Authority Tribunal
Steffen, Robertson And Kirsten ... vs Commissioner Of Income-Tax on 29 October, 1997
Equivalent citations: [1998]230ITR206(AAR)
RULINGS A.A.R. No. 359 of 1997 Decided On: 29.10.1997 Appellants: Steffen, Robertson and Kirsten Consulting Engineers and Scientists Vs. Respondent: Commissioner of Income-tax Hon'ble Judges:
S. Ranganathan, J. (Chairman) and Subhash C. Jain, Member Counsels:
For Appellant/Petitioner/Plaintiff: Samir Chakraborty, M.K. Gyara and S.N. Mitra, Advs.
For Respondents/Defendant: R.B. Das, Adv.
Subject: Direct Taxation Acts/Rules/Orders:
Income Tax Act, 1961 - Sections 9, 9(1), 115A(1), 245N and 245Q; Finance Act RULING
1. This is an application under Section 245Q(1) of the Income-tax Act, 1961 ("the Act"). The applicant, Steffen Robertson and Kirsten ("SRK"), is a company incorporated under the laws of South Africa having its registered office at SRK House, Johannesburg, South Africa. It is thus a foreign company which is non-resident in India and as such entitled to maintain the present application which has been filed in the following circumstances.
2. The applicant has signed a technical consultancy agreement dated December 20, 1996, with Tata Iron and Steel Company Ltd. (TISCO) for providing engineering services to the latter in the form of validation of orebody model, optimisation of pit operations and feasibility study of underground mining of TISCO's chromite ore mines at Sukinda in Orissa. According to the applicant, the operations under the agreement are divided into different stages and some of the work will be carried out at the Johannesburg office of SRK and some in India. The aggregate consideration to be paid by TISCO to SRK under the agreement is US $ 203,090 (sic) but, it is stated, separate costs/fees are provided for each stage of work, broadly classified as follows :.
US $
1. Engineering services rendered in India 59,500
2. Engineering services rendered in Johannesburg 108,500
3. Daily allowances and travelling costs 35,090 203,090
3. The applicant desires to have a ruling regarding the taxability, under the Act, of the sums received or to be received by it under the agreement and hence this application.
4. The applicant has formulated as many as six questions for the ruling of this authority. These questions read as follows :
(a) Whether charges payable by TISCO to the applicant for work carried out by the applicant under the agreement in its office at Johannesburg, South Africa, including preparatory studies before each field visit, detailed under serial No. 3 of Appendix "B" of the agreement, are income liable to income-tax under the Income-tax Act, 1961 ? If so, at what rate ?
(b) Whether the consultancy fees to be received by the applicant from TISCO under the agreement as detailed under serial No. 2 of Appendix "B" of the agreement is income on which income-tax is payable under the Income-tax Act, 1961 ? If so, at what rate ?
(c) Is there any obligation on the part of TISCO to deduct at source, from the sums payable under the agreement to the applicant towards technical and consultancy fees, income-tax under the Income-tax Act, 1961, and, if so, to what extent and at what rate ?
(d) Can TISCO make payment to the applicant of the technical fees/charges in South Africa for the work to be done or services to be rendered in South Africa ? Will that be considered as an income deemed to accrue or arise in India ? Will tax be levied on such income ? If yes, then whether income-tax has to be deducted at source on such payment made in South Africa, and at what rate ?
(e) A daily living allowance as detailed in Appendix "B" of the draft agreement will be paid by TISCO to the foreign technicians of the applicant, Since the same do not fall within the purview of a perquisite, will tax be levied on such an allowance ?
(f) India does not have a Double Taxation Avoidance Agreement (DTAA) with South Africa. Hence, what rate of tax shall be applicable to the technical and consultancy fees paid in India by TISCO to the applicant under the agreement ?
5. Dr. Samir Chakraborty, appearing for the applicant, took us through the agreement between SRK and TISCO dated December 20, 1996. After setting out the preamble and the nature of services and information to be provided by SRK to TISCO, the agreement provides for the contract price and mode of payment thereof. This clause stipulates the stages at which the consideration is to be paid and also refers, to the break-up, as per Appendix "B", of the payments to be made. It, however, specifically excludes any liability whatsoever for SRK in respect of any taxes payable in India. It provides :
"Lump sum payments made hereunder by TISCO to SRK shall be made without deduction of any present or future tax assessment or other governmental charges, statutory levy or cess imposed on such payment by Government of India or any political sub-division or taxing authority thereof and such taxes, assessment or charges, if any, shall be borne and paid by TISCO."
6. This clause makes it clear that all responsibility regarding Indian taxes relating to the payments to be made will be borne by TISCO. SRK is in no way concerned therewith and will not be affected in any manner financially by the provisions of the Indian income-tax law in this regard. Whether the whole or any part of the payments will be liable to tax in India or not and whether TISCO is bound to deduct tax at source therefrom or not and if so, at what rate, are really questions that do not concern SRK for, so far as it is concerned, it has to receive US $ 203,090 from TISCO in full with no liabilities attached thereto.
7. The authority was prima facie of the opinion that in view of the above clause of the agreement, this application has to be dismissed as academic and hence non-maintainable. It is true that Section 245N does not restrict or qualify the nature of the question on which the advance ruling can be sought by an applicant. It reads :
"245N. (a) 'advance ruling' means the determination, by the authority, of a question of law or fact specified in the application in relation to a transaction which has been undertaken, or is proposed to be undertaken, by the applicant."
8. It appeared to the authority that, despite the wide terms in which the definition is couched, certain inherent limitations must be read in as applicable to an application under this Chapter and that an applicant can be permitted to seek a ruling only on a question which affects his income-tax liability arising out of the transaction entered into, or proposed to be entered into, by him. It was felt that it was not open to the applicant to raise a question which does not affect it in any manner. In the present case, it was TISCO that was affected by any decision on the issues raised by the applicant and, since it was not open to TISCO, being a resident, to file an application under Section 245Q, it would not be open, it was felt, to the parties to get over this hurdle indirectly by having the application filed by the applicant which is a non-resident. This view was put to counsel for the applicant and orders were reserved without hearing the application on the merits.
9. On a careful consideration, the authority was of the view that the above conclusion may not be correct and that the application requires consideration on the merits. Notice was, therefore, given to the parties and the application was refixed for hearing to consider arguments both as to the maintainability of the application as also on the merits of the case. The applicant expressed its inability to appear for the hearing on October 11, 1997, and sought a long adjournment. The parties were, however, informed that the request for a long adjournment could not be granted and that the matter would be fixed for hearing on October 20, 1997, at New Delhi. It was also stated that it was open to the parties to attend the hearing through their authorised representatives or to send their submissions by fax or speed post so as to reach the authority by the date fixed for hearing. In response to the above, an application has been received from TISCO praying that TISCO should be made a co-applicant or party to the application and an advance ruling given in the matter. No submissions have been made on the merits and the parties did not appear on the date fixed. In the circumstances, the application is disposed of after due consideration ex parte.
10. The authority, on careful consideration, has come to the conclusion that TISCO cannot be made a party to these proceedings. The Act permits only a non-resident to agitate questions affecting him in proceedings before the authority. If TISCO cannot be permitted to file an application under Section 245Q(1) it cannot be allowed to agitate the matter before the authority either.
11. However, the authority has come to the conclusion that the application filed by SRK cannot be rejected as non-maintainable. It is true that the agreement between the parties casts on TISCO the liability to any tax which may have to be paid by SRK but all the same it cannot be said that SRK is not at all affected by any view that may be taken regarding the taxability of the amounts received under the agreement. SRK is no doubt a non-resident but it is still bound to discharge its obligations under the Act for payment of advance tax as well as for filing a return of income before the income-tax authorities in India on its Indian income liable to tax. If TISCO makes the payments without any deduction of tax at source and eventually it is held that the whole or any portion of the profits of SRK are liable to tax in India, then the failure of SRK to pay advance tax or file a return under an impression that no such tax would be payable would constitute a failure on its part to discharge its statutory obligations and render it liable to all consequences of such default. The fact that the tax, if any, would be paid by TISCO will not relieve the applicant of such liabilities. The authority is, therefore, of the opinion that the question whether the whole or any portion of the profits of the applicant accrue or arise in India is one which is also vital to the interests of the applicant and cannot be described as purely academic from its point of view. For these reasons, the authority is of the opinion that the application filed by the applicant is competent and is liable not to be dismissed in limine.
12. To turn to the merits, the questions raised by the applicant in the application which turn on the liability of the applicant to tax on its receipts under the agreement appear to be capable of a direct and simple answer. The point made on behalf of the applicant is that the portion of the fees/charges attributable to jobs/work carried out by the applicant in its office at Johannesburg, including preparatory studies, do not accrue or arise in India as the place of rendering of such services is outside India. The daily allowance paid by the applicant to the foreign company, it is said, will not come under the purview of the term "perquisites", and hence will not be taxable. In respect of fees/charges paid at Johannesburg, no tax is to be deducted at source as no income-tax is payable in respect of these amounts. On the consultancy fee to be received by the applicant under the agreement in respect of services rendered in India, it is conceded that income-tax would be payable at 30 per cent. there being no DTAA agreement between India and South Africa.
13. The questions raised have to be answered in the light of the provisions contained in Section 9 of the Act. The terms of Section 9(1), relevant for the purposes of this case, read thus :
"9. (1) The following incomes shall be deemed to accrue or arise in India--
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India . . .
(ii) income which falls under the head 'Salaries', if it is earned in India.
Explanation.--For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded as income earned in India ; . . .
(vi) income by way of royalty payable by--
(a) the Government ; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such persons 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 royalty is payable in respect of any right, property or information used or services utilised for the purposes of 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 . . .
Explanation 2.--For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for--
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in Sub-clauses (i) to (v) . . .
(vii) income by way of fees for technical 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 : . . .
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'."
14. The fees paid by the TISCO to SRK clearly fall within the scope of the definitions contained in the above two Explanations. These amounts are being paid by TISCO which is a resident and the statutory test for determining the place of their accrual is not the place where the services, for which the payments are being made, are rendered but the place where those services are utilised. If they are paid for services which are utilised in a business or profession carried on by the payer in India or for the purposes of making any income from a source in India, they will be deemed to accrue or arise in India. It may be that some of the services in this case are rendered abroad by the personnel employed or deputed by SRK but the fees paid are for services utilised by TISCO in the mining business which is being carried on by it in India. Therefore, irrespective of the place where the services are rendered, the amounts should be deemed to accrue or arise in India. The result will be that fees paid in respect of preparatory studies carried out in South Africa, fees paid in respect of information and technical know-how, whether provided in South Africa or in India, irrespective of whether these payments are made in India or abroad, will all be liable to tax as income accruing or arising in India.
15. The applicant seeks to draw a distinction between the fees paid so far as they relate to "engineering services" and those towards meeting the living allowances or travelling expenses of the personnel. The question framed by the applicant in this regard assumes that the fees are paid to SRK's technicians by TISCO. But this is not so. No employer-employee relationship between TISCO and such technicians is shown to exist. On the contrary, the applicant itself has taken up the stand that the living allowances paid to the employees of SRK cannot be treated as "perquisites" paid by TISCO to its employees. There is only an agreement between SRK and TISCO. The agreement stipulates a consolidated remuneration of US $ 203,090 as payable by TISCO to SRK and the Sectionalisation only explains the way in which the figure was arrived at. Neither the salaries nor the allowances and travel expenses of the staff are paid by TISCO to them. There is only a lumpsum remuneration for technical services rendered by TISCO to SRK and the agreement itself says so. Under this agreement, all amounts are being paid by TISCO to SRK towards royalty or fees for technical services. The services may be rendered by the employees to SRK partly in India and partly in Johannesburg but the payments are made by TISCO, which is a resident, for utilising those services in India. The statute does not use the expression "fees for services rendered in India" but advisedly uses the words "fees for services utilised in India". The two expressions have different connotations where, as here, the services are rendered to one person but the consideration is paid by another person in consideration of utilising those services in India. The provisions of Section 9(1)(vi) and 9(1)(vii) are, therefore, clearly attracted. There is no difference between the fees for engineering services and the fees relatable to the living allowances or travelling charges of SRK's employees who render the services ; in other words, the entire consideration paid by TISCO to SRK will be taxable under the Act as income accruing or arising in India. Consequently, before making any remittance of the amounts due to SRK under the agreement, TISCO should deduct tax at the rate specified by the provisions of the relevant Finance Act. The rate will be 55 per cent. if the payments are made in the financial year 1996-97 and 48 per cent if the payments are made in the financial year 1997-98.
16. Regarding the rate of tax deduction at source (TDS), the applicant contends that tax would be deductible at 30 per cent. apparently in view of the provisions of Section 115A(1)(b) of the Act. But that rate would be applicable only if the conditions specified in that section are satisfied, These are :--
(i) that the agreement is one entered into after March 31, 1976 ; and
(ii) that the agreement should be either one approved by the Government of India, or where it relates to a matter included in the industrial policy of the Government, one which is in accordance with such policy ;
17. While the first of these conditions is fulfilled, there is no information placed on record regarding the second. So, the only way in which the Authority can answer this question is by saying that the TDS rate will be 30 per cent. if the second condition is also shown to be satisfied and 55 per cent. or 48 per cent. otherwise, depending respectively upon whether the payments are made in the financial year 1996-97 or the financial year A 1997-98.
18. In the light of the discussions above, the questions raised by the applicant are answered as follows :
RULINGS Questions Answers
1. Whether charges payable by TISCO to the applicant for work carried out by the applicant under the agreement in its office at Johannesburg, South Africa, including preparatory studies before each fieldvisit, detailed under serial No. 3 of Appendix "B" of the agreement, are income liable to income-tax under the Income-tax Act, 1961 ? If so, at what rate ?
Yes. At 55 per cent, if paid in financial year 1996-97 and at 48 per cent, if paid later.
The rate will, however, be only 30 per cent, if the conditions set out in section 115A(l)(b) are fulfilled.
2. Whether the consultancy fees to be received by the applicant from TISCO under the agreement as detailed under serial No. 2 of Appendix "B" of the agreement is income on which income-tax is payable under the Income-tax Act, 1961 ? If so, at what rate ?
do.
3. Is there any obligation on the part of TISCO to deduct at source, from the sums payable under the agreement to the applicant towards technical and consultancy fees, income-tax under the Income-tax Act, 1961, and, if so, to what extent and what rate ?
do.
4. Can TISCO make payment to the applicant of the technical fees/ charges in South Africa for the work to be done or services to be rendered in South Africa ?
Will that be considered as an income deemed to accrue or arise in India ? Will tax be levied on such income ? If yes, then whether income-tax has to be deducted at source on such payment made in South Africa, and at what rate ?
This will be so even if the payments are made at Johannesburg.
5. A daily living allowance as detailed in Appendix "B" of the draft agreement will be paid by the TISCO to the foreign technicians of the applicant. Since the same do not fall within the purview of a perquisite, will tax be levied on such an allowance ?
The living allowance paid to the foreign technicians will form an integral part of the fees payable to SRK under the agreement and will also be taxable in India.
6. India does not have a Double Taxation Avoidance Agreement (DTAA) with South Africa, Hence, what rate of tax shall be applicable to the technical and consultancy fees paid in India by TISCO to the applicant under the agreement ?
The rate of tax applicable to the payments made under the agreement will be 30 per cent, if the conditions of section 115A(l){b) are both fulfilled.
Otherwise, it will be 55 per cent, for amounts paid in the financial year 1996-97 and 48 per cent, for amounts paid in the financial year 1997-98.