Income Tax Act, 1961 - Sections 9, 9(1), 28 to 44C, 44D, 90(2), 115A and 245Q(1) Deputy CIT v. Schlumberger Seaco Inc. (SSI) [994] 50 ITD 348 (Cal); Standard Chartered Bank v. IAC, [1991] 39 ITD 57; State Trading Corporation of India Ltd. v. CTO, [1963] 33 Comp Cas 1057, AIR 1963 SC 1811 1. AB Ltd. was a company incorporated in the UK on June 2, 1983.
Subsequently, it changed its name to "Z" Ltd. (hereinafter referred to as "the applicant"). This change in name was registered with Companies Registration Office, UK on December 11, 1984. The applicant entered into three agreements with "X" (an oil company in India) for rendering consulting services for gas flaring reduction project, etc., in December, 1993, May, 1994, and June, 1994. The applicant filed three applications under Section 245Q(1) of the Income-tax Act, 1961 ("the I.T. Act"), on March 9, 1995, in respect of the above three agreements.
2. It was stated by the applicant in its application that the company is based in UK having no branch, office or any local presence in India and that none of the services provided by the applicant to "X" had been utilised in India. It was also stated that all work on the contract awarded by the "X" to the applicant was carried out in England, using the applicant's own staff and consultants and that the company and its staff are subject to the tax jurisdiction of the United Kingdom. On these grounds it was claimed that the provisions of Section 9(l)(vi)(b) of the I. T. Act do not apply, and, therefore, no tax should be levied on the applicant with regard to its contract with "X".
3. The facts and the questions raised in all the three applications are identical ; therefore, these were heard together and are being disposed of by this single order for the sake of convenience. For proper appreciation of the arguments the facts relating to these applications are set out below.
4. The first agreement between the applicant and the "X" was drawn on December 23, 1993. The purpose of this agreement was in depth reservoir management study of the Offshore-Oil Field on behalf of "X" which included : (b) history matching, reservoir performance production and reservoir management, (d) independent assessment of recoverable reserves by generating reservoir simulation models and carrying out well-wise history matching and provide future production for profile, etc., (g) making development work programme for three reservoirs of offshore oil field.5. The methodology was also determined at the stage of the agreement and it was decided that the applicant will work in close collaboration with "X" staff even for the work to be carried out in the consultant's home office. For this, the applicant was required to do the following : (e) Submit comprehensive reports to "X" covering cost of these aspects, and (f) Hand over the data generated during the study to "X" on computer media, 6. The study was to be completed within four months from the date of commencement and the entire job was to be reviewed in three stages. The first review was to be completed in India. The second review meeting was to be held in the applicant's home office and the third review meeting was to be held in India.
7. The lump sum cost for completion of this work was determined in US $ out of which one per cent, was to be recovered in Indian currency. The taxes (corporate and persona) were to be borne by the applicant but the cost of the work in association with the "X" officers including air fare, boarding and lodging were to be borne by the "X".
8. In May, 1994, another agreement was drawn between the applicant and "X" for 9. This study had commenced in April, 1994, and the agreement was only to regularise the work which had already been undertaken and the draft report was to be submitted by June, 1994. Obviously, therefore, this agreement was drawn after the study had almost been completed. The payment for this was determined in US $ which was to be paid in four instalments. As in the first agreement the taxes and the duties were to be paid by the applicant.
10. The work relating to the review of the oil fields covered by this contract was to be done in India and in terms of paragraph 9.2 of this agreement the payment was to be made partly in US dollars and partly in Indian rupees.
11. The third agreement was drawn in June, 1994, and the scope of work covered in this agreement was to assist and advise "X" on methodology of evaluation of the tenders. This job included commercial and legal advice regarding acceptance of the tenders invited by "X" from different contractors on the basis of the reports submitted by the applicant in accordance with the earlier two agreements. This job was to be performed primarily in India as frequent consultation with the officers of "X" was needed. This "work package" was for a sum of US $ for a period of 30 days and a sum of US $ was to be paid as air tickets from the UK to India. Hotel accommodation and local transport was to be provided by "X" in India.
12. A copy of the application was sent to the concerned Commissioner of Income-tax (CIT) for records of the case, if any, and his views on the facts made out in the application. He pointed out that "X" has deducted tax at source at 30 per cent, from the payments made to the applicant considering the payments as royalty and fees for technical services as provided under Section 115A read with Section 44D. The Commissioner of Income-tax held the view that this was rightly deducted, because, the payments were for royalties and technical services within the meaning of Clauses (vi) and (vii) of Sub-section (1) of Section 9 of the Income-tax Act.
13. The applicant has raised the following sets of questions in the three applications ; First application relating to consulting services contract with "X" for estimation of reserves and generation of production profiles of 23 oil and gas fields of "X" made in May, 1994. The questions posed are : "(1) Whether, on the facts and in the circumstances of the case, any part of the considerations receivable under the agreement of June, 1994, entered into between the applicant and 'X' (an Indian oil company) is chargeable to tax under the Income-tax Act, 1961 (2) If any part of the income is so taxable, what rate of tax would be attracted to the payment made ?" Second application in respect of the applicant's contract with "X" for consulting services for gas flaring reduction process made in December, 1993. The questions posed are : "(1) Whether, on the facts and in the circumstances of the case, any part of the considerations receivable under the agreement of December, 1993, entered into between the applicant and 'X' (an Indian oil company) is chargeable to tax under the Income-tax Act, 1961 (2) If any part of the income is so taxable, what rate of tax would be attracted to the payment made ?" Third application in respect of consulting services for bid evaluation and draft for additional development of offshore oil field made in June, 1994. The questions are : "(1) Whether, on the facts and in the circumstances of the case, any part of the considerations receivable under the agreement of June, 1994, entered into between the applicant and 'X' (and Indian oil company) is chargeable to tax under the Income-tax Act, 1961 (2) If any part of the income is so taxable, what rate of tax would be attracted to the payment made in June, 1994 ?" Counsel argued on behalf of the applicant that "X" has erroneously deducted tax at 30 per cent, disregarding the provisions of Section 44BB of the Income-tax Act. He submitted that the provisions of Section 115A do not apply, because, Section 115A has to be read with Section 44D, which in turn provides for taxation of royalty in pursuance of an agreement. Therefore, only if the applicant had an agreement of this nature the provisions of Section 44D would have been applicable.
Counsel sought to distinguish between "royalty", "fees for technical service" and "business of rendering technical services".
14. He claimed that the applicant was engaged in the business of providing services in connection with prospecting of mineral oil.
Therefore, this case is squarely covered by the provisions of Section 44BB of the Income-tax Act and that neither Clause (vi) nor Clause (vii) of Sub-section (1) of Section 9 would be applicable, because Clause (vi) excludes payment in respect of services utilised for the purposes of a business or profession carded on outside India from the purview of the definition of income by way of royalty ; and, because the applicant was carrying on the business of rendering services outside India, his case would not be covered by Clause (vi). He claimed that even Clause (vii) would not be applicable for the same reason, because, the payment made to the applicant falls in the same set of exceptions provided in Sub-clause (b) of Clause (vii). Moreover, Explanation 2 to Clause (vii) also excludes such payment from taxation under that clause as fees for technical services.
15. He further argued that the case of this applicant does not fall within the proviso to Sub-section (1) of Section 44BB, because, none of the Section s 42 or 44D or 115A or 293A apply. According to him Section 42 applies only to cases where the Central Government has entered into an agreement and that agreement has been laid on the table of Parliament, which is not the case here. Section 44D would also not apply to this case, because, the payment received by the applicant would not be covered by the terms "royalty" or "fees" for technical services. Section 115A would also not apply, because, that Section is dependent upon Section 44D. Section 115A is only a machinery provision for calculation of tax in cases where the income of a foreign company includes royalties or fees for technical services from an Indian concern. He claimed that Section 293A would also not apply because, that Section envisages a notification to be issued by the Central Government covering the class of persons specified in Sub-section (2) of that Section; and, because such notification was never issued, the provisions of this Section would not apply.
16. On the basis of the above arguments, he contended that only the provisions of Section 44BB would be applicable to the present case, which provided for assessment of income on a deemed basis at 10 per cent. of the aggregate payment to a non-resident engaged in the business of providing services or facilities in the prospecting of mineral oils, and this income under the head "Profits and gains of business or profession" is chargeable at the usual rate of tax at 55 per cent. which means the net rate of taxation on such payments would be 5.5 per cent. for the assessment years 1994-95 and 1995-96. It is pointed out that at the time when the first instalment of consideration under the agreement of December, 1995, was paid, the rate of income-tax on a foreign company was 65 per cent. and tax at source was deducted from the payment of 6.5 per cent. apparently on the basis of Section 44BB, but that now the rate of tax deduction is proposed to be hiked up to 30 per cent. erroneously, according to the applicant.
17. Counsel relied on a decision of the Calcutta Bench of the Income-tax Appellate Tribunal (ITAT) in the case of Deputy CIT v.Schlumberger Seaco Inc. (SSI) [994] 50 ITD 348 (Cal) holding, inter alia, that SSI possessed requisite expertise, experience and technical know-how in conducting wire line services and such expertise or experience was the result of a continuous course of activity in rendering such services to various persons engaged in the extraction of oil all over the world, and, because, it was continuously engaged in the above activity, it must be stated to have engaged itself in such business. In addition, they had also provided personnel to operate wire logging equipment. In such a situation it had to be seen whether the services or facilities are rendered or provided in such a manner as to constitute business. The very fact that Section 44BB(l) also speaks of rendering of services shows that it cannot be stated that merely because the assessee has rendered some technical services, the income arising therefrom must be treated only as "fees from technical services" taxable under Section 115A at the special rates. He submitted that the Income-tax Appellate Tribunal had relied on Circular F. No.500/6, dated October 22, 1990, issued by the Central Board of Direct Taxes (CBDT) to the effect that the expression "mining" as contemplated by Explanation 2 to Section 9(l)(vii) includes mining of petroleum and natural gas and this interpretation was based on the opinion of the Attorney-General. On this basis, he pleaded that the case of the applicant falls within the definition of "mining". He further submitted that the business of SSI did not fall within the meaning of "fees for technical services", because, it was rendering services to "X" in respect of mining of mineral oil, therefore, it got excluded from the purview of Explanation 2 to Section 9(l)(vii). He claimed that this decision is applicable to the present case as well, because, (a) the applicant was carrying on business of rendering technical services, and (b) this business was in the area of mining of mineral oils to be undertaken by "X". Therefore, the consideration received for this business is taxable only under Section 44BB as it does not get excluded by the operation of the proviso to that Section .
18. Counsel further claimed that where an agreement between the Indian Government and the Government of any other country exists for avoidance of double taxation, then, by virtue of the provisions of Sub-section (2) of Section 90 of the Income-tax Act, the applicant being a national of UK would be entitled to claim benefit under the agreement and, therefore, if the Income-tax Department contends that a rate of 30 per cent, is applicable in respect of the payment made by the "X" to the applicant, then the applicant should be assessed in accordance with the provisions of the double taxation agreement. He invited reference to the double taxation agreement between UK and India notified on February 11, 1994, and submitted that the applicant does not have a permanent establishment (PE) within the meaning of article 5 of the double taxation agreement and that the business profits embedded in the payments made by "X" would have been taxable in India under Article 7 of the double taxation agreement, only if the business was carried on by the enterprise through a permanent establishment situated in India, However, he submitted that even if the profit is to be taxed under Article 7 of the double taxation agreement, deduction for expenses incurred for the purposes of business, including executive and general administrative expenses whether in India or in UK, would have to be allowed. If this is done the rate of taxation would be much lower than the deemed rate of 30 per cent. provided in Section 115A read with Section 44D.19. He relied upon a decision of the Income-tax Appellate Tribunal, Bombay Bench in the case of Standard Chartered Bank v. IAC [1991] 39 ITD 57 relating to Section 36(l)(viia) of the Income-tax Act read with article 23 of the earlier double taxation agreement between the UK and India. He submitted that the Income-tax Appellate Tribunal had held there that corporations have nationality in accordance with the country of their incorporation. Following the decision of the Supreme Court in the case of State Trading Corporation of India Ltd. v. CTO [1963] 33 Comp Cas 1057 ; AIR 1963 SC 1811, the Income-tax Appellate Tribunal observed that nationality and citizenship are distinct as, nationality has reference to the jural relationship which may arise for consideration under the international law. The bank was a national of the UK but was incorporated in India, therefore, it cannot be subjected to a higher burden of tax than a scheduled commercial bank in India by virtue of Article 23 of the double taxation agreement. Accordingly, the Income-tax Appellate Tribunal held that the bank was entitled to the benefit of Section 36(l)(viia) like any other Indian bank. On this basis, he argued that the applicant should also not be subjected to a higher burden of tax than a national of India. According to him if Section 44BB is not applicable to the applicant, it would mean discrimination within the meaning of Article 26 of the present double taxation agreement between India and UK.20. Counsel reiterated that the payment made by "X" to the applicant would not be covered by the definition of "royalties", and "fees for technical services" even under the provisions of Article 13 of the double taxation agreement. He claimed that the definition of the term "royalties" in paragraph 3 of Article 13 does not cover the payment received by the applicant, because, it is not a payment received as a consideration for use of any copyright, etc., or use of any industrial, commercial or scientific equipment. The payment could have been classified under paragraph 4(c) of Article 13 if it had not been the business of the applicant to render services for imparting technical knowledge, experience, and know-how, etc. He wanted to make a fine distinction between making available technical knowledge, experience, know-how, etc., on the one hand and business of imparting technical knowledge, experience, etc., on the other. However, he argued that even if the payment was to be covered by article 13 of the double taxation agreement, the double taxation agreement would override the provisions of the Income-tax Act, especially Section 44D read with Section 115A, and in that case the tax rate would only be 20 per cent. for fees for technical services as provided under the double taxation agreement, and, therefore, the rate of 30 per cent. claimed by the Department is not justified even on this basis.
21. Counsel also relied upon paragraph 1 of Article 26 of the double taxation agreement which provides for non-discrimination between nationals of the two Contracting States in respect of taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirements to which the nationals of the other State in the same circumstances may be subjected. It was argued that the applicant should not.be subjected to a tax at the rates of 30 per cent. under the Income-tax Act or 20 per cent. under the double taxation agreement on the gross payments because it would amount to discrimination between the applicant and a similarly placed national of India providing such services, as the latter would be taxed under the normal provisions of the Income-tax Act under the head "Income from business or profession". It means that an Indian national would be taxed in India at a rate much lower than the presumptive rate of 20 per cent. or 30 per cent. on the gross payment. It was, therefore, urged that by virtue of the provisions of the non-discrimination clause of the double taxation agreement and the provisions of Sub-section (2) of Section 90 (which provides the applicant the option of being taxed at a rate more advantageous to it), the income of the applicant is liable to be assessed under normal provisions on net basis, i.e., gross receipts minus all eligible expenses incurred for the purposes of business.
22. Arguing on behalf of the Commissioner of Income-tax, the Departmental representative ("DR") submitted that the applicant had rendered technical services to "X" which included (a) survey of 23 areas in India demarcated by "X" for estimation of reserves and generation of production profiles after collecting all essential data in India in close collaboration with "X" ; (b) preparation of simulation studies and a comprehensive report on the forecast of oil and gas production upto the year 2015 and handover of data so generated to "X" on computer media ; (c) assistance and advice to "X" on methodology of the tenders invited on the basis of the report prepared by the applicant and suitable modification of the model contract including commercial and legal aspects.
23. He pointed out that although three agreements have been entered into between the applicant and "X", these are closely connected and interdependent agreements for rendering technical services to "X", for a consideration, which is clearly "fees for technical services" received from "X", an Indian concern, in pursuance of the above agreement and, therefore, the payment is fully covered by provisions of Section 44D. Accordingly, the case of the applicant falls under the proviso to Section 44BB which excludes the applicant from operation of that Section . He also submitted that the effort of learned counsel in trying to make a fine distinction between "fees for technical services" and "income from business of providing technical services" is not at all helpful because Section 44D is a special provision for computing income from royalties and fees for technical services in the case of foreign companies by excluding Section s 28 to 44C of the Income-tax Act which means but for these special provisions fees for technical services would have been assessable under the head "Income from business or profession".
24. He invited our attention to paragraphs 31 to 35 of the Explanatory Memorandum to the Finance Bill, 1976 (see [1976] 102 ITR 178, 186), through which these special provisions of Section 44D were introduced, which explains that such income by way of technical service fees and royalties was being taxed earlier on net basis, i.e., after allowing deduction in respect of cost and expenses incurred for earning the income, but, by virtue of the new provisions of Section 44D, such income in the hands of the foreign companies would now be taxed at flat rates specified in the newly introduced Section 115A with effect from assessment year 1977-78. Accordingly, consequential amendments were also made in Sections 9(l)(vi) and 9(l)(vii). On this basis, he pleaded that the intent of legislation was clear that such fees for technical services are to be taxed only under Section 44D read with Section 115A.He further submitted that the applicant's case is fully covered by Section 9(l)(vii) because the applicant is receiving income by way of fees for technical services payable by the "X", a resident person, in respect of services utilised by "X" in India. He contradicted the claim of learned counsel for the applicant that the case of the applicant gets covered by Explanation 2 to Section 9(l)(vii) because the applicant had received the "fees for technical services" as consideration for the rendering of technical and consultancy services including provision of technical services and other personnel for survey, etc. On this basis, he argued that the rate of 30 per cent.
provided under Section 115A is applicable to the payments received by the applicant.
25. As regards the applicability of the double taxation agreement, he conceded that the provisions of the double taxation agreement would override the provisions of the Income-tax Act whenever there was a difference between the two, but, he claimed that even under the double taxation agreement, Article 13 would be applicable to the payments received as fees for technical services and that learned counsel is not correct in arguing that the case of the applicant should be covered under Article 7 of the double taxation agreement. He urged that the provisions of Article 13 are special provisions for taxation of royalties and fees for technical services, therefore, if an income is covered by these special provisions, there is no question of considering applicability of Article 7 meant for assessing business profits of an enterprise through a permanent establishment. The applicant does not have a permanent establishment in India, therefore, Article 7 would not be applicable even otherwise.
26. He drew our attention to paragraph 4(c) of Article 13 which reads as under (see [1994] 206 ITR (St.) 250) : "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." 27. The Departmental Representative argued that the case of the applicant is fully covered by sub-para. (c) because he has made available technical knowledge, experience, skill and know-how which is also to be transferred to "X" on computer media in terms of the agreement. Therefore, the payment received by the applicant is liable to be taxed at the rate of 20 per cent. of the gross amount under paragraph 2(a)(i)(bb) of Article 13 of the double taxation agreement for the first five years for which the double taxation agreement has effect.
28. As regards the non-discrimination clause of the double taxation agreement, the Departmental Representative pointed out that paragraph 2 of Article 26 is not applicable because the applicant does not have a permanent establishment in India. As regards paragraph 1, he submitted that non-discrimination is to be judged by comparing two classes of persons similarly placed and not two individuals or two companies.
Under the Indian Income-tax Act, income of every person arising in India is to be taxed under the procedures and rates provided under the Income-tax Act. But for the double taxation agreement, the applicant would also have been subjected to tax under the Income-tax Act but it had claimed privilege under Section 90(2) of the Income-tax Act and wants to be assessed in accordance with the double taxation agreement.
Article 13 of the double taxation agreement provides a rate of only 20 per cent. of the total payment as against the rate of 50 per cent.
leviable for similar payments covered under Section 44D read with Section 115A. Thus discrimination, if any, is in favour of the applicant by virtue of the provisions of the double taxation agreement.
29. As regards the claim of the applicant that his income should be assessed under Section 44BB of the Income-tax Act, the Departmental Representative submitted that Section 44BB does provide a lower rate but by virtue of the proviso to that Section , the case of the applicant is not covered at all. Hence, that Section cannot be applied artificially in violation of the proviso to that Section . He further submitted that even if the income of the applicant is to be assessed as business income by applying the provisions of Sections 28 to 44C the net profit may perhaps work out to 80 per cent. (because all expenses in India have been borne by "X") which would be taxable at the rate of 46 per cent. (including surcharge) in the case of a domestic company which means an average tax rate of 36.8 per cent. on the gross payments which is 16.8 per cent. higher than the rate applicable to the applicant by virtue of the provisions of Article 13 of the double taxation agreement. Even if the net profit is assumed at 45 per cent.
of the payments, the average tax payable by a domestic company would be 20.7 per cent. on such payments. On this ground also, he argued that there was no discrimination.
30. A perusal of the facts stated in paragraph. 2 of this order would make it clear that the main contract was regarding identification of the oil reservoir which was dependent upon a thorough survey of onshore and offshore areas in India. Therefore, the main contract of December, 1993, which also covers the major payment received by the applicant, was carried out in India. The work relating to the second agreement was partly in India and partly in the UK. The work relating to the third agreement was also mainly performed in India. Therefore, the source of income arising to the applicant as a result of these three interrelated contracts is in India. On this basis, the Departmental Representative argued that all these three agreements should be treated as one and the income arising to the applicant out of these agreements should be taxed in India.
31. Interesting issues emerge out of the arguments of both the parties in this case. The first issue relates to the earlier contention of the applicant that the payments received by it do not come within the jurisdiction of the Indian income-tax, but, learned counsel of the applicant did not argue on this point, conceding that the provisions of the Income-tax Act and the double taxation agreement apply to the present applicant. No distinction was made by the applicant regarding on-shore activities or off-shore activities and from a perusal of the contracts under reference in these three applications, it is evident that all the three applications are closely inter-related. All the three are related to the rendering of technical services to "X" and, therefore, the payments made under these three agreements have to be considered together for the purpose of taxation in India.
32. Learned counsel for the applicant strongly pleaded that this case falls within the ambit of Section 44BB of the Income-tax Act, therefore, the payments were taxable only at the rate of 5.5 per cent.
of the gross payments (deemed profit of 10 per cent. on gross payments taxable at 55 per cent.). For a proper appreciation of the argument, the relevant provisions of Sub-section (1) of Section 44BB are given below : "44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.--(l) Notwithstanding anything to the contrary contained in Sections 28 to 41 and Sections 43 and 43A, in the case of an assessee being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in Sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession: Provided that this Sub-section shall not apply in a case where the provisions of Section 42 or Section 44D or Section 115A or Section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections." 33. The proviso makes it very clear that this Sub-section shall not apply where the provisions of Section 42, Section 44D, Section 115A or Section 293A apply.
34. Sections 42 and 293A have no relevance to the context of the issue in the present case. Section 115A(b) has relevance but it will apply only in the cases where the agreement under which the royalties and technical fees are received, is either approved by the Central Government or is in accordance with the industrial policy of the Government on the matter to which it relates. On behalf of the Department, it is stated that the approval of the Central Government to the agreement herein is indispensable and should, in fact, have been obtained. There is no information on this issue before the Authority.
It is, however, contended by the applicant that, quite apart from the need for approval under Section 115A, that provision is not applicable to cases like the present, where the receipts are in the nature of business income squarely governed by Section 44BB, but is applicable only to cases of royalty and technical fees arising otherwise than in the course of a business, It is also contended that the receipts in the present case do not fall within the definition of "royalty" and fees for technical services in Explanation 2 to Section 9(l)(vi) and (vii).
Indeed, this is also the basis on which the provisions of Section 44D are said to be inapplicable to the present case. These two provisions may, therefore, be now considered. Section 44D is a substantive Section , making a special provision for computing the income by way of royalties and technical service fee, in the case of foreign companies.
Clause (b) of Section 115A provides the machinery for taxation of such royalties and technical service fees. The relevant provisions of these Sections are given below : "44D. Special provisions for computing income by way of royalties, etc., in the case of foreign companies.--Notwithstanding anything to the contrary contained in Sections 28 to 44C, in the case of an assessee, being a foreign company,-- (a) the deductions admissible under the said Sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent. of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property ; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said Sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern after the 31st day of March, 1976.
(a) 'fees for technical services' shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 ; (b) 'foreign company' shall have the same meaning as in Section SOB ; (c) 'royalty' shall have the same meaning as in Explanation 2 to Clause (vi) of Sub-section (1) of Section 9 ; (d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to Clause (vi) of Sub-section (1) of Section 9, to have been made before the 1st day of April, 1976." "115A. Tax on dividends, royalty and technical service fees in the case of foreign companies.--(1) Where the total income of-- (a) a non-resident (not being a company) or of a foreign company, includes any income by way of- (ii) interest received from Government or an Indian concern on monies borrowed or debt incurred by Government or the Indian concern in foreign currency ; or (iii) income received in respect of units, purchased in foreign currency, of a mutual fund specified under Clause (23D) of Section 10 or of the Unit Trust of India, (A) the amount of income-tax calculated on the amount of income by way of dividends, if any, included in the total income, at the rate of twenty per cent. ; (B) the amount of income-tax calculated on the amount of income by way of interest referred to in Sub-clause (ii), if any, included in the total income, at the rate of twenty per cent. ; (C) the amount of income-tax calculated on the income in respect of units referred to in Sub-clause (iii), if any, included in the total income, at the rate of twenty per cent. ; and (D) the amount of income-tax with which he or it would have been chargeable had his or its total income been reduced by the amount of income referred to in Sub-clause (i), Sub-clause (ii) and Sub-clause (iii) ; (b) a foreign company, includes any income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of Sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,-- (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of thirty per cent.; (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent. ; and (C) the amount of income-tax with which it would have been chargeable had its total income been reduced by the amount of income by way of royalty and fees for technical services.
(a) 'fees for technical services' shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9 ; (b) 'foreign currency' shall have the same meaning as in the Explanation below item (g) of Sub-clause (iv) of Clause (15) of Section 10 ; (c) 'royalty' shall have the same meaning as in Explanation 2 to Clause (vi) of Sub-section (1) of Section 9 ; (d) 'Unit Trust of India' means the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963)", 35. A perusal of these provisions would make it clear that these are special provisions which have to be read together, for computing and taxing income by way of royalties and fees for technical services in the case of foreign companies. Section 44D starts with an overriding expression ''notwithstanding anything to the contrary contained in Sections 28 to 44C . . .". This means that Section 44D has application in respect of royalties and technical fees in the course of a business and that its special provisions take precedence over Sections 28 to 44C and override these provisions. That means Section 44BB is also superseded in respect of computation of income by way of royalties or fees for technical services received from an Indian concern ("X" in this case). The proviso to Section 44BB excluding the application of that Section to cases covered by Section 44D is consistent with and complementary to this. This double safeguard provided by the statute shows that Section 44D includes within its purview also royalties and technical service fees arising in the course of business.
36. It is clarified in the Explanation (a) that "fees for technical services" shall have the same meaning as in Explanation 2 to Clause (vii) of Sub-section (1) of Section 9. A short point is made by counsel that the receipts in the present case are neither royalties nor fees for technical services falling under Section 44D, He says they do not at all come under the definition of royalty and are excluded from the definition of fees for technical services because they relate to mining. This contention cannot be accepted. It may not be covered by the description of the term "royalty" in Section 9(l)(vi) but they are clearly covered by the expression "fees for technical services" as defined in Section 9(l)(vii). The agreement of tbe applicant with "X" does not include any consideration for any mining or like project undertaken by the applicant, though it does stipulate consideration for the rendering of technical or consultancy services in relation to the extraction or exploration of mineral oils by "X".
37. Learned counsel for the applicant wanted to make a fine distinction between fees for technical services and income from business of providing technical services. It is, therefore, essential to have a look at the definition of this expression in the aforesaid Explanation 2 to Clause (vii) of Section 9(1) : "Explanation 2.--For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'." 38. According to this Explanation "fees for technical services" means any consideration for the rendering of any technical or consultancy services, etc. In our view, therefore, the Explanation does not leave any scope for making a distinction between fees for technical services and income from business of providing technical services, in so far as the taxability under Section 44D is concerned. If special provisions like Sections 44BB and 44D had not been included in the Income-tax Act, such rendering of technical services would have been taxable only as business income under the provisions of Sections 28 to 44C.39. It was sought to be made out that the above interpretation will render Section 44BB altogether redundant. This is not correct for Section 44BB will continue to apply to several types of cases in relation to the prospecting for or extraction or production of mineral oils. It is possible to conceive of services or facilities provided in this connection the consideration for which may not amount to "royalty" or "fees for technical services" within the scope of the definition in Section 9(l)(vi) and (vii) of the Act. Consideration for the supply of plant and machinery on hire referred to in Section 44B will not be in the nature of "royalty". Consideration for any construction, assembly, mining or like project is excluded from the compass of the definition of "fees for technical services" within the meaning of Explanation to Section 9(i)(vii). There is, therefore, a wide range of income falling under Section 44BB which will not fall within Section 44D. The exclusion of royalty and fees for technical services from the scope of Section 44BB will not, therefore, render Section 44BB otiose or redundant, as suggested. On the other hand, the proviso in Section 44BB will be meaningless if royalty and technical service fees arising out of a business cannot at all fall within the purview of Section 44D. The entire scheme of the Act--Section 9(l)(vi) and (vii), Section 44D, Section 115A--clearly shows that the underlying idea is to give special tax treatment to income by way of royalties and fees by way of technical services of foreign companies in two ways : by prescribing a flat rate lower than the general rate of tax on the other income by taxing the gross amount of receipts of this nature without providing for any deductions therefrom, a mode of taxation evolved after a good deal of thought and discussions between nations where double taxation is involved. The mode of taxation and relief provided in the double tax avoidance agreement, also shows that royalties and fees for technical services are taxed on a basis different from business except where they arise in the course of a business with a permanent establishment in India. Section 44BB and Section 44D have thus both to be given effect to and the only way of doing it is by restricting Section 44BB to income that does not fall within the scope of Section 44D ; it is this that is made clear by the proviso to Section 44BB(1) which specifically excludes any profits and gains of business or other income falling under Section 44D from the purview of Section 44BB.40. The decision of the Income-tax Appellate Tribunal in the case of Deputy CIT v. Schlumberger Seaco Inc. [1994] 50 ITD 348 (Cal), has been relied upon by learned counsel in support of the above argument. It has no doubt been generally observed by the Income-tax Appellate Tribunal in para. 7 of that order that while introducing Explanation 2 to Section 9(l)(vii), the Legislature had in mind only those non-residents who did not carry on any business as such in India, but were merely in receipt of income by way of fees for technical services. "Royalty" and "fees for technical services" are classes of income which may fall to be assessed under the head "Business" or under the head "Income from other sources" and there is nothing in Explanation 2 to Section 9(l)(vi) and (vii) to exclude receipts of this description in the hands of a recipient as "business income". It is not correct, therefore, to conclude that these definitions will not apply to non-residents who are having business in India. That apart, this is not a case where the applicant has a business in India ; though it is carrying on a business, it has no branch office or permanent establishment in India to which these receipts can be related. Further, in the case before the Tribunal, the Bench excluded SSI from the operation of Section 44D and Explanation 2 to Section 9(l)(vii) because that case fell within the exception provided towards the end of that Explanation ; and, because SSI had conducted wire-logging services to "X" with the help of wire-logging equipments and tools and had also provided personnel to operate the same. The income of SSI consisted of a monthly rental charge for the equipments and tools and monthly charges for the crew.
Since the payments there did not thus fall within Explanation 2 to Section 9(l)(vii), Section 44D had no application and the provisions of Section 44BB were, consequently, attracted. On the contrary, in the present case the applicant has only surveyed the area earmarked by "X", has given the technical designs and know-how to enable "X" to perform the mining jobs itself. On its own showing the applicant has not done any job of mining, nor has it provided any equipment or crew therefor.
The facts of this case are, therefore, different and, in any view of the matter, the applicant does not get excluded by the last clause of Explanation 2 to Section 9(l)(vii). Therefore, the first clause of that Explanation will govern the definition of "fees for technical services", by virtue of which the consideration received for such services would fall within the definition of Section 9(l)(vii) and the applicability of Section 44D cannot be in doubt.
41. In view of the above position of law, we do not agree with the submission of learned counsel for the applicant that the payments made by "X" to the applicant in terms of the three agreements would be taxable under Section 44BB of the Act and we agree with the contention of the Departmental representative that by virtue of the proviso to Section 44BB, the case of the applicant gets covered by the provisions of Section 44D and Section 115A. However, since fees for technical services are covered under article 13 of the double taxation agreement and the rate of tax prescribed in the double taxation agreement is 20 per cent. as against 30 per cent. prescribed under Section 115A of the Income-tax Act, the applicant is entitled to the option available to him under Sub-section (2) of Section 90 of the Income-tax Act as the provisions of the double taxation agreement between India and U.K. are beneficial to it.
42. The expression "fees for technical services" has also been defined in paragraph 4 of article 13 of the double taxation agreement which has already been reproduced in para. 11.1 (page 385) of this order. Clause (c) of paragraph 4 fully covers the type of technical services rendered by the applicant to "X", therefore, the payment received by the applicant for this service is "fees for technical services" within the meaning of paragraph 4 of Article 13. Article 13 provides that such fees may be taxed in India at the rate of 20 per cent. of the gross amount of such fees during the first five years for which the double taxation agreement has effect. The double taxation agreement under reference became operative from October 26, 1993, therefore, the fees received or receivable by the applicant on account of these three agreements will be taxable at the rate of 20 per cent. for the assessment years 1994-95 to 1998-99.
43. We are unable to accept the contention of learned counsel for the applicant that the applicant's case is covered by article 7 of the double taxation agreement, though that article is applicable to profits of an enterprise which carries on business through a permanent establishment in India, the suggestion apparently being that the business profits, arising otherwise than through a permanent establishment are not taxable at all. It is an accepted fact that the applicant does not have a permanent establishment in India, therefore, this article would not be applicable. But this does not allow the applicant's profits to escape taxation, because, as pointed out by the Departmental representative Article 13 makes special provision for taxation of royalties and fees for technical services. It is an accepted norm in interpretation of the double taxation avoidance agreements, as indeed of all documents, that special provisions take precedence over general provisions like that of Article 7 unless specifically excluded and, therefore, the payments received are taxable in accordance with Article 13 of the double taxation agreement.
Moreover, the language of Article 13 itself is quite clear on this.
Royalties and technical fees fall under Article 13 of the double taxation agreement, except where they arise in the course of a business which has a permanent establishment here or where they are relatable to independent personal services. Only in these eventualities will these receipts attract Article 7 or article 15, as the case, may be. It has been specifically so provided in Article 13(0). In the present case the second part of the above exception has no relevance. The first part also has no application since the applicant has no permanent establishment here. It is, therefore, not possible to accept the applicant's contention that the royalties and technical fees should be assessed, if at all, under Article 7 as business income. This is one more reason for not considering Section 44BB as applicable to the instant case for the provisions of the double taxation agreement will not only be relevant but will also govern the mode of taxability of a particular class of income. In other words, royalty and technical fees have to be assessed in the manner set out in Article 13, unless it can be taken out of such treatment on the terms of Article 13(6) or Section 44D of the Act is clearly excluded.
44. Counsel relied considerably on the provisions of Article 26 of the double taxation agreement and used it, practically as what may be described as his trump card, for contending that whatever may be the statutory or other provision applicable in this case, the applicant cannot be taxed at more than 55 per cent. of the net income of the applicant from the contract computed as in the case of any other resident assessee on like income by virtue of the non-discrimination clause. He, however, stated that he was prepared to waive this argument, if the tax rate is kept at 5.5 per cent. of the gross receipts under Section 44BB without going into further niceties and details of the double taxation agreement. The impact of Article 26 of the double taxation agreement, therefore, requires to be considered in some detail. It is not considered necessary to set out here the provisions of Article 26 as the double taxation agreement in extenso is published at pages 235 to 267 of the statutes Section [1994] 206 1TR, 45. The object of Article 26 is to ensure that no discrimination ensues as between nationals of two countries which have entered into a double taxation agreement. Counsel as already mentioned, placed reliance on a decision of the Bombay Bench of the Income-tax Appellate Tribunal in the case of Standard Chartered Bank [1991] 39 ITD 57, holding the said bank to be entitled to the exemption provided under Section 36(l)(viia) of the Income-tax Act on behalf of Article 26 of the double taxation agreement between India and U.K. of 1981, a predecessor to the agreement of 1994 presently under consideration. We do not find ourselves in agreement with learned counsel regarding applicability of the decision in the case of Standard Chartered Bank [1991] 39 ITD 57 (Bom), cited by him, for one thing because the facts of that case were different. The Indian branch of the bank was a permanent establishment in India within the meaning of article 5 of the double taxation agreement and this brought into operation para. 2 of Article 26. The question whether the bank was & U.K. national which could avail of the benefit of para. 1 of Article 26 was not very material. On the other hand, the applicant here does not have a permanent establishment in India. Accordingly, the provisions of para. 2 of article 20 would not at all be applicable to this case and the applicant has to restrict its claim to para. 1 of Article 26.
46. Coming to paragraph 1 of Article 26 we find that it provides for non-discrimination between nationals of the two contracting states. The question for consideration that arises is whether the applicant can be called a "national" of the U. K. The double taxation agreement does not have a definition of the term "national". The only reference to "national" is contained in paragraph 2(c) and 2(d) of Article 4 dealing with fiscal domicile and these relate only to individuals.
47. It is not relevant for our present purpose to consider the correctness or otherwise of the Tribunal in the case cited that Section 36(l)(viia) of the Act meted out discriminatory treatment to non-nationals, for that exemption was also not available to other "nationals" such as non-scheduled Indian banks, as well as scheduled Indian banks engaged in operations outside India. Be that as it may, the decision no doubt lends support to the contention of counsel that the applicant should be treated as a U, K. national. The Tribunal in treating the Standard Chartered Bank as a national of U. K. relied upon the decision of the Supreme Court in the case of the State Trading Corporation of India Ltd, [1963] 33 Comp Cas 1057 ; AIR 1963 SC 1811.
The question before the Supreme Court in that case was whether the corporation could be considered to be a "citizen" of India for purposes of Article 19 of the Constitution and the Constitution Bench answered this question in the negative. The arguments on behalf of the petitioner started with the citation of a rule of English law "that a company or an incorporated corporation has a nationality and the nationality is determined by the law of the country in which it is corporated" and this rule was sought to be extended to the concept of citizenship as well but this attempt did not succeed as the court was of the view that the two concepts were totally different. Though the court cited the rule of English law as to "nationality" and made some observations regarding this concept, it was not seized directly with the determination of the principles to determine the nationality of a company. The judgment of Hidyatullah J. (as he then was) refers to the various principles on the basis of which nationality of a company could be determined in paras. 50 to 56 and observes in para. 57 (page 1833) : "Which corporation should be regarded as possessing Indian nationality is a question to be answered when it arises. Whether the provisions of the Companies Act dealing with foreign companies furnish any assistance in this behalf must also be left unanswered.
It is sufficient to say that even if it be established that a corporation possesses Indian nationality this has not the result which is contended for namely that all or any of the citizenship rights arise." 48. Shah J. (as he then was) also refers to the English rule on the issue as a starting point (para. 90) and then proceeds to point out that this did not conclude the issue of citizenship. It is not possible, particularly in view of Hidayatullah J.'s observation cited above, to regard the decision as conclusively establishing that a corporation should be treated as a national of the country under the laws of which it is incorporated.
49. The expression "national" is easily understood in its application to individuals but there are difficulties in applying this term to other types of associations and companies. In defining the nationality of a company, one can have regard, as pointed out by the Supreme Court, either to the law which governs it or to the origin of the capital with which the company was formed or the nationality of all the individuals comprising it or only of the persons controlling it. Different States have adopted different attitudes in this regard. As Oppenheim points out (International Law, Lauterpacht Edition), pages 642 (page 1832) : "The nationality of corporations is mainly a matter of private international law and considerations of public policy have a decisive influence upon the attitude of every State in regard to it." 50. It is to dispose of this difficulty that paragraph 2 of Article 24 of the OECD convention and model UN Convention specially define "nationals" to include legal persons deriving their status from the laws in force in a contracting State. A similar provision has also been engrafted in the double taxation agreements between India and some countries such as Belgium, GDR, Hungary, Japan, Korea, Libya, Malaysia, Singapore. The treaty with USA confines it to ''individuals". A third set of agreements, like the one with UK above left the term undefined.
In the absence of a definition, it is not easy to say which of the criteria earlier referred to should be applied. We have therefore, to interpret the expression in the context of the other provisions of the double taxation agreement itself. Firstly, while para. 1 of Article 26 deals with nationals, para. 2 deals with enterprises and a rule of non-discrimination against them is enunciated but is restricted only to enterprises having a permanent establishment in India. If the expression "nationals" included companies and other associations as well, the special provision regarding enterprises in para. 2 would not have been necessary at all. Secondly, it is significant that Article 4 of the double taxation avoidance agreement defining the fiscal domicile for purposes of the agreement refers to nationality only with reference to individuals, vide paras. 2(c) and (d) of that article. In the light of these features of the present agreement, it is legitimate to construe the double taxation agreement as prohibiting discrimination, (a) in the case of individuals, and (b) in the cases of enterprises, (other than individuals) only where they have their permanent establishment in India and not otherwise.
51. The applicant is a company incorporated in the U. K. It would be a person resident in the U.K. and its business would be an enterprise of the U. K. carried on by a resident of the U. K. Such a person can invoke Article 26 only if it has a permanent establishment in India.
But, as stated earlier, since the applicant does not have a permanent establishment in India, it cannot claim to come under paragraph 2 of Article 26, which is the only relevant provision against non-discrimination for a "person", who is not an individual.
52. Even assuming for purposes of argument that the applicant is a U.K. national, the allegation that there is any discrimination under the Act against the applicant because of its nationality either under Section 44BB or 44D or 115A is based on misconception. The system of taxation in India does not make a distinction between nationalities of taxpayers. Therefore, the requirements connected with taxation are not more burdensome for a foreign national than the requirements to which any Indian national may be subjected, However, there is a distinction between a person resident in India as defined in Section 6 of the Income-tax Act and a person who is a non-resident. A foreign national may be a resident and an Indian national may be non-resident. It is not known whether the applicant is a national of the U. K. because the statement of farts and the arguments did not elaborate on this point.
However, for the purposes of paragraph 1 of Article 26, a comparison has to be made between persons similarly placed in respect of nationality and residence. The applicant is a company incorporated in the U.K., therefore, its case has to be compared with a non-resident company which is owned and managed by Indian nationals. Under the Income-tax Act, both these companies will be treated similarly and would be subjected to the same rate of taxation and the same requirements. To elaborate, Section 44BB and Section 115A(1) deal with non-resident assessees. Such persons may be Indian or foreign nationals but the concessional treatment under these Sections will be available to both. Likewise Section 44D and Section 115A(1) and (2) deal with foreign companies which again may be run by Indian or foreign nationals. For instance, even if the appellant had been a company formed by Indian nationals and registered outside India, the provisions of Section 44D and Section 115A(2) would operate against it in the same manner. We, therefore, do not find any substance in the charge of discrimination under paragraph 1 of Article 26.
53. Reference can also be made to another angle of the applicant's charge of discrimination : The applicant's contention, based on the assumption that Section 44D and Section 115A are applicable only to foreign nationals, is that such a person will be called upon to pay tax at 30 per cent. or 20 per cent. where the double taxation agreement specifies a smaller rate as in the present case, on the total amount paid as royalties or technical fees, while such receipts will be business income in the hands of an Indian company taxable at the rate of 46 per cent. (including surcharge) but only on the net amount after deduction of expenses incurred for earning the income. It is, however, difficult to assert that this differentiation is necessarily discriminatory against the foreign national. In respect of royalties, it is very difficult to predict the proportion of deductible expenses.
It could vary from practically negligible amounts to substantial amounts. While dealing with the topic in arriving at double taxation agreements there is an allegation, at least in some cases where technology is supplied by developed countries, that the expenditure they had incurred for acquiring the technology already stands recouped [see Srinivasan : Double Taxation Avoidance Agreements 1994, para.
2.97]. This may not be always true but the percentage of permissible deductions is so variable from person to person that one mode of taxation could be advantageous in some cases and the other in other situation(s). As pointed out by the Departmental Representative, it is not conceivable that the margin of profit of such a highly qualified consultant in the sophisticated and highly remunerative area of oil exploration could be insignificant. Even if all the expenses for the earning of the receipts are deducted, the net profit of the applicant (as a business enterprise) can be reasonably worked out at 80 per cent.
of the total receipts. If this is taxed at 46 per cent., the average rate of tax on the net income would be 36.8 per cent. much higher than the rate of 20 per cent. applied in the applicant's case. Even if we assume a net profit of only 45 per cent. on the payments received, the tax rate will work out to 20.7 per cent. In this context much store cannot be placed on the rate of 10 per cent. referred to in Section 44BB which is intended to be a concessional ad hoc rate and which concerns more complicated business activities in the field than a mere receiving of royalties and fees on the technology or expertise readily available with the applicant, the benefits of which are passed on to the party, It cannot, therefore, be postulated that there is discrimination per se against a non-national in regard to the taxation of income by way of royalty or technical fees, 54. In view of the foregoing discussions, we find that there is no discrimination against the applicant with regard to taxation of the fees for technical services received from "X", if the same is taxed under article 13 of the double taxation agreement. In fact, in the circumstances of this case, only Article 13 is applicable and no other provision of the double taxation agreement can be invoked.
55. The ruling of the Authority on the two questions identically set out in the three applications is as follows : 1. On the facts and in the circumstances of the case, the consideration receivable under the agreements entered into between the applicant and "X" is chargeable to tax under the Income-tax Act, 1961.
2. The considerations receivable under the aforesaid agreements are taxable as fees for technical services under article 13 of the Agreement for Avoidance of Double Taxation and Prevention of fiscal evasion with respect to taxes on income and capital gains with the United Kingdom of Great Britain at the rate of twenty per cent. of the gross amount of such fees for technical services for the assessment years 1994-95 and 1995-96. If the considerations are received in subsequent years as well then these also would be taxable at the rate of twenty per cent. up to the assessment year 1998-99.