Tribunal allows appeal, remands case to determine tax liability for engineers under Double Taxation Avoidance Agreement

The Tribunal set aside the disallowance made by the Assessing Officer for non-deduction of tax at source under section 195 of the Income-tax Act, 1961. The Tribunal remanded the case to the CIT(A) to determine the individual duration of stay of the engineers and assess if their income was chargeable under Article 15 of the Double Taxation Avoidance Agreement between India and Finland. The appeal was allowed for statistical purposes, granting the assessee a further opportunity for a hearing in the remanded proceedings.

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Issues Involved:
1. Confirmation of disallowance made by the Assessing Officer (AO) for non-deduction of tax at source under section 195 of the Income-tax Act, 1961.
2. Genuineness of the agreement between the assessee and International Project Services Oy (IPS).
3. Applicability of Article 13 and Article 15 of the Double Taxation Avoidance Agreement (DTAA) between India and Finland.

Detailed Analysis:

1. Confirmation of Disallowance for Non-Deduction of Tax at Source:

The primary issue in the appeal is whether the disallowance of Rs. 1.92 crore under section 40(a)(i) of the Income-tax Act, 1961, for non-deduction of tax at source, was justified. The assessee claimed that the amount paid to IPS was not chargeable to tax in India under Article 13 of the DTAA between India and Finland. However, the AO held that the amount was chargeable to tax as it constituted 'fees for technical services' under section 9(1)(vii) of the Act. The AO disallowed the deduction under section 40(a)(i) due to the failure to deduct tax at source.

2. Genuineness of the Agreement with IPS:

The CIT(A) questioned the authenticity of the agreement between the assessee and IPS. The agreement, dated 1.11.2008, was found to be on plain paper, with the first two pages unsigned and lacking any seal or stamp. The CIT(A) also noted inconsistencies, such as the agreement with IPS being dated before the agreement with Sterlite (21.11.2008). The assessee failed to produce the original agreement, weekly time sheets, or any correspondence with IPS, leading the CIT(A) to conclude that the agreement was not genuine and was a camouflage to defraud the Revenue.

3. Applicability of Article 13 and Article 15 of the DTAA:

Article 13 - Fees for Technical Services:

Article 13 of the DTAA deals with 'Royalties and fees for technical services.' It defines 'fees for technical services' as payments for rendering technical or consultancy services that 'make available' technical knowledge, skill, or know-how to the payer. The Tribunal noted that the services provided by the engineers from Finland did not 'make available' any technical knowledge to the assessee or Sterlite for future use. Therefore, the payments did not fall under the definition of 'fees for technical services' in Article 13.

Article 15 - Independent Personal Services:

The CIT(A) held that the services rendered by the five engineers from Finland fell under 'Independent personal services' as defined in Article 15 of the DTAA. Article 15 covers professional services or other independent activities, including those of engineers. The CIT(A) found that the engineers were present in India for more than 90 days, making their income chargeable to tax in India. The Tribunal agreed with the CIT(A) that the services rendered fell under Article 15, not Article 13, due to the exclusion clause in Article 13(5)(e).

Remand for Further Examination:

The Tribunal noted that the CIT(A) considered the total period of stay of all five engineers collectively, rather than individually. The Tribunal remanded the matter to the CIT(A) to ascertain the individual duration of stay of each engineer and determine if they met the 90-day threshold or had a fixed base in India. The Tribunal directed the CIT(A) to decide the issue of disallowance under section 40(a)(i) after this examination.

Conclusion:

The Tribunal set aside the impugned order and remitted the matter to the CIT(A) for further examination of the duration of stay of the engineers and the applicability of Article 15. The appeal was allowed for statistical purposes, and the assessee was granted a reasonable opportunity of hearing in the remanded proceedings.

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