Income Tax Appellate Tribunal - Delhi
Nqa Quality Systems Registrar Ltd. vs Deputy Commissioner Of Income Tax on 22 December, 2004
Equivalent citations: (2005)92TTJ(DELHI)946
ORDER
N.V. Vasudevan, J.M.
1. These are appeals by the assessee against the common order dt. 21st Dec, 2001, of CIT(A)-XVI, New Delhi, relating to asst. yrs. 1994-95 to 1997-98. Common issues are involved in all these appeals. They were heard together and a common order is being passed for the sake of convenience.
2. The first ground of appeal in all these appeals challenges the validity of reassessment proceedings on the ground that the AO having issued an intimation under Section 143(1)(a) of the Act and having not issued a notice under Section 143(2) of the Act within the period of 12 months specified in the proviso to Section 143(2) of the Act, there results an order of assessment accepting the return of income filed by the assessee. Such assessment cannot be reopened by the AO on a mere change of opinion and without forming the requisite belief about escapement of income. On this ground of appeal, we have heard the learned counsel for the assessee and are of the view that the objection raised by the assessee is not sustainable. It has been held by the Hon'ble Delhi High Court in the case of MTNL v. Chairman, CBDT that an intimation under Section 143(1)(a) is not an assessment. Therefore, the plea of the assessee, which is primarily based on the argument that an intimation under Section 143(1)(a) results into an assessment on expiry of the period of 12 months from the end of the month in which a return of income is filed for issue of notice under Section 143(2), cannot be sustained. Consequently, the case of the assessee would fall within the parameters of Section 147, Expln. 2(b) of the Act. The reopening of assessment is, therefore, valid and the ground of appeal in all these appeals is dismissed.
3. Grounds of appeal 2 to 5 in all these appeals are identical (except for the quantum of the sum disallowed) and they read as follows :
"2. That the CIT(A) erred on facts and in law in confirming the action of the AO in disallowing a sum of Rs. 26,20,807 payable to certain overseas parties for alleged failure of the appellant to deduct tax at source from such payments, invoking provisions of Section 40(a)(i) of the Act.
2.1 That the CIT(A) erred on facts and in law in confirming the action of the AO holding that the amount payable by the appellant to M/s NQA Ltd., UK, for quality assurance assessment and certification activities, etc. was in the nature of royalty/fee for technical services as referred to in Article 13 of the Indo-UK Double Tax Treaty and was liable to tax in India.
2.2 That the CIT(A) erred on facts and in law in confirming that the action of the AO holding that the amount paid by the appellant to M/s WQMN Ltd., UK, for identification of qualified and registered auditors, handling legal, technical and financial matters in UK, etc. was in the nature of royalty/fee for technical services as referred to in Article 13 of the Indo-UK Double Tax Treaty and was liable to tax in India.
2.3 That the CIT(A) erred on facts and in law in confirming the action of the AO holding that the amount paid by the appellant to Mr. DPC Price for carrying out quality assurance audit was in the nature of royalty/fee for technical services as referred to in Article 13 of the Indo-UK Double Tax Treaty and was liable to tax in India.
2.4 That the CIT(A) erred on facts and in law in confirming the action of the AO holding that the amount paid by the appellant to Wakfield Construction Ltd. was liable to tax in India without appreciating that the said company was an Indian company and the provisions of Section 40(a)(i) of the Act were not applicable in respect of the payment made to such company.
3. That the CIT(A) erred on facts and in law in not appreciating that the amounts payable by the appellant to the various overseas parties as aforesaid did not constitute royalty/fee for technical services in terms of provisions of Article 13 of the Indo-UK Double Tax Treaty and the same were not liable to tax in India in the latter's hands and consequently, the appellant was under no obligation to-deduct tax at source therefrom.
4. That the CIT(A) erred on facts and in law in holding that since the appellant has not furnished credible evidence/copies of agreements with Mr. DPC Price, UK, and Wakfield Construction Ltd., the nature of services rendered by the said parties cannot be verified on the action of the AO in disallowing the amounts payable to the aforesaid parties by the appellant invoking provisions of Section 40(a)(i) of the Act on account of failure of the appellant to deduct tax at source from the amounts payable to such parties was in order.
5. That the CIT(A) erred on facts and in law in holding that the copy of the agreement between the appellant and WQMN, UK, which was filed before the CIT(A), was in the nature of additional evidence and that the same was not admissible in absence of an application under Rule 46A of the IT Rules for admission of the same."
4. The facts and circumstances under which the aforesaid grounds of appeal arise are as follows. The assessee is a company. M/s National Quality Assurance Ltd., UK (NQA, UK), was authorised to issue ISO Certification. The assessee entered into an MoU with NQA, UK, and was accredited to provide ISO certification to business and other organisations in India and abroad on behalf of NQA, UK. The assessee was to pay certain fees to NQA, UK, for this. Apart from the above, the assessee was also required to pay NQA, UK, certain fees in connection with rendering of services by NQA, UK, to the assessee in the matter of providing ISO Certification to customers in India. The assessee paid fees to NQA, UK, for rendering services as above. The assessee also paid some amounts to one Mr. DPC Price, an individual, United Kingdom Accreditation Services (UKAS), SIRA, for services rendered. These sums were claimed as deduction while computing income. The persons to whom these payment were made were non-residents. Tax at source had not been deducted at the time of making payments to these persons. The provisions of Section 40(a)(i) of the IT Act read as follows :
Section 40.-Amounts not deductible.-Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-
(a) in the case of any assessee-
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,-
(A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVH-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under Sub-section (1) of Section 200 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under Sub-Section. (1) of Section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.
Explanation : For the purposes of this sub-clause,-
(A) "royalty" shall have the same meaning as in Expln. 2 to Clause (vi) of Sub-Section. (1) of Section 9;
(B) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause. (vii) of Sub-Section. (1) of Section 9.
5. The details of the payments made by the assessee to various persons (non- residents) which were claimed as deductions in computing income from business and the nature of services provided by them in the various assessment years are as follows :
Asst. yr. 1994-95:
Sl. Name of party Nature of services Amount (Rs.)
No.
1. Mr. DPC Price Certification services at final audit 1,97,522
2. M/s NQA Ltd., (a) Quality assurance, 4,07,735
UK assessments and certification
thereof
(b) Providing lead assessors
including associated assessors
(c) Maintaining files, documents
and correspondence
(d) Issuing registration certificates
(e) Appointing a liaison cell in the
UK., etc.
3. M/s WQMN, UK (a) Representing the assessee in 19,93,350
matters relating to co-ordination
with accreditation bodies, i.e.,
ABCB, UKAS, etc.
(b) Identification of suitably
qualified and registered auditors
(c) Payment of invoices for the
professional services rendered
(d) Handling all legal, technical
and financial matters in UK
4. M/s Wakfield Not a non-resident 22,000
Construction Ltd.
Total 26,20,000
Asst. yr. 1995-96:
1. M/s NQA Ltd., UK same as to asst. yr. 1994-95 30,570
2. M/s WQMN, UK same as in asst. yr. 1994-95 21,80,100
Total 22,10,670
Asst yr. 1996-97:
1. M/s WQMN, UK same as in asst. yr. 1994-95 10,57,073
2. M/s SIRA, UK Audit services 67,360
Total 11,24,433
Asst yr. 1997-98:
1. M/s SIRA, UK Auditing services 64,800
2. M/s UKAS, UK Auditing services 10,16,785
Total 10,81,585
6. The AO was of the view that since admittedly no tax had been deducted or paid in respect of the payments made outside India to non-residents, the claim for deduction of these payments as expenditure was to be disallowed in view of the provisions of Section 40(a)(i) of the Act. The plea of the assesses before the AO was that these payments are "taxable profits" within the meaning of the DTAA between UK and India and consequently these payments are taxable in UK only and not in India and, therefore, there is no violation of the provisions of Section 40(a)(i) of the Act, as the payments in question are not chargeable to tax in India in the hands of the recipient. The assessee also drew attention of the AO to arts. 15 and 7 of the DTAA between India and UK. The AO however was not convinced with the explanation offered by the assessee. He held as follows :
"I have considered the submissions made by the assessee. First of all, the contention of the assessee that the payment to these foreign concern was in the nature of personal services is not correct. The assessee-company is in the business of doing quality appraisals and in this field the technical services of foreign companies have been taken, as is evident from the terms of agreement with one of the companies furnished during the course of assessment proceedings for asst. yr. 1998-99. Royalty and fees for technical services are covered under Article 13 of Double Taxation Agreement with UK and as per this article, the amounts shown as payable to the foreign companies as detailed above, are to be taxed in India. In any case, as per the provisions of Section 40(a), any sum for royalty and technical services, which is payable outside India is only to be allowed as a deduction in the year in which tax on such sum is deducted or paid. The assessee has also admitted to the fact that neither tax has been deducted nor payment has been made till date. The plea of the assessee that the tax was not deducted because the payments in question to foreign companies are not to be taxed in India as per the provisions of DTAA with UK is also not correct as discussed above. However, the taxability of the payment made by the assessee in the hands of the recipient in India is not the issue here. The issue is related to allowability of payment on account of royalty and fee for technical services in the light of the provisions of Section 40 (a) and on this issue the case of the assessee does not hold any merit."
The AO thus disallowed the claim for deduction of the aforesaid sums in the respective assessment years.
7. Aggrieved by the order of the AO, the assessee preferred appeals before CIT(A). Before CIT(A), it was contended by the assessee that the provisions of Section 40(a)(i) cover only payments of any interest, royalty, fees for technical services or other sum chargeable to tax under the IT Act, 1961 (the Act). Under the provisions of Section 195 of the Act also, there is an obligation on the part of the assessee to deduct tax at source when making payment to a non-resident of any such which is chargeable to tax under the provisions of the Act. The assessee contended that the payments to the non-residents/payments outside India were not chargeable to tax since these payments were taxable only in UK as per the DTAA between India and UK. Reference was made to the provisions of Article 13 of the Indo-UK DTAA wherein it has been provided that royalties and fees for technical services arising in India may be taxed in India even if the recipient is a non-resident. It was however submitted that the payments in question were not "fees for technical services rendered" as contemplated by the said article. Reference was made to the provisions of Article 15 of the Indo-UK DTAA and it was submitted that the payment made to Mr. Price for auditing services represented consideration paid for rendering 'professional services' and, therefore, not taxable in India and taxable only in UK, and it was also submitted that Mr. Price had not stayed in India for 90 days or more during the previous year or did not have fixed base available to him in India for performing the above activities. Reference was also made to the provisions of Article 7 of the DTAA and it was submitted that the payment in question cannot be even considered as business profits, since the recipients did not have a permanent establishment in India. Since the payments in question were not taxable in India, it was submitted that the action of the AO in making the impugned disallowances by invoking the provisions of Section 40(a)(i) was not proper.
8. The CIT(A), thereafter, made a reference to the fact that there was no evidence let in by the assessee to prove the nature of services rendered. The assessee had filed two agreements before CIT(A), one with M/s NQA Ltd., UK, and the other with WQMN, UK. The CIT(A) refused to take cognizance of these two agreements as according to him these were not filed before AO and the assessee had also not filed an application before him for admitting them as additional evidence. The CIT(A) however made a reference to the terms of this agreement and thereafter made a reference to the provisions of Section 40(a)(i) of the Act and the definition of royalty and fees for technical services rendered as contained in Expln. 2 to Clauses. (vi) and (vii) of Sub-Section. (1) of s, 9 of the Act and held that the payments in question were in the nature of royalty and fees for technical services rendered and taxable in India even as per the Indo-UK DTAA. Aggrieved by the common order of the CIT(A), the assessee has preferred the present appeals.
9. We have heard the rival submissions. We shall first formulate the points for consideration and discuss the rival contentions on each of the points.
1. What is the nature of services rendered by the non-residents ?
2. Whether the payments made by the assessee to the non-resident for services rendered by them can be said to be royalties or fees for technical services rendered within the meaning of Article 13 of the Indo-UK DTAA ?
If yes, then they are taxable in India and consequently, the assessee would be obliged to deduct tax at the time of making such payment to the non-resident.
3. Whether the payments were in the nature of consideration paid for rendering professional services and, therefore, not taxable in India in view of Article 15 of the Indo-UK DTAA ?
If yes, then the payment is not taxable in the hands of the non-resident, provided they do not stay in India for a period exceeding 60 days during the previous year or they do not have a fixed base in India for carrying on their activity.
4. Whether the payments can be said to' business profits of the non-resident which had accrued to them in India ?
If yes, even then such receipts are not taxable if the non-resident does not have a permanent establishment in India and these profits are not attributable to that permanent establishment directly or indirectly within the meaning of Article 17 of the DTAA.
10. Before we proceed to decide the points for consideration, we may clarify that the principal question for consideration is as to whether the payments in question are chargeable to tax in India in the hands of the non-resident, the answer to which will depend on the answer to the points formulated above. We may also clarify that the points raised above have to be considered in the light of the provisions of the Indo-UK DTAA. The provisions of the Act will stand overridden by virtue of the provisions of DTAA which are more beneficial to the non-resident, vide Section 90(2) of the Act. Therefore, the chargeability to tax on the payments in the hands of the non-resident will depend on the provisions of the Indo-UK DTAA.
11. As far as the first point for consideration is concerned, it is clear from the order of assessment atleast copy of one of the agreement between the assessee and NQA, UK, had been filed before the AO. The observation to the contrary by the CIT(A), in our view, is not correct. It is not correct to say that the assessee must have a written agreement in all cases where he avails of services from non-resident. Copies of the bills for services rendered by Mr. Price and that by UKAS, UK, are available which will throw light on the nature of services rendered by the non-residents to the assessee. As far as the two agreements are concerned, viz., agreement between assessee and NQA Ltd., UK, and agreement between M/s WQMN (World Quality Management Network Ltd.), UK, we are of the view that they are necessary for adjudication of the issue in controversy and they are, therefore, considered as evidence available on record.
12. The nature of business of the assessee is to make assessment of quality management systems existing with its customers and suggest appropriate system so as to be in tune with the ISO 9000 Standards. ISO (International Organisation for Standardisation) is the world's largest developer of standards. The assessee to its customers makes available and highlights the use and benefit of these standards and in the process, the services of the non-residents are utilised.
A. The services rendered by M/s NQA Ltd., UK A copy of the agreement between the assessee and NQA Ltd., UK, is placed at pp. 85 to 87 of assessee's paper book. The agreement specifically states that the same is separate and independent of any other agreement between the assessee and M/s NQA Ltd., UK. The UK company, under this agreement, has agreed to provide the assessee with assessors to assess the quality assurance system existing with the assessee's customers. There is also non-competition clause and visit of the assessor to the place of assessee's customer, provision of training, etc. It is clear from this agreement that the nature of service rendered is purely advisory. The bills raised by this party (copies of which are at pp. 88 to 99 of assessee's paper book) also reveal that the charges relate to visits, meeting and surveillance.
B. The services rendered by M/s WQMN Ltd., UK A copy of the agreement with this party is placed at pp. 100 to 101 of the assessee's paper book. The services, which were agreed to be rendered by this party, are also identical. There is also an obligation on the part of this party to train auditors of the assessee. The bills raised by this party (copies of which are placed at pp. 102 to 104 suggest that this party also carried out liaison services on behalf of the assessee in fighting a case in UK Courts. There were some disputes between the assessee and M/s NQA Ltd., UK., which resulted in Court proceedings and this party also looked after them.
C. The services rendered by Mr. Price :
Copies of the bills raised by Mr. Price are placed at pp. 105 to 113 of assessee's paper book. The services are purely professional and they relate to carrying out of audit work.
D. Services rendered by M/s UKAS (United Kingdom Accreditation Service) This party has carried out assessments and surveillance in India. Copies of the bills raised (pp. 114 and 115) clearly show that they had carried out only assessments and surveillance.
E. As far as payments of monies to M/s SERA, UK, and M/s Wakfield Constructions Ltd., are concerned, there is no documentary evidence filed before us. Payments to M/s Wakfield Construction Ltd. are not covered by the provisions of Section 40(a)(i) of the Act since the said party is not a non-resident.
13. Having considered the nature of services rendered by the non-resident, let us now examine the second point which we have formulated above, viz., as to whether the payment by the assessee to the non-resident can be considered as a 'royalty' or 'a fee paid for technical services' within the meaning of Article 13 of the Indo-UK DTAA. Article 13 of the DTAA reads as follows:
Article 13. 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 be 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 fees for technical services is a resident of the other Contracting State, the tax 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;
(bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and
(ii) during subsequent years, 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 purpose of this article, the term "royalties" means
(a) payments of any kind received as a consideration for the use of or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
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 definitions 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.
14. As far as royalties and fees for technical services are concerned, such amounts can be taxed in India if they arise in India, according to the laws of India, even if the recipient is a non-resident of India. The payments in question cannot be royalty as envisaged in Article 13(3) set out above, even on a plain reading. The question is whether they can be said to be "fees for technical services". The services which we have described above cannot be said to be ancillary or subsidiary to the application or enjoyment of any right, property or information nor can it be said that technical knowledge, experience, skill, know-how or process or development and transfer of a technical plan or technical design is involved in the process. A doubt could arise as to whether the services could be said to be rendering technical or consultancy services or making available technical knowledge, experience, skill, know-how or processes. In this regard, a reference may be made to the Indo-US Treaty wherein the expression 'fees for technical services' as used in the Indo-UK DTAA has been used in the Indo-US Treaty. The expression used in the Indo-US Treaty is, however, "fee for included services". There is a memorandum of understanding attached to the Indo-US DTAA explaining the meaning of the words "fees for included services". The relevant extract of the memorandum is as follows :
"Para 4 (in general) This memorandum describes in some detail the category of services defined in para 4 of Article 12 (royalties and fees for included services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of para 4, or because, notwithstanding the fact that they meet the tests of para 4, they are dealt with under para 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For case of understanding, the examples in this memorandum describe US persons providing services to Indian persons, but the rules of Article 12 are reciprocal in application.
Article 12 includes only certain technical and consultancy services. By technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.
Under para 4, technical and consultancy services are considered included services only to the following extent : (1) as described in para 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in para 4(b), if they make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under para 4(b), consultancy services which are not of a technical nature cannot be included services.
Para 4(b) 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 than the category described in para 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se means 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.
Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in para 4(b), include :
1. engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical and individual engineering);
2. architectural services; and
3. computer software development.
Example (7) Facts-The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world 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 is providing a consultancy 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)."
15. A perusal of the aforesaid MoU together with the example cited in the said memorandum clearly reveals that for a fee to be called fee for technical services rendered, it is essential that technical knowledge, skill, know-how should be made available to the assessee and the assessee should be at liberty to use them in his own right. In construing the provisions of Indo-UK DTAA, it is possible to make a reference to provisions of the analogous provisions in the Indo-US DTAA and this is a permissible aid to interpretation of treaties as held by the Hon'ble Mumbai Bench in the case of Raymond Ltd. v. Dy. CIT : (2003) 86 ITD 791 (Mumbai). We have also listed out the nature of services rendered by the non-residents to the assessee. The services referred to above do not result in making available any technical knowledge, experience, skills, know-how or process to the assessee. This was essential before it could be said that the payments made by the assessee to the non-residents were fees for technical services rendered. The decision of the Hon'ble Mumbai Bench in the case of Raymond Ltd. (supra) is on the point. The nature of work carried out by the non- residents involves making assessment surveillance for the purpose of ISO Certification. This service cannot fall within the ambit of fees for technical services as defined in Article 13(4) of the Indo-UK Treaty.
16. The next point for determination is as to whether the services in question could be said to be independent personal services within the meaning of Article 15 of the Indo-UK DTAA. Article 15 of the Indo-UK DTAA is as follows :
Article 15. Independent personal services
1. Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State. Such income may also be taxed in the other Contracting State if such services are performed in that other State and if:
(a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year; or
(b) he or the partnership has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities;
but in each case only so much of the income as is attributable to those services.
2. For the purposes of para 1 of this article, an individual who is a member of a partnership shall be regarded as being present in the other State during days on which although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State.
3. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
17. As far as the applicability of Article 15 of the Indo-UK DTAA is concerned, the same is relevant only in the case of fees paid to Mr. Price while narrating the nature of services rendered by Mr. Price. We have also referred to the nature of services referred and have concluded that these were professional services. These were not technical services. There is a marked difference between fees for technical services and fees for professional services. Professional services are a category distinct from technical services. Even under the provisions of Section 194J of the Act requiring deduction of tax at source, the definition of professional services includes the legal, medical, engineering, accountancy, technical consultancy and interior decoration, whereas the expression 'fees for technical services as given in Expln. 2 to Section 9(1)(vii) of the Act do not include within its fold the professional services as explained in Section 194J of the Act. Since the amount paid to Mr. Price was in the nature of fees paid for professional services the same can be taxed in India only if the person rendering the service stays in India for a period aggregating 90 days during the relevant fiscal year or he has a fixed based regularly available to him in India for performing such activities. It is not the case of the Revenue that the non-resident (Mr. Price) was present in India for a period aggregating 90 days or had a fixed base in India. Therefore, the remuneration paid to Mr. Price is outside the scope of fees for technical services, but was in the nature of fees for professional services not taxable in India.
18. The next point for consideration is as to whether the payment can be said to be business profits for the non-residents which had accrued to them in India and, therefore, taxable. In this connection, Article 7 of the Indo-UK DTAA is relevant, Article 7 reads as follows :
Article 7. Business profits
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is directly or indirectly attributable to that permanent establishment.
19. A perusal of the above article will reveal that the profits of the non-resident which had accrued in India are taxable only in UK unless the non-resident carries on the business in India through a permanent establishment constituted in India. It is not the case of the Revenue that the non-residents in the present case had a permanent establishment in India. Therefore, the business profits cannot be taxed in India in view of the provisions of Article 7 of the Indo-UK DTAA. It is, therefore, held that the amounts paid by the assessee to the non- residents were not chargeable to tax in India and consequently, there, is no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of Section 40(a)(i) were not attracted.
20. We may also make a brief reference to the various contentions raised on behalf of the learned Departmental Representative. The learned Departmental Representative submitted that the question whether the payments made by the assessee to the non-residents are taxable or not in India cannot be decided in the present proceedings. In this regard, he referred to the provisions of Section 195 of the Act and submitted that there was an obligation cast on the assessee to deduct tax at source while making payment. He also pointed out that even if the assessee omits to deduct tax at source under the provisions of Section 40(a)(i) of the Act, he could claim the same in the year in which the tax is so deducted at source. According to him, the onus was on the Department to determine the taxability or otherwise of the payments in the hands of the non-resident and the. assessee cannot decide on this question on his own. The learned Departmental Representative in this regard relied on the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of Andhra Pradesh Ltd. v. CIT (1999) 239 ITR 587 (SC). In the aforesaid decision, the Hon'ble Supreme Court had held that the obligation for a person responsible for making payment was to make an application under Section 195(2) in the event of any doubt regarding the rate at which the tax has to be deducted at source. If no such application is filed the person responsible for making payment has to deduct such sum which should not be lower than the rate which is obliged to be deducted in law. It was contended by the learned Departmental Representative that the assessee instead of coming to the conclusion that the payments made to the non-residents are not taxable ought to have filed an application under Section 195(2) and since he had not done so, the assessee was to be considered as a defaulter. This decision of the Hon'ble Supreme Court had come up for consideration in the case of the Raymond Ltd. (supra) as well as in the case of Maharashtra State Electricity Board v. Dy. CIT : (2004) 90 TTD 793 (Mumbai). The Mumbai Bench of the Tribunal had held that it was only in a case where there was no dispute that the income was chargeable to tax in India and when the rate of tax to be deducted at source was in doubt, there is an obligation to make an application under Section 195(2) of the Act. We, therefore, do not find any merits in the submission of the learned Departmental Representative. Apart from the above, the Act contains provisions for charging of interest from the person responsible for deducting tax at source in the event of failure to deduct tax at source. He is also considered as a person in default of payment of tax in respect of the sum of tax not deducted at source. In view of these provisions, it cannot be said that the assessee should first deduct tax at source without considering the fact whether the income in question is chargeable to tax in the hands of the recipient. For the reasons aforesaid, we hold that the payments by the assessee in question were not chargeable to tax. Consequently, there is no obligation to deduct tax at source. Consequently, the provisions of Section 40(a)(i) of the Act were not applicable and the action of the Revenue authorities in refusing to allow deduction of these expenses by taking recourse to the said provisions cannot be sustained. The disallowance made is, therefore, directed to be deleted. The appeals of the assessee are allowed.