1. This appeal, filed by the Revenue, is directed against the order dt.
14th April, 1998, passed by the CIT(A)-XV, Calcutta, in the matter of order under Section 195(2) of the IT Act, 1961 (hereinafter referred to as 'the Act'), passed by the AO directing the assessee to deduct tax at source at the rate of 35 per cent from payments made to Mr. I.G.O.Seeberger, an Austria based paper consultant, learned CIT(A), vide the above referred order, held that no taxes were required to be deducted from the aforesaid payment. Revenue is aggrieved that the CIT(A) erred in holding that no tax is required to be deducted under Section 195 of the Act from the aforesaid payment.
2. ITC Limited (hereinafter referred to as the assessee-tax deductor') engaged the services of one Mr. I.G.O. Seeberger (hereinafter referred to as the 'Austrian consultant') for the following objectives : "1.1 that the consultant assist ITC-TTD in continuous upgradation of the quality of the products to international standards as defined above.
1.2 to increase the productivity, all round efficiencies in production, and cost effectiveness of the products to specified international standards.
1.3 that the consultant impart the expertise and transfer the technical know-how in respect of the manufacture of the products to ITC-TTD to achieve the. standard parameters as specified in Clauses 1.1 and 1.2 supra.
1.4 that the consultant assist and enable ITC-TTD to develop customers in international markets for the products." Under the terms of agreement dt. 6th July, 1994, the assessee-tax deductor was to pay 'as a consideration for the services rendered by the consultant and his associates', a sum of Deutshe Mark 2,000 (net of taxes) per person per day for each day of their stay at works. In this background of facts, a bill dt. 4th Dec., 1995, was raised on the assessee tax deductor which, inter alia, stated as follows : "Technical services fees for research and evaluation in connection with your problems in the mill Discussion with Mr. Michels from Eirma Wolff & Sohne Concerning problem headbox 3. On 28th May, 1996, the assessee tax deductor moved an application under Section 195(2) of the Act, seeking the AO's permission to make the remittance to the consultant without any deduction of tax at source. This application, inter alia, stated that : "We are making this application for issuance of a No Objection Certificate in favour of Mr. IGO Seeberger for DM 10,000 net of taxes. This amount is payable to him as we engaged his services to give expert recommendations and suggestions in connection with problems related to paper machines. Mr. Seeberger is a resident of Austria and runs a commercial enterprise engaged in providing consultancy services related to paper technology.
Relevant article is Article VII. Under this article, fee for technical services paid will be taxed in India, only if the activities are actually performed in India. In this case Mr.
Seeberger has rendered the above services in Austria and a declaration from him to this effect is enclosed. We are also enclosing sample report Mr. Seeberger sent from Austria.
We wish to bring to your notice that we had earlier applied to you vide our letter dt. 20th June, 1995, to issue a No objection Certificate in favour of the above party without deduction of tax at source on the same grounds. You had complied with our request and allowed us to remit the same by issuing a No Objection Certificate dt. 23rd June, 1995. In view of the above provisions the fee of DM 10,000 payable to Mr. Seeberger is not chargeable to tax in India.
We, therefore, request you to issue a No Objection Certificate for DM 10,000 without deduction of tax at source." 4. The AO was, however, far from impressed. He rejected the assessee's contentions by way of a rather detailed order and directed the assessee tax deductor to withhold tax at the rate of 35 per cent from the payment to be made to the consultant. We consider it desirable to quote following extracts from the AO's order dt. 22nd July, 1996 : "On perusal of the Technical Consultancy Agreement dt. 6th July, 1994, it is seen that there is no clause therein employing Mr.
Seeberger to render technical services from abroad. As per the agreement, Mr. Seeberger and his associates are required to pay periodic visits to the factory premises of TTD in India as and when defects crop up in the machinery and thereafter render assistance/guidance for rectifying the defect, stabilising the machine operation and verifying the quality of products and process parameters, In the instant case, Mr. Seeberger, before writing the letter dt. 28th Nov., 1995, personally, visited the work-site of ITC-TTD in November 1995 and inspected the concerned machineries which were fraught With defects malfunctioning. After collecting all the necessary datas relating to the said machines in India, Mr.
Seeberger went back to home and after analysing and compiling those datas there, he wrote back to the management of TTD suggesting various methods for eliminating the intrinsic defects of the machines and improving efficiency thereof. Thus, it can be clearly seen that the act of providing technical assistance/suggestions from Austria is basically in continuation of the activities actually performed by Mr. Seeberger in India during his visit in November, 1995. Rendering of technical services under consideration exclusively arises from activities in India as the same is intimately connected with the visit of Mr. Seeberger to India and his consequent inspection of the machinery at the factory premises of M/s ITG-TTD. All the relevant datas required for the report of Mr. Seeberger were solely collected from India. Accordingly, fees payable to Mr. Seeberger in connection with the said rendering of technical services are taxable in India, being income deemed to accrue/arise in India within the meaning of Section 9(1)(vii) r/w Section 5(2)(b) of the IT Act, 1961. Tax is, therefore, required to be deducted by the assessee-company from the fees payable to Mr.
Seeberger under Section 195(1) at the rate of 35 per cent before actual remittance thereof and the same is to be deposited in the account of the Central Government." 5. Learned CIT(A) was of the view that "the services were provided outside India and the income does not accrue or arise in India or deemed to have accrued or arisen in India and hence not taxable in India within the meaning of Article VII of DTAA with Austria", He also noted that since the consultant spent only seven days in India, the fees paid to him is also not taxable under Article XIV of the Indo-Austrian DTAA. Giving a categoric finding that, on the above facts, the consultant 'has not rendered the technical services in India', the CIT(A) held that no tax was required to be deducted from payments made to Mr. Seeberger. The Revenue is aggrieved and in appeal before us.
6. We have conscientiously heard Smt. Lakra, learned CIT (Departmental Representative) and Shri Rahul Mitra, learned counsel for the assessee.
We have carefully perused orders of the authorities below, as well as rather elaborate paper book filed by the assessee, and duly deliberated upon the applicable legal position as also the provisions contained in the applicable Indo-Austrian Double Taxation Avoidance Agreement.
7. In our view, there is no doubt about the fundamental legal position that by the virtue of Section 90(2) of the Act, where the Central Government has entered into, under Section 90(1), an agreement with a foreign country, for granting relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply only to the extent such provisions are more beneficial to the assessee. In other words, provisions of the double taxation avoidance agreements override the provisions of the Act, to the extent such provisions are more beneficial to the assessee. This position is duly supported by the judgment of the jurisdictional High Court in the case of CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal).
8. We, therefore, proceed to examine the taxability of this payment of DM 10,000 to Mr. Seeberger, in the light of the provisions of the applicable DTAA that India has entered into with Austria of which Mr.
Seeberger is admittedly a resident.
9. Article VII of the Indo Austrian DTAA, dt. 24th Sept., 1963, which was applicable at the relevant point of time, provides as follows ; "ARTICLE VII--Amounts paid by an enterprise of one of the territories for technical services furnished by an enterprise of the other territory shall not be subject to tax by the first-mentioned territory except insofar as such amounts are attributable to activities actually performed in the first-mentioned territory. In computing the income so subject to tax, there shall be allowed as deductions the expenses incurred in the first-mentioned territory in connection with the activities performed in that territory." 10. We may also refer to the provisions of Article XIV of the aforesaid DTAA which provides as follows : "ARTICLE XIV-1. Subject to Article XII, profits of remuneration from professional services or from services as an employee derived by an individual who is a resident of one of the territories may be taxed in the other territory only if such services are rendered in that other territory.
2. An individual who is a resident of Austria shall not be taxed in? India on profits or remuneration referred to in para (1) if- (a) he is temporarily present in India for a period or periods not exceeding in the aggregate 183 days during the relevant "previous year".
(b) the services are rendered for or on behalf of a resident of Austria, (d) the profits or remuneration are not deducted in computing the profits of an enterprise chargeable to Indian tax.
3. An individual who is a resident of India shall not be taxed in Austria on profits or remuneration referred to in para (1). if- (a) he is temporarily present in Austria for a period or periods not exceeding in the aggregate 183 days during a taxable year, (b) the services are rendered for or on behalf of a resident of India, (d) the profits or remuneration are not deducted in computing the profits of an enterprise chargeable to Austrian tax.
4. Where an individual permanently or predominantly performs services on ships or aircraft operated by an enterprise of one of the territories, such services shall be deemed to be performed in that territory." 11. In view of the above provisions of the DTAA, where an amount is paid by an enterprise of one of the territories, for technical services furnished by an enterprise of another territory, the same shall not be taxed in the source of country, except to the extent services are attributable to the activities actually rendered in the source country.
In other words, where an Indian enterprise makes any payment on account of technical services, to an Austrian enterprise, Indian tax liability is confined to portion of payment which relates to technical services which have actually been attributable to activity carried out in India.
12. The problem, however, arises in interpretating scope of expression 'enterprise' and effect of somewhat competing provision contained in Article XIV of the aforesaid DTAA.13. Although 'model tax conventions' frequently use the expression 'enterprise', none of the model tax conventions define the same and there is considerable debate about the scope of this term. In his famous essay. "The term 'enterprise' in model tax conventions--Seventy years of confusion" [Essay Int. Tax 317-Intertax 491 (1994)] Van Radd K has strongly criticised use of this term, pointing out that this term is used inconsistently in the model conventions, and proposing to eliminate its usage entirely.
14. Dr. Klaus Vogel, in his off-referred commentary on 'Double Taxation Conventions' (Klaus Vogel on Double Taxation Conventions--1997 English edition; published by Kluwar Law International Ltd., UK), describes 'enterprise', though in the context of Article VII of OECD Model Convention, as "an independent activity carried on for profit, distinct both from basic agricultural production and from the 'liberal' professions of an artistic, scientific or academic nature or requiring scientific and other academic training". It would thus appear that rendering of technical services by an individual, even on commercial basis, may not exactly be the same thing as rendering of technical services by an 'enterprise'.
15. Article E(1)(f) of the Indo-Austrian DTAA defines the term 'Austrian enterprise' and 'Indian enterprise' as an industrial or commercial enterprise or undertaking carried on by a resident of Austrian and 'an industrial or commercial enterprise or undertaking carried on by a resident of India'. While even this provision enlightens us little about connotations of the expression 'enterprise', it is clear that only 'industrial' or 'commercial' entities are included in the scope of expression 'Austrian enterprise'.
16. In OECD commentary on Article 14 of the model tax convensions, which deals with independent personal services, a reference is made about the scope of expression 'professional services'. It inter alia, states as follows : "The article is concerned with what are commonly known as professional services and with other activities of an independent character. This excludes industrial or commercial activities and also professional services performed in employment e.g., a physician serving as a medical officer in a factory...." In view of the Hon'ble Andhra Pradesh High Court's judgment in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), OECD model conventions and commentaries thereon constitutes international tax language and the meanings assigned by such literature to various technical terms are to be given due weightage. In our considered view the views expressed by bodies like OECD, which has made major contribution towards development of the tax treaties between various countries, constitute 'contemporanea expositio' as much as the meanings indicated by various expressions in the tax treaties are usually the meanings, normally understood in, to use the words approved by Hon'ble Andhra Pradesh High Court, 'international tax language' developed by institutions like OECD.17. In view of the above discussions, payments made by the assessee-tax deductor to Mr. Seeberger will not be covered by the expression 'payments' made to an Austrian enterprise. When examined in the light of the above discussion, a technical consultancy service by an individual, which admittedly Mr. Seeberger's service is, cannot be said to be service rendered by an Austrian enterprise. In any case, in view of the provisions of Article II(1)(f), only commercial or industrial entities are covered by the meaning of an 'enterprise'. Further, as the technical service in question requires 'scientific and other academic training', carrying out such an activity by an individual does not constitute carrying on an enterprise. On the other hand, rendering of consultancy services by Mr. Seeberger is clearly in the nature of 'professional services'. We have noted that these are activities of an independent character, do not constitute commercial or industrial activities and are not professional services performed during the course of employment. Accordingly, in our considered view, provisions of Article VII of Indo Austrian DTAA will not govern this situation and that provisions of Article XIV will apply in the instant case.
18. Provisions of Article XIV of Indo Austrian DTAA, which have been reproduced in para 10 above, make it clear that remuneration of professional services may be taxed in the source country only to the extent such services are actually rendered in the source country. In addition, however, even such remuneration cannot be taxed in the hands of Austrian resident unless conditions laid down in Article XIV(2)(a) to (d) are fulfilled.
19. Let us now come back to the facts of the case before us. We find Mr. Seeberger's technical consultancy agreement '(at pp. 19 to 33 of the paper book), consultant and his associates, if any, were entitled to 'a sum of DM 2000 net of taxes per person for each day of their stay at the (assessee's) works'. It is also not in dispute that it was connected with the consultant's visit to assessee's plant, and study of problems in that plant, that technical fees is paid. The services are, therefore, clearly rendered in India only. As evident from objectives of the technical consultancy agreement also, which have been reproduced in para 2 above, the professional services are rendered in India. In our view, therefore, it is not material as to whether or not Mr.
Seeberger sent the letter from Austria or whether or not he studied the problem in Austria. Whatever be the situs of studies and background work involved, it does not affect the position that services are 'rendered in India' inasmuch as the consultant has visited the assessee's factory in India, examined the necessary technical aspects here and advised the assessee about appropriate remedial action at the factory. In our considered view, merely because the consultant did.
part of his work in Austria, it cannot be said that the services were not rendered in India. Accordingly, the payment for these services is taxable in India, under Article XIV of the Indo Austrian DTAA.20. We, however, find that the aforesaid technical fees cannot be taxed in the hands of Mr. Seeberger if conditions laid down under Article XIV(2)(a) to (d) are fulfilled (refer to para 10 above). Both the parties agree that there is no dispute about fulfilling Clauses (a), (b) and (d) i.e., that Mr. Seeberger was in India for less than 183 days, that services are rendered on behalf of an Austrian resident, and that the assessee-tax deductor has claimed a deduction in respect of fees paid to Mr. Seeberger. However, there is nothing on record to evidence that 'profit or remuneration are subject to Austrian tax'. At no stage of the proceedings, the assesses has filed any evidence in support of taxability of this amount in Austria. It is altogether a different matter that, authorities below did not requisition such an evidence anyway.
21. In the light of the above discussions, we are of the considered view that the matter should be restored to the file of the CIT(A) to ascertain whether the payment in question was indeed subject to Austrian income-tax (i.e., Einkommensteuer). In case, the fees earned by Mr. Seeberger were subject to Austrian income-tax, action of the CIT(A) will be confirmed. In any other case, the order of the CIT(A) will stand vacated and that of the AO will stand restored. With these directions, the matter is restored to the file of the CIT(A).