2009 (8) TMI 845 - AT - Income Tax

Income accrued in India - payment so made to the firm of legal advisors at Hongkong - whether services being rendered by the non-resident to the resident company, being in the nature of the underwriting, managing the issue and other allied financial services constitute technical, managerial and/or consultancy services in terms of the language used in section 9(1)( vii ) of Income-tax Act, 1961 and the clauses dealing with fees for technical services in the relevant treaty? - HELD THAT - It is manifest that the legal charges for bringing out the GDR issue were incurred by the assessee in UK also apart from Hongkong. When the legal charges paid in UK are accepted to be covered under section 9(1)( vii ), then how it can be argued that similar charges paid in Hongkong be given a different treatment, more so when the relation of the services with the subject continues to remain the same. As respectfully following the Special Bench order in Mahindra Mahindra Ltd. s case 2009 (4) TMI 207 - ITAT BOMBAY-H , we hold that the disputed amount paid in Hongkong is covered by the definition of fees for technical services as given in Explanation 2 and is in the nature of income deemed to accrue or arise in India as per section 9(1)(vii). However, we want to make it clear that on going through the two bills raised by the said firm, it is noticed that the second bill dated 9-11-1994 has two components. One part is of 40,000 Dollars representing out of pocket expenses and disbursement . This part of the total amount of 200,000 Dollars paid to C.S.First Boston Others shall be considered as reimbursement of expenses on which tax is not deductible as per the Special Bench order in the case of Mahindra Mahindra Ltd. We, therefore, hold that equivalent of 160,000 Dollars in Indian rupees is covered under the Explanation-2 as fees for technical services . Insofar as the reliance of the learned A.R. on the case of Cliford Chance 2008 (12) TMI 30 - HIGH COURT OF BOMBAY is concerned we find that the ratio of that judgment is not applicable for the reason that the said judgment was rendered while interpreting section 9(1)(vii)( c) as is apparent from the head notes as well as the operative part of the judgment. the Hon ble Bombay High Court considered the judgment of the Hon ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd. v. DIT 2007 (1) TMI 91 - SUPREME COURT . In that judgment also section 9(1)(vii)( c) was under the consideration of the Hon ble Supreme Court. It was in the context of this provision that it was laid down about the satisfaction of the twin conditions - rendering the services in India and their utilization in India was necessary ingredient for invoking section 9(1)(vii). As discussed above clause (c) applies to a person, making payment by way of fees for technical services, who is a non-resident. Since the assessee before us is admittedly resident in India, clause (c) of section 9(1)(vii), which is applicable in the case of a non-resident payer, can have absolutely no application here. Resultantly the ratio decidendi in the case of Clifford Chance is alien to the issue under consideration. We are, therefore, of the considered opinion that there is no substance in this contention raised by the ld. AR. This ground is partly allowed to the extent of granting immunity from deduction of tax at source only on the reimbursement of expenses, as discussed. The remaining amount in Indian rupees equivalent to 1,60,000 is taxable u/s 9(1)(vii). Having failed to deduct tax at source, the assessee is in default as per section 195 and liable to be visited with the consequences as per section 201(1) and (1A). Additional ground - validity of order passed by the AO - limitation period - HELD THAT - It is noticed that the Hon ble Delhi High Court in Delhi Development Authority v. ITO 1997 (7) TMI 79 - DELHI HIGH COURT has held that the order u/s 201(1) is an order of assessment and the same judgment stands approved by the Hon ble Apex Court in the case of ITO v. Delhi Development Authority 2001 (11) TMI 6 - SUPREME COURT . Now when the Hon ble Supreme Court has held that order u/s 201(1) is to be treated as an order of assessment and as per section 2(8) assessment includes reassessment , then it becomes manifest that the time-limit for initiating and completing the proceedings u/s 201(1) has to be at par with the time-limit available for initiating and completing the reassessment, more so when the scope of section 147 also ropes in the cases of assessment apart from reassessment. The golden rule - If two views are possible, then the view in favour of the taxpayer should be adopted - envisages two equally convincing views sustainable in law, based on the interpretation of section. It presupposes the existence of two divergent plausible views with equal pull from both the sides. If a provision is capable of interpretation in such a manner that two views can be possibly formed, then, of course, the one in favour of the assessee should be followed. But if force in both the views is not of same magnitude inasmuch as one view greatly overweighs the other by considering either the language of the provision itself or as interpreted by the Hon ble Supreme Court, then the view not in conformity with such interpretation shall have to lean in favour of the other view, notwithstanding the fact that it is in favour of the assessee. In that view of the matter, it is manifest that once a particular view has been expressed by the Hon ble Supreme Court on an issue, then any contrary view taken by the other High Courts has to be considered as impliedly overruled. Thus it is palpable that the Special Bench has taken an unexceptionable view on the question of limitation and the contention raised on behalf of the assessee, in an attempt to persuade us to depart from it, deserves to be and is hereby dismissed as devoid of any merit. This additional ground, therefore, fails. In the result, the revenue s appeal is dismissed and that of the assessee is partly allowed.

Summary

Issues Involved:

1. Classification of services rendered by non-resident Lead Managers as technical, managerial, or consultancy services under Section 9(1)(vii) of the Income-tax Act, 1961.
2. Taxability of such services under the Double Taxation Avoidance Agreement (DTAA).
3. Determination of whether services were rendered in India.
4. Relevance of the location where services were rendered for taxability.
5. Classification of consideration as sales commission versus managing fee.
6. Application of Section 9(1)(vii) versus Section 9(1)(i) of the Income-tax Act, 1961.
7. Deductibility of tax at source on payments made to non-resident entities.
8. Limitation period for passing orders under Section 201(1) and 201(1A).

Issue-wise Detailed Analysis:

1. Classification of Services:
The Assessing Officer (AO) held that the services rendered by non-resident Lead Managers, including underwriting, managing, and other financial services, constituted technical, managerial, and consultancy services under Section 9(1)(vii) of the Income-tax Act, 1961. This classification was based on the dictionary meaning and judicial precedents, including the Central Board of Direct Taxes v. Oberoi Hotels India (P.) Ltd. and GVK Industries Ltd. v. ITO.

2. Taxability under DTAA:
The AO found that the services rendered fell within the purview of Explanation 2 to Section 9(1)(vii) and Article 13(4) of the DTAA between India and the UK. The definition of "fees for technical services" in the DTAA was deemed identical to the Income-tax Act, thus making the payments taxable in India.

3. Services Rendered in India:
The AO concluded that it was not necessary for the services to be rendered in India for them to be taxable under Section 9(1)(vii). This interpretation was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)].

4. Relevance of Location for Taxability:
The AO's interpretation that the location where services were rendered was irrelevant for determining taxability under Section 9(1)(vii) was upheld. This was based on the language of the section which does not mandate the services to be rendered in India.

5. Classification of Consideration:
The AO held that the consideration received for the services should not be described as selling commission but as fees for technical, managerial, and consultancy services. The CIT(A) partially upheld this view, treating certain payments as non-taxable.

6. Application of Section 9(1)(vii) vs. Section 9(1)(i):
The AO held that Section 9(1)(vii) is a specific provision that overrides the general provision of Section 9(1)(i). This view was upheld by the CIT(A).

7. Deductibility of Tax at Source:
The AO held that the assessee was liable to deduct tax at source under Section 195 on payments made to non-resident Lead Managers. The CIT(A) upheld this for payments to Skadden, Arps, Slate Meagher & Flom but not for other entities.

8. Limitation Period:
The assessee raised an additional ground challenging the order on account of the limitation period. The Special Bench in Mahindra & Mahindra Ltd. v. Dy. CIT held that the maximum time-limit for passing orders under Section 201(1) or (1A) is the same as prescribed under Section 149, i.e., four years or six years from the end of the relevant assessment year. This was upheld, and the assessee's contention was dismissed.

Conclusion:
The revenue's appeal was dismissed, and the assessee's appeal was partly allowed. The tribunal upheld the classification of services as technical, managerial, and consultancy services, making them taxable under Section 9(1)(vii) and the DTAA. The assessee was found liable to deduct tax at source on certain payments, and the limitation period for passing the order was confirmed as per the Special Bench's decision.