TaxTMI 
TaxTMI 
2005 (6) TMI 213
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....These fees are chargeable to tax in India under section 9(1)(vii) of the Act. Accordingly the assessee was required to deduct tax as required under section 195 of the Act. The assessee having failed to deduct such tax under section 195 was treated as the assesseein-default under section 201 of the Act. Facts 3. The appellant is in the process of setting up a power plant at Toranagallu, Bellary District, Karnataka. The appellant entered into an agreement dated 20-9-1995 with REOL, a company incorporated in USA for setting up the said power plant. The agreement provided thus: "Whereas the Employer (Jindal Tractebal Power Company Limited - JTPCL) requires that certain Scope of Supply should be provided and executed by the Contractor (Raytheon-Ebasco Overseas Limited - REOL) namely offshore equipment supply and related services as more particularly described in Schedule 3 setting out the Scope of Supply and has appointed to act as the Engineer, Tata Consulting Engineers for the purposes thereof and has accepted a Tender by the Contractor for the provision and execution of such Scope of Supply in the fixed lump sum amount [which shall not be subject to any adjustment (except in accor....
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....sequently suo motu filed appeal under section 248 to the Appellate Commissioner to hold that the assessee was not required to deduct tax at source and claim the refund of the tax deducted and paid to the Government. 4. Learned CIT(A) considered the relevant orders of Assessing Officer as well as the submission by learned counsel for assessee. She also perused the agreement between the assessee and REOL. She concluded that since the services have been utilized for a business situated in India, the payment of technical services is taxable in India as provided under section 9(1)(vii) of the Act. Section 9(1)(vii) will apply regardless of the fact that there is no business connection between the non-resident and Indian Enterprise. She also perused the provision of Double Tax Avoidance Agreement (DTAA) with USA. During the appellate proceedings, learned CIT(A) asked certain details relating to project cost, cost of machinery, cost of erection work, cost of supervision charges and amount of customs duty paid. The appellant filed reply dated 18-1-1999. Learned CIT(A) observed that the questions were answered in vague manner. Learned CIT(A) in this regard observed thus: "The appellant fi....
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....cal services" are defined in Explanation 2 in section 9(1)(vii). As per said section fees for technical services will not include consideration for any construction, assembly, mining or like projects undertaken by the recipients. Thus though the amount paid is 'fees for technical services' the same is outside the scope of Explanation 2 to section 9(1)(vii). For this proposition he relied upon the following decisions: (i) ITO v. National Mineral Development Corpn. Ltd. [1992] 44 TTJ (Hyd.) 8, (ii) CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459 (Mad.), (iii) CIT v. Mitsui Engg. & Ship Building Co. Ltd. [2003] 259 ITR 248 (Delhi), (iv) CIT v. Sundwiger Emfg. & Co. [2003] 262 ITR 110 (AP), (v) CIT v. Energomach Exports [1998] 232 ITR 448 (Kar.). 5.1 Shri Velapalli further submitted that even if the amount is treated as chargeable to tax in India under section 9(1)(vii), as per provision of DTAA between India and USA, the amount is not chargeable to tax in India. If the amount under DTAA is not chargeable to tax in India, the provision of DTAA will override the provision of the Income-tax Act. Hence the assessee is not required to deduct tax under REOL. For this proposition....
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....pproval for engagement of foreign technical services. 1. With reference to your letter No. Nil dated 9th October, 1995, we advise that we have no objection to your engaging the services of technicians from M/s. Raytheon Ebasco Overseas Ltd. USA for a period from 20-9-1995 to 20-7-1998 on the terms advised to us provided they come to India on valid employment/business/entry visa/self, deputed to India. 2. Please note that our approval for meeting the expenses should not be construed as approval for tax exemption for which purpose if required, you may kindly approach the concerned authorities. 3. Please arrange to deposit with RBI or SBI 5 per cent cess under the Head of Account "0045-Other Taxes and Duties on Commodities and Services - 198 - Receipt under Research and Development Cess Act, 1986" on all payments made in connection with the deputation of technical personnel to India, including payments made locally in Indian Rupees towards their passage fare, local living expenses etc. as per Research and Development Cess Act, 1986. The provision would be applicable if foreign technicians are deputed to India. 4. This approval is not valid if the foreign national mentioned above c....
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....C.BT.PERTAIN/005/02.02/J-125/95-96 dated 27-3-1996 which stipulates the conditions and procedure for making payment of US $ 28,270,000 to REOL for the services. As and when payment is to be released, we will have to approach RBI for approval with the documents listed in the RBI's letter dated 27-3-1996. You may refer to the RBI's letter and ensure that all the documents are made available to us along with your monthly bills, so that there will be no delay in obtaining RBI's approval. As can be seen from RBI's letter dated 27-3-1996, one of the pre-conditions for RBI approval is NOC from Income-tax authorities. The Income-tax authorities will issue NOC after being satisfied that the tax deduction is in order. At that stage, if they ask for any clarification, we will revert to you. As an alternative, we can apply to the Income-tax Department under section 195(2) of the Income-tax Act or you can apply to the department under section 195(3) of the Act, for clarification and confirmation about the income which is subject to deduction of tax. It will be better if you make the application under section 195(3), as you will be in a better position to technically convince the income-tax dep....
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....s different than quantification. He invited our attention to the decision of Hon'ble Supreme Court in the case of A.V. Fernandes v. State of Kerala [1957] 8 STC 561 wherein at pages 573 and 574, Hon'ble Supreme Court Observed thus: "Reliance was placed in support of this position on the observations of this Court in Messrs. Chatturam Horilram Ltd. CIT, Bihar & Orissa: 'As has been pointed out by the Federal Court in Chatturam v. CIT, Bihar (quoting from the judgment of Lord Dunedin in Whitney v. Commissioners of Inland Revenue) there are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment. That, ex-hypothesis, has already been fixed. But assessment particularizes the exact sum which a persori liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay.' The appellant, however, forgets that the three stages in the imposition of a tax which are laid down here predicate, in the first instance, a declaration of liability as the starting point. ....
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....x from payments - is not restricted to payments in relation to works contracts - Person responsible for payment - Has to deduct from entire sum paid or credited and not merely income component of the sum - No right or duty to determine whether part of sum paid constitutes income of contractor - Income-tax Act, 1961, section 194C(1)." 6.2 Shri Indrakumar further submitted that for assessment year 1998-99, the Assessing Officer has directed the assessee to deduct the sum. The assessee has deducted the sum. The assessee has also issued necessary certificate for deduction of tax at source. Once the amount is deducted and paid to the credit of Government, it is for the payee to claim the credit in its assessment under the Act and the payer cannot demand refund of taxes deducted. The certificate of deduction is placed at page 407 of the paper book filed by the assessee. The appellant has given details of services rendered by REOL which in the terms of appellant himself is for following: (i) Providing engineering and design work relating to conceptualization of the power plant. (ii) Providing material based on overall design including specific requirements of the power plant. (iii) Pr....
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....he Act, yet the same is not chargeable to tax in India for the reason that under Article 12(4), the technical plan or technical design is not made available to the assessee. (ii) Even if it is chargeable to tax under Article 12(4), yet under Article 12(5), such fees for included services does not include amount paid for services which are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property. Since the services are inextricable linked to the sale of property the same is not chargeable to tax by invoking Article 12(4) of the Double Taxation Avoidance Agreement. 7. We have heard both the counsels at length. We have also considered the facts, arguments advanced, the material in the paper book to which our attention was drawn as well as case laws cited. In this case, the assessee is held as assessee-in-default under section 201 for failure to deduct tax as required under section 195 of the Act. Section 195 provides as under: "195.(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (no....
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....terest or other sum without deducting tax thereon under sub-section (1)." As per the Assessing Officer, the income is chargeable to tax in India but the section 9(1)(vii) of the Act being the fees for technical services. Explanation 2 to section 9(1)(vii) defines the words "fees for technical services". The relevant section and Explanation thereto provides as under: "9.(1) The following incomes shall be deemed to accrue or arise in India - (i) to (vi) (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning 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 or profession carried on by such person 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 way of fees for technical services payable in pursuance of an agreement ma....
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....he 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) .. .. .. (4) For purposes of this article, 'fees for included services' means 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: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge; experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. (5) Notwithstanding par....
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....mount is also not paid for the purpose of making or earning any income from any source outside India. Hence at first instance the amount is chargeable as fees for technical services under section 9(1)(vii) of the Act. 7.3 We shall now examine whether the provision of DTAA will take out the income received by the non-resident from the chargeability provision. Article 12 of DTAA between India and USA provides that fees for included services arising in any Contracting State and paid to a resident of other Contracting State may also be taxed in the Contracting State in which they arise according to the laws of that State at the rates prescribed in Article 12(2) of the DTAA. Article 12(4) defines the words" Fees for included services". As per this clause, the payments for rendering technical services or consultancy services, if such services make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of technical plan or technical design can be charged to tax in India. In the present case it is seen that the payee REOL is one of the world leader in setting up the power plant based on corex gas. REOL was required to choose certain....
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.... 1,414,003,483 --------------------------------------------------- Total Project Cost 241,054,719 8,388,704,221 --------------------------------------------------- --------------------------------------------------------- B. REOL US $ Rupees Percentage in relation to total  ....
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....will be considered as fees for included services as defined in Article 12(4)(b) of the DTAA. 8. We shall also discuss the case laws relied upon by learned counsel for assessee. The first decision relied is the case of National MineralDevelopment Corpn. Ltd. In the said case, the non-resident collaborator agreed to supply the conveyor belt and also agreed to assemble them and erect them at the site and maintain them with guaranteed performance for five years. A consolidated sum of DM 1,07,000 was payable towards supervision, erection and commissioning charges apart from cost of conveyor belt amounting to DM 25,70,400. The Tribunal held that erecting a conveyor belt is a form of construction. It was in this circumstances, it was held that erecting a conveyor belt is a form of construction and hence as per Explanation 2 outside the scope of fees for technical services. In the present case it is seen that the technical services, start up services and turnkey responsibility is not only in respect of equipment supplied but encompassing the entire power project. Accordingly the said decision will not help the case of assessee. 8.1 The next decisions relied by learned counsel for assesse....
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....e assessee, which was a foreign company; for supply of equipment for being installed at a hydro-electric project of the Indian company on 30-1-1974. The Indian company also entered into a supplemental agreement on the same day with the assesseecompany to depute its experienced engineers to supervise the installation of the equipment at the dam site. In accordance with the supplementary agreement, the assessee-company agreed to provide technical assistance and advice to the Indian company in the erection and commissioning of the equipment as well as in the training of engineers of the Indian company. The technical personnel supervised the actual erection of the equipment supplied by the assessee-company at the dam site and did other jobs laid down under the contract. For the work done by the technical personnel, the Indian company paid a certain sum of money to the assessee-company during the relevant accounting period. The assessee-company contended before the Assessing Officer that the amount received from the Indian company was not assessable to tax under section 9 of the Income-tax Act, 1961, for the assessment year 1980-81, as there was no business connection between the Indian....
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....e cases, it was held that if the provision of Double Taxation Avoidance Agreement is favourable to the payee, the same will override the provision of the Act. We entirely agree with the submission made by learned counsel for assessee. However we have examined the provision of the Act as well as provision of Double Taxation Avoidance Agreement and concluded that even under the provision of Double Taxation Avoidance Agreement, the amount paid is fees for included services under Article 12(4) of the DTAA. 8.5 The other decisions in following cases relied by learned counsel for assessee also will not apply to the present set of facts. Learned counsel for assessee relied on - (i) Dy. CIT v. ITC Ltd [2002] 82 ITD 239 (Cal.), (ii) Pro-quip Corpn.'s case, (iii) Lucent Technologies Hindustan Ltd.'s case, (iv) UHDE Gmbh v. Dy. CIT [1997] 57 TTJ (Mum.) 447, (v) Maharashtra State Electricity Board v. Dy. CIT [2004] 83 TTJ (Mum.) 325. We have perused all these decisions. We find that the facts in all these cases are quite different than the facts in the present case before us. In the case of I.T.C Ltd., the assessee purchased certain machinery from UK based company. The UK company deput....
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.... upon Calcutta High Court in the case of John Patterson & Co. (India) Ltd. v. ITO [1959] 36 ITR 449. In the said case it was held thus: "No arrangement or agreement privately arrived at between an employer and an employee can affect or alter or modify the statutory liability of the employer under section 18(2) of the Income-tax Act, 1922 to deduct tax at source at the appropriate rates from payments to the employee." In the light of above observation Shri Indrakumar submitted that the appellant do believe that the amount paid is fees for technical services but only at the instance of payee, the assessee has stopped deduction of taxes. We agree with the submission made by Shri Indrakumar. Once the assessee forms' an opinion that the amount paid is 'fees for technical services', it should have deducted tax at source and should not have stopped deduction only at the instance of payee. By deducting taxes at source, the rights of parties as regards the taxability of the sum are in no way effected. The payee can claim credit of the tax deducted in its own assessment. The payee can still claim that the amount is not chargeable to tax in India. However, the opinion of payee do not determ....
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....to cost. Since the contract in question dealt with the execution of several works, merely because a provision was made for security deposit/guarantee or provision for levy of liquidated damages for execution of the project, that would not support the contention that the payments were not made for rendering technical services. The engineering fees paid to the assessee were for technical services as contemplated under section 9(1)(vii). They were assessable in India." We find that the facts before us are more or less similar. Considering the facts of the present case, we held that the amount paid by way of technical services and start up services are independent supply of equipment. We also found that the amount paid is fees for technical services as defined in Explanation 2 to section 9(1)(vii) of the Act. The appellant is therefore required to deduct tax under section 195 of the Act. 9.4 Shri Indrakumar also relied on the decision of AAR in Steffen Robertson & Kristen Consulting Engineers & Scientists', case. The headnote in the said case read as under: "Non-resident - Advance ruling - Income deemed to accrue or arise in India - Fees for technical services - Scope of Explanation....