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TMI Blog2018 (8) TMI 1817X X X X Extracts X X X X X X X X Extracts X X X X ..... 0/- u/s 40(a)(i) with respect to payment made to Dr. U Thiele. Disallowance u/s 40(a)(i) - Payment made to Dr. Werner Stibal who is resident of Swiss Confederation who provided professional services to the assessee - Personal services in the nature of independent scientific services - Indo Swiss DTAA - Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State - HELD THAT:- According to Article 12 (5) (b) meaning of the Term fees For Technical Services specifically excludes income covered under Article 14 and 15 of the DTAA. Therefore, issue in this year is specifically covered in favour of the assessee by the decision of the coordinate bench in case of Graphite India [ 2002 (10) TMI 232 - ITAT CALCUTTA-C] wherein identical issue with respect to Indo US DTAA was in question. There are also similar condition in Indo Swiss DTAA in article 12 (5) (b) excluding professional services under article 14 and 15 of that DTAA. Therefore, it is apparent that the services are covered under Article 14 of the DTAA and not under Article 12 of DTAA. Further it is not the case of the revenue that the services provided by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as same falls under Article 14 of the DTAA. According to that same is not chargeable to tax in India. For similar reasons given thereunder we delete the disallowance - ITA No. 5083/Del/2014, ITA No. 5084, 5085, 5086/Del/2014 - - - Dated:- 23-8-2018 - SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For the Appellant : Shri P.C. Parwal, FCA For the Respondent : Shri Atiq Ahmed, Sr. DR ORDER PER PRASHANT MAHARISHI, A. M. 1. These are the four appeals filed by the assessee involving some commons issues for four years i.e. 2008-09 to 2011-12 and therefore, they are heard together and disposed of by this common order. 2. Firstly, we state the facts for Assessment Year 2008-09 and decide the issue and our decision would be applied to other subsequent years in appeals for subsequent three years on those grounds, whenever facts are similar 3. For Assessment Year 2008-09, assessee has preferred appeal against the order of the ld CIT (A)-XVII, New Delhi [The Ld CIT (A)] dated 26.06.20147. The Ld CIT (A) has dismissed appeal filed against the assessment order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment falls under the category of fees for technical services‟ u/s 9(1) (vii) of the Act as well as article 12 of The DTAA. He further stated that in the books of account the assessee itself has treated it as technical consultancy. According to him, the article 12 of the DTAA applies. He rejected that article 14 of DTAA cover the above activities as the services do not fall under the independent scientific, literary, artistic, educational or teaching activities. He therefore, held that the assessee should have deducted tax @ 10% of the above sum and therefore, disallowance u/s 40(a) (i) read with section 195 of the Act was made. The ld AO further relied upon the decision of Gujarat Narmada Valley Fertiliser Company Ltd Vs. ITO 2 ITD 515. He further held that similar payment was also disallowed for Assessment Year 2007-08. He further held that this year the assessee has taken a different argument that Dr. Thiele is a scientist and engaged in developing the new products. The ld AO rejected this argument also. Consequently, the assessment u/s 143(3) of the Act was passed at ₹ 54774410/- against the return income of the assessee of ₹ 54438260/- on 30.12.2010. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of SMS Demag (P) Ltd. vs. DCIT(supra) is not applicable. In view thereof we uphold the orders of lower authorities. This ground of the assessee is dismissed. 5.4.I shall now discuss Section 5 of the I. T. Act which talks of what the total income of a person who is a resident and non-resident is:- (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person; Or (b) accrues or arises or is deemed to accrue or arise to him in Inc I accrues or arises to him outside India during such year: Provided that, in the case of a person not ordinarily resident in India within the meaning of sub- s. (6) of s. 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration (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 subsection (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, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of this section shall apply accordingly. (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to an nonresident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by genera! or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. (3) Subject to rules made under sub-section (5) any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is required to be deducted at sources. b. He further submitted that Dr. Thiele does not have any fixed base in India and he has not stayed for 120 days or more in India as provided under Article 14 of DTAA, therefore, payment made to him is not subject to tax deduction at source as it is not chargeable to tax in India. c. It was further submitted that recipient was providing an independent scientific services‟ for development of the new products. Merely because the payment is made in pursuance of a technical agreement, it would not make any difference with respect to the nature of services. He further referred to the agreement entered into by the assessee and submitted that Dr. Theile would assist in enhancing the extra properties and better working of the products of the company. Hence, it is an independent scientific service. d. He further submitted that in Assessment Year 2007-08 the coordinate bench rejected the contention of the assessee on the ground that the assessee failed to demonstrate that services rendered by the recipient are independent scientific services, however he submitted that for the current year the assessee has produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no infirmity in the order passed by the lower authorities. 9. We have carefully considered the rival contentions and perused the orders of the lower authorities. Undisputedly, the assessee is engaged in the business of manufacturing of master batches and engineering plastic compounds. It paid ₹ 336150/- to Dr. Thiele an individual resident of Germany towards various services. The nature of the services provided is mentioned in agreement between the assessee and the service provider. The scope of work enlisted in Article 2 of the above agreement is as under:- 2. Scope of Work. 2.1 The Mono concentrates / tailor made master batches, to be developed and commercialized, will be such products which will enhance the extra properties, better workability of PES, PA and their compatibility with other fibers and will also include specifically, the following products (hereinafter referred to as New Products) are collected by PPL as desirable development targets: 2.1.1 CD Masterbatch 2.1.2 FR Masterbatch 2.1.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DTAA entered into by India and Germany and how the impugned income is treated therein. Claim of the assessee is that such income falls under Article 14 of the DTAA. According to provision of article 14 of DTAA independent personal services‟ are dealt with as below:- ARTICLE 14 INDEPENDENT PERSONAL SERVICES 1. Income derived by an individual who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that State except in the following circumstances when such income may also be taxed in the other Contracting State : (a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities, in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State ; or (b) if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 120 days in the relevant fiscal year; in that case, only so much of the income as is derived from his activities performed in that other State may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s‟ as per Article 14 of the DTAA. Such is not the case for this year as already mentioned. Assessee has pointed out exhaustive details to show that services provided by recipient of consideration falls in the category of independent scientific services‟. In view of the facts assessee has established in this year with conclusive evidences which are not controverted by revenue, it is established that Dr. Theile, a German Individual has provided professional services in the nature of Independent Scientific services‟ covered under article 14 of the DTAA. 13. The revenue is holding that services of the Dr. Theile are covered under article 12 of DTAA pertaining to royalty and fees for Technical Services‟ which is as under:- ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. 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. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. 14. According to Article 12 of the DTAA, if the Fees for Technical services‟ is arising in India but paid to resident of Germany than such Income may be taxed in Germany. However, if he is beneficial owner of FTS, then such Income may also be taxed in India and according to the laws of India but not more than 10 % of the Gross amount. In the present case, the characterization of Income of Dr. Thiele is correctly made as Fees for Technical se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Honorable High courts in CIT v. Copes Vulcan Inc. [1987] 167 ITR 884; [1987] 30 Taxmann 549, [2004] 267 ITR 209 (Kar) in AEG AKTIENGESLLSCHAFT v. COMMISSIONER OF INCOME-TAX. Furthermore, we also draw support from the Advance Ruling in Case of Dieter Eberhand Gustav Van Der Mark V CIT 235 ITR 698 (AAR) where it ruled that, if the applicant‟s case falls under a more beneficial provision, it would be futile to stretch the interpretation to bring it under some other provision of the treaty or the Income-tax Act. This position is too well established to require any further elaboration. In this Case AAR was rendering advance ruling in identical case where the issue of interpretation of Treaty between India and Germany was involved where in article 12 does not specifically exclude income covered article 14 of the DTAA. Further ld AR has relied up on the Decision of The coordinate benches in case of 86 ITD 384 in case of Graphite India and another decision in case of 73 Taxmann.com 108 where the issue involved was Indo US Tax Treaty, where the Article 12(5)(e) specifically excluded income covered under Independent personal Services, therefore, they do not apply to the facts before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest, dividend, management charges, remuneration for labour or personal services, or income from the operation of ships or aircrafts. In the instant case, the assessee carried on an industrial ‗project , but what the non-resident did, even on his own admission, was rendering consultancy services in connection with the industrial project of the assessee. Such consultancy services could not constitute an industrial activity, since such an activity anticipates manufacture or at least a distinct connection with the same on one‟s own. Any ancillary activity, much less of an advisory or assistance nature, cannot constitute industrial activity. Similarly, commerce envisages trading activity in the form of the purchase and sale of a commodity. Admittedly, the non-resident had not entered into any business activity with the assessee, or with anyone else. The absence of all these ingredients will thus lead to the conclusion, that the receipts of the non-resident through the assessee were not industrial or commercial profits. Thus, the receipts of the non-resident were clearly chargeable to tax and, consequently, the assessee was bound to deduct tax at source on the payments mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. In view of this, we hold that the payment made by the assessee to Dr. Thiele was chargeable to tax u/s 9(1)(vii) of the Act but by virtue of Article 14 of the DTAA income is chargeable to tax only in Germany. Therefore, assessee is not required to withhold any tax under section 195 of the Act and therefore, no disallowance u/s 40(a)(i) can be made. Therefore we reverse the orders of the lower authorities holding that impugned income of Non Resident individual is covered under Article 12 of the DTAA. Accordingly, ground No. 1 of the appeal of the assessee is allowed. 18. Now for Assessment Year 2009-10 the assessee has raised three grounds of appeals against the order of the ld CIT(A)-XVII, New Delhi dated 26.06.2014, however before us only two grounds, i.e. Ground No 1 and 3 are pressed before us. Ground No 1 related to the confirmation of Disallowance u/s 40 (a) (i) on failure to deduct tax at sources on professional service paid to Individual non Residents, Ground No 3 related to disallowance u/s 14 A of the Act. 19. The grounds of appeal are as under:- 1. The ld Commissioner of Income Tax (appeals) has erred on facts and in law in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to delete the disallowance of ₹ 268980/- u/s 40(a)(i) with respect to payment made to Dr. U Thiele. 22. The second issue involved in the same ground is with respect to disallowance u/s 40(a)(i) of ₹ 1082175/- made to Dr. Werner Stibal who is resident of Swiss Confederation who provided professional services to the assessee. The ld Assessing Officer noted that similar services were provided by the Swiss National and where there is specific Article 12 for fees for technical services it has to be considered in that Article only. Therefore, he rejected the claim of the assessee that the income of the foreign national falls under the Article 14 of DTAA and no tax is required to be deducted. The ld CIT(A) originally missed the issue and failed to decide on merit and subsequently he rectified his order on 08.08.2014 confirming the view of the ld Assessing Officer. 23. The ld AR repeated the same argument which were advanced before the ld lower authorities and the ld DR supported the order of the ld lower authorities. 24. We have carefully considered the rival contentions and perused the orders of the lower authorities. It is und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, any industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. For purposes of this Article the term fees for technical services means payments of any kind to any person in consideration for the rendering of any managerial, technical or consultancy services, including the provision of services by technical or other personnel. 5. Notwithstanding paragraph 4, fees for technical services does not include amounts paid: (a) for teaching in or by educational institutions; (b) for services covered by Article 14 or Article 15, as the case may be. 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in support of the assessee s contention that the impugned payment for consultancy fees is covered by the scope of expression independent personal services within meanings of Article 15 of the Indo US DTAA, and, of course, in support of revenue s contention, that the impugned payment is covered by the scope of fees for technical services termed as fees for included services within meanings of Article 12(4) of the same. On a careful analysis of the provisions of the Article 12, however, even this proposition seems to be somewhat fallacious inasmuch as in case the impugned payment falls within the scope of expression independent personal services within meanings of Article 15, the same shall automatically be out of ambit of Article 12(4) since, in view of the specific provisions of Article 12(5), notwithstanding the provisions of Article 12(4), fees for included services does not, inter alia, include amounts paid to any individual for independent personal services as defined in Article 15. In other words, when an amount paid to an individual, or for that purpose a firm of individuals, resident in the United States of America, is found to be covered by the scope of expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture were incurred by the assessee. The ld AO rejected the explanation of the assessee stating that the assessee is keeping consolidated accounts of its income and further the assessee is also using administrative, managerial and infrastructure set up for earning such income. He further held that assets of the company are also used by the assessee. Therefore, he held that component of interest of ₹ 234769/- and expenditure component of ₹ 94998/- totaling to ₹ 329767/- is disallowable u/s 14A of the Act. However, he wrongly disallowed ₹ 249178/- u/s 14A of the Act. The assessee contested the same before the ld CIT(A) stating that disallowance made by the ld AO is wrongly mentioned at ₹ 249178/- but actually disallowance is ₹ 329767/-. It further stated that there cannot be any disallowance because of interest holding that working capital borrowing cash credit limited and the assessee is having current asset of ₹ 43.52 crores against the cash credit utilised of only ₹ 4 crores, hence full cash credit account borrowings are used and tied up in current assets and not in exempt income earning investments. With respect to expenditure, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 234769/- on account of interest. With respect to the expenditure disallowance of ₹ 94998/- we find no force in the argument of ld AR and hence same is confirmed. Accordingly, out of total disallowance of ₹ 329767/- u/s 14A we uphold the disallowance of other expenses of ₹ 94998/- under Rule 8D (2) (iii) and delete the disallowance on account of indirect interest expense of ₹ 234769/- under rule 8D (2) (ii) read with section 14A of the Act. Accordingly, ground No. 3 of the appeal is partly allowed. 35. Accordingly, appeal of the assessee for Assessment Year 2009-10 is partly allowed. 36. For Assessment Year 2010-11 the assessee has filed appeal against the order of the ld CIT(A)-XVII, New Delhi dated 26.06.2014 wherein, the disallowance u/s 40(a)(i) of the Act of ₹ 1211667/- has been confirmed holding it to be payment made to Swiss National holding it to be covered under Article 12 of DTAA, whereas, claim of the assessee is that same is covered under Article 14 of the DTAA. Both parties confirmed that the facts and circumstances of the issue are identical to the facts of issue decided by us in appeal of the assessee for Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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