Income Tax Appellate Tribunal - Mumbai
Hindalco Industries Ltd. vs Income Tax Officer on 25 November, 2003
Equivalent citations: (2004)85TTJ(MUM)71
ORDER
S.V. Mehrotra, A.M.
1. This appeal by the assessee is directed against the order of the CIT(A)"-Central--I, Mumbai, dt. 29th Feb., 1996. The only effective ground raised in this appeal is that learned CIT(A) erred in upholding the action of the AO in holding that the amount remitted for services rendered outside India was taxable in India.
2. The assessee-company, as per the statement of facts filed before the learned CIT(A), is one of the largest aluminium manufacturing company in the country. It has entered into an agreement with Raytheon Engineers and Constructors Inc., USA (hereinafter referred to as 'Raytheon' in short) for conducting study and submission of Techno Economic Feasibility Report for setting up a one million tonnes capacity steel plant on 7th May, 1993 for a consideration of US $ 79,500. The company remitted the said consideration in three equal instalments of US $ 26,500 on 30th July, 1990, 3rd Dec., 1993 and 24th Feb., 1994, respectively. After a lapse of about one and a half year, the report became old and the company felt that in view of the fast changing technology, it was necessary and desirable to get the same updated. For this purpose, the company had approached Raytheon. Raytheon agreed to update the report outside India for a consideration of US $ 25,000. The Reserve Bank of India had imposed a pre-condition for depositing advance TDS for granting approval to remit US $ 25,000. Accordingly, the assessee had deposited Rs. 1,73,700 as advance TDS. The assessee-company approached the ITO (TDS) for issuance of no objection certificate without deduction and payment of tax in respect of remittance on the ground that the amount payable for updation of the report was for services rendered outside India by Raytheon. Therefore, the question of taxability of the said amount in India did not arise. The ITO (TDS) did not agree with the submissions made before him and directed the assessee-company vide order under Section 195(2) dt. 6th Oct., 1995 to deduct tax @ 20 per cent as per DTAA with USA and pay the same to Government account as per law. The ITO, inter alia, observed that the company itself had held that .the original fees of US $ 79,500 was subjected to taxation and had made TDS as per earlier NOCs.
3. Before the learned CIT'(A), the assessee's contention was that the services relating to updating for techno economic feasibility report were rendered outside India and if the services were rendered outside India, the provisions of IT Act were inapplicable. It was further pointed out that the income to the foreign company neither accrued or arose nor could be deemed to accrue or arose in India. Learned CIT(A) held that the situs of services had nothing to do with the taxability under Section 9(1)(vii) of the Act. He referred to Expln. 2 below Sub-clause (vii) of Sub-section (1) of Section 9 and pointed out that fees for any managerial, technical or consultancy services was fees for technical services.
4. The learned CIT(A) pointed out that no material had been placed before him to show that the payment would come within the exclusionary part of Expln. 2 to Section 9(1)(vii) of the Act. He, accordingly, confirmed the order of the AO.
5. Shri R.H. Toprani, learned counsel for the assessee, submitted that admittedly the fees of US $ 25,000 paid to non-residents was to be treated as income from technical services in terms of Section 9(1)(vii). However, the said clauses cannot be read independently of Section 9(1)(i) r/w Explanation thereunder. He submitted that since, in the instant case, no operations were carried on by the non-residents in India, no portion of the technical fees paid to non-residents could be deemed to accrue or arise in India in terms of Section 9(1)(i).
6. The learned counsel, Shri R.H. Toprani, submitted that if Section 9(1)(vii) is read independently of Section 9(1)(i) absurd result would' follow. The learned counsel referred to Section 9(1)(i) and Section 9(1)(vi) & (vii) and pointed out that by not excluding the income referred to in Section 9(1)(vi) & (vii) from the purview of Section 9(1)(i) r/w Expln. (1) thereof, the legislature has expressly indicated that it never intended to exclude Clause (vi) and (vii) from the purview of Section 9(1)(i), by the Finance Act, 1976 w.e.f. 1st July, 1976.
7. Learned counsel submitted that business includes rendering technical services and, therefore, if no business connection is in India, then the fees for technical services is not taxable in view of Section 9(1)(i).
8. The learned counsel further submitted that there is no provision in Section 9(1)(vii) for the situation where the services are not actually utilised by residents. He pointed out that Section 9(1)(vii)(b) contemplates only for that situation where the fees is payable in respect of services utilised in a business or profession carried on by the resident outside India. The learned counsel referred to the decision of the Hon'ble Supreme Court in the case of Federation of A.P. Chambers of Commerce, Industry and Ors. v. State of Andhra Pradesh and Ors. (2001) 247 ITR 36 (SC) and pointed out that the Hon'ble Supreme Court has considered the expression "is used" and has held that it implies actual user and not merely meant for utilisation.
9. He submitted that utilisation of services in fact is necessary and during the intervening period the situation remains fluid as liability to tax does not crystallise. The learned counsel for the assessee further submitted that no period of utilisation has been given in the section. He also referred to one hypothetical situation and pointed out that there is no provision for a situation where the technical services were actually utilised in India though meant for utilisation abroad. He submitted that it is not understandable as to how the non-resident assessee's liability could depend on the action of the resident in India. The learned counsel for the assessee submitted that interpretation which leads to absurdity should be avoided. He pointed out that if Section 9(1)(vii) is read as part of Section 9(1)(i), then the absurdity is avoided. Learned counsel referred to Sections 198 and 199 of the IT Act and pointed out that the tax deduction is deemed to be the income of the assessee and by making the deduction of tax before utilisation of the feasibility report, the 'receipt' has been converted into income. Thus, learned counsel submitted that unless there was utilisation of feasibility report by the resident, no income could accrue to the person from whom technical services were obtained. He submitted that this makes Section 9(1)(vii) unworkable. In this regard, the learned counsel referred to Section 5(2) and pointed out that by making the TDS the whole character is changed and the income which is taxable on the basis of accrual as per Section 5(2)(b) is taxed as under Section 5(2)(a) on receipt basis. Thus, the learned counsel in sum and substance submitted that harmonious construction is required.
10. Learned counsel submitted that the main purpose of Sections 9(1)(vi) and (vii) was to define royalty and technical services for rate purposes only and for that purpose only they have been separately classified "from Section 9(1)(i). In this regard, the learned counsel relied on the following contents from the Finance Minister's Budget Speech for the asst. yr. 1976-77:
"The present system of taxation of foreign companies gives rise to several administrative difficulties and uncertainties. As a measure of simplification, I propose to levy income-tax at a flat rate of 40 per cent on the gross amount of royalties received by them from Indian concerns under approved agreements made after 31st March, 1976. Lump sum payments received by such companies for providing technical know-how outside India under approved agreements will be charged to tax at a flat rate of 20 per cent of the gross amount received by them. Royalties and technical service fees received by foreign companies under existing agreements will continue to be charged on the existing basis, subject to the modification that the expenditure incurred for earning such income will be limited to 20 per cent of the gross payments."
11. The learned counsel for the assessee submitted that as ,a matter of fact Section 9(1)(vi) and (vii) have been misplaced and they should have been made part of Section 9(1)(i). He relied on the decision of the Hon'ble Supreme Court in the case of CIT v. V. Venkatachalam (1993) 201 ITR 737 (SC). In this case the facts were that the assessee-HUF derived long-term capital gains in a sum of Rs. 1,02,740 during the previous year relevant to the asst. yr. 1973-74. It claimed deductions thereon under and as provided by Section 80T of the IT Act. The ITO, however, adopted a different method. He found that during the said previous year, the assessee had suffered business loss of Rs. 41,892. He set off the said loss against capital gains of Rs. 1,02,740 and applied the deductions provided in Section 80T to the balance figure. The assessee's claim for allowing deductions under Section 80T on the gross capital gains of Rs. 1,02,740 was upheld by the Hon'ble Supreme Court, inter alia, making the following observations at p. 740:
"Evidently, the deductions provided for by the said provision had to be made from out of the capital gains. In this case, the capital gain was Rs. 1,02,740. It is on the said sum that the deductions provided for by Section 80T had to be applied. In such a case, no question can arise of the business loss being set off against this capital gain. The profits and gains (and loss) from business had to be computed in accordance with a different set of provisions, namely, Section 30 to 43A, as they obtained at the time. Room for argument has arisen on account of the use of the words; "from such income" in the main limb of Section 80T. Relying upon the said words, the Revenue contends that the ITO must apply the deductions under Section 80T to the total income computed by him in accordance with the Act. The order of the ITO is sought to be justified on this basis. It is not possible to agree. The language of Section 80T, reasonably understood, is not capable of and does not admit of such construction. Probably, the placement of Section 80T is wrong. It ought to have been placed along side Section 48, as has since been done by the Finance Act, 1987, w.e.f. 1st April, 1988. By the said Act, Section 80T has been omitted and its provisions with certain changes, have been placed in Section 48 (Of course, Section 48 has been totally recast w.e.f. 1st April, 1993, by the Finance Act, 1992). The words "such income", in our opinion, meant and referred to the capital gains and not the total income of the assessee."
Drawing analogy from this decision, learned counsel argued that placement of Section 9(1)(vi) and (vii) independently of Section 9(1)(i) by the legislature is not justifiable.
12. The learned counsel submitted that he is not challenging the validity of the provisions but his submissions are limited to the extent of interpretation and construction of statute. In this regard, he referred to the decision of the Hon'ble Supreme Court in-Electronics Corporation. of India Ltd. v. CIT (1990) 183 ITR 43 (SC) and pointed out that the question whether the ingredients of the provisions of Section 9(1)(vii)(b) of the IT Act, 1961, which deems the fees for technical services paid to a non-resident by a person who is resident to accrue or arise in India, being of substantial public importance, especially as it concerned collaboration agreements with foreign companies and such other arrangements for the better development of industry and commerce in India has been referred to a Constitution Bench of the Supreme Court.
Further, he submitted that if Section 9(1)(vi) and (vii) is not treated as part of Section 9(1)(i), then quantification is not possible.
The learned counsel for the assessee, however, fairly submitted that in the following decisions, the Courts have held that Section 9(1)(vii) is independent of Section 9(1)(i) but the aforementioned arguments had not been considered in the said cases :
(i) CIT v. Copes Vulcan Inc. (1987) 167 ITR 884 (Mad); and
(ii) Cochin Refineries Ltd. v. CIT (1996) 222 ITR 354 (Ker).
13. The learned Departmental Representative submitted that there is no dispute regarding US $ 79,500 on which the assessee himself had deducted tax for the technical services rendered by Raytheon. The learned Departmental Representative pointed out that plain reading of the Act clearly suggest that the business connection has nothing to do with the rendering of technical services by person outside India and the same is taxable as per the provisions of Section 9(1)(vii). He pointed out that there is no scope for questioning the wisdom of the legislature. He relied on the decision of the Hon'ble A.P. High Court in Elkem Technology v. Dy. CIT (2001) 250 ITR 164 (AP).
14. We have carefully "considered the rival submissions and have perused the records of the case. If we examine the scheme of the Act in regard to taxability of income of non-resident, we find that as per Section 5(2), income of a person who is a non-resident includes all income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India. Section 9 deals with income which is deemed to accrue or arise in India. As per Section 9(1)(i) if income accrues or arises to an assessee because of business connection in India or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situate in India, then the income is deemed to accrue or arise in India. Thus, under Section 9(1)(i) connection in India is the determining factor for deciding the accrual of income in India. It is noteworthy that prior to the amendment by the Finance Act, 1976, it contained the following words also:
"Or through or from any money lent at interest and brought into India in cash or in kind".
These words were omitted from Section 9(1)(i) and taxability of income by way of interest was brought in a separate Clause 9(1)(v). Simultaneously, the legislature incorporated Section 9(1)(vi) and (vii) by the Finance Act, 1976. The object of this amendment was to obviate several administrative difficulties and uncertainties as is mentioned in the speech of the Hon'ble Finance Minister. The learned counsel for the assessee's main plank of argument is that these clauses have separately been incorporated in Section 9 only for administrative convenience for determining the rate of tax. But they should be read as part of Section 9(1)(i) or proviso or Explanation thereto.
15. The learned counsel for the assessee's argument is that harmonious construction be adopted so that the scheme of the Act is made workable which, according to the learned counsel for the assessee is possible only if Section 9(1)(vii) is interpreted as part of Section 9(1)(i). .
16. Before we consider various arguments of the learned counsel for the assessee, it would be useful to refer to some of the principles of interpretation as noted in the commentary of Chaturvedi & Pithisaria Vol. I at p. 347:
(1) It is the duty of the Courts to avoid a head-on clash between two sections of the Act and to construe the provisions which appear to be in conflict with each other in such a manner as to harmonise them.
(2) The provisions of one section of a statute cannot be used to defeat the other provisions unless the Court, in spite of its efforts, finds it impossible to effect reconciliation between them.
(3) It has to be borne in mind by all the Courts all the time that when there are two conflicting provisions in an Act, which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both: This is the essence of the rule of "harmonious construction".
Thus, it is evident that principles of interpretation are to be applied only where the meaning is not manifest from the plain words of the statute. The interpretation which would create unfair, irrelevant or unreasonable result, should, if possible, be avoided. Thus, resort can be had to all the interpretation clauses if there is ambiguity in the section or if the literal interpretation leads to a situation where a particular provision becomes unworkable. The learned counsel's first argument is that the legislature while inserting Clauses (vi) and (vii) of Section 9 by the Finance Act, 1976 did not exclude-incomes referred to in the said clauses from the purview of Section 9(1)(i) which clearly shows that the legislative intent was not to exclude these clauses from the purview of Section 9(1)(i). We are unable to accept this argument of the learned counsel for the assessee because it is for the legislature to couch a section in the manner in which it deems proper so as to achieve the object for which the section has been brought on the statute. Section 9 enumerates various categories of incomes which shall be deemed to accrue or arise in India. All the categories mentioned in Section 9 are independent of each other without drawing any support for their workability on other categories. Therefore, we do not find any rational basis as to why at all the legislature should have incorporated any exclusionary clause in Section 9(1)(i) while inserting Section 9(1)(vi) and (vii). Even in the case of income by way of interest, when the amendment was brought in by the Finance Act, 1976, only those words dealing with the interest income were omitted from Section 9(1)(i) and placed in Section 9(1)(v). No exclusionary clause was, accordingly, incorporated in Section 9(1)(i) while separately classifying interest income under Section 9(1)(v). There was no clause dealing with royalty and technical services prior to amendment by the Finance Act, 1976 and, therefore, they were not taxable prior to Finance Act, 1976. Therefore, they were separately inserted.
17. The second argument of the learned counsel for the assessee is that business includes technical services and, therefore, unless there is business connection in India, the fee for technical services cannot be taxed. There is no dispute as far as the proposition advanced by the assessee's learned counsel is concerned. However, the legislature has categorised this specific business separately in Section 9(1)(vii) and, therefore, when special provision has been made the general provision will not apply as was held in CIT v. Shahzada Nand & Sons and Ors. (1966) 60 ITR 392 (SC) which reads as under:
"The rule is, that whenever there is a particular enactment and a general enactment in the same statute, and the latter, taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative, and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply."
18. Now, we would examine the learned counsel's argument with respect to business connection in India. We find that in all categories of Section 9 only those incomes have been deemed to accrue or arise in India which have some business connection in India. The Hon'ble Supreme Court in Electronics Corporation. of India Ltd. v. CIT (supra) has clearly observed that unless there exists a nexus with something in India, Parliament will have no competence to make the law. Such a law may have extra territorial operations in order to subserve the object and that object must be related to something in India. Section 9(1)(vii), with which we are concerned, has been referred to a Constitution Bench. No judgment of Hon'ble Supreme Court was brought to our notice which has declared the provisions of Section 9(1)(vii)(b) ultra vires the Constitution. The Hon'ble Andhra Pradesh High Court has upheld the constitutional validity. Therefore, the position of law as it stands is that Section 9(1)(vii)(b) is intra virus the Constitution. The Hon'ble Andhra Pradesh High Court has observed as under:
"Section 9(1)(vii)(b) of the IT Act, 1961 uses the expression "fees for services utilised in India" and not "fees for services rendered in India". Accordingly, if the fees are paid for services utilised by the Indian company in its business carried on by it in India, irrespective of the place where the services were rendered, the amount of the fees should be deemed to accrue or arise in India."
In Clauses (v) to (vii), the nexus is determined qua payer. If the income .is accruing to payee on account of Indian territorial nexus, then the same has been brought to tax.
19. The next argument of the learned counsel is that there is no provision in Section 9(1)(vii) to deal with the situation where the services are not actually utilised by the Government/resident. In our opinion, this issue is irrelevant in the present appeal because the' technical services were meant for utilisation in India. However, we proceed to examine the arguments of learned counsel for the assessee for the purposes of interpretation of Section 9(1)(vii). We are unable to accept the argument of the learned counsel for the assessee because in Section 9(1)(vii)(b) the utilisation of services is essential by the resident only in a business or profession carried on by the resident outside India. If a resident pays by way of fees for technical services outside India for the services to be utilised in India, then that income per se will be treated as income accruing or arising to the person in India. However, if the services were meant for utilisation outside India, then it would not be taxable in India. It is difficult to comprehend a situation where the technical services obtained by a person for being utilised in a business carried on outside India are immediately utilised in the business. Considerable time gap is bound to be there before it can be said that the technical services have actually been utilised. If we accept the arguments of the learned counsel for the assessee, it would lead to a situation where the exception contained in Section 9(1)(vii)(b) would become otiose. This, in our opinion, is not the object of the legislation. The learned counsel for the assessee has also submitted that there is no provision for the situation where the technical services are actually utilised in India though meant for utilisation abroad. In our opinion, in such a situation, the income would go out of the purview of exception clause and will become taxable. It is well settled principle of taxing statute that charging section is to be construed strictly.
20. The next argument of the learned counsel for the assessee is that the main purpose of Section 9(1)(vi) and 9(1)(vii) is to define royalty and technical services. The learned counsel for the assessee pointed out that Section 9(1)(vi) and (viii) are not redundant as they have been incorporated for rate purposes as is evident from the Finance Minister's Budget Speech. In this regard we have reproduced earlier the extracts of the speech of the Hon'ble Finance Minister, from which as pointed out earlier, it is evident that this amendment was brought out to obviate several administrative difficulties and uncertainties. As is evident, the fees for technical services has been defined vide Expln. 2 and, therefore, it cannot be said that the whole object of inserting Section 9(1)(vii) was to define fees for technical services or for rate purposes only. Section 9(1)(vii) is a separate category altogether.
21. The argument of the learned counsel for the assessee was regarding placement of Section 9(1)(vi) and 9(1)(vii) for which he relied on the decision of the Hon'ble Supreme Court in (1993) 201 ITR 737 (SC) (supra). Since, in our opinion, Section 9(1)(vii) is not part and parcel of Section 9(1)(i), it is academic to consider this argument of the learned counsel for the assessee. However, the decision of the Hon'ble Supreme Court relied upon by the learned counsel for the assessee cannot be applied to the present situation because there the Hon'ble Supreme Court was seized with the situation of considering deduction under Section 80T either before or after set off the business loss. The Hon'ble Supreme Court taking note of the provisions of Section 80T held that it has to be applied to gross capital gains earned by the assessee and not after set off of business loss. In this regard it is noteworthy that Section 80T specifically dealt with deduction in respect of long-term capital gains and the section itself was so couched that the term "such income" in the said section was interpreted to refer to long-term capital gains only. In that context, the Hon'ble Supreme Court made observation that Section 80T should have been placed along with Section 48. The situation in the present case is entirely different as the legislature has consciously incorporated separate categories of income. As we have already considered the arguments of the learned counsel for the assessee regarding utilisation of technical aspect and have held that utilisation in the present context means 'meant for utilisation', we do not consider it necessary to go into the argument of the learned counsel for the assessee, noted earlier, with regard to Sections 198 and 199 r/w Section 5(2) of the Act.
22. The next argument of the learned counsel for the assessee is that if Section 9(1)(vi) and (vii) are not treated as part of Section 9(1)(i), then quantification is not possible. This argument of the learned counsel for the assessee is self-contradictory because we do not find any material difference in Section 9(1)(i) and Section 9(1)(vi) and (vii) as both refer to the term "income". The Hon'ble Madras High Court in (1987) 167 ITR 884 (Mad) (supra) has clearly held that income by way of fees for technical services whether arising out of business connection or not will have to be treated as coming only under Section 9(1)(vii) and not under Section 9(1)(i).
23. In view of aforementioned discussion, respectfully following the decision of the Hon'ble Madras High Court cited supra, the assessee's appeal is dismissed.
24. In the result, the appeal is dismissed.