TaxTMI 
TaxTMI 
TaxTMI 
2015 (1) TMI 469
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....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 accrued in India and thereby upholding the AO's order in ....
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....n 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 passed by the CIT(A) be set aside and/or cancelled. 5. For that on the facts....
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....ports 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 plant would fall under the category of 'works contracts' and leviability of TDS ther....
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....[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 nature that "the contract may be for work to be done for remuneration and supply of ma....
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....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 that "where it was necessary" is a vague explanation. Coming to the assessee's explanation that as there was no composite contract for purchase of machinery and services, it was not considered necessa....
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....en 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 as such the payments to the vendor of related equipments cannot be said to be towards any services. He, however, observed that there was a contractual clause with respect to "services of a seller" and that ....
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....nternational 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-appellant, and Shri Abhishek Shula, appearing for the revenue-respondent. We have gone through elaborate written submissions filed by the assessee from time to time- including before the authorities below, we have also perused....
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....s 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 part of income embedded in payments to the non residents is in respect of any services, and as such not taxable even under the Indian Income Tax Act, the assessee should be granted liberty to argue on all legal issues, including impac....
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....ld 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 is held to be in existence, one has to see the applicable treaty, if any, to examine whether or not the assessee gets any relief from the provisions of such a tax. This approach, however, was not approved in the landmark Special Bench decision in the case of Mot....
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....tracting 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 jurisdictions over a tax subject. Unless a tax jurisdiction has a right to tax an income, it is irrelevant whether or not, under the domestic tax legislation of that tax jurisdiction, the income in question is taxable...... 17. In our considered view, therefore,....
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....xation 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 thought canvassed by the learned representatives, we are, for the reasons we have set out in the preceding paras-including the reasons of deference for the Larger Bench of this Tribunal and conceptual foundation elaborated in these paras, of the considered view that in ....
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.... 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 of tax deductible from these payments, and, in the absence of such an exercise, ought to have deducted tax at source from entire payments. The observations relied upon by the AO and the CIT(A) are as follows: 10. In Transmission Corporation case (supra) a non-resident ....
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....ome 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 decision holds is that in the event of any part of the income embedded in the payment being taxable in India, the tax is required to be deducted from such payment. There is no dispute, in the present case, on this proposition about the scope of Section 195. The contention of t....
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....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 where no portion of payment is exigible to tax, the question of application of s. 195(2) does not arise, because, as the section itself categorically provides that it comes to play "where the person responsible for paying any sum chargeable under this Act (other than salary) to a non-r....
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....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 obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India. In our view, the a....
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....t 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- (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 ; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinari....
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....on 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 carried out at the project site in India, and that factor is also present in installation, commissioning and erection. In any case, once we come to the conclusion, as seems to be free from any doubt or controversy, that income as a result of such activities, as installation, commissioning, erection or assembly of a plant, machinery or equi....
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....s 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 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 o....
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.... 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 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 attributable to (a) that permanent establishment; (b) sales in the ....
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....ially: ..................... (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 building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities , if any) continue 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 pay....
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....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 other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve month period; ........................ (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) 37. The underlying principle in all the above definition, even as there is a variance on the threshold time limits, is that unless the installation or assembly project or supervisory activities in connection therewith cross the specified threshold time limit, the no....
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....s 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 limit (indeed for the permanent establishment threshold more generally) is to encourage businesses to undertake preparatory or ancillary operations in another State that will facilitate a more permanent and substantial commitment later on, without becoming immediately subject to tax in that State. [@ page 108; emphasis by underling supplied by us] 41. The UN's 'Committee of experts on International Cooperation in Tax Matters', which reviews and updates the UN Model Convent ion Commentary, not only has presence, but....
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....s 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 per cent of the gross amount of the royalties or fees for technical services. .............................. 4. The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of a person making payments, in consideration for the services of a managerial, technical or consultancy nature; including the provision of services of technical or other personnel. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees ....
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....tracting 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 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 or property in respect of which, or the contract under which, the royalties or fees for technical services are paid is effectively connected with such permanent establi....
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....tivities 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 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 or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political subdivision, a local authority thereof or a resident of that Contracting State. Where, however, the person paying the royalties or fees for techni....
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....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 that State itself, a Land or a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in wh....
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....r 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 or consultancy services (including through the provision of services of technical or other personnel) if such services are ancillary and subsidiary to the application or enjoyment of the right, for which a payment described in sub-paragraph (b) of paragraph 3 is received; (b) 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: (i) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-paragraph (a) of....
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....yments 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 the law 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 : (a) in the case of royalties within paragraph 3 (a) of this Article, and fees for technical services within paragraph 4 (a) and (c) of this Article; (i) during the first five years for which this Convention has effect; (aa) 15 per cent 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 firstmentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of....
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....nd 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 services) of this Convention. 6. The provisions of paragraphs 1 and 2 of this Article 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 provision of Article 7 (Business profits) or ....
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....han 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 royalties or fees for included services in all other cases; and (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 as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the 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 cinema....
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....ices 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. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. ....
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....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 also not in dispute, as has been stand of the revenue all along, that the construction, installation and assembly activities are de facto in the nature of technical services. To that extent, and unlike in the case of the provisions relating to Service PE, there is indeed overlapping effect of Article 5 and Article 12 or Article 13, so far as such services are concerned. As to what should be done in such a situation, we find guidance from the observations of Hon'ble Supreme Court in the case of Union of India vs. India Fisheries (P) Ltd. [57 ITR 331 (1965)] "If there is an apparent conflict between two independent provisions of law, the special provision must prevail." This principle is described in Sampat lyengar's Commentary on Law of Income-tax (9th Edn; Vol. 1, p. 48) ....
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....E 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 Model Convention, that even though " construction, assembly and similar activities could, as a result of modern technology, (may) be of very short duration and still result in a substantial profit for the enterprise" and even though "the period during which foreign personnel remain in the source country is (perhaps) irrelevant to their right to tax the income", the right to tax will not vest in the source country unless time limit threshold is satisfied as "the reason for the time limit (indeed for the permanent establishment threshold more generally) is to encourage businesses to undertake preparatory or ancillary operations in another State that will facilitate a more permanent and substantial commitment later on, without becoming immediately subject to tax in that State". If we are t....
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.... 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 charges. It could thus not be possible for the assessee to take an about turn now and claim that such payments are not taxable anyway. Learned counsel for the assessee, on the other hand, fairly submitted that the taxability of such payments as FTS or FIS was taken as granted, without appreciating this nuance of the matter, as coming to the light in the course of this hearing, so far as standalone payments for these services were concerned, but neither such a conduct on the part of the assessee can constitute estoppel against the correct legal position nor would it imply that the a part of sale consideration can be fictionally treated as towards such services and then treated as FTS or FIS while the scope of such payments, under the tax treaties, is confined to amounts actually paid as FTS o....
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.... 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 included services- as these are termed in Indo US tax treaty. 51. The same is the position with regard to the Indo Belgium tax treaty by the virtue of following MFN (most favoured nation) clause vide protocol dated 26th April 1993 which provides as follows: 1. Ad Articles 5, 7 and 12 If under any Convention or Agreement between India and a third State being a member of the OECD which enters into force after 1st January, 1990, India limits its taxation on royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in the present Agreement on the said items of income, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under the present Agreement with effect from the date fr....
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....ect 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 specifically exclude, "amounts paid for ... services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property", Elaborating upon the scope of this provision, which also finds place in Indo US tax treaty, a coordinate bench of this Tribunal, in the case of Hindalco Industries Ltd Vs ACIT [94 ITD 242 (2005)], has observed as follows: 23. The easily discernible common thread in all the transactions visualized in art. 12(3)(a) is that all these transactions are such that when sale takes place by the resident of one Contracting State to the resident of the other Contracting State, consideration of sale is taxable under art. 12 in the source country as well. Article 12(3)(a) and (b) only define as to what constitutes 'royalties' and art. 12(2) provides that 'royalt....
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....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 brought to tax, in view of the provisions of Article 12(5)(a) of Indo Swiss tax treaty, in the hands of the Swiss vendors as well. As corresponding provisions also find place in Indo UK [Article 13(5)(a)] and Indo US [Article 12(5)(a)] tax treaties, for this reason as well and for the material facts being similar, the consideration for installation, commissioning or assembly activities, or supervision services in respect thereof, can also not be subjected to tax in India in the hands of the UK and US based vendors either. 56. As evident from a plain look at the language employed in the FTS and FIS clauses of related tax treaties the taxability as FTS or FIS arises at the point of time when the payment is "actually" made "for" technical services "arising in a Contracting State and paid to a resident of other Contracti....
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....ed 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 income and the accounting was done on cash basis. On these facts, TDS liability of the assessee cannot be said to crystallize at the time of income actually accruing to the foreign company and Revenue's claim that taxability crystallizes at the time of income accruing to the foreign company is not even relevant for deciding that question. As Rowlatt, J. has said, Cape Brandy Syndicate vs. IRC 1 KB 64, "in a taxing statute, one has to look merely at what is clearly said; there is no room for any intendment...". Since s. 195 specifically provides for deduction of tax at source at the time of payment or crediting the payee's account, whichever is earlier, we are unable to approve the stand of the Revenue regarding deduction of tax at source on the basis of accrual of income. In this view of the matter, we are of the consi....
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....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 be attributed to such an installation, commissioning or assembly activity. The question as to whether, under the contract, the assessee was separately compensated for the installation, commissioning or assembly activities, or supervisions activities relating thereto, or whether the consideration for such activities was embedded in the sale consideration itself, is, not really to be examined any further, as the scope of taxability under Section 5(2)(b), given the facts of this case, is wholly academic. These provisions could have been pressed into service when these could have been more beneficial to the assessee, but now that these payments have no tax implications at all in India under the scheme of the relevant tax treaties under section 90(2), there is no occasion for the assessee to look at the provisions of the In....