TaxTMI 
TaxTMI 
2011 (5) TMI 573
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under section 201(1) and 201(1A) of the Act, treating the assessee as an 'assessee-in-default' and raising a demand of Rs. 7,41,944 for the assessment year 2003-04 and of Rs. 25,95,736 for assessment year 2004-05 and of Rs. 73,14,584 for the assessment year 2005-06, representing the sum of tax, which according to the Assessing Officer the assessee was liable to deduct but failed to deduct, and the interest under section 201(1A) thereon. 3. Brief facts of the case are that the assessee, engaged in the business of running a Five Star Hotel in the name of "VICEROY", was being converted into Marriot Chain Hotel under the franchise granted by the International Licensing Company SARL (Marriot USA). To meet the standard for Marriot group the assessee embarked upon an expansion programme by way of adding new blocks in the hotel and also upgradation by way of bringing about interior and exterior changes, landscaping etc. And for this purpose the assessee has entered into four separate and independent agreement with : 1. Anthony Corbett & Associates UK 2. Marriot International Design & Constructions USA 3. Bensly Design Group international Construction Company Ltd., Tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cer was not justified in treating the assessee as an assessee in default and raising a demand of Rs. 7,41,944 and accordingly, cancelled the order of the Assessing Officer passed u/s 201(1) and 201(1A) of the Act. Aggrieved by the order of the CIT(A) for this year, the Revenue preferred appeal in ITA No.401/H/2007. 6. As far as the appeals for the assessment years 2004-05 and 2005-06 are concerned, the CIT(A), on appeal, held that in so far as the payments made by the assessee to M/s Marriot International, USA and M/s Lim Hong Lian, Singapore are concerned, the Assessing Officer was not justified in treating the assessee as an assessee in default. As for the payments made to Marriot International, USA, the CIT(A) following his order for the assessment year 2003-04 dated 26-12-2006 held that the services rendered by M/s Marriot International do not come within the ambit of 'fees for included services'. As for the payments made to M/s Lim Hong Lian, Singapore, he concluded that the services are in the nature of independent personal services and for these reasons and in view of the DTAA between India and Singapore, according to which the payment made by the assessee is taxable in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e by the assessee and the rate of tax shall not exceed 20% . 10. Aggrieved by the action of the CIT(A) in upholding partly the orders of the Assessing Officer passed u/s 201 & 201(1A) read with section 195 of the Act, the assessee preferred its appeals in ITA Nos.436 & 437/H/2005, whereas contesting the relief granted by the CIT(A), the Revenue preferred its appeals in ITA Nos. 401, 482 & 483/H/2007. First we will take up the Revenue appeals in ITA Nos. 401, 482 & 483/H/2007. 11. As per the Assessing Officer, during the accounting year under consideration, the assessee deductor had engaged a non-resident consultant, M/s. Marriott International Design & Construction Services, a company incorporated in USA, for rendering technical services in various fields. The company is in the business of design and construction consultancy. As no explanation was furnished by the assessee for non-deduction of tax from the payment made the Assessing Officer concluded that the assessee deductor had conceded the default. The Assessing Officer has referred to the DTAA between India and USA wherein technical services is covered under "fees for included services" which can be taxed both in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case. 14. In view of the above, he held that provisions of section 195 are not applicable. Accordingly, he held that there is no application of provisions of section 201(1) and 201(1A) of the I.T. Act in respect of payment to Marriot International Design & Construction Services, USA in the assessment years 2003-04, 2004-05 and 2005-06. Against this finding the Revenue is in appeal before us. Further, for the assessment years 2003-04, 2004-05 and 2005-06, the Revenue is having a grievance against admission of crucial evidence in the form of agreement between Marriot International and the assessee company without giving opportunity to the Assessing Officer to examine this evidence in terms of Rule 46A of Income-tax Rules, 1962. For the assessment years 2004-05 and 2005-06 the Revenue is also in appeal before us with regard to finding of CIT(A) that the condition of making available of technical knowledge etc., is not satisfied in respect of US$ 30,000 payable to Bensley Design Group International Consulting Company, Thailand, though the CIT(A) having accepted that there is no specific article dealing with 'fee for technical services' in Indo-Thailand DTAA. 15. The learned DR s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oup (P.) Ltd. [2008] 94 ITD 31 (Mum.). 4. C.E.S.E. Ltd. v. Dy. CIT [2005] 275 ITR (AT) 15 (Kol.). 18. He submitted that the CIT(A) wrongly concluded that no technology or technical skill was transferred to the assessee by the Marriott International. The CIT(A) erred in concluding that the Article 12(4) contemplates only 'transfer' of technology or technical skill. The words used in the Article are 'make available' of technical knowledge, experience, skill, know-how etc., the CIT(A) did not appreciate that 'make available' and 'transfer' are quite distinct. 19. He submitted that the CIT(A) erred in not appreciating that the scope of services rendered by Marriott International would fit into the definition of fees for included services as per Article 12 of DTAA. From the extracts of the agreement between the assessee company and Marriott International it can be noticed that the scope of work is not just review as sought to be made out by the CIT(A). The scope of work as extracted in the CIT(A) order includes technical review services including the following : 1. Determination of the condition, specification and status of FF&E, fixex a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hain, it satisfies the stipulation of making available the technical knowledge, skill, experience, etc. Mentioned in Article 12(4)(b). 23. He submitted that the agreement entered into between the assessee company and Marriott International (MIMCO) which was relied upon by the CIT(A) was not made available to the Assessing Officer, at the time of seeking the remand report. The Assessing Officer in his order passed u/s 201(1) on 29-11-2005 has in para 3.1., extracted certain clauses from an agreement entered into between the assessee company and Marriott International Design and Construction Services, Inc. (MIDCS). This agreement is titled as 'Interim Advisory Services Agreement' and was executed on 29-1-2003 copy of this agreement was available with the Assessing Officer. However, the agreement relied upon by the CIT(A) is titled as pre-conversion technical service agreement entered into between the assessee company and Marriott International Management Company BV (MIMCO) and was executed on 9-9-2003. This agreement was not made available to the Assessing Officer and as such the CIT(A) ought not to have considered this agreement without giving an opportunity to the Assessing Offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the facts of the present case. He submitted that during the assessment proceedings, the assessee had only produced 'Interim Advisory Services Agreement' dated 29-1-2003 entered into between the assessee company and Marriott International Design and Construction Services, Inc. (MIDCS) which has been duly considered by the assessing officer in his order. 24. On the other hand the learned AR submitted that the assessee had entered into agreement with the Marriott International for rendering professional services in connection with the upgradation of the hotel. As per the agreement, Marriott was to provide advisory services for design, conversion, furnishing and equipping of the hotel including advising owners and owner's consultant on Marriott standards on the aesthetics and systems necessary for the hotel to be operated as a Marriott Hotel, and reviewing the design documents prepared by owner and owner's consultant to verify compliance with Marriott standards. The services were provided from outside the country and in view of the above; the assessee was not liable for tax deduction at source for the amount paid for such services. He relied on the judgment of Supreme Court in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of sub-section (2) in section 9 of the Act. The relevant provisions of section 9, which need our attention, is clause (1) (i) which is extracted hereunder: Income deemed to accrue or arise in India : 9 (1) The following incomes shall be deemed to accrue or arise in India: (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfers of a capital asset situate in India. Explanation: For the purposes of this clause:- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. (b) in the case of non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident he shall not be deemed to be a broker, general commission agent or an agent of an independent status. Further, for better understanding, it is necessary to go through the agreement signed by the assessee company with Marriott International. The relevant para of the article 2 of the agreement reads as follows: 27. We have also carefully gone through the Article 2.2(a) of the agreement between Marriott International and Viceroy Hotel which deals with the services have to be rendered by the Marriott International; Article 2.2(a) reads as follows: Based on limited inspection and technical review conducted by Marriott prior to the effective date the requirements of converting the hotel to MHRS International Hotel as on the conversion date are anticipated to be set forth in the scope of works. To the extent no otherwise completed prior to effective date, however representatives of MIMCO and its affiliates have the righ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... providing new drive way lighting. It has also advised to provide Marriott sign on the roof top. It has advised to enhance the existing outdoor landscaping by adding additional plants to give the garden a lusher fill. Similar suggestions have been given for Hotel Assembly area, Hotel Food and Beverage, Hotel Recreation etc. Thus, from the scoped of work it appears that the services provided by Marriott International is in the nature of advisory and review services so that the existing facilities available in the hotel can be elevated to Marriott standards. It is necessary to go into definition of included services in Indo US treaty so as to find out whether the services rendered by Marriott fit into the definition of included services in Articles 12(4)(a) and 12(4)(b) of the Treaty. 30. We have also gone through the definition of 'included services in Indo US Treaty so as to find out whether the services rendered by Marriott will fall under the purview of included services as enumerated in article 12(4)(a) and 12(4)(b) of the Treaty : Article 12(4) of the Indo US Treaty reads as below: For the purpose of this article 'fees for included services' means payments of any kind ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that Technical skills were required by the performer of the service in order to perform commercial information service does not make the service a technical service within the meaning of Article 12(4)(b). 32. Further we find that similar issue has also been decided in the case of Raymond Ltd. (supra) wherein the ITAT, Mumbai has dealt in detail the concept of 'make available' and have opined that the technical knowledge, experience, skill etc. must remain with the person utilising the services even after rendering of the services comes to an end. Similar view was also expressed by Hon'ble Mumbai in the case of Boston Consulting Group (P.) Ltd. (supra) wherein the Tribunal observed that : Unless the services are technical in nature, there cannot be any question of 'technology' being contained therein which the person acquiring the services can be enabled to apply. Therefore, so far as the provisions of India Singapore Tax Treaty as also the provisions of India US Tax Treaty are concerned, payment for services not containing any techn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e foreign company would be taxable under the provisions of the Act. The Indian company employed personnel made available by the foreign company, who worked under the direct control of the Indian company. The Supreme Court held that the services of the foreign company in making the employees available were rendered wholly outside India and that the activities of the foreign personnel lent or deputed by the foreign company did not amount to a business activity carried on by the foreign company in India. It was further held that the fee did not accrue or arise in India nor could it be deemed to have accrued or arisen in India and that to rope in the income of the non resident under the deeming provision of section 42(1) of the 1922 Act it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed. In the case of Addl. CIT v. New Consolidated Gold Fields Ltd. [1983] 143 ITR 599 (Pat.), the assessee company and the foreign company entered into an agreement under which the foreign company was to be technical adviser of the assessee company in the matter of exploration, mining and mineral dressing operat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngly, in the light of the of ITAT Mumbai & Calcutta, no technology or technical skill is being transferred to the assessee company. 33. In view of the above, in our opinion, in the present case, what was made available to the assessee company was advisory services and opinion for improvement of the existing facilities. It is also noted by the assessing officer mentioned in his order that the services rendered by Marriott which includes advisory services and reviewing of the design documents prepared by the owner or owner's consultant to verify compliance with Marriott's standards. It is thus clear that Marriott themselves are not preparing and transferring any drawing, designs, technical plan etc. They are simply reviewing, what is being done by the parties engaged for designing upgrading the Hotel. In view of this, the fees paid to Marriott International will not fall within the ambit of fees for included services. As such, a provision of section 195 is not applicable. Accordingly, there is no question of application of provisions of section 201(1) and 201(1)(A) of the IT Act. 34. Regarding payment of US $ 30,000 which is relating to construction administration/conservation,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icle 13(4) and 13(4)(c) of the DTAA between India and UK and will not fall under article 15 of the DTAA and assessee shall require to deduct TDS at the time of making payment and failure to do so, the assessee became an assessee in default in terms of section 201(1) of the Act. 38. The learned AR submitted that the services, which had been rendered by Anthony Corbett & Associates, are of advisory in nature and not of technical services as there is no transfer of technology but only installation of electrical fittings. 39. According to the learned AR, this service is covered by articles 7 and 5 of DTAAs. Under article 7 of the DTAAs, income earned by a non resident in India under the head 'business' can be taxed in India only if the non resident has a permanent establishment in India. Permanent establishment itself is defined in article 7 and it means a permanent branch or a permanent office location in India. If the business is carried on through employees and if those employees stay in India for less than 90 days in the case of UK, there will be no PE in India and the corresponding business profit of the non resident becomes non taxable. In this case, the contract between th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... neither be regarded as personnel service or independent services covered under article 14 of DTAA and the exemption or exclusion contained there under. Without prejudice to this the assessing officer has observed that even if the payments made to the non resident is treated as fees for professional services or independent activities within the meaning of article 14 of the DTAA with Kingdom of Thailand, then also such fees can be taxes under the IT Act. It is because, the exemption provided under article 14 is available only to such payments which are not borne by an enterprise or a permanent establishment situated in India. In the present case, the payment has been made by an enterprise situated in India and accordingly, the non resident company is not entitled to claim any exemption on the strength of Article 14 of the DTAA. The assessing officer also stated that the instruction contained in CBDT circular No.333 (F.506/42/81-FTD) dated 2-4-1982 is in effect complementary to article 22 of the DTAA which provide that where there is no specific provision under the DTAA, it is the basic law which will govern the taxation of the income of the non resident. Following the aforesaid stan....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... According to the AR, as per Indo Thai Agreement signed on 22-3-1985, there is no article in the relevant DTAA dealing with fees for technical services, there is only an article dealing with royalties, and of course, there is an article dealing with business profits. The assessing officer wrongly applied the residuary article 22 and taxed the income arising in India for the Thai company at the rate of 40% in accordance with the Finance Act 2005, first schedule part I Paragraph E. As per section 115A(1)(b)(B) of the IT Act 1961, a non resident of foreign company includes any income by way of royalty or fees for technical services received from the govt. or an Indian concern in pursuance of an agreement made by the foreign company with govt. or the Indian concern after 31st day of March, 1976 and where such agreement is with an Indian concern, the agreement is approved by the central govt. or where it relates to a matter included in the industrial policy, for the time being in force, of the govt. of India, the agreement is in accordance with that policy, then the tax payable shall be aggregate of the amount of income tax calculate on the income by way of fees for technical services, ....