Authority Tribunal
Hyder Consulting Ltd. vs Commissioner Of Income-Tax on 5 January, 1999
Equivalent citations: [1999]236ITR640(AAR)
RULINGS A.A.R. No. 431 of 1998 Decided On: 05.01.1999 Appellants: Hyder Consulting Ltd.
Vs. Respondent: Commissioner of Income-tax Hon'ble Judges:
Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members Counsels:
For Appellant/Petitioner/Plaintiff: N. Ranganathan, N. Ravi Vishwanath and K.R. Sekar, Chartered Accountants For Respondents/Defendant: None Subject: Direct Taxation Acts/Rules/Orders:
Income Tax Act, 1961 - Sections 195, 195(2) and 245R RULING Dr. Mohini Bhussry, (Member)
1. The applicant is a non-resident being a company incorporated in the U.K. It is engaged in carrying out a World Bank Project under National Highway Phase-II. While rendering technical services for construction of roads in Orissa, it has raised following questions relating to the income from the project :
"(i) On the facts and in the circumstances of the case, whether the amount received by the Hyder Consulting Limited, United Kingdom, for and on behalf of STUP Consultants Limited for the services rendered by STUP Consultants Limited be construed as income of Hyder Consulting Limited, liable for tax to be deducted at source in accordance with the provisions of Section 195 of the Income-tax Act, 1961 ?
(ii) On the facts and in the circumstances of the case, whether the tax rate currently being adopted by the Government of Orissa for the purpose at 42.85% with respect to payments being made in foreign currency and 30 per cent. on the payments made in local currency is appropriate given the fact that the rate prescribed in the Double Taxation Avoidance Agreement between India and the United Kingdom is 15 per cent. ?
2. The Government of Orissa awarded the contract relating to the rendering of technical services to Hyder Consulting Limited in connection with the II World Bank National Highway Project as mentioned above. It relates to laning and strengthening of NH5 between Bhubaneshwar-Cuttack and Jagatpur. The contract was formalised on January 10, 1995. On the same day, Hyder Consulting Limited entered into a sub-consultancy agreement with STUP Consultants Limited.
3. The scope of services to be rendered by the sub-consultant and the amounts payable to them have been provided for in the main agreement between HCL and the Government of Orissa. In the main agreement between HCL and the Government of Orissa, three types of payments are envisaged :
(i) Payment in foreign currency to HCL.
(ii) Payment in local currency to HCL.
(iii) Payment in local currency to sub-consultants (SCL). All the above sums payable form part of the Government of Orissa's contractual obligation (in terms of the main agreement between HCL and the Government of Orissa) although the amounts payable to SCL are routed through HCL.
4. As per the terms of the contract, the Executive Engineer, Orissa, PWD, is the authorised officer on behalf of the Government of India for making payment to the applicant-company for their supervision work. The applicant-company has entered into an agreement with an Indian company, STUP Consultants Limited, for providing manpower and certain other services.
5. The Government of Orissa sought clarification from the Income-tax Department, i.e., the Income-tax Officer, Bhubaneswar, regarding rate of deduction of tax while making the said payments.
6. At the time of hearing, counsel for the applicant stated that the reference made by the Government of Orissa was in terms of Section 195(2) of the Income-tax Act which calls upon the Assessing Officer to determine the appropriate proportion of the payments chargeable to tax. The applicant is aggrieved that the Income-tax Officer (TDS), Bhubaneswar, has arrived at tax rate of 42.85 per cent. The application was made by the Government of Orissa on January 20, 1998, and has been pending ever since though the tax was being deducted at the aforesaid rate.
7. It was argued by learned counsel that the matter may not be considered as a pending proceeding in terms of the proviso (a) to Section 245R(2) as it is not the applicant who has referred the matter to the Income-tax Officer (TDS). Therefore, the matter was not pending in the applicant's case before any income-tax authority, and the applicant was within its right to come up before the authority. We agree that the application is maintainable since no application from the applicant itself is pending before the Department.
8. It is the contention of HCL that the amounts payable by the Government of Orissa to HCL for onward payment to SCL would not constitute income liable for tax deduction under the Indian Income-tax Act since the amounts are necessarily linked to the amounts claimed by/payable to SCL. Further, the amounts which are accepted to be paid by the Government of Orissa are always lower than the amounts claimed by SCL and, therefore, at any given point of time no income accrues or arises to HCL on this account.
9. Learned counsel next referred to Circular No. 372 (see [1984] 146 ITR (St.) 9), dated December 8, 1983, with reference to Section 10(6A) of the Act. It was claimed that the taxes paid in the instant case will not be included in computing the total income of the foreign company, as the agreement was approved by the Government of India.
10. From the Revenue side, none was present ; only written submissions have been made.
11. Regarding the first question it has been pointed out by the Revenue that the person responsible for deducting tax, i.e., the Government of Orissa, is justified in doing so as they are not aware of the nature of sub-consultancy agreement between the applicant and the local company--STUP Consultants Limited. Regarding the second question, the Commissioner of Income-tax in his report has stated that the rate of tax should be 15 per cent. as provided in the Double Taxation Avoidance Agreement with the U. K.
12. After going through the detailed written submission of the Income-tax Officer (TDS) and the arguments at the time of hearing of learned counsel for the applicant, it is clear that the nature of income is that of fees for technical services. The rate of deduction of tax would be as per Article 13 of the Double Taxation Avoidance Agreement between India and the U.K. which is 15 per cent. of the gross amount of the fees for technical services received by the company. The computation made by the Income-tax Officer (TDS) falls within the ambit of Section 195(2) which involves determination of the proper proportion of the sum payable to a non resident constituting taxable income. As already mentioned, the services being rendered are in the nature of technical services covered by Article 13 of the Double Taxation Avoidance Agreement with the U. K. We do not consider it necessary to go into further discussion relating to question No. 2.
13. Regarding question No. 1, learned counsel for the applicant pleaded that the amount received by the applicant on behalf of the sub-consultants should not be subjected to TDS as it amounts to only reimbursement of actual expenses. It was pointed out to counsel that this is a vexed question of fact which is best left to the Assessing Officer to compute as it will not be proper to go into the determination of the profit element or otherwise of the transaction. This is a factual issue that will have to be examined at the time of assessment of income of the applicant.
14. Therefore, the answer to question No. 1 is not necessary and on question No. 2, the rate of deduction of tax would be 15 per cent. as per Article 13 of the Double Taxation Avoidance Agreement between India and the U.K. The tax paid will not form part of the income as per Section 10(6A) of the Income-tax Act as already mentioned above.