1. AUTHORITY FOR ADVANCE RULINGS

1. Capital or Revenue expenditure – Supplier of capital equipment – delay in delivery within stipulated time – Liquidated damages

Mahanagar Telephone Nigam Ltd., In re – (2006) 286 ITR 211 (AAR) : 205 CTR (AAR) 104 : 156 Taxman 105 (AAR) – Assessment Year 2002-03

Liquidated damages recovered by the applicant from the supplier of capital goods on account of failure of the latter to deliver equipments within the stipulated time were in the nature of capital receipt and, therefore, the amount refunded to the supplier on account of part waiver of such damages, not voluntarily but under the direction of Telecom Commission is not allowable as deduction either under s. 37(1) or s. 57(iii).

Facts

1. ITI was one of the suppliers of plant and machinery to MTNL, the applicant, a notified resident. The purchase order/agreement provided that if ITI failed to deliver the equipment within the stipulated time, the applicant would be entitled to liquidated damages. For the period 1987-88 to 1995-96 the applicant recovered liquidated damages amounting to Rs. 21,41,29,382. In some years the amount was adjusted against the cost of the assets and in some years the amount was shown as income in the respective year. Subsequently MTNL received representations from ITI for waiver of the liquidated damages as according to ITI such supplies could not be made within the stipulated time due to various reasons beyond its control. In this regard MTNL received a direction from the Telecom Commission for waiver of the liquidated damages. Accordingly the board of directors of the applicant decided that it would be appropriate to waive the liquidated damages in respect of the delays in supply of the equipment. And certain amounts were refunded to ITI by MTNL during the financial year 2001-02 (assessment year 2002-03).
    

2. On these facts the applicant sought a ruling from the Authority on the question whether the amount refunded by the applicant on account of waiver of liquidated damages would be an allowable deduction in computing its income from business under the Income-tax Act, 1961. On the facts stated the Authority ruled:

Ruling

1. That it was only in compliance with the directions of the Telecom Commission that the applicant reluctantly agreed to refund a part of the charges and not voluntarily for the purpose of the business. Since, as far as the applicant was concerned, all the equipment and apparatus supplied by ITI constituted capital assets, damages recovered on account of supply of capital assets would be capital in nature and would not be allowable as revenue expenditure.
    

2. That the amount laid out being capital in nature it went out of the purview not only of section 37(1) but also section 57(iii) of the Act and any further consideration as to whether the refund granted was for the purpose of the business would not avail the applicant.

Cases applied/relied on

1. Swadeshi Cotton Mills Co. Ltd. vs. CIT (No. 2) [1967] 63 ITR 65 (SC) applied.
    

2. Travancore Rubber and Tea Co. Ltd. vs. CIT [2000] 243 ITR 158 (SC) and Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC) relied on.

2. Non-resident – Fringe Benefit Tax

Population Council Inc., In re (2006) 286 ITR 243 (AAR)

The applicant, a non-resident non-profit making organization, having a regional office in India, which carried on charitable, scientific and educational activities, was liable to pay fringe benefit tax under section 115WA of the Income-tax Act, 1961, in relation to fringe benefits provided to its employees.

Facts

The applicant, a non-resident organization carrying on charitable, scientific and educational activities was having a branch office in India. Fringe benefits were provided to its employees. The applicant sought a ruling from the AAR as to whether it was liable to pay tax under section 115WA.

Ruling

1. Though a non-resident may not be chargeable to income-tax in India, the non-resident will be liable to pay fringe benefit tax under section 115WA of the Income-tax Act, 1961.
    

2. Sub-section (2) of section 115WA commences with a non obstante clause and states that notwithstanding that no income-tax is payable by an employer on his total income computed in accordance with the provisions of the Act, the tax on fringe benefits shall be payable by such employer. This provision is clarificatory in nature. The sub-section clarifies that even when no income-tax is payable by an employer on his total income computed in accordance with the provisions of the Income-tax Act, the tax on fringe benefits shall be payable by such employer.
    

3. When section 115WA says that fringe benefit tax is payable by an employer on his total income computed in accordance with the provisions of the Act it is futile to contend that if there is no total income which can be computed in accordance with the provisions of the Act, no fringe benefit tax is payable by the employer. Such an interpretation would be contrary not only to the intention of Parliament but also to the plain language of the provision and basic principles of interpretation.

Cases referred to

1. Becke vs. Smith [1836] 2 M & W 191.
    

2. CIT vs. Dorr-Oliver (India) Ltd. [1994] 209 ITR 691 (Bom).
    

3. CIT vs. Justice R. M. Datta [1989] 180 ITR 86 (Cal).
    

4. Duke of Buccleuch, In re [1889] 15 P. D. 86 (CA).
    

5. Ganji Krishna Rao vs. CIT [1996] 220 ITR 654 (AP).
    

6. Steel Authority of India Ltd. vs. National Union Water Front Workers [2001] 99 FJR 332 (SC); [2001] 7 SCC 1.
    

7. Warburton vs. Loveland [1832] 2D & CI 480.

2. HIGH COURT

3. Non-resident – Head Office expenditure – Applicability of s. 44C

CIT vs. Deutsche Bank A. G. (2006) 205 CTR (Bom) 28 – Assessment Year 1984-85

When one of the three parameters of s. 44C fails, the entire section becomes unworkable and consequently assessee becomes entitled to full deduction under s. 37(1).

Facts

1. The assessee, a foreign bank, filed its return of income for Rs. 1.61 crores. This return was revised on 27th October, 1986 and the income was reduced to Rs. 1.47 crores. The reason for revising the return was the claim of the assessee for deduction of the full amount of head office expenses debited to the P & L a/c to the extent of Rs. 21.07 lakhs on the ground that s. 44C was not applicable as one of the three parameters mentioned in cls. (a), (b) and (c) of s. 44C was not attracted. According to the assessee, when one of the three parameters failed, the entire s. 44C also could not be applied. That, when one of the three parameters failed, the entire computation of deduction would collapse and, therefore, the ceiling on expenditure contemplated by s. 44C would not be attracted and, therefore, the assessee was entitled to the total head office expenditure of Rs. 21.07 lakhs debited to the P & L a/c under s. 37(1) of the Act.
    

2. This position of the assessee was accepted by the Tribunal. The Department filed a reference to the High Court under s. 256(1) of the Act.

Judgment

1. In the present case, Expln. (iii) which defines average head office expenditure is not applicable because under cl. (b) r/w Expln. (iii), as it stood at the relevant time, deduction in respect of head office expenses was limited to the annual average of head office expenditure allowed during a base period of three previous years relevant to the asst. yrs. 1974-75, 1975-76 and 1976-77. The assessee commenced its business operations only in October 1980. Therefore cl. (b) of s. 44C was not attracted.
    

2. Sec. 44C begins by a non obstante clause which states that notwithstanding anything to the contrary contained in ss. 28 to 43A, deduction in respect of head office expenditure shall be restricted to the least of the three deductions mentioned in cls. (a), (b) and (c). Therefore, s. 44C overrides the provisions of ss. 29 to 37.
    

3. Sec. 44C is not conferring deductions on the assessee. It is restricting the deduction under s. 37(1) by virtue of the overriding provisions contemplated by s. 44C. Therefore, when the working of s. 44C fails, the entire s. 44C becomes non-workable and consequently, the assessee would become entitled to the full deduction under s. 37(1).
    

4. The expression used in s. 44C is “whichever is the least”. This expression shows that the least of the three parameters should be taken into account for computing allowance under s. 44C for head office expenditure incurred by the non-resident. Therefore, in the absence of one of the parameters out of the three parameters, the entire section becomes non-workable. Hence, the entire s. 44C stands ruled out. It is for this reason, the legislature had to delete cl. (b) from 1st April, 1993, by keeping only cl. (a) and cl. (c). This deletion shows that none of the parameters could be ignored and, therefore, the legislature had to delete cl. (b).

Case referred to/concurred with

1. Citibank N.A. vs. CIT (2003) 183 CTR (Bom) 294 : (2003) 262 ITR 47 (Bom) – referred.
    

2. Rupenjuli Tea Co. Ltd. vs. CIT (1991) 92 CTR (Cal) 37 : (1990) 186 ITR 301 (Cal) – concurred with.

3. TRIBUNAL

4. Taxation of Branch of Korean Bank at a rate higher than the rate applicable to Domestic Companies –Whether Discriminatory under Article 25 of DTAA between India and Korea –Explanation to section 90 introduced by the Finance Act, 2001 with retrospective effect from – 1-4-1962

Chohung Bank vs. Deputy Director of Income-tax [2006] 102 ITD 45 (Mum) - Assessment Year 2002-03

Double Taxation Avoidance Agreement (DTAA) in general does not prevail over the Finance Act and, hence, over tax rates. Wherever DTAA has provided taxation of a particular category of income at certain rates, then charging of that income at different rates as per Income-tax Act may come in conflict with DTAA and, hence, taxes over that category of income would be levied at rates so provided in DTAA. Where no such rate on an income or a category of income on status of an assessee has been prescribed in DTAA, then there cannot be any conflict with Income-tax Act. Therefore, it would be wrong to say that DTAA as such would prevail over Income-tax Act and, hence, rates as applicable to domestic companies are to be applied to non-domestic companies. Introduction of Explanation in section 90 by Finance Act, 2001 with retrospective effect from 1-4-1962 is no way in conflict with DTAA between India and Korea.

Facts

1. A banking company based in Korea had a branch in India. The said branch (called assessee-company) was involved in normal banking activities including financing of foreign trade and foreign exchange transactions.
    

2. The assessee claimed that the tax rate as applicable to Indian companies carrying on similar business should be applied in its case instead of the tax rate applicable to non-resident companies and in this regard relied upon Article 25 of the DTAA between India and Korea.
    

3. The Assessing Officer rejected the claim of the assessee holding that Article 25 provided protection against discrimination on the basis of nationality; that non-discrimination clause could be invoked only when the foreign entity and Indian entity were carrying on the same activities and not when they were carrying similar activities; that Indian banking company carried many other activities such as advances to agriculture and to weaker sections, which were not done by non-resident banking company; that Indian banking companies distributed dividend in India, whereas dividend was not payable by non-resident banking company in India; that OECD Model Convention also distinguished the words ‘same activities’, and ‘similar activities’; that Article 24 of UN model convention also provided that where PE did not distribute dividends the extension of reduced rates to PE would also not serve any purpose; that in the case of Bank of Tokyo Mitsubishi Ltd., the Tribunal had held that non-discrimination clause is not applicable to differential rate treatment; that the CBDT Circular No. 333, dated 2-4-1982 also affirmed the proposition that differential rate treatment to foreign companies or to their PE was not hit by non-discrimination clause; and that the amendment made in section 90 by way of introduction of Explanation provided to tax non-resident companies at higher rates, and levied tax at the higher rates applicable to non-domestic companies.
    

4. On appeal, the Commissioner (Appeals) confirmed the impugned order.

Decision

On Second Appeal; The Tribunal held as under:–

1. It is one thing to say that provisions of agreement will prevail over the provisions of the Income-tax Act insofar as assessability of an item is concerned and it is a different thing to say that the DTAA will also control the applicability of the Finance Act which provides the rates for different assessable entities.
    

2. The charging of the assessee at higher rate applicable to non-domestic companies was not hit by non-discrimination clause of Article 25 of the DTAA with Korea because clause (2) of Article 25 could not be construed to mean that no tax could be levied on a foreign company at a rate higher than the rate payable by Indian company.
    

3. Further, the DTAA in general does not prevail over the Finance Act; hence, over the tax rates. Section 90 does not provide so. However, wherever DTAA has provided the taxation of a particular category of income at certain rates, then charging of that income at different rates as per the Income-tax Act may come in conflict with DTAA and, hence, the taxes over that category of income will be levied at the rates so provided in DTAA. But where no such rates on an income or a category of income on the status of an assessee have been prescribed in DTAA, then there cannot be any conflict with the Income-tax Act. Therefore, DTAA as such would not prevail over the Income-tax Act, and, hence, rates as applicable to domestic companies cannot be applied to non-domestic companies. In the instant case, no rates for charging non-domestic companies have been provided in DTAA with Korea. Hence, it could not be said that DTAA with Korea was in conflict with the Income-tax Act.
    

4. Article 25(1) provides that Contracting States would not discriminate ‘nationals’ of other Contracting State in the matter of taxation, and if that ‘national’ is working ‘under same circumstances’, then taxation on such enterprise would not be less favourable than the taxation on the enterprises of that other State. Based on Article 25(1) and Article 25(2), the assessee submitted that it was discrimination that domestic companies were subjected to lower rates whereas the non-resident company (PE) in India of foreign bank was subjected to higher rates and that it was discrimination to tax the PE of foreign bank at higher rates when the Indian bank and the branch of foreign bank acting as PE were engaged in same activities. However, Article 25(1) contains some important words/ phrases which testify as to when and under what circumstances this non-discrimination clause would be applicable. One is ‘nationals’ and the other is ‘in the same circumstances’.
    

5. The Mumbai Bench of the Tribunal in the case of Credit Lloynnais vs. Dy. CIT [2005] 94 ITD 401 considered the concept of ‘national’ and ‘in the same circumstances’ and held that when different tax treatments are being given to the assessee on the basis of criterion connected with requirements regarding residence of the tax-payer, it would not be covered by the scope of non-discrimination clause.
    

6. Further, the concept of discrimination based on nationality was also discussed in explanatory notes on UN Model Convention from which the language in most of DTAAs including the Indo-Korean DTAA and Indo-French DTAA has been borrowed. The relevant Article in UN Model Convention is Article 24. The non-discrimination clause in Article 24(1) of UN Model Convention and so the Article 25(1) of Indo-Korean DTAA provided that the term ‘national’ in Article 3(g) of Indo-Korean DTAA showed that those who may be entitled to invoke Article 25 of Indo Korean DTAA are individuals (possessing the nationality of a Contracting State), legal persons, partnerships and associations. Further, from Article 3(g) of Indo-Korean DTAA, it appears that corporate bodies are not covered in the definition of ‘nationals’. Since ‘legal person’ comes side by side with individual in the above definition, then from the principle of ‘Nocitur-a-soccii’, the ‘legal person’ would not be a corporate body. Further, ‘other entity’ as used in Article 3(g) would also not include ‘corporate bodies’, unless they are declared ‘nationals’ under the law of that State.
    

7. Similar views were expressed by professor, Dr. Klaus Vogel, University of Munich, in his treatise on ‘Double Taxation Convention’ Third Edition (being a commentary to the OCED UN – US Model Convention for the DTAA on income and capital) on page 1291.
    

8. Presuming that the assessee-company was a national of the Contracting State (i.e., Korea), it still could not be said that it was functioning in India under the same circumstances like a domestic company. Another distinction between domestic company and non-domestic company is the declaration of dividend or making arrangement therefor. Indian domestic company has to declare dividend or make prescribed arrangement therefor. But there is no such thing binding upon the non-domestic company, as they do not have the shareholders in India. Thirdly, the domestic banking company has to abide by the additional conditions imposed by Reserve Bank of India about advantages to agriculture or to weaker sections of society. The percentage of advantages to priority sector is more in case of domestic banking company as compared to non-domestic banking company. Hence, it could not be said that domestic banking company and non-domestic company are working under the same circumstances.
    

9. Therefore, domestic banking company and non-domestic banking company do not function under ‘same circumstances’ and, hence, discrimination clause in Article 25 of the Indo-Korean DTAA is not applicable.
    

10. Section 2(22A) shows that not only Indian company but also any other company can be termed as domestic company, provided it has made prescribed arrangement for distribution of dividend (including dividend on preference shares) payable out of income-tax. Section 2(23A) defines a ‘foreign company’ as a company, which is not a domestic company. The non-discrimination clause can be invoked among the members of the ‘same set of persons’. Those domestic companies, which belong to one set and those which are not domestic companies, fall into other set. A non-resident company who falls in the definition of ‘domestic company’ by virtue of its having made prescribed arrangement for distributing dividend cannot be discriminated. From this definition also, one does not find any case of discrimination as Indian domestic company and non-resident company fall in two different sets. Within the group (or set) there should not be any discrimination on the basis of nationality.
     

11. Explanation was inserted in section 90 with retrospective effect from 1-4-1962. It clearly provides that charging of a foreign company at a higher rate will not be regarded as less favourable as compared to domestic company. The department also issued a Circular No. 14 of 2001 to explain the effect of the Explanation. The Explanation introduced in 2001 by the Finance Act, 2001 with retrospective effect from 1-4-1962 is no way in conflict with the DTAA with Korea. Therefore, the amendment made in section 90 by way of insertion of Explanation is applicable insofar as it is not in conflict with the provisions of DTAA.
     

12. Therefore, there is no conflict of the Explanation to section 90 with the DTAA with Korea, as the areas of operation of Explanation to section 90 and Article 25(1) are in different fields. Explanation clarifies the position as it always stood; DTAA with Korea did not prescribe any separate or specific rate or any particular criteria to be applied on income of Korean companies assessed in India. The Explanation does not deal with assessability of any item of income, and even if any conflict is envisaged, still then the provision of DTAA with Korea would yield to law passed independently by the Parliament.
     

13. The words ‘less favourable’ have not been defined either in the DTAA with Korea or in the Income-tax Act. Therefore, it could not be construed to mean that levy of higher rate on the income of non-domestic company would be ‘less favourable’. Article 25(2), as per model convention, is designed to curb the discrimination in the treatment of PE as compared with resident enterprises belonging to the same sector of activities. Even though, broadly Indian domestic bank and PE of the assessee-bank were engaged in banking activities but the activities were not the same; they might only be similar. Secondly, co-operative societies are charged with different rates looking to their social involvement and upliftment of poor and the prospects of their betterment through co-operative sector. Clauses (6), (1) and (8) of Model Conventions on Article 25(2) provide that it will not be a discrimination, if the Contracting State provides special privilege to public bodies, or whose activities are performed for public benefit, or to its own bodies being integral part of the State, etc. Therefore, it was not acceptable to compare co-operative societies with non-resident banking companies upon whom there is no such social burden.
     

14. Further, Explanation to section 90 so introduced with effect from 1-4-1962 is an integral part of section. It clearly lays down that charging of foreign company at a higher rate would not be treated as less favourable. Therefore , the order of the Commissioner (Appeals) was liable to be confirmed.

Cases referred

1. CIT vs. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.),
    

2. CIT vs. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP),
    

3. Credit Lloynnais vs. Dy. CIT [2005] 94 ITD 401 (Mum.),
    

4. ABN Amro Bank NV vs. Jt. CIT [2005] 4 SOT 643 (Kol.) (TM),
    

5. CIT vs. VR. S.R.M. Firm [1994] 208 ITR 400 (Mad.),
    

6. CIT vs. R.M. Muthaiah [1993] 202 ITR 508/67 Taxman 222 (Kar.),
    

7. Arabian Express Line Ltd. of UK vs. Union of India [1995] 212 ITR 31/82 Taxman 6 (Guj.),
    

8. CIT vs. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460 (SC) and
    

9. Gramophone Co. of India Ltd. vs. Birendra Bahadur Pandey AIR 1984 SC 667

5. Taxation of Non-Resident Company – Ambit of section 44BB –Fees for Technical Services taxable u/s 44D r/w Sec 115A

ONGC vs. ACIT [2006] 9 SOT 8 (Delhi) (SMC) – Assessment Year 2002-03

Provisions of section 44BB cover only such services, which have solely been provided for basic activity of prospecting, extraction or production of mineral oils. The assessee filed return of income in its capacity as representative-assessee of a Non-Resident Company (NRC) and offered revenue receipts taxable as per provisions of section 44BB as its profits in connection with business of exploration, etc., of mineral oils. The NRC had rendered services to assessee in connection with assessment of internal damage of CPI units of SHG platform and providing estimate of replacement. Immediate purpose of assessment was to see that water produced on offshore platform was fit for human consumption. The A.O. held that services provided by NRC were technical service covered by section 44D read with section 115A.Since services in connection with assessing feasibility of water for human consumption was an activity wholly unrelated to prospecting for mineral oil and was having a far-fetched relationship with same, the services rendered by NRC could not be said to be ‘in connection with’ oil exploration and would not qualify under section 44BB.In view of the facts, consideration received by NRC from assessee had to be treated as ‘fee for technical services’ within meaning of section 9 and therefore, services provided by NRC were covered by section 44D.

Facts

1. The assessee-company filed the return of income in its capacity as representative-assessee of a company situated in U.K. in the status of Non-Resident Company (NRC).
    

2. The NRC had rendered services to the assessee in connection with the assessment of internal damage of CPI units of SHG platform and providing estimate of replacement. The immediate purpose of assessment was to see that the water produced on the offshore platform was fit for human consumption.
    

3. The assessee had offered the revenue receipts taxable as per the provisions of section 44B as its profits in connection with the business of exploration, etc., of mineral oils.
    

4. In the assessment proceedings, the assessee claimed that the services rendered by NRC were directly connected with the exploration for extraction and production of mineral oils, and that as per Board Instruction No. 1862, dated 22-10-1990, rendering of services like imparting of training and carrying out drilling operations for exploration or exploration of Oil and Natural Gas would be covered by the exception under the expression ‘Mining Project’ or ‘Like Project’ recurring in Explanation 2 to section 9(1)(vii).
    

5. The Assessing Officer held that the services rendered by NRC in no way could be with reference to the services used in section 44BB, as the services rendered were purely for ‘technical services’ offered in connection with the assessment (Inspection) of internal damages to CPI units of SHG Platform. Accordingly, the Assessing Officer held that the services provided by the NRC were technical services covered by section 44D, read with section 115A.
    

6. On appeal, the Commissioner (Appeals) confirmed the impugned order.

Decision

1. In order to be eligible under section 44BB, the amount paid to the non-resident has to be on account of the provision of services and facilities in connection with, or supply of plant and machinery in the prospecting for, or extraction or production of mineral oils. The expression ‘mineral oil’ is also stated to include petroleum and natural gas. It is, thus, evident that the provision of service and facility should be in connection with or supply of plant and machinery in the basic activity of extraction or production of mineral oils. The CDI Units that are used for preparation of water fit for human consumption are independent of the plant and machinery required for such basic business.
    

2. If an activity is not connected with the prospecting of mineral oils, the same would not fall within the scope of section 44BB. For the expression ‘in connection with’ used in section 44BB only such services can be included which have solely been provided for the basic activity of prospecting, extraction or production of mineral oils.
    

3. Thus, the service in connection with assessing the feasibility of water for human consumption was an activity wholly unrelated to the prospecting for mineral oil and was having a far-fetched relationship with the same. The intention of section 44BB is to cover the activities having a proximate relation to the activity of extracting. Therefore, the instant activities could not be said to be ‘in connection with’ oil extraction and would not qualify under section 44BB.
    

4. The assessee’s contention that the service rendered by NRC was a step-in-aid to the basic activity could also not be accepted, as this was an independent activity unrelated to the basic activity. The expression ‘set-in-aid’ used in various pronouncements was with respect to basic activity, which was inextricably linked thereto.
    

5. It was a finding of fact of the lower authorities that the services in the instant case were not rendered in connection with prospecting, extracting or production of mineral oils. The assessee had failed to furnish these vital documents in respect of services despite adequate opportunities. In such circumstances, the only resort could be to the facts as established by the lower authorities.
    

6. The assessee had alternatively argued that the instant services did not qualify as ‘Fee for technical services’ under the Indo-UK treaty, since no technical information was ‘made available’ to the ONGC. However, it is a settled position that whenever an expression is not defined under a treaty, the resort has to be to the domestic law.
    

7. Since the answer to the question posed for making a reference for the meaning of ‘Fees for technical services’ or the expression ‘made available’ used thereunder to another treaty or tax law of Contracting State was available in the treaty under consideration, there was no logic to resort to Indo-US Treaty for the meaning of the term ‘made available’ used in the definition of ‘Fee for technical services’ under Article 13 of the DTAA between India and U.K. The treaty between the two States has to be read as a whole. Upon such reading, if a term is not found defined, then one has to understand the meaning assigned to such term under the laws of that Contracting State alone. In the instant case, it was, therefore, unthinkable to go to Indo-US Treaty and import the meaning of expression ‘made available’ in that treaty to the treaty under consideration, more so when the model of convention of both the countries was also altogether different. Therefore, the meaning of ‘Fees for technical services’ has to be understood from Explanation 2 to section 9(1)(vii) and, accordingly, the services rendered were covered by the definition given under the Act. Exception carved therein for mining or like project being not applicable to the nature of service rendered by the NRC, the consideration so received had to be treated as ‘Fee for technical services’ within the meaning of section 9 and as such section 44D had rightly been applied for making assessment of income in the instant case.

Cases referred

1. Agland Investment Services Inc. vs. ITO [1985] 22 Taxman 9 (Delhi) (Trib.)
    

2. Jt. CIT vs. ONGC as agent of Altair Filters Intl. Ltd., U.K. [IT Appeal No. 1098 (Delhi) of 2000, dated 4-2-2004]
    

3. Dy. CIT vs. Boston Consulting Group (P.) Ltd. [2005] 94 ITD 31 (Mum.)
    

4. CIT vs. Chunilal Prabhudas & Co. [1970] 76 ITR 566 (Cal.),
    

5. CIT vs. P.V. V.A.L Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460 (SC),
    

6. Abdul Razak A. Meman, In re [2005] 276 ITR 306/146 Taxman 115 (AAR),
    

7. DHV Consultants BV, In re [2005] 277 ITR 97/147 Taxman 521 (AAR),
    

8. DLJMB Mauritius, In re [1997] 228 ITR 268/94 Taxman 218 (AAR) ,
    

9. Morgan Stanley & Co. International Ltd., [2005] 272 ITR 416/142 Taxman 630 (AAR-New Delhi),
    

10. Hindalco Industries Ltd. vs. Asstt. CIT [2005] 2 SOT 528 (Mum.)
     

11. Clifford Chance, United Kingdom vs. Dy. CIT [2002] 82 ITD 106 (Mum.)

[Authors’ Note: The observations of the Tribunal in Paragraphs 15 and 16 of the Order regarding interpretation of the term “Make available” used in the definition of “Fees for Technical Services” in Article 13 of India – UK DTAA, are at variance with the interpretation of the term preferred in the decisions of the co-ordinate benches of the Tribunal in Raymond Ltd. vs. Dy. CIT (2003) 80TTJ (120)/86 ITD 761 (Mum), & C.E.S.C. Ltd. vs. Dy CIT (2003) 80 TTJ (Cal)(TM) 806/87 ITD 653 (Cal)(TM) etc. It appears that the Member’s attention was not drawn to the said two Tribunal decisions which have relied upon the MOU signed under the India – USA Treaty to interpret the term “Make available” used in Article 13 of the India – UK DTAA. In our view, the decisions in Raymond Ltd. & C.E.S.C. Ltd. present the correct view of the matter.]

6. U.K. based Non Resident Company – Taxability of profits from supply of hardware & software to wireless communication service provides – section 9 of IT Act and Rule 10 of I.T. Rules – Articles 5 and 13 of India – UK DTAA

DCIT vs. Metapath Software International Ltd. [2006] 9 SOT 305 (Delhi) – Assessment Year 1997-98

Assessee, a company incorporated under laws of United Kingdom, was a leading provider of software solutions to wireless communication providers. Assessee sold software and hardware to Indian customers against payment and transferred ownership of said goods in India. Assessee did not admit tax liability on said payment. Assessing Officer held that income of assessee was covered under section 9(1) on ground that assessee had Permanent Establishment (PE) in India and worked out 40 per cent of total value of hardware supplied as income of assessee along with income from supply of software. Since assessee had deputed its two employees in India whose salaries were paid by assessee, assessee had a permanent establishment in India in form of its employees as per Article 5(2)(k) of DTAA between India and UK. Therefore, income from supply of hardware and software to Indian customers accrued and arose to assessee in India and, hence, it was taxable in India. Since PE was merely doing job business of negotiations, profits attributable to PE were to be reduced to 8%. Since payment received by assessee was not for any copyright but for a copyrighted article, payment could not be considered as royalty within meaning of Explanation 2 below section 9(1) or DTAA with UK. Therefore, consideration received by assessee on licensing of software was to be taxed as business income and not as royalty.

Facts

1. The assessee, a company incorporated under the laws of United Kingdom, was a leading provider of software solutions to wireless communication providers.
    

2. The assessee sold software and hardware to Indian customers against payment and transferred ownership of the said goods in India.
    

3. For the assessment year 1997-98, the assessee filed the return of income declaring taxable income at nil, on the ground that it did not constitute a Permanent Establishment (PE) in India and hence, income derived by the assessee from such activity was not liable to Indian taxes even under the provisions of the India-UK tax treaty.
    

4. The Assessing Officer held that the income of the assessee from supply of software and hardware to Indian customers was covered under the provisions of section 9(1). He also held that the assessee had a PE in India as per Article 5(2)(k) of the DTAA between India and UK in the form of its two employees who were deputed in India and whose salaries were paid by assessee and, therefore, the income of the assessee from supply of software and hardware to Indian customers was taxable in India.
    

5. He further held that the income from supply of hardware was taxable as business income and the income from supply of software was taxable as royalty. The Assessing Officer ultimately worked out 40 per cent of the total value of hardware supplied as income of the assessee from business. He also brought to tax the value of software supplied by the assessee treating the same as akin to royalty.
    

6. On appeal, the Commissioner (Appeals) held that since the sales of software and hardware had been made in India and the transfer of ownership of the said goods took place in India, the income accrued and arose to the assessee in India. He further held that since the two employees of the assessee stayed for the whole year in India, they constituted its PE under Article 5(2)(k) of the DTAA between India and U.K.
    

7. The Commissioner (Appeals) also considered the audited profits and loss account filed by the assessee and having noticed that the weighted average of profit was only 10.5 per cent and the Assessing Officer applied a rate of 40 per cent without any basis, and that the supply of hardware was not the main business of the assessee but was only an incidental business, applied a rate of 12% of the turnover as the profits on supply of hardware. He further held that 4% of the profits was attributable to operations outside India and 8 per cent attributable to PE operations in India. The Commissioner (Appeals) further, with regard to the income from sale of software, held that the instant transaction was one of sale leading business profits and not royalties.

Decision

On Second Appeal, the Tribunal held as follows:–

1. In the case of Motorola Inc. vs. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB), an identical issue regarding ascertainment of profits attributable to PE in India, which had supplied hardware in India, was involved. In that case, there were three activities attributable to the PE : (i) network planning, (ii) negotiations in connection with the sale of equipment, and (iii) the signing of the supply and installation contracts. The Tribunal sustained 20% of the net profits in respect of the Indian sales as income attributable to the PE.
    

2. In the instant case, the PE was merely doing the job business of negotiations. Therefore, the Commissioner (Appeals) was justified in reducing the profits from the supply of hardware attributable to PE to 8%. The said percentage would also meet the requirements of Rule 10(ii).
    

3. The question as to whether the consideration received by the assessee on licensing of software should be taxed as the business income or as royalty had again been elaborately dealt with in the case of Motorola Inc. In the case of Motorola Inc., the assessee was leading supplier of telecommunication equipments comprising of both hardware and software. It had entered into supply agreements with cellular operators in India for supply of hardware and software during the relevant assessment years and received payments therefor. The Tribunal, after analyzing the terms of the agreements, held that the payment received by the assessee was not for any copyright in the software but was only for the software as such as a copyrighted article and, therefore, payment could not be considered as royalty within the meaning of Explanation 2 below section 9(1) or Article 13(3) of the DTAA between India and Sweden. The definitions of royalty under Indo-Sweden DTAA and Indo-UK DTAA are one and the same.
    

4. A comparative chart of various clauses of the agreements in the case of the instant assessee and that of the agreements in the case of Motorola Inc. had also been filed before the Tribunal. In the light of the similarity of facts as it existed in the case of the assessee and that of the case of Motorola Inc., it was to be held that the consideration received by the assessee on licensing of software was to be taxed as business income and not as royalty.

[Note: It was also held by the Tribunal that in the light of the decision of the Delhi Bench of the Tribunal in the case of Sedco Forex International Drilling Inc. vs. Dy. CIT [2000] 72 ITD 415, which has since been confirmed by the Uttaranchal High Court in the case of CIT vs. Sedco Forex International Drilling Co. Ltd. vs. [2003] 264 ITR 320/[2004] 134 Taxman 109, that the interest for non-payment of advance-tax could not be levied under section 234B upon the assessee.]

Cases referred

1. Sedco Forex International Drilling Inc. vs. Dy. CIT [2000] 72 ITD 415 (Delhi)
    

2. Iraqi Airways vs. IAC [1987] 23 ITD 115 (Delhi)
    

3. Motorola Inc. vs. Dy. CIT [2005] 95 ITD 269 (Delhi) (SB) and
    

4. CIT vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320/[2004] 134 Taxman 109 (Uttaranchal)

7. Disallowance u/s 40(a)(i) r/w sec. 195 – Non deduction of TDS from legal fees paid to U.K. solicitor from – Not liable for TDS – Assessee’s claim allowed

IMP Power Ltd. vs. ITO [2006] 9 SOT 156 (Mum.) – Assessment Year 2001-02

Assessee paid legal fees outside India to a UK based firm of solicitors in connection with legal proceedings in UK and claimed deduction of same as business expenditure. The A.O disallowed the claim holding that since no tax at source was deducted on said payment, provisions of section 40(a)(i) were squarely attracted. Since legal fees paid to solicitors in UK was not chargeable to tax under Act in India, assessee was under no obligation to deduct tax at source under section 195 from payment so made and, therefore, assessee’s claim was to be allowed.

Facts

1. The assessee paid legal fees outside India to a UK based firm of solicitors in connection with the legal proceedings in the UK and claimed deduction of same as business expenditure.
    

2. The assessee did not deduct tax at source from the payment so made on the ground that payee was not assessable, being a non-resident, having no office in India, so provisions of section 195 would not be applicable.
    

3. The Assessing Officer disallowed the assessee’s claim holding that since no tax at source was deducted by the assessee from the payment so made, the provisions of section 40(a)(i) were squarely attracted to the instant case and same would prevail over the provisions of section 195.
    

4. On appeal, the Commissioner (Appeals) confirmed the impugned order.

Decision

On Second Appeal, the Tribunal held in favour of the assessee as follows:

1. There is no conflict in the provisions of section 195 and section 40(a)(i), because the purpose of section 195 is to ensure deduction of tax at source on payments to non-resident, which are chargeable under the provisions of the Act and section 40(a)(i) also states the same principle in a sense that disallowance of deduction in respect of any sum which is chargeable under the Act and where the tax has not been deducted at source. Thus, the basic condition is chargeability of the sum paid to the non-resident under the provisions of the Act.
    

2. Both the revenue authorities had not given a finding whether the amount paid to the solicitors in the UK was chargeable to tax under the provisions of the Act. However, this aspect was settled by the decision of the Tribunal in the case of Maharashtra Electricity Board vs. Dy. CIT [2004] 90 ITD 793 (Mum.), wherein it was held that where the provisions of Article 15 of the DTAA, between India and the UK, were applicable, payment of fee for legal consultancy services to the UK based firm of solicitors, was taxable in the UK and was not exigible to tax in India.
    

3. Therefore, the assessee (i.e., Tax deductor) was under no obligation to deduct tax at source from the payment so made.
    

4. The assessee had further placed reliance on the Circular No. 786, dated 7-2-2000; Although the said Circular directly deals with the export commission, yet it essentially confirms the view that requirement of deduction at source under section 195 would arise only if the impugned payment to the non-resident is chargeable to tax in India.
    

5. Thus, the revenue authorities were not justified in disallowing the expenditure, relating to legal fee paid to the UK based solicitors.

Cases referred

1. Maharashtra State Electricity Board vs. Dy. CIT [2004] 90 ITD 793 (Mum.)
    

2. Asstt. CIT vs. DHL Operations B.V. [2005] 142 Taxman 1 (Mum.)
    

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

4. Lucent Technologies Hindustan Ltd. vs. ITO [2005] 92 ITD 366/[2004] 3 SOT 757 (Bang.)
    

5. Ind Telesoft (P.) Ltd., In re [2004] 267 ITR 725/140 Taxman 463 (AAR)
    

6. G.V.K. Industries Ltd. vs. ITO [1997] 228 ITR 564/[1998] 96 Taxman 179 (AP).