C.E.S.C. Ltd. vs Deputy Commissioner Of Income Tax on 6 August, 2003

[Cites 32, Cited by 6]

Income Tax Appellate Tribunal - Kolkata

C.E.S.C. Ltd. vs Deputy Commissioner Of Income Tax on 6 August, 2003

Equivalent citations: [2003]87ITD653(CAL), [2005]275ITR15(CAL), (2003)80TTJ(CAL)806

ORDER

Pramod Kumar, A.M.

1. This appeal is directed against the order dt. 27th Feb., 1998, passed by the CIT (West Bengal-I), under Section 263 of the IT Act, 1961 (hereinafter referred to as 'the Act'), and in the matter of 'no objection certificate' issued by the Dy. CIT, Spl. Range 11, Kolkata, authorizing CESC Ltd. to remit a sum of UK £ 52,000 to one M/s Mott Ewbank Preece of UK, after deducting the tax at source @ 5 per cent of the gross amount.

2. Although the assessee has raised nine grounds of appeal, we deem it fit and proper to begin with addressing ourselves to the core grievance of the assessee that the 'no objection certificate' sought to be revised by the impugned order was not prejudicial to the interest of the Revenue inasmuch as, consequent to the 'no objection certificate' in question, the assessee had to deduct tax at source @ 5 per cent whereas no tax was really required to be deducted at source from the remittance in question.

3. Briefly, the facts. CESC Ltd. also known as Calcutta Electricity Supply Corporation and hereinafter referred to as the 'assessee tax deductor', is an Indian company engaged in the business of generation and distribution of electricity. This company sponsored, jointly with Rolls Royce plc of UK, setting Up of coal fired thermal power plant on Balagarh Island, near Kolkata. In addition to these two sponsorors, Asian Development Bank (ADB), Commonwealth Development Corporation (CDC) and International Finance Corporation (IFC), and certain Indian investors like Industrial Credit and Investment Corporation of India Ltd. (ICICI) were to hold the equity in the project company. It was in this backdrop of facts that one M/s Mott Ewbank Preece, a unit of Mott McDonald Limited (hereinafter referred to as 'MEP') was appointed as 'technical advisor' to the financial institutions. We may mention that the expression 'financial institution' collectively refer to Asian Development Bank (ADB), Commonwealth Development Corporation (CDC), Industrial Credit and Investment Corporation of India Ltd, (ICICI), UK Export Credit Guarantee Corporation and ANZ Grindlays Bank plc., and that International Finance Corporation (IFC) was co-ordinator in the present project. To highlight the purpose and scope of MEP's work, we may only refer to the following extracts from the agreement dt. 6th Oct., 1995, for appointment of MEP as 'technical advisor', a copy of which was placed before us at pp. 1 to 17 of the assessee's paper book :

"Term and purpose ..........................

(c) The purpose of obtaining MEP's expert opinion on various elements of the Project as specified by the Scope of Work is to provide a basis for the Financial Institutions to assess critical technical, economic, commercial and environmental aspects and risks related to the Project with a view to providing financing or other credit support to finance the construction and start-up costs expected to be incurred upto Project completion.

(d) MEP will act as representative of the Financial Institutions and on instructions from the co-ordinator and/or from time to time the other Financial Institution: Its responsibility will be directly to the Financial Institution.

2. Scope of Work ...............................

Technical appraisal of the project for the Financial Institution......"

The aforesaid agreement further provided that "MEP shall not undertake any other obligation or commitments to the borrower, its shareholders or their affiliates which would, or might reasonably be expected to, give rise to a conflict of interest with its obligations to financial institutions thereunder without first notifying the obtaining the consent of the financial institutions."

4. There is no dispute about the fact that it was in consideration for the services so rendered by MEP that the assessee tax deductor incurred a liability to pay UK £ 52,000 and that the assessee tax deductor moved a petition dt. 10th Nov., 1995, which described the payment in the nature of 'fees for professional services', seeking AO's permission to remit the aforesaid payment without any deduction of tax at source. On 6th Dec., 1995, however, the AO issued a 'no objection certificate' to the assessee tax deductor whereby it was authorized to make the remittance after deduction of tax at source @ 5 per cent.

5. It is this 'no objection certificate' which is subject-matter of impugned revision order passed by the CIT.

6. The CIT, being of the view that the above receipt in the hands of MEP was taxable @ 20 per cent, initiated revision proceedings under Section 263 on 21st Jan., 1998. After giving an opportunity of hearing to the assessee and after taking into account assessee's objection to the proposed revision, learned CIT concluded as follows :

"The payment for fees for such services is well within the scope of "fees for technical services" and, therefore, taxable under the DTAA and the Indian IT Act, 1961. Further, the rate prescribed as per DTAA between India and U.K. is 20 per cent. In view of this position, AO has to adopt the rate of 20 per cent for deducting the tax at source. The order under Section 195 deducting tax at 5 per cent is, therefore, erroneous and prejudicial to the. interest of Revenue. I, accordingly, set aside the order under Section 195, dt. 6th Dec., 1995, and direct AO to pass an order in conformity with the provisions of DTAA and IT Act, 1961, as discussed above."

7. Aggrieved by this order of the learned CIT, the assessee is in appeal before us.

8. We have heard Shri Kuashik Mukerjee, learned counsel for the assessee, and Shri D.K. Ghosh, learned Departmental Representative. We have also carefully perused orders of the authorities below, as indeed the paper book filed before us, and have duly deliberate upon the Double Taxation Avoidance Agreements (DTAAs) and judicial precedents cited at the Bar. We find that it is an unambiguous legal position that by the virtue of Section 90(2) of the Act, where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply only to the extent they are more beneficial to that assessee. Thus, provisions of such double taxation avoidance agreements override the provisions of the Act, to the extent these agreements are more favourable to the assessee. In our considered view, therefore, only in the event of assessee's case failing on the provisions of the DTAA, the question of examining provisions under the IT Act arises. We may, in this regard, quote the following observations made by the Hon'ble jurisdictional High Court in the case of CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal):

"............The conclusion is inescapable that in case of inconsistency between the terms of the agreement and the taxation statute, the agreement alone would prevail.

The CBDT has issued a Circular No. 333 on 2nd April, 1982 [see (1982) 137 ITR (St) 1], on the question as to what the AOs will do when they find that the provisions of the Double Taxation Avoidance Agreement are not in conformity with the provisions of the IT Act, 1961. Then it was laid own by the Board in the said circular as follows :

The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the IT Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the IT Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement.

Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the IT Act, that will govern the taxation of income.' In our view, the circular reflected the correct legal position inasmuch as the convention or agreement is arrived at by the two contracting Governments in deviation from the general principles of taxation applicable to the contracting States; otherwise, the Double Taxation Avoidance Agreement will have no meaning at all."

We will, therefore, take up taxability of impugned payments to the MEP, in the light of provisions in applicable India-UK DTAA.

9. Let us first take a look at the scope of expression 'fees for technical services' so far as applicable India-UK DTAA is concerned.

10. Article 13(4) of the India-UK DTAA defines "fees for technical services" as payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of technical or other personnel) which :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3(a) of this article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in para 3(b) of this article is received; or

(c) make available technical knowledge, experience, skill, knowhow or processes, or consist of the development and transfer of a technical plan or technical design.

11. As far as services covered by Article 13(4)(a) and (b) are concerned, the provisions are self-explanatory and there is no controversy about scope of these two categories, The controversy, however arises about the scope of services covered by Article 13(4)(c) and in particular by the scope of expression 'make available' used therein. We may also mention that, according to the learned CIT, the services rendered by the MEP are covered by the scope of art, 13(4)(c) of the DTAA.

12. The provisions of Article 13(4)(c) clearly depart from the normal definition of 'fees for technical services' in DTAAs that India has entered into with foreign countries which is somewhat on the lines of definition given in Expln. 2 to Section 9(1)(vii) of the IT Act. The key difference, in our considered view, is that as against reference to 'rendering of technical services in the statute and most of the DTAAs, the stress here is on 'making available' technical knowledge, experience, skill, know-how or processes, etc. This paradigm shift in the definition of 'technical services' is noticed in the Indo-USA DTAA, dt. 12th Sept., 1989. The provisions of Article 13(4)(c) of the Indo-UK DTAA are in pari materia with the definition of 'fees for included services' under Article 12(4)(b) of Indo USA DTAA which is as follows :

(4) For the 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 .....

(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."

13. In the protocol note attached to and forming part of the aforesaid DTAA, Government of India has confirmed that memorandum of understanding between India and USA with regard to interpretation of Article 12 (royalties and fees for included services) also represents the views of the Indian Government. This memorandum, inter alia, provides as follows :

"Para. 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan 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......... 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 means that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of para 4(b)."

14. We have no reasons to believe that Government of India had any other views for identical provisions in India-UK DTAA. When provisions are in pari materia, there cannot be different meanings assigned to the provisions, unless there is anything repugnant in the context. We find nothing to support any deviation from the interpretation canvassed in the memorandum of understanding, attached to and forming part of Indo-US DTAA, extracts from which have been reproduced above. As stated by Lord Mansfield, "where there are different statutes in pari materia though made at different times, or even expired, and not referring to each other, they shall be taken together, as one system and as explanatory of each other." (R. v. Loxdale 97 ER 394 at p. 395). In our considered view, this principle of interpretation of statutes should also govern the interpretation of DTAAs, particularly when those DTAAs deal with the same thing and are identical in material respects. We may also refer to the observations of Griffith, CJ, in the case of Webb v. Outrim AC 81 PC, at p. 89 that, "When a particular from of legislative enactment, which has received authoritative interpretation whether by judicial decision or by a long course of practice, is adopted in framing a later statute, it is a sound rule of construction to hold that the words so adopted by the legislature to bear that meaning which has been so put on them." A fortiorari, when a particular DTAA clause has received an authoritative interpretation, from an authority no less than the Government of India itself, and identical clause is adopted in framing a later DTAA, it is to be held that the clause so adopted in the later DTAA will also normally have the same meaning as assigned to that clause.

15. We, therefore, find that it is a fairly settled position that consideration for rendering of technical services, as is the thrust of Expln. 2 to Section 9(1)(vii) of the Act and definition of "fees for technical services' as adopted in most of the DTAAs that India has entered into with various countries, is materially distinct from 'consideration for technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person's as is the expression used in India-UK and India-USA DTAAs.

16. We may also mention that this paradigm shift in definition of the 'fees for technical services', so far as Article 13(4)(c) of India-UK DTAA is concerned, is a concerned departure from the traditional model which represented broadly by the definition of technical services as given in the Indian IT Act. Even after India entered into DTAA with United States on 12th Sept., 1989, wherein this departure from traditional definition was made for the first time, India has entered into several DTAAs wherein traditional definition, on the lines of definition in Indian IT Act, 1961, continues to find the place, such as in India Australia DTAA, dt. 25th July, 1991, India Belgium DTAA, dt. 26th April, 1993, India France DTAA, dt. 29th Sept., 1992, India Germany DTAA and India Israel DTAA, dt. 29th Jan., 1996. On the other hand, there are several DTAAs wherein the narrower definition of 'technical services', as in the case before us, has been adopted e.g., in India Switzerland DTAA, dt. 2nd Nov., 1994, and, of course, India UK DTAA, dt. 25th Jan., 1993. The choice of narrower definition for the expression 'fees for technical services' in India UK DTAA, therefore, is clearly a conscious departure from, what can be termed as, traditional definition of 'fees for technical services'. In this view of the matter, we get no assistance from the construction the' expression 'fees for technical services' has received, in the context of traditional definition of that expression. The question then arises as to what is the precise scope of definition of technical services referred to in Article 143(4)(c) of the India UK DTAA.

17. In our considered view, in order to be covered by the provisions of Article 13(4)(c) of the India UK DTAA, not only the services should be of technical in nature but such as to result in making the technology available to the person receiving the technical services. We also agree that merely because the provision of the service may require technical input by the person providing the service, it cannot be said that technical knowledge, skills, etc. are made available to the person purchasing the service. As to what are the connotations of 'making the technology available to the recipient of technical services', as is appropriately summed up in protocol to Indo-US DTAA, "generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology." We are in considered agreement with the views expressed in the protocol to Indo-USA DTAA which, as we have mentioned earlier, also represents views of the Government of India on this subject.

18. It takes us to the key question as to whether, on the facts of the case before us, it could be said that payment to MEP was in consideration for the rendering of any technical or consultancy services which "made available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design."

19. Let us now take a look as to what were the services being rendered by MEP and to whom were these services rendered. As per Article l(c) of the agreement appointing MEP as 'technical advisor' to the 'financial institutions' (also referred to as 'the independent engineer' and 'engineer' in the agreement), MEP was to give expert opinion on various elements of project to 'provide basis to the financial institutions to assess critical technical, economic, commercial and environmental aspects and risks related to the project, with a view to providing finance or other credit support to finance the construction and start up costs expected to be incurred upto project completion'. As to the precise scope of work in phase one, which is relevant for our purposes, Article 2 of the agreement states that the duties undertaken will be "technical appraisal of the project for financial institutions to be made before financial close in accordance with the scope of work outlined in terms of reference set out in Appendix A'. Appendix A," in turn, inter alia, states as follows :

"The Engineer (MEP) will review the project documentation with respect to technical feasibility and economic viability on behalf of the Asian Development Bank, Commonwealth Development Corporation, International Finance Corporation ECGD and ICICI (India) (the "Senior Lenders"). This engineering review will encompass the proposed design, procurement, construction, startup and testing, and operation and maintenance of the project. The Engineer will identify risks or issues which, if not corrected or mitigated, could result in commercial failure of the project, or losses to the lenders. In such cases, alternative solutions will be suggested for the consideration of senior lenders, and the project developer, BPCL. The Engineer's role is that of reviewing and opining rather than designing or directing the project. The Engineer's review is limited to engineering issues and their potential effect upon commercial performance; legal and regulatory issues will not be stated except to the extent expressly stated."

20. A further break-up of the duties to be performed by MEP, as given in the aforesaid agreement (relevant portion of the agreement at pp. 12 to 16 of the paper book), explains the work to consist of the tasks in the nature of (i) review of proposed conceptual design of the project; (ii) review of project contracts and agreement to check for appropriateness particularly with regard to obligations of the project company under the agreements, and comment on inconsistencies or flaws that would impair technical performance of the project, or the satisfactory and efficient operation of the project, and its economic viability; (iii) visit the power purchaser WBSEB and discuss and comment on the reasonableness of schedule and arrangements for construction of the interconnection with WBSEB, adequacy of the protective devices in the plant configuration, viability of proposed metering system, plant dispatch arrangement, transmission line load flows by season, and overall system compatibility with the proposed plant; (iv) review of turnkey contractor's scope of work and corresponding pricing estimate methodologies for the three contract and the Rolls Royce parental guarantee which comprises the turnkey contract arrangements; (v) review of the proposed arrangements for the initial supply of coal from Coal India Ltd.; (iv) review of operation and maintenance agreement and the owner's O & M plan for completeness and consistency with the requirements of all other project agreements and to ensure that responsibilities for O & M are clearly assigned and reasonable; (vii) review of the environmental impact agreement; (viii) review of technical parameters and assumptions that are significant to the projected financial performance of the project; (ix) report on any other issues detected that might jeopardize the effective construction and operation of the plant; and, finally (x) prepare draft task reports for each of the major tasks described above and send these to senior lenders for review and comment upon completion of each task.

21. We have carefully perused the details of precise nature of work performed by MEP, as discussed above, vis-a-vis the scope of 'fees for technical services' referred to in Article 13(4)(c), as discussed in para 16 earlier in this order. In our considered view, while the service rendered by MEP undoubtedly has substantial technical inputs, it does not result in, to use the phraseology employed in the India UK DTAA, 'making available the technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design'. We may also mention that the agreement, under which services were provided by MEP and genuineness of which has not at all been called to question by the Revenue, categorically mentions that MEP's "role is that of reviewing and opining rather than designing or directing the project", as evident from the extracts reproduced in para 18 'above. We are of the considered view that merely expressing opinion on or reviewing the project details can amount to 'making available' the technology in the sense that the receipient of services "is enabled to apply the technology". We find that MEP was merely to watch the interests of financial institutions and the services it was required to render, for doing so, had some technical inputs in it. The recipients of services in this case are certain foreign financial institutions and the only reason of taxability of payment for these services is the source rule i.e., because the payment made by an Indian resident. In fact, the agreement itself specifically states that MEP's role is that of reviewing and opining rather than designing or directing the project. Reviewing and opining per se does not result in making available the technical knowledge and skills, etc. There is nothing before us to even remotely suggest that any technology was made available to the financial institutions or, for that purpose, to the project itself. In order to services being covered by the definition of 'technical services' for the purpose of Article 13(4)(c) of India UK DTAA, services should not only be technical in nature but these services should make available the technical Knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. In our considered view, therefore, Revenue's case clearly fails on the second limb of this test. As we have stated earlier, it is not even Revenue's case, and rightly so, that the services rendered by MEP are covered by Clauses (a) and (b) of Article 13(4). We are, therefore, of the considered view that the payment for services rendered by MEP cannot be said to be covered by the meaning of 'fees for technical services' within the meanings of Article 13(4) of the India UK DTAA.

22. In the light of these discussions, we are of the considered view that since the payment made by the assessee tax deductor, to the M/s Mott Ewbank Preece (MEP) was not in the nature of 'payment of fees for technical services' under Article 13(4) of the DTAA and since the M/s Mott Ewbank Preece admittedly did not have any Permanent Establishment (PE) in India, income embedded in the related payment to MEP was not exigible to tax in India. Accordingly, the assessee tax deductor was not under any obligation to deduct tax at source from the remittance made to the aforesaid M/s Mott Ewbank Preece. It is also not in dispute, in the light of Hon'ble jurisdictional High Court's judgment in the case of CIT v. Davy Ashmore India Ltd. (supra), that provisions of such double taxation avoidance agreements override the provisions of the Act, to the extent these agreements are more favourable to the assessee. Accordingly, provisions of the IT Act, 1961, will not apply to the case before us. In this view of the matter and bearing in mind the fact that the no objection certificate dt. 6th Dec., 1995, authorized the assessee to make the remittance after deduction of tax at source @ 5 per cent, we are of the considered view that the 'order' sought to be revised by the learned CIT was not prejudicial to the interests of the Revenue inasmuch as consequent to the 'no objection certificate' in question, the assessee had to deduct tax at source @ 5 per cent whereas no tax was really required to be deducted at source from the remittance in question. Hon'ble Supreme Court, in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC) has, inter alia, observed that "A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the CIT suo motu under it is that the order of the ITO is erroneous insofar as it is prejudicial to the interests of the Revenue." Their Lordships further observed that "The CIT has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent--if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse, cannot be had to Section 263 of the Act." On the facts of the case before us, we find that while the no objection certificate sought to be revised by the CIT was indeed erroneous as it saddled the assessee tax deductor with a liability to deduct withholding tax @ 5 per cent whereas the assessee tax deductor did not have any liability to deduct any withholding taxes since the income embedded in payments to MEP was not exigible to tax in India, we are also of the view that the no objection certificate in question was not at all prejudicial to the interest of the Revenue because Revenue's interests were not adversely affected, in any manner whatsoever, by the aforesaid no objection certificate. We find that not only that issuance of aforesaid no objection certificate. We find that not only that issuance of aforesaid no objection certificate did not result in any loss of revenue, it did not even prejudice any interests of the Revenue. Therefore, the conditions for invoking Section 263 of the Act, as elaborated by Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra), were not satisfied. It leads us to the conclusion that the facts and circumstances of the case did not warrant or justify CIT's exercise of powers under Section 263. Accordingly, learned CIT did err in assuming jurisdiction under Section 263 on the facts of this case. We, therefore, deem it fit and proper to cancel the impugned order passed by the learned CIT. We order accordingly.

23. Before parting with the matter, we may place it on record that as we have decided the matter on the issue as to whether or not the no objection certificate sought to be revised by the learned CIT was at all prejudicial to the interest of the Revenue, we do not deem it necessary to adjudicate on the other issues, raised by the assessee in this appeal before us, including the issue as to whether a non-statutory 'no objection certificate' issued by the AO can at all be subject-matter of revision under Section 263 of the Act. In the light of our findings above, this and remaining grounds of appeal become infructuous. We, accordingly, refrain from making any observations on merits of the same.

24. In the result, appeal is allowed.

B.K. Mitra, J.M. 15th July, 2002

1. I have gone through the draft order recorded by my learned Brother in minute details. I am unable to agree with the finding of the learned AM on the following reasons :

I have noticed that the learned CIT has passed the following order :

(i) "On a perusal of the agreement between assessee and Mott the purpose of obtaining MEP's expert opinion is to provide a basis for the financial institutions to assess critical technical, economic, commercial and environmental aspects and risks related to the project with a view to providing financing or other credit support to finance the construction and start up costs expected to be incurred up to project completion."

(ii) "On careful reading of the agreement and considering the scope of the services rendered by MEP, it is evident that the role of engineers is not only reviewing and opining but also making available technical knowledge, skill, experience and transfer of the same in the implementation of the project. The scope of review is wider than merely expressing an opinion, it leads to and results in transfer of knowledge, skill, etc. without which project cannot be implemented. The payment of fees for such services is well within the scope of the term "fees for technical services" and, therefore, taxable under the DTAA and the Indian IT Act, 1961. Further, the rate prescribed as per DTAA between India and U.K. is 20 per cent. In view of this position, AO has to adopt the rate of 20 per cent for deducting tax at source. The order under Section 195 deducting tax at 5 per cent is, therefore, erroneous and prejudicial to the interests of Revenue".

Exercise of power given under Section 263 of the IT Act is dependent upon certain conditions as, mentioned in the section. It is true that exercise of power is dependent upon the consideration by the CIT but consideration by the CIT must be based on objective conditions laid down in Section 263 of the Act. When powers are conferred on statutory authorities to exercise the same when "they are satisfied" or when "it appears to them" or when "in their opinion" or if they consider that "certain state of affairs "exist" or when powers enable the statutory authorities to take such action as they think fit in relation to a subject-matter, the Tribunal would not readily differ to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated where reasonable conduct requires the criterion of reasonableness is not subjective but objective. The onus of establishing unreasonableness, however, rests upon the person challenging the validity of the action in the instant case. We have noticed that the exercise of the power is dependent upon the CIT considering the order of he AO to be erroneous insofar as it is prejudicial to the interests of the Revenue. Therefore, there must be material before the CIT before he passes the order to come to the conclusion that the order sought to be rectified was erroneous insofar as it is prejudicial to the interests of the Revenue. To such a conclusion the CIT can come on relevant material fact in respect of which reasonable opportunity must be given to the person sought to be affected and as such reasonable opportunity again on the principle of natural justice requires that the assessee to be affected should be given intimation of the material. It is also true that if the basic materials upon which the CIT proposes to act are intimated or communicated to the assessee the CIT may in his order rely on such supporting materials, It is found that such basic materials upon which the CIT proposes to act in an action under Section 263 must be intimated to the assessees concerned. In the instant case, we have noticed that such basic materials upon which the CIT proposes to act have been communicated to the petitioner. Furthermore, in the instant case there is a challenge thrown by the assessee that there were no materials on the facts and circumstances of the case for the CIT to come to the conclusion that the order in question is erroneous insofar as it is prejudicial to the interests of the Revenue.

2. An order must be erroneous "so as to be prejudicial to the interests of the Revenue. In this connection it may however by stated that anything which is prejudicial to the interests of the Revenue would be erroneous and that anything which is not lawful would be prejudicial to the interests of the Revenue. In this connection reliance may be placed on the order of the Hon'ble Supreme Court in the case of Smt. Tara Devi Agarwal v. CIT (1973) 88 ITR 323 (SC) and also on the observation of the Karnataka High Court in the case of CIT v. T. Narayana Pai (1975) 98 ITR 422 (Kar).

3. The power conferred under Section 263 is of wide amplitude. It enables the CIT to call for and examine the proceedings under that. It empowers the CIT to make or cause to be made such enquiry as it deems necessary in order to find out if any order passed by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue. After examining the record and after making or causing to be made an enquiry, if he considers the order to be erroneous, then he can pass the order thereon as the circumstances of the case justify. In this connection reliance may be made placed on the judgment of the apex Court in the case of CIT v. Sri Manjunatheswar Packing Products and Camphor Works (1998) 231 ITR 53 (SC). The only limitation on the power of the CIT is that he must have some materials which would enable him to form a prima facie opinion that the order passed by the officer is erroneous insofar as it is prejudicial to the interests of the Revenue. Once the CIT comes to the conclusion on the basis of the material that the order of the officer is erroneous and prejudicial to the interests of the Revenue, the CIT is empowered to pass an order as the circumstances of the case may warrant. The CIT is empowered to cancel the assessment and direct a fresh assessment. In the instant case, we have noticed that the payment of fees for such services rendered by the engineer is well within the scope of the term "fees for technical services" and, therefore, taxable under the DTAA and the Indian IT Act, 1961. I am, therefore, of the opinion that the CIT has rightly directed the AO to adopt the rate of 20 per cent for deducting tax at source instead of 5 per cent which was ordered by the AO under Section 195. The action of the AO was erroneous and prejudicial to the interests of the Revenue and, therefore, the learned CIT was quite justified in invoking his power under Section 263 of the IT Act, 1961.

4. In the result, the appeal is dismissed.

REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 BY THE BENCH August, 2002 As there is a difference of opinion between the JM and the AM, the matter is being referred to the Hon'ble President of the Tribunal with a request that the following questions may be referred to a Third Member or pass such orders as the Hon'ble President may kindly decide :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that income embeded in the payment of UK £ 52,000 paid to M/s Mott Ewbank Preeece was not exigible to tax in India, or whether the Tribunal should have held that the same being covered by the scope of "fees for technical services" under the applicable Double Taxation Avoidance Agreement, the CIT was justified in holding that the order under Section 195(2) passed by the AO was indeed prejudicial to the interests of the Revenue, inasmuch as it directed the assessee to deduct tax @ 5 per cent whereas correct rate of tax should have been 20 per cent ?"

M.A. Bakshi, Vice President (As Third Member) 23rd July, 2003

1. As a result of difference of opinion amongst the Members constituting the Division Bench., I was nominated as Third Member in respect of the difference of opinion. Parties have been heard and record perused. The controversy in this case arises as a result of an order under Section 263 by the learned CIT, West Bengal-I in respect of an order under Section 195 passed by the AO on 6th Dec., 1995, allowing the appellant, viz., M/s Calcutta Electric Supply Co. Ltd. (hereinafter called the 'CESC Ltd.') to remit a sum of pound sterling 52,000 to Mott Ewbank Preece, U.K., on deducting income-tax @ 5 per cent. The relevant facts of this case are briefly stated as under even at the cost of repetition for coherence and ready reference.

2. The State Government of West Bengal had marked a site at Balagarh island in the river Hooghly, 70 kms north of Kolkata, for building a coal fired thermal power plant for power generation. Subsequently, in an effort to attract private sector investment into power generation, the State Government invited CESC Ltd. to develop the proposed site as an independent power project of ultimate capacity of 1,500 megawatt (MW). The project was sponsored by CESC Ltd. from India and Rolls Royce plc of U.K. In addition to the sponsors. Asian Development Bank (hereinafter called 'ADB'), Commonwealth Development Corpn (hereinafter called 'CDC'), International Finance Corpn (hereinafter called 'IFC') and Indian investors were to hold equity in the project company termed as Balagarh Power Co. Ltd. (hereinafter called 'BPCL'). The project cost was estimated at US dollar 752 million. IFC was coordinator in the said project, M/s Mott Ewbank Preece, a unit of Mc Donald Ltd. (hereinafter called as 'MEP') was appointed as technical advisor of the financial institutions, viz., ADB, CDC, ICICI (Industrial Credit and Investment Corporation of India Ltd.), UK Export Credit Guarantee Corpn. and ANZ Grindlays Bank plc. An agreement dt. 6th Oct., 1995 was executed, copy of which is placed on record (pp. 1 to 17 of the paper book). As per the terms of the said agreement, the assessee was required to pay MEP an amount of 52,000 pound sterling for services rendered and reimbursement of expenses. It may be pertinent to mention that in terms of the requirement of Reserve Bank of India, a no objection certificate from the IT authority is required for remitting any foreign exchange abroad. The CBDT in Circular No. 659, dt. 29th Nov., 1994 [211 ITR (St) 28] prescribed a form for the said purpose. The assessee had filed an application dt. 10th Nov., 1995 with the AO seeking authorization for payment of the abovenoted amount without deduction of tax at source. The AO issued a letter dt. 6th Dec., 1995, permitting remittance of the sum after deduction of tax at source @ 5 per cent of the amount payable. The assessee though had claimed that no deduction is required to be made at source, yet accepted the order of the AO of deducting tax @ 5 per cent and the remittance was made after the deduction of the said tax. It may be pertinent to mention that the order under Section 195 passed by the AO asking the assessee to deduct tax @ 5 per cent as against the claim of the assessee of nil deduction of tax is appealable under Section 248 of the IT Act, 1961. However, the order of the AO was not challenged before any authority.

3. Subsequently, the assessee had furnished similar applications to the AO in regard to further payments to MEP. The AOP in the respective orders passed under Section 195 had directed the assessee to remit the payments after deduction of tax @ 20 per cent. The learned counsel informed me during the course of hearing that such orders of the AO passed under Section 195 have been challenged by way of appeal and the matter is pending in the Tribunal. It may be relevant to point out that in the application filed with the AO for issue of no objection certificate, the assessee had indicated the purpose of payment as 'fee for personal services'.

4.The CIT issued a notice under Section 263 to the assessee to show-cause as to why the order dt. 6th Dec., 1995, passed by the AO authorizing remittance to MEP after deduction of tax @ 5 per cent may not be set aside as being erroneous and prejudicial to the interests' of Revenue as the actual rate of tax deductible in respect of the said payment was @ 20 per cent. The notice issued by the CIT is placed at p. 20 of the paper book.. The assessee objected to the proposed action by virtue of letter dt. 16th Feb., 1998, followed by letter dt. 17th Feb., 1998. These letters are placed at pp. 21 to 32,of the paper book. The CIT, however, overruled the objection raised by the assessee and passed an order dt. 27th Feb., 1998, under Section 263 holding that the authorization vide order dt. 6th Dec., 1995, of the AO was erroneous and prejudicial to the interests of the Revenue and that the AO was to deduct tax at source @ 20 per cent as per the Double Taxation Avoidance Agreement (DTAA) between India and UK as the payment made by the assessed to MEP was in the form of "fee for technical services".

5. The assessee challenged the order dt. 27th Feb., 1998, passed by the CIT under Section 263 by way of an appeal to the Tribunal, as provided under the Act. The learned AM has expressed the view that the order passed by the AO is erroneous insofar as the assessee has been asked to deduct tax- @ 5 per cent, but since as per his opinion no tax was payable in respect of the payment made to MEP, the order passed by the AO was not prejudicial to the interests of Revenue. He has, accordingly, for the detailed reasons given in his draft order, proposed to cancel the order of the CIT passed under Section 263 of the Act. However, the learned JM by a dissenting border has held that the payment made to MEP is a payment for fee for technical services and, accordingly, the order passed by the CIT under Section 263 was justified. Following point of difference has been identified by the Bench :

"Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that income embedded in the payment of UK pound 52,000 paid to M/s Mott Ewbank Preece was not exigible to tax in India, or whether the Tribunal should have held that the same being covered by the scope of "fees for technical services" under the applicable Double Taxation Avoidance Agreement, the CIT was justified in holding that the order under Section 195(2) passed by the AO was indeed prejudicial to the interests of the Revenue, inasmuch as it directed the assessee to deduct tax @ 5 per cent whereas correct rate of tax should have been 20 per cent ?"

6. The learned counsel for the assessee contended that the power of the CIT under Section 263 for revising an order vests only if two conditions are satisfied. Firstly, the order passed by the AO must be erroneous, and, secondly, the said order should be prejudicial to the interests of Revenue. It was contended that as held by their Lordships of the Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC), both the conditions must co-exist for the exercise of the power under Section 263 by the CIT. The learned counsel further contended that the order of the CIT under Section 263 is unsustainable in law insofar as the provisions of DTAA between India and UK [(1994) 206 ITR (St) 235) relating to the taxation of fee of the nature involved in this case are more favourable to the recipient than the provisions of the IT Act, 1961, In such a situation, the provisions of DTAA override the provisions of the IT Act, 1961. Reliance has been placed on the decision of the jurisdictional High Court in the case of CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal). Reference has also been made to CBDT Circular No, 333, dt. 2nd April, 1982, [(1982) 137 ITR (St) 1]. It was conceded by the learned counsel for the assessee that as per Explanation to Section 9(1)(vii) of the IT Act, 1961, the payment made to MEP would fall within the ambit of 'income by way of fee for technical services'. So however, payment not falling within the definition 'fee for technical services' under the DTAA with U.K. the payment to MEP is not liable to tax at all. In this connection reference was made to para 4 of Article 13 of the DTAA between India and U.K. which defines the term 'fees for technical services' and it was contended that since the MEP has not made available technical knowledge, experience, skill, know-how or processes nor was any technical plan or technical design transferred to the payer, the amount paid to MEP did not fall within the ambit of 'fee for technical services' or 'consultancy services'. The learned counsel invited my attention to the definition of the term 'fee for technical services' in the DTAA entered into between India and Germany (1997) 223 ITR (St) 130 at 142], wherein the term has been defined to mean the 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 other services mentioned in Article 15 of the said DTAA. It was contended that the definition of the 'fee for technical services' under the DTAA between India and Germany is wider than the definition of DTAA between India and UK. My attention was also invited to the DTAA entered into between India and USA (1991) 187 ITR (St) 102) where the definition for 'fees for included services' is given to mean 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 personal) 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 para 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.

It was contended that the definition of 'fee for included services' is in pari materia with the definition of 'fee for technical services' provided under the DTAA between India and U.K. Reference has also been invited to the explanatory memorandum relating to para 4(b) of Article 12 of the DTAA between India and U.S.A. wherein it has been clarified that the technology will be considered made available when the person acquiring the service is enabled to apply the technology. It has also been claimed that 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, skill, etc. are made available to the person purchasing the service, within the meaning of para 4(b). It has further been clarified that the use of a product which embodies technology shall not per se be considered to make the technology available. My attention was invited to the agreement entered into between MEP and project developer and financiers. It was contended that the scope of the advice under the agreement was to identify the risks or issues which, if not corrected or mitigated, could result in the commercial failure of the project or losses to the lenders. It was contended that though MEP was to suggest alternative solutions for the consideration of the senior lenders and the project developers, its role was limited to reviewing and opining rather than designing or directing the project, It was, accordingly, contended that the payment made to MEP did not fall within the ambit of 'fee for technical services' within the meaning of Article 13 of the DTAA between India and U.K. It was, thus, pleaded that the order passed by the CIT under Section 263 may be held as without jurisdiction and unwarranted.

7. In response to the query as to whether the payment made to MEP falls within the ambit of Article 7 of DTAA as business profit or under Article 15 as payment of personal services, the learned counsel contended that admittedly MEP was engaged in the business of providing professional services. However, since MEP did not have any permanent establishment in India, therefore, profits attributable to the services were not taxable under Article 7 of DTAA between India and U.K. It was further contended that admittedly the services provided by MEP would fall within the definition of 'independent personal services', but Article 15 of DTAA between India and U.K. which provides for taxation of such services, is applicable only in respect of the income derived by individual, whether in his own capacity or as member of the partnership which is a resident of contracting State in respect of professional services or independent activities of a similar character. According to the learned counsel, MEP is a company and, therefore, Article 15 of the DTAA is not attracted in this case. In reply to another query as to whether it was open to the appellant to claim that the payment to MEP was not taxable at all when the order of the AO under Section 195 directing to deduct tax @ 5 per cent was not challenged by the assessee, the learned counsel relied upon the decision of the Supreme Court in the case of Carborandum Co. v. CIT (1977) 108 ITR 335 at 339, 345 (SC). It was pointed out that in that case the assessee had accepted levy of tax @ 5 per cent. However, when the CIT initiated action under Section 33B of the IT Act, 1922, corresponding to Section 263 of the IT Act, 1961, the assessee challenged such action on the ground that the sum receivable by it was not per se taxable in India. The Supreme Court held that the sum received was not taxable in India and that since 5 per cent levy of tax not having been challenged by the assessee, the Court could not interfere with such taxation but held that the technical fee in excess of 5 per cent was not taxable. According to the learned counsel, the ratio of the said decision of the Supreme Court squarely applies to the facts of the present case and that the assessee is well within its right in challenging the order of the CIT under Section 263 for imposing the tax @ 20 per cent on the ground that no tax at all is chargeable without affecting the levy of 5 per cent. It is accordingly, pleaded that the view expressed by the learned AM is correct in comparison to view expressed by the learned JM. It has also been pointed out that the finding of the learned JM that any order which is prejudicial to t he interests of Revenue is erroneous and vice-versa is contrary to the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra). The learned counsel further contends that the reliance by the learned JM on the decision of the Supreme Court' in the case of CIT v. Shree Manjunatheswai Packing Products & Camphor Works (1998) 231 ITR 53 (SC) is misplaced as the issue in that case related to meaning of the word 'record' for the purpose of Section 263 and the said decision has no application to the present case. It has also been contended that though the learned JM has held that the payment of MEP is in the nature of fee for technical services, so, however, no underlying reason has been given to support such finding. It was, accordingly, pleaded that the appeal of the assessee may be allowed.

8. The learned Departmental Representative, on the other hand, contended that MEP had provided technical services to the assessee as well as to the financial institutions and that the MEP was also responsible for suggesting corrections to any deficiency or inaccuracy in the project implementations. The assessee was entitled to use the technical information given by MEP for the generation of electricity. It was, accordingly, pleaded that the order passed by the AO in asking the assessee to deduct tax @ 5 per cent was erroneous and prejudicial to the interests of Revenue. The learned Departmental Representative contended that the rate of 5 per cent was not applicable in respect of any payment made to a non-resident. The AO perhaps applied the rate of 5 per cent which was applicable to payments under Section 194J for rendering professional services. The AO ignored the fact that the payee, i.e., MEP was a non-resident and the provision of Section 194J was not applicable. Since the tax was to be deducted @ 20 per cent on account of technical and consultancy services provided by MEP, the order passed by the AO was erroneous and that both the conditions for invoking Section 263 were satisfied in this case.

9. I have given my careful consideration to the rival contentions. The dispute involved in the appeal of the assessee is relating to the chargeability of tax in respect of the amount paid to MEP on the terms and the conditions of the agreement executed between the appellant along with financial institutions with MEP. Section 4 of the IT Act, 1961 provides for levy of tax in respect of the total income of the previous year of every person. Section 5 of the IT Act, 1961 gives the scope of total income, which is subject-matter of taxation under the IT Act. Section 5(1) is applicable in respect of residents and since the MEP is a non-resident, the same is irrelevant. Section 5(2) is applicable in respect of the nonresidents. Therefore, the same is reproduced hereunder for the sake of ready reference :

"5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which -

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1 :--Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2 :--For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India".

10. Section 9 of the IT Act, 1961 provides the income deemed to accrue or arise in India. The relevant portion of the said section is reproduced hereunder:

"9(1) The following incomes shall be deemed to accrue or arise in India :

(vii) income by way of fees for tech nical services payable by

(a) the Government; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised 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 utilised 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"."

11. It is evident form the aforementioned provisions of the IT Act, 1961 that as per the Explanation to Section 9, the amount paid to MEP falls within the ambit of 'fee for technical services' and, accordingly, by virtue of the provisions of the IT Act, 1961, the income is deemed to accrue or arise in India. However, Section 90 of the IT Act, 1961 provides for an exception. Section 90 is quoted hereunder:

"90(1) The Central Government may enter into an agreement with the Government of any country outside India-

(a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases, of such evasion or avoidance, or

(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

Explanation : For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India."

A bare reading of the above section reveals that the section empowers the Central Government to enter into an agreement with the Government of any country outside India for specific purposes, inter aha, for avoidance of double taxation of income under the Act and under the corresponding law enforced in that country. In this case, the Central Government has entered into an agreement with the United Kindgom which is reported in (1994) 206 ITR (St) 235. The source of the DTAA is thus Section 90 of the IT Act, 1961. If one were to apply the provision of the IT Act, 1961, the payment to MEP would fall within the ambit of taxation as income having accrued or arisen in India under, Section 9(1)(vii) r/w Sections 4 & 5 of the IT Act, 1961. However, Sub-section (2) of Section 90 of the IT Act, 1961, provides that where the Central Government has entered into an agreement with the Government of any country outside India under Sub-section (1) of Section 90 for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent those are more beneficial to the assessee.

12. It is noteworthy that Sub-section (2) of Section 90 provides for application of beneficial provisions of the agreement in contrast to the contrary provisions of the IT Act, 1961. It has, however, to be borne in mind that in the event of there being no conflict between the provisions of the DTAA and the IT Act, 1961, the effect shall have to be given to the provisions of the IT Act, 1961. It is only when there is a conflict between the provisions of the agreements in contrast with the provisions of the IT Act, 1961 that the beneficial treatment is to be given as per Section 90(2) of the IT Act, 1961. In this connection circular of the CBDT being No. 333, dt. 2nd April, 1982, also clarifies the position of law, which is quoted hereunder :

"Subject : Conflict between the provisions of the IT Act, 1961, and the provisions of the Double Taxation Avoidance Agreement--Clarification.

It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the AO's when they find that the provisions of the agreement are not in conformity with the provisions. of the IT Act, 1961.

2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the IT Act, 1961, In fact, the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the IT Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country where provisions to the contrary have been made in the agreement.

3. Thus, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e., the IT Act, that will govern the taxation of income."

13. In the case of Advance Ruling P. No. 13 of 1995 as reported in ABC, In re. (1997) 228 ITR 487 (AAR), it has been held as under:

"Where a matter is governed by the provisions of the IT Act, 1961, and also by a double taxation avoidance agreement, the provisions of the double taxation advance agreement should prevail unless the statutory provision is more beneficial to the assessee".

14. In view of the aforementioned settled law, it is necessary to consider the taxability of payments to MEP in the light of the DTAA between India and U.K. and if a provision is made for taxation of payments under the provisions of the DTAA, the same would be applicable unless the provisions of the Act are more beneficial to the assessee. Thus, in the light of this background, I proceed to consider the taxability of the payments to MEP as per DTAA between India and UK and also proceed to consider the veracity or correctness of the order under Section 263.

15. MEP is resident of U.K. The nature of services provided to the appellant and the financial institutions was admittedly in the nature of engineering services. MEP, it is not disputed, is engaged in the business of providing such services. Article 7 of the DTAA between India and U.K. provides for assessment of income of an enterprise if it has any permanent establishment in India. It is not the case of the Revenue that MEP is having any permanent establishment in India. As such the payment made by the appellant to MEP was not taxable under Article 7 of DTAA between India and U.K. Article 15 of the DTAA between India and U.K. provides for taxation of income derived from providing independent personal services by any individual in his own capacity or in the capacity of a member of a partnership. Since the status of MEP is that of a company, Article 15 of the DTAA is inapplicable. Thus, the only area which is required to be considered is as to whether the payment falls within the ambit of Article 13 of the DTAA between India and U.K. It would be useful to reproduce relevant portion of the said Article 13 as under :

"Royalties and fees for technical services.

1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may he taxed in that other State.

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fee for technical services is a resident of the other Contracting State, the fee so charged shall not exceed :

(a) in the case of royalties within para 3(a) of this article, and fees for technical services within paras 4(a) and (c) of this Article ;

(i) during the first five years for which this Convention has effect;

(aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and

(ii) during subsequent year, 15 per cent of the gross amount of such royalties or fees for technical services; and

(b) in the case of royalties within para 3(b) of this article and fees for technical services defined in para 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.

3. For the purposes of this Article, the term "royalties" means :

(a)..........

(b)............

4. For the purposes of para 2 of this article, and subject to para 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3(a) of this article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in para 3(b) of this article is received; or

(c) 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. The definition of fees for technical services in para 4 of this article shall 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 property described in para 3(a) of this article;

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic;

(c) for teaching in or by educational institutions :

(d) for services for the private use of the individual or individuals making the payment; or

(e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention."

[Paras 6 to 9 are not relevant and, therefore, not reproduced.]

16. It is not disputed that the payment to MEP does not fall within the ambit of the definition under Article 13(4)(a) or (b). It is the claim of the Revenue that the payment made to MEP falls within the ambit of Article 13(4)(c). Before proceeding further, it will be relevant to point out that the definition of 'fee for technical services' under Article 13 of the DTAA between India and U.K. is a departure from the definition generally adopted in various DTAAs with various other countries. The definition adopted in this case is in pari materia with the definition adopted in the DTAA between India and USA, as reported in (1991) 187 ITR (St) 102. Under the DTAA between India and USA, Article 12(4) defines 'fee for included services' to mean 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 para 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."

It is thus observed that the definition of 'fee for included services' under DTAA between India and USA under Article 12(4), para (b)and the definition of 'fee for technical services' provided under the DTAA between India and U.K. under Article 13(4), para (c) are in pari materia. In regard to the meaning of make available technical knowledge, experience, skill, know-how, etc. under Article 12(4) of DTAA between India and USA, it 'will be useful to refer to memorandum of understanding concerning "fee for included services" in Article 12 appended to the DTAA between India and USA which is intended to guide the taxpayers and the tax authorities in interpreting Article 12. The relevant portion of the memorandum of understanding is reproduced hereunder :

"Para 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 plan 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 para 4(a) because it excludes any person acquiring the service. Generally speaking, technology will be considered made available when the person acquiring the services 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 purchasing the service, within the meaning of para 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available."

The memorandum of understanding also contains certain examples indicating the scope of conditions in para 4(b) of Article 12 of the DTAA between India and USA, which are as under:

Example (3):

Facts : A US manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the US company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The US contractors work with the technicians in the Indian firm for a few months. Are the payments to the US firm considered to be payments for "included services" ?

Analysis:

The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes.

Example (5):

Facts : An Indian firm owns inventory control software for use in its chain ofretail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company's wares. The company wants to modify its software to permit the salesmen to assess the company's central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a US computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services ?

Analysis :

The fees are for included services. The US company clearly performs a technical services for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer program) which it has developed.

Example (6):

Facts : An Indian vegetable oil manufacturing company wants to produce a cholesterol-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulae which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulae. Are the fees paid by the Indian company for included services ?

Analysis:

The fees are for included services. The services are technical, and the technical knowledge is made available to, the Indian company.

Example (7):

Facts : The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world wide. It hires an American marketing consulting firm to do a computer simulation of the would market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services ?

Analysis :

The fees would not be for included services. The American company providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc. nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of para 4(b)."

17. On perusal of memorandum of understanding concerning 'fee for included services' in Article 12 appended to the DTAA between India and USA with the help of the examples, it becomes abundantly clear that the technology would be considered made available when the person acquiring the service is enabled to apply the technology. The mere fact that the provision of the service may require technical input by the person providing the service does not per se means that technical knowledge, skill, etc. are made available to the person purchasing the service, within the meaning of Article 12, para 4(b) of DTAA between India and USA. which is in pan materia with Article 13(4)(c) of DTAA between India and U.K. In example No. 3, the USA firm had sent experts to India to show engineers of the Indian company how to produce the extra-strong wallboard, Since the Indian company was able to apply the technology, the payment for the services would fall within the ambit of technical knowledge, experience, skill, etc. having been made available.

In example No. 5, the USA company has modified the software for the Indian company. The services provided are purely technical services and the technical plan is transferred to the Indian company. Thus, the services provided fall within the definition of 'fee for included services'.

In example No. 6, the USA company had trained the employees of Indian company in applying the formula for producing cholesterol-free oil. Thus, the technical knowledge and skill is made available to the Indian company which falls within the definition of fee for included services'.

In example No. 7, the consultancy services are involved in the use of substantial technical skill and expertise which was provided by the American company. So, however, there was, no scope for transferring any technical experience, knowledge or skill or technical plan or design to the Indian company. What was transferred to the Indian company was commercial information. The mere fact that the technical skill was required by the performer of the service in order to perform the commercial information service does not make the service as 'fee for included service' within the meaning of Article 12, para 4(b) of DTAA between India and USA.

18. A pertinent question that remains to be considered is as to whether it is permissible to derive any benefit from the explanatory memorandum in respect of the DTAA between India and USA in interpreting similar provision of DTAA between India and U.K. In this connection it is pertinent to point out that the DTAA between India and USA is dt. 20th Dec., 1990, i.e., prior to DTAA between India and U.K. dt. 11th Feb., 1994, reported in (1994) 206 ITR (St) 235. It is well-settled principle of law that when an expression of doubtful meaning has received an authoritative interpretation from any Court of law and when the legislature adopts the same word or expression, subsequently it must be held that the legislature was conscious of the interpretation given by the Courts of such expression of doubtful meaning. This principle is supported by the decision of the Supreme Court in the case of Banarsi Devi and Anr. v. ITO and Ors. (1964) 53 ITR 100 (SC). The learned AM has also referred to the decision in the case of R. v. Loxdale. 97 ER 394 at p. 395 and observations of Griffith, CJ in the case of Webb v. Outrim AC 81 PC, at p. 89 in his order in support of the finding that when a particular form of legislative enactment, which has received authoritative interpretation whether by judicial decision or by a long course of practice, is adopted in framing a later statute, it is a sound rule of construction to hold that the words so adopted by the legislature to bear the meaning which has been so put on them, Applying the above principle to the facts of this case, the meaning of 'fee for technical services', under Article 12(4)(b), which is in pari materia with the definition of 'fee for technical services' under Article 13(4)(c) of DTAA between India and U.K. having been explained by the Government of India in relation to the DTAA between India and USA and later on similar language having been used in the DTAA between India and U.K., the meaning assigned by the Government, of India in regard to the provisions of DTAA between India and USA earlier must, be held to have the same meaning as explained by the Government of India and agreed by the Government of USA.

19. In the light of the above explanation relating to, the meaning of 'fee for technical services' as understood by the Government of India, and the Government of USA, it Will be relevant to examine as to whether the services rendered by the MEP fall within the ambit of the definition of 'fee for technical services' envisaged under Article 13(4)(c) of DTAA between India and U.K. In this connection, the scope of work of MEP is crucial for determination of the issue. As per the agreement between borrower and the financiers on the one part and the MEP on the other part, the scope of work is described as under :

"Scope of work Scope of work for the Technical Adviser describes the duties to be undertaken for Phase I of the work which are as follows :

Phase I : Technical appraisal of the project for financial institutions to be made before financial close in accordance with the scope of work outlined in the terms of reference set out in Appendix A. Subsequently, on appointment to undertake the Phase II works, the duties of the Technical Adviser will include but may not be limited to :

Phases II : Certification of physical progress and disbursements during the construction phase, periodic site and factory visits to ensure that the developer's project: management team is adequately protecting the interests of the lenders to the project witnessing site performance and efficiency test; and certifying when the project provisional and final completion will be achieved. The terms of reference for Phase II shall be agreed between MEP and the financial institutions prior to financial close."

20. As per the terms of reference being Phase-I, Appendix 'A' to the said agreement, it is provided as under:

"The Independent Engineer. The independent engineer (the Engineer) will be appointed by the International Finance Corporation (IFC) in conjunction with the project developers. The Engineer will report to IFC, while contractual arrangements will be with the project developers, BPCL. Payment for services will and must be made by the project developers upon authorization of IFC.

The Engineer will review the project documentation with respect to technical feasibility and economic viability on behalf of the Asian Development Bank, Commonwealth Development Corporation, International Finance Corporation, ECGD and ICICI (India) the "senior lenders"). This engineering review will encompass the proposed design, procurement, construction, start-up and testing, and operation and maintenance of the project. The Engineer will identify risks or issues which, if not corrected or mitigated, should result in the commercial failure of the project or losses to the lenders. In such cases, alternative solutions will be suggested for the consideration of the senior lenders and the project developer, BPCL. The Engineer's role is that of reviewing and opinion rather than designing or directing the project. The Engineer's review is limited to engineering issues and their potential effect upon commercial performance, legal and regulatory issues will not be addressed except to the extent expressly stated."

21. As per the terms of reference, the scope, of work is described as under:

"One. Technical appraisal of the project for senior lenders to be made before financial close in accordance with the scope of work outlines below.

Two. Certification of physical progress and disbursements during the construction phase, periodic site and factory visits to ensure the developer's project management team is adequately protecting the lender's interest,witnessing site performance and efficiency tests, and certifying when project provisional and final completion is achieved."

The terms of reference also provided for preparation of the reports by the Engineer. The report is required to be related to unresolved issues and asserted risks identified by the Engineers.

22. When the scope of the work of MEP described above is considered in the light of the definition of 'fee for technical services' read with the explanatory memorandum relating to similar provisions under the DTAA between India and USA, there appears to be a blurred picture at the first sight. So, however, on careful consideration it is observed that there is specific assertion in the terms of reference incorporated in the agreement to the effect that the Engineers' role is that of reviewing and opining rather than designing and directing the project. In the agreement it is provided that in the case of any risks or issues which are required to be corrected or mitigated, the Engineers would suggest alternative solutions for the consideration of the senior lender and the project developer, BPCL. If the suggestions based on technical appraisal, knowledge and skill are ultimately adopted, it might fall within the ambit of MEP having made available technical knowledge, skill, know-how, etc. to the assessee. So, however, the scope of suggestion of corrections and alternative solutions is limited and is contingent and the essence of the agreement is reviewing and opining rather than designing and directing the project and suggesting corrections is only incidental and is not the substance of the agreement. In the light of this background and taking into account the views of the Government of India in respect of similar provision under the DTAA between India and USA., I am of the firm view that the scope of the work of MEP does not fall within the ambit of 'fee for technical services' as per the definition of Article 13(4)(c) of the DTAA between Indian and U.K.

23. The payment made to MEP by the assessee not being a payment as 'fee for technical services' as per the definition of Article 13(4)(c) of the DTAA between India and U.K., the order passed by the AO in asking the assessee to deduct tax @ 5 per cent was evidently erroneous insofar as the rate of 5 per cent tax was applicable only in respect of residents providing professional services and not in respect of payments made to non-residents. So, however, no prejudice has been caused to the Revenue by the said order of the AO insofar as such a payment was not liable to tax under the provisions of DTAA between India and U.K. The direction for deducting tax @ 5 per cent as against at Nil chargeable in this case is thus a direction favourable to the Revenue rather than prejudicial to the interests of the Revenue. As held by the Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), for exercise of the power under Section 263 two conditions must co-exist the impugned order must be erroneous and also prejudicial to the interests of Revenue. In this case, agreeing with the learned AM that the order passed by the AO was erroneous but it was not prejudicial to the interests of Revenue, I hold that the order passed by the CIT under Section 263 does not meet the requisite conditions under Section 263 of the Act insofar as no prejudice is caused to the Revenue as a result of erroneous order of the AO. The order under Section 263 thus deserves to be set aside. I, therefore, agree with the learned AM and as a result of this order, the order of the CIT under, Section 263, is liable to be set aside.

24. Before winding up, I consider it necessary to deal with another aspect of the case raised during the course of hearing of the appeal. As pointed out elsewhere in this order, the assessee had filed an application to the AO asking for no objection certificate for remittance of 52,000 sterling pound to MEP without deduction of tax. The nature of services referred to in the application was admittedly fee for personal services. The AO by an order under Section 195 had authorized remittance after deduction of tax @ 5 per cent. The order of the AO was not challenged by the assessee by way of an appeal. Thus, a pertinent question that arises for determination is as to whether in these circumstances it was open to the assessee to challenge the said order of the AO in the proceedings under Section 263 on the ground that no tax was chargeable in respect of the remittances to MEP. This issue, in my view, is squarely covered by the decision of the Supreme Court in the case of Carborandum Co. v. CIT (supra).

25. In this case the American company had filed the return of income with an application for refund of the entire tax deducted at source. The ITO took the view in the assessment order that 5 per cent of the technical fee paid to the American company was earned by it in India and only that small amount was assessable to income-tax. As a result of the order of the ITO, the major portion of the tax deducted at source was refunded to the assessee-company. Subsequently, the CIT in exercise of his power under Section 33B of the 1922 Act (corresponding to Section 263 of 1961 Act) revised the order of the ITO and took the view that at least 75 per cent of the technical fee earned by the assessee-company during the year had accrued or arisen in India. The American company went up in appeal to the Tribunal against the revisional order of the CIT. The Tribunal set aside the said order and restored that of the ITO, though it was of the view that even 5 per cent of the technical fee could not be taken as income of the assessee-company taxable under the Act. But since the company had not gone in appeal because of the smallness of the amount of tax payable on the basis of 5 per cent. The Tribunal was obliged to maintain the order of the ITO. At the instance of the CIT, a reference was made to the High Court. The Hon'ble Madras High Court upholding the stand taken on behalf of the Revenue answered the question referred to it in its favour and against the assessee-company. On appeal to the Supreme Court by the American company, it was held that the technical service fee received by the assessee-company from Indian company during the accounting year relevant to asst. yr. 1957-58 did not accrue or arise in India nor could it be deemed to have accrued or arisen in India. Since 5 per cent of the technical service fee had been brought to tax by the ITO and no appeal was filed against it by the assessee-company, their Lordships held that they cannot interfere with the assessment of 5 per cent but held that the technical fee in excess of 5 per cent was not taxable. The principle laid down by their Lordships of the Supreme Court in the case of Carborandum & Co. v. CIT (supra) is squarely applicable in this case in so far as the assessee had not challenged the order of the AO under Section 195 in asking to deduct tax @ 5 per cent from the payments to MEP. However, that would not stand in the way of the assessee claiming in the proceedings under Section 263 that no tax was at all chargeable on the payments made to MEP. The only restriction upon the assessee is that the relief cannot be granted to the assessee in respect of 5 per cent levy directed by the AO, which has not been challenged.

26. As a result of cancellation of the order under Section 263, the order passed by the AO will get restored and the liability @ 5 per cent shall stand. Therefore, the contention advanced on behalf of the assessee that it is permissible for them to challenge the liability of tax in respect of the remittances notwithstanding the fact that the liability as such was not challenged originally is accepted in the light of the aforementioned decision of the Supreme Court and the objection of the Revenue rejected.

27. Let the matter be placed before the regular Bench for announcing the majority view.

B.K. Mitra, J.M. 6th August, 2003

1. Whereas there was a difference of opinion between the members in this case, the following point of difference was referred to the Third Member under Section 255(4) of the IT Act;

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that income embedded in the payment of U.K Pounds £ 52,000 paid to M/s Hott Ewbank Preece was not exigible to tax in India, or whether the Tribunal should have held that the same being covered by the scope of "fees or technical services" under the applicable Double Taxation Avoidance Agreement, the CIT was justified in holding that the order under Section 195(2) passed by the AO was indeed prejudicial to the interest of the Revenue, inasmuch as it directed the assessee to deduct tax @ 5 per cent whereas correct rate of tax should have been 20 per cent ?"

2. The Hon'ble President appointed Shri M.A. Bakshi, Vice-President, Kolkata Bench, Kolkata, as Third Member in this matter who vide order dt. 23rd July, 2003, has concurred with the view of the learned AM in respect of the issue referred before him.

3. In view of the above decision taken by the Hon'ble Third Member concurring with the learned AM, we hold, by majority view, that the order passed under Section 263 should be cancelled and the order passed by the AO will get restored and the liability @ 5 per cent shall stand. Therefore, the contention advanced on behalf of the assessee that it is permissible for them to challenge the liability of tax in respect of the remittances notwithstanding the fact that the liability as such was not challenged originally is accepted in the light of the decision of the Hon'ble Supreme Court in the case of Carborandum & Company v. CIT (1977) 108 ITR 335 (SC) at 339. 345 and the objection of the Revenue is, therefore, rejected.

4. In the result, the appeal is allowed.

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Income Tax Appellate Tribunal - Kolkata

C.E.S.C. Ltd. vs Deputy Commissioner Of Income Tax on 6 August, 2003

Equivalent citations: [2003]87ITD653(CAL), [2005]275ITR15(CAL), (2003)80TTJ(CAL)806