TaxTMI 
TaxTMI 
2005 (6) TMI 213
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.... towards fees for technical services. 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 b....
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....ssee-in-default under section 201(1) of the Act. However, the assessee subsequently 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 v....
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.... be under section 9(1)(vii) of the Act. He submitted that the words "fees for technical 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 I....
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....ment of foreign technical services. The RBI granted approval by its letter dated 27-3-1996 in following terms: "Approval 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 applic....
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....yet received any confirmation from TCE about the correctness and completeness of this list. You must have received a copy of RBI's letter No. EC.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....
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....he only course left open to the assessee is to deduct tax at source. The assessee is not to assess the total income. He submitted that chargeability is 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 th....
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.... note in the said case is extracted herein: "Deduction of tax at source - payments to contractors "for carrying out any work" - Provision for deduction as incometax 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 de....
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....India and USA. He fairly submitted that- (i) No doubt the amount is considered as technical services and start up services are fees for technical services under section 9(1)(vii) of the 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 responsi....
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....ficate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest 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 ma....
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.... 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 subdivision 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) .. .. .. (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 whi....
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.... the recipient but by the appellant who is payer. The amount is paid by way of fees for technical services by the assessee who is resident in India. The fees are not payable in respect of services utilized in a business by the assessee outside India. The amount 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 ....
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....bsp; 21,099,899 734,276,485 4. EOI 40,632,284 1,414,003,483 --------------------------------------------------- Total Project Cost 241,054,719 8,388,704,221 --------------------------------------------------- --------------------------------------------------------- B. REOL US $ Rupees Percentage in relation &nb....
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....Article 12(4)(b) of the DTAA. The amount paid cannot be considered as for services that are ancillary and subsidiary as well as inextricably and essentially linked to the sale of property. Thus Article 12(5)(a) will not be applicable in the present set of facts and hence the amount paid 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....
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....cured and supplied by REOL. This case will accordingly not be of any assistance to the assessee. 8.3 The next decision relied upon is that of CIT v. Energomach Exports [1998] 232 ITR 448 (Kar.). The headnote in the said case read as under: "An Indian company entered into an agreement with the 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 t....
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....xplanation 1 to section 9(1)(vii) is not applicable. Thus this case will not help the assessee in any manner. 8.4 The other two cases relied by learned counsel for assessee are- (i) P.V.A.L. Kulandagan Chettiar's case. (ii) Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). In both these 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) Maharas....
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....ith the decisions relied by learned special counsel for revenue Sri Indrakumar. In the case of Ganapat Rai Hira Lal, though the assessee is not required to compute the income of payee yet it is settled law that the provision of section 195 can be invoked only when the amount is chargeable to tax in India. 9.1 Shri Indrakumar has relied 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 ....
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....d be in the nature of preparation of designs and drawings. So long as the parties have treated it as technical advice, the parties are bound by it and when the question of liability to pay tax arises, the assessee cannot be permitted to turn around and say that the supply of designs, drawings, etc. are part of plant and machinery and must be added 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 req....