Income Tax Appellate Tribunal - Kolkata
Gentex Merchants Pvt. Ltd. vs Dy. Director Of Income-Tax ... on 18 February, 2005
Equivalent citations: [2005]94ITD211(KOL), (2005)95TTJ(KOL)956
ORDER
N.S. Saini, Accountant Member
1. This is an appeal against the order passed by the CIT (A)-XL, Kolkata dated 27.11.2003. In the Memorandum of appeal the appellant has taken the following effects grounds: -
1. "The learned CIT(A) erred in holding that payment by the appellant for the services rendered by M/s. Wet Enterprises, Inc. ("Wet Enterprise") under the Agreement are covered as a taxable payment under Article 12 of the DTAA between India and USA at 15% of US$ 357,000"
2. "He erred in not appreciating that under the provisions of the tax treaty between India and USA ("tax treaty") the amount of USD 357,000 payable by the appellant to Wet Enterprises was not taxable in India"
3. "The learned CIT(A) erred in not providing the appellant with the reasons recorded by the Assessing Officer while determining the taxability of the payments, in the order passed under Section 195(2) of the Income-tax Act."
4. "He erred in not appreciating in the correct perspective the submissions made by the appellant."
5. "Each one of the above grounds of appeal is without prejudice to each other."
2. In the present case the appellant has objected to the order passed by the Assessing Officer Under Section 195 of the I.T. Act directing the appellant to deduct tax at source @ 15% on remittance of US $3,57,000/- to be remitted to. Wet Enterprises, Inc., U.S.A. In the impugned order Under Section 195 of the Act the A.O., however, did not give any reasons for directing the appellant to withhold tax before remitting the funds in convertible foreign exchange.
3. In the first appeal the assessee challenged the order of the A.O. requiring assessee to withhold tax @ 15%. Before the CIT (A) it was argued by the appellant that the payment made to Non-Resident American Company did not give rise to any income, which accrued in India. Referring to the Double Taxation Avoidance Agreement (DTAA) between India and the USA it was argued that Article 12 thereof was not applicable, as scope of agreement with American company did not enable the appellant to apply technologies etc. received from the American Company. The Ld. CIT (A), however, after examining the agreement between the appellant and the American Company dated 21.1.2003 noted that the American Company had provided technical as well as consultancy services to the appellant to bring to fruit through its knowledge, experience, skill and know-how. The CIT (A) therefore held that the facts on record indicated that the payment made by the appellant to American Company represented payment of fees for services rendered for providing technical plan, design and finalizing construction of the water systems. The CIT (A) therefore held that the payment made by the appellant to the American Company was covered by Article 12(4)(b) of DTAA between India and the USA. He accordingly held that the A.O. was justified in directing the assessee to withhold tax @15% from the payments to be effected to the Non-Resident American Company. The CIT (A), however, held that no surcharge was payable on the tax deductible at source.
4. Being aggrieved by the orders of the authorities below the assessee has come up in 2nd Appeal before us. At the time of hearing the Ld. A/R filed a paper book wherein copies of agreement between Non-Resident American Company & the appellant & DTAA between India and the USA were furnished. The A/R of the appellant argued that the payments effected by the appellant to Non-Resident Company did not result in accrual of any income in India. The payments were made by the assessee to the Non-Resident company for obtaining advice, which was rendered wholly outside India. Further such advice was rendered by the Non-Resident company in the course of carrying on its business and since the Non-Resident company did not have any permanent establishment (P.E.) in India, no income or business profits attributable to such P.E. could be assessed in the hands of the Non-Resident company. It was argued that in the present case income if any was assessable under Article 7 of the DTAA and Article 12 of the said Treaty was not applicable. In support of this proposition the Ld. A/R placed reliance on the examples 4 & 7 of Memorandum annexed to the Treaty to claim that the services rendered did not give rise to the income in India which was the country of the source. The Ld. A/R also relied on the decision of the Mumbai Bench of the ITAT in the case of Raymond Ltd. v. DCIT and also on the decision of the ITAT, Kolkata in the case of CESC Ltd. v. DCIT 80 TTJ (CAL) 806.
5. The Ld. D/R on the other hand fully supported the order of the CIT (A). He argued that the agreement between the Non-Resident company and the appellant provided for rendering of technical services for the benefit of the appellant in India. In terms of the agreement, the services were actually provided in India and for which purpose the employees of the Non-Resident company visited India to render such services. Further in terms of the scope of agreement the Non-Resident company had also provided drawings and designs which were used by the appellant for its benefit and therefore the services provided by the Non-Resident Company fell squarely within the ambit of Article 12(4)(b) of the DTAA between India and the USA. The Ld. D/R therefore argued that as per Article 12(4) of the agreement the country of source had right to tax the fees paid to the person resident of other contracting state @15%. He, therefore, urged that no interference is called for in the order of the CIT(A).
6. We have heard the arguments on behalf of rival parties, perused the agreement between the Non-Resident company and the appellant and also the DTAA between India and the USA. We have also carefully perused the appellate orders on which reliance was placed by the assessee.
7. In the present case the crux of the issue is whether amount received by the Non-Resident American company gives rise to income taxable in India and whether it was falling under Article 7 or Article 12 of DTAA. According to the assessee no income accrued in India since such income pertained to business profits. Further since there is no P.E. in India of the Non-Resident company, to which such income can be attributed, the income, if any, was not taxable in India. The assessee further argued that the amounts paid under the agreement did not fall within the definition of fees for included services within the meaning of Section 12(4)(b) and therefore the payments effected under the agreement dated 3.3.2003 could not be taxed in India. It is therefore necessary to first refer to Article 12(4) of DTAA between India and the USA. The said Article 12(4) reads as follows: -
4. For 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:
a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 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 necessary to ascertain as to whether the said Article 12(4) can be applied to the facts of the present case.
8. We note that the appellant had entered into an agreement with. Wet Enterprises Inc., California, USA on 3rd March 2003. The assessee was owner of a property at 22 Aurangazeb Road, New Delhi where a residential building was proposed to be constructed. The American company was engaged to give advice and provide other services, designs etc. for development of Water features at the said premises. In the written note submitted, the A/R of the assessee has clarified that as per Article 2 to 6 of the agreement between the American company and the assessee the work was to be performed in the following five phases :-
2. Schematic Design Phase
3. Design Development Phase
4. Engineering and Construction Phase
5. Construction and Installation Phase
6. Field Commissioning and Programming Phase
8. (a) We note from the agreement that in the Schematic Design Phase, the American company was to interact with the Project Consultants to review the drawings and documents. It also provided that the American company shall prepare Schematic Design Drawing necessary to detail the design intent for the water features. The American company was also to issue drawings for review as their Schematic Design Package. The deliverables by the American company in this phase included site plan, plans, sections and elevations in schematic form.
8. (b) In the Design Development phase the American company was to prepare the design development drawing including mechanical, electrical and lighting schemes, equipment layout etc. The deliverables envisaged in this phase were Feature plan and sections, Piping and instrumentation diagram, Equipment room plan and sections, Electrical single line diagram and panel schedule and Piping specifications etc.
8. (c) In the Engineering and Construction Document phase, the American company was to prepare mechanical and electrical system engineering drawings and documentation required for construction and installation of water features. This phase envisaged release of the engineering documents by the American company for construction purposes. The deliverables envisaged in this phase included Feature finish plan and sections, Feature basin plan and details, Feature architectural details, Piping and instrumentation diagram, Basin equipment penetration and piping plan, Equipment room plan and sections. Feature mechanical details, Electrical single line diagram and panel schedule, Basin electrical wiring plan, Electrical details, Piping specifications etc.
8. (d) In the Construction and installation phase, the American company was to provide information appropriate for shop drawings, product data and samples. In this phase the American company was to provide Site inspection checklist for pre-installation and pre-test and Adjust checklist.
8. (e) In the field Commissioning and Programming phase, the American company was to provide technical assistance for the start up of the equipment and systems and the test and adjust calibration of the water features. In this phase the American company was also to depute their persons to undertake Site trip by the technicians for conducting tests and adjustments to the Water features.
9. On reading of the Agreement between the parties as a whole, we note that various phases contemplated in the agreement were composite and cumulative. Every phase was related to each other and the contract was a single composite contract and the American company was to undertake the work on cumulative basis for which composite non-divisible fee was to be paid. It is clear from the agreement that each phase was depended on the other and each phase was carried out in succession and only on completion of all phases the scope of work envisaged in the agreement stood fulfilled. It is, therefore, incorrect to say that the agreement merely provided for giving advice to the appellant and there was no transfer of any design or knowledge. The reading of the agreement clearly indicates that the appellant company was to execute the water features at 22 Aurangazeb Road, New Delhi in accordance with the designs, drawings and technical specifications provided by the American company and the American company was to ensure that the features executed by the contractors at the site conformed to the drawings, designs specifications provided by the American company. From the agreement between the assessee and the foreign company, it is also quite clear that the American company was not only to provide the Schematic ideas but also to provide technical designs, drawings and information on the basis of which alone the Indian company was to execute and install the Water Features. Article 12(4)(b) provides that fees for included services shall include "services which makes available technical knowledge, experience, skill, know-how or consists of development and transfer of technical plan or technical design". The Ld. A/R placed reliance on the fact that the assessee did not become the owner of the technical drawings or designs and the Intellectual Property Rights in the drawings always retained with the American company It was argued that since the assessee did not acquire the ownership rights nor he could transfer or alienate the designs or information to any third party the assessee got mere right to use for which payment was effected. For deciding the issue under Article 12(4) it is not material as to whether the . assessee acquired on outright basis any technical knowledge, know-how, technical plan or design. The said Article 12(4) is attracted the moment a person resident of one State makes available technical knowledge, experience or transfers a technical plan or technical design to the person of other contracting state. From the agreement between the assessee and the American company it is apparent that the later was to deliver the technical drawings and designs to the former for its own use and benefit in India. The term transfer as used in Article 12(4) does not refer to the absolute transfer of rights of ownership. It refers to the transfer of technical drawing or designs to be effected by the Resident of one State to the Resident of other State which is to be used by or for the benefit of Resident of other state The said Article 12(4)(b), in our opinion, does not contemplate transfer of all rights, title and interest in such technical design or plan. Even where the technical design or plan is transferred for the purpose of mere use of such design or plan by the person of other contracting state and for which payment is to be made. Article 12(4)(b) will be attracted The facts on record clearly indicate that under the agreement the American company was required to deliver such technical designs or plan for the sole use by the assessee company in India. In fact, the assessee did use these technical plans and drawing for constructing and / or installing the Water Feature at 22 Aurangazeb Road, New Delhi. In the above circumstances we are of the opinion that the payments effected under the agreement with the American company squarely fell within the definition of "fees for included services" and therefore the assessee was liable to deduct tax @15% of the amount payable, Under Section 195 of the Act. We also note that the case laws cited by the assessee are not applicable to the facts of the case. In the case of Raymond Ltd. the payment was effected by the assessee to a company, Resident of U.K. The nature of activities contemplated in the contract between the Indian company and the U.K. company were totally different as the question was whether the amount so paid were fees for technical services In that case although Tribunal held that services rendered were technical services; due to specific clauses of DTAA between U.K. and India, income was not taxable. Moreover, since there is a specific clause included in Article 12(4) of DTAA with the USA which defines the term fees for included services and further since the payment made under the agreement in the present case falls within the said definition, the assessee cannot get benefit of the decision of the Mumbai Bench which was rendered in the context of DTAA between India and U.K. As regards the decision of the Coordinate Bench of the IT AT, Calcutta in the case of CESC Ltd. we find that under the agreement the role of the foreign company was limited to review and give opinion to the Indian Resident rather than to design and direct the project. On these facts the Tribunal had found that making suggestions for corrections was only the incidental part of the agreement and it was not the substance of the agreement between the parties. On the contrary we find that the substance of the present agreement envisaged that the American Company shall not only advice the Indian company but in fact it will prepare all the designs and drawings necessary for implementing the Water Features and also assist the Indian company in actual erection and commissioning of water features. We thus find that from the very inception of preparing schematic designs and drawings till the actual implementation and commissioning of the water features the American company was intimately connected with the project and in fact the whole project was intended to be conducted at the behest direction and supervision of the American company. In the circumstances the decision of the Coordinate Bench in the case of CESC Ltd. cannot be applied. We, therefore, agree with the view taken by the CIT (A) that the amounts payable to American company were "fees for included services" within the meaning of Article 12(4)(b) of the DTAA with the USA and therefore liable for withholding of tax Under Section 195 of the Act. Accordingly we dismiss the appeal of the assessee.
10. In the result, the appeal is dismissed.