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TMI Blog2006 (10) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... ign development phase III. Construction document phase IV. Compensation. 3. The agreement stipulates that the entire designs and drawings will be transferred at Singapore either to the assessee or its agent by M/s. Site Concepts International Ltd., PO Box No. 362, Road Town, Tortola, British Virgin Islands. It also stipulates that the entire work will be carried out by M/s. Site Concepts International Ltd. in Singapore and no part of the work will be carried out in India. The assessee made payments to M/s. Site Concepts International Ltd. without deducting any tax at source after obtaining a certificate from chartered accountant in accordance with the procedure laid down under section 195. The Assessing Officer issued a notice under section 201 of the Act to the appellant, to show-cause as to why the appellant should not be treated as assessee in default on the ground that the payments made to M/s. Site Concepts International Ltd., were fees for technical services and hence the income is chargeable to tax in India under section 9(1)(vii) of the IT Act. The assessee contended that the payment in question was not fee for technical services and that it was a payment made for purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that the payments in the instant case were made for the development and transfer of the design, and being an out and out transfer on sale of such designs and drawings, the payments for such sum would not constitute fees for technical services. (g)The lower authorities have not appreciated the fact that the payments were made without deducting tax at source after obtaining a certificate from chartered accountant to the effect in accordance with the procedure laid down under section 195. (h)The lower authorities have erred in upholding the reliance placed upon case law under other enactments and of foreign Courts in sustaining the conclusions. The same are not relevant; the cases are distinguishable as they have been rendered under different facts and under different enactments. (i)Assuming without admitting, that the payments were liable for deduction of tax at source, the learned CIT(A)-IV has erred in confirming the applicability of provisions of section 195A of the IT Act in determining the amount of tax to be deducted at source. (j)In view of the above and on other grounds to be adduced at the time of hearing, the appellant prays: (i)The order passed by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esigns and drawings would not constitute fee for technical services. (iii) India Hotels Co. Ltd. v. ITO, Mumbai 'B' Bench in IT Appeal No. 553 (Mum.) of 2000, order dated 14-12-2005, wherein it was held that the services were only to create design and title in the design, etc. has passed to the assessee company and it is not a payment or fees for technical services nor a payment in the nature of royalties and that the assessee company had purchased and acquired the designs and drawings. (iv) CIT v. Klayman Porcelains Ltd. [1998] 229 ITR 735 (AP). 4.4 He further argued that the lower authorities have erred in holding that this is a service contract by relying on the decisions rendered under sales-tax laws for the reason that both these enactments are different and the definitions are also different. For this proposition he relied on the following case law: (i) Jagatram Ahuja v. CGT [2000] 246 ITR 609 (SC) at p. 620 (ii) CIT v. Bharat Earth Movers Ltd. [2004] 268 ITR 232 (Kar.) (iii) CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 (SC). 4.5 Alternatively, he contended that the payments were made after obtaining a certificate from a chartered accountant in accordance with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cope description" followed by "work description, conceptual design phase design" supports the view taken by the first appellate authority. He specifically pointed out to section 2 sub-clause (3), wherein it is stated as follows: "The specific professional service for the conceptual design phase shall consist of the following: (a)Preparation of one color rendered schematic landscape plan at the rate of 1:500 scale showing hardscape and softscape design approach. (b)Presentation of two color rendered elevation/sections of initial concept." 5.1 He took this Bench through the three page document which is in the form of a letter and submitted that the substance of the agreement has to be seen and that this was definitely a service contract. He submitted that the nonresident was required to obtain the specific details from the assessee and had to develop the plans and designs using their professional expertise and that these plans and designs are project specific and assessee specific and thus it is a case of professional service as defined in section 9(1)(vii ). He relied heavily on the order of the Assessing Officer as well as that of the CIT(A) and submitted that the same may be u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th on the matter and after relying on a number of decisions of the Hon'ble Supreme Court has come to the conclusion that even though the product in question is a customer specific, it cannot be held as works contract. We are convinced with the arguments of the learned counsel for the assessee that in the case of a service contract, the property in question always remains with the service receiver and whereas in the case of a sale, the property in goods is passed on to the buyer only on transfer. In this case, it cannot be said that the property in the designs and drawings at the conceptual and development stage belonged to the assessee. The contract specifically provides that the designs and drawings would be transferred to the assessee from the non-resident in Singapore. 6.2 Visakhapatnam Bench of the Tribunal in the case of Skoda Export Co. Ltd. v. Dy. CIT [2003] 81 TTJ (Visakha) 633 has held as follows: "Drawings and designs and technical documents supplied by the non-resident company (assessee) to an Indian company being in the nature of plant and machinery, receipts thereof cannot be considered as fee for technical services and consequently the SDR variations in respect of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.4 Section 9(1)(vii ) deals with income by way of fees for technical services and Explanation (2 ) defines fees for technical services as "means for consideration for rendering of any managerial, technical or consultancy services". It also provides what is not to be included within such term. When a specific definition is given in the Act, it is not correct for the assessing authority to widen its scope and say that the meaning in general parlance has to be taken while considering this term. 6.5 Even otherwise, the undisputed fact is that no part of the work or service was done in India. The agreement specifically provides that the entire work will be carried out in Singapore and no part of the work will be carried out in India. There is no evidence with the Revenue that this covenant in the agreement has been violated. On this factual position, the legal aspects discussed in the case of AP Power Generation Corporation Ltd. v. Asstt. CIT [2007] 105 ITD 423 (Hyd.), wherein at para 24 p. 52 it is held as follows: "The next contention is whether the act of not making application under section 195(2) to the ITO does empower the ITO to enforce deduction of tax from the gross sums of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant for the purpose. In any event, this is the only way the provisions contained in section 195 and section 201 can be harmoniously interpreted. We, therefore, hold that the power of the ITO under section 201 of the Act to deem the person responsible for paying any sum to the non-resident under section 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money'. (Emphasis, italicized in print, supplied) At p. 772, in answer to question No. 2 it is stated as follows: 'The obligation of the respondent-assessee to deduct tax under section 195 is limited only to the appropriate proportion of the income chargeable under the Act forming part of the gross sums of money paid to the three non-residents above referred.'" Approving of this decision the Hon'ble Supreme Court in the case of Transmission Corpn .of AP Ltd. v. CIT [1999] 239 1TR 587 (SC) at 596 answered question No. 2 as follows: "'the obligation of the respondent-assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act.' 24.1 A combined reading of these two judgments clearly indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on a principal to principal basis and the exporter and the importer have no other business connection the fact that the exporter allows the importer to pay for the plant and machinery in instalments will not by itself render the exporter liable to tax on the ground that the income is deemed to arise to him in India. The Indian importer will not in such a case, be treated as an agent of the exporter for the purpose of assessment'. Further, para 7 (p. 3) of the same circular reads as follows: '7. Extent of the profit assessable under section 9 does not seek to bring into the tax net the profits of a non-resident which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India, which is liable to income-tax.' Para 2 of Circular No. 786 reads as follows: '2. The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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