2003 (7) TMI 649 - AT - Income Tax

Summary

Issues Involved:
1. Whether the "no objection certificate" issued by the Assessing Officer was prejudicial to the interests of the Revenue.
2. Whether the payment made to M/s. Mott Ewbank Preece (MEP) was taxable as "fees for technical services" under the Double Taxation Avoidance Agreement (DTAA) between India and the UK.
3. Whether the Commissioner of Income-tax was justified in invoking section 263 of the Income-tax Act, 1961.

Summary:

1. Prejudice to the Interests of the Revenue:
The core grievance of the assessee was that the "no objection certificate" sought to be revised by the impugned order was not prejudicial to the interests of the Revenue. The Tribunal found that the "no objection certificate" issued by the Assessing Officer, which authorized the assessee to remit the payment after deducting tax at source at 5 percent, was not prejudicial to the interests of the Revenue. The Tribunal held that the payment to MEP was not exigible to tax in India, and therefore, no tax was required to be deducted at source. Consequently, the "no objection certificate" did not result in any loss of revenue or prejudice to the interests of the Revenue.

2. Taxability as "Fees for Technical Services":
The Tribunal examined the scope of the term "fees for technical services" under Article 13(4) of the India-UK DTAA. It was determined that the services rendered by MEP did not fall within the definition of "fees for technical services" as per Article 13(4)(c) of the DTAA. The Tribunal emphasized that the services must "make available" technical knowledge, experience, skill, know-how, or processes to the recipient. The Tribunal concluded that MEP's role was limited to reviewing and opining rather than designing or directing the project, and therefore, the services did not make available any technical knowledge or skills to the financial institutions or the project itself.

3. Justification for Invoking Section 263:
The Tribunal held that the conditions for invoking section 263 of the Act were not satisfied. The order of the Assessing Officer was indeed erroneous as it required the assessee to deduct tax at 5 percent, whereas no tax was required to be deducted. However, the order was not prejudicial to the interests of the Revenue. The Tribunal referred to the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, which stated that both conditions'erroneous and prejudicial to the interests of the Revenue'must coexist for the Commissioner to exercise jurisdiction under section 263. Since the "no objection certificate" did not adversely affect the Revenue's interests, the Tribunal canceled the impugned order passed by the Commissioner.

Separate Judgment by Judicial Member:
The Judicial Member disagreed with the Accountant Member's findings, stating that the services rendered by MEP were within the scope of "fees for technical services" and taxable under the DTAA and the Income-tax Act, 1961. The Judicial Member upheld the Commissioner's order under section 263, asserting that the Assessing Officer's order was erroneous and prejudicial to the interests of the Revenue.

Order of Third Member:
The Third Member agreed with the Accountant Member, concluding that the payment to MEP did not fall within the definition of "fees for technical services" under Article 13(4)(c) of the DTAA. The Third Member emphasized that the services provided by MEP did not make available any technical knowledge or skills to the recipient. Consequently, the order under section 263 was set aside, and the original order of the Assessing Officer was restored, subject to the 5 percent tax deduction as directed.

Final Outcome:
The appeal was allowed, and the order passed by the Commissioner under section 263 was set aside. The Tribunal held that the payment made to MEP was not taxable as "fees for technical services" under the DTAA between India and the UK, and the "no objection certificate" issued by the Assessing Officer was not prejudicial to the interests of the Revenue.