TaxTMI 
TaxTMI 
2003 (7) TMI 649
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....t whereas no tax was really required to be deducted at source from the remittance in question. Briefly, the facts : CESC Limited, also known as Calcutta Electricity Supply Corporation and hereinafter referred to as the "assessee tax deductor", is an Indian company engaged in the business of generation and distribution of electricity. This company sponsored, jointly with Rolls Royce Plc. of UK, setting up of a coal fire thermal power plant on Balagarh Island, near Kolkata. In addition to these two sponsorors, Asian Development Bank (ADB), Commonwealth Development Corporation (CDC) and International Finance Corporation (IFC) and certain Indian investors like Industrial Credit and Investment Corporation of India Ltd. (ICICI) were to hold the equity in the project company. It was in this backdrop of facts that one M/s. Mott Ewbank Preece, a unit of Mott McDonald Limited, (hereinafter referred to as "MEP") was appointed as "technical advisor" to the financial institutions. We may mention that the expression "financial institution" collectively referred to as Asian Development Bank (ADB), Commonwealth Development Corporation (CDC), Industrial Credit and Investment Corporation of India....
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....ioner. The Commissioner, being of the view that the above receipt in the hands of MEP was taxable at 20 per cent., initiated revision proceedings under section 263 on January 21, 1998. After giving an opportunity of hearing to the assessee and after taking into account the assessee's objection to the proposed revision, the learned Commissioner concluded as follows : "The payment of fees for such services is well within the scope of 'fees for technical services' and therefore taxable under the Double Taxation Avoidance Agreement and the Indian Income-tax Act, 1961. Further, the rate prescribed as per Double Taxation Avoidance Agreement between India and U.K. is 20 percent In view of this position, the Assessing Officer has to adopt the rate of 20 percent for deducting the tax at source. The order under section 195 deducting tax at 5 percent is, therefore, erroneous and prejudicial to the interests of the Revenue. I, accordingly, set aside the order under section 195 dated December 6, 1995 and direct the Assessing Officer to pass an order in conformity with the provisions of the Double Taxation Avoidance Agreement and the Income-tax Act, 1961 as discussed above." Aggrieved by t....
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....provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.' In our view, the circular reflected the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the general principles of taxation applicable to the Contracting States; otherwise, the Double Taxation Avoidance Agreement will have no meaning at all." We will, therefore, take up taxability of impugned payments to the MEP, in the light of the provisions in the applicable India-UK Double Taxation Avoidance Agreement. Let us first take a look at the scope of expression "fees for technical services" so far as the applicable India-UK Double Taxation Avoidance Agreement is c....
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.... '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 : . . . . (b) make available technical knowledge, experience, skill, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design." In the protocol note attached to and forming part of the aforesaid Double Taxation Avoidance Agreement, the Government of India has confirmed that memorandum of understanding between India and USA with regard to the interpretation of article 12 (Royalties and fees for included services) also represents the views of the Indian Government. This memorandum, inter alia, provides as follows : "Paragraph 4(b) of article 12 refers, to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, n....
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.... later Double Taxation Avoidance Agreement, it is to be held that the clause so adopted in the later Double Taxation Avoidance Agreement will also normally have the same meaning as assigned to that clause. We, therefore, find that it is a fairly settled position that consideration for rendering of technical services, as is the thrust of Explanation 2 to section 9(1)(vii) of the Act and definition of "fees for technical services" as adopted in most of the Double Taxation Avoidance Agreements that India has entered into with various countries, is materially distinct from "consideration for technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design to such person" as is the expression used in India UK and India USA Double Taxation Avoidance Agreements. We may also mention that this paradigm shift in the definition of the "fees for technical services", so far as article 13(4)(c) of the India-UK Double Taxation Avoidance Agreement is concerned, is a conscious departure from the traditional model which repre....
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.... the technology available to the recipient of technical services", as is appropriately summed up in protocol to India-USA Double Taxation Avoidance Agreement, "generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology." We are in considered agreement with the views so expressed in the protocol to India-USA Double Taxation Avoidance Agreement which, as we have mentioned earlier, also represents views of the Government of India on this subject. It takes us to the key question as to whether, on the facts of the case before us, it could be said that payment to MEP was in consideration for the rendering of any technical or consultancy services which "made available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design". Let us now take a look as to what were the services being rendered by MEP and to whom were these services rendered. As per article 1(c) of the agreement appointing MEP as "technical advisor" to the "financial institutions" (also referred to as "the independent engineer" and "engineer" in the ag....
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....oject, and its economic viability ; (iii) visit the power purchaser WBSEB and discuss and comment on the reasonableness of schedule and arrangements for construction of the inter-connection with WBSEB, adequacy of the protective devices in the plant configuration, viability of proposed metering system, plant dispatch arrangement, transmission line load flows by season, and overall system compatibility with the proposed plant ; (iv) review of turnkey contractor's scope of work and corresponding pricing estimate methodologies for the three contract and the Rolls Royce parental guarantee which comprises the turnkey contract arrangements ; (v) review of the proposed arrangements for the initial supply of coal from Coal India Limited ; (vi) review of operation and maintenance agreement and the owner's O & M plan for completeness and consistency with the requirements of all other project agreements and to ensure that the responsibilities for O & M are clearly assigned and reasonable ; (vii) review of the environmental impact agreement ; (viii) review of technical parameters and assumptions that are significant to the projected financial performance of the project ; (ix) report on any oth....
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....purpose of article 13(4)(c) of the India-UK Double Taxation Avoidance Agreement, services should not only be technical in nature but these services should make available the technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. In our considered view, therefore, the Revenue's case clearly fails on the second limb of this test. As we have stated earlier, it is not even Revenue's case, and rightly so, that the services rendered by MEP are covered by clauses (a) and (b) of article 13(4). We are, therefore, of the considered view that the payment for services rendered by MEP cannot be said to be covered by the meaning of "fees for technical services" within the meaning of article 13(4) of the India-UK Double Taxation Avoidance Agreement. In the light of these discussions, we are of the considered view that since the payment made by the assessee tax deductor, to M/s. Mott Ewbank Preece (MEP) was not in the nature of "payment of fees for technical services" under article 13(4) of the Double Taxation Avoidance Agreement and since M/s. Mott Ewbank Preece admittedly did not have any permanent est....
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....ent whereas the assessee tax deductor did not have any liability to deduct any withholding taxes since the income embedded in payments to MEP was not exigible to tax in India, we are also of the view that the no objection certificate in question was not at all prejudicial to the interests of the Revenue because the Revenue's interests were not adversely affected, in any manner whatsoever, by the aforesaid no objection certificate. We find that not only that issuance of the aforesaid no-objection certificate did not result in any loss of revenue, it did not even prejudice any interests of the Revenue. Therefore, the conditions for invoking section 263 of the Act, as elaborated by the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, were not satisfied. It leads us to the conclusion that the facts and circumstances of the case did not warrant or justify the Commissioner's exercise of powers under section 263. Accordingly, the learned Commissioner did err in assuming jurisdiction under section 263 on the facts of this case. We, therefore, deem it fit and proper to cancel the impugned order passed by the learned Commissioner. We order accordingl....
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....ng tax at source. The order under section 195 deducting tax at 5 percent is therefore erroneous and prejudicial to the interests of the Revenue." Exercise of power given under section 263 of the Income-tax Act is dependent upon certain conditions as mentioned in the section. It is true that exercise of power is dependent upon the consideration by the Commissioner but consideration by the Commissioner must be based on objective conditions laid down in section 263 of the Act. When powers are conferred on the statutory authorities to exercise the same when "they are satisfied" or when "it appears to them" or when "in their opinion" or if they consider that "certain state of affairs exist" or when powers enable the statutory authorities to take such action as they think fit in relation to a subject-matter the Tribunal would not readily differ to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated where reasonable conduct is required the criterion of reasonableness is not subjective but objective. The onus of establishing unreasonableness, however, rests upon the perso....
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....e to be made such enquiry as it deems necessary in order to find out if any order passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. After examining the record and after making or causing to be made an enquiry, if he considers the order to be erroneous, then he can pass the order thereon as the circumstances of the case justify. In this connection reliance may be placed on the judgment of the apex court in the case of CIT v. Shree Manjunathesware Packing Products and Camphor Works [1998] 231 ITR 53. The only limitation on the power of the Commissioner is that he must have some materials which would enable him to form a prima facie opinion that the order passed by the Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. Once the Commissioner comes to the conclusion on the basis of the material that the order of the officer is erroneous and prejudicial to the interests of the Revenue the Commissioner is empowered to pass an order as the circumstances of the case may warrant. The Commissioner is empowered to cancel the assessment and direct a fresh assessment. In the instant case, we have noticed....
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....the "CESC Ltd.") to remit a sum of pound sterling 52,000 to Mott Ewbank Preece, U.K., on deducting income-tax at 5 percent The relevant facts of this case are briefly stated as under even at the cost of repetition for coherence and ready reference. The State Government of West Bengal had marked a site at Balagarh island in the river Hooghly, 70 kms. North of Kolkata for building a Coal Fired Thermal Power Plant for power generation. Subsequently in an effort to attract private sector investment into power generation, the State Govt. invited CESC Ltd. to develop the proposed site as an independent power project of ultimate capacity of 1,500 Mega Watt (MW). The project was sponsored by CESC Ltd. from India and Rolls Royce Plc. of U.K. In addition to the sponsors, Asian Development Bank (hereinafter called "ADB"), Commonwealth Development Corporation (hereinafter called "CDC"), International Finance Corporation (hereinafter called "IFC") and Indian investors were to hold equity in the project company termed as Balagarh Power Co. Ltd. (hereinafter called "BPCL"). The project cost was estimated at US Dollar 752 Million. IFC was coordinator in the said project. M/s. Mott Ewbank Preece....
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.... Officer for issue of no objection certificate, the assessee had indicated the purpose of payment as "fee for personal services". The Commissioner of Income-tax issued a notice under section 263 to the assessee to show-cause as to why the order dated December 6, 1995, passed by the Assessing Officer authorizing remittance to MEP after deduction of tax at 5 percent may not be set aside as being erroneous and prejudicial to the interests of the Revenue as the actual rate of tax deductible in respect of the said payment was at 20 percent The notice issued by the Commissioner of Income-tax is placed at page-20 of the paper book. The assessee objected to the proposed action by virtue of letter dated February 16, 1998 followed by a letter dated February 17, 1998. These letters are placed at pages 21 to 32 of the paper book. The Commissioner of Income-tax, however, overruled the objection raised by the assessee and passed an order dated February 27, 1998 under section 263 holding that the authorization vide order dated December 6, 1995 of the Assessing Officer was erroneous and prejudicial to the interests of the Revenue and that the Assessing Officer was to deduct tax at source at 20 ....
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....63 by the Commissioner of Income-tax. Learned counsel further contended that the order of the Commissioner of Income-tax under section 263 is unsustainable in law in so far as the provisions of the Double Taxation Avoidance Agreement between India and U.K. [1994] 206 ITR (St.) 235 relating to the taxation of fee of the nature involved in this case are more favourable to the recipient than the provisions of the Income-tax Act, 1961. In such a situation, the provisions of the Double Taxation Avoidance Agreement override the provisions of the Income-tax Act, 1961. Reliance has been placed on the decision of the jurisdictional High Court in the case of CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal). Reference has also been made to the Central Board of Direct Taxes Circular No. 333 dated April 2, 1982 [1982] 137 ITR (St.) 1. It was conceded by the learned counsel for the assessee that as per the Explanation to section 9(1)(vii) of the Income-tax Act, 1961 the payment made to MEP would fall within the ambit of "income by way of fee for technical services". So, however, the payment not falling within the definition "fee for technical services" under the Double Taxation Avoidance ....
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.... to paragraph 4(b) of article 12 of the Double Taxation Avoidance Agreement between India and U.S.A. wherein it has been clarified that the technology will be considered made available when the person acquiring the service is enabled to apply the technology. It has also been claimed that the fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skill, etc., are made available to the person purchasing the service, within the meaning of paragraph-4(b). It has further been clarified that the use of a product which embodies technology shall, not per se be considered to make the technology available. My attention was invited to the agreement entered into between MEP and project developer and financiers. It was contended that the scope of the advice under the agreement was to identify the risks or issues which, if not corrected or mitigated, could result in the commercial failure of the project or losses to the lenders. It was contended that though MEP was to suggest alternative solutions for the consideration of the senior lenders and the project developers' its role was limited to reviewing ....
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....lenged by the assessee, the court could not interfere with such taxation but held that the technical fee in excess of 5 percent was not taxable. According to learned counsel, the ratio of the said decision of the Supreme Court squarely applies to the facts of the present case and that the assessee is well within its rights in challenging the order of the Commissioner of Income-tax under section 263 for imposing the tax at 20 percent on the ground that no tax at all is chargeable without affecting the levy of 5 percent It was accordingly, pleaded that the view expressed by the learned Accountant Member is correct in comparison to the view expressed by the learned Judicial Member. It has also been pointed out that the finding of the learned Judicial Member that any order which is prejudicial to the interests of the Revenue is erroneous and vice versa is contrary to the decision of the Supreme Court in the case of Malabar Industrial Co. Ltd. [2000] 243 ITR 83. Learned counsel further contends that the reliance by the learned Judicial Member on the decision of the Supreme Court in the case of CIT v. Shree Manjunathesware Packing Products & Camphor Works [1998] 231 ITR 53 is misplaced a....
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....onresident, the same is irrelevant. Section 5(2) is applicable in respect of the non-residents. Therefore, the same is reproduced hereunder for the sake of ready reference : "5.(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 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 India during such year. Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India." Section 9 of the Income-tax Act, 1961 provides the income deemed to accrue or arise in....
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....e-tax under this Act and income-tax in that country, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Explanation.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic co....
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.... "Subject : Conflict between the provisions of the Income-tax Act, 1961, and the provisions of the Double Taxation Avoidance Agreement-Clarification. It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961. 2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement. 3. Thus, where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Inco....
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....chnical 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 law of that State ; but if the beneficial owner of the royalties or fee for technical services is a resident of the other Contracting State, the fee so charged shall not exceed : (a) in the case of royalties within paragraph 3(a) of this article, and fees for technical services within paragraphs 4(a) and (c) of this article ; (i) during the first five years for which this Convention has effect ; (aa) 15 percent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and (bb) 20 percent of the gross amount of such royalties or fees for technical services in all other cases ; and (ii) during subsequent years, 15 percent of the gross amount of such royalties or fees for technical services ; and (b) in the case of ro....
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....on generally adopted in various Double Taxation Avoidance Agreements with various other countries. The definition adopted in this case is in pari materia with the definition adopted in the DTAA between India and U.S.A. as reported in [1991] 187 ITR (St.) 102]. Under the DTAA between India and U.S.A., article 12(4) defines "fees for included services" to mean 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, knowhow or processes or consist of the development and transfer of a technical plan or technical design." It is thus observed that the definition of "fees for included services" under the DTAA between India and U.S.A. under article 12(4), para. (b) and the definition of "fee for technical services" provided under the DTAA between India and U.K. under article 13(4), para. (c) are in pari materia....
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....or included services. The services are of a technical or consultancy nature ; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes. Example (5) : Facts : An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company's wares. The company wants to modify its software to permit the salesmen to assess the company's central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services? Analysis : The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer programme) which it has developed. Example (6) : Facts : An Indian vegetable oil manufacturing company wants to....
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....he U.S.A. firm had sent experts to India to show engineers of the Indian company how to produce the extra-strong wallboard. Since the Indian company was able to apply the technology, the payment for the services would fall within the ambit of technical knowledge, experience, skill, etc. having been made available. In example No. 5, the U.S.A. company has modified the software for the Indian company. The services provided are purely technical services and the technical plan is transferred to the Indian company. Thus, the services provided fall within the definition of "fees for included services". In example No. 6 the U.S.A. company had trained the employees of the Indian company in applying the formula for producing cholesterol-free oil. Thus the technical knowledge and skill is made available to the Indian company which falls within the definition of "fees for included services". In example No. 7, the consultancy services are involved in the use of substantial technical skill and expertise which was provided by the American company. So, however, there was no scope for transferring any technical experience, knowledge or skill or technical plan or design to the Indian compa....
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....ions of the DTAA between India and U.S.A. earlier must be held to have the same meaning as explained by the Government of India and agreed by the Government of U.S.A. In the light of the above explanation relating to the meaning of "fee for technical services" as understood by the Govt. of India and the Govt. of U.S.A., it will be relevant to examine as to whether the services rendered by the MEP fall within the ambit of the definition of "fees for technical services" envisaged under article 13(4)(c) of the DTAA between India and U.K. In this connection, the scope of work of MEP is crucial for determination of the issue. As per the agreement between the borrower and the financiers on the one part and the MEP on the other part, the scope of work is described as under : "Scope of work Scope of work for the technical adviser describes the duties to be undertaken for Phase I of the work which are as follows : Phase I : Technical appraisal of the project for financial institutions to be made before financial cost in accordance with the Scope of Work outlined in the Terms of Reference set out in Appendix A. Subsequently, on appointment to undertake the Phase II works, the dut....
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....ruction phase periodic site and factory visits to ensure the developer's project management team is adequately protecting the lender's interest ; witnessing site performance and efficiency tests ; and certifying when project provisional and final completion is achieved." The terms of reference also provided for preparation of the reports by the engineer. The report is required to be related to unresolved issues and asserted risks identified by the engineers. When the scope of the work of MEP described above is considered in the light of the definition of "fees for technical services" read with the explanatory memorandum relating to the similar provisions under the DTAA between India and USA, there appears to be a blurred picture at the first sight. So, however, on a careful consideration it is observed that there is specific assertion in the terms of reference incorporated in the agreement to the effect that the engineers' role is that of reviewing and opining rather than designing and directing the project. In the agreement it is provided that in the case of any risks or issues which are required to be corrected or mitigated, the Engineers would suggest alternative solutions....
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.... as no prejudice is caused to the Revenue as a result of erroneous order of the Assessing Officer. The order under section 263 thus deserves to be set aside. I, therefore, agree with the learned Accountant Member and as a result of this order, the order of the Commissioner of Income-tax under section 263 is liable to be set aside. Before winding up, I consider it necessary to deal with another aspect of the case raised during the course of hearing of the appeal. As pointed out elsewhere in this order, the assessee had filed an application to the Assessing Officer asking for no objection certificate for remittance of 52,000 sterling pound to MEP without deduction of tax. The nature of services referred to in the application was admittedly fee for personal services. The Assessing Officer by an order under section 195 had authorized remittance after deduction of tax at 5 per cent.. The order of the Assessing Officer was not challenged by the assessee by way of an appeal. Thus, a pertinent question that arises for determination is as to whether in these circumstances it was open to the assessee to challenge the said order of the Assessing Officer in the proceedings under section 263....