TaxTMI 
TaxTMI 
2011 (8) TMI 370
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.... in law in not applying the provisions of section 115A(1)(b)(BB) of the Income-tax Act, 1961 ("the Act") for determining the rate of tax applicable on fees for technical services. Fees for Technical Services v. Business Income: 1.2 The learned Assessing Officer as well as the DRP erred in fact and in law in holding that the income received by the Appellant from the Panvel Dabhol Pipeline ("PDPL") project was in the nature of business income and not fees for technical services. 1.3 The learned Assessing Officer as well as the DRP erred in fact and in law in holding that the Appellant had undertaken construction of pipeline project and therefore as per Explanation 2 to section 9(1)(vii) of the Act the income is not to be considered as fees for technical services despite the fact that the role of the Appellant was limited only to providing technical services. 1.4 The Assessing Officer as well as the DRP failed to appreciate the fact that the Appellant had not undertaken any construction, but had provided only technical know-how and therefore the nature of services rendered by the Appellant were in the nature of technical services and not construction activity. 1.5 The learned Ass....
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.... 2,01,78,094. It is also noted by the Assessing Officer that out of the said income, income amounting to Rs. 29,80,546 has been shown as business income and offered to tax at normal rate of tax i.e. @ 40 per cent but the balance income of Rs. 1,71,97,548 has been shown as technical fee and offered to tax @ 10 per cent as per the provisions of Article 12 of the Indo-Russia DTAA (hereinafter to be referred as DTAA). After considering the submissions of the assessee in the course of assessment proceedings, the Assessing Officer framed a draft assessment order as per the provisions of section 144C of the Income-tax Act, 1961 and the same was passed on 29-12-2009 and duly served upon the assessee. As per the said order, the income of the assessee company derived from the PDPL project amounting to Rs. 1,71,97,548 was proposed to be held as business income and subject to tax as per the provisions of Income-tax Act, 1961 read with the provisions of Article 7 of the Indo Russian DTAA whereas there is no dispute regarding the balance income amounting to Rs. 29,80,546. Thereafter, the assessee raised various objections before DRT Ahmedabad but as per its directions dated 3-9-2010, it was held....
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....essee is for construction, assembly, mining or like project, which has been specifically excluded from the definition of FTS because the income in question of the assessee has been derived from the construction project but this is not true. It is submitted that for the purpose of deciding this aspect of the matter, it is necessary to go through the agreement between the assessee company and M/s. Kalpataru Power Transmission Limited (KPTL), which is available on pages 205 - 214 of the paper book. It is submitted that this Cooperation Agreement dated 12-9-2006 has been entered into between the assessee & KPTL after the consortium dated 11-5-2006 and on 24-5-2006, the work had been awarded by GAIL as per letter of acceptance dated 5-9-2006 of GAIL India Ltd. It is submitted that as per the cooperation agreement, it was agreed by these two parties i.e. the assessee and the KPTL that the assessee will provide its technical guidance and consultancy for the project management whereas entire work to be executed on contact is to be undertaken by KPTL by deploying all the required input resources. It is submitted that it was also agreed between the parties that the assessee will give 3 per c....
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.... responsibility of the assessee as per this cooperation agreement, it was submitted that Annexure 1 to the cooperation agreement, which is available at pages 218-219 of the paper book, defines the scope of work of the assessee. It is submitted that from such scope of work of the assessee as per this co operation agreement, it is clear that the assessee is only rendering technical services regarding designs and engineering for civil and structural, electrical, cathodic protection, equipment design and engineering, pipeline crossings, and instrumentation and hence, the receipt of the assessee is nothing but FTS. Regarding the objection of the Assessing Officer that such receipt of the assessee company is from construction, assembly, mining or like projects, it was submitted that it may be that's the receipt of the assessee company is in connection with construction project but it definitely not from the construction project and hence this objection of the Assessing Officer is not valid and, therefore, the claim of the assesses hold be accepted. Reliance was placed on the tribunal decision rendered in the case of Voith Siemens Hydro Kraftwerkstechnik GMBH & Co. v. ADIT in I.T. Appeal ....
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....ompany is nothing but consideration for construction of pipeline project and hence falls within the exclusion category of Explanation (2) to section 9(1)(vii) as has been held by the Assessing Officer. 8. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. It is by now a settled position of law that if the provisions of Income-tax Act, 1961 are more favourable as compared to the provisions of DTAA then the assessee can always opt for assessment as per the provisions of Income-tax Act, 1961. The provisions of Income-tax Act, 1961 with regard to the issue in dispute before us are contained in section 9(1)(vii) and also in section 115A and the provisions of section 44DA are also relevant. We, therefore, reproduce the provisions of section 9(1)(vii), Section 44DA and section 115A of the Act: "Section 9(1) : The following incomes shall be deemed to accrue or arise in India:- (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....
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....incurred for the business of such permanent establishment or fixed place of profession in India; or (if) in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent, establishment to its head office or to any of its other offices:" "115. Omitted by the Finance Act, 1987, w.e.f. 1-4-1988. Tax on dividends, royalty and technical service fees In the case of foreign companies. 115A. (1) Where the total income of- (b) a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fees for technical services other than income referred to in sub-section (I) of section 44DA] received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1A) and....
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....o KPTL. KPTL will be responsible for all the arrangements of resources as well as expenses including common expenses of the consortium. The responsibility of the assessee as described in Annexure 1 to the cooperation agreement is available on page 218-219 of the paper book and hence, it is very relevant to reproduce the same here in below: "ACTIVITIES UNDER THE SCOPE OF WORK OF ZANGASUNDER I'ANVEL-DABHOL GAS PIPE LINE PROJECT OF GAIL (INDIA) LIMITED The activities included in the scope of work of Zangas are as follows - 1. Design & Engineering: (a) Civil & Structural Zangas Shall provide (he following design & engineering services under civil & structural head, based on the topographical and soil investigation data collected by KPTL (through an experienced & competent agency)- (i) Review of Layout plan to enable finalization of Plot plan for - > Sectionalizing Valve Station - 9 Nos. > Intermediate Pigging Station - 1 Nos. (ii) Review of Structural & Architectural design of Control Room for a typical &nb....
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....O2 flooding and clean agent system, including the following:- > Data sheets of equipment > Review of vendor data > Review of constructional details given by vendor (e) Pipeline Crossings > Review of Design & Engineering of HDD crossings > Design & Engineering of Bored crossings (f) Instrumentation Review off Design of field Instrumentation System as per Specifications including following:- > Material Take Off > Instrument Cable Layout > Detailed Engineering of instrument Installation 2. Preparation of Welding Procedure and Welder qualification Procedure 3. Review of Work procedures for Pipeline Laying. 4. Deputation of Experts for Site review of implementation by KPTL of technical services provided by ZANGAS." 10. From the above details regarding scope of work of Zangas i.e. the assessee in respect of PDPL....
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....n the meaning of term "construction and assembly" as provided in the exclusion provided in Explanation (2) to section 9(1)(vii) of the Income-tax Act, 1961. Hence, as per this Tribunal decision, the term contract alone is not the deciding factor and it is very important to see as to what was the actual activity is undertaken by the assessee. In the present case, all the objections of the Assessing Officer, DRP and the Ld. D.R. of the revenue are based on the consortium agreement and agreement of the consortium with GAIL and it has been contended that since the assessee is the leader of consortium and as per the terms of contract with GAIL, the assessee was the leading partner of the consortium, the entire construction work of the project in the hands was done by the assessee and the assessee's activities are not confined to mere providing of FTS. But the assessee has brought on record the corporation agreement along with its Annexure 1 which outlines the scope of the activities of the assessee. As per the scope of activities as has been reproduced above, the assessee is required to provide design and engineering of various aspects and is also required for preparing the welding proc....
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.... been declared by the assessee. If the Assessing Officer says that the construction work was undertaken by the assessee company then he should have assessed the income of the assessee by disregarding this cooperation agreement and the income should have been quantified by him after considering the gross receipt of the consortium and after deducting al the expenses incurred for the purpose and the remaining income should have been distributed between the two partners of the consortium i.e. the assessee and KPTL on the basis of consortium agreement or on some reasonable basis. This has not been done by the Assessing Officer and he has accepted the income declared by the assessee which is to the extent of 3 per cent of gross receipt of the consortium on the basis of this cooperation agreement. Having accepted the cooperation agreement on this aspect, it was not justified on the part of the Assessing Officer and DRP to say that with regard to the scope of activities of the assessee company, cooperation agreement is not valid and they have to go by consortium agreement. They have also not brought on record any evidence to show that the assessee has undertaken any extra activity in addit....