Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S Petronet Lng Ltd., New Delhi on 6 April, 2018
ITA No. 865/Del/2011
Assessment year 2006-07
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F' NEW DELHI
BEFORE
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 865/Del/2011
AY: 2006-07
ACIT, vs Petronet LNG Ltd.,
Circle 14(1), World Trade Centre,
Room No. 415, 1st Floor, Babar Lane,
4th Floor, New Delhi.
C.R. Building, (PAN: AAACP8148D)
I.P. Estate,
New Delhi.
(Appellant) (Respondent)
Appellant by : Shri Ravi Kant Gupta, Sr. DR
Respondent by: Shri Vishal Kalra, Adv.
Ms Mansi Kakkar, CA
Date of Hearing: 10.01.2018
Date of Pronouncement: 06.04.2018
ORDER
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
This appeal has been preferred by the revenue against the order dated 19.11.2010 passed by the Ld. Commissioner of Income Tax (Appeals)-XVII, New Delhi and pertains to assessment year 2006-07 wherein, vide the impugned order, the Ld. Commissioner of Income Tax (Appeals) had deleted the addition of Rs. 38,98,851/- made by the Assessing Officer u/s 40(a)(i) of the Income Tax Act, 1961 (hereinafter called 'the Act'). 1 ITA No. 865/Del/2011 Assessment year 2006-07 The grounds raised in the appeal are as under:-
"1. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition of Rs.38,98,851/- made by the AO u/s 40(a)(i) of the IT Act, 1961.
2. That on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in not appreciating the fact that addition was made on account of payments made to foreign parties without deducting tax at source and therefore, the addition was made correctly u/s 40(a)(i) of the IT Act, 1961.
3. That the appellant craves to the allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal".
2. Brief facts of the case are that the assessee filed its return of income declaring total income at Nil and book profit of Rs. 2,94,58,68,507/- for taxability u/s 115JB of the Act. Subsequently, the assessee's case was picked up for scrutiny. During the course of assessment proceedings, the Assessing Officer (AO) noted that during the year under consideration, the assessee had made the following payments to the two parties:-
1. Fluor Transworld Services Inc. Rs. 38,98,851
2. Furgo survey Ltd. Rs. 2,07,455 2.1 The Assessing Officer asked the assessee to explain as to why these payments may not be treated as fee for technical 2 ITA No. 865/Del/2011 Assessment year 2006-07 services having deemed to accrue or arise in India as per section 9(i)(vii) of the Act. The assessee was also asked to explain as to why it had not deducted tax at source for these two payments as per section 195 of the Act and further as to why this amount of Rs. 41,06,346/- may not be disallowed u/s 40(a)(i) of the Act. 2.2 It was the submission of the assessee before the Assessing Officer that as far as the payment to M/s Fluor Transworld Services Inc. was concerned, the payment was made for recommendation of vaporization scheme and cold recovery scheme from LNG and the work performed by M/s Flour Transworld was covered by Article 23 of the Double Taxation Avoidance Agreement (DTAA) with USA and further M/s Fluor Transworld Services Inc. did not have any Permanent Establishment or fixed place of business as defined in the Indo-
US DTAA and further since the same was taxable in the country of residence, no tax was deductible at source in India. With respect to the payment made to M/s Fugro Survey Ltd., the assessee submitted before the Assessing Officer that this company had provided Marine Weather Forecasting Services which was covered by Article 22 of the DTAA with UAE and the same was taxable in the country of residence and no tax was 3 ITA No. 865/Del/2011 Assessment year 2006-07 deductible at source in India. However, the Assessing Officer did not accept the contentions of the assessee and proceeded to make a disallowance of Rs. 41,06,346/- u/s 40(a)(i) of the Act. 2.3 Aggrieved, the assessee approached the First Appellate Authority. The Ld. Commissioner of Income Tax (Appeals) deleted the disallowance in respect of payment made to M/s Fluor Transworld Services Inc. but upheld the disallowance with respect to payment made to M/s Fugro Survey Ltd. 2.4 Now, the department has approached the Income Tax Appellate Tribunal (ITAT) and has challenged the deletion of Rs. 38,98,851/- by the Ld. Commissioner of Income Tax (A) in respect of payment made to M/s Fluor Transworld Services Inc.
3. The Ld. Senior Departmental Representative (Sr. DR) placed extensive reliance on the findings of the Assessing Officer in this regard and submitted that the Assessing Officer had given a concrete finding that the payment was in the nature of fee for technical services and, therefore, they fell under the definition of 'income deemed to accrue or arise in India' in terms of provisions of section 9(i)(vii) of the Act. The Ld. Sr. DR re-emphasised that the assessee was liable to deduct tax at source on this payment 4 ITA No. 865/Del/2011 Assessment year 2006-07 and that the Ld. Commissioner of Income Tax (Appeals) had erred in deleting these disallowances.
4. In response, the Ld. Authorised Representative (AR) placed extensive reliance on the order of the Ld. Commissioner of Income Tax (Appeals). He read out the relevant portions from the impugned order and submitted that the deletion had been rightly made by the Ld. Commissioner of Income Tax (Appeals). He also drew our attention to copy of agreement with M/s Fluor Transworld Services Inc. for providing services relating to LNG terminal and placed at pages 29-32 of the Paper Book.
5. We have heard the rival submissions and perused the material available on record. It is seen that during the relevant previous year, the assessee had made payments to M/s Fluor Transworld Services Inc. for rendering services in connection with review of the alternative vaporization process for the LNG terminal and recommend a suitable process to the assessee. The scope also involved study of the benefits of the various scheme for generating power through the utilization of LNG. 5.1 The scope of services agreed with Fluor Transworld Inc. was as follows:
5 ITA No. 865/Del/2011
Assessment year 2006-07 • Undertake study, comparison and evaluation of the following types of LNG Vaporizers including space requirement and cost evaluation :
Open Rack Vaporizers Submerged Combustion Vaporizers Intermediate Fluid Vaporizers Ambient Air Vaporizers • Recommend an optimum vaporizing scheme out of the above based on the evaluation • Evaluate the techno-economic benefits of a scheme for generating power through the use of LNG, which involved the following:
Study the potential of reducing the in-plant power generation capacity by 50 percent based on 2.5 MMTPA annual capacity of the LNG terminal Study the implications of a scheme that does not restrict the quantum of power being generated assuming the surplus power would be exported.
5.2 The AO disallowed the claim of deduction under section 40(a)(i) of the Act holding that the payments were in the nature of 6 ITA No. 865/Del/2011 Assessment year 2006-07 fee for technical services under the Act and accordingly, tax should have been withheld on the same.
5.3 In this regard, it is seen that section 9 of the Act provides instances of income deemed to accrue or arise in India; further clause (vii) of sub-section (1) of that section envisages that income by way of fees for technical services payable by resident to a non-resident shall be deemed to accrue or arise in India.
Explanation 2 to section 9(1)(vii) of the Act defines the term fee for technical services as consideration for rendering of any managerial, technical or consultancy services but does not include consideration for construction, mining or any other similar project undertaken.
5.3 Section 90(2) of the Act provides that where the provisions of a tax treaty are applicable to an assessee, then such assessee would be governed by either under provisions of the Act or the applicable tax treaty, whichever is more beneficial. 5.4 Fluor Transworld Inc. is a company incorporated in US and accordingly, the provisions of the Agreement for Avoidance of Double Taxation (DTAA) between India and USA would apply in the instant case. Therefore, Fluor Transworld would be governed 7 ITA No. 865/Del/2011 Assessment year 2006-07 by the provisions of the Act or the India - US tax treaty, whichever is more beneficial.
5.5 Article 12 of the India - US treaty provides that "Royalties and fees for included services" arising in India and paid to a resident of USA may be taxable in India at the rates specified in the said Article.
5.6 As per Article 12(4) of India-US treaty, fee for included services means any consideration received in connection with rendering of technical or consultancy services:
which are ancillary and subsidiary to the application or enjoyment of right in any patent, trademark, design or model, plan or secret formula or process or on any information concerning industrial, commercial or scientific experience; or which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design.
5.7 It is our considered opinion that the provisions of the India-
US treaty provide for a restrictive meaning of fee for included services vis-a-vis the meaning of fee for technical services under 8 ITA No. 865/Del/2011 Assessment year 2006-07 the Act in as much as only those technical/consultancy services which are ancillary and subsidiary to the application/ enjoyment of right, property or information or which 'make available' technical knowledge, skill, knowhow, process etc would be liable to tax.
5.8 The Memorandum of Understanding ("MOU"), concerning fee for included services in Article 12 to the India - US treaty provides as follows:
"Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available'' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person 9 ITA No. 865/Del/2011 Assessment year 2006-07 purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available"
5.9 Thus, in accordance with the MOU, technology will be considered to be 'made available' when the person acquiring the service is able to apply such technology on his own. 5.10 On the basis of details furnished by the assessee along with the copy of the letter of award issued to M/s Fluor Transworld Services Inc. USA, it may appear that the same involves use of technical knowledge or skill and will qualify as fees for technical services, as defined in Explanation 2 to section 9(i)(vii) of the Act. However, Article 12(4) of the India-USA DTAA dealing with fee for included services requires that technical knowledge, experience skill etc as provided in the definition of the term fee for technical services should be "made available" to the recipient of such services. An analysis of the MOU to the India-US DTAA concerning the said clause indicates that in order to fall within the ambit of the said Article, mere rendering of services involving technical knowledge, skill etc. is not sufficient. It contemplates that the person utilizing the service should be able to make use 10 ITA No. 865/Del/2011 Assessment year 2006-07 of such technical knowledge, skill etc on his own and without recourse to the service provider in future. The scope of the services agreed with Fluor Transworld Services Inc. involves evaluation of different types of LNG vaporizers, recommendation of a suitable form of vaporizer and study of the benefits of various schemes for generating power through utilization of LNG. These services involve deployment of personnel having the requisite experience and skill to perform the services. However, it is not possible that the assessee would be able to carry out such services in future on its own without recourse to the service provider to fall within Article 12(4) of the India-US DTAA. The nature of services rendered does not indicate making available technical knowledge, skill, know-how etc. to the assessee. Thus, on the basis of the facts and circumstances of the case, payment to Flour Transworld Services Inc. does not qualify as fee for included services as per the provisions of the India-US DTAA. Although the Ld. Sr. DR has argued vehemently against the action of the Ld. CIT (A) in deleting this addition, he could not point out any factual or legal inaccuracy in the finding recorded by the Ld. CIT (A). He also could not bring to our notice any judicial precedent in favour of the department. Accordingly, we 11 ITA No. 865/Del/2011 Assessment year 2006-07 have no reason to interfere with the findings of the Ld. CIT (A) and we dismiss the grounds raised by the department.
6. In the result, the appeal of the department stands dismissed.
Order pronounced in the Open Court on 6th April, 2018.
Sd/- Sd/-
(PRASHANT MAHARISHI) (SUDHANSHU SRIVASTAVA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
DT. 6th APRIL 2018
'GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
By Order
Asstt. Registrar
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