TaxTMI 
TaxTMI 
2019 (2) TMI 797
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.... filed by the Revenue the Ld. AR sought permission to address the claim subject to no objection posed by the revenue. The Sr. DR stated that she has no objection if the Ld. AR wants to set out his claim first. In the said background the Ld. AR invited attention to the assessment order dated 2.5.2013 passed u/s 147 read with section 143(3) and 144C (3) of the Income Tax Act 1961. Referring to the same it was submitted that the case was reopened on the basis of reasons recorded relying on the decisions taken by the Revenue in 2006-07, 2007-08 and 2008-09 assessment years. Filing a copy of the reasons recorded. This specific fact noticed in para 5 of the same was relied upon. The relevant extract referred to is extracted hereunder :- "5. Earlier assessments for A.Y. 2006-07, 2007-08 & 2008-09 have been done taxing the income from consultancy services in respect of NH-45 on gross basis. For the A.Y. 2006-07 & 2008-09 the department has preferred appeal before ITAT and for A.Y. 2007-08 the assessee is in appeal before CIT(A). The decision regarding applicability of section 44D to receipts from NH-45 has not attained finality and is pending before various appellate authorities." 3. I....
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....Km 28.00 to Km 67.00 and 4-laning from Km 67.00 to 121.00 including strengthening and up-gradation of existing 2-lanes [Tambaram-Tindivanam Section) of NH-45. As per the scope of work defined under the agreement, the appellant was required to provide services in implementation of the project, review and approve material, its design results and recommend special tests wherever required for materials, suggest substitutes of unsuitable materials, to assess adequacy of inputs such as materials and labour. The appellant was also required to supervise and check the setting out of the culverts, bridges, foundations, floor slabs, all other work required for the project, e.g., Grade stakes, dope stakes, flow lines of culverts, roadway layout, longitudinal section and cross section, thickness of pavement layers, especially of asphalt concrete payment, location and dimensions of bridges, box and pipe culverts etc. The Ld AO held that income derived by the appellant from NH-45 project was in the nature of [i] 'fee for technical services' in terms of Explanation 2 of section 9 (1) (vii)of the act and (ii) 'fee for included services' under Article 12 of the treaty. Since the appe....
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....ctivities in India. The assessee has entered into contracts with. various parties mainly State Governments and has been providing them consultancy services as required under such agreement. These services are in the nature of FTS. 2. Assessee filed its return of income for AY 2005*-06 declaring an income of Rs. 37,10,940/- on 31.10.2005. The return was processed under section 143{l). 3. The agreement entered with. the assessee with NHAI for the purpose of rendering consultancy services in respect of NH-45 {Tembaram-Tiniduanam section), was signed on 20th March, 2002. Since the agreement is signed before 31st March, 2003 section 44D is applicable instead of section 44DA Income from that contract is to be taxed at gross basis @ 20% instead of net basis and no expenses is to be allowed. 4. The assessee has calculated the taxability of its income on net basis including income from NH- 45. 5. Earlier assessments for A Y 2006-07, 2007-08 and 2008-09 have been done taxing the income from consultancy services in respect of NH-45 on gross basis. For the AY 2006-07 and 2008-09 the department has preferred appeal before ITAT and AY 2007-08 the assessee is in appeal before CIT (A).....
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....rning any income from any source outside India " or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business of professions carried on by such persons in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to any income by l.oay of fees for technical services payable in pursuance of an agreement made before the t= day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation l . - For the purposes of the foregoing proviso, an agreement made an or after the t= day of April, 1976, Shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. 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 provisions of services of technical....
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....act and its receipt from NHAI project was taxable as normal business profits. Questions no.(i) framed in para 4 is accordingly answered in negative and in favor of appellant. As a result, the question no.(ii)becomes inconsequential. 7.4 However, let us examine the alternate plea of the appellant also regarding applicability of section 44D of the Act. Article 12(2) of the treaty provides that fee for included services provides that provisions of sub-article (2) shall not apply if the beneficial owner of fee for included services was a resident of contracting state and carries on the business in the other contracting State in Which the Fee for included services arises through a PE situated therein. In such a case, the provisions of Article 7 regarding computation of business profit shall apply. The implication of Article 12(6) are that the fee for included services shall not be taxed on gross basis at the rate given in the treaty and shall be taxable as business profit if there is a Permanent Establishment. Article 7(2) provide that where an enterprise carries on business in the other contracting State through a Permanent Establishment situated therein, the profit attributable to ....
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....s and fees from technical services. While these two sets or provisions dealing with taxability on gross basis may belong to the same genus of taxation. models, but, at the same time, these are two independent, mutually exclusive, and therefore, computing sets of provisions. Once it is clear that these are competing models of taxation of royalties and fees for technical services on gross basis, in the IT Act and in the India-Sinqapore Tax Treaty. It has to follow that the provisions of the IT Act, in preference over the provisions of the applicable tax Treaty, cannot be thrust upon an unwilling appellant. Therefore, the Provisions of the royalties and fees for technical services on gross basis under the tax Treaty on the technical services' for the purposes of the said Treaty. This situation is quite distinct and different from the situation that the receipts are in the nature of royalties and fees for technical services' for the purpose of treaty but are being taxed on the net basis because of the application of Article 12(6), i.e., on account of being attributable to the PE in the other Contracting State. IN other words, in case a receipt is held to be not taxable as '....
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.... in the India-Singapore treaty etc. The relevant para of Explanatory Notes to the Finance Act, 2003, which. explains the intention behind the insertion of the new section, is extracted below: «With a view to harmonize the provisions relating to the income from royalty or fees for technical services attributable to a fixed place of professions or a permanent establishment in India with similar provisions in the various Double Taxation Avoidance Agreement, the bill proposes to insert a new section 44DA to provide that the income by way of royalty or fees for technical services received from government or the Indian concern in pursuance of an agreement made by a non resident (not being a company) or a foreign company with the Government or the Indian concern after the 31st day of March 2003, where such non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of professions place of profession situated therein, and the right property or contact in respect of which the royalties or fees for technical services are paid is effectively connected with....
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....ff accordingly. 8. In the result, the appeal is allowed." 4.1 As has been argued on behalf of the assessee and which position of fact has not been controverted by the Revenue. It is seen that the said issue has come up for consideration before the ITAT and in 2006-07 and 2008-09 assessment years in ITA No. 1231/Del/2012 and 1346/Del/2012 the issue was decided by the Co-ordinate bench in the following manner :- 7. "We have carefully considered the rival contention as well as also perused the relevant documents relied up on by both the parties. The only issue that emerges in this appeal is that whether the amount received by the assessee from NH-45 project is chargeable to tax u/s 44D of the act or under the normal provision of taxation. If the amount is chargeable to tax as FTS u/s 44D then the assessee shall not be allowed any deduction for expenditure and the income shall be chargeable to tax @ 20 % u/s 44D rws 115A of the Act. According to the assessing officer it is chargeable to tax u/s 44D and according to assessee it s chargeable to tax under the normal provision of taxation as it is not fees for technical services as per section 9 (1) (vii) of the act. Further as the ....
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....bridges box and pipe culverts. 10. LD AO has held that assessee is only providing services in those contracts and is not carrying any business India. It is admitted fact that assessee is engaged in the consultancy services but that is also the business of the assessee being carried on in India. This facts is apparent that AO himself has taxed Rs. 3629478/- as business income of the assessee. Act of providing services to the various clients in India is in fact the business of the assessee. This fact has also been admitted by Ld AO in Para no. 2 of the assessment order. Ld AO has made irrelevant analysis of disclosure in the return of income of the assessee as well as the nomenclature described in TDS certificate, when AO himself agrees that assessee is engaged in the business of Page 6 of 13 services wrt highways, transport etc. Therefore it cannot be said that assessee is not carrying any business in India. 11. LD AO producing the provision of Explanation 2 to section 9 (1) (vii) has held that the receipts of the assessee is Fees For Technical services. The provisions of explanation 2 to section 9 (1) (vii) defines the scope of "Fees For Technical services" as under :- "Ex....
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....on since it is a stepin- aid to construction. The assessee also contends that 'construction' is not a mere physical activity or laying bricks and mortars to include something more, viz., mental process of step-in-aid and it includes engineering and bid evaluation. He also contends that bid evaluation and engineering amounts to a formulation and 'construction' includes formulation among other activities like erection, fabrication, fashioning, shifting devising and creation also. The learned departmental representative, on the other hand, supports the stand of the revenue and contends likewise as has been reasoned in the impugned orders of the lower authorities. 6. In our opinion, on the facts and in the circumstances of the case, the assessee must succeed, since section 9(1)(vii), when read with Explanation 2attached thereto, makes it clear and postulates a situation where fee for technical services is taxable as income but any consideration for any construction, assembling, mining or like project undertaken by an assessee is excluded from the purview of the said assessment and construction, assembling, mining or like project does include a step-in-aid thereto. Th....
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....mpany with Government or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent. of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern after the 31st day of March, 1976 but before the 1st day of April, 2003. Explanation For the purposes of this section,-- (a) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ; (b) "foreign company" shall have the same meaning as in section 80B ; (c)....
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....e the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration....
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....the business of the permanent establishment including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of the enterprise as a whole in accordance with the provisions of and subject to the limitation of the taxation laws of that State. The implication of the Article 7 read with sub-article (2) and sub-article (3) is that if a non-resident entity is providing services or carrying on a business in India through a PE then its income is to be computed after deducting all the expenses incurred by it in accordance with the domestic law. In this context, in my opinion, this limitation will apply to expenses, such as, rate of depreciation, various restrictions placed under section 36, proviso to section 37 regarding disallowance of unlawful expenses, limitation u/s 40(a)(i) and 43B etc .The limitation referred in Article 7(3) does not mean that income is to be taxed under presumptive scheme of computation u/s 44D. It would practically mean going back to article 12(2) of the treaty and render provisions of article 12(6) redundant. This issue was examined by Mumbai Tribunal in the ....
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....ion is quite distinct and different from the situation that the receipts are in the nature of 'royalties and fees for technical services' for the purpose of Treaty but are being taxed on the net basis because of the application of Article 12(6), i.e., on account of being attributable to the PE in the other Contracting State. In other words, in case a receipt is held to be not taxable as 'royalties and fees for technical services' under the provisions of the India-Singapore tax Treaty, the same cannot also be subjected to tax under Section 44D r/w Section 115A either." 7.5 Subsequently, the above judgment has been followed by the various courts, e.g., in the case of JCIT vs. Essar Oil Ltd. (2006) 7 SOT 216 and in the case of Cray Research India Ltd. vs. JCIT 136 TTJ 1 delivered on October, 2010. Similarly in the case of JCIT vs. Essar Oil Ltd. the Court has examined similar issue. In this case, a U.K. company entered into a contract with M/s Essar Oil Ltd. for supervision of construction and commissioning activities in India for the refinery complex being built at Jamnagar. The appellant company returned a loss of Rs. 66,20,690/- after deducting all expenditure fr....
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.... (not being a company) or a foreign company with Government or the Indian concern after the 31 day of March, 2003, where such nonresident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession 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 place of profession, as the case may be, would be computed under the head "Profits and gains of business or profession" in accordance with the provisions of the Income-tax Act. However, it is provided that no deduction shall be allowed, in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices. " 7.7 It can be inferred from the explanatory notes above that legislature was o....