Authority Tribunal
Dieter Eberhard Gustav Von Der Mark vs Commissioner Of Income-Tax on 24 November, 1998
Equivalent citations: [1999]235ITR698(AAR)
RULINGS A.A.R. No. 394 of 1997 Decided On: 24.11.1998 Appellants: Dieter Eberhard Gustav Von Der Mark Vs. Respondent: Commissioner of Income-tax Hon'ble Judges:
Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members Counsels:
For Appellant/Petitioner/Plaintiff: H.P. Ranina, Adv.
For Respondents/Defendant: H. Srinivasulu, Deputy CIT Subject: Direct Taxation Acts/Rules/Orders:
Double Taxation Avoidance Agreement Between Germany and India - Articles 14 and 16; Income Tax Act, 1961 - Section 15 Cases Referred:
CBDT v. Oberoi Hotels (India) Private Limited, [1998] 231 ITR 148 RULING
1. An application under Section 245Q(1) of the Income-tax Act, 1961, for seeking advance ruling was filed by Mr. Dieter Eberhard Gustav Von Der Mark, Krieler Strasse 7,50935, Koln, Germany, on December 18, 1997. The applicant is a citizen and permanent resident of Germany. The applicant's stay in India during the financial years 1995-96, 1996-97 and 1997-98 was respectively 13 days, 13 days and 25 days. It is , therefore, evident that the applicant was non-resident during the relevant period and is entitled to file this application.
2. The applicant, as per the statement of the relevant facts given by him, is a qualified and experienced engineering consultant in Germany. Till 1994, he was vice-president of one of the reputed manufacturing companies in Germany with which Pennwalt India Limited had a technical collaboration. Since 1994, the applicant is stated to be practising as a Process Engineering Consultant. It is stated that the applicant joined the board of directors of Pennwalt India Limited on December 15, 1995, by virtue of his technical merit and cordial relations with the company.
3. According to the applicant, he had been approached by Pennwalt India Limited for technical and marketing consultation in respect of their process equipment, viz., super centrifuge, super-D-canter and vibrating screens. The services were to be rendered from Germany. The purpose of the consultancy is said to be technical advancement of the company's products and development of export potential in the European market.
4. The services rendered by the applicant from abroad are stated to be as follows ;-
(i) Location of manufacturers of specialised raw materials for use in the manufacture of the said equipment.
(ii) Application of the machines for various processes and necessary changes in design construction, etc.
(iii) Improvement and advancement required in manufacturing.
(iv) Identification of customers for such products in European industry.
5. According to the applicant, he has more than 35 years of experience in marketing and selling engineering goods in the chemical industry. In support of this, the applicant has enclosed his bio-data with the application. The applicant further claims that he has wide contacts and knowledge of the industry and is in a position to identify suppliers of specialised materials of construction, help the Indian company from Germany for improvement in use of materials, designs and specifications as is necessary for the process equipment and conditions in the European market.
6. An agreement with Pennwalt India Ltd. was entered into by a letter of offer dated October 30, 1996, by that company for rendering technical and marketing services. The applicant conveyed his acceptance by reply dated November 15, 1996. Prior to this agreement, he was also appointed as a non-whole-time non-resident additional director/director of the company for promotion of the company's products overseas on a fee not exceeding Rs. 4,00,000 per annum. As per resolution passed at the meeting of the board of directors held on September 29, 1997, which is annexed to the application, the applicant also gets the following payments :
(a) A sum not exceeding Rs. 4,00,000 per annum as consultancy fee for upgradation and acceptability of the company's products overseas for a period of two years with effect from July 1, 1997 ;
(b) Remuneration of 1 per cent, of the net profits of the company by way of commission ;
(c) Sitting fee and expenses for attending meetings of the board or committee thereof ; and
(d) Reimbursement of travelling, hotel and other incidental expenses incurred by him abroad.
7. The resolution mentioned above confirms remuneration and other payments to the applicant as a "technical consultant". However, the letter of offer of Pennwalt India Ltd. does not refer to payments for sitting fee as a director or "similar payments" if any, but only mentions that "the total remuneration by way of consultation fee in a financial year is not to exceed US $ 11,000 as per the board's decision". It is thus not clear what amount is to be attributed to fee towards sittings of board of directors or similar other payments.
8. The applicant is stated to have personally undertaken visits to the potential suppliers and customers for technical discussions to understand their technical specifications, etc. He is also stated to have communicated with these suppliers and customers abroad through telephone, fax and corresponded with them. Thereafter, he is stated to have advised the Indian company with regard to improvements in design and manufacture to suit the European market. He is also stated to have advised the Indian company to participate in trade exhibitions and machinery shows abroad for display of the products to European consumers.
9. It has been claimed that the above services rendered by the applicant are entirely in Germany and Europe and no part of the services has been rendered in India. It is also claimed that the professional fees receivable by the applicant are solely in respect of the services rendered.
10. On the basis of these facts, the applicant has raised the following questions for our consideration :
"1. Whether professional fees receivable by the applicant, Mr. Von Der Mark, are taxable in India, in view of Article 14 of the Agreement for Avoidance of Double Taxation dated April 14, 1994, between India and the Federal Republic of Germany, having regard to the fact that no services are rendered in India ?
2. Whether income-tax is deductible at source under Section 195 of the Income-tax Act, 1961, by Pennwalt India Ltd. at the time of remittance of the said professional fees by Pennwalt India Limited to Mr. Von Der Mark ?"
11. The applicant's own interpretation of law is that as per Article 14 of the Double Taxation Avoidance Agreement (DTAA) between India and Germany, income derived by an individual who is a resident of a contracting State from the performance of the professional services is taxable only in that State, unless the individual has a fixed base in the other contracting State or if he stays in the other contracting State for a period exceeding 120 days in the relevant fiscal year. In this regard, the applicant states that he is a permanent resident of Germany and has neither a fixed base in India nor his stay in India has exceeded 120 days in any previous year. It has also been stated that there is no possibility of his stay in India exceeding 120 days in any fiscal year in the future. On the basis of these averments, it has been argued that both the conditions as stated in Clause (a) and Clause (b) of Article 14 of the DTAA are not applicable in his case.
12. The applicant claims that the amount received or receivable by him as professional fee is for the services wholly rendered by him from Germany and as such the fees received by him from Pennwalt India Ltd. have not accrued in India. Accordingly, it has been contended that the income is not taxable as per the provisions of Section 5(2) of the Income-tax Act, 1961. In a nut-shell, in the applicant's view, he is not liable to pay any tax in India for the following reasons :--
(a) The applicant is an individual who is a resident of Germany ;
(b) He has not performed any professional services from India ;
(c) Payment in respect of services is received outside India ;
(d) There is no fixed base in India and he has his own fixed base in Germany ; and
(e) His stay in India does not exceed 120 days.
13. In response, the Department through the CIT, Mumbai City-II, Mumbai, has stated that the applicant had been appointed as additional director of Pennwalt India Ltd. from October 30, 1996, on payment of Rs. 4 lakhs per annum, 1 per cent, of commission on net profit of the company, director's fee and other perquisites. The Department's view is that the applicant's role is that of a marketing executive where his technical qualifications assumed secondary importance. Therefore, income accrues to the applicant in India through a fixed base in India. The Department is further of the view that the amount of Rs. 4 lakhs accruing to the applicant is liable to taxation under the head "Salary" under Section 15 of the Income-tax Act, 1961, irrespective of the fact whether it is paid in India or abroad. According to the Department, as per Article 16 of the DTAA between India and Germany, the director's fee paid to the applicant is taxable in India.
14. During the hearing, it was clarified by Shri H. P. Ranina, learned counsel for the applicant, that the tax at source was being deducted in respect of one per cent, commission paid to the applicant. As such, there was no dispute on that score.
15. As regards the fee paid to the applicant in respect of other professional services, Shri Ranina contended that Article 14 of the DTAA directly applied to the applicant's case. Article 14 reads as follows (see [1997] 223 ITR (St.) 130, 143) :
"Independent personal services ;
1. Income derived by an individual who is a resident of a contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other contracting State :
(a) if he has a fixed base regularly available to him in the other contracting State for the purpose of performing his activities, in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State ; or
(b) if his stay in the other contracting State is for a period or periods amounting to or exceeding in the aggregate 120 days in the relevant fiscal year, in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.
2. The term 'professional services' includes independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants."
16. Shri Ranina argued that the expression "professional services" used in Article 14(2) was very wide which included certain specific services including that of an engineer. This did not mean that other professions which were not specified in Article 14(2) were not covered. Services rendered by the applicant, according to Shri Ranina, clearly fell within the expression "professional services" as referred to in Article 14(2).
17. Shri Ranina submitted that it was on account of his engineering expertise and knowledge that he had been appointed to promote the products and not on account of any marketing skills or expertise which he did not possess. However, according to Shri Ranina, even marketing services fell within the meaning of the expression "professional services" as referred to in Article 14(2).
18. Shri Ranina refuted the Department's argument that Article 16 of the DTAA applied in the applicant's case. He contended that this was not so because this article applied only in respect of "director's fees and similar payments". The fees payable under the consultancy agreement did not fall within the meaning of the expression "similar payments". In fact, the commission paid to the applicant would fall within the meaning of the expression "similar payments". Therefore, tax had been deducted at source under the provisions of the income-tax law and only the net after tax commission had been remitted by Pennwalt India Ltd. to the applicant. It was further contended by Shri Ranina that Article 12 did not apply in the case of the applicant because the fees for technical services did not arise in India but arose in Germany. Further, this article was general in nature whereas Article 14 was specific to professionals. When two articles overlapped, the specific article will apply to the exclusion of the general article.
19. In the light of the aforesaid, Shri Ranina concluded that no income arose to the applicant in India and could not be taxed under Article 12, 14 or 16 in India. The income of the applicant arose entirely in Germany and Article 14(1) squarely applied whereby the amount would be taxable only in Germany, since the conditions of Clauses (a) and (b) were not satisfied in the case of the applicant. Hence, no tax was required to be deducted at source by Pennwalt India Ltd. while making the payment of the fees to the applicant under the consultancy agreement.
20. Shri H. Srinivasulu, arguing for the Department, submitted that the consultancy service charges received by the applicant were covered by Article 16 of the DTAA since the applicant received commission, consultancy charges, reimbursement of various expenses and director's fee in his capacity as a director of Pennwalt India Ltd. and that but for this he would not have received the consultancy charges. The consultancy charges received by the applicant, according to him, were covered by the word "similar payments" in Article 16 of the DTAA. Under Article 16, all types of remunerations received by a director from an Indian company were taxable in India.
21. The Department's representative further submitted that the applicant was not entitled to claim the benefit of Article 14 of the DTAA for the following reasons :
(i) The applicant had a fixed base in India and such fixed base was in the form of directorship in Pennwalt India Ltd., or, in any case, the company itself was the fixed base for the applicant to render the services.
(ii) Article 14(2) defined the term "professional services" to include independent scientific, literary, artistic, educational or teaching activities, as well as independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. It was an inclusive definition and the services rendered by an engineer were covered by the term professional services. Though the applicant was an engineer, he was not rendering only engineering services. The services rendered by the applicant were predominantly marketing services, and as such the applicant was not covered by the term professional services,
22. Shri Srinivasulu made an alternative submission that the consultancy charges received by the applicant were in the nature of fee for technical services under Article 12 of the DTAA. Article 12(4) defines the fee for technical services as under (see [1997] 223 ITR (St.) 130, 142) :
"The term 'fees for technical services' as used in this article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this agreement."
23. Shri Srinivasulu referred to a judgment of the Supreme Court of India to elaborate the meaning of the words "technical services" and "professional services" in the case of CBDT v. Oberoi Hotels (India) Private Limited [1998J 231 ITR 148, at 172. In this case, the court held as under ; "But this court in Continental Construction Ltd.'s case [1992] 195 ITR 81 took the view that the amendment was only of clarificatory nature and the term 'technical services' always included within it professional services as well. This court has gone even to the extent that when a person consults the lawyer and seeks his opinion on certain issues the advice rendered by the lawyer would be a piece of technical service."
24. Thus, according to Shri Srinivasulu, the term "technical services" included professional services. The words used in Article 12(4) of the DTAA were "managerial, technical or consultancy nature" and the professional services rendered by the applicant were covered by the words "technical services". Accordingly, he submitted that Article 12(6) was also applicable in the case of the applicant.
25. The Authority has carefully considered the rival contentions. It is not possible to agree with the averment of the Department that the applicant has a fixed base in India or that the services rendered by him fall within the purview of Article 16 except to the extent indicated hereafter. There is no relationship of employer and employee between the applicant and Pennwalt India Ltd. so as to attract Section 15 of the Income-tax Act, 1961, which deals with the income chargeable under the head "Salaries". The authority is inclined to agree with the argument of Shri H. P. Ranina, learned counsel for the applicant, that the expression "professional services" is wide enough to include services, if any, rendered by the applicant as an engineer and that the various services rendered by Mr. Von Der Mark are in the nature of professional services falling under Article 14 of the DTAA between India and the Federal Republic of Germany. The conditions mentioned in the said article are clearly satisfied, as there is no permanent establishment in India in the facts and circumstances of the present case and the stay of the applicant in the relevant financial years has been for less than 120 days. The reliance by the Department on CBDT v. Oberoi Hotels (India) Private Limited [1998] 231 ITR 148 (SC) in support of the conclusion that the professional services included technical services so as to attract Article 12(4) of the DTAA, is misplaced. The intendment of Section 80-0 of the Income-tax Act, 1961, is to extend the benefit of income-tax deduction to the assessee while computing his total income, with the twin objective of encouraging the export of Indian technical know-how and augmentation of foreign exchange resources of the country. This case is not relevant for the present purposes and is clearly distinguishable on the facts and the applicable treaty provisions before us. Further, if the applicant's case falls under a more beneficial provision, it would be futile to stretch the interpretation to bring it under some other provision of the treaty or the Income-tax Act. This position is too well-established to require any further elaboration.
26. However, the Authority is inclined to take the view that the payment of fee to the applicant for sittings of the board of directors or similar payments, if any, would squarely fall under Article 16 of the DTAA between India and the Federal Republic of Germany. Article 16 reads as under (see [1997] 223 ITR (St.) 130, 144)) :
"Directors' fees and similar payments, derived by a resident of a contracting State in his capacity, as a member of the board of directors of a company which is a resident of the other contracting State may be taxed in that other State."
27. The rule contained in Article 16 is an exception to the more general rule in Article 14. Hence, in determining whether a director's fee paid to a non-employee director is subject to tax in the country of residence of the corporation, it is not necessary to establish that the fee is attributable to a fixed base in that country. The resolution of the board of directors of Pennwalt India Ltd. at its meeting held on September 29, 1997, clearly envisages sitting fee for attending meetings of the board or a committee thereof. The fee paid in this regard to the applicant would attract Article 16 of the DTAA.
28. In the light of the aforesaid position, the conclusions of the authority with respect to the questions posed by the applicant are as under :
A.Whether professional fees receivable by the applicant Mr. Von Der Mark are taxable in India, in view of article 14 of the Agreement for Avoidance of Double Taxation dated April 14, 1994, between India and the Federal Republic of Germany, having regard to the fact that no services are rendered in India.
B. Whether income-tax is deductible at source under section 195 of the Income-tax Act, 1961, by Penn walt India Ltd. at the time of remittance of the said professional fees by Pennwalt India Limited to Mr. Von Der Mark.
No. However, the fee received by the applicant for sittings of the board of directors and similar payments, if any, would be liable to be taxed under article 16 of the DTAA between India and the Federal Republic of Germany and in this regard, the tax at source is deductible.