2004 (12) TMI 323 - AT - Income Tax

Chargeability to tax - Nature of services rendered by the non-residents - Taxability of payments as royalties or fees for technical services u/s Article 13 of the Indo-UK DTAA - Applicability of art. 15 of the Indo-UK DTAA - Payments for professional services - business profits - HELD THAT - It is clear from the order of assessment atleast copy of one of the agreement between the assessee and NQA, UK, had been filed before the AO. The observation to the contrary by the CIT(A), in our view, is not correct. It is not correct to say that the assessee must have a written agreement in all cases where he avails of services from non-resident. Copies of the bills for services rendered by Mr. Price and that by UKAS, UK, are available which will throw light on the nature of services rendered by the non-residents to the assessee. As far as the two agreements are concerned, viz., agreement between assessee and NQA Ltd., UK, and agreement between M/s WQMN (World Quality Management Network Ltd.), UK, we are of the view that they are necessary for adjudication of the issue in controversy and they are, therefore, considered as evidence available on record. The nature of business of the assessee is to make assessment of quality management systems existing with its customers and suggest appropriate system so as to be in tune with the ISO 9000 Standards. ISO (International Organisation for Standardisation) is the world s largest developer of standards. The assessee to its customers makes available and highlights the use and benefit of these standards and in the process, the services of the non-residents are utilised. Royalties and fees for technical services - A doubt could arise as to whether the services could be said to be rendering technical or consultancy services or making available technical knowledge, experience, skill, know-how or processes. In this regard, a reference may be made to the Indo-US Treaty wherein the expression fees for technical services as used in the Indo-UK DTAA has been used in the Indo-US Treaty. The expression used in the Indo-US Treaty is, however, fee for included services . There is a memorandum of understanding attached to the Indo-US DTAA explaining the meaning of the words fees for included services . Applicability of art. 15 of the Indo-UK DTAA - We have also referred to the nature of services referred and have concluded that these were professional services. These were not technical services. There is a marked difference between fees for technical services and fees for professional services. Professional services are a category distinct from technical services. Even under the provisions of s. 194J of the Act requiring deduction of tax at source, the definition of professional services includes the legal, medical, engineering, accountancy, technical consultancy and interior decoration, whereas the expression fees for technical services as given in Expln. 2 to s. 9(1)(vii) of the Act do not include within its fold the professional services as explained in s. 194J of the Act. Since the amount paid to Mr. Price was in the nature of fees paid for professional services the same can be taxed in India only if the person rendering the service stays in India for a period aggregating 90 days during the relevant fiscal year or he has a fixed based regularly available to him in India for performing such activities. It is not the case of the Revenue that the non-resident (Mr. Price) was present in India for a period aggregating 90 days or had a fixed base in India. Therefore, the remuneration paid to Mr. Price is outside the scope of fees for technical services, but was in the nature of fees for professional services not taxable in India. Whether the payment can be said to be business profits for the non-residents which had accrued to them in India - It is not the case of the Revenue that the non-residents in the present case had a permanent establishment in India. Therefore, the business profits cannot be taxed in India in view of the provisions of art. 7 of the Indo-UK DTAA. It is, therefore, held that the amounts paid by the assessee to the non-residents were not chargeable to tax in India and consequently, there, is no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of s. 40(a)(i) were not attracted. Whether the payments made by the assessee to the non-residents are taxable or not in India - We do not find any merits in the submission of the learned Departmental Representative. Apart from the above, the Act contains provisions for charging of interest from the person responsible for deducting tax at source in the event of failure to deduct tax at source. He is also considered as a person in default of payment of tax in respect of the sum of tax not deducted at source. In view of these provisions, it cannot be said that the assessee should first deduct tax at source without considering the fact whether the income in question is chargeable to tax in the hands of the recipient. Thus, we hold that the payments by the assessee in question were not chargeable to tax. Consequently, there is no obligation to deduct tax at source. Consequently, the provisions of s. 40(a)(i) of the Act were not applicable and the action of the Revenue authorities in refusing to allow deduction of these expenses by taking recourse to the said provisions cannot be sustained. The disallowance made is, therefore, directed to be deleted. The appeals of the assessee are allowed.

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Disallowance of payments to overseas parties for failure to deduct tax at source.
3. Nature of services rendered by non-residents and their taxability under the Indo-UK Double Tax Treaty.

Summary:

1. Validity of Reassessment Proceedings:
The first ground of appeal challenges the validity of reassessment proceedings on the basis that an intimation u/s 143(1)(a) does not constitute an assessment. The Hon'ble Delhi High Court in MTNL vs. Chairman, CBDT held that an intimation under s. 143(1)(a) is not an assessment. Consequently, the reopening of assessment falls within the parameters of s. 147, Expln. 2(b) of the Act. The ground of appeal is dismissed.

2. Disallowance of Payments to Overseas Parties:
The assessee challenged the disallowance of payments made to certain overseas parties for alleged failure to deduct tax at source, invoking provisions of s. 40(a)(i) of the Act. The CIT(A) confirmed the AO's action, holding that the payments were in the nature of royalty/fee for technical services as per art. 13 of the Indo-UK Double Tax Treaty and were liable to tax in India. The assessee contended that these payments did not constitute royalty/fee for technical services and were not liable to tax in India, thus no obligation to deduct tax at source existed.

3. Nature of Services Rendered by Non-Residents:
The Tribunal examined the nature of services rendered by non-residents to determine if they constituted "royalty" or "fees for technical services" under art. 13 of the Indo-UK DTAA. The services provided by M/s NQA Ltd., UK, M/s WQMN Ltd., UK, Mr. DPC Price, and UKAS were purely advisory, professional, and related to assessment and surveillance for ISO Certification, which did not involve making available technical knowledge, experience, skill, know-how, or process to the assessee. Therefore, these payments did not qualify as "fees for technical services" under art. 13(4) of the Indo-UK DTAA.

4. Professional Services under Art. 15 of Indo-UK DTAA:
The Tribunal held that payments to Mr. Price were for professional services, not technical services, and thus not taxable in India under art. 15 of the Indo-UK DTAA, as he did not stay in India for 90 days or more, nor had a fixed base in India.

5. Business Profits under Art. 7 of Indo-UK DTAA:
The Tribunal concluded that the payments could not be considered business profits taxable in India under art. 7 of the Indo-UK DTAA, as the non-residents did not have a permanent establishment in India.

Conclusion:
The Tribunal held that the payments made by the assessee to non-residents were not chargeable to tax in India, and consequently, there was no obligation to deduct tax at source. The provisions of s. 40(a)(i) were not applicable, and the disallowance of these expenses by the Revenue authorities was not justified. The appeals of the assessee were allowed.