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TMI Blog2016 (2) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. 3. The revenue has raised the following grounds of appeal for Assessment Year 2008- 09:- "1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in deleting the addition made by the AO by holding that the income derived by the assessee from NH-45 project is to be computed under article 12(6) and article 7, after deducting all expenses from the gross receipts and not to be taxed as free for technical services in terms of explanation 2 of section 9(i) (vii) of the Act and also not alternatively under section 44D of the Act. 4. As facts in both the appeals are similar we deal with them together referring the facts for AY 2006-07. The facts in brief of the case are that the assessee is a foreign company incorporated in USA and is engaged in the business of providing consultancy services in the areas of highways, transportation, water supply, waste management etc. The assessee has set up several projects offices in India to carry on its activities in India. For AY 2006-07 assessee filed its return of income declaring an income of Rs. 51,26,472/- on 06.12.2006. The case was selected for scrutiny and the same was processed u/s 143(1). The notice u/s 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of audited books of accounts. The AO has not doubted the authenticity and the income computed as per books of accounts. b. The income of the assessee from NHAI is not in the nature of 'Fees for Technical Services', as the assessee is covered by exceptions to Explanation 2 of section 9(1)(vii) of the Act. c. The assessee, providing engineering services related to construction services, is covered by the Explanation 2 of the above section. The agreement entered into by the assessee with NHAI was for the implementation of the project, review and approve material, its design results and recommend special tests wherever required for materials, suggest substitutes for unsuitable materials, assess adequacy of inputs such as material and labour, supervise and check the setting out of the culverts, bridges, foundations, floor slabs, and all other work required for the project. Therefore, it is clear from the perusal of the said activities that the assessee company was involved in the construction activities, which include engineering and other related services. For this he relied up on the decision of Agland investments services Inc. Vs ITO 22 taxman 9 ( del) and DCIT V Schlum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax there in provided for. 8. The following issue emerges for the consideration that whether the income received by the assessee on account of NH-45 is fees for technical services or not u/s 9 (1) (vii) of the Income tax Act. Assessing officer has merely gone on the presumption that as a. The contracts receipts are for the consultancy services it is covered in the definition of Fees for Technical services. b. He has also been lead by the classification of receipt in the TDS certificates where the deduction has been made u/s 194J of the act as consultancy fees. c. Assessee itself says in return of income that it is engaged in the business of consultancy. We are of the view that for the purposes of the characterization of the income of the assessee all the above criteria are not relevant for the reason that 1) The consultancy services are in general, "fees for technical services". But AO need to examine it with respect to explanation (2) of section 9(1) (vii) of the act which has also provided some exclusions. AO has failed to look in to those exceptions carved out in the right perspective. 2) The Section mentioned in TDS certificate and the disclosure in the return of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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". 12. Therefore according to this any consideration which is for the rendering of any managerial technical or consultancy services is characterized as " fees for technical services" . However some exceptions are carved out if the such managerial technical or consultancy consideration is for any construction etc or like projects undertaken by the recipient. Ld AO has failed to consider this exceptions carved out in definition of FTS, Therefore the attempt made by ld AO is on incomplete reading of that explanation ignoring exceptions. Hence It is necessary to examine the nature of work carried out by the assessee. From the nature of work carried out by the assessee it is apparent that it has got the consultancy work related to laying down of roads etc which is for construction activity or like project. 13. Ld AO has held that as assessee is rendering ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion the expertise and technical assistance of consultants and technical assistance in connection with construction and assembly of hulling, drying and processing factories and plants and also for management services thereof. The bid evaluation and engineering services are said to be connected with inviting tenders and for other process but the ultimate aim for those tenders and process is the construction of the corporation processing factory and plant and in this view of the matter, the step-in-aid included in these services, viz., engineering and bid evaluations, has to be held as a step-inaid for construction of factories and plants of the Corporation, hence, under section 9(1)( vii) read with Explanation 2 attached thereto the income is not taxable. We hold and direct accordingly. Rs. 84,456, as such, stands deleted from computation. The appeal succeeds and stands allowed." 15. Ld AO has rejected the contention of the assessee holding that the case of the assessee does not fall within the exception. Bereft of any reasoning that why the services rendered wrt construction of roads is not a construction activity or like projects. On reading the above decision we fully agree with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976. It is clear for the above provision that for invoking it the fees for technical services should have the same meaning as per explanation 2 to section 9 (1) (vii) of the act. As we have already held that receipt of assessee is not „fees for Technical services as defined under above explanation as it relates to construction activity , we are of the view that accordingly that receipt is out of the purview of presumptive taxability u/s 44D of the Income tax Act. 17. Further LD AO has also analyzed the provision of article 12 (4) of the Indo US DTAA and has held that consultancy services provided by the assessee are made available to the clients in form of reports which are used by such clients in their projects. He relied up on the order of AAR in case of Intertek testing Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. Therefore on reading of the above exposition of the term " make Available' it's is not the case of the AO that there is imparting of technical skill which is absorbed by the receiver so that NHAI can deploy the similar technology in future without depending on the provider. In view of above we are of the view that these payments do not qualify under article 12 (4) of the DTAA as the conditions of " make Available" does not satisfy. 19. Regarding Reliance by Ld AO on the decision of AAR in Ericson Rulings 224 ITR 203 (AAR) is also half hearted. In that ruling it is held that it does not change the character of receipt but it is chargeable under the different mechanism. We are on the issue of deciding the mechanism under which the receipt would be taxable under Domestic tax laws read with the Indo US Treaty. 20. On the other aspects of applicability of DTAA CIT (A) has held as under :- 7.4 However, let us examine the alternate plea of the appellant also regarding applicability of section 44D of the act. Article 12 (2) of the treaty provides that fee for included services may also be taxed in the source State. However, sub-article (6) carves out an exclusion and provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 44D, -which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under Section 115A. A somewhat similar scheme of taxability of royalties and fees for technical service on gross basis, but a lower rate, also finds place in most of the tax treaties including India-Singapore Tax Treaty. Article 12 provides for taxation of fees for technical services in the source country on gross basis, but at a lower tax rate of 15 per cent, barring the case of fees for technical services which are ancillary and subsidiary to the enjoyment of property for which royalties under para 12(3)(b), which are taxed at an even lower rate of 10 per cent. Section 44D r/w Section 1 ISA of the Indian IT Act, and Article 12 of the India-Singapore tax Treaty are, therefore, similar in nature. These alternate paradigms, contained in Section 44D r/w Section 115A and in Article 12 of the India-Singapore tax Treaty, offer alternative but similar models of taxation of income from royalties and fees from technical services. While these two sets of provisions dealing with taxability on gross basis may belong to the same genus of taxation models, but, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management of the project. As per the A.O., these services fell within the ambit of the fee for technical services and taxed the income of the appellant by invoking the provision of section 44D of the Act despite the fact that the receipt of the appellant company were assessable under Article 7 of DTAA between India and U.K. The ITAT did not agree with the contention of the A.O. It was held that in case of receipts through permanent establishment in respect of which profits are to be computed under article 12(3) of the DTAA, section 44D was not to be applied for the purpose of deduction of expenses. The court further held that section 44D and for that matter explanation 2 to section 9(l)(vii) do not apply. 7.6 This controversy has now been laid to rest by insertion of new section 44DA in the act w.e.f. 1.04.2004 by the Finance Act, 2003 where aseesee has been given explicit option to compute its income on net basis if it has maintained books of account. The explanatory memorandum to the finance act stated that the section 44DA was inserted with a view to harmonize the scheme of taxation of royalty and fee for technical services under the act with the provisions of the treaty wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause existed, i.e., similar to article 12(6) in this case. There is no infirmity pointed out by the lD DR in the findings of CIT appeal regarding applicability of article 7 of the DTAA regarding taxability of the sum and its consequent taxability u/s 44D of the Act. 21. It is also not controverted that assessee was carrying on similar activities in the preceding years as well, and the income earned form the said activities have been accepted by the Department as business income of the assessee and assessment made u/s 143(3) of the Act. Principle of consistency has been accepted by the courts in many judicial precedents and some of the landmark decisions in the cases are of Radhasoami Satsang v. CIT: (1992) 193 ITR 321 (SC), CIT v. Lagan Kala Upwan: (2003) 259 ITR 489 (Del), Saurashtra Cement & Chemical Industries v. CIT: (1980) 123 ITR 669 (Guj), Commissioner of Income Tax v. Paul Brothers: (1995) 216 ITR 548 (Bom) and Commissioner of Income Tax v. Modi Industries Limited: [2010] 327 ITR 570. Therefore on this ground too assessee deserves relief. 22. In view of above, we are of the view that according to the provision of section 44D rws 9 (1) (vii) of the act assessee's recei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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