2. The first and main ground urged by the assessee is directed against the order of the Commissioner (Appeals) in confirming the order of the assessing officer with regard to payment made for preparing the Feasibility Study Report as fees paid for technical services. According to the assessee, Commissioner (Appeals) failed to appreciate that the amount was paid for outright purchase of Feasibility Study Report and hence it could not be considered as fees for technical services.
Assessee filed the return on 6-3-1998 declaring nil income. The case was selected for scrutiny subsequently.
Assessee is a company and entered into an agreement with Central India Coal Company Ltd. ('CICCO' for short hereinafter referred to as ) for the Feasibility Study Report for developing coal mines for Lohara West Mine Project. For this the assessee received payment of Rs. 55,32,000 from CICCO. As per the agreement, tax payable in India is to be borne by Indian party, as such CICCO paid 20 per cent tax on the said amount. The Feasibility Report is to remain as the property of CICCO in accordance with the agreement. As per Article 1 of the agreement, assessee was to sell the Feasibility Report on outright sale. The report was required to be prepared on the basis of technical data and other information supplied by CICCO in respect of Lohara West Mine. Assessee has no right, title, interest in the Project Report prepared. CICCO was required to furnish the information, technical data and geological information in respect of Lohara West Mine Project to the assessee for the purpose of preparing the report after feasibility study. This information was furnished by CICCO in France to the assessee. According to the assessee, assessee-company is not having any establishment whatsoever in India where from information given by CICCO could be processed. Preparation and fincilization of the Feasibility Report was carried out by the assessee outside India and no part of the activity was conducted at any place in India.
As per Section 5(2) of the Income Tax Act, 1961, income of a non-resident includes income from sources within India. For this purpose, it was contended, the income should be received or deemed to have been E received in India during the previous year relevant to the assessment year under consideration. It was contended, it is clear from the reading of the agreement with CICCO that save and except for the payment was made by a company incorporated in India as far as the assessee concerned, there is no activity whatsoever carried out in India. In other words, assessee did not carry any activity for the purpose of earning income in India. Hence, Section 5(2) of the Act does not apply as far as the assessee is concerned.
Assessee contended, as per the Double Taxation Avoidance Agreement ('DTAA' for short) between India and France, specifically by virtue of Article 7, the profit of an enterprise of one of the Contracting State unless the enterprise carries on business in other Contracting State through a permanent establishment situated therein, such profit cannot be taxed in the Contracting State. It was contended, as far as the assessee is concerned, assessee did not have any permanent establishment within the meaning of Article 5(2) of the DTAA nor the assessee did carry on any activity for preparation of the Feasibility Report within India. According to the assessee, as per Article 7 of DTAA, the income/profit arising to the assessee on the sale and/or transfer of the Feasibility Report to CICCO was only a business profit liable to be taxed in France. In support of the above, assessee relied upon the decision of the Special Bench of the Tribunal in the case of Graphite Vicarb India Ltd. v. IT (1992) 43 ITD 28 (Cal.) (SB). In the case of Graphite Vicarb India Ltd. (supra), the Indian company had entered into an agreement with the company for outright purchase of technical drawings and designs. It was the contention of the Indian company that as per Article 3 of the DTAA between India and France, the consideration paid for the outright sale of technical drawings and designs was the French Company's business profit and since the said French company did not have any permanent establishment in India, no income chargeable to tax accrued in India in terms of the said agreement.
Assessee contended that assessee's case is covered by the said decision. Article 3 of the old DTAA corresponds to Article 7 of the new DTAA entered into between India and France, which according to the assessee clearly provides for taxation of business profit only in the country where the business is actually carried on through a permanent establishment, in India. It was a case of outright sale of Feasibility Report and not a case of transfer of technical know-how, wherein only the right to use the same is granted to the transferee.
Hence, it was contended that the assessee was not liable to be taxed in India. For the above proposition, assessee relied upon the following decisions:Christiani & Nielsen Copenhagan v. First Income Tax Officer (1991) 39 ITD 355(Bom.), Held: Work done for preparing the Feasibility Study Report - not technical know-how - not liable to tax in India.
Held: Service charges are not technical fees and not taxed in India as these constitute business profit on German company.
It was contended, in view of the above, Indian representative of the assessee, i.e., CICCO, filed the return showing Nil income of the assessee and paid the tax under protest. As such, the entire amount is liable to be refunded to CICCO. Assessee relied upon the decision of Tribunal in the case of ITO v. Hindustan Latex Ltd. .
Without prejudice to the above, it was contended, even if it is considered as income by way of fees for technical service; it is covered by Explanation 2 to Section 9(1)(vii) and falls under the exception category. For the above proposition, assessee also relied upon the definition of the term "fees for technical services" in Article 13(4) of the DTAA, which reads as under: 4. The term 'fees for technical services' as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, inconsideration for services of a managerial, technical or consultancy nature.
4. However, the assessing officer did not agree with the contentions of the assessee and while coming to the above conclusion, he particularly taken note of Articles 1 and 2 of the agreement entered into between CICCO and the assessee, which read as under: Article 1: Objective and scope of work - The objective of the agreement is to perform a feasibility study for the Lohara West Mine i.e. a property of CICCO. The information from Indian sources will have to be incorporated in the economical part of the study. The entire study is to be conducted under the leadership of the CDF ie.
assessee, however, the input of CICCO, or its local consultant, if any, is required for the local part.
Article 2: of the agreement states the procedure for collection data. The data will be provided by CICCO and these data will be scrutinized by CDF experts. Complementary information will be gathered either on site) during a visit made by CDF representatives or by mail. Upon completion of the data collection phase, CDF will carry out the geological studies and will design the general layout of the mine. After finalization of the basic design of the mine, CDF will carry out the complementary technical studies as per Article 1.
CDF will complete and finalize the technical part of the feasibility study with incorporation of part carried out by CICCO. CDF will prepare and send the final report to CICCO.5. Assessing officer held, from the above it is clear that the assessee is providing technical services to CICCO. Basic data were to be provided by CICCO, on the basis of which certain technical services are to be provided by the assessee. Assessing Officer rejected assessee's contention that the assessee will sell the Feasibility report on outright basis. He held, this is a far-fetched contention. Assessee is providing managerial/technical and consultancy services to CICCO on the basis of data provided by CICCO. The property in the form of report never belonged to the assessee. Hence, there is no question of any outright sale of the same by the assessee to CICCO. It is only technical services delivered in the form of Report, for which CICCO is paying the impugned amount of Rs. 55,32,000 as total consideration.
This is a fee for Feasibility Study Report. Once the Report is delivered to CICCO, the assessee had not title, right or interest in the project report, as it is for the development of coal mines for Lohara West Mine Project. Assessing officer held, since the assessee is covered under Article 13 of the DTAA, assessee's income is taxable in India even in the absence of a permanent establishment. If the fee is payable in respect of services utilised in a business or profession carried on in India or for the purpose of making or earning any income from any source in India, the same is taxable as income. In the instant case the payment is made within India, which is squarely covered under Sections 5 and 9 of the Income Tax Act, 1961. He held, the Special Bench decision relied upon by the assessee in the case of Graphite Vicarb India Ltd.(supra) is distinguishable on facts. That was a case wherein there was outright sale of technical drawings and designs; whereas in the instant case the assessee-company has provided technical services. He held, the case laws relied upon by the assessee are also not applicable as facts are distinguishable. Assessee was asked why the entire tax paid by CICCO should not be included in the gross receipt.
Assessee, in reply, relied upon Section 10(6A) and submitted that tax paid by CICCO will not be included in the gross receipt. In support of the above, assessee relied upon the decision of the Authority for Advance Ruling in the case of Horizontal Drilling Internationals. A. v.CIT . This was not accepted by the assessing officer, as the facts are distinguishable. Hence, assessing officer held, assessee has rendered services in the nature of managerial, technical and consultancy, which is covered under Article 13 of the DTAA between India and France. Some other addition was also made by the assessing officer. Aggrieved by the above order, assessee carried the matter before the first appellate authority.
6. The facts were not disputed before the Commissioner (Appeals). The issue before the Commissioner (Appeals) has been briefly stated vide Para 6 of his order and that is "whether the sum of Rs. 55.32 lakhs received by the French company as a consideration for the services of managerial, technical or consultancy nature fall within the meaning of 'fees for technical services' in Article 13(4) of the DTAA with France and if so whether it is taxable in India or not?" 7. It was contended before the Commissioner (Appeals) that the work for preparing and finalising the feasibility report was done by persons of Charbonnages De France International SA ('CDF' for short) in France.
CDF persons visited the site in India for 2 to 3 days and even if it is considered that part of the work was done in India, it cannot be ignored that such work in India constituted an insignificant part of the total work done by the assessee and therefore it cannot be inferred from this that the work in relation to preparation and finalisation of the feasibility report was not actually done in France. The study consisted drawing by CDF of the general layout of the mine and based on this CDF was required to give the basic design and related documents for the operation of mine in India. The Indian company implemented the feasibility report received from CDF in India. It was Indian company that had approached CDF for the feasibility study report, perhaps for the reason that conducting of such study was not found feasible in India. Hence, the payment received by CDF in consideration of the services rendered outside India, i.e., in France, cannot be taxed here in India.
8. For the above proposition, assessee relied upon the decision of the Tribunal in the case of D.C.M. Ltd. v. ITO . In this case the assessee entered into an agreement with Japanese company for the repairs of foundation of its factory, which was sinking. Japanese company did the design calculation and engineering work in that country, for which it was paid certain amount as engineering and management fees. The case of the assessee was that since the said fees were paid for the services rendered outside India, i.e., in Japan, it cannot be taxed here in India. The plea was upheld by the Tribunal in view of article X(k) of DTAA B with Japan, which reads : "Fees for technical services payable to an enterprise shall be treated as income from sources within the Contracting State in which are rendered the services for which such fees are paid." Commissioner (Appeals) held, it is obvious that the assessee's representative misplaced his reliance on this decision. The ratio of the decision is not applicable in the present case of the assessee in view of Article 13(7) of DTAA with France.
9. Commissioner (Appeals) further held, Article 7 of the DTAA with France, says that, the French enterprise is taxable in India if it carries on business in India through a permanent establishment situated in India, but Article 7(6) lays down an exception to the taxability of such profits in India. Article 7(6)reads as under: (6) Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be effected by the provisions of this Article.
He held that the import of Article 7(6) is that even if a French enterprise carries on business in India, such profits insofar as they represent the income from royalties and fees for technical services are not liable to tax in India within the meaning of Article 7 of DTAA, but are liable to tax within the meaning of Article 13 of the DTAA. The only requirement to bring them to tax in India under Article 13 is that such profits should be royalties or fees for technical services, within the meaning of Article 13(3) or Article 13(4), as the case may be. He further held, once it is found that the French enterprise has rendered the services, which answer the description of "fee for technical services" given in Article 13(4) of the DTAA, the payment by an Indian company to French enterprise shall be deemed to arise in India by virtue of Article 13(7) of DTAA.10. Another contention of the assessee's representative was that the fee received by the assessee is entitled to be treated as business profit under Article 7 of the DTAA inasmuch as the services rendered by them were part of business profits. For the above proposition, assessee relied upon the decision of the Tribunal in the case of Christiani & Nielsen Copenhagen v. First ITO (1991) 39 ITD 355 (Bom.). This was a case wherein the assessee, a company registered in Denmark entered into an agreement with an Indian company for conducting preliminary studies, calculation and assimilation of data and finally preparing a feasibility report with regard to trans-harbour communication link between island city and main land and the issue was whether even if the assessee had no permanent establishment in India, the provisions of article III could be applied to it. Tribunal approved this view. The second question was whether it could be said that the fees received by the assessee in consideration was within the meaning of article III(3) and thus the provisions of Section 9(1)(vii) were not applicable.
Tribunal held, it has no applicability. Tribunal further held that article XIV applies only to profits or remuneration derived by individual who is a resident of one of territories. Fees received by the assessee could not be held to be taxable under article XIV. Coming to the instant case, the contention of the assessee was again rejected by the Commissioner (Appeals), holding that there was no article relating to fees for technical services in the DTAA with Denmark.
Commissioner (Appeals) held, this decision also does not support the case of the assessee.
11. Assessee again relied upon the decision of the Authority for Advance Ruling in the case of Horizontal Drilling International S.A. v.CIT . This was a case wherein the business of a French company consisted of undertaking and performance of public works contracts, including drilling works, laying of pipes etc. The contract was awarded by Gas Authority of India Ltd. for installation of gas pipelines under a river for a consideration, which assessing officer held, as fee for technical services within the meaning of Article 13(4) of DTAA. On the other hand, assessee contended that the whole duration of the project in India was less than three months and it did not have a permanent establishment in India within the meaning of Article 5(3) of DTAA; therefore, its business profits were not taxable in terms of Article 7 of DTAA. The Authority for Advance Ruling held that only the payment made in consideration of services be included within the definition in Article 13(4) but the payment made in consideration of execution of construction or installation of project need to be excluded. Coming to the instant case of the assessee, Commissioner (Appeals) records that the assessee prepared feasibility report for a mine project in India, which, beyond any doubt, constitutes rendering of technical services to the Indian company. It is not a case where the assessee had carried out any construction or installation project in India. He held, the payment under consideration cannot be treated as business profits in the hands of the French company.
12. Assessee again relied upon the decision of the jurisdictional High Court in the case of CIT v. Gilbert & Barker Mfg. Co.
. This was a case wherein the assessee, a foreign company, under an agreement, granted licence to the Indian company to manufacture, sell and service, gasoline pumps of the type made by it on a consideration of 5 per cent of the sale price of the pumps and spare parts. It was held that the supply of know-how to the Indian company on a licence basis can be regarded as a method of carrying on business.
The agreement in that case showed that the assessee had not parted with any capital asset. Therefore, the income returned by the assessee was liable to be taxed as business income under Section 28 of the Income Tax Act. However, coming to the instant case of the assessee, the Commissioner (Appeals) distinguished the decision and agreed with the assessing officer for the reason that it was not a case of any outright sale of an asset as the sale involves transfer of an asset.
Commissioner (Appeals) agreed with assessing officer's finding that "assessee's argument that it has sold the feasibility report on outright basis to the Indian company is far fetched inasmuch as the property in the form of report never belonged to it. He held, even if it is assumed that it was a case of outright sale by CDF to the Indian company, then it cannot be said that it was a payment made to CDF for information concerning industrial, commercial or scientific experience in the form of a study report furnished by CDF to the Indian company and it follows therefrom that it was a payment within the meaning of royalty as defined in Article 13(3) of DTAA. He held, assessee's case is clearly distinguishable.
13. On the other hand, the Commissioner (Appeals) found that the Third Member decision of the Jaipur Bench of the Tribunal in the case of Modern Threads (India) Ltd. v. CIT (1999) 69ITD 115 is applicable in the instant case of the assessee Commissioner (Appeals) records that "in that case, an Indian company, under a contract with an Italian company, agreed to make the lump sum payments, not of taxes, for the supply of basic process engineering documentation and for the transfer of technical know-how for the production of a particular acid assessing officer treated the said payments as royalty. Tribunal held that the contract provides for the grant of sub-licence and assignment of technical know-how. These terms in the contract make it clear that the technical know-how and related documentation have been transferred to the assessee. The word 'grant' means where anything is passed from one to another and in this sense, it comprehends sales also. It also means the conveyance of property from one person to another by the deed. The word 'right' has been defined to mean claim a thing. A right is an interest, which is recognised and protected by law. The term 'licence' means authority or permission to do something specified, leave to do a thing which the licensor would otherwise have the right to payment. In the legal sense, a licence is a permission to do something which, without the licence, would not be lawful. The word 'supply' is merely a form of sale and despatch. Hence, it was concluded by the Tribunal that the transaction amounts to sale in the hands of the Italian company.
Therefore, the consideration received by it would be a business profit in its hands. Tribunal further observed that the royalty payment is linked to the production or profits earned through the use of process or secret formula, patent, copyright, etc. "However, the said payments do not relate to use of any process, secret formula or patent for production of any commodity but for creating an asset in the shape of plant-designed, constructed and operated as per technical know-how developed by the Italian company and basic process engineering documentation provided by it. Therefore, they did not constitute 'royalty' income in the hands of Italian company within the meaning of Article 13 of DTAA.G 14. The Commissioner (Appeals) confirmed the order of the assessing officer vide Paras 11.1,12 and 13 of his order, observing as under: 11.1 A careful reading of the above decision clearly shows that the present case is not one of sale. As stated earlier, the payment received by the appellant falls within the meaning 'fees for technical services' in Article 13(4) of the DTAA and not as business profits.
12. Article 13(1) of the DTAA outlines the basic rule that the fees for technical services is liable to tax in the country of which the recipient is a resident. However, Article 13(2) entitles the State of source to tax the income only to a limited extent of withholding some percentage of the gross amount of fees for technical services as tax and Article 13(7) leaves no scope for doubt that the source country shall be deemed to have the jurisdiction to tax such fees as it recognizes the principle of taxation at source. This principle is also recognized in the Income Tax Act, 1961, as Section 9(1 )(vu) contains a clear cut source rule specifying the criteria on the basis of which the fees for technical services can be regarded a deemed to accrue or arise in India. However, the definition of "fees for technical services" in Explanation 2 to Section 9(1)(vii) clearly excludes the "consideration for any construction, assembly, mining or like project undertaken by the recipient". The AR has sought to take shelter under the said Explanation 2 by contending that even if the amount paid to CDF is considered as the fees for technical services, the same falls under the exception provided therein, being a consideration for the mining or like project undertaken by the appellant. However, this plea does not hold the ground for the simple reason that in the present case, the appellant has not received the said consideration for any mining project but for the preparation of a feasibility study report for the efficient working of a coal mine owned by an Indian company. The mining project is of the Indian company and not of CDF. Therefore, this plea also fails.
13. Keeping in view the facts of the case and the discussion made in the preceding paras, it is held that the assessing officer has rightly brought to tax the payment of Rs. 55.32 lakhs received by the appellant company as the fees for technical services within the meaning of Article 13 of the DTAA with France.
Aggrieved by the above order, assessee is in appeal before the Tribunal.
15. The learned Counsel for the assessee Shri R.R. Vora appeared on behalf of the assessee. The following grounds of appeal have been raised by the assessee: On the facts and in the circumstances of the case, the learned Commissioner (Appeals)-IV ('Commissioner (Appeals)')? 1. (a) erred in confirming the amount paid for preparing the feasibility study report as fees paid for technical services; (b) failed to appreciate that the amount was paid for outright purchase of feasibility study report and hence, cannot be considered as fees for technical services; 2. should have appreciated that the amount paid shall be at the most considered as business profit of Charbonnages De France International SA (CDF) and since it has no PE in India, same will not be liable to tax in India; 3. Without prejudice to the above, for the sake of argument, even if the amount paid is considered as fees for technical services, the same is covered by Explanation 2 to Section 9(1)(vii) and falls under exceptional category i.e., for the purpose of mining and hence, not liable to tax in India.
16. The assessee further filed additional ground of appeal, which reads as follows: Without prejudice to the above ground Nos. 1 to 3; on the facts and circumstances of the case the learned assessing officer and Commissioner (Appeals) erred in holding that rate of tax payable on fees is 20 per cent instead of 15 per cent.
17. There is a delay of more than five months for filing of the appeal.
A petition for condonation of delay has been filed along with the affidavit from one of the employees explaining the reasons for delay.
18. After perusing the affidavit as well as the application for condonation of delay and on hearing both the parties, we are of the considered opinion that the delay is to be condoned. By not filing appeal, assessee does not gain any advantage. The explanation that the default ant employee remembered the receipt of the Commissioner (Appeals)'s order on receipt of penalty notice is plausible explanation. We condone the delay.
19. Shri R.R. Vora repeated the contentions made before the revenue authorities. The sum and substance of his submissions are: (a) the fee paid is business income of CDF and as CDF does not have apermanent establishment: in India, as per Article 7 of DTAA the income is not chargeable to tax in India and the same is chargeable only in France. That fee paid by the Indian company to the French company cannot be treated as fees for technical services under Article 13(4) of the DTAA read with Protocol signed between India and France. Reliance was placed on Article 13(1) and 13(4) and the protocol exchanged between India and France dated 29-9-1992. That as per Section 90(2) of the Income Tax Act, provisions of DTAA or the normal Income-tax provisions, whichever is beneficial, can be adopted by the assessee and assessee has opted to be governed by the p provisions of DTAA. (b) That Article 7 of the DTAA apply. If a view that Article 13(4) will applyis taken, then it will have to be read with the protocol signed between the two countries and the notification issued by the Government and that such a reading would include, only such technical services,which make available technical knowledge, experience, skill, know-how or consist of development and transfer of technical plan or technical design. That the French company had not made available technical knowledge etc., to the Indian company and thus it is not fee for technical services. That the protocol notification results in this Article 13(4) being analysed in two parts, ie., (1) the rate lower than; and (2) scope more restricted than. That the subsequent protocol limits the scope of taxation of a particular income, like fees for technical services by reading down the provision by placing interpretation applicable to United Kingdom etc., and that the concessional rate or scope of taxation will apply even to the earlier Treaty executed between India and France.
(c) Shri R.R. Vora argues that not only lower than the rate prescribed in the French Treaty, if provided for in subsequent treaty is applicable, but that the scope limiting the taxation of certain income like FBS, will also become applicable to earlier French Treaty.
(d) The thrust of Shri Vora's argument is that the definition of the term 'Fees for included services' as in DTA A with UK, USA and Switzerland has to be applied to the facts of this case in view of the protocol and notification referred above. He relied on the decision of the Kolkata Bench of this Tribunal in the case of Dy.
CIT v. ITC Ltd. . That the services in question and the scope of taxability thereon, is to be viewed by applying the same scope as in the Indian DTAAs with United Kingdom, United States of America and Switzerland. When such an interpretation is given, the services in question cannot be held to be payment for including services. He relied on the following case laws:National Organic Chemical Industries Ltd. v. Dy. CIT ;Hindalco Industries Ltd. v. ITO 20. He repeated the alternative submission raised by way of additional ground that the rate of tax applicable should be 10 per cent as per Indo-German and Indo-Swiss Treaty and not 20 per cent as levied by the assessing officer.
21. Shri T. Shivkumar arguing on behalf of the revenue, vehemently controverted the submissions of learned Counsel for the assessee and submitted that the French company had rendered technical services in India, in pursuance of an agreement entered into, with an Indian company.
He took this Bench to the agreement entered into by CICCO and Charbonnages De France SA. He read out Article 1 of the agreement, which is the objective and scope of work and submitted that the agreement is for the purpose of a feasibility study. He heavily relied on the order of the assessing officer as well as the first appellate authority. The sum and substance of his arguments are that, on going through the clauses of the agreement, it is clear that the assessee is providing the technical services to CICCO as per the agreement. That the assessee's argument that it purchased the feasibility report, on outright sale basis, is far-fetched and not supported by the facts. The property in the form of the report was never the property of the assessee and thus the question on sale of the same does not arise. That the decisions cited by the assessee have been considered in detail, by the first appellate authority and were distinguished on facts. On the argument of the assessee, that the payment in question, alternatively, should be considered as payment for included services and that the protocol and notification restricts the scope of taxation, he submitted that the protocol and notification only referred to rate of tax and the scope of rate and that the entire Double Taxation Avoidance Agreement between France and India is neither re-written or replaced by that of DTAA's between USA and India etc. He submits that Clause 7 of the protocol ref erred to only case of advantage in the rate of tax and nothing more. He submits that rate of scope is different from the term scope of taxation itself.
22. Rival contentions heard. On a careful consideration of facts and circumstances of the case and on a perusal of the papers on record and case laws cited we hold as under: The assessing officer at Page 5 Para 4 of his order listed the important Articles in the agreement signed between the assessee and CICCO. For ready reference, they are extracted below: Article 4: Specifies the obligations of CDF on the following lines: "CDF guarantees that they will perform all work and services in good workman like manner to an end and see that the work will be completed properly and as expeditiously as possible." Article 5: Specifies the obligations of CICCO to provide necessary information, personnel and equipment and also ensure good implementation of the feasibility study.
A plain reading of the above agreement, discounts the theory of the assessee that he has sold a feasibility report to CICCO. Thus, we agree with the finding of the revenue authorities on this issue.
23. The other undisputed facts are that the assessee has no establishment in India and that the entire preparation and finalization of feasibility report was carried outside India. The entire information etc., was provided by CICCO. Under these facts and circumstances, the issue that is to be seen, is whether Section 5(2) and Section 9(1)(vii) are attracted. Once we reach the conclusion that Section 5, Sub-section (2), Section 9(1)(vii) of Act apply, then only recourse should be taken to the Double Taxation Avoidance Agreement. When it is admitted that the entire services are rendered outside India and when only payment is made out of India then it cannot be held that the income of the assessee as is received or accrued in India, so as to bring the income to tax under the Indian Income Tax Act.
In support of our view, we draw strength from the recent decision of the Hon'ble Supreme Court in the case of lshikawajima-Harima Heave Industries Ltd v. Director of Income-tax , where it is held as follows: Deemed income - Accrual - Test is of "business connection" and not "permanent establishment" - "Business connection" under Income-tax Act different from "Permanent establishment" Under Double Taxation Avoidance Law - Income Tax Act, 1961, Section 9(1)(vii) - Convention for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income between India and Japan, Article 5.
Technical services - Non-resident - Overseas Services - Sufficient territorial nexus with India necessary - Two conditions for taxability - Must be utilized in India and must be rendered in India - Income Tax Act, 1961, Section 9(1)(vii).
Non-resident - Turnkey Project - assessee carrying out offshore services - Fees for services - Not taxable in India merely because non-resident has permanent establishment in India - Only if services are utilized in India and they are rendered in India - Income Tax Act, 1961, Sections 5(2), 9(1)(i), Explanation (a) - Convention for Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income between India and Japan, Articles 5,7(1), 12(1), (2), (5), Para 6 of Protocol.
Respectfully applying this judgment to the facts of the case we have to necessarily allow the plea of the assessee.
The decision of the Special Bench of the Tribunal in the case of Graphite Vicarb India Ltd. v. ITO (1992) 43 ITD 28 (Cal.) (SB) is not applicable to the facts of the case for the reason that there is no transfer of technical know-how in the case. The Special Bench was dealing with a case where the French company was to transfer- technical know-how for the manufacture of certain products. This is a case where the assessee-company has to provide feasibility report as per agreement.
The Hon'ble Supreme Court in the case of ITO v. Sriram Bearings Ltd. , relied upon by the assessee, was considering the sale of trade secrets in Japan. In that case there is no transfer. The consideration paid for technical services is taxable in India. Thus, this case is of no help to the assessee.Christiani & Nielsen Copenhagan v. First ITO (1991) 39 ITD 355 (Bom.), relied upon by the assessee, the facts of the case are similar. The assessee-company was registered in Denmark and had an agreement with the Indian company for conducting preliminary studies, collection and assimilation of data and to finally prepare a feasibility report with regard to trans-harbour communication link between island city and main land. The Bench took a view that the fees received by the assessee in consideration for the aforesziid services was in nature of industrial and commercial profits within the meaning of Article 111(3) and, thus, provisions of Section 9(1)(vii) were not applicable and as the assessee has no permanent establishment in India, in view of the Double Taxation Avoidance Agreement, the payment cannot be taxed in India. This decision applies in all fours to the facts of this case.
considering the supply and service agreement of a German company with an Indian concern. In this case, there was a bulk purchase of material on behalf of the Indian company, which was charged at cost plus 4 per cent as procurement fees. This decision is not applicable to the facts of the present case.D.C.M. Ltd. v. ITO (1990) 35 ITD 35 (Del)(TM), the Bench was considering the case of a company which had a number of units engaged in the manufacture of several items, one of which was a fertilizers and chemicals factory and the assessee-company approached the Japanese company for the repair of the foundations of the said factory. The payment was described as "engineering and management fees". The Third Member had held that the services were rendered in Japan and if fee is payable for such services, that portion could not be treated as income from sources within India under the agreement.
This case is helpful to the case of the assessee.
In any event, we have based our decision on the judgment of the Hon'ble Supreme Court in the case of Ishikawajima-Harima Heave Industries Ltd. (supra).
25. In view of the above discussion, as the undisputed fact is that the assessee has no permanent establishment in India and as all the services are rendered outside India, the income in question cannot be considered as accrued in India and thus Section 5(2) and Section 9(1)(vii) are not attracted.
As we have held so, the provisions of DTAA need not be gone into. As far as the other arguments of the learned Counsel of the assessee are concerned, we do not go into the same, as it would be an academic exercise to do so.