Full Judgment
Held: Fees payable by the applicant to the consultant satisfies all the requirements of the definition of fees for technical services within the meaning of Explanation 2 to section 9(1)(vii)(b) and as the services in the form of reports are utilized in India the amount payable as such would be income deemed to accrue or arise in India hence taxable in India.
1. The applicant, a company registered under the Indian Companies Act, 1956, and a tax resident of India, filed this application under Section 245Q(1) of the IT Act, 1961 (for short the "Act"). The applicant is the owner of mines. It is engaged in prospecting and extraction of minerals, metals, ores, etc. It is carrying on business of exporting minerals. For the purpose of its business, the applicant gets the analysis of samples and ores conducted from technical lab of the consultant-Met-Chem, Canada Inc. Under the agreement between the applicant and the consultant, the material required to be analyzed and tested in the laboratory in Canada in respect of specific contents has to be sent to the consultant who will send reports to the applicant from time-to-time. For technical services rendered outside India the consultant and the lab fees are required to be paid by the applicant in dollars in Canada. However, the technical consultants will also visit India at different intervals for collecting random samples at the mining head of the proposed mining areas of the company for which the applicant has to bear all necessary expenses and to provide assistance and facilities of travel, etc., free of cost. On these facts, the applicant seeks advance rulings of the Authority on the following reframed questions : (1) Whether the services rendered by a non-resident company Met-Chem Canada Inc. is considered to be in India or outside India as per the facts already given in Annex. 1 para 2 and Annex. II para 3 of the Form No. 34D. (2) If services rendered by a non-resident company Met-Chem Canada Inc. considered to be in India what is applicable rate of TDS.2. The Government of Republic of India and the Government of Canada entered into an agreement for the avoidance of double taxation and prevention of fiscal evasion with reference to taxes and income and on capital on 6th May, 1997, which was notified on 15th Jan., 1998.
Fees for technical services payable by the applicant to the consultant in Canada would be income deemed to accrue or arise in India in view of provisions of Section 9(1)(vii)(b) of the Act.
However, where the services for which the fees is payable, are utilized by the applicant in a business or profession carried on outside India, it would not be the deemed income of the consultant.
Though the analysis of samples and ore and lab tests are done outside India and the technical fee is paid outside India in dollar, it is important to note that the samples are collected in India and the lab reports for which the payment is made is being used in the applicant's business in India. The report is not used for the purpose of making or earning any income from any source outside India. As the income is deemed to accrue or arise to the consultant in India, Section 195 of the Act would be attracted. The rate of tax to be deducted at source will be as prescribed in Part II of Schedule I to the Finance Act. If the rates provided in the Treaty are more beneficial to the applicant, the same would apply to the applicant.
4. Mr. Sanjay Verma, learned Counsel appearing for the applicant, has argued that, as the consultant is carrying out necessary lab tests of iron ore in Canada and is preparing the reports in Canada, the fees would fall under exception mentioned in Sub-clause (b) of Clause (vii) of Sub-section (1) of Section 9 of the Act. Relying on the definition of the expression "fees for technical services" in Expln. 2 to Section 9(1)(vii) of the Act, it is contended that the fees payable to the consultant would be outside the scope of the expression. He has also relied upon CBDT Circular No. 786, dt. 7th Feb., 2000 and Circular No.23, dt. 23td July, 1969, to contend that no tax is deductible under Section 195 of the Act.
6. On the above contentions of Mr. Verma, the points which arise for consideration are : (i) whether the fees payable by the applicant to the consultant for analyzing and lab testing of samples of iron ore, etc., and sending reports to the applicant, satisfies the definition of fees for technical services; and (ii) whether the fee is covered by the exclusionary clause of Section 9(1)(vii)(b) of the Act.
(1) The following incomes shall be deemed to accrue or arise in India : (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or 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" It may be seen that Expln. 2, quoted above, defines "fees for technical services", for the purposes of Clause (vii) of Sub-section (1), to mean any consideration including any lump sum consideration for the rendering of any managerial, technical or consultancy services; however, the expression does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be the income of the recipient, chargeable under the head 'salaries'. In this case, the recipient, Met-Chem, Canada, is a non-resident consultant. From the facts narrated above, it is evident that the fees is being paid to the consultant for the rendering of technical and consultancy services and not as consideration for any construction, assembly, mining or like project undertaken by it and that it would not also be the income of the consultant chargeable under the head 'salaries'. It follows that the fees payable by the applicant to the consultant satisfies all the requirements of the definition of fees for technical services within the meaning of Expln. 2 to Section 9(1)(vii)(b)of the Act.
The next important point is whether the fees falls within the exclusionary clause of deemed income. Section 9(1), extracted above, says that income enumerated in Clauses (i) to (vii) of Sub-section (1) shall be deemed to accrue or arise in India. We are concerned here with Clause (vii), which speaks of income by way of fees for technical services payable by persons specified in Sub-clauses (a) to (c) thereof. The relevant provision is Sub-clause (b) of Section (vii) which has two limbs. The first limb refers to a person who is a resident; the second limb incorporates an exclusionary clause which takes out the fees from the ambit of the deemed income. If the fees is payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, the fees payable to the non-resident consultant in Canada will not be deemed income of the consultant arising or accruing in India. Obviously, in this case the applicant is not utilizing services of the consultant (reports) in a business or profession carried out outside India nor is it utilizing the said services for the purpose of making or earning any income from any source outside India. Mr. Verma has misread the provision when he quoted last part of Clause (b) thus : "for the purpose of making or earning any income from any sources in India". It is apparent that for the word "outside India" he assumed "in India", and thus the contention advanced by him is wholly misconceived.
7. Mr. Verma has also placed reliance on CBDT Circular No. 786, dt. 7th Feb., 2000 and Circular No. 23, dt. 23rd July, 1969 to contend that the fees cannot be subjected to TDS. We are afraid we cannot accede to the contention of the learned Counsel. The relevant part of the circular reads : "It had been clarified then that where the non-resident agent operates outside the country, no part of his income arises in India.
Further, since the payment is usually remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India. Such payments were therefore held to be not taxable in India.
The relevant sections, namely Section 5(2) and Section 9 of the IT Act, 1961, not having undergone any change in this regard, the clarification in Circular No. 23 still prevails. No tax is therefore deductible under Section 195 and consequently," It may be noticed that the clarification proceeds on the footing that no part of income of the foreign agent arises in India. In the instant case we have held above that the fees for technical services paid by the, applicant to the consultant in Canada would be deemed income of the consultant under Section 9(1)(vii)(b) of the Act. Further, Circular No. 23, dt. 23rd July, 1969, relates to income accruing or arising through or from "business connection" in India. In Performing Rights Society Ltd. and Anr. v. CIT , the Hon'ble Supreme Court declined to take note of the said circular on the ground that it contemplates a situation quite different from the liability to tax on income accruing or arising to a non-resident under Section 9 of the Act.
For the above reasons, none of the circulars would be of any assistance to the applicant.
8. From the above discussion, it follows that though the consultant carried on analysis and lab tests of samples collected in India and prepared the reports outside India, the fact remains that the services in the form of reports were utilized in India in the business of the applicant in India and also for earning income from source within India and, therefore, the services are rendered in India. We have taken the same view in our ruling dt. 2nd Sept., 2005, in AAR/658/2005, Wallace Pharmaceutical (P) Ltd. 9. Insofar as rate of tax to be deducted at source is concerned, it is common knowledge that the rates of tax are prescribed in Part II of Schedule I to the Finance Act, 2005; item 2(b)(vi) is the relevant item which gives the rate of tax. It would be apt to refer to para 2 of Article 12 of the Treaty which incorporates rates of tax applicable to 'fees for included services' In this treaty the definition of the 'fees for included services' includes payments of any kind to any person in consideration for the rendering of any technical or consultancy services. and is in the following terms : 2 However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to sub-para (a) of para 3 and fees for included services as defined in this article (other than services described in sub-para (b) of this paragraph) : (i) during the first five taxable years for which this Agreement has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and (B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and (ii) during the subsequent years, 15 per cent of the gross amount of the royalties on fees for included services; and The rate of tax applicable to the consultant on its deemed income would be lower of the two rates viz., rates given in Part II of Schedule I to the Finance Act, 2005, or para 2 of Article 12; that is, whichever is more beneficial.
(1) that the services rendered by the Met-Chem Inc., Canada, is considered to be rendered in India on the basis of facts given in Annex. I para 2 and Annexure II para 3 of the application; (2) that the rate of tax applicable for the purpose of TDS would be the lesser of the rates prescribed under Finance Act, 2005 or in para 2 of Article 12 of the Treaty, that is whichever is more beneficial to the applicant.