2005 (11) TMI 365 - AT - Income Tax

DTAA between India and United Kingdom - Construction supervisory services - fees for technical services Or Not - Carry forward of the loss for set off against profits in subsequent years - Foreign companies - computation of income by way of royalty etc. - limitation on deduction for expenses as set out in section 44D - HELD THAT - It is an admitted position that the terms of Article 7 of the DTAA between India and UK is similar to the terms of Article 7 of the DTAA between India and Singapore considered by the Tribunal in the case of Boston Consulting Group P. Ltd. 2005 (2) TMI 771 - ITAT MUMBAI . In that case the assessee was receiving income through its permanent establishment in India by providing strategy consultancy services such as marketing and sales strategy business strategy and portfolio strategy etc. to its clients in India and abroad. The Tribunal after discussing the terms of Article 7 of the DTAA and referring to the provisions of sections 44D and 115A of the Income-tax Act has held that such services clearly rule out the applicability of clauses (a) and (c) to Article 12(4) of the DTAA. As regards clause (b) of Article 12(4) the Tribunal held that only such services as are technical in nature are covered which may enable the recipient of services to apply the technology and not consultancy services. In case receipts through permanent establishment in respect of which profits are computed under Article 7(3) of the DTAA are not fee for technical services section 44D is not to be applied for purposes of deduction of expenses. Tribunal held that receipts by assessee-Singapore-company through its permanent establishment in India chargeable to tax under Article 7(3) of the DTAA between India and Singapore being from strategy consultancy services were not from technical services as referred to in Article 12(4)(d) of the DTAA. Hence section 44D and for that matter Explanation 2 to section 9(1)(vii) did not apply and therefore the limitation for deduction under section 44D was not attracted. The Tribunal also held that even if a contrary view was possible the one favourable to the assessee has to be preferred. Similar is the view taken by the Tribunal in the case of Raymond Ltd. 2002 (4) TMI 891 - ITAT MUMBAI . Facts and circumstances being similar following the detailed discussions contained in the order of the Boston Consulting Group Pte. Ltd. we are of the opinion that the CIT(A) has come to a right conclusion and his order does not call for any inference. It is accordingly upheld and the revenue s grounds are rejected. In the result the appeal is dismissed.

Summary

Issues Involved:

1. Whether the services provided by the assessee fall within the category of "fees for technical services" and are assessable under section 44D of the Income-tax Act, 1961 read with section 115A.
2. Whether the Assessing Officer should consider the claim of the assessee for carry forward of the loss for set off against profits in subsequent years.

Issue-wise Detailed Analysis:

1. Classification of Services as "Fees for Technical Services":

The primary issue in this case is whether the services provided by the assessee fall within the category of "fees for technical services" as per the Income-tax Act, 1961 and the Indo-UK Double Taxation Avoidance Agreement (DTAA). The Assessing Officer classified the services provided by the U.K. Company, which included construction supervisory services, supervision of start-up and commissioning, material and warehouse management, and other incidental services, as "fees for technical services." Consequently, he applied section 44D, which disallows the deduction of expenses for such services.

The CIT(A) disagreed with this classification, holding that the services provided did not enable the company personnel to apply the technical knowledge independently and thus did not constitute "fees for technical services." The CIT(A) referenced the Indo-US Treaty protocol and previous Tribunal decisions, including General Electric Technical Services Co. Inc., which supported the view that supervisory services are not "fees for technical services" if they do not transfer technical knowledge or skills to the recipient.

2. Computation of Income and Carry Forward of Loss:

The second issue pertains to whether the assessee's claim for carry forward of the loss should be considered. The assessee argued that no receipts had accrued in the current year, but expenses incurred would result in income in subsequent years, justifying the carry forward of the loss amounting to Rs. 66,20,690. The Assessing Officer, adhering to section 44D, did not allow the deduction of expenses and thus denied the carry forward of the loss.

The CIT(A) directed the Assessing Officer to compute the income as business income under Article 7 of the Indo-UK DTAA and to consider the claim for carry forward of the loss. This decision was based on the non-discriminatory clause in the DTAA, which mandates equal treatment for permanent establishments of contracting states compared to domestic enterprises, and previous Tribunal rulings that supported the deduction of expenses for business income computation.

Tribunal's Decision:

The Tribunal upheld the CIT(A)'s decision, agreeing that the services provided did not fall under "fees for technical services" and should be assessed as business income under Article 7 of the Indo-UK DTAA. The Tribunal referenced similar cases, including Boston Consulting Group P. Ltd. and Raymond Ltd., where it was held that consultancy services not enabling the application of technology do not constitute "fees for technical services." Therefore, section 44D's limitations on expense deductions were not applicable.

The Tribunal concluded that the CIT(A) correctly directed the computation of income as business income and allowed the carry forward of the loss. The appeal by the revenue was dismissed, affirming the CIT(A)'s order.

Conclusion:

The Tribunal's judgment clarified that the services provided by the assessee did not qualify as "fees for technical services" under the Indo-UK DTAA and should be assessed as business income, allowing the deduction of expenses and carry forward of losses. The appeal by the revenue was dismissed, supporting the assessee's position and the CIT(A)'s directives.