AI Drafter 
TaxTMI 
TaxTMI 
2017 (9) TMI 33
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....e order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the reopening was bad in law. 4. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the assessment was reopened based on a mere change of opinion. 5. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of professional charges of Rs. 6,52,000/- u/s.40(a)(i). 6. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of corporate maintenance charges of Rs. 27,55,966/- u/s.40(a)(i). 7. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the assessment year 2003-04 a disallowance uls.40(a)(i) would not be attracted in the case of the appellant in respect of the professional charges and corporate maintenance charges. 8. For that the Commissioner of Income Tax (Appeals) failed to appreciate that in the instant case the appellant had deducted tax at source in respect of the payment of professional charges and corporate maintenance charges. 9. For that the Commissioner of Income Tax....
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....above disallowances. 4.1 During the assessment proceedings, the Assessing Officer (in short 'AO') found that the assessee has made the payment of Rs. 6,52,000/- under the head professional charges in March, 2003 and the TDS u/s.195 was deducted on the same date. However, the assessee has remitted the amount to the Government of India account in November, 2003 which is beyond the due date specified u/s.200(1) of Income Tax Act. 4.2 Similarly, the assessee has paid a sum of Rs. 27,57,966/- towards corporate Management charges and deducted the TDS u/s.195 but remitted the same beyond the due date specified u/s.200(1) of the Act. Therefore, the AO made the addition of Rs. 6,52,000/- towards professional charges and Rs. 27,55,966/- under the corporate management charges aggregating to Rs. 34,07,966/- u/s.40(a)(i) of the Act. 5.0 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO. Therefore, the assessee filed appeal before this Tribunal. 6.0 During the appeal, the Ld.AR of the assessee made two fold arguments. Firstly the AR argued that as per the provisions of the 40(a)(i) of the Act, pr....
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....ns of Sec.40(a)(i) before the amendment which is applicable to the instant case and the same is extracted as under: 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", - (a) in the case of any appellant- [(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India on which tax has not been paid or deducted under Chapter XVII-B; (emphasis supplied) Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation.-For the purposes of this sub-clause, - (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same....
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....d but remitted to the Government account in the subsequent year. Therefore, the AO has rightly applied the disallowance u/s.40(a)(i) and the Ld.CIT(A) has confirmed the disallowance. The assessee's argument on this ground is not acceptable and the same is dismissed. 8.0 The next argument taken by the assessee on the issue of disallowance in non-discriminating Clause provided in DTAA with Indo-UK Treaty. For ready reference, we re-produce the Aerticle-24 of DTAA between India and Germany and Article-26 of Indo-UK treaty which reads as under: ARTICLE 24 - Non-discrimination-1: Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to nationals of that other State in the same circumstances and under the same conditions are or may be subjected." Article 26 of the DTAA between India and UK: ARTICLE 26 - Non-discrimination-2: The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more bur....
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....Act, 2006 with retrospective effect from 1st April, 2006, provided for disallowance of payments made to a non-resident only where tax is not deducted at source at the time of remittance. However, a similar payment to a resident does not result in disallowance in the event of nondeduction of tax at source. Thus, non-resident left with a choice of dealing with a resident or a non-resident in business would opt to deal with the a resident owing to the provisions of s.40(a)(i) of the Act. To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same condition as if the payment is made to a resident. Thus this clause in DTAA neutralizes the rigour of the provision of s.40(a)(i) of the Act. In this regard it would be relevant to refer to the provisions of s. 90(2) of the IT Act, 1961. It reads thus: 8.17 We therefore hold that in view of the provision of art. 26(3) of DTAA, the AO cannot seek to invoke the provisions of s.40(a)(i) of the Act for deduction while-computing the profits and gains of business or profession. A similar view was taken by Tribunal ....
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....ng to the parent company based at Germany. All the activities of the parent company as well as its subsidiary companies based around the world are routed through the Server. According to the Ld.AR, the Server Maintenance Charges are in the nature of reimbursement charges paid to the parent company for using software related issues and cannot be held as payment of fee for Technical Services and hence the TDS is not applicable. The Ld.AR relied on the decision of ITAT, Chennai, in the case of Cairn Energy Pvt. Ltd., reported in (2010) 2 ITR 38. 11.1 Similarly, in the case of Testing and Development Charges, the Ld.AR argued that the assessee is using the output of technology without human intervention. For holding the payment as Fee for Technical Services(FTS) the element of human intervention is necessary. whereas in the assesse's case both for server maintenance and testing and development charges there is no human involvement and thus the payment cannot be held as Fee for technical services. 12.0 The nature of the services rendered by the parent company in respect of Server maintenance and testing and development charges were elaborately discussed by the Ld.CIT(A) in his Ord....
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....was involved. The only skill required was knowledge to operate the machines and to take readings. Any shortcoming found in the component was not set right by the testing company, but the component would be sent back to the appellant for rectifying. The only task of the non-resident was to give a report on the performance of the components by giving actual values based on readings against design specifications. The appellant contended that the mere noting of actual readings against design specifications does not amount to rendering of technical services. The non-resident carried out the testing services in the normal course of its business. There was no involvement of the appellant and no interaction between the appellant and the non-resident apart from obtaining the reports. Moreover, the testing done was normal routine testing not involving any specialized treatment. Therefore, the appellant submitted that the payment was not made for technical services falling within the meaning of technical services envisaged in the DTAA between India and Italy or u/s 9(1)(vii) of the Income tax Act. The charges paid could only be considered as business profits of the non-resident. ....
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....harti Cellular Ltd., in respect of fee for technical services and also relied on the decision of Skycell Communications Ltd. & Anr. vs. DCIT & Ors. reported 251 ITR 53 (Mad). On the other hand, the Ld.DR relied on the lower authorities orders. 14.0 We heard the rival submissions and perused the material placed before us. 14.1 The Assessing Officer made the addition under the impression that in respect of services rendered outside India is taxable, even though there is no permanent establishment in India, by virtue of Amendment to explanation of Section 9(2) of Income Tax Act the Fee for Technical Services (FTS) payable outside India would be deemed to accrue or arise in India and hence TDS is deductible. 14.2 The Ld.AR made Three fold arguments contesting additions made u/s.40(a)(i) relating to the server maintenance charges and the testing and development charges, the Ld.AR argued that the payment was not in the nature of FTS hence the TDS u/s 195 is not applicable. Further the payments are covered by the DTAA between India and Italy and according to the treaty unless the payee has Permanent Establishment(PE) in India the business profits are not taxable u/s 9(1)(vii) of ....
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.... gathered from the surrounding word i.e. from the context. Coupling of the words together shows that they are to be understood in the same sense. The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial services and consultancy services has to be given by human only and not by any means or equipment. Therefore, the word "technical" has to be construed in the same sense involving direct human involvement without that, technical services cannot be held to be made available. Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user cannot be characterized as providing technical services. The Hon'ble Delhi High Court in the case of CIT vs. Bharati Cellular Ltd (supra) in this regard has observed and held as under: "In the said Explanation the expression "fees for technical services" means any consideration for rendering of any " managerial, technical or consultancy services". The word " technical" is preceded by the word " managerial" and succeeded by the word " consultancy". Since the expression " technical services" is i....
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...., who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant. 15. From the above discussion, it is apparent that both the words "managerial" and "consultancy" involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word "technical" as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1)(vii) of the said Act. This is so because the expression " technical services" takes colour from the expressions " managerial services" and " consultancy services" which necessarily involve a human element or, what is now a days fashionably called, human interface" This principle has been....
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....same to the Revenue. Satellite television has become ubiquitous, and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments made to the cable operator. Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. 6. When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical ....
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....ii) of the said Act. In the said Explanation the expression 'fees for technical services' means any consideration for rendering of any 'managerial, technical or consultancy services'. The word 'technical' is preceded by the word 'managerial' and succeeded by the word 'consultancy'. Since the expression 'technical services' is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words: "Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general." This would mean that the word 'technical' would take colour from the words 'managerial' and 'consultancy', between which it is sandwiched. The word 'managerial' has been defined in the Shorter Oxford English Dictionary, Fifth Edition as: "of pertaining to, or characteristic of a manager, esp. a professional manager of or with....
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....i)' of the said Act. This is so because the expression 'technical services' takes colour from the expressions 'managerial services' and 'consultancy services' which necessarily involve a human element or, what is now a days fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection/port access do not involve 'any human interface and, therefore, the same cannot be regarded as 'technical services' as contemplated under s.1 94J of the said Act. 15.4 From the judicial pronouncements discussed above the fee for technical services involve human element and consideration is for rendering the managerial, technical and consultancy services. Consequently, applying the rule of noscitur a sociis the word 'technical' as appearing in Explanation-2 to Section 9(1)(vii) would also have to be construed as involving human element. But facility provided by the parent company in the case of server maintenance charges was the usage of various activities mentioned above and no human interface is involved. According to the assessee, usage services are utilized by the parent company and the subsidiary companies alone and no third party was allowe....
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....ons and human expert knowledge only can decide whether the parts are acceptable or not. Beginning from the activity of sending the auto parts to the activity of testing and development the human intervention and skill is necessary. Mere machine operator cannot decide whether the auto parts are as per the specifications and drawings or not? Therefore we are unable to agree with the Ld.AR that the services are not in the nature of FTS and hold that the payment is made for technical services. 16.3 Ld.AR argued that the assessee is covered by DTAA and as per the Article-7 of DTAA between India and Italy only profits of the business are chargeable to tax if the entity has a permanent establishment in that country. In this case, the parent company has no permanent establishment in India and hence no tax is required to be deducted. 16.4 The argument of the assessee is not acceptable since the Fee For Technical services are covered by Article-13 of the DTAA (and not by article -7) which reads as under: 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 Cont....
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....t 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 which the permanent establishment or fixed base is situated. 7. 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 royalties or fees for technical 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 Convention. 16.5 The assessee submitted that the services are rendered outside India and to tax the income under section 9(1)(vii) of IT act in the year under consideration the services should ha....