Income Tax Appellate Tribunal - Hyderabad
Spectrum Power Generation Ltd., Hyd, ... vs Acit, Circle-3(2), Hyd, Hyderabad on 16 December, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 1101/HYD/2016
Assessment Year: 2009-10
Spectrum Power Asst. Commissioner of
Generation Limited, Vs Income Tax,
HYDERABAD Circle-3(2),
[PAN: AAECS3685A] HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri M.V. Anil Kumar, AR
For Revenue : Smt. Suman Malik, DR
Date of Hearing : 28-11-2016
Date of Pronouncement : 16-12-2016
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-3, Hyderabad dated 26-05-2016, confirming the action of the Assessing Officer (AO) in disallowing an amount of Rs. 1,05,05,655/- under the provisions of Section 40(a)(ia) of the Income Tax Act [Act].
2. Briefly stated facts are that assessee debited an amount of Rs. 1,05,05,655/- under the head 'professional charges'. When enquired, it was explained that this payment was made to a party called Precision Energy Associates, LLC, USA, represented by its proprietor, Mr. Joe Mitchell, a professional consultant. AO I.T.A. No. 1101/Hyd/2016 :- 2 -: Spectrum Power Generation Limited disallowed the amount on the reason that the services rendered by the said person are technical services and as per the provisions of Section 9(1)(vii)(b), the payment was liable for TDS and as no TDS was collected/deducted, such payment itself is disallowable u/s. 40(a)(ia).
3. Before the Ld. CIT(A), it was submitted that there was a copy of Services Contract Agreement dt. 18-01-2007 and the correspondence between Mr. Joe Mitchell, in the form of e-mails, documents and his presence in India on the site during the relevant financial year was submitted to AO along with copy of the passport. It was further submitted that DTA between India and USA overwrites the provisions of Income Tax Act, 1961 and the services rendered by Mr. Joe Mitchell, are independent, personal services and are covered by Article 16 of the DTAA. Since Mr. Joe Mitchell was not in India for more than 183 days, the amount received by him is not taxable in India. Alternately, it was also submitted that if Mr. Joe Mitchell and Precision Energy Associates, LLC, USA, to be considered as one and the same, then, it is the professional income covered under Article 7. In the absence of a permanent establishment, the same cannot be taxed in India. Looking at the either way, it was submitted that the provisions of Section 40(a)(ia) or Section 9(1)(vii)(b) are not applicable to the payment made.
4. Ld. CIT(A) examined the issue and rejected the contentions of assessee by stating as under:
"5.1 I have carefully gone through the submissions of the appellant, Services Contract Agreement submitted by the appellant and DTA I.T.A. No. 1101/Hyd/2016 :- 3 -: Spectrum Power Generation Limited agreement between India and USA. After considering all the information on record, the issue is decided as under.
5.2 During the appeal proceedings, the case was discussed with Sri R.Lakshman Rao, Finance Managar and Sri S.Valramanl, General Manager ( Operation & Maintenance) and it was Informed to me that the appellant is one of the earliest units of gas based power generating units. The unit was started in 1990s with imported machinery. Initially Rolls Royce company was giving required technical guidance till November'2006. The appellant company was not earning profits, on the other hand Rolls Royce was charging both for services and also for its brand which had become burdensome to the appellant. Therefore the services of Rolls Royce were replaced with Mr.Joe Mitchell and an agreement for period of 3 years from January'2007 to January'2010 was entered between the appellant company and Mr.Joe Mitchell, who was a technical expert rendering his advice on operation and maintenance of this imported machinery. In the meantime, the appellant developed in-house talent and from February'2010 onwards the consultancy of foreigners was done away with.
5.3 During the relevant financial year an amount of Rs.1,05,05,650/- was paid to foreign consultant Mr.Joe Mitchell. The amounts were paid through banking channels. From the copy of Invoices raised by Mr. Joe Mitchell, one can understand that Mr.Joe Mitchell raised one invoice per month which Includes remuneration of 18,000/- USD per month along with other expenses like travel, living and other misc expenses. As per the ledger account of Mr.Joe Mitchell, all the amounts were paid through the banks.
5.4 As per note given by the appellant during appeal proceedings, the services rendered by Mr.Joe Mitchell are as under:
"All the Plant Technical decisions were finalized & vetted by him. Mr. Joe Mitchell used to visit Kakinada Site for couple of days every month/alternate month and he communicated either telephonically or through email for the rest of the period during the financial year 2008-09.
All the Purchase Requests & Third Part Services were scrutinized and finalized by him. After technical evaluation of all the purchases and services by the site technical and commercial staff, Mr. Joe Mitchell evaluated the same and advised the best option to the Company. Such decisions were provided either in person during his visits to India or through emails.
Whenever, he was in India, he participated in all the Technical meetings.
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He was in the interview panel for the Technical Staffs recruitment. During his visits to India, he used to take Interviews personally and decide on the selection process otherwise he used to conduct the interviews telephonically.
Periodical Gas Turbines & Steam Turbine maintenance schedules planning were approved by him. Also the list of-Gas Turbine parts refurbishment items and new items procurement list were approved by him. Maintenance schedules and parts refurbishment periodicity is finalized by Mr. Joe Mitchell in consultation with OEM.
He was involved in technical and commercial 'negotiations and he was finalizing the Work Orders' and Purchase Orders. After technical and commercial negotiations by site technical and commercial staff, Mr. Joe Mitchell was involved in the last round of final negotiations and finalizes the work/purchase orders.
Sourcing of alternate vendors for Gas Turbines hardware procurements from the foreign countries. His international exposure helped the Company in identifying alternate vendors in USA. His rich and varied experience helped the company in getting in better price.
Attended Gas Turbine Users' Conferences at Canada/USA and implemented technical Improvements in the Plant and such technical information/ knowledge was imparted to the plant staff."
From the careful reading of above note, it is understood that Mr.Joe Mitchell is a technical expert handling machinery of gas based turbines and was rendering engineering service and financial services In connection with operation and maintenance of such machinery. Therefore the services rendered are to be classified as Technical Services.
5.5 The provisions of Income Tax Act dealing with 'Income deemed to accrue or arise in India' in Sec.9 of Income Tax Act, 1961 read as under:
(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 utilized 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 is deemed to be income accruing or arising in India.
In the Instant case, the services were rendered In India by a foreign consultant. Therefore, the provisions of Sec.9(1)(vii)(b) are clearly attracted and the payment made to Mr.Joe Mitchell Is clearly taxable in India.
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Explanation to Sec.9(2) read as under:-
[Explanation. - For the removal of doubts, it ls hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not.
(i) the non-resident has a residence or place of business or business connection in India, or
(ii) the non-resident has rendered services in India.
This explanation was introduced In Finance Act 2010 with retrospective effect from 1.6.1976. According to this explanation, the non-resident is liable to tax on the payment made by a resident in India irrespective of whether he (nonresident) has any business connection in India or not. Further, payment made by a resident to non-resident Is still taxable even If the services were rendered outside India by non-resident.
Whereas In the Instant case Mr.Joe Mitchell rendered his services In India at a place called Kakinada In Andhra Pradesh. Therefore, according to provisions of Sec.9(1)(vii)(b) the payment made to Mr.Joe Mitchell is clearly liable to tax in India.
5.6 Coming to the provisions of DTAA with USA, before determining taxability of income of Mr.Joe Mitchell, It is relevant to know his period of stay in India. The details are as under:
Date of arrival Date of departure Days of stay 01-04-2008 10-04-2008 10 31-05-2008 11-06-2008 12 12-07-2008 24-07-2008 13 02-10-2008 28-10-2008 27 15-01-2009 22-01-2009 8 19-02-2009 20-02-2009 2 11-03-2009 31-03-2009 21 Total 93 The Article 15 of DTAA read as under:
Independent Personal Services
1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from, the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the I.T.A. No. 1101/Hyd/2016 :- 6 -: Spectrum Power Generation Limited first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State:
(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities;
in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or
(b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.
2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
As evident from clause (b) of Article 15, the professional services are taxable In other contracting state (India) if the period of stay exceeds 90 days during the relevant financial year. In the Instant case, period of stay was 93 days, therefore Mr. Joe Mitchell was clearly liable to tax in India, therefore such payment is liable to TDS .
Article 16 of DTAA read as under: .
Dependent Personal Services
1. Subject to the provisions of Articles 17 (Directors' Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and Pensions in Respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (payments Received by Students and Apprentices) and 22 ( Payments received by Professors, Teachers and Reserch Scholrs), salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of Paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned state, if:
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(a) the recipient is present in the other State for period or periods not exceeding in the aggregate 183 days in the relevant taxable year;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and
(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or business which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operating in international traffic by an employee of a Contracting State may be taxed in that State.
If Mr.Joe Mitchell is considered as employee of M/s.Precision Energy Associates, as the period of stay in India is less than 183 days, according to Article 16 such Income is not taxable.
In view of the above discussion, the payment made to nonresident consultant towards technical services is liable to TDS u/s 195 of Income Tax Act as per Article 15 of DTAA with USA. As no TDS was made on such payment, the same cannot be allowed as deduction.
6. In result, the appeal is dismissed".
5. Assessee is aggrieved and preferred the grounds as under:
"1. The CIT (A) erred in law and facts of the case in holding that section 9 (1)(vii)(b) of the Income Tax Act, 1961 are applicable ignoring the fact at DT AA with USA prevails over the provisions of the Income Tax Act, 1961.
2. Your Appellant submits that the Explanation introduced by Finance Act 2010 to section 9(1)(vii)(b) are applicable to the fact and circumstance of the case, the payment is not taxable in India.
3. Your Appellant submits that the CIT(A) on applying the provisions of section 90, by virtue of which, the DTAA with USA prevails over the Income Tax Act, 1961 ought to have deleted the disallowance of payment to foreign consultant of Rs. 1,05,05,655.
4. Your Appellant submits that the Provisions of section 40(a)(i) or 40(a)(ia) are not applicable to the facts of the case, therefore the addition may be deleted.
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5. Your Appellant submits that the CIT(A) erred in holding that the services rendered by Mr. Joe Mitchell are independent personal services and not dependent personal services ignoring the fact that he is an employee of M/s. Precision Energy Associates, a company in USA.
6. Your Appellant submits that the actual stay of Mr. Joe Mitchell during the previous year relevant to the Assessment year in question is only 86 days and not 93 days, as the day of arrival or departure are ignored while calculating the days of stay, therefore even as per Article 15 or Article 16 of DTAA with USA, his stay in India is within the stipulated period. Hence, the payment is not taxable in India.
7. Your Appellant alternatively submits that in absence of any Permanent Establishment (PE) in India, the services of Mr. Joe Mitchell or M/s Precision Energy Associates are not taxable under the Income Tax Act, 1961 by virtue of the DTAA with USA.
8. Your Appellant submits that it is not the case of the Assessing Officer or the CIT(A) that the services rendered by Mr. Joe Mitchell or M/s. Precision Energy Associates are covered by Article 12 of DTAA with USA, your appellant submits that Article 7 of DTAA is applicable and therefore not subject to tax in India".
6. Ld. Counsel in the course of arguments submitted that Ld. CIT(A) has given a finding that if Article 16 is applicable the amount is not taxable. It was submitted that the services rendered by the person are categorised as 'independent personal services' and Ld. CIT(A) considered the period of stay as ninety three days. It was submitted that while calculating the period, Ld. CIT(A) has not excluded either the day of arrival or the day of departure in computing the days of stay. If, for the seven visits made by Mr. Joe Mitchell seven days are excluded, then period of stay in India falls less than ninety days and his services are not taxable under Article 15 even. Considering the DTAA, it was submitted that the amount is not liable to tax in India and accordingly, the provisions of Section 40(a)(ia) are not applicable.
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7. Ld. DR however, relied on the orders of the Ld. CIT(A) to submit that the amount is taxable as there is no dispute with reference to applicability of Section 9(1)(vii)(b).
8. We have considered the rival contentions and perused the details on record. While there is no dispute with reference to applicability of Section 9(1)(vii)(b), the issue as decided by the Ld. CIT(A) is with reference to Article 15 of the DTAA. Provisions of DTAA over write the provisions of IT Act as held by the Hon'ble Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan (2003) [132 Taxman 373] (SC). If the services are considered as dependent personal services being given by the Executive Director of one man company M/s. Precision Energy Associates, LLC, USA, then it comes under Article 16 on which Ld. CIT(A) gave a finding that amount is not taxable. In the alternate, if the services are considered as independent personal services under the Article 15, then the period of ninety days is relevant. However, the Ld. CIT(A) made a mistake in calculating days by including day of arrival and day of departure also for the period of stay. One of the days is to be excluded to consider the period of stay. If that is taken into consideration, for the seven trips made by Mr. Joe Mitchell, the period of stay will come to eighty six days i.e., less than ninety days. Looking at either way, as the amount is not taxable in India applying the provisions of DTAA, question of disallowance u/s. 40(a)(ia) does not arise. Moreover, from the record, no steps were taken by the AO u/s. 201 / 201(1A) under the provisions of TDS. Keeping the amendment brought to Section 40(a)(ia) on this issue also, we have to hold that the amount is not disallowable u/s. 40(a)(ia). Accordingly, assessee's grounds are I.T.A. No. 1101/Hyd/2016 :- 10 -: Spectrum Power Generation Limited allowed. AO is directed to exclude the amount and allow the same as deduction.
9. In the result, appeal of assessee is allowed.
Order pronounced in the open Court on 16th December, 2016 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 16th December, 2016 TNMM Copy to :
1. Spectrum Power Generation Limited, C/o. M. Anandam & Co., Chartered Accountants, 7A, Surya Towers, S.D. Road, Secunderabad.
2. The Asst. Commissioner of Income Tax, Circle-3(2), Hyderabad.
3. CIT (Appeals)-3, Hyderabad.
4. Pr.CIT-3, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.