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2008 (12) TMI 234 - AT - Income TaxTDS u/s 195 - Disallowance u/s 40 - payment made to the Malaysian company for supply of the personnel - head office expenses - cost of external services - payment to Dumul Technology Services B.V. in connection with the engineering services for the project at Haldia. TDS u/s 195 - Disallowance u/s 40(a)(i) - payment made to the Malaysian company for supply of the personnel - taxable in the hands of the assessee in India or not under Article 7 of the Treaty by holding that the assessee has a PE in India within the meaning of Article 5(4) - Whether the non-resident Malaysian company has a PE in India or not? HELD THAT - It is clear that the supervisory work was assigned to the assessee and the Malaysian company had no role in supervision of the work at Haldia. Admittedly the entire responsibility to execute the contract was that of assessee. Even the AO has accepted this fact. Further the personnel supplied by the Malaysian company worked under the control and direction of the assessee company. This finding of the CIT(A) remains uncontroverted. The role of the Malaysian company came to an end on the supply of the personnel to the assessee. Thus in our opinion it cannot be said that the Malaysian company had any obligation to supervise the work at Haldia. Therefore the reasons given by the AO do not survive. At this stage it may be mentioned that such issue came up before the Authority for Advance Ruling in the case of Tekniskil (Sendirian) Berhard 1996 (4) TMI 491 - AUTHORITY FOR ADVANCE RULINGS held that if all that the applicant has done is to recruit foreign labour abroad and made them available to HHI in India both of the applicants can be said to have no relation to a PE in India . It would be appropriate to mention that the AAR had given its opinion considering the DTAA between India and Malaysia with which we are concerned. Therefore the view taken by us is fortified by the aforesaid decision. In view of the above discussion we do not find any infirmity in the findings given by the CIT(A) that the assessee has no PE in India. We have held that there was no PE of the non-resident Malaysian company in India in terms of art. 5 of DTAA between India and Malaysia. Hence the payment received by the non-resident Malaysian company was not taxable in India. Consequently the provisions of s. 195 and s. 40(a)(i) of the Act could not be invoked by the AO. The order of the CIT(A) is therefore upheld on this issue. Disallowance u/s 44C - head office expenses - Whether sum representing the payment of salary to the engineers at head office in respect of the work done by them vis-a-vis the Halida project in India can be considered as head office expenses for the purpose of s. 44C - HELD THAT - As already noted head office expenses are restricted to executive and general administration expenses. It is admitted by the ld DR that such expenses cannot be said to general administration expenses. However it is pleaded that such expenditure can be said to be in the nature of executive expenses. We are unable to accept such contention. Executive -A person or body with managerial or administrative responsibility in a business organization - The technical job done by the engineers in our opinion cannot be said to be in the nature of executive job since no managerial act is involved in such work. Accordingly we uphold the finding of the CIT(A) that the salary paid to the engineers would not fall within the ambit of the expression head office expenses as defined in Expln. (iv) to s. 44C. The order of the CIT(A) is therefore upheld on this issue though for different reason. Disallowance u/s 40(a)(i) - cost of external services - Not deducted tax at source against such payment - employees were deputed in India for a total number of 135 days - HELD THAT - It is the settled legal position that if the two provisions are applicable to a fact situation then the one which is beneficial to the assessee would be applicable. Reliance can be placed on the decision of the AAR in the case of Brown Root Inc. 1997 (10) TMI 398 - AUTHORITY FOR ADVANCE RULINGS . Therefore in our opinion the CIT(A) was justified in holding that cl. (j) being more beneficial to the assessee would be applicable inasmuch as the period of stay is six months or more. Since the period of stay is only for 135 days art. 5 would have no application to the present case. As far as the proviso is concerned it is applicable only when the services are rendered in connection with the prospecting for or extracting or production of mineral oil in the Contracting State. The learned counsel for the assessee has specifically asserted that no supervisory activity related to prospecting for or extracting or production of mineral oils was carried out. Even the ld DR has not brought any material on record to justify the applicability of the proviso. Merely because the supervisory activities related to the construction of a part of the refinery it cannot be said that such supervisory activity was rendered in connection with the prospecting for or extracting or production of mineral oil. Therefore we do not find any infirmity in the order of the CIT(A). The order of the CIT(A) is therefore upheld on this issue. Disallowance u/s. 40(a)(i) - payment to Dumul Technology Services B.V. in connection with the engineering services for the project at Haldia - contention of the ld DR is that the CIT(A) has wrongly applied the amended provisions of art. 12 of the DTAA between India and Netherlands since the amendment was made by Notification No. S.O. 693(E) dt. 30th Aug. 1999 - HELD THAT - It has been specifically stated in the notification that existing art. 12 relating to royalty fees for technical services and payment for use of equipment shall be modified with effect from April 1997. In view of this clear intent of the agreement the contention raised by the ld DR cannot be accepted. The order of the CIT(A) is therefore upheld on this issue. Hence the appeal of the Revenue is dismissed.
Issues Involved:
1. Disallowance under Section 40(a)(i) of the IT Act, 1961. 2. Disallowance of salary cost attributable to the Indian project but debited in the books of the head office. 3. Disallowance of cost of external services. 4. Disallowance of payment for engineering services. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(i) of the IT Act, 1961: The first issue pertains to the disallowance of Rs. 1,23,98,902 under Section 40(a)(i) of the IT Act, 1961. The assessee, a non-resident company incorporated in the Netherlands, engaged in the design and construction of oil and gas products, was awarded a contract by IOCL for the Haldia Refinery Project. The assessee subcontracted its subsidiary, a Malaysian company, to supply personnel for the project. The AO disallowed the deduction, asserting that the Malaysian company had a PE in India under Article 5(4)(a) of the DTAA between India and Malaysia since the personnel stayed in India for more than six months. The CIT(A) overturned this, stating that the Malaysian company did not have a PE in India as it only supplied personnel who worked under the assessee's supervision. The Tribunal upheld the CIT(A)'s decision, noting the Malaysian company's role ended upon supplying personnel, aligning with the Authority for Advance Ruling in Tekniskil (Sendirian) Berhard. 2. Disallowance of Salary Cost Attributable to Indian Project: The second issue involves the disallowance of Rs. 42,09,874 representing the salary cost attributable to the Indian project but debited in the head office books. The AO treated these expenses as head office expenses under Section 44C of the Act, as they were not reimbursed actual expenses. The CIT(A) found that 90% of the costs were for technical/engineering staff, not general administrative expenses, and therefore not covered by Section 44C. The Tribunal agreed, noting that technical job expenses do not fall within the scope of "head office expenses" as defined in Explanation (iv) to Section 44C, which pertains to executive and general administration expenses. 3. Disallowance of Cost of External Services: The third issue addresses the disallowance of Rs. 21,48,042 paid to ASC International, UK, for supervisory services. The AO deemed the UK company had a PE in India under Article 5(2)(k) of the India-UK treaty, as the personnel worked in India for 135 days. The CIT(A) disagreed, applying Article 5(2)(j), which requires a presence of more than six months for a PE to exist. The Tribunal upheld the CIT(A)'s decision, stating that Article 5(2)(j) was more beneficial to the assessee and the proviso to Article 5(2) did not apply as the services were not related to prospecting for, extracting, or producing mineral oil. 4. Disallowance of Payment for Engineering Services: The final issue concerns the disallowance of Rs. 49,12,080 paid to Dumul Technology Services B.V. for engineering services. The AO considered these payments as fees for technical services taxable under Article 12 of the India-Netherlands treaty. The CIT(A) found that the services were for material inspection and did not involve transferring technical knowledge, thus falling under Article 7 of the treaty. Since there was no PE in India, the payments were not taxable. The Tribunal upheld this view, noting that the amended Article 12 of the DTAA applied retrospectively from 1st April 1997, making the CIT(A)'s application correct. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s findings on all issues, confirming that the payments and expenses in question were not taxable in India due to the absence of a PE and the nature of the services provided.
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