Case Laws update

1. AUTHORITY FOR ADVANCE RULINGS

1. Fees for Technical Services

AT&S India Pvt. Ltd. – 2006-TIOL-14-ARA-IT

Reimbursement of salary cost to foreign company for assigning employees to Indian company are taxable as ‘fees for technical services’.

Facts

1. The Applicant, a subsidiary of AT&S, Austria (the Foreign Company) was engaged in the business of manufacturing of printed circuit boards. The Applicant had entered into several agreements with the Foreign Company. Two such material agreements were (i) Foreign Collaboration Agreement (FCA); and (ii) Secondment Agreement. As per the terms of the Secondment agreement between the foreign company and the Applicant, the foreign company assigned its qualified employees to the Applicant to work on full time basis. The assigned employees were to receive compensation from the Applicant substantially similar what they would have received as employees of the foreign company. The salaries of the assigned employees were to be paid by the foreign company and the Applicant was to reimburse these salaries to the foreign company.
    

2. The Applicant sought a ruling as to whether the payment towards reimbursement of the salary cost of seconded employees by the Applicant to foreign company would be subject to withholding tax in view of the fact that (1) the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria, (2) AT&S Austria is not engaged in the business of providing technical services in the ordinary course of its business, (3) AT&S Austria is not charging the applicant any separate fee for the Secondment and (4) the seconded personnel works under the direct control and supervision of the applicant?”

Ruling

1. The AAR held that pursuant to FCA, the foreign company has offered the services of technical experts to the Applicant on the latter’s request and the terms and conditions for providing services of technical experts were contained in the secondment agreement. Though the term “reimbursement” was used in the agreements, under the secondment agreement the Applicant was required to compensate the foreign company for all costs directly or indirectly arising from the secondment of personnel and that the compensation was not limited to salary, bonus, benefits, personal travel etc. though all these and certain other payments (such as relocation costs of seconded personnel and their families, roundtrip air fares for such personnel, etc.) formed part of the compensation. The AAR held that the payments were not reimbursements as it was not supported by any evidence of actual expenditure incurred by the foreign company (except the debit notes of salaries of seconded personnel). The AAR further held that even if it is assumed that the debit notes represent the amount of actual expenditure, it would make no difference as the same is payable to the foreign company under the secondment agreement for services provided by it.
    

2. The AAR observed that as per the foreign collaboration agreement (FCA) between the Applicant and the foreign company, the foreign company should provide all assistance and cooperation to the Applicant in its business venture by providing appropriate support, technology and such other services as may be required. Further, the foreign company should offer the services of its technical experts to the Applicant, if requested, for working on the project being executed by the Applicant, on such charges, terms and conditions as will be agreed between the parties. The AAR held that as per the provisions of the Act, any consideration paid for rendering of a managerial, technical or consultancy services which include provision of services of technical or other personnel, falls within the meaning of FTS subject to one exception, that is when the consideration would be income of the recipient chargeable under the head ‘salaries’. Further, as per Article 12(4) of the Tax Treaty, FTS means payments of any amount to any person, other than payments to an employee of a person making payments, in consideration for services of a managerial, technical or consultancy nature including provision of services of technical or other personnel.
    

3. The AAR further held that as the payments which AT&S Austria would be receiving, were in the nature of the fee for technical services, it was not material for the purpose of the question whether AT&S Austria was charging any separate fee for the secondment of the employees.
    

4. The AAR further observed that as per the plain reading of secondment agreement, the foreign company retained the right over the seconded personnel and had the power to remove any seconded personnel from the Applicant. The only condition for such removal was that it should replace that employee with another. Considering the facts and circumstances and the reasons mentioned above, the AAR held that the role of the foreign company was not of a mere employment agent and that in effect the seconded personnel remained the employees of the foreign company even though while working under the Applicant they would have to abide by the employment agreement.
    

5. In addition, the AAR also observed that the recipient of the compensation is the Foreign Company and not the seconded employees and the compensation is not income of the foreign company chargeable under the head ‘salaries’. The fact that employees of foreign company have received their salaries from the Applicant and have paid tax under the head ‘salaries’ is of no consequence. The AAR finally held that the payments made to the foreign company by the Applicant were for rendering ‘services of technical or other personnel’ and it was not payment of salaries. Accordingly, the AAR held that payments made by the Applicant to Foreign Company were in the nature of FTS within the meaning of provisions of the Act [Explanation 2 to section 9(1)(vii)] as well as that of the Tax Treaty [Article 12(4)] and therefore they would be subject to withholding tax as per the provisions of the Act.

2. HIGH COURT

2. Transfer Pricing – Reference to Transfer Pricing Officer – Vires of CBDT Instruction No. 3 of 2003, dt. 20th May, 2003

Sony India (P) Ltd. vs. Central Board of Direct Taxes & Anr. (2006) 206 CTR (Del) 157: 157 Taxman 125

AO is not bound to accept the arm’s length price as determined by the TPO and he can consider not only the report of the TPO but any other material that may be placed before him; CBDT Instruction No. 3 of 2003, dt. 20th May, 2003, is consistent with the statutory objective underlying s. 92CA and it is neither violative of Art. 14 of the Constitution nor ultra vires the Act.

Facts

1. The assessee company, a wholly owned subsidiary of its non-resident principal, engaged in assembling, manufacturing and distribution of electronic goods, also imported some high end-products from its principal for sale in India. It filed its return for the assessment year 2002-03 declaring income exceeding Rs. 5 crores. Subsequently, the CBDT issued Instruction No. 3, dated 20-5-2003 which provided, inter alia, that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA compulsorily be made to the Transfer Pricing Officer (TPO) for the computation of Arm’s Length Price (ALP). On reference made pursuant to said instruction, the TPO while passing a detailed order determining the ALP of the international transactions of exports made by the assessee to its foreign associates, recommended that the Assessing Officer should enhance its income on the basis of its report. The Assessing Officer passed assessment order accordingly and a demand was raised asking it to pay the tax so determined on its enhanced income.
    

2. The assessee filed a writ petition challenging the Instruction No. 3 and contended that the classification of international transactions into two categories; i.e., those of the value exceeding Rs. 5 crores, in respect of which a reference has to be compulsorily made to the TPO by the Assessing Officer for determination of ALP, and those of a value less than that amount, is suspect and violative of article 14 of the Constitution inasmuch as section 92C itself makes no such classification and, therefore, the same cannot be introduced by an instruction issued by the CBDT in exercise of its powers under section 119; that consequently, the same is ultra vires the Act.
    

3. The assessee further contended that the discretion of the Assessing Officer under section 92CA to make a reference to the TPO only where he considers it ‘necessary and expedient’ has been taken away by the impugned instruction insofar as international transactions of a value of over Rs. 5 crores are concerned; that provision of section 92CA presupposes the formation of a judicial opinion by the Assessing Officer before making a reference to the TPO but the same has been fettered by the said instruction, which also renders it illegal and ultra vires the Act. The assessee further contended that the ultimate decision on the computation of the ALP is that of the Assessing Officer under section 92C, is sought to be supplanted by the decision of TPO for transactions of the value over Rs. 5 crores by the circular; moreover, the TPO is not bound to follow the steps outlined in section 92C(1), (2) and (3) which are otherwise mandatory for the Assessing Officer to follow and in absence of any specific provision in the Act permitting this, a CBDT instruction cannot be permitted to bring about this change.

Judgment

1. The only condition that is spelt out for the reference to the TPO is the opinion of the AO that it is ‘necessary or expedient so to do’. There is no gainsaying that power conferred on an authority, particularly a discretionary power, cannot be exercised mechanically. What is ‘necessary or expedient’ will depend on the facts and circumstances of every case and the satisfaction of the AO in this regard will have to be based on some objective criteria. On the other hand, the relatively insignificant value of the transaction may make it inexpedient for the matter to be referred to the TPO. It is not possible to anticipate the instances that may necessitate the invoking of the discretion vested in the AO in this regard. It is trite that any misuse of such exercise of discretion can be corrected by way of judicial review by statutory appellate authorities and ultimately the Courts. There is nothing in s. 92CA itself that requires the AO to first form a considered opinion in the manner indicated in s. 92C(3) before he can make a reference to the TPO. It is not possible to read such a requirement into s. 92CA(1). However, it will suffice if the AO forms a prima facie opinion that it is necessary and expedient to make such a reference. One possible reason for the absence of such a requirement of formation of a prior considered opinion by the AO is that the TPO is expected to perform the same exercise as envisaged under s. 92C(1) to (3) while determining the ALP under s. 92CA(3). The latter part of s. 92CA(3) unambiguously states that the AO shall ‘by an order in writing, determine the arm’s length price in relation to the international transaction in accordance with sub-s. (3) of the s. 92C.’ It will be pointless to have a duplication of this exercise at two stages one after the other. On the other hand, the scheme is that after the TPO determines the ALP the matter revives before the AO at the s. 92C(4) stage where, in terms of s. 92CA(4) the AO will compute the total income ‘having regard to’ the ALP determined by the TPO. Two aspects require to be taken note of in this context. The AO will necessarily have to give an opportunity to the assessee after receiving the report of the TPO and before he finalises the assessment computing the total income. Secondly, the provisions do not mandate that the AO is bound to accept the ALP as determined by the TPO. And for good reason because the AO has himself not made up his mind at the stage about the ALP. He has, in a sense, only ‘outsourced’ this exercise to the TPO. He can always be persuaded by the assessee at that stage to reject the TPO’s report and proceed to still determine the ALP himself. It must be recalled that it is the AO who is the authority to finalise the assessment and that power cannot be usurped, as it were, by the TPO or any other authority contrary to the scheme of the Act. If on the other hand one were to interpret the provisions to require the AO to first form a considered opinion on the ALP before referring the matter to the TPO, then the AO will thereafter have no option but accept the report of the TPO and to that extent the AO’s final say on the ALP while computing the total income gets diluted. By preserving the power of the AO to determine the ALP even after the determination by the TPO, full effect can be given to the words ‘having regard to’ occurring in both ss. 92C(4) and 92CA(4). In view of the settled legal position, the expression ‘having regard to’ in ss. 92C(4) and 92CA(4) enables the AO to consider not only the report of the TPO but any other material that may be placed before him by the assessee to arrive at a different conclusion.
    

2. At the outset, it may be observed that Instructions No. 3 of 2003 dt. 20th May, 2003 are based on a correct interpretation of the relevant provisions of the Act as explained hereinabove. They can indeed guide the AO while taking up the exercise of computing the ALP in terms of s. 92C. There is no doubt that the instruction ‘picks out’ transactions of a value in excess of Rs. 5 crores for a particular treatment: the automatic reference to the TPO for determination of their ALP. In that sense it recognises two classes of international transactions within the meaning of s. 92C. To the extent that administrative instructions have been judicially recognised as capable of supplementing statutory provisions and capable of filling gaps in the legislation without violating the scheme of the statute, such instructions would be vulnerable to being tested for prohibitory classification on the touchstone of Article 14. But not all classification is forbidden by the statute or the Constitution. It is only where such classification is not based on an objective intelligible criteria and which bears no nexus to the object sought to be achieved that it will invite constitutional invalidation on the anvil of Article 14. Applying this test, the impugned instruction cannot be held to violate Article 14. The classification brought about by the impugned instruction is based on a straightforward recognizable basis giving no room for confusion. Transactions of a high value require a careful examination to determine if the declared price is in fact an acceptable ALP.
    

3. The impugned instruction also is not ultra vires the Act only because the classification of international transactions it brings about is not contained in the Act itself. The classification is not inconsistent with or contrary to the objective sought to be achieved by the provisions of Chapter X of the Act. The impugned instruction serves to supplement the statutory provisions to achieve the objective and not override them. The impugned instruction does not seek to bye-pass the statute. Since the impugned instruction is based on a correct understanding of the legal position, the question of the CBDT’s binding instruction being contrary to the statute does not arise. The instructions are consistent with s. 119. A reading of the impugned instruction indicates that it acts as a guideline to the AO in the exercise of the discretion conferred under s. 92CA(1). This instruction is in fact helpful in ensuring that the discretion of the AO will not be abused. It correctly interprets the law as requiring only a formation of a prima facie opinion by the AO at the stage of the reference. Therefore, the question of the CBDT supplanting the judicial discretion of the AO does not arise. It is perfectly possible that, independent of the circular, the AO might still ‘consider it necessary or expedient’ to refer an international transaction of such value to the TPO for determination of the ALP. At the same time it is not as if the transactions of the value of less than Rs. 5 crores cannot be referred to the TPO by the AO.
    

4. It is not as if the impugned instruction is intended to apply for all times to come. It is stated to be an experiment aimed at enhancing the efficiency of the AO and is for a limited period. Secondly, it is expected that in due course there will be available to AOs a database of decisions handed down by the TPOs who are expected to officers more experienced than the AOs. This database will doubtless be a useful guide to the AOs in their determination of ALP. Once this object is achieved, it may not be necessary to continue with the instruction. However, this is ultimately for the CBDT to decide taking into account all relevant factors that will impinge on the decision to continue the impugned instruction. For these reasons, the impugned instruction No. 3 dt. 20th May, 2003 issued by the CBDT is consistent with the statutory objective underlying s. 92CA(1) and acts as a guidance to the AO in the exercise of discretion in referring an international transaction to the TPO for determination of its ALP. It is neither arbitrary nor unreasonable, and is not ultra vires the Act.

3. TRIBUNAL

1. Foreign Airline making payment of landing & parking charges and navigational charges to Airport Authority – Whether liable to deduct TDS u/s 194-I and u/s 194J, respectively – Whether ‘Assessee in default’ u/s 201 – Whether liable to pay interest u/s 201(IA)

Singapore Airlines Ltd. vs. ITO-TDS [2006] 7 SOT 84 (Chennai)

Assessee, a foreign company operating airlines in India, paid charges to International Airport Authority of India towards landing and parking charges. The Tribunal, following the decision in the case of Japan Airlines, held that since payment of landing and parking charges could not be termed as rent, provisions of section 194-I were not attracted to said payment. However, the payment in question attracted provisions of section 194C since there was a contract between assessee and International Airport Authority of India.

In addition the assessee-airline paid charges to International Airport Authority of India for navigational facilities. The Tribunal held that since assessee was in fact getting technical services apart from using equipments for purpose of communication between aircraft and Air Traffic Controller, provisions of section 194J were applicable in respect of payment made for navigational facility.

As regards applicability of section 201, since IAAI had paid taxes on amount received from the assessee the Tribunal held that the assessee could not be treated as assessee-in-default under section 201(1). Further, since tax was paid by IAAI in respect of amount paid by assessee, the assessee was liable to pay interest under section 201(1A) from date on which deduction had to be made till date on which IAAI paid tax in respect of amount received from assessee.

Circulars and Notifications – CBDT Circular

F. No. 275/201/95-IT(B), dated 29-1-1997

Cases referred to

1. Dy. CIT vs. Japan Airlines [2005] 92 TTJ 687/93 ITD 163 (Delhi) [Followed],

2. Skycell Communications Ltd. vs. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.),

3. Chennai Metropolitan Water Supply & Sewerage Board vs. ITO [I.T. Appeal No. 2232 (Mad.) of 2003],

4. CIT vs. Rishikesh Apartments Co-operative Housing Society Ltd. [2002] 253 ITR 310/[2001] 119 Taxman 239 (Guj.).

[Author’s Note: The Delhi High Court has taken a view in United Air Line vs. CIT (2006) 287 ITR 281 (Delhi) that Lending Fees and Parking Charges amount to “Rent” and thus, liable to TDS u/s 194I]

2. There is no immunity from tax to a sovereign unless specifically granted

DCIT vs. Royal Jordanians Airlines [2006] 98 ITD 1 (Delhi) (SB)/97 TTJ 134 [Assessment Years 1994-95 to 1996-97 and 2000-2001]

There is no immunity from tax to a sovereign unless specifically granted. In absence of any specific provision to exempt income of a foreign government owned airlines from taxation in India in Income-tax Act or in any treaty between Government of India and Jordan or any Government order, it would not be justified to declare income of the assessee as not chargeable to tax in India.

Facts

1. The assessee – Airlines (RJA) filed its returns declaring nil income claiming that since it was owned by and formed part of sovereign Government of Jordan, its income was not taxable in India in view of the accepted principles of international law.
    

2. It also placed reliance on the appellate order in its own case for earlier years, wherein following the Tribunal’s order in the Iraqi Airways vs. IAC [1987] 23 ITD 115 (Delhi), the then Commissioner (Appeals) accepted the assessee’s said claim, which was further upheld by the Tribunal on the revenue’s appeal.
    

3. The Assessing Officer, however, while treating it as a foreign company, completed the assessments under section 143(3).
    

4. On appeal, the Commissioner (Appeals), allowed the assessee’s said claim for two years but disallowed it for other two years.
    

5. On cross appeals, the Tribunal holding that on the facts of the case and in law, it was difficult to follow the order of its co-ordinate Bench in the assessee’s own case, made a reference to the President of the Tribunal, who, in exercise of his powers under section 255(3), constituted a Special Bench for disposal of the said appeals.

Decision

The Special Bench of the Tribunal held as follows:

1. On a perusal of the various authorities relied upon in the Tribunal’s decision in the case of Iraqi Airways, it was found that the same were mainly in respect of the person or property of one sovereign in the territory of another sovereign. However, the question in the instant appeals did not relate to person and property but the commercial activity carried on in another sovereign State.
    

2. At any rate, it is firmly established that in India the immunity of State property from taxation does not extend to corporations owned or controlled by the State and they are routinely subjected to levy of income-tax.
    

3. Whatever may be the legal position in respect of immunity from taxation to a sovereign prior to independence of India, but after coming into force of the supreme law of the land, i.e. the Constitution of India, there is no immunity from taxation to any sovereign State unless specifically provided either by the Constitution of India or any other enactment. Article 285 and Article 289 of the Constitution specifically provide that properties of the Union of India shall be immune from State taxation on one hand and the properties and income of the State shall be immune from Union taxation unless otherwise provided by the Parliament.
    

4. A perusal of the Articles 285 and 289 reveals that concept of general immunity from taxation to a sovereign is no more available. The exemption from taxation has been provided only with reference to certain taxes and there is no immunity from taxation in other fields of taxation, which is apparent from the fact that the Union of India and States are not immune from taxation under Central Sales Tax Act, 1956, Custom Act, 1962 and Central Excise and Salt Act, 1944. Further, Article 285 of the Constitution permits the Parliament to provide to the contrary as is apparent from the expression ‘save insofar as Parliament may by law otherwise provide’, which shows that immunity granted under Article 285 is not for ever and the Parliament has been empowered to withdraw the same as and when it desires to do so. Further, Article 289 grants immunity from Union taxation in respect of property and income of State but sub-Article (2) authorises the Parliament to impose tax in respect of a trade or business carried on by or on behalf of the State Government. Apart from the said provisions, Article 287 provides immunity from State taxation to Union of India on the consumption or sale of electricity which is consumed by or sold to Government of India or consumed in the construction, maintenance or operation of any Railway of Government of India. Even that immunity can be withdrawn since Parliament has been empowered to provide otherwise.
    

5. Thus, there is no immunity from tax to a sovereign unless specifically granted. If there is no immunity to Government of India, the question of granting any immunity to a foreign sovereign simply does not arise. However, it is up to the Parliament whether to grant such immunity or not.
    

6. As regards the question as to whether the Parliament has granted any exemption to a foreign sovereign under the Act, section 10 provides general exemptions in respect of certain incomes. A perusal of the same shows that the intention of Parliament is not to grant general immunity from taxation to a foreign Government.
    

7. A perusal of the provisions of section 10(15A) shows that exemption to a foreign State has been provided in respect of a particular income, i.e., where payment is made by Indian company engaged in business of operation of aircraft, for acquiring an aircraft engine on lease. By implication, exemption is not available to foreign State in other circumstances. The payment for providing spares, facilities or services has been specifically excluded from the exemption. Further, that exemption is no more available w.e.f. 1-4-2006. It shows the clear intent of the Parliament. Had there been a general immunity to a foreign State, there was no question of granting exemption to foreign State under section 10(15A).
    

8. The entire debate on the question of sovereign immunity was uncalled for because if the assessee enjoys any sovereign immunity from taxation, the source of that immunity has to be found in the provisions of Act itself or in any other law for the time being in force. It is a well settled legal position that Income-tax Act is a self-contained code.
    

9. Having already held that in the absence of any specific law in India under which the assessee might claim sovereign immunity, the entire debate as to whether the commercial activity of RJA would be covered by sovereign immunity was unnecessary. However, on a reading of section (3) of Royal Ordinance No. 10 of the year 1969 that created RJA, it was to be seen that apart from being made a body corporate, the Ordinance also provides that RJA may sue and be sued in that capacity. Immunity from being sued is fundamental to the concept of sovereign immunity. It goes to the root of the matter. If it is provided that RJA may be sued even in its home country, the argument in relation to sovereign immunity did not appear to survive any more. Therefore, RJA did not enjoy any immunity from taxation in India. Its income to the extent chargeable to tax in India under the Act was liable to be assessed in the status of foreign company.

The Special Bench of the Tribunal referred to a number of judicial precedents.

3. Non-resident—Sale of shares – Computation of Long Term Capital Gains – Shares in Indian company allotted to assessee as consideration for supplying know-how, machines and granting licence to manufacture hoists – Cost of acquisition of shares is cost of executing contract in consideration of which shares allotted – Cost was in foreign currency – Gains to be computed in terms of foreign currency, ss. 48, 55(2)(b)(i) of Income-tax Act

Sale of bonus shares – Bonus shares issued prior to 1-4-1981 – Option to take cost of acquisition as fair market value on 1-4-1981 – Income-tax act, 1961, s. 55(2)(aa)(iiia).

Heinrich De Fries GmbH vs. JCIT [2006] 281 ITR (A.T.) 0018 Assessment Year 1996-97

Fact

1. The assessee, a non-resident company, supplied know-how and machinery to an Indian company and also granted a licence to the company for manufacture of hoists under an agreement entered into in 1963. In consideration of this, it was allotted 25,000 equity shares of Rs. 100 each in the Indian company in 1964 which allotment was approved by RBI.
    

2. Apart from this, the assessee also received bonus in the years 1975, 1979 and 1985 and in all it possessed 1,13,333 shares.
    

3. All these shares were sold in the previous year relevant to the assessment year 1996-97.
    

4. The assessee contended that the cost of acquisition of the asset was in foreign currency and that the sale consideration was to be converted in the same currency and the capital gain was to be computed in terms of that currency.
    

5. The A.O. did not approve the computation made by the assessee but on appeal the Commissioner (Appeals) upheld the assessee’s contention that the first proviso to section 48 was applicable. The Commissioner (Appeals) also entertained certain new pleas taken by the assessee, but dismissed the assessee’s claim to take the fair market value as on April 1, 1981, in respect of the bonus shares acquired before that date, as their cost of acquisition.

Decision

On appeals by the assessee and the Department, the Tribunal held in favour of the assessee as follows:–

1. The cost of acquisition of shares was not what was paid by the assessee to the Indian company because nothing was paid in cash by the assessee to the Indian company. These costs were the costs which were incurred by the assessee on supplying know-how, on supplying machines and incurring costs on granting the licence to manufacture hoists. If one gets certain shares for doing some work, the cost of acquisition of those shares, in monetary terms, is the cost incurred in doing that work. The costs so incurred in supplying the machinery and know-how at that point of time was DM 2,17,175, incurred in German currency. Therefore, the cost of acquisition of 25,000 original shares was DM 2,17,175. The capital gains were to be computed by comparing the Deutsche Marks equivalent of the full sale consideration in Indian rupees vis-a-vis cost of acquisition, in Deutsche Marks, of these shares.
    

2. There was no doubt that the cost of acquisition of bonus shares, in terms of the specific provisions of section 55(2)(aa)(iiia), was to be taken at nil. In respect of bonus shares allotted before April 1, 1981, even after the insertion of section 55(2)(aa)(iiia), the assessee has an option to take their fair market value as on April 1, 1981, as the cost of acquisition.
    

3. Therefore, the computation of capital gains on sale of shares was to be divided in three parts (a) sale of 25,000 original shares for which the cost of acquisition was to be taken at DM 2,17,175, (b) sale of 55,000 bonus shares for which the cost of acquisition was to be taken at the fair market value as on April 1, 1981, and (c) sale of the remaining, that is, 33,333 bonus shares for which the cost of acquisition was to be taken as nil. The onus of furnishing the fair market value of shares as on April 1, 1981 was on the assessee.
    

4. That the Commissioner (Appeals) had the powers to consider the additional ground raised by the assessee for the first time at the appellate stage.

Cited cases

1. Asbestos Cement Ltd. vs. CIT [1993] 203 ITR 358 (Bom) distinguished

2. CIT vs. E.R. Squibb and Sons Inc. [1999] 235 ITR 1 (Bom) distinguished

3. Jute Corporation of India Ltd. vs. CIT [1991] 187 ITR 0688 (SC) applied.

4. Non-Resident assessee rendering Strategy and Business Consultancy Services in India – Non-technical in nature – Not to be treated as “Royalties and Fees for Technical Services” under India-Singapore Tax Treaty – Limitation on deduction of expenses for purpose of computing profits – Sections 44D and 115A have no application
   DCIT vs. Boston Consulting Group P. Ltd. [2006] 280 ITR (A.T.) 1 (Mumbai)/94 ITD 31 (Mumbai) Assessment Year 1997-98

Fact

1. The assessee, a Singapore based company, was engaged in the business of rendering strategy consulting services such as business strategy, marketing and sales strategy, portfolio strategy, etc., through a permanent establishment in India.
    

2. These consultancy services were non-technical in nature inasmuch as these services were in the nature of strategy and business consulting which were intended to improve the performance of its clients by focusing on fundamentals of business.
    

3. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee had received Rs. 1,41,48,885 as gross professional receipts, out of which Rs. 1,00,98,885 were received from foreign companies and the assessee claimed expenditure of Rs. 5,44,08,428 to earn the said professional receipts.
    

4. The Assessing Officer completed the assessment computing the taxable income of the assessee at Rs. 40,50,000 and taxing it at the concessional rate of 20% in terms of section 115A, and computing the loss to be carried forward at Rs. 2,87,35,585, that is, Rs. 1,00,98,885 being professional fees received from foreign concerns minus Rs. 3,88,34,470 being pro rata expenditure incurred on earning the said fees.
    

5. The Commissioner (Appeals) observed that the receipts in question could not be treated as fees for technical services for the purpose of Article 12 of the Double Taxation Avoidance Agreement and that being attributable to the assessee’s permanent establishment in India, were to be taxed in India in terms of the provisions of the Double Taxation Avoidance Agreement. The Commissioner (Appeals) held that since the income was to be computed on net basis according to Article 7(3) and since there was a net loss in the case of the assessee, there was no income liable to be taxed in the hands of the assessee in terms of the DTAA with Singapore.

Decision

On appeal by the Department; the Tribunal held in favour of the assessee as follows:

1. In the India-Singapore tax treaty only services which are technical in nature are covered by the scope of Article 12(4)(b) and non-technical services could not be covered by the scope of Article 12(4)(b).
    

2. There was no finding by the Assessing Officer that the receipts of the assessee could be covered by any of the sub-clauses in Article 12(4).
    

3. Where royalties and fees for technical services arise in the course of business carried on through a permanent establishment, the taxable profits in respect thereof are to be computed with reference to the principles laid down under Article 7(3).
    

4. There was no dispute that the receipts were not in the nature of royalties and therefore these receipts were required to be examined from the point of view of scope of fees for technical services only.
    

5. In case the receipts were held to be outside the scope of fees for technical services which is defined in Article 12(4) the limitations set out in section 44D would not be applicable. The heading of a section certainly is a relevant factor to be taken into consideration in construing the ambit of the section. Thus, the limitation on deduction of expenses, for the purpose of computing profits attributable to the
   permanent establishment in India and in terms of the provisions of section 44D was not applicable to the case of the assessee.

Cited cases

1. Ensco Maritime Ltd. vs. Deputy CIT [2004] 91 ITD 459 (Del) followed The Tribunal also referred to a number of judicial decisions.

[Author’s Note: In this decision, the Tribunal has extensively dealt with the principles of interpretation of a Tax Treaty and its inter play with the Income-tax Act. This decision is a ‘must read’ for all students of International Taxation]