section 195 of the Act.
9.4 Shri Indrakumar also relied on the decision of AAR in Steffen, Robertson and Kirsten Consulting Engineers and Scientists v. CIT 203 ITR 206. The head note in the said case read as under:
NON-RESIDENT - ADVANCE RULING - INCOME DEEMED TO ACCRUE OR ARISE IN INDIA - FEES FOR TECHNICAL SERVICES -SCOPE OF Explanation TO SECTION 9 - AMOUNTS PAID FOR PREPARATORY STUDIES IN FOREIGN COUNTRY - SERVICES TO BE UTILISED IN INDIA - SUCH AMOUNTS WOULD BE DEEMED TO ACCRUE OR ARISE IN INDIA - NO DIFFERENCE BETWEEN FEES FOR ENGINEERING SERVICES AND AMOUNTS PAID AS LIVING ALLOWANCES AND TRAVEL ALLOWANCES - INCOME TAX ACT. 1961. Section 9.
Though the decision of AAR are binding only in respect of applicant before the AAR yet it has a pursuasive value. As per Section 9(1)(vii). the income by way of fees for technical services payable by a person who is a recipient is deemed to accrue or arise in India. The exception is only in respect of fees payable in respect of services utilized in a business carried on by a resident Indian outside India Conversely if the services are utilized in a business carried on in India, it will be charged to tax in India as deemed to accrue or arise in India. In the present case it is seen that M/s. Jindal Tranctebel PCL is a resident in India and is utilizing the services in a business carried on in India The sum paid to the non-resident is therefore chargeable to tax in India
10. In view of our above discussion, we hold that the appellant was required, to deduct tax as per provision of Section 195 of the Act. Since the assessee failed to deduct such tax, the Assessing Officer was justified in treating the assessee as assessee in default under Section 201 of the Act. We accordingly do not find any merit in all these appeals.
In the result all the appeals are dismissed.