2019 (2) TMI 797 - AT - Income Tax

Receipts of the assessee from National Highway Authority of India - characterization of income - whether the same do not qualify as fees for technical services, and not taxable under the provision of section 44D r.w.s. 115A of the Act? - Held that - As decided in assessee s own case 2016 (2) TMI 667 - ITAT DELHI it is not controverted that assessee was carrying on similar activities in the preceding years as well, and the income earned form the said activities have been accepted by the Department as business income of the assessee and assessment made u/s 143(3) of the Act. Principle of consistency has been accepted by the courts in many judicial precedents and some of the landmark decisions in the cases are of Radhasoami Satsang v. CIT (1991 (11) TMI 2 - SUPREME Court ), CIT v. Lagan Kala Upwan (2002 (12) TMI 74 - DELHI High Court), Saurashtra Cement & Chemical Industries v. CIT (1979 (2) TMI 21 - GUJARAT High Court ), Commissioner of Income Tax v. Paul Brothers (1992 (10) TMI 5 - BOMBAY High Court ) and Commissioner of Income Tax v. Modi Industries Limited 2010 (8) TMI 51 - DELHI HIGH COURT . Therefore on this ground too assessee deserves relief. According to the provision of section 44D rws 9 (1) (vii) of the act assessee s receipt from NH is not taxable as FTS under that section but under normal provision of income tax act as business income. On this count we confirm the order of CIT (A). - Decided against revenue

Issues Involved:
1. Whether the receipts from National Highway Authority of India (NHAI) qualify as fees for technical services (FTS) under Section 44D read with Section 115A of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Qualification of Receipts as Fees for Technical Services (FTS):

Background:
The appellant, a foreign company incorporated in the USA, engaged in providing consultancy and engineering services, received income from NHAI for a project related to the construction of highways. The Assessing Officer (AO) treated this income as 'fees for technical services' (FTS) under Explanation 2 of Section 9(1)(vii) of the Income Tax Act and Article 12 of the Indo-US Double Taxation Avoidance Agreement (DTAA). Consequently, the AO taxed the income on a gross basis at 20% under Section 44D read with Section 115A, disallowing any expenditure deductions.

Appellant's Argument:
The appellant contended that the receipts were business income, not FTS, and thus should be taxed on a net basis. They argued that their services fell under the exclusion provided in Explanation 2 of Section 9(1)(vii), which exempts consideration for construction, assembly, mining, or like projects from being classified as FTS. The appellant relied on various judicial precedents, including the Delhi Tribunal's decision in Agland Investment Services Inc. and the Calcutta Tribunal's decision in DCIT vs. Schlumberger Seaco Inc.

Tribunal's Analysis:
The Tribunal examined the scope of work defined in the agreement with NHAI, which included services integral to the construction project, such as material review, design approval, supervision of construction activities, and assessment of inputs. The Tribunal noted that such services were closely linked to the construction activity and thus fell under the exclusion in Explanation 2 of Section 9(1)(vii).

The Tribunal also referred to the principle established in the Agland Investment Services Inc. case, where engineering and bid evaluation services were considered steps-in-aid for construction, thus outside the purview of FTS.

DTAA Consideration:
The Tribunal further analyzed Article 12(6) of the Indo-US DTAA, which states that if the beneficial owner of the fees carries on business through a Permanent Establishment (PE) in the source country, the income should be computed under Article 7, allowing for the deduction of expenses. The Tribunal found that the AO's application of Section 44D was incorrect as it contradicted the provisions of the DTAA, which should prevail when beneficial to the taxpayer.

Precedent and Consistency:
The Tribunal highlighted that similar issues in the appellant's previous assessment years (2006-07, 2007-08, and 2008-09) were decided in favor of the appellant by the ITAT. The principle of consistency, as upheld by various judicial precedents, was applied to maintain uniformity in the treatment of similar issues across different assessment years.

Conclusion:
The Tribunal concluded that the receipts from NHAI did not qualify as FTS under Section 9(1)(vii) and were to be taxed as business income under the normal provisions of the Income Tax Act. The appeal of the revenue was dismissed, and the order of the CIT(A) granting relief to the appellant was upheld.

Final Judgment:
The appeal of the revenue was dismissed, affirming that the receipts from NHAI were not taxable as FTS under Section 44D read with Section 115A but as business income under the normal provisions of the Income Tax Act.

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