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TMI Blog2005 (6) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... are chargeable to tax in India under section 9(1)(vii) of the Act. Accordingly the assessee was required to deduct tax as required under section 195 of the Act. The assessee having failed to deduct such tax under section 195 was treated as the assesseein-default under section 201 of the Act. Facts 3. The appellant is in the process of setting up a power plant at Toranagallu, Bellary District, Karnataka. The appellant entered into an agreement dated 20-9-1995 with REOL, a company incorporated in USA for setting up the said power plant. The agreement provided thus: "Whereas the Employer (Jindal Tractebal Power Company Limited - JTPCL) requires that certain Scope of Supply should be provided and executed by the Contractor (Raytheon-Ebasco Overseas Limited - REOL) namely offshore equipment supply and related services as more particularly described in Schedule 3 setting out the Scope of Supply and has appointed to act as the Engineer, Tata Consulting Engineers for the purposes thereof and has accepted a Tender by the Contractor for the provision and execution of such Scope of Supply in the fixed lump sum amount [which shall not be subject to any adjustment (except in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax deducted and paid to the Government. 4. Learned CIT(A) considered the relevant orders of Assessing Officer as well as the submission by learned counsel for assessee. She also perused the agreement between the assessee and REOL. She concluded that since the services have been utilized for a business situated in India, the payment of technical services is taxable in India as provided under section 9(1)(vii) of the Act. Section 9(1)(vii) will apply regardless of the fact that there is no business connection between the non-resident and Indian Enterprise. She also perused the provision of Double Tax Avoidance Agreement (DTAA) with USA. During the appellate proceedings, learned CIT(A) asked certain details relating to project cost, cost of machinery, cost of erection work, cost of supervision charges and amount of customs duty paid. The appellant filed reply dated 18-1-1999. Learned CIT(A) observed that the questions were answered in vague manner. Learned CIT(A) in this regard observed thus: "The appellant filed a reply dated 18-1-1999 vide which each of the questions were answered in a vague manner. The earlier cost of the project vis-a-vis REOL amounted to US $ 77,395,000. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assembly, mining or like projects undertaken by the recipients. Thus though the amount paid is 'fees for technical services' the same is outside the scope of Explanation 2 to section 9(1)(vii). For this proposition he relied upon the following decisions: (i) ITO v. National Mineral Development Corpn. Ltd. [1992] 44 TTJ (Hyd.) 8, (ii) CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459 (Mad.), (iii) CIT v. Mitsui Engg. Ship Building Co. Ltd. [2003] 259 ITR 248 (Delhi), (iv) CIT v. Sundwiger Emfg. Co. [2003] 262 ITR 110 (AP), (v) CIT v. Energomach Exports [1998] 232 ITR 448 (Kar.). 5.1 Shri Velapalli further submitted that even if the amount is treated as chargeable to tax in India under section 9(1)(vii), as per provision of DTAA between India and USA, the amount is not chargeable to tax in India. If the amount under DTAA is not chargeable to tax in India, the provision of DTAA will override the provision of the Income-tax Act. Hence the assessee is not required to deduct tax under REOL. For this proposition he relied upon the following decisions: (i) Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) (ii) CIT v. P.V.A.L Kulandagan Chettiar [2004] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection to your engaging the services of technicians from M/s. Raytheon Ebasco Overseas Ltd. USA for a period from 20-9-1995 to 20-7-1998 on the terms advised to us provided they come to India on valid employment/business/entry visa/self, deputed to India. 2. Please note that our approval for meeting the expenses should not be construed as approval for tax exemption for which purpose if required, you may kindly approach the concerned authorities. 3. Please arrange to deposit with RBI or SBI 5 per cent cess under the Head of Account "0045-Other Taxes and Duties on Commodities and Services - 198 - Receipt under Research and Development Cess Act, 1986" on all payments made in connection with the deputation of technical personnel to India, including payments made locally in Indian Rupees towards their passage fare, local living expenses etc. as per Research and Development Cess Act, 1986. The provision would be applicable if foreign technicians are deputed to India. 4. This approval is not valid if the foreign national mentioned above come to India without valid employment/business/entry visa. You are advised to approach Ministry of Home Affairs for clearance if the foreign natio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to REOL for the services. As and when payment is to be released, we will have to approach RBI for approval with the documents listed in the RBI's letter dated 27-3-1996. You may refer to the RBI's letter and ensure that all the documents are made available to us along with your monthly bills, so that there will be no delay in obtaining RBI's approval. As can be seen from RBI's letter dated 27-3-1996, one of the pre-conditions for RBI approval is NOC from Income-tax authorities. The Income-tax authorities will issue NOC after being satisfied that the tax deduction is in order. At that stage, if they ask for any clarification, we will revert to you. As an alternative, we can apply to the Income-tax Department under section 195(2) of the Income-tax Act or you can apply to the department under section 195(3) of the Act, for clarification and confirmation about the income which is subject to deduction of tax. It will be better if you make the application under section 195(3), as you will be in a better position to technically convince the income-tax department as to how out of the total amount of US $ 28,270,000 payable for services, only US $ 4,721,132 is subject to withholding tax." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate of Kerala [1957] 8 STC 561 wherein at pages 573 and 574, Hon'ble Supreme Court Observed thus: "Reliance was placed in support of this position on the observations of this Court in Messrs. Chatturam Horilram Ltd. CIT, Bihar Orissa: 'As has been pointed out by the Federal Court in Chatturam v. CIT, Bihar (quoting from the judgment of Lord Dunedin in Whitney v. Commissioners of Inland Revenue) there are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex-hypothesis, has already been fixed. But assessment particularizes the exact sum which a persori liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.' The appellant, however, forgets that the three stages in the imposition of a tax which are laid down here predicate, in the first instance, a declaration of liability as the starting point. If there is a liability to tax, imposed under the terms of the taxing statute, then follow the provisions in regard to the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct from entire sum paid or credited and not merely income component of the sum - No right or duty to determine whether part of sum paid constitutes income of contractor - Income-tax Act, 1961, section 194C(1)." 6.2 Shri Indrakumar further submitted that for assessment year 1998-99, the Assessing Officer has directed the assessee to deduct the sum. The assessee has deducted the sum. The assessee has also issued necessary certificate for deduction of tax at source. Once the amount is deducted and paid to the credit of Government, it is for the payee to claim the credit in its assessment under the Act and the payer cannot demand refund of taxes deducted. The certificate of deduction is placed at page 407 of the paper book filed by the assessee. The appellant has given details of services rendered by REOL which in the terms of appellant himself is for following: (i) Providing engineering and design work relating to conceptualization of the power plant. (ii) Providing material based on overall design including specific requirements of the power plant. (iii) Providing quotations based on specifications developed by REOL for the power plant. (iv) Supplying drawing review to enab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or technical design is not made available to the assessee. (ii) Even if it is chargeable to tax under Article 12(4), yet under Article 12(5), such fees for included services does not include amount paid for services which are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property. Since the services are inextricable linked to the sale of property the same is not chargeable to tax by invoking Article 12(4) of the Double Taxation Avoidance Agreement. 7. We have heard both the counsels at length. We have also considered the facts, arguments advanced, the material in the paper book to which our attention was drawn as well as case laws cited. In this case, the assessee is held as assessee-in-default under section 201 for failure to deduct tax as required under section 195 of the Act. Section 195 provides as under: "195.(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income is chargeable to tax in India but the section 9(1)(vii) of the Act being the fees for technical services. Explanation 2 to section 9(1)(vii) defines the words "fees for technical services". The relevant section and Explanation thereto provides as under: "9.(1) The following incomes shall be deemed to accrue or arise in India - (i) to (vi) (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before 1-4-1976, and approved by the Central Government. Explanation 1 : For the purposes of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this article, 10 per cent of the gross amount of the royalties or fees for included services. (3) .. .. .. (4) For purposes of this article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge; experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. (5) Notwithstanding paragraph 4, "fees for included services" does not include amounts paid: (a) for ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source outside India. Hence at first instance the amount is chargeable as fees for technical services under section 9(1)(vii) of the Act. 7.3 We shall now examine whether the provision of DTAA will take out the income received by the non-resident from the chargeability provision. Article 12 of DTAA between India and USA provides that fees for included services arising in any Contracting State and paid to a resident of other Contracting State may also be taxed in the Contracting State in which they arise according to the laws of that State at the rates prescribed in Article 12(2) of the DTAA. Article 12(4) defines the words" Fees for included services". As per this clause, the payments for rendering technical services or consultancy services, if such services make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of technical plan or technical design can be charged to tax in India. In the present case it is seen that the payee REOL is one of the world leader in setting up the power plant based on corex gas. REOL was required to choose certain supplier and machinery and approve the machinery itself. The agreement also pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art up/ 16,959,856 590,202,989 7% Overall rsp. Total Contract 58,457,820 2,034,332,136 Price ---------------------------------------------------------- From the above it is clear that the technical services and start up/turnkey responsibility services is not only in respect of equipment supplied by REOL but its technical services is also to be applied to equipment supplied by other contractors including REOL. The services, therefore, cannot be considered as ancillary and subsidiary as well as inextricably and essentially linked to the sale of property by REaL alone. The technical services, start up services and turnkey responsibility services takes care of the entire project. The assessee was asked to furnish the declaration made before Customs authority while paying amount for technical services, start up services. These details were sought by learned CIT(A) as well as by this Bench during the course of hearing. The assessee was also asked to produce the invoices raised by REaL in respect of technical services, start up services. The assessee has not produced these details. The reason is best known to the assessee. In absence of these details, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case relied by learned counsel for assessee is CIT v. VMFC 260 ITR 110 (sic.). In the said case, the non-resident supplier had supplied the cutting and polishing machine and the employees of non-resident had come to India in connection with commissioning of the machine. The preamble to the contract was supply of capital equipment which stated that "inspection testing, road! rail worthy backing, sale, delivery and furnishing performance guarantee etc. In view of the terms of contract, Hon'ble High Court held that services rendered by experts and payments made towards same were part and parcel of same consideration and could not be severed and treated as business income. The expenses of technicians could not be viewed in isolation from main contract and hence it was held that the payment made on daily basis was part and parcel of construction and purchase of machinery. We are unable to appreciate the relevance of said decision to the facts of present case. The payee REaL has not supplied the entire power plant along with technical services but has merely procured certain machineries from different manufacturers. The REOL has been instrumental in conceptualizing the power plant, rende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and held that the assessee-company was not liable to pay tax. The Tribunal affirmed the order of the appellate authority. On a reference: Held, that the assessee-company (foreign company) had no share or interest in the management of the Indian company. The assessee-company had sold the machinery to the Indian company and, for installation of the said machinery and plant supplied technical personnel and technical services until the machinery started functioning and production. Thereafter, the services of the technical personnel in the Indian company ceased and the Indian company was not responsible to the assessee-company. Except to complete the terms of the agreement entered into for the purchase of machinery, there was no other interest of the assessee-company in the Indian company. Therefore, it could not be said that there was any business connection between the assessee-company and the Indian company nor that the salary and other expenses paid to the technical personnel of the assessee-company amounted to receipt arising from a business connection." From the aforesaid decision, it is seen that even though the assessee-company has contended that the amount paid will be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny technical services. The present case is not for supplying any engineering drawings and designs but rendering technical services and start up services for power plant as a whole and not specific to any machinery. In the case before Hon'ble Bangalore Benches of the Tribunal, Lucent Technologies Hindustan Ltd.'s case, the payment was treated as royalty in respect of sale of computer equipment. The case was not in respect of fees for technical services and hence the same cannot be applied to the present set of facts. The decision of Hon'ble Mumbai Bench of ITAT in the case of UHDE Gmbh was with reference to having a permanent establishment in India When the amount is considered as fees for technical services under section 9(1)(vii) of the Act, the income is deemed to accrue or arise in India whether or not the payee has permanent establishment in India. Thus the said case will also have no application to the case before us. In the case before ITAT, Mumbaiin the case of Maharashtra State Electricity Board, the Tribunal held that Article 15 of DTAA between India and UK in respect of provision of professional services will override the provision of Article 13 of DTAA relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is not disputing the liability to deduct the same as deductible under section 195. 9.3 Shri Indrakumar relied upon the decision of Hon'ble Karnataka High Court in AEG Aktiengesllschaft's case. In the said case it was held thus: "Held, that technical services rendered vary depending upon the nature of the work undertaken and the nature of the services received. If the parties have treated certain services as technical services and remuneration has been fixed for the said services, it is not open to the assessee, at a later stage to contend that the remuneration received was not by way of 'fees for technical services' rendered. In the agreement entered into between the assessee and M, 'engineering fee' was separately set out. If all the authorities below had, on consideration of the claim of the assessee and reading of the agreement as a whole, recorded a finding that the remuneration received by the assessee was by way of 'fees for technical services' rendered there was no justification to take a different view. The provision contained in clause (6) of Article VII-A of the amended Double Taxation Avoidance Agreement entered Jindal into between India and Germany, is simil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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