TaxTMI 
TaxTMI 
2016 (2) TMI 667
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and also not alternatively under section 44D of the Act. 3. The revenue has raised the following grounds of appeal for Assessment Year 2008- 09:- "1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in deleting the addition made by the AO by holding that the income derived by the assessee from NH-45 project is to be computed under article 12(6) and article 7, after deducting all expenses from the gross receipts and not to be taxed as free for technical services in terms of explanation 2 of section 9(i) (vii) of the Act and also not alternatively under section 44D of the Act. 4. As facts in both the appeals are similar we deal with them together referring the facts for AY 2006-07. The facts in brief of the case are that the assessee is a foreign company incorporated in USA and is engaged in the business of providing consultancy services in the areas of highways, transportation, water supply, waste management etc. The assessee has set up several projects offices in India to carry on its activities in India. For AY 2006-07 assessee filed its return of income declaring an income of Rs. 51,26,472/- on 06.12.2006. The case was selected for scruti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....intaining regular books of accounts and computed its income on the basis of audited books of accounts. The AO has not doubted the authenticity and the income computed as per books of accounts. b. The income of the assessee from NHAI is not in the nature of 'Fees for Technical Services', as the assessee is covered by exceptions to Explanation 2 of section 9(1)(vii) of the Act. c. The assessee, providing engineering services related to construction services, is covered by the Explanation 2 of the above section. The agreement entered into by the assessee with NHAI was for the implementation of the project, review and approve material, its design results and recommend special tests wherever required for materials, suggest substitutes for unsuitable materials, assess adequacy of inputs such as material and labour, supervise and check the setting out of the culverts, bridges, foundations, floor slabs, and all other work required for the project. Therefore, it is clear from the perusal of the said activities that the assessee company was involved in the construction activities, which include engineering and other related services. For this he relied up on the dec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is also claimed that it is entitled to the benefit of Indo US DTAA and therefore there is no presumptive tax there in provided for. 8. The following issue emerges for the consideration that whether the income received by the assessee on account of NH-45 is fees for technical services or not u/s 9 (1) (vii) of the Income tax Act. Assessing officer has merely gone on the presumption that as a. The contracts receipts are for the consultancy services it is covered in the definition of Fees for Technical services. b. He has also been lead by the classification of receipt in the TDS certificates where the deduction has been made u/s 194J of the act as consultancy fees. c. Assessee itself says in return of income that it is engaged in the business of consultancy. We are of the view that for the purposes of the characterization of the income of the assessee all the above criteria are not relevant for the reason that 1) The consultancy services are in general, "fees for technical services". But AO need to examine it with respect to explanation (2) of section 9(1) (vii) of the act which has also provided some exclusions. AO has failed to look....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "Explanation 2.- For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". 12. Therefore according to this any consideration which is for the rendering of any managerial technical or consultancy services is characterized as " fees for technical services" . However some exceptions are carved out if the such managerial technical or consultancy consideration is for any construction etc or like projects undertaken by the recipient. Ld AO has failed to consider this exceptions carved out in definition of FTS, Therefore the attempt made by ld AO is on incomplete reading of that explanation ignoring exceptions. Hence It is necessary to examine the nature of work carried out by the assessee. From the nature of work carried out by the assessee it is apparent that i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a step-in-aid thereto. The assessee, as has been stated above, entered into an agreement with the corporation and it provided for two separate activities, viz., to give to the said corporation the expertise and technical assistance of consultants and technical assistance in connection with construction and assembly of hulling, drying and processing factories and plants and also for management services thereof. The bid evaluation and engineering services are said to be connected with inviting tenders and for other process but the ultimate aim for those tenders and process is the construction of the corporation processing factory and plant and in this view of the matter, the step-in-aid included in these services, viz., engineering and bid evaluations, has to be held as a step-inaid for construction of factories and plants of the Corporation, hence, under section 9(1)( vii) read with Explanation 2 attached thereto the income is not taxable. We hold and direct accordingly. Rs. 84,456, as such, stands deleted from computation. The appeal succeeds and stands allowed." 15. Ld AO has rejected the contention of the assessee holding that the case of the assessee does not fall within the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oreign company" shall have the same meaning as in section 80B ; (c) "royalty" shall have the same meaning as in the Explanation 2 to clause (vi) of sub-section (1) of section 9 ; (d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976. It is clear for the above provision that for invoking it the fees for technical services should have the same meaning as per explanation 2 to section 9 (1) (vii) of the act. As we have already held that receipt of assessee is not „fees for Technical services as defined under above explanation as it relates to construction activity , we are of the view that accordingly that receipt is out of the purview of presumptive taxability u/s 44D of the Income tax Act. 17. Further LD AO has also analyzed the provision of article 12 (4) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied." 18. Therefore on reading of the above exposition of the term " make Available' it's is not the case of the AO that there is imparting of technical skill which is absorbed by the receiver so that NHAI can deploy the similar technology in future without depending on the provider. In view of above we are of the view that these payments do not qualify under article 12 (4) of the DTAA as the conditions of " make Available" does not satisfy. 19. Regarding Reliance by Ld AO on the decision of AAR in Ericson Rulings 224 ITR 203 (AAR) is also half hearted. In that ruling it is held that it does not change the character of receipt but it is chargeable under the different mechanism. We are on the issue of deciding the mechanism under which the receipt would be taxable under Domestic tax laws read with the Indo US Treaty. 20. On the other aspects of applicability of DTAA CIT (A) has held as under :- 7.4 However, let us examin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cle 12(6) redundant. This issue was examined by Mumbai Tribunal in the case of DCIT vs. Boston Consulting Group Pte, Ltd. reported at 2005 94 ITD 31 Mum in the context of the Indo-Singapore Tax Treaty. It was held as under: "that non-deduction of expenses under Section 44D, -which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under Section 115A. A somewhat similar scheme of taxability of royalties and fees for technical service on gross basis, but a lower rate, also finds place in most of the tax treaties including India-Singapore Tax Treaty. Article 12 provides for taxation of fees for technical services in the source country on gross basis, but at a lower tax rate of 15 per cent, barring the case of fees for technical services which are ancillary and subsidiary to the enjoyment of property for which royalties under para 12(3)(b), which are taxed at an even lower rate of 10 per cent. Section 44D r/w Section 1 ISA of the Indian IT Act, and Article 12 of the India-Singapore tax Treaty are, therefore, similar in nature. These alternate paradigms, contained in Section 44D r/w Section 115A and in Article 12 of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eturned a loss of Rs. 66,20,690/- after deducting all expenditure from the gross receipts. The main services provided by the appellant company were construction supervisory services of the project supervision of start up and commissioning of the project and material and warehouse management of the project. As per the A.O., these services fell within the ambit of the fee for technical services and taxed the income of the appellant by invoking the provision of section 44D of the Act despite the fact that the receipt of the appellant company were assessable under Article 7 of DTAA between India and U.K. The ITAT did not agree with the contention of the A.O. It was held that in case of receipts through permanent establishment in respect of which profits are to be computed under article 12(3) of the DTAA, section 44D was not to be applied for the purpose of deduction of expenses. The court further held that section 44D and for that matter explanation 2 to section 9(l)(vii) do not apply. 7.6 This controversy has now been laid to rest by insertion of new section 44DA in the act w.e.f. 1.04.2004 by the Finance Act, 2003 where aseesee has been given explicit option to compute its i....