TaxTMI 
TaxTMI 
2001 (12) TMI 196
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....ucting tax at source from two payments, amounting to French Francs 3,14,790 and French Francs 3,14,950 covered by the respective appeals, made to one M/s. Decoufle s.a.r.l., France, on account of installation and commissioning charges in respect of certain machineries purchased from this very French company. 3. Briefly stated, material facts of the case are that respondent ie. ITC Limited (hereinafter referred to as "the assessee tax-deductor") imported two sets of machines from Decoufle s.a.r.l., France, (hereinafter referred to as 'Decoufle'). Decoufle also deputed its technicians, for installation and commissioning of these machines, 6th March, 1995 to 10th July, 1995 (146 days) and 15th March, 1995 to 29th May, 1995 (75 days) respectively. It was in connection with this installation and commissioning of machines that the assessee was to pay sums of French Francs 5,14,790 and French Francs 3,14,950 (net of taxes) to Decoufle. The assessee moved applications under section section 195 of the Income-tax Act (hereinafter referred to as 'the Act') and prayed for issuance of a 'no objection certificate' for remitting these sums without any deduction of tax at source. It was contend....
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....e concluded that 'it cannot be said that M/s. Decoufle has provided technical consultancy service to the appellant'. The CIT(A) further observed that Decoufle did not have any 'permanent establishment'(PE) in India and that unless the Decoufle has a PE in India or unless the installation project takes more than six months time, income embedded in such payments was not taxable in India. It was stated that when there is no PE and the installation project does not take time beyond six months, the tax has to be paid in the country from which plant and machinery is purchased and from which the persons come for setting up and installing the plant and machinery. In support to this proposition, a reference was made to Article 5 and Article 7 of the India France DTAA. It was in this background that the CIT(A) came to the conclusion that the Assessing Officer was not justified in declining issuance of a no objection certification for remittances to Decoufle, without any deduction of tax at source. The CIT(A) also directed the Assessing Officer that 'refunds (of taxes already deducted) may be issued forthwith'. Revenue is aggrieved and in appeal before us. 5. We have conscientiously heard ....
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....e been made in the Agreement. Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income tax Act, that will govern the taxation of income.' In our view, the Circular reflected the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the General principles of taxation applicable to the Contracting States; otherwise, the double taxation avoidance agreement will have no meaning at all." 6. We will, therefore, firstly examine taxability of impugned payments to Decoufle, in the light of provisions in applicable India France Double Taxation Avoidance Agreement. In view of the provisions of Article 30(1)(a)(i) of India France DTAA dated 29th September, 1992, which came in force on 1st August, 1994, this DTAA is applicable with respect to income arising in India in the previous years beginning 1995-96 i.e. fiscal years beginning on or after 1st day of April following the calendar year in whi....
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....age, it is also important to refer to an extract from the protocol signed at the time of conclusion of the aforementioned India France DTAA. The relevant portion is reproduced below: PROTOCOL At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the Convention: ....................... ........................ 7. In respect of Articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate of scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply un....
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....bsp; 2nd November, 1994 Article 12(5)(a) 244 ITR St. 134 10. In India United Kingdom Double Taxation Avoidance Agreement, Article 13(4) and 13(5) provides as follows: Article 13(4) For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Article 13(5) The definitions of fees for ....
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.... the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). [*Article 12(3)(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof]. 12. We have also noticed that Article 12(4) and 12(5) of the India Switz....
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....f property' is outside the scope of 'fees for technical services' liable to separate treatment under the respective DTAA. In other words, in all these treaties, unless the 'fees for services that are, ancillary and subsidiary, as well as inextricably and essentially linked to the sale of property' is attributable to PE and fulfils the other requirements laid down under the relevant article dealing with business profits, the same cannot be taxed in the source country. The scope of expression 'fees for technical services', in these treaties, appears to be far more restricted than the scope of the same expression in Indo French DTAA which broadly defines fees for technical services as to mean payments in consideration for services of a managerial, technical or consultancy nature. Therefore, whereas payments for all kind of technical services are to be treated as 'fees for technical services' for the purpose of Article 13(4) of Indo French DTAA, such payments cannot be treated as to be in the nature of 'fees for technical services', under respective articles in Indo UK, Indo US and Indo Swiss Double Taxation Avoidance Agreements, in case the same constitutes' fees for services that are....
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....ome; Now, therefore, in exercise of the powers conferred under section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Convention notified by the said Notification which are necessary for implementing the aforesaid Convention between India and France, namely: ............................. ............................. ............................ IV. With effect from the 1st April, 1995, for the existing paragraph 2 of Article 13 relating to 'Royalties and fees for technical services and payments for the use of equipment', the following paragraph shall be read: "2. However, such royalties, fees and payments may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed: (a) in the case of royalties and fees 20 per cent of the gross amount of such royalties or fees; and (b) in the case of payments referred to in paragraph 5 of this Article, 10 per cent of the gross amount of such payments." V. With effect f....
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....the protocol to the India France DTAA and the same does not or cannot undermine the clear and ambiguous provisions of the India France DTAA. According to the learned counsel, the above notification is clearly redundant and, in any event, does not whittle down or override the benefits which are otherwise envisaged in paragraph 7 of the protocol to the Indo French DTAA. As an alternate submission, and without prejudice to the above line of argument, reliance was placed on the order passed by a co-ordinate bench of this Tribunal in the case of Tata Iron & Steel Co. Ltd. v. Dy. CIT [1999] 69 ITD 292 (Mum.) in support of the proposition that executive authority of the Government cannot, by way of a notification, lay down provisions having retrospective effect. It is thus submitted that by way of notification dated 20th July 2000, no amendment, allegedly impairing the existing rights guaranteed by the protocol clause in question, can be made in a treaty which will adversely affect the taxpayer's rights effective from a date earlier than 20th July, 2000. On the strength of these submissions, learned counsel submitted that the CBDT notification dated 20th July, 2000 does not adversely affe....
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....out legality of the aforesaid notification or to deal with other similar contentions raised by the assessee. In any event, in our considered view, the benefit of lower rate of or restricted scope of 'fees for technical services' under the Indo French DTAA is not dependent on any further action by the respective Governments, unlike the situation envisaged in, for example, paragraph 4 of protocol to Indo Philippines DTAA or paragraph 3 of protocol to Indo Swiss DTAA. We leave it at that. 18. In the light of the above discussions, we are of the considered view that the same scope of 'fees for technical services' as provided for in the Indian DTAAs with UK, USA and Switzerland, which is far more restricted vis-a-vis the scope of this expression in Indo French DTAA, shall also apply under Indo French DTAA, with effect from the date on which the Indo French DTAA or such other DTAA enters into force, whichever enters into force later. As all the three DTAAs discussed above entered into force on a date earlier than the commencement of the previous year 1995-96, the scope of technical services, for the purpose of Indo French DTAA, cannot be broader than that envisaged in the above DTAAS.....
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....evant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, whichever is applicable by virtue of the provisions of section 90". As we have earlier observed, provisions of the DTAA clearly override the provisions of the Act to the extent the provisions in such agreements are more favourable to the assessee. Therefore, in case a DTAA provides for lower rate, which includes 'Nil' rate, of taxes, such a rate will prevail over the rate given in the Act. As a natural corollary to this proposition, when, in terms of the provisions of a DTAA, an income is not exigible to income-tax in India, no tax is required to be deducted under section 195 from the payment of such income to a non resident. We have already held that, in terms of the provisions of the applicable Indo French DTAA, the income embedded in impugned payments to Decoufle was not liable to income tax in India. Accordingly, in our considered view, the assessee tax deductor was not under any obligation to deduct tax at source from related remittances to the French company i.e. Decoufle s.a.r.l. 21. For the detailed reasons set out above, we support the conc....