9911796707
TMI Blog1995 (9) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... t was carried out in England, using the applicant's own staff and consultants and that the company and its staff are subject to the tax jurisdiction of the United Kingdom. On these grounds it was claimed that the provisions of section 9(1)(vi)(b) of the I. T. Act do not apply, and, therefore, no tax should be levied on the applicant with regard to its contract with "X". The facts and the questions raised in all the three applications are identical ; therefore, these were heard together and are being disposed of by this single order for the sake of convenience. For proper appreciation of the arguments the facts relating to these applications are set out below. The first agreement between the applicant and the "X" was drawn on December 23, 1993. The purpose of this agreement was in depth reservoir management study of the Offshore-Oil Field on behalf of "X" which included : (a) reservoir simulation studies, (b) history matching, reservoir performance production and reservoir management, (c) review of "X" plans, (d) independent assessment of recoverable reserves by generating reservoir simulation models and carrying out well-wise history matching and provide future production for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assist and advise "X" on methodology of evaluation of the tenders. This job included commercial and legal advice regarding acceptance of the tenders invited by "X" from different contractors on the basis of the reports submitted by the applicant in accordance with the earlier two agreements. This job was to be performed primarily in India as frequent consultation with the officers of "X" was needed. This "work package" was for a sum of US $ for a period of 30 days and a sum of US $ was to be paid as air tickets from the UK to India. Hotel accommodation and local transport was to be provided by "X" in India. A copy of the application was sent to the concerned Commissioner of Income-tax (CIT) for records of the case, if any, and his views on the facts made out in the application. He pointed out that "X" has deducted tax at source at 30 per cent. from the payments made to the applicant considering the payments as royalty and fees for technical services as provided under section 115A read with section 44D. The Commissioner of Income-tax held the view that this was rightly deducted, because, the payments were for royalties and technical services within the meaning of clauses (vi) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of rendering technical services". He claimed that the applicant was engaged in the business of providing services in connection with prospecting of mineral oil. Therefore, this case is squarely covered by the provisions of section 44BB of the Income-tax Act and that neither clause (vi) nor clause (vii) of sub-section (1) of section 9 would be applicable, because clause (vi) excludes payment in respect of services utilised for the purposes of a business or profession carried on outside India from the purview of the definition of income by way of royalty ; and, because the applicant was carrying on the business of rendering services outside India, his case would not be covered by clause (vi). He claimed that even clause (vii) would not be applicable for the same reason, because, the payment made to the applicant falls in the same set of exceptions provided in sub-clause (b) of clause (vii). More over, Explanation 2 to clause (vii) also excludes such payment from tax ation under that clause as fees for technical services. He further argued that the case of this applicant does not fall within the proviso to sub-section (1) of section 44BB, because, none of the sections 42 or 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng such services to various persons engaged in the extraction of oil all over the world, and, because, it was continuously engaged in the above activity, it must be stated to have engaged itself in such business. In addition, they had also provided personnel to operate wire logging equipment. In such a situation it had to be seen whether the services or facilities are rendered or provided in such a manner as to constitute business. The very fact that section 44BB(1) also speaks of rendering of services shows that it cannot be stated that merely because the assessee has rendered some technical services, the income arising therefrom must be treated only as "fees from technical services" taxable under section 115A at the special rates. He submitted that the Income-tax Appellate Tribunal had relied on Circular F. No. 500/6, dated October 22, 1990, issued by the Central Board of Direct Taxes (CBDT) to the effect that the expression "mining" as contemplated by Explanation 2 to section 9(1)(vii) includes mining of petroleum and natural gas and this interpretation was based on the opinion of the Attorney-General. On this basis, he pleaded that the case of the applicant falls within the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 36(1)(viia) of the Income-tax Act read with article 23 of the earlier double taxation agreement between the UK and India. He submitted that the Income-tax Appellate Tribunal had held there that corporations have nationality in accordance with the country of their incorporation. Following the decision of the Supreme Court in the case of State Trading Corporation of India Ltd. v. CTO [1963] 33 Comp Cas 1057 ; AIR 1963 SC 1811, the Income-tax Appellate Tribunal observed that nationality and citizenship are distinct as, nationality has reference to the jural relationship which may arise for consideration under the international law. The bank was a national of the UK but was incorporated in India, therefore, it cannot be subjected to a higher burden of tax than a scheduled commercial bank in India by virtue of article 23 of the double taxation agreement. Accordingly, the Income-tax Appellate Tribunal held that the bank was entitled to the benefit of section 36(1)(viia) like any other Indian bank. On this basis, he argued that the applicant should also not be subjected to a higher burden of tax than a national of India. According to him if section 44BB is not applicable to the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an Indian national would be taxed in India at a rate much lower than the presumptive rate of 20 per cent. or 30 per cent. on the gross payment. It was, therefore, urged that by virtue of the provisions of the non-discrimination clause of the double taxation agreement and the provisions of sub-section (2) of section 90 (which provides the applicant the option of being taxed at a rate more advantageous to it), the income of the applicant is liable to be assessed under normal provisions on net basis, i.e., gross receipts minus all eligible expenses incurred for the purposes of business. Arguing on behalf of the Commissioner of Income-tax, the Departmental representative ("DR") submitted that the applicant had rendered technical services to "X" which included (a) survey of 23 areas in India demarcated by "X" for estimation of reserves and generation of production profiles after collecting all essential data in India in close collaboration with "X" ; (b) preparation of simulation studies and a comprehensive report on the forecast of oil and gas production upto the year 2015 and handover of data so generated to "X" on computer media ; (c) assistance and advice to "X" on methodology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f services utilised by "X" in India. He contradicted the claim of learned counsel for the applicant that the case of the applicant gets covered by Explanation 2 to section 9(1)(vii) because the applicant had received the "fees for technical services" as consideration for the rendering of technical and consultancy services including provision of technical services and other personnel for survey, etc. On this basis, he argued that the rate of 30 per cent. provided under section 115A is applicable to the payments received by the applicant. As regards the applicability of the double taxation agreement, he conceded that the provisions of the double taxation agreement would override the provisions of the Income-tax Act whenever there was a difference between the two, but, he claimed that even under the double taxation agreement, article 13 would be applicable to the payments received as fees for technical services and that learned counsel is not correct in arguing that the case of the applicant should be covered under article 7 of the double taxation agreement. He urged that the provisions of article 13 are special provisions for taxation of royalties and fees for technical services, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he applicant would also have been subjected to tax under the Income-tax Act but it had claimed privilege under section 90(2) of the Income-tax Act and wants to be assessed in accordance with the double taxation agreement. Article 13 of the double taxation agreement provides a rate of only 20 per cent. of the total payment as against the rate of 30 per cent. leviable for similar payments covered under section 44D read with section 115A. Thus discrimination, if any, is in favour of the applicant by virtue of the provisions of the double taxation agreement. As regards the claim of the applicant that his income should be assessed under section 44BB of the Income-tax Act, the Departmental Representative submitted that section 44BB does provide a lower rate but by virtue of the proviso to that section, the case of the applicant is not covered at all. Hence, that section cannot be applied artificially in violation of the proviso to that section. He further submitted that even if the income of the applicant is to be assessed as business income by applying the provisions of sections 28 to 44C the net profit may perhaps work out to 80 per cent. (because all expenses in India have been borne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B of the Income-tax Act, therefore, the payments were taxable only at the rate of 5.5 per cent. of the gross payments (deemed profit of 10 per cent. on gross payments taxable at 55 per cent.). For a proper appreciation of the argument, the relevant provisions of sub-section (1) of section 44BB are given below: "44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.-(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub- section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession': Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent. of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property ; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern after the 31st day of March, 1976. Explanation.-For the purposes of this section,- (a) 'fees for technical services' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ; (b) 'foreign company' shall have the same meaning as in section 80B ; (c) 'royalty' shall have the same meaning as in Explanation 2 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h that policy, then, subject to the provisions of sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,- (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of thirty per cent. ; (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent. ; and (C) the amount of income-tax with which it would have been chargeable had its total income been reduced by the amount of income by way of royalty and fees for technical services. Explanation.-For the purposes of this section,- (a) 'fees for technical services' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ; (b) 'foreign currency' shall have the same meaning as in the Explanation below item (g) of sub-clause (iv) of clause (15) of section 10 ; (c) 'royalty' shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9 ; (d) 'Unit Trust of India' means the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963)". A perusal of these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 2.-For the purposes of this clause, '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 or consideration which would be income of the recipient chargeable under the head 'Salaries'." According to this Explanation "fees for technical services" means any consideration for the rendering of any technical or consultancy services, etc. In our view, therefore, the Explanation does not leave any scope for making a distinction between fees for technical services and income from business of providing technical services, in so far as the taxability under section 44D is concerned. If special provisions like sections 44BB and 44D had not been included in the Income-tax Act, such rendering of technical services would have been taxable only as business income under the provisions of sections 28 to 44C. It was sought to be made out that the above interpretation will render section 44BB altogethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lling under section 44D from the purview of section 44BB. The decision of the Income-tax Appellate Tribunal in the case of Deputy CIT v. Schlumberger Seaco Inc. [1994] 50 ITD 348 (Cal), has been relied upon by learned counsel in support of the above argument. It has no doubt been generally observed by the Income-tax Appellate Tribunal in para. 7 of that order that while introducing Explanation 2 to section 9(1)(vii), the Legislature had in mind only those non-residents who did not carry on any business as such in India, but were merely in receipt of income by way of fees for technical services. ''Royalty'' and ''fees for technical services'' are classes of income which may fall to be assessed under the head ''Business'' or under the head ''Income from other sources'' and there is nothing in Explanation 2 to section 9(1)(vi) and (vii) to exclude receipts of this description in the hands of a recipient as ''business income''. It is not correct, therefore, to conclude that these definitions will not apply to non-residents who are having business in India. That apart, this is not a case where the applicant has a business in India ; though it is carrying on a business, it has no branch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e double tax ation agreement between India and U.K. are beneficial to it. The expression ''fees for technical services'' has also been defined in paragraph 4 of article 13 of the double taxation agreement which has already been reproduced in para. 11.1 (page 385) of this order. Clause (c) of paragraph 4 fully covers the type of technical services rendered by the applicant to ''X'', therefore, the payment received by the applicant for this service is ''fees for technical services'' within the meaning of paragraph 4 of article 13. Article 13 provides that such fees may be taxed in India at the rate of 20 per cent. of the gross amount of such fees during the first five years for which the double taxation agreement has effect. The double taxation agreement under reference became operative from October 26, 1993, therefore, the fees received or receivable by the applicant on account of these three agreements will be taxable at the rate of 20 per cent. for the assessment years 1994-95 to 1998-99. We are unable to accept the contention of learned counsel for the applicant that the applicant's case is covered by article 7 of the double taxation agreement, though that article is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that whatever may be the statutory or other provision applicable in this case, the applicant cannot be taxed at more than 55 per cent. of the net income of the applicant from the contract computed as in the case of any other resident assessee on like income by virtue of the non-discrimination clause. He, however, stated that he was prepared to waive this argument, if the tax rate is kept at 5.5 per cent. of the gross receipts under section 44BB without going into further niceties and details of the double taxation agreement. The impact of article 26 of the double taxation agreement, therefore, requires to be considered in some detail. It is not considered necessary to set out here the provisions of article 26 as the double taxation agreement in extenso is published at pages 235 to 267 of the statutes section [1994] 206 ITR. The object of article 26 is to ensure that no discrimination ensues as between nationals of two countries which have entered into a double tax ation agreement. Counsel as already mentioned, placed reliance on a decision of the Bombay Bench of the Income-tax Appellate Tribunal in the case of Standard Chartered Bank [1991] 39 ITD 57, holding the said bank to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' of India for purposes of article 19 of the Constitution and the Constitution Bench answered this question in the negative. The arguments on behalf of the petitioner started with the citation of a rule of English law ''that a company or an incorporated corporation has a nationality and the nationality is determined by the law of the country in which it is corporated'' and this rule was sought to be extended to the concept of citizenship as well but this attempt did not succeed as the court was of the view that the two concepts were totally different. Though the court cited the rule of English law as to ''nationality'' and made some observations regarding this concept, it was not seized directly with the determination of the principles to determine the nationality of a company. The judgment of Hidyatullah J. (as he then was) refers to the various principles on the basis of which nationality of a company could be determined in paras. 50 to 56 and observes in para. 57 (page 1833) : ''Which corporation should be regarded as possessing Indian nationality is a question to be answered when it arises. Whether the provisions of the Companies Act dealing with foreign companies furnish any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith enterprises and a rule of non-discrimination against them is enunciated but is restricted only to enterprises having a permanent establishment in India. If the expression ''nationals'' included companies and other associations as well, the special provision regarding enterprises in para. 2 would not have been necessary at all. Secondly, it is significant that article 4 of the double taxation avoidance agreement defining the fiscal domicile for purposes of the agreement refers to nationality only with reference to individuals, vide paras. 2(c) and (d) of that article. In the light of these features of the present agreement, it is legitimate to construe the double taxation agreement as prohibiting discrimination, (a) in the case of individuals, and (b) in the cases of enterprises, (other than individuals) only where they have their permanent establishment in India and not otherwise. The applicant is a company incorporated in the U. K. It would be a person resident in the U.K. and its business would be an enterprise of the U. K. carried on by a resident of the U. K. Such a person can invoke article 26 only if it has a permanent establishment in India. But, as stated earlier, sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption that section 44D and section 115A are applicable only to foreign nationals, is that such a person will be called upon to pay tax at 30 per cent. or 20 per cent. where the double taxation agreement specifies a smaller rate as in the present case, on the total amount paid as royalties or technical fees, while such receipts will be business income in the hands of an Indian company taxable at the rate of 46 per cent. (including surcharge) but only on the net amount after deduction of expenses incurred for earning the income. It is, however, difficult to assert that this differentiation is necessarily discriminatory against the foreign national. In respect of royalties, it is very difficult to predict the proportion of deductible expenses. It could vary from practically negligible amounts to substantial amounts. While dealing with the topic in arriving at double taxation agreements there is an allegation, at least in some cases where technology is supplied by developed countries, that the expenditure they had incurred for acquiring the technology already stands recouped [see Srinivasan : Double Taxation Avoidance Agreements 1994, para. 2.97]. This may not be always true but the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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