2005 (2) TMI 450 - AT - Income Tax

Tax deductible at source - Payment To Non-Residents - services rendered for providing technical plan, design and finalizing construction of the water systems - DTAA between India and USA - Whether it was falling under article 7 or article 12 of DTAA - HELD THAT - We are of the opinion that the payments effected under the agreement with the American company squarely fell within the definition of fees for included services and therefore the assessee was liable to deduct tax @ of 15% of the amount payable, under section 195 of the Act. In the case of Raymond Ltd. 2002 (4) TMI 891 - ITAT MUMBAI the payment was effected by the assessee to a company, Resident of U.K. The nature of activities contemplated in the contract between the Indian company and the U.K. company were totally different as the question was whether the amount so paid were fees for technical services. In that case although Tribunal held that services rendered were technical services; due to specific clauses of DTAA between U.K and India, income was not taxable. Moreover, since there is a specific clause included in article 12(4) of DTAA with the USA which defines the term fees for included services and further since the payment made under the agreement in the present case falls within the said definition, the assessee cannot get benefit of the decision of the Mumbai Bench which was rendered in the context of DTAA between India and U.K. On the contrary we find that the substance of the present agreement envisaged that the American company shall not only advice the Indian company but in fact it will prepare all the designs and drawings necessary for implementing the Water Features and also assist the Indian company in actual erection and commissioning of water features. We thus find that from the very inception of preparing schematic designs and drawings till the actual implementation and commissioning of the water features the American company was intimately connected with the project and in fact the whole project was intended to be conducted at the behest direction and supervision of the American company. In the circumstances the decision of the Coordinate Bench in the case of CESE Ltd. 2003 (8) TMI 538 - ITAT KOLKATA cannot be applied. We, therefore, agree with the view taken by the CIT(A) that the amounts payable to American company were fees for included services within the meaning of article 12(4)(b) of the DTAA with the USA and therefore liable for withholding of tax u/s 195 of the Act. Accordingly, we dismiss the appeal of the assessee. In the result, the appeal is dismissed.

Issues Involved:
1. Taxability of payment under Article 12 of the DTAA between India and USA.
2. Applicability of tax treaty provisions to the payment made.
3. Non-provision of reasons by the Assessing Officer.
4. Consideration of appellant's submissions.
5. Prejudice between grounds of appeal.

Issue-wise Detailed Analysis:

1. Taxability of Payment under Article 12 of the DTAA between India and USA:
The appellant contended that the payment to M/s. Wet Enterprises, Inc. ("Wet Enterprises") was not taxable in India under Article 12 of the DTAA. The CIT(A) held that the payment for services rendered by Wet Enterprises was taxable at 15% under Article 12(4)(b) of the DTAA, as the services included technical knowledge, experience, skill, know-how, and the development and transfer of technical plans or designs. The Tribunal upheld this view, stating that the agreement involved comprehensive technical services and deliverables that fell within the scope of "fees for included services" as defined in Article 12(4)(b).

2. Applicability of Tax Treaty Provisions to the Payment Made:
The appellant argued that the payment did not result in income accruing in India and should be assessed under Article 7 of the DTAA, which pertains to business profits, rather than Article 12. The Tribunal noted that the agreement involved multiple phases of technical services, which included the transfer of technical designs and plans, making Article 12(4)(b) applicable. The Tribunal emphasized that the nature of the services provided by Wet Enterprises, including the preparation of designs and technical assistance for the construction and installation phases, clearly indicated that the payment was for "fees for included services."

3. Non-provision of Reasons by the Assessing Officer:
The appellant contended that the Assessing Officer did not provide reasons for directing the withholding of tax at 15%. The Tribunal did not find this argument sufficient to overturn the CIT(A)'s decision, as the substantive issue of taxability under the DTAA was adequately addressed by the CIT(A) and supported by the agreement's terms.

4. Consideration of Appellant's Submissions:
The appellant argued that the CIT(A) did not properly consider their submissions. The Tribunal found that the CIT(A) had thoroughly examined the agreement and the nature of services provided by Wet Enterprises. The Tribunal agreed with the CIT(A) that the services rendered by Wet Enterprises involved significant technical input and the transfer of technical designs, making the payment taxable under Article 12(4)(b).

5. Prejudice between Grounds of Appeal:
The appellant stated that each ground of appeal was without prejudice to the others. The Tribunal addressed each ground on its merits and found that the primary issue of taxability under Article 12(4)(b) was decisive. The Tribunal concluded that the payment was indeed taxable under the DTAA and upheld the CIT(A)'s order.

Conclusion:
The Tribunal dismissed the appeal, affirming the CIT(A)'s decision that the payment to Wet Enterprises was taxable under Article 12(4)(b) of the DTAA between India and the USA. The Tribunal held that the services provided by Wet Enterprises constituted "fees for included services," requiring the appellant to withhold tax at 15%. The arguments regarding the non-provision of reasons by the Assessing Officer and the applicability of Article 7 were not found to be persuasive.

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