Authority Tribunal
Decta vs Commissioner Of Income-Tax on 17 May, 1996
Equivalent citations: [1999]237ITR190(AAR)
RULINGS A.A.R. No. 271 of 1996 Decided On: 17.05.1996 Appellants: DECTA Vs. Respondent: Commissioner of Income-tax Hon'ble Judges:
S. Ranganathan, J. (Chairman), D.B. Lal and R.L. Meena, Members Counsels:
For Appellant/Petitioner/Plaintiff: B.K. Gupta, F.C.A. and Sandeep Malhotra, Adv.
For Respondents/Defendant: R.K. Tanwar, Assistant Commissionr of Income-tax Subject: Direct Taxation Acts/Rules/Orders:
Income Tax Act, 1961 - Section 9(1) RULING
1. This application under Section 245Q(1) of the Income-tax Act, 1961 ("the Act"), raises a very interesting question for consideration.
2. The applicant, "The Developing Countries Trade Agency", is a company incorporated in the United Kingdom on April 17, 1986. Its name was changed to the shorter form, "DECTA", on October 13, 1993. It is a nonresident company for the purposes of the Act. It had entered into memoranda of understanding with as many as forty-five Indian companies from time to time. Under these agreements, it received various amounts from these companies and the question on which the ruling of the Authority has been sought is in regard to the taxability of these amounts under the Act. The questions posed by the applicant are as follows :
"(1) Whether the amount of contribution received/receivable to recover part of the cost of the technical assistance provided by the applicant under the provisions of its aid programme to the companies assisted by it in India is income of the applicant under the provisions of the Income-tax Act and chargeable to tax ?
(2) Whether the amount of contribution received/receivable to recover part of the cost of the technical assistance provided by the applicant under the provisions of its aid programme to the companies assisted by it in India is fees for technical services as defined in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 of the Income-tax Act or in article 13 para. 4 of the Avoidance of Double Taxation Agreement with India and the U. K. (3) Even if the amount of contribution referred to in question No. 2 be assumed to be in the nature of technical fees, will such fee be chargeable to tax in India keeping the memorandum of articles of association of the applicant in view ?"
3. DECTA was originally established by the British Government's Overseas Development Administration (ODA) in 1973 to assist exporters and export promotion organisations in Third World countries. In 1986, it became an autonomous company limited by guarantee and sponsored by the ODA. In 1991, the control of DECTA was passed from the ODA to the "Crown Agents for Overseas Government and Administrations", a statutory UK corporation with worldwide activities in the field of industrial and economic development, inspection and quality assurance, and economic, financial and technical consultancy services. DECTA is still sponsored by the ODA to provide information and advisory services and undertake research and promotional activities for the benefit of Third World countries. It also specialises in highly focused project activities aimed at developing private-sector commercial and industrial capabilities, oriented towards exports mainly to West Europe and other developed markets.
4. DECTA began working in India in 1982 on a three-year trade promotion project which was the subject of a bilateral agreement between the British and Indian Governments. Since 1987, the Government agreed on the terms of reference of an Intergrated Export Development Programme for India ("EDPI"). Over the following three years, DECTA conducted studies of the Indian economy with a commitment to private-sector development particularly in the matter of exports. It selected sectors and specific companies within those sectors that had potential to develop products and capability to export those products to hard currency markets but needed technical and marketing assistance to realise that potential. Phase II of the programme ran from 1990 to 1993 and Phase III has commenced since April, 1993. Broadly speaking, the terms of reference of the projects under Phase III envisage that DECTA should open a Project Liaison Office in Delhi to aid administration of the programme and to facilitate communication between DECTA and various governmental and official bodies which will be involved in the projects. They also envisage that DECTA should administer project bank accounts in India to handle the rupee contributions that will be paid by the companies receiving direct assistance, such contributions being a commitment by the companies to the achievement of the aims of the projects and intended to be used for various local expenses incurred in running the projects. EDPI Phase III consists of three separate sections involving : (1) a scheme of direct product specific technical assistance in areas of market identification, product development to match market requirements and development of export capability and marketing to achieve the sales potential ; (2) a market entry scheme for general consumer and industrial products involving a small amount of design and systems assistance but mainly involving assistance in marketing to identify buyers and facilitate market entry ; and (3) an export breakthrough service using the skills of a panel of market development consultants in target markets and offering a customised package of assistance to Indian companies in areas of general market research, specific market research, search for a partner and marketing and follow-up services.
5. As mentioned earlier, DECTA is a U. K. company, with its principal objects set out in the memorandum of association, extracts of which are set out below :
Clause 3 : The objects for which the agency is established are :
(1) to promote commerce and help developing countries, particularly the poorest and least developed, to promote their economic development by increased exports, especially to the United Kingdom ;
(2) to deal with enquiries from developing countries' producers, exporters, trade organisations and export promotion organisations on-
(i) market opportunities in the UK and in other countries on occasion ;
(ii) trading procedures, including the appointment of agents and distributors ;
(iii) product quality, adaptation and presentation ; and
(iv) methods of marketing and promotion.
(3) to arrange and organise visits to the UK by developing country exporters, trade and export promotion organisations and government officials ;
(4) to arrange, to provide, consultancy services applicable to developing country trade promotion ;
(5) to arrange and present training courses, either alone or in collaboration with other institutions ;
(6) to advise and assist developing country exporters wishing to attend appropriate trade fairs ;
(7) to advise UK importers and trade organisations on opportunities for expanding trade with developing countries ;
(8) to maintain contacts and provide information on international trade practice and opportunities to developing country commercial diplomatic officers ; and (9) to maintain contacts and exchange information and expertise with other national and international organisations concerned with developing trade promotion, particularly those in Europe.
Clause 4 : The income and property of the agency shall be applied solely towards the promotion of its objects as set forth in this memorandum of association and no portion thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to members of the agency.
Clause 7 ; If upon the winding up or dissolution of the agency there remains, after the satisfaction of all its debts and liabilities, any property whatsoever the same shall not be paid or distributed among the members of the agency but shall be given or transferred to any body or bodies having objects similar to the objects of the agency which shall prohibit the distribution of its or their income and property among its members to an extent at least as great as that applying to the agency under or by virtue of Clause 4 hereof, such body or bodies being determined by the members of the agency at or before the date of dissolution.
6. The broad scheme of operation of the DECTA in Phase III of the EDPI projects was as follows :
The Government of the United Kingdom intended to make available to the Government of India a sum not exceeding £ 4,300,000 by way of technical co-operation funds to be administered by the DECTA through its project office in Delhi. The project office was initially set up for the period of three years for purpose of undertaking purely liaison activities and coordinate between the head office and the Indian authorities in relation to the EDPI. The Reserve Bank of India granted permission for the establishment of the project office subject to the following conditions ;
(1) Except the proposed liaison work the projects office will not undertake any other activity of a trading, commercial or industrial nature or enter into any business contracts without prior permission of the RBI.
(2) No commission/fee will be charged or any other remuneration received/income be earned by the projects office for its liaison activities/ services rendered by the projects office otherwise in India.
(3) The entire expenses of the projects office will be met exclusively out of the funds received from abroad through normal banking channels.
(4) The representative will not borrow or lend any money from/to any person in India without the prior permission of the RBI.
(5) The representative will not acquire, hold, transfer or dispose of any immovable property in India without the prior permission of the RBI. (6) The representative will furnish (on a yearly basis)-
(a) a certificate from the auditors to the effect that during the year no income was earned by or accrued to the office in India ;
(b) details of remittances received from abroad duly supported by bank certificates ;
(c) certified copy of the audited final accounts of the office in India; and
(d) annual report of the work done by the representative in India, stating therein the details of actual export or import, if any, effected during the period in respect of which the representative had rendered liaison services.
7. DECTA was also permitted by the Reserve Bank of India (RBI) to open an account called "QA.22A/C" with the Standard Chartered Bank subject to the following conditions :
(1) Credits to the account will be by way of foreign inward remittances and consultation charges received from Indian companies.
(2) Debits to the account will be
(a) for making payment of hotel bills in India for DECTA staff members and experts.
(b) for purchase of tickets of Indian Airlines, Indian Railways or any other form of transportation for internal travel by DECTA staff members and experts as also for purchase of international air tickets of staff members of DECTA ;
(c) for payment of local expenses related to the project.
(3) Any other credits or debits to the account worth permissible only with the Reserve Bank of India's approval.
(4) No repatriation of the funds was to be permitted in future. The applicant had supplied to us a copy of the letter dated March 22, 1994, from the British High Commission in India, to the Deputy Secretary in the Department of Economic Affairs, New Delhi. The project memorandum attached thereto was, however, placed before us at our direction at the time of hearing. Para. 3 of this memorandum is of relevance and may be extracted here :
"3. Project description :
3.1. The objective of the project is to provide Indian export earnings to hard currency markets over a five year period and, in this phase, to develop Indian consultancy capacity, especially in the private sector, to provide advice of this kind.
3.2. Promotion of export capability will concentrate on assisting the companies to become more efficient and competitive by upgrading design capability, production techniques, operational and marketing skills.
3.3. The project will help companies in key sectors, with exporting potential, to achieve increased exports. It will aim both at companies at present unable to afford commercial consultancy rates and at larger firms which, once persuaded of the benefits, can afford to employ consultancy services on a commercial basis.
3.4. An additional objective is to increase the chance of sustaining project benefits by ;
(a) Encouraging Indian consultancy companies to develop the expertise to provide this service. DECTA will research the availability of sound Indian consultancy companies. British consultants employed under the programme will be encouraged to work with these Indian consultants to share their knowledge and experience and possibly to form longer term associations. DECTA will produce a proposal within the first six months of the project on how the development of local consultancy capability will be encouraged.
(b) Requiring Indian companies to pay a more realistic share of the costs of services. The target will be an average contribution of 25 per cent, of the cost of the service each company receives. DECTA will review the charging rate during the first six months and will by the end of that period produce a proposal on how to achieve an average contribution of 25 per cent, through a variable charging scheme related to the ability to pay. The proposal will also consider how to increase the proportion of project funds directed to small and medium size companies to the extent that this is compatible with the objectives of achieving a return of ten times the direct value of assistance to the companies and achieving an overall contribution of 25 per cent. It is recognised that there may have to be a trade off between these objectives. The contributions from companies will be re-cycled into the programme through the DECTA bank account in India. Companies will be required to graduate from the programme after they have received a maximum of four years (cumulative) technical cooperation (when, for instance, they have participated in previous phases of the project.)"
8. The statement of facts will not be complete without a reference to the terms of the memoranda of understanding entered into between DECTA and several companies in various sectors in India. The memoranda vary from case to case but, broadly speaking, the pro forma sets out the scope of services in paragraph 2 along with detailed work plans and work schedules in regard to each of the companies. Paragraph 5 of the memorandum deals with costs. Paragraph 3.1 reads thus :
"3.1 The contribution : ODA requires DECTA to recover part of the cost of the technical assistance being provided under the provisions of its aid programme in respect of each work period. The company is, therefore, required to contribute an amount ("the contribution") as set out below to the cost of the services provided by DECTA in that work period. The contribution for the first work plan annexed in Appendix I shall be Indian rupees 168,750. For subsequent work plans the contribution will be recorded in the work plan itself."
Para 3.2 deals with the mode of payment. Broadly speaking, 25 per cent, of the contribution for each work period has to be made on the first day of the work period and the balance has to be paid in monthly instalments. Under para. 7, DECTA retains the copyright of the documents prepared by it and the company shall only be entitled to use them or copy them only for the implementation of the work plan and the purpose for which it is intended.
9. It may be useful to mention one more circumstance to allay one's curiosity as to why DECTA should be required to receive contributions from the companies with which it contracts and that only to the extent of 25 per cent, of the cost as referred to earlier. It may be mentioned that originally the cost of the projects was being met in its entirety by DECTA itself. However, subsequently, the ODA requested DECTA to ensure that the participating companies made a rupee contribution towards the cost of the assistance they received from the organisation. There were three main reasons for this :
(i) Assistance that is offered free of charge does not elicit the level of commitment required from companies to ensure the success of the project;
(ii) It was considered that companies were benefited financially from the assistance provided and it was, therefore, reasonable to expect some financial input from them ;
(iii) The rupee contribution may be added to the overall budget so that the scope of the programme could be extended and more companies could be assisted.
10. It has been necessary to set out in detail the nature of the arrangements between DECTA and the Indian companies which have been entered into as part and parcel of a development programme which has the blessings of the Governments of the United Kingdom and India. In substance, it is the ODA of the Government of U. K. that makes available to the Government of India a huge sum which is utilised by DECTA for providing necessary assistance to the Indian companies. The Indian companies have the benefit of these services and in lieu thereof they make a contribution which can perhaps be described as a "token contribution" towards the cost of the various projects. The problem that faces DECTA in this situation is whether the contribution made by the Indian companies under the above arrangement is liable to tax in India. The applicant apparently apprehends that the amounts referred to above could be sought to be brought to tax as "fees for technical services" as defined in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 of the Act or in paragraph 4 of article 13 of the Avoidance of Double Taxation Agreement between India and the United Kingdom (DTAA). The Department's case as set out in the reply sent by the Assistant Commissioner of Income-tax in his letter dated March 27, 1996, which was also the stand taken by him at the time of hearing before us, is that the DECTA is receiving consultancy charges for providing various kinds of technical and managerial services to the Indian companies and that these charges clearly constitute "fees for technical services" within the meaning of the Act as well as of the DTAA.
11. Para. 4 of Article 13 of the DTAA reads thus (see [1994] 206 ITR (St.) 250):
"For the purposes of paragraph 2 of this article, and subject to paragraph 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 ..."
12. The Act also defines the expression in an almost identical manner. Explanation 2 to Section 9(1)(vii) reads thus :
"9(1)(vii).--. . . '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'."
13. The case of the Department may appear, at first sight, to be covered by the definitions given above. There is no doubt that DECTA provides various kinds of services to the companies with which it enters into memoranda of understanding and, if the contributions or amounts paid by the companies into the account of the DECTA with the Standard Chartered Bank really represent the consideration for the services so rendered, then the amount thereof will be clearly taxable as income in India both by virtue of Section 9(1)(vii) of the Act as well as by virtue of Article 13(4) of the DTAA. But the real and crucial question is whether the payments made are capable of being described as the consideration for the services rendered by DECTA. One way of looking at the transaction is that, on the one hand, DECTA provides some services to the companies and towards those services the companies make a cash payment. The cash payment may not be equivalent to the cost of the services rendered but it can be said that it is none the less consideration for the services rendered. It was open to DECTA to have offered these services for nothing as it used to do once. It is equally open to DECTA to charge full consideration for these services or even a consideration that generates profit for itself. The fact that DECTA has chosen to receive from the companies only 25 per cent, of its cost of the project does not render the amount received any the less a consideration for the services rendered. It may be said to be a case of inadequate consideration perhaps but none the less it is consideration for services rendered and hence will attract the statutory provision referred to earlier.
14. Attractive as the above argument is, it fails to take into account the real nature of the projects, the spirit in which they have been conceived and the specific terms of the contract. It is not really in dispute that, though DECTA has got several profitable lines of activities outside India, its functioning in so far as these projects are concerned is as an agent of the ODA. It is merely implementing an agreement between the British Government and the Indian Government under which the former extends, through DECTA, all kinds of assistance to Indian companies for developing their products, their export potential and their export markets in Europe and other countries in the West. It has already been mentioned that, under these agreements, DECTA is to open a bank account to which only certain credits and debits are permitted. The credit entries comprise foreign inward remittances from the ODA in pounds sterling and the amounts received from the Indian companies described in the memorandum of understanding as "contribution" and referred to in the Reserve Bank of India's letter as "consultation charges". The debits to the account fall into three categories :
"2. (i) For making payment of hotel bills in India for DECTA's staff members and experts ;
(ii) For purchase of tickets of Indian Airlines, Indian Railways or any other form of transport for internal travel by DECTA's staff members and experts as also for purchase of international air-tickets of staff members of DECTA ; and
(iii) For payment of local expenses related to the project."
15. The applicant has placed on record a letter dated December 16, 1993, from the Reserve Bank of India which specifically advised the DECTA's bankers "to ensure that the debits in respect of items 2(i) and (ii) are met from inward remittances only" but there is another letter dated February 23, 1994, in identical terms but without this endorsement. It is not clear why there are two such letters on record and it appears that the restriction contained in the first letter has been withdrawn by the second. Even so, it is clear that, so far as DECTA's account with the Standard Chartered Bank is concerned, it does not cater to the technical fees or consultation charges or other remuneration which DECTA may pay to the various managerial or technical personnel which they employ for the purposes of the projects. The Indian rupee contribution goes to meet only the expenses of the staff members and experts of DECTA by way of hotel bills or transport and other local expenses related to the project incurred in India. On this analysis it will be clear that this is not a case where DECTA provides technical services to the Indian companies and charges them therefor at a concessional rate. This is a case where the DECTA executes various types of projects which will help Indian companies in their exports and all this is done at the expense, directly, of DECTA, and, indirectly, at the cost of the ODA or the British Government. Only a portion of the expenses incurred locally in India is met by the contributions made by the companies. In substance and reality therefore the payments made by the companies cannot be described as consideration for the technical services provided by DECTA. It is, at best, only a pooling arrangement under which the amounts contributed by the ODA and the Indian companies are credited to a joint account (in the name of the DECTA) out of which the project expenses are met. It is really a joint arrangement for the management of the projects and the contribution by the Indian companies is the modus operandi by which they are made to meet a part of the expenses incurred on the projects. It would be totally absurd and incorrect to describe these contributions as being in the nature of a payment to DECTA or as fees for technical services within the meaning of Section 9 or Article 13.
16. The subtle but real difference between the two types of cases in such situation has been brought out in an illustration put forward by the applicant in the course of the arguments. Suppose a doctor is treating a patient and his normal fee for such treatment is Rs. 1,000 but he receives from the patient only Rs. 500. The sum of Rs. 500 is the practitioner's fees though it is not commensurate with the market value of the services rendered. Suppose, on the other hand, a doctor, doing social service, offers free medicines or treatment to his patients who are not financially affluent charging no fees or charges for the medicine or other treatment from them. But suppose that, in order to stop them from exploiting his generosity and also in order to inculcate in them a sense of respect for his profession, he tells them that 25 per cent, of the cost of their medicines and treatment will have to be borne by themselves. This would be a case where the doctor does not receive any consideration for his services and all that is happening is that, in the project called medical treatment of his clientele, the patient saves 75 per cent, and has to bear only 25 per cent, of the expenses involved. Such an arrangement, in the opinion of the authority, does not contain any element bearing the character of income. Here also the contribution by the company is really not a payment to DECTA but only a contribution to a common fund in the hands of DECTA to enable the latter to defray a part of the expenses of the project carried out by DECTA on behalf of the company in question.
17. One of the arguments addressed before the authority on behalf of the applicant was that even if the amounts of contribution by the various companies can be treated as income by way of technical fees, they cannot be charged to tax in India keeping in view the memorandum and articles of association of the applicant. The relevant Clauses have already been set out. The argument is that the income is utilised by the DECTA not for private profit but only for purposes of utility to Indian industries which is a charitable purpose. The profits, if any, cannot be distributed amongst the shareholders of DECTA and even if the company were to be dissolved, the assets and liabilities are bound to be transferred to some other non-profit making organisation. This argument is not really of much help to the applicant. The income of a charitable organisation is nonetheless its income and it will not be chargeable to tax only where the organisation falls within the four corners of the provisions contained in Sections 11 to 13B of the Act. These provisions hedge in the exemption with various kinds of restrictions and conditions regarding application of income, investment, accumulation and so on which, perhaps, may not be fulfilled in the present case. It is, however, not necessary to go into these questions since, in the opinion of the authority, the contributions in question do not constitute income at all in the hands of DECTA.
18. For the reasons discussed above, the Authority makes the following ruling on the questions raised by the applicant :
ruling Question Answer (1) Whether the amount of contribution received/ receivable to recover part of the cost of the technical assistance provided by the applicant under the provi-sions of its aid programme to the companies assisted by it in India is income of the applicant under the pro-visions of the Income-tax Act and chargeable to tax ?
No (2) Whether, the amount of contribution received/ receivable to recover part of the cost of the technical assistance provided by the applicant under the provi-sions of its aid programme to the companies assisted by it in India is fees for technical services as defined in Explanation 2 to clause (vii) of sub-section (1) of sec-tion 9 of the Income-tax Act or in article 13. para. 4 of the Avoidance of Double Taxation Agreement with India and U. K. No (5) Even if the amount of contribution referred to in question No. 2 be assumed to be in the nature of technical fees, will such fee be chargeable to tax in India keeping the memorandum of articles of associ-ation of the applicant in view ?"
Does not arise