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TMI Blog1996 (6) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem with the hardware belonging to, and the software licensed to, these companies and provision of related services. For this purpose, it has also opened branch offices in India at New Delhi, Bombay and Madras with the permission of the Reserve Bank of India. The Indian companies have informed the applicant that, while making payments to it under the contract, they will withhold income-tax at 55 per cent. as prescribed under paragraph 2(b)(ix) of Part II of the First Schedule to the Finance Act, 1995. The applicant, however, does not expect its net profits on the contracts in question to be more than ten per cent. of the total gross receipts from the Indian companies. According to a profit and loss account and the balance-sheet prepared for the calendar year, 1995 (unaudited), the applicant s gross receipts from the Indian contracts during the period were ₹ 13,84,70,250 and the net profits were ₹ 35,27,289 which works out to even less than three per cent. The case of the applicant, therefore, is that there is no justification to deduct tax at source on the entire payments made to it by the Indian companies at 55 per cent. The tax deduction should not, according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent application. RPG Cellular Services has raised the question not on the applicant s behalf or with a view to benefit the applicant but only to safeguard its own interest as it has a statutory duty to deduct the proper amount of tax from payments made to a non-resident. The question raised no doubt pertains to one of the payments made to the applicant, but is not one pending determination before any other authority in the applicant s case. In this situation, this Authority is of the view that it would not be proper to reject the application in limine by relying on clause (a) of the proviso to sub-section (2) of section 245R. Turning now to the question raised by the applicant, which is in regard to the rate at which tax has to be deducted at source from the payments made by the Indian companies to the applicant-company for the installation of the cellular system, the answer is directly provided by the provisions of the relevant Finance Act ( F. A. ). The rates for deduction of tax at source during the financial year 1995-96 from payments of an income nature made to a foreign company are set out in Part II of the First Schedule to the Finance Act, 1995. Under paragraph 2(b) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,717,111 2. Training programme 5,841,077 (2) RPG, Madras (1) Installation service 45,801,462 Nil 45,801,462 (2) Training programme 6,046,817 - 100 % (3) Bharti Cellular Installation and Training 85,951,677 It is thus seen that the applicant is rendering consultancy and technical services to the Indian companies in a field of its speciality and receiving remuneration therefor. The remuneration received by the applicant is also fees for technical services within the meaning of India s Double Taxation Avoidance Agreement (DTAA) with Sweden, article 13(4) of which reads (see [1989] 178 ITR (St.) 25) : Article 13 Royalties and fees for technical services . . . . (4) The term fees for technical services as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in annexure III to that policy and are in accordance with that policy. Prima facie, therefore, deduction of tax at source from the payments in question should be made at 30 per cent. of the payments made. The arguments before us proceeded, at the first stage, on the assumption, if not concession, that the payments received by the applicant from the Indian companies are in the nature of fees for technical services . The argument advanced by Shri P. N. Mehta, relying on the provisions of the DTAA, was as follows: The relevant provision of the DTAA regarding the taxation of fees for technical services is article 13. Under paragraph 1 of this article, royalties and fees for technical services arising in a contracting State and paid to a resident of the other contracting State may be taxed in that other State. However, such royalties and fees for technical services may, under paragraph 2, also be taxed in the contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 20 per cent. of the gross amount of the royalties or fees for tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o incurred, whether in the State in which the permanent establishment is situated or elsewhere, as are allowed under the provisions of the domestic law of the contracting State in which the permanent establishment is situated. . . . Paraphrasing this provision in its application to the present case, it is contended that the amounts received by the applicant should be treated as business profits and that the assessable profits from this source should be computed after making the necessary deductions and outgoings laid out to earn those profits. As already stated, according to the applicant s unaudited balance-sheet and profit and loss account for the year ending December 31, 1995, the net profit worked out only to about 2.3 per cent. of the receipts. Making some allowance for estimates, learned counsel contends that the assessable profits cannot be taken at more than 10 per cent. of the receipts and that, therefore, the tax leviable in respect thereof cannot be more than 5.5 per cent. of the total amount of the receipts applying the tax rate specified in paragraph 2(ix) of the First Schedule to the Finance Act, 1995, as applicable in respect of payments to foreign companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement 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; . . . Clause (b) of this provision, it will be seen, mandates that no deductions shall be allowed in respect of any expenditure or allowance under the provisions of sections 28 to 44C, where the payment is received, as in the present case, from an Indian concern under an agreement entered into after March 31, 1976. In other words, one of the consequences of computing the income in the present case under article 7 of the Double Taxation Agreement is to attract, for the purposes of such computation, the relevant provisions of the Act and one of such provisions negates the allowance of any deduction whatsoever from the gross payments received. The result is that the acceptance of the applicant s argument that the income in question has to be computed under article 7 of the DTAA does not improve the applicant s position; on the other hand, it makes the entire gross amount of fees rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only the net income earned by the applicant which, according to it, is not more than 10 per cent. of the receipts from the Indian companies, that can be brought to tax in India. On the other hand, the entire gross receipts will be subject to tax at 30 per cent. under section 115A. The second avenue of escape sought by the applicant from the provisions of sections 44D and 115A of the Act is by contending that, in the present case, the receipts accruing to the applicant company are business profits and not fees for technical services . It is conceded that the receipts fall within the meaning of the expression fees for technical services contained in article 13. But it is said that they are taken out of the purview of this description and assigned for purposes of assessment to article 7 under the head Business profits . They have, therefore, it is said, ceased to be fees for technical services and will not attract the provisions of sections 44D and 115A. There is a fallacy in this argument. The receipts of the applicant company from the three Indian companies are clearly fees for technical services within the meaning of article 13 of the DTAA. Paragraph 3 does not take away ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand in the way of his availing of the benefits of article 7 of the agreement that might have otherwise been available to it, learned counsel for the applicant sought to exclude the applicability of these two sections to the present case altogether. He contended that, whatever might be the position under article 13 of the DTAA, the receipts by the applicant will not constitute fees for technical services within the meaning of Explanation 2 to clause (vii) of section 9(1) inasmuch as the definition, which is also applicable to section 44D and section 115A, excludes consideration for any construction, assembly, mining or like project undertaken by the recipient . He contended that, in the present case, the applicant does not do anything except to assemble the hardware and software belonging to the Indian companies. He sought to bring the present case within the scope of the expression assembly or like project used in the Explanation. The Authority does not desire to express any final opinion on this contention raised on behalf of the applicant and would leave it open to the applicant to raise such contention in other proceedings that may arise later for two reasons. In the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of tax deduction is specified in the Finance Act and the Act provides two situations in which that rate can be got reduced. One is under section 195(2), where the person who pays the amounts files an application and obtains a certificate from the Assessing Officer that tax need not be deducted on the gross amounts paid but could be restricted to a smaller portion of the payments made. Such an application has been filed by one of the Indian companies in the present case but its subject-matter is not, and cannot be, the subject-matter of adjudication here. The second is the course prescribed under section 195(3), under which it is open to a non-resident receiving payments from a resident to obtain from the Assessing Officer a certificate that the payment can be made without making any tax deduction at source. This he can do only if he satisfies the Assessing Officer that the amount of tax payable by the non-resident recipient on the said receipts will be nil. But that is not the case here, even of the applicant. This being so, tax deduction at source has to be done under section 195(1) read with the provisions of the Finance Act, 1995. The Authority can only direct the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arning those receipts and can be called upon to pay tax only at the rate of 46 per cent. of the net income that is applicable to domestic companies under the Finance Act. The levy of a higher tax or the levy of a tax on gross payments instead of net payments would be discriminatory and contravene the provisions of article 26. The Authority would like to express no opinion on this contention either. Once again, it should be pointed out that the question before the Authority is one of the rate of tax deduction. Whether the tax liability sought to be imposed on the applicant is in any way discriminatory can be resolved only after the assessment is made and the tax payable by it is determined. This can be done only after the applicant-company files its return and takes up its stand on this issue before the Assessing Officer. It is open to the applicantcompany to contend at that stage that though the tax might have been deducted at source at a rate of 30 per cent. on the gross payment received by it, the assessment should be different, whether because the receipts fall outside the purview of the Explanation to section 9(1)(vii) or because the levy of tax on the gross receipts or at a hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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