2004 (3) TMI 54 - HC - Income Tax

Double Taxation Avoidance Agreement between the Republic of India and the Federal Republic of Germany - 1. Whether Tribunal was right in holding that the engineering fees received/receivable by the assessee was in the nature of fees for technical services in accordance with the definition of fees for technical services as given in clause (4) of article VIIIA of the amended DTAA? - 2. Whether, Tribunal Was right in holding that the engineering fees received/receivable by the assessee could also be considered as falling within the definition of fees for technical services even in terms of the provisions of section 9(1)(vii)? - All the questions are answered in affirmative against the assessee and in favour of the Revenue

Summary

Issues Involved:
1. Nature of engineering fees received by the assessee.
2. Applicability of section 9(1)(vii) of the Income-tax Act, 1961.
3. Applicability of article VIIIA versus article III of the amended Double Taxation Avoidance Agreement (DTA Agreement).

Detailed Analysis:

1. Nature of Engineering Fees:
The Tribunal held that the engineering fees received by the assessee were in the nature of fees for technical services as defined in clause (4) of article VIIIA of the amended DTA Agreement between India and Germany. The Tribunal observed that the payments were made for services of a technical nature and thus considered as fees for technical services. The Tribunal noted that the burden of proof was on the assessee to demonstrate that the payments were not for technical services, which the assessee failed to discharge. Therefore, the engineering fees were deemed to be for technical services in accordance with article VIIIA of the amended DTA Agreement.

2. Applicability of Section 9(1)(vii) of the Income-tax Act:
The Tribunal concluded that the engineering fees could also be considered as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961. The restrictive clause in Explanation 2 to section 9(1)(vii) did not apply as the assessee did not undertake any construction or assembly project in India. The Tribunal found no contradiction between the provisions of the Act and the terms of the amended DTA Agreement, which were consistent with section 9(1)(vii) of the Act.

3. Applicability of Article VIIIA vs. Article III of the DTA Agreement:
The Tribunal held that the case was covered by article VIIIA of the amended DTA Agreement, which specifically deals with royalties and fees for technical services, rather than article III, which deals with business profits. The Tribunal reasoned that when there is a special provision for a specific type of income, such as fees for technical services, it should prevail over a general provision dealing with business profits. The Tribunal's conclusion was supported by the decision of the Madras High Court in CIT v. Copes Vulcan Inc., which stated that special provisions exclude general provisions when dealing with specific types of income.

Conclusion:
The High Court affirmed the Tribunal's findings on all three issues. The engineering fees were considered fees for technical services under both the amended DTA Agreement and section 9(1)(vii) of the Income-tax Act. Article VIIIA of the amended DTA Agreement was deemed applicable over article III. All questions were answered against the assessee and in favor of the Revenue.