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TMI Blog2022 (10) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered make available technical knowledge, experience, skill, know-how, or processes or consists of the development and transfer of a technical plan or technical design. With regard to payments made by the assessee to Link List Ltd., UAE., we notice that as per the DTAA between India and UAE, there is no specific clause with regard to the taxability of fees for technical services, and therefore in our considered view the nature of income would take the character of Business Income which can be taxed only when there is a permanent establishment (PE) for the recipient of the payment. Considering the nature of service rendered by the vendors to the assessee, there is no use of technology in the services provided. The vendor is not employing any technology but is providing manpower service to the assessee in order to enable the assessee to meet the project commitments given to the customers. Though the deployed employees may possess the technical knowledge to carry out the services to the customers, no technology is made available to the assessee. Following the ratio laid down in the case of CIT v. De Beers India Minerals (P.) Ltd [ 2012 (5) TMI 191 - KARNATAKA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed u/s. 40(a)(i) 5. Aggrieved, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) gave partial relief to the assessee by deleting the disallowances made u/s. 14A and section 40(a)(i). The revenue is in appeal against the order of the CIT(Appeals). Disallowance u/s. 14A r.w. Rule 8D 6. The AO noticed during the course of assessment that the assessee has made certain investments the income from which is exempt from tax. The AO also noticed that the assessee has not worked out any disallowance towards income from investments exempt under the Act. The assessee submitted before the AO that during the year under consideration, it is not having any exempt income and therefore no disallowance u/s. 14A is warranted. However, the AO did not agree with the contention of the assessee and proceeded to invoke section 14A r.w. Rule 8D. In this regard, the AO relied on Circular No.5 / 2014 dated 11.2.2014 issued by the CBDT and also the decision of the ITAT, Kolkata in the case of M/s. Champion Commercial Co. Ltd. (ITA No.644/Kol/2012). 7. Before the CIT(Appeals), in addition to the submission that there is no exempt income earned, the assessee also submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f PCIT v. Era Infrastructure India Ltd. (supra) held as follows:- 5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: 4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read: Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India. The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are it is declared or for the removal of doubts .' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:- 22. Second, a retrospective provision in a tax act which is for the removal of doubts cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 2014-15 the assessee does not have any exempt income (page 2 and page 456 of paper book) and therefore applying the ratio laid down by the Hon ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra), we delete the addition made by the AO u/s. 14A for both the assessment years. Onsite project expenses without TDS disallowed u/s. 40(a)(i) 13. On verification of the financial statements of the assessee, the AO noticed that the asse has made payments towards certain onsite project expenses amounting to Rs.56,41,12,597towards reimbursement of salary expenses incurred outside India for the projects. The AO noted that these payments are made to Datamatics Solutions Inc. and Link List Ltd., where no TDS has been deducted at source. The assessee submitted before the AO that these companies mainly employ manpower services for the purpose to meet the objectives of clients. These companies do not impart any technical know-how, skill process or technical plan or design and therefore the amounts paid to these companies are neither fees for technical services (FTS) nor royalty. The AO rejected the contention of the assessee and concluded that the service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the financial year 2011-12 relevant to the Asst. Year 2012-13, the company was doing very well with the profit margin of about 30%. However, in the financial year 2012-13 relevant to the Asst. Year 2013-14, there has been a major setback due to mis-management by the CEO which lead to high attrition of Senior technical staff, Managers, etc leaving the company abruptly. Because of this, the implementation and technical support at the onsite client's places, got adversely impacted, consequently, the appellant could not execute. and complete the ongoing projects. The client's had stopped the payment related to the contract. ii. In order to keep the relationship with the ultimate clients; Tech Caliper Inc and Datassured Inc, intact and also to realize the payments for the work already completed, the appellant sought their help to find ways and means to complete the ongoing projects. Accordingly, the clients suggested some local vendors at their places (in USA in Dubai) who could source technical manpower to complete the unfinished projects of the appellant, to tide over the crisis. For this, the appellant has produced supporting e-mail correspondences with the end client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther correspondence exchanged between the end Clients with the appellant, establish the above beyond doubt. Therefore, it is not true that the appellant's own employees were deputed for the onsite work and the vendors Linklist and Datamatics, have only facilitated the said deployment. 8.3.9 It is also true that the services were rendered by both the overseas third party service providers (Linklist Ltd., and Datamatics Solutions) directly at the client's (TCI and DA) locations, without interaction with the appellant's staff and considering the same, it cannot be said that any technology was transferred to the appellant to fulfil the definition of making available clause. The employees of the appellant having been laid off/retrenched, there was no active/passive connect of the employees of the appellant with that of the so called manpower hired abroad through the vendors. Thus, it can be safely concluded in the absence of any such contact with the employees of the appellant, no institutional memory was created, which is a must for any sort of transfer of technology/ technical knowledge. It is also stated that the operations of the appellant were shut after concluding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the work as the deployment was for the untrained manpower hired from the local market abroad. 8.3.10 Considering the circumstantial evidence furnished, it is clear from the direct deployment of the Technical manpower engaged from the market and at the clients onsite (to get the work done), without any training or skill up-gradation, that the nature of the work to be 'simple and basic entry level needed for the implementation and maintenance tech support work'. Therefore, the assumption drawn by the AO that highly skilled Technology services were rendered by the manpower to the Appellant is incorrect. 16. Aggrieved the revenue is in appeal before the Tribunal. 17. We have considered the rival submissions and perused the material on record. The ground under which the AO is contending that TDS provisions are applicable to the payment made by the assessee to the vendors is that the manpower employed are doing highly technical job whereby the technical knowledge is made available to the assessee. The payments made by the assessee to Datamatics Solutions Inc., USA need to be analysed from the applicability of article 12 of the Double Taxation Avoidance Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion would be regarded as fee for technical/included services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 23. The agreement entered into between the assesses and the Fugro makes it clear that the objective of the survey will be to provide high quality, high resolution geophysical data suitable for selecting probable kimberlite targets. The assessees acknowledge the Fugro to be an expert in all aspects of the air borne survey and subsequent data processing. All operations, tests and calibrations have to be carefully undertaken to ensure the highest possible data quality and to meet or exceed the specifications described in the agreement. It is the responsibility of the Fugro to take the appropriate action to maintain the level of data quality. Survey areas are also mentioned in the agreement. The contract provides that all helicopter charges for the entire survey will be the responsibility and cost of the assessees. 24. The Fugro air borne services provides four varieties of applications of advanced geophysical mapping technologies. They are Electromagnetic, Aeromagnetic, Airborne Gamma-Ray Spectrometry, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following products: (1) Raw XYZ file for each block with header. (2) Final XYZ file for each block with header. (3) Digital plot files for the RTP and 3kHz Resistivity maps for each block. (4) Aircraft data for entire survey. Pseudocolour 3kHz resistively map for each block, Pseudo-sunshare RTP TMI map for each block;-. Acquisition and processing report. (Tests and Calibrations report), Analog rolls for the entire survey. 26. Thus, in terms of the contract entered into with Fugro, they have given the data, photographs and maps. But they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future. The Fugro has not made available the aforesaid technology with the aid of which they were able to collect the data, which was passed on to the assessees as a technical service. In other words, Fugro has rendered technical service to the assessees. They have not made available the technical knowledge with which they rendered technical service. There is no transmission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vii) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue. 28. Fugro is engaged in providing services relating to collection and processing of the data. The contract is for providing of services and not for supply of technical design or plan. Fugro compiles the data and processes them for error correction and delivers it to the assessees in a computer readable media. Using this raw input data provided by Fugro, the assessees using further process in software technology, which are not owned or provided by Fugro, generates a report to determine probable targets. The reports and maps are only additional mode of representation of data and it is not a technical plan or design as understood in law. Para 1.15 of the agreement entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of two years from the expiry of the licence or abandonment of operations or termination of the licencee, whichever is earlier. 30. It is because of the statutory obligation imposed on the licencee in the contract entered into between the assessees and Fugro, it is specifically provided in clause (15) that all information and data relating to any site on which any work or services are performed under the agreement shall belong exclusively to the assessees and its assigns and the contractor shall keep such information strictly confidential. All information recorded in digital and analog form and all products derived from information are the property of the assessees. The contractor agrees not to divulge any information to any person or organisation without the written permission of the assessees and only to be divulged to the assessee personnel who are specified by the assessees as appropriate persons to whom the contractor may provide information. Further clause (16) provides that the contractor shall not grant entry to any data site or aircraft to any person other than those authorised by the assessees and the contractor shall exercise all due care to preserve the integri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technicalservices as well. With FTS article or without FTS article, the income by way of fees of technicalservices continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technicalservices. 29. In view of the above discussions, in our considered view, even if the receipts in question are in the nature of fees for technicalservices in the hands of Afras UAE and GMS Thailand, these receipts are not taxable in the hands of these entities, in terms of the respective tax treaties, in India. It is only elementary that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, the provisions of this (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that the services rendered by third party vendors can be described as payroll services and in the invoices raised by the vendors the description is towards reimbursement of salaries of the manpower hired. Considering the nature of service rendered by the vendors to the assessee, there is no use of technology in the services provided. The vendor is not employing any technology but is providing manpower service to the assessee in order to enable the assessee to meet the project commitments given to the customers. Though the deployed employees may possess the technical knowledge to carry out the services to the customers, no technology is made available to the assessee. Therefore, following the ratio laid down by the jurisdictional High Court in the case of CIT v. De Beers India Minerals (P.) Ltd (supra), we hold that the assessee is not liable to deduct tax at source for the reimbursement of the salary cost made to the vendor Datamatics Solutions Inc., USA for deployment of manpower. Further the vendor Link List Ltd., UAE does not have a permanent establishment in India and therefor the impugned payments cannot be taxed in India and thereby no tax is deductible at source on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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