TaxTMI 
TaxTMI 
2015 (1) TMI 469
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.... both of these appeals are being disposed of by way of this consolidated order. 2. Grievances raised by the assessee-appellant, as set out in the respective memorandum of appeal, are as follows: Assessment year 2010-11 1. For that on the facts and in the circumstances of the case, the CIT (A) erred in law and on facts in confirming the order passed by the ACIT (TDS), Jabalpur u/s 201 read with Sec. 195 of the I T Act and thereby confirming the demand of Rs. 1,40,10,757 raised on the appellant on account from non-deduction of tax on foreign remittances made for purchase of plant and machineries. 2. For that on the facts and in the circumstances of the case, the CIT (A) was unjustified in law and on facts in confirming the levy of interest u/s 201(1A) of the I T Act even though the appellant had no liability to deduct tax at source in respect of foreign remittances made for purchase of plant and machineries. 3. For that on the facts and in the circumstances of the case, the authorities below were wholly unjustified in holding that the gross amounts paid by the appellant to the foreign suppliers of the plant and machineries represented income of the Non Residents accrue....
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.... purchase of plant and machineries. 2. For that on the facts and in the circumstances of the case, the CIT (A) was unjustified in law and on facts in confirming the levy of interest u/s 201(1A) of the I T Act even though the appellant had no liability to deduct tax at source in respect of foreign remittances made for purchase of plant and machineries. 3. For that on the facts and in the circumstances of the case, the authorities below were wholly unjustified in holding that the gross amounts paid by the appellant to the foreign suppliers of the plant and machineries represented income of the Non Residents accrued in India and thereby upholding the AO's order in which he had held that the appellant should have deducted tax @ 42.25% of the gross remittance amounts. 4. For that on the facts and in the circumstances of the case, the CIT(A) misdirected himself in upholding the order of the AO by relying wholly on extraneous considerations; irrelevant materials; without properly appreciating the facts of the case and without correctly understanding specific legal provisions contained in the I T Act 1961 as also the relevant DTAAs and in that view of the matter the order pass....
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.... in these payments was not chargeable to tax in India as these payments were for imports of plant, equipment and machinery. It was also contended that as the payments were made for purchases, which did not give rise to taxability of related income in India, there was no requirement of tax withholding requirement from these payments. The AO-TDS, however, did not share this perception of facts. He was of the view that the payment was not only for purchases but also for incidental services in connection with installation and commissioning of these machines, and, accordingly, the assessee was required to deduct tax at source from these payments. He was also of the view that even if a part of income included in these payments was liable to be taxed in India, it was incumbent upon the assessee to approach the Assessing Officer, under section 195(2), for determination of income in respect of which tax is to be deducted at source. The AO-TDS noted that these payments were admittedly for composite contracts which includes all the services and other charges and that "contracts entered into by the ....... (assessee) for design, manufacture, supply, installation, testing and commissioning of p....
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....ese cases, as listed by the AO-TDS, are as follows: 1-MMD Asia Pacific Limited, UK [order dated 12/3/2010], 2-Thermo Fisher Scientific Ecublens SAL Switzerland [order dated 8/5/2010], 3-Rexnord NV, Belgium [order of June 2010], 4-Tangshan Senpu Mine Equipment Co Ltd, China [order dated 16.8.2010] , 5-IKN GmbH, Germany [order dated 19.4.2007], 6-PARR Instrument Co, Ilionois [order dated 17.9.2009], 7-RHI AG, Austria [order dated 30.3.2009], 8-Shanyung Heavy Industries Co. Ltd, China [order dated 20.3.2007] , and 9-Polysius AG Germany [order dated 15.9.2009]. The AO-TDS, on the basis of the above discussions, concluded that the contract is a composite contract for supply of plant and machinery and also for ancillary services of installation, commission and erection of such plant and machinery. He referred to Hon'ble Supreme Court's judgment in the case of Hindustan Shipyard Limited Vs State of AP [(2000) 6 SCC 579] to highlight that examination of a contract to find out whether it is for sale of goods or works contract must depend on the terms and conditions laid down under the contract. It was also noted that, in the considered opinion of Hon'ble Supreme Court, a contract of the nat....
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...., assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) rationalized the stand taken by the AO-TDS and added a large number of judicial precedents to support the stand so taken by the AO-TDS. In a lengthy order running into 163 pages, learned CIT(A) confirmed, and in fact fortified, the stand of the AO-TDS, reproduced extensively from several judicial precedents and held that the assessee indeed ought to have deducted tax at source @42.23% on gross basis from all these payments. The broad line of reasoning adopted by the learned CIT(A) was like this. As for the assessee's contention that the taxes have been duly deducted as when payments for supervision charges are made, learned CIT(A) observed that "in the mercantile system of accounting, a liability is to be accounted for as soon as it is recognized" and that "there is no claim that the assessee is following cash system of accounting". Learned CIT(A) did take note of the assessee's contention that form 15CA and form CB were duly filed, wherever necessary, but rejected this explanation as " vague" on the ground that it is not clear whether the certificates were filed or not and tha....
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..... Hence, in the absence of any pleading/ evidence to the contrary, it has to be assumed that the liability as arisen was recognized and accounted for in the impugned accounting year. This may have been paid over sufficient number of years but once recognition of a crystallized liability has taken place, it should be accounted for and held to be, in fact, accounted for in the course of FY 2009-10 and 2010-11 (for subsequent year itself). Subsequent adjustment entries for the future years would not detract from this aspect. The assessee further stated that further payments of $ 7,500 and $ 3,100 were made in the financial years 2011-12 and 2012-13 over and above the contract price for installation of equipments on which prescribed rate of 10% was deducted. It is not, however, the case of the AO that subsequent remittance was not made or TDS was not deducted. His case rests on entirely different foundation that it is composite nature of the contract.................. (Emphasis by underlining supplied by us) 6. Learned CIT(A) noted the submissions of the assessee to the effect that in some cases erection and installation of equipment was done by the domestic contractors and....
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....nstallation and commissioning etc. 9. Learned CIT(A), in this backdrop, discussed, in great detail, several judicial precedents right from the landmark Supreme Court decision in the case of McDowell's to Voadfone International Holding's rather decent case and used that analysis to support the theory that all these contracts are composite contracts, are used as instruments of impermissible tax manoeuvrings and tax should have been deducted from all these payments. On a somewhat philosophical note, and quite in tune with the tone of these scholarly discussions, he concluded on the following note: "The classic and final word on this issue must belong to the observation of the House of Lords in the case of Regna Vs Inland Revenue Commissioner [(1995) 215 ITR 487 HL]. Para 39 of the said judgment reads as under: "Every tax avoidance scheme involves a trick and a pretence. It is the task of the revenue to unravel the trick and duty of the court to ignore the pretence". 10. Aggrieved by the order of the CIT(A), the assessee is now in second appeal before us. 11. We have heard Shri D S Damle and Shri A P Srivastava, appearing along with Shri Swapan Usrethe, for the assessee-app....
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.... is not that taxes have not been deducted from the payments for installation, commissioning and supervision charges, but that a part of the payment for machines, plant and machinery represents payment of consideration for services rendered in India as there is no separate consideration, save and except for nominal reimbursement of actual costs and allowances of technical personnel visiting the installation site, for services rendered in India. 15. According to learned Departmental Representative, as long as vendor is associated with any work, or its supervision, to be carried out in India and no separate consideration is paid for the same, the sale consideration for such machine, plant and machinery must be held to have an embedded payment for these services which is taxable in India. It is submitted that the arguments of the assessee do not, even remotely, address with the core issue raised by the revenue authorities. The rendition of services and deduction of tax at source from additional payments made, which are prima facie for out of pocket expenses and allowances to technicians, is irrelevant in this context. 16. Learned counsel once again submitted that even though no p....
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....come Tax Act. 19. While on this aspect, we may also refer to the following observations made by a coordinate bench in the case of ACIT Vs Epcos AG (28 SOT 412): 15. One of the arguments advanced by the learned Departmental Representative is that we should begin by examining taxability, of the income earned by the foreign company, under the provisions of the Indian IT Act (hereinafter referred to as the 'domestic tax legislation' or 'the Act') and, when this income is found to be taxable in terms of the domestic tax legislation, we should hold its taxability as such, unless, of course, the income is exempt from taxation in India under the provisions of the tax treaty. ............. 16. Even as we are alive to the fact that the approach suggested by the learned Departmental Representative will not lead to any different results than the one arrived at by any other approach to the issue, we are not inclined to accept the suggestion of the learned Departmental Representative. There is indeed a school of thought which suggests that what needs to be examined first is the taxability under the domestic law i.e. the Indian IT Act and only when the taxability under the domestic law i....
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.... first and foremost, allocates the rights of taxation of the tax jurisdictions over a tax object. In a cross-border tax situation, there is always a conflict between source rule and residence rule. This conflict develops when a person resident in one of the Contracting States earns income which is sourced from the other Contracting States. ................. it provides for the basis and mechanism of taxability outside the residence jurisdiction. ............... One must not lose sight of the fact that there is nothing like an exemption under a treaty. The taxability of a tax subject, i.e., a taxpayer, continues to be in the residence country irrespective of source jurisdiction taxation of an income. .................. Therefore, the real issue is to what extent residence jurisdiction yields taxability of a tax subject to the source country, or, to put it from a source country's perspective to what extent does the source country yield taxability to residence country over a tax subject in respect of a limited tax object in the source country. Therefore, broadly speaking, a tax treaty is primarily a detailed instrument assigning the taxing rights between two, or more, competing tax ju....
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....e tax treaty, it would not make difference, in the ultimate analysis, whether one examines the case on the touchstone of the scheme of the treaty first and domestic law later, or vice versa. Late Prof. Klaus Vogel, in his oft referred book 'Klaus Vogel on Double Taxation Conventions', has observed that, "only very little legal background, is required to recognize that logically, both the methods or procedure are equivalent". Giving an illustration, he further explains, that "the treaty acts like a stencil that is placed over the pattern of domestic law and covers over certain parts" and adds that "whether the stencil or the pattern is examined first, the same conclusion results, so the order of application can be decided pragmatically case from case". The stand taken by another eminent international tax expert, Ned Sheldon, is also on these lines. In his well-known work 'Interpretation and Application of Tax Treaties', Ned Sheldon has remarked that this "issue can be theorized and philosophized upon, but the inevitable conclusion is that one must consider both domestic law and the treaty" and he concludes that "in practice it does not matter". While we recognize the school of thoug....
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....tax withholding demand, that the recipient non resident is liable to be taxed in India in respect of the income embedded in these payments, and for that purpose, examine the taxability of the recipient under the provisions of the respective tax treaty as well. In any event, it is a purely legal issue and, as is the well settled legal position, a legal issue can certainly be taken up before the Tribunal even for the first time. There cannot be any estoppel against the law. We may also add that a copy of the submissions filed by the learned counsel for the assessee was handed over to the learned Departmental Representative on 23rd September 2014 and certain propositions were put to him by the bench, and that learned Departmental Representative has also been heard on the same on 26th September 2014. 21. As we proceed to examine the issue regarding taxability of the impugned payments in India, we may also note that the authorities below have laid great emphasis on certain observations in Hon'ble Supreme Court's landmark judgment in the case of G E Information Technology Centre Pvt. Ltd. (supra) in support of the proposition that the assessee ought to have applied for determination o....
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....n India" and that "(i)t was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India". There can be little doubt that once it is an admitted position that a part of income embedded in the payments is exigible to tax in India, the provisions of Section 195 will come into play, but then, in the case before us, the contention of the assessee is that no part of the income embedded in the payments to vendors is taxable in India at all. 23. It is also important to bear in mind the fact that just because payment of erection and commissioning of plant and machinery in India, in the case of Transmission Corporation of AP (supra), was accepted to be taxable in the facts of that case cannot be construed to mean that such payments are taxable on the facts of all the cases. This decision is not an authority for the proposition that in the case of all equipment purchase contracts wherein erection and commissioning services are to be performed, supervised or assisted by the foreign vendors, the consideration paid for such contracts will have income exigible to tax in India. All that this de....
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....e assessee under s. 195(2) seeking a determination of the appropriate portion of the sum remitted, income-tax on the gross sum has to be deducted and paid. However, penultimate paragraph of the judgment (p. 596 of the report) the Supreme Court has upheld as correct the answer given by the Andhra Pradesh High Court that the obligation of the assessee to deduct tax at source under s. 195 is limited only to the appropriate portion of income chargeable under the Act. In our humble understanding of the section in the light of the judgment, the position appears to be like this. The sum paid to the non-resident may be either fully or partly chargeable to income tax. If it is fully chargeable (pure income) undoubtedly the tax is to be charged at the appropriate rate on the whole sum and deducted and paid. If the sum is only partly chargeable (embedded or hidden income), the assessee has to apply under s. 195(2) to the AO for determination of the appropriate portion." 26. We are in considered agreement with the views so expressed by our distinguished colleagues and would only add the observations of their Lordships or the ratio of the judgment do not affect that position that in a case w....
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....o tax in India, by the virtue of the provisions of the applicable DTAA, the deduction of tax under s. 195 of the Act does not come to play at all. It leads us to the conclusion that the expression 'chargeable under the provisions of this Act' cannot include an income, which in terms of the specific provisions of the applicable Double Taxation Avoidance Agreement, is not exigible to tax in India. (Emphasis by underlining supplied by us) 25. In the case of G E Technology Centre Pvt Ltd (supra), Hon'ble Supreme Court came to the same conclusion, and thus upheld the stand so taken by the coordinate bench, by observing as follows: In our view, Section 195(2) is based on the "principle of proportionality". The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligatio....
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....issioning or assembly of plant and equipment, such a consideration is liable to tax in India under section 4 and 5 of the Income Tax Act, 1961. These sections provide as follows: Section 4 - Charge of income-tax. 4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person: Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly. (2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. Section 5- Scope of total income. 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which....
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....s only with an income which is deemed to (Emphasis by underlining supplied by us) accrues or arises in India. Something which accrues and arises in India need not be deemed to accrue and arise in India as well. That precisely seems to be the reason as to why the definition of 'fees for technical services' under Explanation 2 to Section 9 (1)(vii) specifically excludes "consideration for any construction, assembly, mining or like project undertaken by the recipient". Even though this exclusion clause does not make a categorical mention about 'installation, commissioning or erection' of plant and equipment, these expression, belonging to the same genus as the expression 'assembly' used in the exclusion clause and the exclusion clause definition being illustrative, rather than exhaustive, as evident from the expression 'or like project undertaken by the recipient, the installation, commissioning and erection of plant and equipment are also, in our considered view, covered by this exclusion clause. The common thread, and the highest common factor, in all the three activities set out in the exclusion clause, i.e. construction, assembly and mining, is that all these activities are carrie....
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....in the light of the applicable DTAA provisions. the taxability of the income embedded in these transactions. 34. The recipients of these payments, as is the undisputed factual position, are engaged in the business of manufacturing and selling related equipment, plant or machinery. As to what should be the scope of taxation of such business income, as all the related DTAAs provide, that the profits non-resident vendor shall not be taxable in India, unless the non-resident vendor carries on business in India through a permanent establishment in India, and where the non-resident vendor carried on business through the permanent establishment, taxability of income shall be confined, except in the cases in which limited force of attraction principle is specifically extended in article 7(1) i.e. Belgium, Germany and US, to the income as is attributable to that permanent establishment. This basic scheme of taxation of business profits of non-resident vendors is evident from the following related treaty provisions: Article 7(1) of India Austria Double Taxation Avoidance Agreement [251 ITR (Stat) 79]- hereinafter referred to as Indo Austrian tax treaty ARTICLE 7 BUSINESS PROFITS ....
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....other State but only so much of them as are attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. Article 7(1) of India United Kingdom Double Taxation Avoidance Agreement [206 ITR (Stat) 235]- hereinafter referred to as Indo UK tax treaty ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. Article 7(1) of India United USA Double Taxation Avoidance Agreement [187 ITR (Stat) 102]- hereinafter referred to as Indo US tax treaty ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of ....
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....ned before us . The related provisions in respect of all these jurisdictions above are as follows: Indo Austria tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: ..................... (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (for the same or connected project, site or activities) continue for a period of more than six months. ................................. (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) Indo Belgium tax treaty Article 5 Permanent Establishment 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: ........................ (j) a buildi....
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.................................... (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment; ................................. (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) Indo US tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: ....................... (k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with o....
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....le Taxation Convention between the Developed and Developing Countries'. While elaborating upon this model provision and recognizing, while rejecting, the legitimate concerns about erosion of tax base by the developing countries, the UN Model Convention Commentary has observed as follows: 10. A few developing countries oppose the six-month (or 183 days) thresholds in subparagraphs (a) and (b) of paragraph 3 altogether. They have two main reasons: first, they maintain that construction, assembly and similar activities could, as a result of modern technology, be of very short duration and still result in a substantial profit for the enterprise; second, and more fundamentally, they simply believe that the period during which foreign personnel remain in the source country is irrelevant to their right to tax the income (as it is in the case of artistes and sportspersons under Article 17). Other developing countries oppose a time limit because it could be used by foreign enterprises to set up artificial arrangements to avoid taxation in their territory. However, the purpose of bilateral treaties is to promote international trade, investment, and development, and the reason for the time....
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....s for creation of PE are satisfied. 42. In view of the above discussions, even if a part of the income, embedded in the impugned payments made to non-resident vendors, can indeed be attributed to the installation, assembly or commissioning activities of the plant, machinery or equipment purchased, such an income, on the facts of this case, cannot be brought to tax as business income under article 7 read with article 5 of the respective DTAAs. 43. Let us now move on to examine the impact of taxability of impugned payments as fees for technical services. The relevant tax treaty provisions are as follows: Indo Austrian tax treaty ARTICLE 12 Royalties and Fees for Technical Services 1. Royalties and fees for technical 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 laws of that State, but if the beneficial owner of the royalties and fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 pe....
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....ther provisions of this Convention. Indo Belgian tax treaty Article 12 Royalties and Fees for Technical Services 1. Royalties and fees for technical 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 laws of that State, but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 20 per cent of the gross amount of the royalties or fees for technical services. 3. (a) .................................. (b) the term "fees for technical services" as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. 4. The provisions of paragraphs 1 and 2 shall n....
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....n which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. .......................... 4. The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment or Performs in that other contracting state independent Personal service from a fixed base situated therein or performs in that other contracting state independent personal service from a fixed base situated there....
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..... .................................... 4. The term "fees for technical services" as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is tha....
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.... (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 referred to in sub-paragraph (a) of paragraph 4 of this Article, 10 per cent of the gross amount of such royalties or fees for included services. 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematogrph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent trademark, design or model, plan, secret formula or process, or for information concerning industrial commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment. 4. For purposes of this Article the term "fees for included services" means: (a) payments of any kind to any person in consideration for the rendering of any technical ....
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.... for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment, then such royalties or fees for included services shall be deemed to arise in the State in which the permanent establishment is situated. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. Indo UK tax treaty ARTICLE 13 Royalties and fees for technical services 1. Royalties and fees for technical 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 ....
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....ragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this article is received; or (c) 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. The definitions of fees for technical services in paragraph 4 of this article shall not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the private use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal serv....
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.... creation or assignment. Indo US tax treaty ARTICLE 12 Royalties and fees for included services 1. Royalties and fees for included 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 included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in subparagraph (b) of this paragraph ): (i) during the first five taxable years for which this Convention has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and (B) 20 per cent of the gross amount of the royaltie....
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.... (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal services). 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business profits) or Article 15 (Independent personal services), as the case may be, shall apply. 7. (....
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....s. There is thus a general provision for rendering of technical services and a specific provision for rendering of technical services in the nature of construction, installation or project or supervisory services in connection therewith. 45. While on this issue, it is important to bear in mind the fact that when it comes to 'services PE', as in article 5(2)(l) of Indo US tax treaty or article 5(2)(k) of Indo UK tax treaty, any services which can be covered by the FTS or FIS clause in the respective tax treaty are specifically excluded as these clauses refer to "the furnishing of services, other than included services as defined in Article 12 (Royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel " and "the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise though employees or other personnel" respectively. There is no such exclusion clause in the PE article dealing with construction, installation and assembly activities, including supervision activities relating thereto. It is a....
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....Art. 372 of the Constitution of India should govern the particular situation involved therein. Their Lordships then pointed out that "a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where specific provisions do not apply." 47. The same principle must apply in the treaty situations as well. What is the point of having a PE threshold time limit for construction, installation and assembly projects if such activities, whether cross the threshold time limit or not, are taxable in the source state anyway. If we are to proceed on the basis that the provisions of PE clause as also FTS clause must apply on the same activity, and even when the project fails PE test, the taxability must be held as FTS at least, not only the PE provisions will be rendered meaningless, but for gross versus net basis of taxation, it will also be contrary to the spirit of the following observations in the UN Model Convention Commentary, as reproduced earlier in this order in paragraph 40 above. As we have noted so earlier, i t appears to be a conscious decision of India, being a party to a double taxation avoidance agreement based on the UN ....
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....nam Port Trust's case (supra), these model conventions and commentaries thereon constitute international tax language and the meanings assigned by such literature to various technical terms should be given due weightage. In our considered view, the views expressed by these bodies, which have made immense contribution towards development of standardization of tax treaties between various counties, constitute 'contemporanea expositio' inasmuch as the meanings indicated by various expressions in tax treaties can be inferred as the meanings normally understood in, to use the words employed by Lord Radcliffe, 'international tax language' developed by bodies like OECD and UN. 48. When we put it to the learned Departmental Representative as to what is the purpose of an installation PE clause in Article 5, if PE or no PE, the consideration for installation and assembly project, or supervisory activities in connection therewith, are to be taxed anyway as FTS or FIS, he pointed out that the assessee has on its own accepted the taxability under the FTS clause and withheld tax, on that basis, while making specific remittances for independent payments for the installation and commissioning c....
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....urse to the service provider, these services will not be covered by the definition of the fees for technical services. In other services, it is condition precedent for the taxability of an income under the head 'fees for technical services' or 'fees for included services', under these tax treaties, that there should be a transfer of technology to the recipient of the service. This is what coordinate benches of this Tribunal have held, in a series of decisions including in the cases of Raymond Ltd Vs DCIT [86 ITD 791 (2002)], CESC Ltd Vs DCIT [87 ITD TM 653 (2003)], and this stand has also been confirmed by Hon'ble Delhi and Karnataka High Courts in the cases DIT Vs Guy Carpenter & Co Ltd [346 ITR 504 Del (2012)] and CIT Vs De Beers India Pvt Ltd [346 ITR 467 Kar (2012)]. By no stretch of logic, installation or assembly activities even involve transfer of technology in the sense that recipient of these services can perform such services on his own without recourse to the service provider, nor has it been the case of the authorities below. For this short reason alone, the installation, commissioning or assembly activities cannot constitute fees for technical services, or fees for inc....
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....at we have taken note of the views of the coordinate bench. We are in considered agreement with the views so expressed by the coordinate bench, and, following the same approach, we hold that the provisions of the Indo US and Indo UK tax treaty, which came into force with effect from 1st April 1991 and 1st April 1995 respectively (i.e. after the cutoff date of 1st January 1990 set out in protocol to Indo Belgium tax treaty) and which restrict the taxability of only such fees for technical services as 'make available' the technical knowledge, experience, skill or know-how etc, will apply in respect of Belgian tax resident vendors as well. 53. In the light of the above discussions, and in view of narrower scope of FTS by the virtue of 'make available clause' in Indo UK tax treaty, which has come into effect much after the cut-off date set out in protocol to Indo Belgian tax treaty, the taxability as fees for technical services does not come into play in the cases of Belgian vendors as well. 54. We have also further that, in terms of article 12(5)(a) of Indo Swiss tax treaty, the fees for technical services, which is termed as fees for included services in this treaty, does speci....
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....nsaction also does not give rise to taxability in the source country. In other words, the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation. That is the intent and purpose, in our understanding, of the provisions of art. 12(5)(a) .................... 55. In view of these discussions, in our humble understanding, Installation, commissioning or assembly of a plant, machinery or equipment , or any supervision activity connected therewith, is ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of such a property i.e. plant, equipment or machinery. Therefore, for this short reason, any consideration for installation, commissioning or assembly activities, or supervision services in respect thereof, of a property, which obviously includes a plant, equipment or machinery, cannot be included in fees for included services under the Indo Swiss tax treaty as well. Accordingly, even if there be any income embedded in the impugned payments, in respect of installation, commissioning or assembly activities, or supervisory activities connected therewith, the same cannot be brough....
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....on at source liability under s. 195 crystallises in the present case-at the time of payment of the franchise fees, at the time of crediting the same to the account of M/s Societe Des Hotels Meridien, or, as argued by the Revenue, at the time of the franchise fees accruing to the aforesaid company. The answer to this question is provided by the plain and unambiguous language of s. 195 itself which states that tax is to be deducted "at the time of credit of such income to the account of the payee or at the time of payment thereof............whichever is earlier". In our considered view, it is not open to the Revenue, for the purpose of determining TDS liability of an assessee tax deductor, to tinker with, or in anyway reject, the method of accounting employed by such assessee tax deductor. The judicial precedents relied upon by the authorities below deal with the issue of taxability in the hands of the foreign company and therefore, in our considered view, these judicial precedents have no bearing on the determination about the point of time when TDS liability under s. 195 crystallises. It is also not in dispute that account of the payee was not credited at the time of accrual of inc....
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....cts of this case. In many of the cases, as noted in the orders of the authorities below, the related installation and commissioning services, and supervision services in connection therewith, have been rendered by the domestic entities and payments made to those entities have already been subjected to tax withholding under other provisions of chapter XVII D but, disregarding this reality, the CIT(A) has proceeded on the basis that "cost of services is also vested in the cost of material" whether such services are performed or not. When admittedly no such services were rendered, there not have been any occasion to bring fictional 'consideration' for those services to tax. 58. In view of the above discussions, in our considered view, under the scheme of allocation of taxing rights under the related tax treaties, India does not have the right to tax income, even if any, in respect of rendition of installation, commissioning or assembly services, embedded in the invoice value of the related equipment, plant or machinery. We, therefore, see no need to address ourselves to the question whether any part of the stated sale consideration for these equipment, plant or machinery can indeed....