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TMI Blog2010 (10) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... compute profits and gains of business, you compute profits and gains of various businesses of the assessee and then unabsorbed depreciation would become current year’s depreciation whenever you compute profits and gains of business or any business other than the business in which section 44D has been invoked Regarding applicability of section 44AB - whether it needed to get separate tax audit report for different projects in India or was one tax audit report enough as the assessee was taxed on all its projects as a foreign company in India - It is first principle of tax that a corporate entity whether Indian or foreign is liable for tax as a single entity by clubbing all income that arises to it from various sources against same head of income or under various heads of income Regarding interest u/s 234B and 234D - As far as charging of interest under section 234B is concerned, admittedly the entire income of the assessee, i.e., a foreign company is liable for deduction of tax at source under section 195 of the Income-tax Act - Insofar as ground of charging interest under section 234D is concerned for assessment year 2002-03, the Delhi SB in the case of ITO v. Ekta Promoters (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -do- 5. 1682/D/08 2002-03 -do- 27-2-2008 20-3-2006 passed under section 143(3) r/w section 147 6. 1683/D/08 2003-04 -do- -do- 20-3-2006 under section 143(3) 7. 1297/D/08 2004-05 -do- 11-1-2008 12-12-2006 under section 143(3) 2. The first issue which is common in assessment years 1998-99 to 2001-02 is that Learned CIT (Appeals) has erred in upholding reopening of the assessment proceedings. 3. The brief facts of the case are that the assessee is a company incorporated in United Kingdom and is a tax resident of that country. The assessee is a non-resident foreign company for the purpose of tax assessment in India under the Income-tax Act, 1961. The assessee, in India was engaged, inter alia, in the business erection, commissioning, supervision, operation and maintenance of power plants. The business activities in India were carried out by the assessee through various projects, offices, located in India which constitute its permanent establishment in India under article 5 of Double Taxation Avoidance Agreement between India and U.K. 4. In asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of its income from all the activities, including the activity of rendering of technical services on net basis, i.e., after allowing deduction for expenses from the gross receipts. Assessing Officer also formed an opinion that the facts relating to the nature of income being fees for technical services were not brought to the notice of the then Assessing Officer by the assessee. Thus, according to him, the assessee failed to disclose fully and truly all material facts necessary for its assessment. The new incumbent is also of the opinion that the earlier Assessing Officer had not formed any opinion with regard to taxation of fee for technical services. On the basis of the above opinion, he observed that the omission to assess the income by way of fee for technical services on gross basis had resulted into escapement of income within the meaning of section 147 of the Act. In the opinion the Assessing Officer, the case of the assessee also comes within the ambit of Explanation 2 appended to section 147 because this escapement is to be construed as deemed escapement of income. The Assessing Officer after recording reasons for reopening of the assessments had issued notices un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessments have been reopened in other years also. 9. The learned counsel for the assessee thereafter took us through the assessment orders right from assessment years 1991-92 up to 1999-2000 which are placed in Paper Book-III. He also took us through the questionnaire issued by the Assessing Officer in some of the years and how assessee has replied. He pointed out that assessee has duly disclosed fully and truly all material facts in respect of nature and various objects carried on by it. Assessing Officer had made a detailed inquiry on all projects. Assessing Officer has consistently held that the receipts received by the assessee are to be assessed as business income. He specifically invited our attention to page No. 104 of the Paper Book-III where the assessee has explained the nature of its activities and the nature of receipts. This explanation was submitted to the Assessing Officer in assessment year 1998-99 in response to the query of the Assessing Officer. He also took us through the questionnaire available at page No. 264 of Paper Book-I and the reply submitted by the assessee at page 268 of the Paper Book-I. 10. On the strength of all these material, learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 264 of the Act, meaning thereby, that the proposal conceived by the Assessing Officer has no legs to stand. Once a higher authority did not agree with the stand taken by a lower authority then on the basis of that very material it is not advisable for the Assessing Officer to again form an opinion that income has escaped assessment. In support of this contention, he relied upon the following decisions : 1. Hon ble Supreme Court in Asstt. CIT v. Surat City Gymkhana [2008] 300 ITR 214; 2. CIT v. Aslam Ulla Khan [2010] 321 ITR 150 (Kar.); and 3. CIT v. Siemens Aktiongesellschaft [2009] 177 Taxman 81 (Bom.). 13. In his next fold of contention, he pointed out that how an authority can take contradictory stand. Learned Director of Income-tax while exercising his powers under section 264 did not agree with the proposal of the Assessing Officer that income shown by the assessee is to be considered as fee for technical services. He rather held that it is business income. If that be so, then how an approval to reopen the assessment can be granted under section 151 of the Act which is altogether a contrary stand. To buttress this contention, he relied upon the following decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It files a consolidated statement of accounts of its activities in India which consists of the gross income from all the projects and gross expenses supposedly pertaining to the gross receipts, so shown in that statement. In the opinion of the Assessing Officer, income from various projects shall contain the item of income which may be subjected to taxation at different rates and as such tax treatment of them shall vary according to the facts of the business carried out by the assessee in each project. The assessee though maintaining the accounts of each project individually and getting them tax audited as required statutorily each year but it is not understandable why the same has not been submitted along with the return of income by the assessee. Thus, according to the Learned DR, assessee failed to disclose all material facts fully and truly. He further contended that Learned CIT (Appeals) has relied upon the decision of Hon ble Delhi High Court in the case of Consolidated Photo Finvest Ltd. v. Asstt. CIT [2006] 281 ITR 394. He also submitted that Explanation 1 appended to the proviso to section 147 provides that mere production of books of account or other evidence from whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons recorded by the Assessing Officer which read as under : Rolls Royce Industrial Power (India) Ltd. Assessment year 2002-03 Reasons for issue of notice under section 148 of the Income-tax Act, 1961. The assessee is a company incorporated under the laws of United Kingdom. The assessee has filed its return of income with Circle 15(1), New Delhi. During the previous year relevant to the assessment year 2002-03, the assessee has rendered technical services to Spectrum Power Generation Ltd. under the Operation Maintenance agreement entered into on 14-3-1995 and under Erection Testing and Commissioning Agreement entered into on 12-12-1994 and thereby earned Fees for Technical Services (FTS) in India. These FTS were clearly taxable under article 12 of Double Taxation Avoidance Agreement between India and UK as well as Income-tax Act, 1961 on gross basis. Other contracts of the similar nature were also undertaken by the assessee, namely, Budge Budge Project, Calcutta, two Pipeline IOCL Project, Calcutta, and Rihand Project, Sonbhadra, UP. However, the assessment was completed in Circle 15(1), New Delhi under section 143(1) of the Income-tax Act, 1961. The re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made, but (i) income chargeable to tax has been under-assessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed. In view of the above, I have reasons to believe that income chargeable to tax exceeding Rs. 1,00,000 has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961. The income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material facts, necessary for its assessment for this assessment year. Issued Notice under section 148 of the Income-tax Act, 1961. 18. Hon ble Delhi High Court in the case of Kelvinator of India Ltd. (supra), Jal Hotels Co. Ltd. (supra) etc. has held that if an assessment was made under section 143(3) and there is no fresh information with the Assessing Officer then assessment cannot be reopened on the basis of change of opinion. The observations of the Hon ble Delhi High Court (Full Bench) decision in the case of Kelvinator of India Ltd. are worth to no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act, 1872, judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong. Hence, it is clear that section 147 of the Act does not postulate conferment of power upon the Assessing Officer to initiate reassessment proceedings upon a mere change of opinion. 19. The emphasis of Learned DR at the time of hearing was upon the decision of Hon ble Delhi High Court in the case of Consolidated Photo Finvest Ltd. (supra) which has also been relied upon by the Learned CIT (Appeals). In this decision, Hon ble Court has upheld the reopening of assessment on the ground that where the assessment order is silent on the claim allowed, it cannot be presumed that possible angles have been considered. Hon ble Court as a matter of fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st is an integral part of the maintenance cost of the plant. The balance 30 per cent constitutes hiring charges of technical personnel and purchase of services. In an operation of this magnitude, the total receipt paid for this work includes the cost of consumables. Therefore, 70 per cent of the receipt cannot be paid to be the remuneration for rendering technical services. The balance 30 per cent receipts have to be examined in the light of Article 13(4) of the DTAA. The assessee here is neither making available technical knowledge, experience nor is it developing and transferring the technical plan or design. Therefore, sub-para 4(c) is ruled out. Similarly this operation and maintenance activity of the assessee is neither ancillary nor subsidiary to the application or enjoyment of the right, property or information as described under article 13(3)(a) or article 13(3)(b). The services rendered under the Operation and Maintenance (O M) Agreement cannot be considered as ancillary or subsidiary to the enjoyment of any right described as royalty . Therefore, invoking of sub-para 4(a) and 4(b) of Article 13 are also ruled out. Under Article 13 therefore the fee for technical se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent years 1998-99, 1999-2000 and 2001-02 are not relevant for this assessment year. Relying upon the decision of Hon ble Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Broker (P.) Ltd. [2007] 291 ITR 500. We do not find any merit in this ground raised by the assessee in assessment year 2000-01. 23. In view of the above discussion, we allow the ground of appeal raised by the assessee in assessment years 1998-99, 1999-2000 and 2001-02 and quash the reassessment order whereas in assessment year 2000-01, the ground raised by the assessee is rejected. 24. The assessee RRIPIL has raised various issues in these appeals. Here we are disposing of issues raised with respect to taxation of income received with respect to contract awarded for operation and maintenance (O M Project) of a power plant for 10 years vide agreement dated 14-3-1995 in Kakinada, Andhra Pradesh by Spectrum Power Generation Ltd. The Assessing Officer observed that the receipts from the above referred O M contract are in the nature of Fee for Technical Services; they arise through a PE and are wholly attributable to that PE; they are taxable, as per scheme of taxation, under the provisions of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of provisions of the Income-tax Act, 1961 and that the allowability of expenses is governed by provisions of section 44D of the Income-tax Act, 1961. 27. In the appeal filed before the CIT(A) he held that there is no dispute as to the taxability of the above income arising to the appellant from rendering of operation and maintenance services in respect of the power station. The dispute relates to mode of computation of income and consequent rate of tax to be applied on such income. The appellant had declared the income under article 7 of the DTAA as business profits on net basis and consequently, applied normal rate of tax, whereas the Assessing Officer assessed the income under section 44D of the Act as fees for technical services on gross basis and applied the tax rate of 30 per cent on such income under section 115A of the Act. 28. The CIT(A) further concluded that the income arising to the assessee from rendering all operations and maintenance services in respect of Godavari Power Station was in the character of fees for technical services under Explanation 2 to section 9(1)(vii) of the Act, as well as, under article 13(4)(c) of the DTAA between India and U.K. He fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 of DTAA as per local laws in India. N.A. N.A. 15 16 N.A. N.A. N.A. N.A. d. Taxing other income on gross basis as foreign company income in India. N.A. N.A. N.A. N.A. 6 3(a) 3(b) 3(a) 3(b) e. Taxing insurance claim as normal income under the I.T. Act N.A. N.A. N.A. 14(c) N.A. N.A. N.A. 4 Budge Budge Project a. Taxing supervision of management activity as FTS taxing u/s 44D of the I.T. Act 17 to 20 16 to 19 17 to 20 N.A. N.A. N.A. N.A. b. Taxing interest income interest on refund of I. Tax on gross basis @ 15% N.A. N.A. N.A. 15(a) to15(c) 7(a) 7(d) N.A. N.A. c. Taxing profit on sale of assets as normal income in India. N.A. N.A. N.A. 15(c) N.A. N.A. N.A. d. Taxing foreign exchange fluctuation N.A. N.A. N.A. N.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 N.A. 31. Shri Pradeep Dinodia, CA appeared on behalf of the assessee and contended that award of contract in respect of Godavari project by M/s. Spectrum was a work contract and not a contract for rendering technical services, therefore the income received from M/s. Spectrum was not in the nature of fee for technical services but was business receipts. It was argued by Shri Dinodia that O M contract entered into with M/s. Spectrum was a work contract both within the meaning of section 9(1)(vii), Explanation 2 of IT Act as well as under article 13(4)(c) of DTAA between India and UK and that assessee has not made available to M/s. Spectrum any skill, technology, expertise, technical design or plant, therefore running of power plant by the assessee would not fall within the definition of FTS under Article 13 of DTAA between India and UK. Our attention was invited to the various terms and conditions of the contract dated 14-3-1995 entered into with M/s. Spectrum. Learned AR highlighted various clauses in the agreement which indicated that it was a works contract of operating the power plant by the assessee which required huge cost to be incurred. A detailed cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agent of the Owner. However, on specific authorization by the Owner, accepted by the Operator, the Operator may represent the Owner for any matters specified in such authorization on terms to be agreed. With respect to facility work force at page 450, following were the respective clauses: (a) The Operator shall make its own arrangements for the engagement of all labour, local or otherwise, and, save insofar as the Agreement otherwise, provides, for the transport, housing, feeding and payment thereof; (b) The Operator shall not, otherwise than in accordance with the statutes, ordinances and Government regulations or orders for the time being in force, import, sell, give, barter or otherwise dispose of any goods, alcoholic liquor, or drugs, or permit or suffer any such importation, sale, gift, barter or disposal by its sub-contractors, agents or employees. At page 452 personal training has been defined as: Personal Training: The Operator shall make appropriate personnel available at the Facility for the initial and facility specific training and shall establish and thereafter maintain a regular training programme (the Training Programme ). At least six (6) m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of operations, the Operator shall deliver a report summarizing the Facility megawatt output, steam output, internal power consumption, fuel consumption, treated water consumption, plant load factor and availability for such previous month. Within fifteen (15) days after the end of each calendar month of operations, the Operator shall deliver a report in the form provided in Exhibit G, summarizing in detail the Work performed during such month. The Operator shall verbally advise the Owner of any unscheduled outage as soon as possible, but in any event, no later than two hours after its commencement. Any unscheduled Services required as a consequence of an unscheduled outage shall be reported to the Owner. The Operator shall provide such additional information and prepare such additional reports, notices and other communications with respect to the Operator s performance of Unscheduled Services as the Owner may reasonably request. At page 456 clause regarding owner s excess reads as under:- Owner s Access: The Operator shall provide the Owner and the Owner s designees unrestricted access to the Facility and to the Operator s records at the Facility, provided that such parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officers and residences subject however to the Operator not violating other party s rights. (b) providing adequate storage areas, workshops, warehouses, cranes and machine tools that have been provided by the supply contractor and the erection contractor and which are in a condition suitable for the performance of the work, (c) obtaining and maintaining all consents, licences, easements, rights of way and approvals required for the performance of the work, (d) providing and maintaining all things necessary to meet and comply with Government Requirements including adequate drainage and sewerage systems provided under the Supply and Erection Contracts, (e) providing access to and use of suitable clinic and medical facilities located at the Site for the Facility Work Force as well as any other employees or representatives of the Operator or the Operator s agents and subcontractors, (f) providing a trained security service including guards for the Site and the Facility, (g) painting and maintenance of all buildings and structures on the Site, maintenance of roads, pathways and access ways in Site, the maintenance of the landscaping of the Site, upkeep of the Site and mainte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall have the option to extend/the duration of this Agreement for an additional five (5) years term, provided Owner gives written notice to the Operator of such intent no later than one hundred and eighty (180) days prior to the expiration of the Agreement under Clause 8.1 and provided also that the Operator agrees in writing to the extension prior to the expiration of the Agreement. Expiry : On expiry or termination (by the Owner in the event of the Operator s default) or cessation of this Agreement: (i) the Operator shall hand over to the Owner in good order all equipment, materials, spare parts, consummables available at the Site and the Facility and any drawings and other documents which are necessary to operate, maintain and manage the Facility. (ii) the Operator shall assist the Owner in retaining such of the Facility Work Force as the Operator shall decide. (iii) the Operator shall provide on site training to the Owner s personnel who shall operate the Facility after the term of this Agreement in the operation and maintenance of the Facility for a period of 3 (three) months prior to end of the Agreement in accordance with the training provided for the Operator s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gross receipts of the business. The Assessing Officer was of the view that though the income from the said activity was liable to tax as business profits under article 7 of the DTAA but the computation of the income has to be made in accordance with paragraph 5 of the said article which provides that in determining the profits of the permanent establishment, the deduction for expenses shall be allowed under the provisions of and subject to the limitations of the domestic law of the Contracting State in which the permanent establishment is situated. In other words, the deduction for expenses incurred by the assessee in respect of the activity of operation and maintenance of power station shall be allowed in accordance with the provisions of the Indian Income-tax Act, 1961 and subject to the limitations provided therein. In view of this, the Assessing Officer held that since the profits derived from the operation and maintenance of the power station were in the nature of fees for technical services, the same were to be computed in accordance with the provisions of section 44D of the Act which is an integral part of Chapter IV-D of the Act relating to computation of business incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of royalty, the Finance Act, 1976, has amended the Income-tax Act clearly specifying the circumstances in which income by way of fees for technical services will be deemed to accrue or arise in India and also defining the expression fees for technical services . For this purpose, a new clause (vii) has been inserted in section 9(1) of the Income-tax Act. 16.2 Under the new provision, income by way of fees for technical services of the following types will be deemed to accrue or arise in India: (a) Fees for technical services payable by the Central Government or any State Government; (b) Fees for technical services payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and (c) Fees for technical services payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. 16.3 The expression fees for technical services has been defined to mean any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. Explanation. For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer authorities. We found that purchase of spares accounted for 54 per cent of the total cost. Similarly other expenses like rent, rate and taxes, depreciation, auditor s remuneration accounted for another 16 per cent. This together constitute 70 per cent which cannot form part of the fee for technical services. This cost is an integral part of the maintenance cost of the plant. The balance 30 per cent constitutes hiring charges of technical personnel and purchase of services. 37. In an operation of this magnitude, the total receipt paid for this work includes the cost of consumables. Therefore 70 per cent of the receipt cannot be held to be the remuneration for rendering technical services. The balance 30 per cent receipts have to be examined in the light of Article 13(4) of the DTAA. The assessee here is neither making available technical knowledge, experience nor is it developing and transferring the technical plan or design. Therefore, sub-para 4(c) is ruled out. Similarly this operation and maintenance activity of the assessee is neither ancillary nor subsidiary to the application of enjoyment of the right, property or information as described under Article 13(3)(a) or Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is directly or indirectly attributable to that permanent establishment. 2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment shall be treated for the purposes of paragraph 1 of this Article as being the profits directly attributable to that permanent establishment. 3. Where a permanent establishment takes an active part in negotiating, concluding or fulfilling contracts entered into by the enterprise, then notwithstanding that other parts of the enterprise have also participated in those transactions, that proportion of profits of the enterprise arising out of those contracts which the contribution of the permanent establishment to those transactions bears to that of the enterprise as a whole shall be treated for the purposes of paragraph 1 of this Article as being the profits indirectly attribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the permanent establishment; nor shall account be taken in the determination of the profits of a permanent establishment of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the head office of the enterprise or any of its other offices. 8. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 9. Where profits include items of income which are dealt with separately in the other Article of this Convention, then the provisions of those Articles shall not be affected by the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue is not open for debate as the Apex Court has decided this in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706. The CIT DR in response to this proposition of the assessee submitted that this restriction contained in section 44D(b) is valid as in a normal net profit case the tax rate is higher whereas where section 44D(b) is applied, then the gross receipt is taxed at 30 per cent as against perhaps 40 per cent rate on net profit. Therefore, there is no prejudice being caused to the assessee by following the restriction contained in section 44D(b) in the interpretation of Article 7.5. 41. Applicability of tax on gross receipt versus net profit basis is on the proposition that Article 13.4(c) of the DTAA would prevail over the definition under section 9(1)(vii) Explanation 2 and as the income of the assessee is not fees for technical services, then in that case the limitation contained in Article 7.5 will not in any case apply as section 44D(b) only applies to FTS. In the course of hearing before us, the learned CIT-DR has disagreed with learned AR insofar as Article 13(4)(c) would be applicable to the facts of the case and that even under the DTAA the receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of decisions which are as under:- 44. The Special Bench of ITAT in Mumbai in the case of Mahindra Mahindra v. Dy. CIT [2009] 30 SOT 374, has also given its opinion with regard to the explanation of Make Available in the Indo-UK Treaty. It has followed the judgments in the cases of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.) and of AAR in the case of Intertex Testing Services India (P.) Ltd., In re [2008] 307 ITR 418 (New Delhi). The Special Bench held as under : Make available means to provide some thing, which is capable of use by the other. ....... If the non-resident uses all the technical services at his own end, albeit the benefit of that directly and solely flows to the payer of the services, that cannot be characterized as the making available of the technical services to the recipient. Other judgments cited before us are - 24. Raymond Ltd. s case (supra). The Tribunal gave its interpretation of the expression make available in the following clear-cut words (paragraphs 92 and 93): 92. We hold that the word which occurring in the article after the word services and before the words make available not only describes or defines more clearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the first party uses all the technical services at its own end abroad, albeit the benefit of that directly and solely flows to the payer of the services in India, that cannot be characterized as the making available of the technical services to the recipient. Therefore, making available the technical services to the recipient is of paramount importance for including consideration paid for it as Fees for Included Services (FIS) under Art. 12 of the DTAA. In the instant case, the assessee put up a categorical claim before the Assessing Officer that these services were provided overseas to facilitate the timely execution of the project and no part of the services was made available to TVCL. This specific contention raised before the Assessing Officer had not been controverted by him. On the contrary, the Assessing Officer that had made out a case that since the assessee was instructing TVCL and imparting education about the expertise in India, hence, if the instructions through managerial services or technical input was provided, it should be considered as equivalent to making available the technical knowledge, expertise, skill etc. to TVCL. Thus, it was apparent that the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... win tests of rendering services and making technical knowledge available at the same time was satisfied. 29. Dy. CIT v. Parasram Puria Synthetic Ltd. [2008] 20 SOT 248 (Delhi). The term fees for technical services as per Explanation (b) to section 194J means as defined in Explanation 2 below clause (vii) of sub-section (1) of section 9. As per said Explanation fees for technical services means any consideration (including any lump-sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel), but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient chargeable under the head Salaries . The Madras High Court in the case of Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 has held that the installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. In the instant case, there might be use of services of technically qualified pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Make Available . No skill, expertise etc. has been made available by the Singapore company to the Indian company such that shall the Indian company can do the same service in the future by itself. 33. NQA Quality Systems Registrar Ltd. v. Dy. CIT [2005] 92 TTJ (Delhi) 946. [India - UK Treaty] Assessment surveillance rendered by the company are not made available to the recipient of the services and thus does not fall within the definition of Fees for technical services under the treaty. 34. Asstt. CIT v. Paradigm Geophysical Pty. Ltd. [2008] 117 TTJ (Delhi) 812 Fees for technical services - Not Made Available to receipt therefore not FTS. 35. Meakens Phillips v. Asstt. CIT (International Taxation) [2006] 287 ITR 227 (Mumbai) (AT) [sic-McKinsey Co. Inc.(Philippines) v. Asstt. Director of IT [2006] 199 TTJ (Mum.) 857 : [2006] 284 ITR 227 (Mum.)(AT). It was held that when there was no material to suggest that the payment was for any services which enable the recipients of those services to apply the technology itself. It cannot be concluded that the consideration paid for such consultancy services was taxable in India under art. 12(4)(b) as included servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 46. Now we deal with the judgments cited by CIT-DR Shri Ashwani Kumar in support of his case that the monies received by the assessee are FTS and should be taxed under section 44D on gross basis as per rates given under section 115A of the Income-tax Act. First case cited by him is CBDT v. Oberoi Hotels (India) (P.) Ltd. [1998] 231 ITR 148 (SC). He submitted that in this case the Oberoi Hotels was not only maintaining but also operating a hotel. Technical expertise was required for the same and the Hotel claimed deduction under section 80-O of the Income-tax Act. The second case cited by CIT DR is of the Supreme Court in Continental Construction Ltd. s case (supra). Therein again it was held by Supreme Court that the professional services were technical services in nature and the assessee was entitled to deduction under Chapter VI-A of the Income-tax Act. The CIT-DR relied upon judgment of the Income-tax Appellate Tribunal in Dy. CIT v. Tristar Consultants [2004] 91 ITD 15 (Mum.) and stated that professional services were covered within the meaning of fees for technical services and, therefore, professional services were part of technical services. On article 13.4(c) of the DTAA t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly the same works contract would be taxed at the rate of 2 per cent under section 194C of the Act and also would be subject to tax on its net profits without the application of section 44D. 49. We have given a careful consideration to the facts of the instant case and the arguments filed on this issue. The orders of Assessing Officer, the CIT(A), the arguments addressed by CIT DR, the written synopsis and the rejoinder filed by the assessee, copies of which have been given to CIT DR as well. In our opinion, a distinction between rendering of service and carrying out of a work is very important. Carrying out of work also may require technical expertise but it does not convert a works contract into a service contract. The Delhi High Court decision in the case of SRF Finance Ltd. v. CBDT [1995] 211 ITR 861 has very nicely brought out the distinction between the rendering of service and carrying out of work. Once this distinction is kept in mind, then if we look at the facts of the case, it will be clear that when the assessee as an operator operates a power plant in Kakinada in Andhra Pradesh, it actually carries out a work and gets paid a price for it. It does not render any serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go about his business and would take all and every precaution to maintain the safety of the facility and would maintain the very expensive plant and equipment, follow proper procedures and also have trained staff at site so that there is no mishandling of this expensive facility while operating the plant. For this the operator, i.e., the assessee had to give detailed programme, plans as to how he would go about operating and maintaining the power plant. This is purely in line with normal prudent practice of carrying out of a works contract. It does not make available any skills or knowledge etc. to the owner. It does not convert a works contract into a service contract. Training of personnel of the owner under clause 8.3(iii) of the contract would take place three months before termination or cessation of the contract, i.e., in February 2007. During the currency of the contract when the assessee is carrying on its work of operating and maintaining the power plant, there is no training taking place whatsoever. It is further buttressed by the fact that there is no personnel whatsoever of the owner at site as per the contract. All the facilities and the work force is that of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all civil works and pipe lines and the designs and drawings were to be passed on to the client. The contract also envisaged necessarily that the assessee had to make available technical information to the client so that the client was able to use it for its own projects outside India. Thirdly, the training of employer s personnel was an important part of the contract. Fourthly, the contract was to be executed in close co-ordination with the client s personnel. All these factors were wholly absent in the case of the assessee. The assessee was operating and maintaining a power plant and was not developing and designing any plants which would enable Spectrum to operate the power plant itself. It was a contract with men and materials where all employees, equipments, service tools were that of the operator, i.e., assessee. There was no training of any work force of the client. The assessee was an independent contractor. There was no close co-ordination between the personnel of Spectrum and the assessee. Thus, the judgment of Continental Construction also does not apply to the facts of the case of the assessee. 52. The third judgment is that of Tristar Consultants (supra). There the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any design etc. as envisaged under section 9(1)(vii) Explanation 2 or Article 13.4(c) of the DTAA between India and UK by the assessee to Spectrum. The training in the pre-operational stage was of the assessee own work force. That was done prior to February 1997 which does not fall within this period. The training as cited by the CIT DR on plant of Spectrum personnel at the second stage was only at the time the contract was go come to an end after 10 years, i.e., February 2007. We do not know whether any such training was actually conducted by the assessee for Spectrum. For the years under our review, i.e., assessment years 1998-99 to 2004-05, there is no provision and the CIT DR has not been able to point out any provision in the contract wherein the assessee was to train Spectrum personnel. In the absence of any such training to be provided, it cannot be said that anything was made available by the assessee to Spectrum. What to talk of training, we have also seen from the contract that there was no personnel envisaged to be present in the facility during its operation by the assessee. There was no close co-ordination of the personnel of the assessee and Spectrum as was the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on the enterprises of that other State on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of the Convention. 54. In view of the above provision taxing of a non-resident U.K. company in a manner which is more burdensome vis-a-vis an Indian company would lead to discrimination. This would also amount to unfavourable treatment being meted out to a U.K. company vis-a-vis the Indian compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instant case. Furthermore, Article 13(4)(c) read with Article 26 of DTAA does not permit the revenue authorities to discriminate against the assessee, a UK registered company and accord it less favourable treatment than a domestic company and therefore, section 44AD cannot be invoked in assessee s case. Thus, looking from any angle, the income received by the assessee from M/s. Spectrum was not a fee for technical services, we therefore direct the Assessing Officer to compute assessee s income and profit and gains of business from operation and maintenance of power plant of net profit and loss basis. We direct accordingly. 57. In the assessment years 1998-99, 1999-2000 and 2001-02, we have already allowed legal ground with respect to reopening of assessment under section 147 in favour of the assessee resulting in quashing the reassessment proceedings as a whole. However, the assessee has also raised issue with respect to merit of the income received from M/s. Spectrum which was brought to tax in the name of FTS which is also decided in favour of the assessee as discussed hereinabove. 58. With respect to the grounds taken by assessee for taxing of Interest income in various yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax Act. We direct accordingly. 60. Ground taken by the assessee for Budge Budge project arises only in the assessment year 2000-01. Both the Assessing Officer and CIT(A) have in their orders stated that reason for treating these on gross basis is the same as in the O M project. In fact, the Assessing Officer states Therefore, the scheme of taxation of such receipts as discussed while considering the O M Godavari project equally applies to the instant project as well. Since the agreement was signed before 31-5-1997, as per the provisions of section 115A, the gross receipt under the said agreement is taxable at the rate of 30 per cent . The CIT(A) has also repeated the arguments used by Assessing Officer for taxing it on gross basis as done in the O M Godavari project. We have already held that on an interpretation of DTAA between India and U.K., Article 7, especially 7.5 and Article 13(4)(c), the nature of services is such that it would not fall within the definition of fees for technical services and the taxing of receipts on gross basis would be discriminatory vide Article 26 of the DTAA. For the reasons recorded by us while disposing of the grounds relating to O M proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63. With regard to the ground taken for taxation of Foreign Exchange Fluctuation in assessment year 2002-03, there is no dispute to the well-settled legal proposition that if profit or loss on account of foreign exchange fluctuation arises out of capital assets, then it will be capital receipt and in case it arises out of trading business, then it should be treated as trading income. The Assessing Officer is directed to verify the same and act accordingly. 64. Ground with regard to taxing of same income both in assessment year 2002-03 and in assessment year 2003-04 arises in assessment year 2003-04. The Assessing Officer is directed to verify the same and in case it has been taxed twice, he is directed to tax it only in the year in which this income has arisen. We direct accordingly. 65. In respect to ground taken with regard to Margins on Liaison Offices, both the Assessing Officer and the CIT(A) have held that the assessee should have charged 15 per cent in addition to cost from its Head office and, therefore, have added notional income on the expenses incurred on Liaison offices in India amounting to 15 per cent of the actual cost incurred. It was submitted before us that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 165 ITR 209. The parts reproduced by him from the judgment are In view of the clear language of section 44D, it appears to us that while it is open to the assessee to claim adjustment of business loss of past years which have been carried forward against business income computed under the said section, it is not open to the assessee to put unabsorbed depreciation carried forward in the same bracket as carried over business loss and also seek such adjustment of the same qua loss. Again he has cited Incidentally, we note that in the scheme of the section 44D, the concept of business loss will be irrelevant inasmuch as in the computation of income under the said section, the income of the assessee cannot go below nil . 68. CIT(A) confirmed the action of Assessing Officer and held that section 72 read with section 44D of the Act would not permit the set off of unabsorbed loss of earlier years against fees for technical services computed under section 44D of the Act. He similarly held that even unabsorbed depreciation of earlier years can also not be allowed against income of fees of technical services computed under section 44D. It was contended by ld. AR that carry for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 32(2) there was depreciation element being allowed to the assessee. Similarly, for other business of the assessee, i.e., HBPL Augmentation Project, IOCL Project etc., depreciation was being allowed by the Assessing Officer himself. Therefore, even following the logic of the Calcutta High Court, carry forward of unabsorbed depreciation under section 32(2) had to be allowed to the assessee. On the other hand, ld. DR relied on the orders of lower authorities. 69. We have considered the rival contentions and given our careful consideration to the materials placed on record and are of the opinion that carry forward business loss is a statutory right allowable to the assessee by section 72 of the Act. This statutory right cannot be withheld from the assessee as this loss has been properly computed and allowed to be carried forward in the previous assessment years which have become final. Copies of the same have been filed before us. The manner of computation of profits and gains of business would not convert profits and gains of business income under another head of income. It will continue to be profits and gains of business. The Assessing Officer in all these years has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s heads of income. There is no provision in the Income-tax Act which requires a taxpayer to file tax audit reports for each separate business that it does. We, therefore, hold that the assessee was correct in filing a single tax audit report in respect of the sources of income of all businesses that it had in India under section 44AB of the Income-tax Act. 71. Grounds have also been taken against charging of interest under sections 234B and 234D in the assessment years 2001-02, 2002-03, 2003-04 and 2004-05. As far as charging of interest under section 234B is concerned, admittedly the entire income of the assessee, i.e., a foreign company is liable for deduction of tax at source under section 195 of the Income-tax Act. Therefore, in view of the decisions of the Delhi Special Bench in Motorola Inc. v. Dy. CIT [2005] 95 ITD 269, Sumit Bhattacharyya v. Asstt. CIT [2008] 113 TTJ 633 (Mum.) (SB), CIT v. Sedco Forest International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal), DIT (International Taxation) v. Ngc Network Asia LLC [2009] 313 ITR 187 (Mum.) all have held that no interest under section 234B would be chargeable and we direct the Assessing Officer to delete the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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