9911796707
TMI Blog2004 (12) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... K, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 of the Indo-UK Double Tax Treaty and was liable to tax in India. 2.2 That the CIT(A) erred on facts and in law in confirming that the action of the AO holding that the amount paid by the appellant to M/s WQMN Ltd., UK, for identification of qualified and registered auditors, handling legal, technical and financial matters in UK, etc. was in the nature of royalty/fee for technical services as referred to in art. 13 of the Indo-UK Double Tax Treaty and was liable to tax in India. 2.3 That the CIT(A) erred on facts and in law in confirming the action of the AO holding that the amount paid by the appellant to Mr. DPC Price for carrying out quality assurance audit was in the nature of royalty/fee for technical services as referred to in art. 13 of the Indo-UK Double Tax Treaty and was liable to tax in India. 2.4 That the CIT(A) erred on facts and in law in confirming the action of the AO holding that the amount paid by the appellant to Wakfield Construction Ltd. was liable to tax in India without appreciating that the said company was an Indian company and the provisions of s. 40(a)(i) of the Act were not applicable in respect of the payment made to such company. 3. That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a)(i) of the IT Act read as follows: Sec. 40.--Amounts not deductible.--Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-- (a) in the case of any assessee-- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,-- (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-s. (1) of s. 200: Provided that where in respect of any such sum, tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-s. (1) of s. 200, such sum shall be allowed as a deduction in computing the income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the provisions of s. 40(a)(i) of the Act, as the payments in question are not chargeable to tax in India in the hands of the recipient. The assessee also drew attention of the AO to arts. 15 and 7 of the DTAA between India and UK. The AO however was not convinced with the explanation offered by the assessee. He held as follows: "I have considered the submissions made by the assessee. First of all, the contention of the assessee that the payment to these foreign concern was in the nature of personal services is not correct. The assessee-company is in the business of doing quality appraisals and in this field the technical services of foreign companies have been taken, as is evident from the terms of agreement with one of the companies furnished during the course of assessment proceedings for asst. yr. 1998-99. Royalty and fees for technical services are covered under art. 13 of Double Taxation Agreement with UK and as per this article, the amounts shown as payable to the foreign companies as detailed above, are to be taxed in India. In any case, as per the provisions of s. 40(a), any sum for royalty and technical services, which is payable outside India is only to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia for performing the above activities. Reference was also made to the provisions of art. 7 of the DTAA and it was submitted that the payment in question cannot be even considered as business profits, since the recipients did not have a permanent establishment in India. Since the payments in question were not taxable in India, it was submitted that the action of the AO in making the impugned disallowances by invoking the provisions of s. 40(a)(i) was not proper. 8. The CIT(A), thereafter, made a reference to the fact that there was no evidence let in by the assessee to prove the nature of services rendered. The assessee had filed two agreements before CIT(A), one with M/s NQA Ltd., UK, and the other with WQMN, UK. The CIT(A) refused to take cognizance of these two agreements as according to him these were not filed before AO and the assessee had also not filed an application before him for admitting them as additional evidence. The CIT(A) however made a reference to the terms of this agreement and thereafter made a reference to the provisions of s. 40(a)(i) of the Act and the definition of royalty and fees for technical services rendered as contained in Expln. 2 to cls. (vi) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA. 11. As far as the first point for consideration is concerned, 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. 12. 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 wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by the non-resident, let us now examine the second point which we have formulated above, viz., as to whether the payment by the assessee to the non-resident can be considered as a 'royalty' or 'a fee paid for technical services' within the meaning of art. 13 of the Indo-UK DTAA. Article 13 of the DTAA reads as follows: Article 13. Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties within para 3(a) of this article, and fees for technical services within paras 4(a) and (c) of this article; (i) during the first five years for which this convention has effect; (aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d essentially linked to the sale of property, other than property described in para 3(a) of this article; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the private use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in art. 15 (independent personal services) of this convention. 14. As far as royalties and fees for technical services are concerned, such amounts can be taxed in India if they arise in India, according to the laws of India, even if the recipient is a non-resident of India. The payments in question cannot be royalty as envisaged in art. 13(3) set out above, even on a plain reading. The question is whether they can be said to be "fees for technical services". The services which we have described above cannot be said to be ancillary or subsidiary to the application or enjoyment of any right, proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for which a royalty payment is made; or (2) as described in para 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under para 4(b), consultancy services which are not of a technical nature cannot be included services. Para 4(b) Para 4(b) of art. 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in para 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Dy. CIT (2003) 80 TTJ (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai). We have also listed out the nature of services rendered by the non-residents to the assessee. The services referred to above do not result in making available any technical knowledge, experience, skills, know-how or process to the assessee. This was essential before it could be said that the payments made by the assessee to the non-residents were fees for technical services rendered. The decision of the Hon'ble Mumbai Bench in the case of Raymond Ltd. is on the point. The nature of work carried out by the non-residents involves making assessment surveillance for the purpose of ISO Certification. This service cannot fall within the ambit of fees for technical services as defined in art. 13(4) of the Indo-UK Treaty. 16. The next point for determination is as to whether the services in question could be said to be independent personal services within the meaning of art. 15 of the Indo-UK DTAA. Article 15 of the Indo-UK DTAA is as follows: Art. 15. Independent personal services 1. Income derived by an individual, whether in his own capacity or as a member of a partnership, who is a resident of a Contracting State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18. The next point for consideration is as to whether the payment can be said to be business profits for the non-residents which had accrued to them in India and, therefore, taxable. In this connection, art. 7 of the Indo-UK DTAA is relevant. Article 7 reads as follows: Article 7. Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is directly or indirectly attributable to that permanent establishment. 19. A perusal of the above article will revea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the payments made to the non-residents are not taxable ought to have filed an application under s. 195(2) and since he had not done so, the assessee was to be considered as a defaulter. This decision of the Hon'ble Supreme Court had come up for consideration in the case of the Raymond Ltd. as well as in the case of Maharashtra State Electricity Board vs. Dy. CIT (2004) 83 TTJ (Mumbai) 325 : (2004) 90 ITD 793 (Mumbai). The Mumbai Bench of the Tribunal had held that it was only in a case where there was no dispute that the income was chargeable to tax in India and when the rate of tax to be deducted at source was in doubt, there is an obligation to make an application under s. 195(2) of the Act. We, therefore, 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
