Income Tax Appellate Tribunal - Chennai
Rane (Madras) Ltd., Chennai vs Assessee on 11 June, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH, CHENNAI
Before Dr. O. K. Narayanan, Vice President and
Shri George Mathan, Judicial Member
.....
M.A. No. 76/Mds/2011
(In ITA No. 106/Mds/2009)
Assessment Year : 2004-05
M/s. Rane (Madras) Ltd., The Income Tax Officer,
'Maithri', v. Company Circle-V(3),
132,Cathedral Road, Chennai.
Chennai-600 086.
(PAN: AACCR9772M)
(Applicant) (Respondent)
Applicant by : Shri R. Vijayaraghavan
Respondent by : Shri Anirudh Rai
ORDER
PER GEORGE MATHAN, JUDICIAL MEMBER :
This is a miscellaneous application filed by the assessee on 11-05-2011 against the order of the Tribunal in ITA No. 106/Mds/2009 dated 11-06-2010 for the assessment year 2004-05.
2. Shri R. Vijayaraghavan, Advocate represented on behalf of the assessee and Shri Anirudh Rai, learned CIT-DR represented on behalf of the Revenue.
3. The assessee has filed this miscellaneous application wherein it has been stated as follows :
2MA 76/Mds/2011
"The Miscellaneous Petition is filed against the order of the Income Tax Appellate Tribunal, "A" Bench ("Appellate Tribunal") dated 11th June 2010. The issue involved in the appeal is disallowance under section 40(a)(i) of the Income-tax Act, 1961 ("the Act") on payments of export commission to M/s. Al Aquilli Trading L.L.C., Dubai and Mr. James Drutchas U.S.A (herein referred as "Consultants/representatives") The Appellate Tribunal has dismissed the appeal of the Petitioner/Appellant and confirmed the disallowance under section 40(a)(i) of the Act, without analyzing and concluding the following issues raised before the Tribunal.
The Petitioner has raised the following submissions while arguing the matter before the Hon'ble Bench:
i) Applicability of Circular 786 dated 07.02.2000 The Petitioner in Page 3 & 4 of the appellate order states with respect to Circular 786 dated 07.02.2000 as under:
"Both are payments for acquiring orders from abroad. By virtue of circular 786 of2000 the amount is not taxable. Withdrawal of the Circular is only prospective.
JCIT v George Williamson (Assam) Ltd. l 116 ITD 328 Gau Indopel garments (P) Ltd.v. DCIT 86 ITD 102 Mad SOL Pharmaceuticals Ltd v ITO 83 ITD 72 Hyd Indtelesoft (P) Ltd. In Re 267 ITR A.A.R. Withdrawal of CBDT Circular 786 dt. 7.2.2000 of 2009 is prospective:
Siemens 2010-TIOL-102-ITAT-MUM Shakthi Raj Film Distributors v. CIT 213 ITR 20 Bom CIT v. Janardhana Mills 311 ITR 439 Mad"3 MA 76/Mds/2011
The Petitioner submits that though the Appellate Tribunal has reproduced in its order the notes of arguments submitted at the time of hearing, it has not given any analysis and conclusion on the applicability of the Circular. Therefore, there is a mistake in the order which requires to be rectified.
ii)Section 9(1)(vii)(b) - Earning of income from a source outside India The relevant notes of arguments as given in Page 4 of the order are extracted below:
"The Payment is in connectipn with exports and hence it is not deemed to accrue in India by the virtue of exclusion under sec 9(1)(vii)(b).
CIT v KKK West Germany 262 ITR 513 Mad.
Titan Industries Ltd v ITO (2007) 11 SOT 206 Bang.
Lufthansa 1ndia Cargo P Ltd. 91 ITD 133 Del.
In the said order, the Appellate Tribunal has observed as under :
"It is true that the technical information does not belong to the representative, but the representatives have source the technical information in their territory and supplied the same to the assessee for the advancement of the R&D in the assessee's business. Thus the source of the use of the technical information is the business of the assessee in India. The payment has been made to a non- resident by a recipient for assisting the resident in obtaining technical knowhow for the improvement of the resident's product in line with the requirement of the automobile industry in the territory of the non-resident. Thus the source of the income of the non-resident is the business of the assessee in India and consequently, it would have to be held that the income of the non-residents in relation to the sources from India are the income being 'fee for technical service', which are deemed to accrue or arise in India"
The Petitioner submits that Section 9(1 )(vii)(b) states that income by way of fees for technical services shall be deemed to accrue or arise in India, if it is payable by 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 {rom any source outside India. However, the Appellate Tribunal has not appreciated that the expenses are incurred in connection with the export to US and the expenses incurred in connection with 4 MA 76/Mds/2011 earning income from a source outside India. Therefore, the payment cannot be considered as income deemed to accrue or arise to a non-resident in India. The Appellate Tribunal having not considered these arguments, its order suffers from apparent mistake which requires to be rectified.
iii)Article 26(3) of India-USA Tax Treaty.
The Petitioner submits that Article 26(3) of the India-USA tax treaty deals with non- discrimination clause which provides that royalty and other disbursements made by a resident of a contracting state (Petitioner) to a non-resident (Consultant) is deductible in computing the income of a resident (Petitioner) as if the payment is made to a resident. Further, Section 40(a)(ia) was amended to include fee for technical services paid to residents by Finance Act No.2 of 2004 w.e.f 01.04.2005. Hence payments made to non-resident prior to 01.04.2005 cannot be disallowed by virtue of Article 26(3) as similar payments to residents were not covered under Section 40(a)(ia) of the Income tax Act. The Appellate Tribunal having not considered these arguments, its order suffers from apparent mistake which requires to be rectified.
iv) Applicability of Article 12(4)(b) of India-USA Double Taxation Avoidance Agreement (DT AA) - Fee for included services The relevant notes of arguments as given in Page 4 of the appellate order are extracted below:
"Fees Jar included service as per Article 12(4)(b) means services that make available technical knowledge, experience, skill, know how or process or technical knowhow or process or consist of development and transfer of technical plan or technical design. Only technical knowhow which can be utilized further by the recipient will not include other services.
FICllINRE 320ITR 124 (A.A.E.)
Anapharm Inc In Re. 305 ITR 394 A.A.R.
Invernsys Systems In Re 317 ITR 438 A.A.R
Worley Parsons Services Pvt Ltd 313 ITR 74 A.A.R
Bovis lend Leas (India) ltd 2009-TIOL-666-ITAT-BANG
Bharath Petroleum Corporation Ltd v JCIT 111 TTJ 375 Mum.
ACITv. Paradigm Geophysical PTY Ltd 117 TTJ 812 Del
ICICI Bank 20 SOT 453 (Mum)"
In the said order, the Appellate Tribunal has observed as under:
"In respect of the representative Mr. JD, is to assist the assessee company along with its group in gaining access to special training, research papers and publications including current journals and magazines pertaining to the automobile industry to support the R&D activity of the assessee company's group. This clearly 5 MA 76/Mds/2011 shows that technical information is being made available to the assessee and Mr. JD did not have technical knowledge. It is true that the technical information does not belong to the representatives, but the representatives have source the technical information in their territory and supplied the same to the assessee for the advancement of the R&D in the assessee's business"
The Petitioner respectfully submits that there is misconception of factual details. The Appellate Tribunal ought to have appreciated that the non-resident representatives merely assist the companies in gaining access to training and they do not undergo any training and pass on the technical information to the Petitioner. In such a scenario, the said act of representation by non-resident agents cannot be considered as making available technical services.
The Petitioner submits that even if the payment is considered as "fee for technical services", as per Article 12(4)(b) of the India-USA DTAA, the payment would not be taxable in India, due to the availability of the clause 'make available' in the Tax Treaty. It is further submitted that the term 'make available' has not been defined in the India- USA DTAA. However, the Memorandum of understanding (MOU) in the India-USA DTAA contemplates that technology will be considered as 'made available' when the person acquiring the service is enabled to apply the technology/ skills involved in rendering such service.
However, the Appellate Tribunal has not considered the arguments of the Petitioner and has not interpreted the term 'make available' in the proper perspective. Therefore, there is an apparent mistake in the order which requires to be rectified. Applicability of provisions of DTAA "The applicability of the DTAA cannot be considered at this stage as one should remember that DTAA is for avoidance of double taxation. It is in the assessment, if any of the two non- resident representatives of the assessee that the provisions of DTAA are to be considered. This is because the DTAA also provides for the beneficial taxation subject to the condition that the income of the non-resident, which has accrued in Indiahas been offered for taxation in the country in which they are resident"
The Petitioner submits that as per sub-section (2) of Section 90 of the Act, where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax or avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee.
The Petitioner submits that the Appellate Tribunal has not considered the above provision and held that provisions of DT AA are to be considered only in the assessment of the non-resident. Since the observation in the order is not in 6 MA 76/Mds/2011 accordance with provisions of Section 90(2) of the Act, the appellate order suffers from apparent mistake which requires to be rectified.
v) Non consideration of payment to AIAquilli Trading LLC, Dubai The Petitioner further submits that there are two payments viz. one to James Drutchas, USA and the other to Al Aquilli Trading LLC, Dubai. However, the Appellate Tribunal in its order, restricted the discussion on the payments of export commission made to James Drutchas, USA only.
The Petitioner submits that non-consideration of specific issue amounts to mistake apparent on record which requires to be rectified.
vi) Non-application of the decision of the Special Bench, Chennai in Prasad Productions The Special Bench in the case of Prasad Productions held as under:
"Therefore, in our view, it is the payer who is the first person to decide whether the payment he is making bears any income character of not. Now we can visualise various situations that can arise for the applicability of sec 195:
(a) If the bona fide belief is that no part of the payment has any portion chargeable to tax, sec 195 would be totally inapplicable,
(b) If the payer believes that whole of the payment is income chargeable to tax, he will be liable to deduct tax under sec. 195 (1) of the Act.
In the above decision, the Special Bench observed that the assessee should have bona fide belief that the payment is not chargeable to tax in India. However, in Page 18 of the appellate order dated 11th June 2010, the Appellate Tribunal has held as under:
"The payments made by the assessee to two representatives is plain and simple remuneration and not reimbursement of expenses. In fact; in the submissions made by the assessee, which is extracted in page 3 & page 5 of the order of the CIT the word used is remunerated. The remuneration is well understood to encompass within itself the element of income. In the circumstances, it cannot be said that the assessee had a bona fide belief Once, it is held that the assessee did not have bona fide belief that the payment to the non-residents did not have the income component, the decision of the Special Bench in the case of Prasad Productions Ltd. referred to supra would no more come to the rescue of the assessee. "
The Petitioner submits that the Appellate Tribunal has not correctly applied the decision of Special Bench (supra). The Special Bench states that assessee should have bona fide belief that the payment is not chargeable to tax and it does not contemplate that the payment should not have income component. 7 MA 76/Mds/2011 Even if the payment has income component only if the same is chargeable to tax in India, tax has to be deducted on such payments.
Further, the Petitioner respectfully submits that while arguing the appeal this issue was clarified. The counsel on record pointed out that the act of non-deduction of tax by Petitioner itself establishes the fact that Petitioner had bona fide belief that the payment is not chargeable to tax in India and as such it does not warrant withholding of tax. Therefore, non-application of the decision of the Special Bench in a correct perspective would amount to mistake apparent on record which requires to be rectified.
The petitioner therefore prays that the Hon'ble Appellate Tribunal may be pleased to recall the order dated 11th June 2010 and repost the appeal for fresh hearing or in the alternative suitably amend the order to rectify the aforesaid mistakes that are apparent from record and thereby render justice."
4. At the time of hearing the assessee has also filed a Note of 4 pages which reads as under:
"NOTE Payment made to two Non residents for procurement or orders.
Circular No 786 dt 7.2.2000 has clarified that it is not taxable in India. The withdrawal of this circular in 2009 is only prospective.
1. The ClT has disallowed on the only ground that tax has not been deducted and that the payer cannot decide whether the amount is taxable or not.
The CIT's decision is against the decision of the special bench and the SC decision in GE Technology.
2. The Assessee submitted that the CIT has not considered the effect of
(a) CBDT Circular No 86 dt 7.2.2000.
(b) The import of 'make available' clause under the DTAA with USA.
(c) Payment was made in connection with exports- Madras High Court decision.
(d) Under Article 26(3) of the DTAA between india and USA, disallowance of 8 MA 76/Mds/2011 In the hands of a resident, payment made to non deduction can be made under the same conditions as if they have been paid to a resident. Disallowance of fees for technical services paid to Non resident for non TDS is not permissible as similar provision is not applicable to residents till later.
As these issue had not been considered by the CIT, the same should have been set aside to the ClT or the AO for consideration.
3. The Tribunal has held that the assessee did not have bonafide belief that the amount is not taxable, on the sole ground that payment is remuneration and not reimbursement. Even remuneration under the above circumstances is not taxable in India. Hence the assessee bona fide believed that the amount is not taxable.
4. In case of JD, USA he merely assisted the Appellant in gaining access to training etc. For an amount to be considered as Fees for included services the Assessee should himself make available technical knowledge, skill etc. The examples given as an annexure to the DTAA has explained. In any event two views are possible.
5. ITAT has referred to Explanation2 to sec 9(1) by FA 2010. Subsequent amendment cannot substantiate the CIT's order (CIT v Max India Ltd 295 ITR 282 (SC).
6. The tribunal has not considered the case of the other agent AI Aquilli Trading LLC, Iran whose job is only to procure orders and liaise with importers. They have not sourced any technical information.
7. These payments were paid in connection with exports and hence exempt u/s 9(1)(vii)(b). ITAT has held that as the source of income is business in India. Assessee's contention is supported by jurisdictional High Court in 262 ITR 513 where also Royalty was paid for exports from India. In any event two views are possible.
8. The ITAT has held that applicability of DTAA cannot be considered at this stage. If an amount paid to Non resident is not taxable, under DTAA, then the payer is not required to deduct tax at source and the payment cannot be disallowed u/s 40(a) for non deduction of tax. Hence the provisions of DTAA are required to be considered.
8. The Appellant submitted that under Article 26 (3) of DTAA with USA payments made to a Non resident is deductible in payer's taxable income, under the same conditions as if they had been paid to a resident. FTS paid to a resident cannot be disallowed for Non deduction of Tax till sec 40(a) was amended by Finance Act (N02) of 2004 w.e.f. 1.4 2005. Hence the amount cannot be disallowed u/s 40(a) for the year in appeal viz., 2004-05. This was not considered by ITAT.
9. In any event in all the above issues there are two views possible and hence the order of the CIT cannot be sustained.
9MA 76/Mds/2011
NOTE Both are payments for acquiring orders from abroad. By virtue of circular 786 of 2000 the amount is not taxable. Withdrawal of the Circular is only prospective.
KIT v George Williamson (Assam) Ltd. 116 ITD 328 Gau. Indopel garments (P) Ltd v DCIT 86 ITD 102 Mad. SOL Pharmaceuticals Ltd v ITO 83 ITD 72 Hyd. ITa Indtelesoft (P) Ltd In Re 267 ITR 725 AAR
Withdrawal of CBDT Circular 786 dt 7.2.2000 by circular No.23 of 2009 is prospective:
Siemens 2010-TIOL-102-ITAT-MUM
Shakthi Raj Flm Distributors v CIT 213 ITR 20 Bom
CIT v Janardhana Mills 311 ITR 439 Mad.
Even if it is considered as Fees for Technical Services The Payment is in connection with exports and hence it is not deemed to accrue in india by the virtue of exclusion under sec 9(1)(viib).
CIT v. KKK West Germany 262 ITR 513 Mad. Titan Industries Ltd. v. ITO (2007) 11 SOT 206 Bang Lufthansa India Cargo P. Ltd. 91 ITD 133 Del." In case of payment to the Non Resident of USA
Fees for included service as per Article 12(4)(b) means services that make available technical knowledge, experience, skill, Know how or process or Technical know how or process or consistof development and transfer of Technical plan or technical design. Only technical Knowhow which can be utilised further by the recipient. Will not include other services.
FICCI, IN RE 320 ITR 124 (AAR)
Anapharm Inc In Re. 305 ITR 394 AAR
Invensys Systems In Re 317 ITR 438 AAR
Worley Parsons Services Pty Ltd 313 ITR 74 AAR
10
MA 76/Mds/2011
Bovis lend Leas (India) Itd 2009-TIOL-666-ITAT-BANG
Bharath Petroleum Corporation Ltd v KIT 111 TTJ 375 Mum.
ACIT v Paradigm Geophysical PTY Ltd 117 TIJ 812 Del
Taxation Dept. ICICI Bank 20 SOT 453 (Mum)
Under Article 26(3) of the DTAA dealing with which provides for non discrimination provides that Royalty and other disbursements made to a Non resident is deductible il computing the payer's taxable income, under same conditions as if they had been paid to a resident. 40(a)(ia) was amended to include fees for technical services paid to residents, by Finance Act (No2) of 2004 with effect from 1.4.2005. Hence payment made prior to that cannot be disallowed u/s 40(a)(ia) in view of Article 26 of the DTAA between India and USA, the expenditure cannot be disallowed Millenium Infocom Technologies Ltd v ACIT 117 ITD 114 Del Asianet Communications Ltd. 2010-TIOL-75-ITAT-MAD Asianet C The only reason the (IT has held the order to be erroneous is because the Assessee has not deducted the tax or approached the AO u/s 195(2) for approval to remit without deducting tax. He has not rebutted the Assessee's contention that the amounts remitted is not taxable. He has concluded that it is not necessary to determine whether it is taxable or not and hence non deduction will result in disallowance.
CIT v. India Pistons Ltd. 295 ITR 550 Mad
Vijay Ship Breaking Corpn v. CIT 314 ITR 309 SC
Prasad Productions 2010 TIOL 182-ITAT-MAD-S
In any event there are two views possible and hence he has no jurisdiction u/s 263. Malabar Industrial Co. Ltd. Vs. CIT - 243 ITR 83 SC".
11 M.A. 76/Mds/2011
5. At the time of hearing it was submitted by the learned authorised representative that the Tribunal had not considered the fact that the payment to the Iranian agent was not fees for technical services. It was also the submission that the Tribunal had not considered that as per Article 26(iii) of the Double Taxation Avoidance Agreement (DTAA) the rigour of section 40(a)(i) of the Income Tax Act, 1961 ('the Act' for short) could not apply since as per the DTAA the non- resident cannot be worse of from a 'resident tax payer' in relation to transaction entered by the latter with everybody in India. It was the submission that the decision pf the Tribunal in the case of Asianet Communications Ltd. had also not been considered. It was the submission that the order of the Tribunal was liable to be recalled.
6. In reply the learned DR submitted that all the issues which had been argued had been considered by the Tribunal and the miscellaneous application filed by the assessee was nothing but a prayer for review of the order of the Tribunal which was not permissible.
7. We have considered the rival submissions. A perusal of the miscellaneous application filed by the assessee shows that what has been raised by the assessee are fresh arguments on the issues. It is not pointing out any mistake apparent from the record. The assessee has also raised an issue that the non-application of the decision in a proper perspective would amount to a mistake apparent from record. Here we may mention that there has been no non-application of a decision 12 M.A. No.76/Mds/2011 in the proper perspective. It is not the argument of the assessee that the decision has not been considered. A verification of the log book also shows that the decision in the case of Asianet Communications Ltd. which now being quoted by the assessee was not argued at that point of time. The assessee did raise and argued the case on the applicability of the Special Bench decision in the case of Prasad Productions Ltd. which was considered in detail. Further on a specific query from the Bench as to whether any appeal has been filed against the decision of this Bench of the Tribunal in ITA No. 106/Mds/2009 dated 11-06-2010, no answer was forthcoming. A perusal of the note filed at the time of hearing also shows that the arguments on the issues had been considered and it has not been pointed out that there was any mistake apparent from record. In the circumstances, we are of the view that as the issues as raised in the appeal have been considered and the submissions of the assessee have also been considered while deciding the appeal in ITA No. 106/2009, no mistake apparent from the record is shown in regard to the said order. Consequently, the miscellaneous application stands dismissed.
8. The order was pronounced in the court on Monday, 18th day of July,2011.
Sd/- Sd/-
(Dr. O. K. Narayanan) (George Mathan)
Vice President Judicial Member
Chennai,
Dated the 18th July, 2011.
H..
Copy to: Applicant/AO/CIT (A)/CIT/D.R./Guard file