Judgment:
1. These 12 appeals involved common grounds. The appeals were argued in a consolidated manner by the ld. counsel for the assessee and the ld.DR. Therefore, consolidated order is passed. The ld. counsel for the assessee and the ld. DR referred to the facts in ITA No. 196 / Delhi/ 2003 and, therefore, various issues are dealt with as per facts in this appeal.
2. On perusal of the order of ITO Ward 23(2), Delhi (hereinafter called 'the Assessing Officer'), it is found that SAIL filed an application on 1-6-1998 seeking authorization to remit DMs 81,685 (net of taxes), in respect of the payment of fees for supervision as per the contract dated 28-2-1996 with M/s. BMH Claudium Peters AG. Germany (hereinafter called 'the Principal Contractor'), after deduction of tax at the rate of 10 per cent and payment thereof. It was claimed that the payment to the Principal Contractor amounted to the payment of fees for technical services under Article 12 of the Indo-German Agreement for Avoidance of Double Taxation (hereinafter called 'the DTAA'). The Assessing Officer referred to the provisions contained in para 2 of Article 5 with a view to find out whether the assessee had any Permanent Establishment (PE) in India. In particular, he referred to Clause (z) of this para, dealing with a building site or construction, installation or assembly projects or supervisory activities in connection therewith where such site, project or activities continue for a period of more than six months. It was found on the basis of agreement that the assessee has rendered services for a period of more than 6 months at the installation site of the Steel Authority of India Ltd. (SAIL), where installation work was carried out by the Indian Contractors. In view of the provisions contained in the aforesaid Clause (z), he came to the conclusion that the assessee has a PE in India. The scope of the work of the assessee and Indian Contractors included design and manufacture of plant and equipment, installation thereof, supervision of installation work, training of purchaser's personnel, etc. It was held that though the payment to the Principal Contractor, on behalf of whom the appeal was filed, was in respect of rendering of technical services, in view of the finding that the assessee had PE in India, the provisions contained in Article 12 were not applicable because of the exclusionary clause contained in para 5 of the article. Therefore, it was held that the income of the assessee arising from rendering technical services was taxable under Article 7 of the DTAA. Under this article, the profits have to be worked out as provided under the Income-tax Act, 1961. The rate of tax applicable to such profits was 30 per cent under Section 115A of the Act. Therefore, it was held that the assessee should deduct tax at source at the rate of 30 per cent of fees for technical services.
3. Aggrieved by this order, the assessee find an appeal before the Ld.
CIT(A)-XXIX, New Delhi. The Ld. CIT(A) pointed out that the assessee has been providing technical supervisory services to SAIL as per its contract since 1992, for modernization of its steel plants in India.
The new designs for the plants were developed by the assessee in Germany and technical supervisory services were rendered at the steel plants in India. Therefore, he held that the assessee had a fixed base in India in the form of construction, installation and commissioning of the plants in India. This fixed base constituted the PE of the assessee in terms of para 2 of the Article 5 of the DTAA, as the supervisory work continued for more than 6 months. Therefore, it was held that exclusionary provision contained in para 5 of Article 12 was applicable and the profits of the business had to be computed under Article 7. It was further held that the assessee was carrying on the business of providing technical supervisory services. In view thereof provisions contained in Sections 44D and 115A of the Income-tax Act, 1961, were applicable. Thus, it was held that the assessee is liable to deduct tax at the rate of 30 per cent of the gross payments made by the assessee.
It was also pointed out that while it may appear somewhat inequitable that gross receipts in the form of fees for technical services are taxed at the rate of 30 per cent, but that is not the case for the reason that the business profits are taxable in the case of a foreign company at the rate of 48 per cent.
4. Aggrieved by this order, the assessee is in appeal before us. It has taken up 6 substantive grounds of appeal. However, these grounds can be summarized under two heads as under: (i) the Ld. CIT(A) erred in holding that exclusionary provision contained in para 5 of Article 12 of the DTAA is applicable.
(ii) without prejudice to the above, the Ld. CIT(A) erred in holding that the provisions of Sections 44D and 115A are applicable.
5.1 Before us, the ld. counsel referred to the provisions contained in Section 195 of the Income-tax Act, dealing with tax deduction at source from payments made to a non-resident person or a foreign company. It was pointed out that under this section, the SAIL is liable to deduct tax at source from any payment made to the assessee. He referred to the Tripartite Agreement dated 15-8-1992 between SAIL, the assessee and the Siemens. In pursuance of this contract, the assessee has been providing technical supervision services for erection of machinery by Indian Contractors at the factory sites of the SAIL. The job of construction is not undertaken by the assessee, but it is done by the Indian Contractors. The assessee provides technical supervisory services for erection of machinery, etc. In particular, he referred to Schedule-2 of the Contract dealing with scope of work and services. The tech nical services rendered by the assessee are described in para 2.3 of the Schedule, which is reproduced below: 2.3.1 Technical Services to be provided by the Contractor shall generally include the following: (c) Basic and detail design/drawings and engineering for the scope of work as defined in Schedule-8 of this Contract.
(d) Technical Services relating to planning, procurement, manufacturing, inspection, expediting, packing, shipping, storing etc. as per Schedule-8 of this Contract for supplies to be made under contract No. 1.
(e) Project Management Services and complete feedback data and information to Purchaser/Consultant for the same for the Package.
(f) Training of Purchaser's personnel as per Schedule-8 of the Contract.
(g) Deputation of foreign experts for supervision of design and manufacture of Plant and Equipment as well as for Supervision of Erection, cold tests, commissioning, guarantee tests, etc.
(h) Deputation of foreign experts for the performance of at-site-machining of the mill stand.
(i) Consultancy Services, if any, obtained by the Contractors from elsewhere.
5.2 It was pointed out that the dispute between the assessee and the Revenue is whether tax should be deducted at the rate of 10 per cent from the fees paid by the SAIL or at the rate of 30 per cent. The case of the Department is that exclusionary provision of para 5 of Article 12 of the DTAA, dealing with "royalties and fees for technical services" is applicable. In this connection, the Assessing Officer and the Ld. CIT(A) referred to Clause (i) of para 2 of Article 5, dealing with PE. This clause reads as under: A building site or construction, installation or assembly project or supervisory activities in connection therewith where such site, project or activities continue for a period exceeding six months.
5.3 It was contended that this clause is applicable only if installation or assembly project belongs to the assessee and supervisory activities are carried on by it in connection therewith, provided that such installation or assembly project continues for a period exceeding 6 months. It was pointed out that the installation or the assembly project etc. does not belong to the assessee. The same belongs to SAIL or the Indian Contractors. The assessee is merely providing supervisory service at the installation site albeit in connection with installation carried out at the site by the Indian Contractors. In other words, the case of the ld. counsel was that for the site to become the PE of the assessee, the installation or assembly project should have been carried out by the assessee and supervisory activities should have been rendered in connection with the such installation. Merely providing supervisory services does not constitute the PE irrespective of the fact that such services were rendered for a period exceeding 6 months. In the alternative, it was argued that if it is held that merely providing supervisory services for more than 6 months constitute assessee's PE, then, the profits are to be computed as per Article 7 of the DTAA. Para 3 of the Article 7 provides that in determination of profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere and according to the domestic law of the Contracting State in which the PE is situated. The case of the ld. counsel was that Article 7 clearly provides for deduction of expenses incurred in India and outside India for computation of profits of the PE. Thus it was argued that Ld. CIT(A) erred in applying provisions of Section 44D in computation of profits under which no deduction is admissible to the assessee. He referred to the provision contained in Section 90(2) of the Act, which mandates that the provision of this Act shall apply to the extent they are more beneficial to the assessee. Since the provisions of the DTAA are more beneficial to the assessee, therefore, it was argued that the profits should be computed in accordance with Article 7 thereof.
5.4 The Ld. counsel relied on the decision of ITAT 'B' Bench, New Delhi, in ITA Nos. 1692 and 4123/Bom./86, for assessment year 1983-84, in the case of IAC(Asst), Range XlI(A), Bombay v. Elektrim Warsaw, dated 15-1-1992, a copy of which filed before us. In that case, it was urged by the Ld. counsel for the assessee that in estimating the net profit at the rate of 10 per cent of the amount of receipts, the Ld.
CIT(A) had simply relied upon IAC's order in the case of SAIL, though the audited accounts of the assessee were also before him. The Hon'ble Tribunal held that the net profit of the assessee for purposes of taxability was not without basis and that basis was quite reasonable, proper and just. The Ld. CIT(A) had adopted well-known grossing up method for estimating taxable income and, therefore, we don't feel inclined to interfere with his order. On the basis of this decision it was argued that profits of the assessee may be estimated at 10 per cent of the receipts.
5.5 The Ld. Counsel also relied on the decision of the ITAT, Mumbai Bench 'C' in the case of Dy. CIT v. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31. That case was decided under Indo-Singapore Treaty. In para 28 of the order, the Hon'ble Tribunal held that term" fees for technical services", under Article 12(4)(b) does not cover "consultancy services" unless such services were technical in nature. That admittedly was not the case. Therefore, the profits had to be computed under Article 7. It was further held that the limitation on reduction of expenses under Section 44D does not come into play. It was also held that Sections 44D and 115D of the Act on one hand and Article 12 of the Indo-Singapore Treaty on the other are similar in nature and constitute alternative but similar models for taxation of income from royalties and fees for technical services. Once it is clear that these are competing models of taxation, it has to follow that the provisions of Income-tax Act cannot come into play unless these are more beneficial to the assessee. Based upon aforesaid cases, the counsel argued that the payments in question were in the nature of payment of fees for technical services. The provisions of DTAA were more beneficial to the assessee and, thus, these provisions ought to have been applied by the Assessing Officer and the Ld. CIT(A).
6. As against the aforesaid, the ld. DR pointed out that SAIL applied to the Assessing Officer for making certain remittances to the assessee after deducting 10 per cent of the amount as tax. The Assessing Officer and the Ld. CIT(A) were of the view that the tax ought to have been deducted at the rate of 30 per cent. He referred to the Tripartite Agreement between SAIL, the assessee and Siemens. He further pointed out that in case the exclusionary clause of Article 12 becomes applicable, then, the profits of the assessee, attributable to the PE, have to be worked out on the basis of domestic law. The crucial, question in this behalf is whether the assessee had a PE in India or not. In this connection, he referred to Clause (i) of para 2 of Article 5, which we have already reproduced in para 5.2 (supra). He read out this clause and pointed out that the words installation or assembly projects were separated from the words "supervisory activities in connection therewith" by the conjunction "or". Therefore, his case was that supervisory activities by themselves can constitute a PE provided that such activities were carried out in connection with any building site or construction, installation or assembly projects, if they continued for a period of more than 6 months. The ld. DR fairly pointed out that a view will have to be taken here whether the building site, etc., should belong to the assessee or it could belong to any other party for deciding whether supervisory activities by themselves, if continued for a period of more than 6 months, will constitute the PE of the assessee. However, he strongly agitated that there is nothing in this clause to show that the building site etc. ought to belong to the assessee. Therefore, supervisory activities by themselves could constitute PE provided that they continue for a period exceeding 6 months. He further referred to the provision contained in Explanation 2 below Section 9(1)(vii), which defines the term "fees for technical services." He also referred to para 3 of Article 7 of DTAA, which provides for the computation of profits of the PE. It is mentioned that the executive and general administrative expenses are to be allowed whether incurred in the Contracting State or elsewhere and according to the domestic law of the Contracting State. In view of the aforesaid, the provisions contained in Sections 28 to 44DA of the Act came into play. Section 44D(b) provides that no deduction in respect of any expenditure or allowances shall be allowed under any of the aforesaid 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 the Government or the Indian concern after 31-3-1976 but before 1 -4-2003.
It was pointed out that the agreement was entered into on 15-8-1992 and, therefore, this date falls between those dates. Thus, provision contained in Section 44D(b) becomes applicable in terms of para 3 of Article 7. Accordingly, no expenditure is allowable in computing income by way of fees from technical services. The rate of tax is provided in Section 115A at 30 per cent. Therefore, it was strongly argued that the assessee was required to deduct tax at the rate of 30 per cent of the fees received by it from SAIL.
7.1 We have considered the facts of the case and rival submissions. We are of the view that the interpretation of provision contained in Clause (i) of para 2 of Article 5 is of paramount importance for settling the controversy at hand. This para contains inclusive definition of the PE. It consists places such as a place of management, a branch, an office, a factory, a workshop, a warehouse or sales outlet etc. apart from building site, etc. We may also examine the provision contained in para 1 of Article 5, which defines PE to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on. On the basis of para 1 it can be inferred that fixed place of business should be that of the assessee. It may be owned, rented out to the assessee or the assessee might have obtained facility by way of license to carry out business from that fixed place.
But, the assessee should have some kind of domain or control over the place for conduct of his business either or wholly or partly. Para 2 contains within its ambit a branch, an office, a factory, a warehouse or sales outlet, etc. In order that such places constituted the PE of the assessee, it follows from aforesaid discussion that domain and control over the branch, the office, and the warehouse, etc., should be that of the assessee for the purpose of conducting its business. We may now extract that portion of the Clause (i), which is applicable to the facts of the case. It will read "installation or assembly project or supervisory activities in connection therewith". These words will have to read in their plain meaning. To our mind, the conjunction "or" does not separate the words before it from the words after it, rather the words after it will have to be read with the words before it.
Therefore, it follows that if supervisory activities are carried out in connection with installation or assembly project, the same may constitute a PE, if other conditions are satisfied. This clause, unlike other clauses of this para, deals with service activities such as assembly or installation, which have to be rendered at the premises of the enterprise in the Contracting State. It also includes supervisory activities in connection with installation, etc. However, there is no condition that such activities need to be where installation service is also provided by the enterprise of the other Contracting State. Such a PE is called a service PE in the common parlance. Since the control and domain over the premises may not be with that enterprise, therefore, there is an additional condition of rendering such services for a period exceeding six months. Therefore, we are of the view that Clause (i) of para 2 stands in distinction with other clauses. In other words, the building site or construction, installation or assembly project need not be that of the assessee and supervisory activities carried out in connection therewith becomes PE of the assessee if they continue for a period exceeding 6 months. Therefore, even if the installation or assembly project does not belong to the assessee, it is a fact that he has been providing supervisory services for installation purposes as and such services have been provided for a period exceeding six months.
To our mind, supervisory activities by themselves, in such a situation, constitute PE. Consequently, we are of the view that the provision contained in para 5 of Article 12 is applicable. Therefore, we will have to examine the issue of computation of profit of the PE under Article 7 of the DTAA.7.2 Having decided the issue of PE against the assessee, we now turn to the issue of computation of profit of the PE. The ld. counsel relied on the decision in the case of Elekrim Warsaw and Boston Consulting Group Pte Ltd. (supra). The case of Elekrim involved the estimation of profit, which is not the case here. The case of Boston Consulting Group Pte Ltd. (supra) proceeded on the footing that consultancy services do not constitute technical services and, therefore, the profit has to be computed after allowing various expenditure. In the instant case, it is an admitted position that the services rendered by the assessee constitute technical services. Therefore, the ratio of the case of aforesaid Boston Consulting Group (supra) is not applicable. Article 7 provides that the profit of the enterprise shall be computed after deducting expenses incurred in the Contracting State and outside it and in accordance with the domestic law of the Resource State. Thus, this article clearly recognizes that the profit shall be computed, in this case, in accordance with the provisions contained in the Income-tax Act, 1961. Therefore, the profit is to be computed under Chapter IV of the Act. Section 44D(b), containing a non obstante clause, provides that no expenditure or allowance shall be allowed in computing income by way of fees for technical services in pursuance of an agreement made after 31-3-1976 but before 1-4-2003. It may seem harsh, but the state of law applicable to the case of the assessee is that no expenditure or allowance is deductible from fees for technical service.
7.3 The ld. counsel also argued that Section 44D was replaced by Section 44DA by Finance Act, 2003, w.e.f. 1-4-2004 which provides for deduction of expenditure or allowance in accordance with the provisions of the Act. Since the subject-matter of both the sections is same, the amendment should be taken as clarificatory in nature. We have considered this argument also, however, we are unable to agree with him for two reasons, namely, - (i) the provisions are substantive in nature and, therefore, Section 44DA applies prospectively to the proceedings of assessment year 2004-05 and onwards, and (it) the new provision is made specifically applicable in respect of agreements made after 31-3-2003. Thus, the new provision is not applicable to the facts of the assessee's case. It does appear to us that the amendment was made prospectively in order to mitigate the hardship caused by the old provisions.
7.4 Placing of Section 44D and Section 44DA under Chapter IV leads to an inference that royalties and fees for technical service are taxable under the head "Profits and gains of business or profession". However, in place of the normal rate provided in the relevant Finance Act, Section 115A provides for the rate of tax at 30 per cent, which has been adopted as TDS rate by the Assessing Officer and the Ld. CIT(A).
The rate of 10 per cent, provided in the DTAA, is not applicable as the receipts are not taxable under Article 12 of the DTAA. Thus, we do not find any error in the orders of lower authorities in this matter also.
8. It was stated both by the Ld. counsel for the assessee and the ld.DR that all payments have been made in pursuance of the same contract.
Therefore, other appeals have similar facts except that the recipients may be different. That does not make any difference insofar as the determination of the issue at hand is concerned.