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TMI Blog2013 (2) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... the case. Even while noting that Pehla carried out type test using sophisticated equipment without any human intervention CIT (A) failed to address the topic and wrongly held that consideration paid to Pehla is taxable in India, although Pehla does not have a Permanent Establishment in India. 3. The CIT(A) erred in upholding the stand of the AO that the payment to be made to Pehla is in the nature of fees for technical services covered by section 9(1 )(vii) read with Explanation to section 9 of the Income-tax Act, 1961 and as per DT AA between India and Germany. Without prejudice to the above, the CIT(A) ought to have held that the payment to be made to Pehla was in the nature of business profits and as per Article 7 of the DT AA between India and Germany, the payment was not liable to tax in India in the absence of a Permanent Establishment (PE) in India to which such payment could be attributed". 2. Brief facts of the case are that the assessee was required to make payment to "Pehla Testing Laboratory" (hereinafter referred to as PTL) located at Berlin Siemensstadt 13623 Berlin, Germany for carrying out type tests of the circuit breakers manufactured by assessee in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribing the nature and procedure of the testing was filed before the AO. Reliance was also placed on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Bharati Cellular Ltd reported in 2009, 319 ITR 258 and Madras High Court judgment in the case of Skycell Communications Ltd. v. DCIT reported in 2001, 251 ITR 53 (Mad.) to support that the expression "Technical Services" involves a human element, whereas in the case of assessee there is no involvement of human interface. 4. AO, however, rejected the assessee's contentions on the ground that firstly, type of the services provided by the Pehla Lab is of highly technical in nature and the payment is definitely covered by section 9(1)(vii) and secondly, the Explanation 2 to section 9 which was inserted by the Finance Act, 2007 with retrospective effect 1.6.1976 provides that, where the income is deemed or accrued or arise in India, such income shall be included in the total income of the non resident, whether or not the non resident has a residence or place of business or business connection in India. Reference was also made to CBDT Circular No.03 of 2008 dated 12.03.2008. AO further held that the decision of the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to PTL in the following manner: "3.7 The nature of services has been described in detail in the preceding Paras. However, to reiterate, the payments are to Pehla Testing Laboratory, located at Berlin, Germany for carrying out type tests. The type tests were required to be carried out on the circuit breakers manufactured by the appellants to prove that the design of the equipment meets the requirements stipulated by International Standards and were for the purpose of fulfillment of one of the Tender formalities laid down by the purchasers. For this purpose, the appellants had to send the circuit breakers (the product manufactured by the appellants) to Pehla Germany to obtain the type testing certificate. The circuit breakers undergo a destructive test in the laboratories. The breakers are not received back in India and are destroyed. Pehla carried out only type testing by using their sophisticated test equipments to impose both high voltage and high currents on the circuit breakers without human intervention and issued reports of the tests conducted". Thereafter he come to the conclusion that PTL is carrying out technical kind of services after observing as under: "3.10. Keepin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment made to Pehla cannot be taxed in view of Article 7 of the DTAA as Pehla does not have a PE in India was also rejected by the CIT (A) as per the discussion given from Para 5.1 to 5.6. Accordingly assessee's entire contentions were rejected. 8. The learned Counsel appearing on behalf of the assessee after reiterating the facts as incorporated above, submitted that, it has been undisputed by the AO that the type testing carried out by Pehla by use of highly sophisticated test equipment is without any human intervention and this fact has also been admitted by the CIT (A) in Para 3.7 of his order, wherein his decision has been recorded. Once it is an admitted fact that no human intervention is involved in such kind of testing, it does not amount to rendering of any "technical services". He submitted that the word "technical service" as appearing in Explanation 2 to section 9(1) (vii) is sandwiched between the word "managerial" and "consultancy" and therefore the word "technical service" has to be read along with these two words. These words signify the involvement of human intervention as without human involvement managerial and consultancy services cannot be provided. A te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ines and no human intervention is required in such kind of transmission. Further the judgment of the Hon'ble Delhi High Court has been set aside by the Hon'ble Supreme Court in the case now reported as CIT v. Bharati Cellular Ltd. [2011] 330 ITR 239 (SC). Thus the said decision cannot be relied upon. In the case of Jaipur Vidyut Vitran Nigam Ltd. (supra) passed by the ITAT Jaipur Bench, the matter related to transmission of electricity which is distinguishable from assessee's case. In support of his contention, he gave an example of conducting of blood test, which nowadays are done through sophisticated machines, but it is certified by the Pathologist who analyses the report. This kind of conducting blood test is definitely said to be done by the Pathologist only who is human and not a service through machine. He also relied upon the decision of the Cochin Refineries reported in (1996), 222 ITR 354 (Ker.), wherein the matter related to carrying out certain tests conducted by a foreign company at the instance of the Indian company and the payments made to the person of the foreign company was treated as FTS within the meaning of section 9(1)(vii). Thus in the case of assessee also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions relied upon by the parties. One of the main issue for our adjudication which also goes to the core of the issue is, whether the payment made to Pehla Testing Laboratories in Germany, for carrying out certain tests on circuit breakers manufactured by assessee for the purpose of certification, so as to meet the international standard, falls within the meaning of fees for technical services and is taxable within the meaning of section 9(1)(vii). Assessee in pursuance of its tender formalities with the Gujarat Energy Transmission Corporation Ltd and Maharashtra State Electricity Transmission Company Ltd. was required to obtain type testing certificate of the circuit breakers manufactured by it. For this purpose it has sent the circuit breakers to be tested in the Laboratory of PTL, wherein the circuit breakers undergo destructive tests in the Laboratories. Once it passes through the test in the Laboratories, certificate is given by the PTL for the quality of the product manufactured by assessee. Whether such a payment for this kind of testing falls within the realm of fees for "technical services". Section 9(1)(vii) provides that income by way of Fee for Technical Services shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsultancy services. No other definition as such of the term technical services in the Act has been given. The word "technical" as appearing in Explanation 2 is preceded by the word "managerial" and succeeded by the word "consultancy". It cannot be read in isolation as it takes colour from the word "managerial and consultancy" between which it is sandwiched. The Courts have held that in such a case principle of noscitur a sociis gets attracted, which means that the meaning of the word or expression is to be gathered from the surrounding word i.e. from the context. Coupling of the words together shows that they are to be understood in the same sense. The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial services and consultancy services has to be given by human only and not by any means or equipment. Therefore, the word "technical" has to be construed in the same sense involving direct human involvement without that, technical services cannot be held to be made available. Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself has been defined, inter alia, "as a person who gives professional advice or services in a specialized field". It is obvious that the word "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as " ask advice for, seek counsel or a professional opinion from; refer to (a source of information) ; seek permission or approval from for a proposed action" . It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant. 15. From the above discussion, it is apparent that both the words "managerial" and "consultancy" involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word "technical" as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a Lab by the automatic machines though under observations of technical experts. Once these tests are done successfully by the machines, a certificate is issued by the authorities of the PTL. The learned CIT (DR) had argued that for observing the process, preparing the report, issuance of certificate and for monitoring of machines, human involvement is definitely there, therefore, it cannot be held that there is no human intervention. In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9(1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of "technical services" by human skills. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the Revenue. Satellite television has become ubiquitous, and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments made to the cable operator. 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. 6. When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el on behalf of assessee that he has not disputed that the payment made was within the purview of fees for technical services. This aspect of the matter was thus not disputed. Therefore, the Hon'ble High Court has not dealt with this issue at all. Even in the other cases as relied upon by the learned CIT (DR) the issue mostly revolved around whether the income were accruing in India or not. None of the judgments relied upon are directly on the point whether the technical services has been provided through human intervention or not. 17. Lastly coming to the learned DR's contentions that the judgment of the Hon'ble Delhi High Court in the case of Bharati Cellular Ltd. (Supra) has been set aside by the Hon'ble Supreme Court, it is however, seen that the Hon'ble Supreme Court has set aside the matter to the Assessing Officer with regard to examination and to establish whether technical services provided, involved any kind of human intervention or not during the process of call communication. The Hon'ble Supreme Court has not reversed or adversely commented on the provisions or principles of law discussed by the Hon'ble Delhi High Court. It was on the fact of the case that the matter w ..... 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