| SooperKanoon Citation | sooperkanoon.com/75294 |
| Court | Income Tax Appellate Tribunal ITAT |
| Decided On | Oct-31-2006 |
| Judge | P Mohanarajan, J S Reddy |
| Reported in | (2007)110TTJ(Bang.)698 |
| Appellant | Abishek Developers |
| Respondent | income Tax Officer |
2. The facts in brief are as follows : The assessee is engaged in the real estate development. It entered into an agreement with M/s Site Concepts International Ltd., for the development and transfer of designs and drawings in connection with real estate development. The agreement stipulates the following projects/scope descriptions: 3. The agreement stipulates that the entire designs and drawings will be transfened at Singapore either to the assessee or its agent by M/s Site Concepts International Ltd., PO Box No. 362, Road Town, Tortola, British Virgin Islands. It also stipulates that the entire work will be carried out by M/s Site Concepts International Ltd. in Singapore and no part of the work will be carried out in India. The assessee made payments to M/s Site Concepts International Ltd. without deducting any tax at source after obtaining a certificate from chartered accountant in accordance with the procedure laid down under Section 195. The AO issued a notice under Section 201 of the Act to the appellant, to show-cause as to why the appellant should not be treated as assessee in default on the ground that the payments made to M/s Site Concepts International Ltd., were fees for technical services and hence the income is chargeable to tax in India under Section 9(1)(vii) of the IT Act. The assessee contended that the payment in question was not fee for technical services and that it was a payment made for purchase of goods and thus it cannot be treated as an assessee in default for non-deduction of tax. The AO relying on the judgment of Hon'ble Supreme Court in the case of Hindustan Aeronautics Ltd. v. State of Karnataka andRainbow Colour Lab v. State of Madhya Pradesh and Ors. (2000) 159 CTR (SC) 37 : AIR 2000 SC 810, and held that the dominant intention of the contract in question is that of a service and not supply of goods and thus the payments received by the non-resident company from the Indian resident are "fees for technical services" and thus the receipts are deemed to be income of the non-resident chargeable to tax in India, in terms of Section 9(1)(vii) of the Act. He held that the assessee was required to deduct tax on such remittances in terms of Section 195 of the IT Act, 1961 and having failed to do so, was an assessee in default under Section 201(1).
Aggrieved, the assessee carried the matter in appeal without success.
Further aggrieved, the assessee is in appeal before us. The assessee has raised the following grounds: (a) The learned AO had erred in passing the order under Section 201 r/w Section 201(1A) of the IT Act in the manner passed and the learned CIT(A) has erred in confirming the same. The lower authorities have erred in not appreciating the facts of the case and the law applicable thereto.
(b) The lower authorities have erred in regarding the payments made by the appellant to the non-resident as constituting "fees for technical services" and consequentially holding the appellant to be in default for not having deducted tax at source on the payments made.
(c) The lower authorities have erred in concluding that the payments constituted "fees for technical services" without concluding whether it constitutes managerial services or technical services.
(i) the deployment of 'means' in Section 9(1)(vii) would denote that the definition is exhaustive and not elastic in import; (ii) Section 9(1) containing deeming fictions is to be strictly construed.
(e) The lower authorities have erred in not appreciating the fact that the payments, not satisfying any of the limbs of the definition of "technical services" would therefore not fall within the ambit of Section 9(1)(vii) of the IT Act.
(f) The lower authorities have erred in not appreciating the fact that the payments in the instant case were made for the development and transfer of the design, and being an out and out transfer on sale of such designs and drawings, the payments for such sum would not constitute fees for technical services.
(g) The lower authorities have not appreciated the fact that the payments were made without deducting tax at source after obtaining a certificate from chartered accountant to the effect in accordance with the procedure laid down under Section 195.
(h) The lower authorities have erred in upholding the reliance placed upon case law under other enactments and of foreign Courts in sustaining the conclusions. The same are not relevant; the cases are distinguishable as they have been rendered under different facts and under different enactments.
(i) Assuming without admitting, that the payments were liable for deduction of tax at source, the learned CIT(A)-IV has erred in confirming the applicability of provisions of Section 195A of the IT Act in determining the amount of tax to be deducted at source.
(j) In view of the above and on other grounds to be adduced at the time of hearing, the appellant prays: (i) The order passed by the AO and confirmed by the CIT(A)-IV be quashed or (ii) The appellant be held not liable to deduct tax at source in respect of impugned payments and interest levied be also deleted.
4.1 The term fees for technical services is defined in Explanation to Section 9(1)(vii) to mean "any consideration for the rendering of managerial, technical or consultancy services and thus indicates that the definition is exhaustible in nature and that there is no scope for enlargement of the same, so as to include fees for other services. His contention is that for a payment to be covered under fees for technical services, by Section 9(1)(vii), it should satisfy the condition of being a payment for consultancy, managerial or technical services.
4.2 The intellectual property in the said designs vested with M/s Site Concepts International Ltd., and the payment in the instant case was made for the transfer of the designs by sale at Singapore and that the AO acknowledges that the payment was made for development and transfer of drawings and designs i.e. payment was made for transfer of title as the non-resident did not retain the property in the drawings and design.
4.3 The contract was not a contract of service as in the case of service, the supplier undertakes to perform services, which required the use by the supplier of special knowledge, skill and expertise, but not the transfer of such knowledge, skill or expertise to the other party. He distinguished the sale transaction from a service transaction by submitting that in the case of a sale, it presupposes the title in the goods as that of the transferor, prior to the same being conveyed to the buyer and whereas in the case of a service, the property always belongs to the person who makes payment for the services. That the property in the designs and drawings did not belong to the assessee from the beginning and the payments made by the appellant constitutes a purchase consideration for the transfer of title in the drawings. He relied on the following case law: (i) CLT v. Davy Ashmore India Ltd. (1991) 190 LTR 626 (Cal), wherein it was held that the payments for acquisition of drawings and designs would not constitute royalties.
(ii) Munjal Showa Ltd. v. ITO (2001) 117 Taxman 185 (Del), wherein it was held that payment for supply of designs and drawings would not constitute fee for technical services.
(iii) India Hotels Co. Ltd. v. ITO, Mumbai 'B' Bench in ITA No. 553/Mum/2000, order dt. 14th Dec, 2005, wherein it was held that the services were only to create design and title in the design, etc.
has passed to the assessee company and it is not a payment or fees for technical services nor a payment in the nature of royalties and that the assessee company had purchased and acquired the designs and drawings.
4.4 He further argued that the lower authorities have erred in holding that this is a service contract by relying on the decisions rendered under sales-tax laws for the reason that both these enactments are different and the definitions are also different. For this proposition he relied on the following case law:CIT v. Sun Engineering Works (P) Ltd. 4.5 Alternatively, he contended that the payments were made after obtaining a certificate from a chartered accountant in accordance with the procedure laid down under Section 195 and therefore the provisions of Section 201 r/w Section 195 are not attracted.
4.6 He submitted that the payments made to the non-resident may require deduction of tax at source if any portion thereof constitutes income chargeable to tax in India and that the earlier statute required the assessee to seek a certificate from the AO for remitting amounts to non-resident without deduction of tax and that under the present law, the AO's certificate has been dispensed with and in its place a certificate from a chartered accountant was mandated to be obtained.
Thus, he argues that obtaining of certificate from the chartered accountant constitutes a parallel regime for making a payment to non-resident without deduction of tax at source or after deducting tax at a particular rate. Thus, he argues that as the assessee has obtained a certificate from a chartered accountant prior to remittance of the amount, he cannot be held as assessee in default.
4.7 He submitted that under the current law, if the IT Department was of the opinion that the certificate issued by the chartered accountant does not lay down the correct position of law, then the procedure would be to initiate proceedings under Section 163 by treating the person who made the payment as an agent of the non-resident.
4.8 He submits that the collection of tax by way of TDS is only a mechanism for recovery of tax or a provisional payment and that when the assessee on a genuine, valid and bona fide belief does not make a deduction of tax, by following the procedure prescribed by the CBDT, it cannot be held as an assessee in default. He concluded his submissions by pointing out that the non-resident does not have a PE in India and the transaction is not that of a sale and that the assessee had followed the prescribed procedure prior to remittance and thus cannot be held as an assessee in default. He prayed for relief.
5. The learned Departmental Representative, on the other hand, vehemently controverted the arguments of learned Counsel for the assessee and submitted that the agreement which is extracted by the AO in his order under Section 201 clearly brings out that it is a works contract and the payment was made for rendering of professional services. He pointed out that the wording in the agreement i.e.
"project scope description" followed by "work description, conceptual design phase design" supports the view taken by the first appellate authority. He specifically pointed out to Section 2 Sub-clause (3), wherein it is stated as follows: The specific professional service for the conceptual design phase shall consist of the following: (a) Preparation of one color rendered schematic landscape plan @ 1:500 scale showing hardscape and softscape design approach.
(b) Presentation of two color rendered elevation/sections of initial concept.
5.1 He took this Bench through the three page document which is in the form of a letter and submitted that the substance of the agreement has to be seen and that this was definitely a service contract. He submitted that the nonresident was required to obtain the specific details from the assessee and had to develop the plans and designs using their professional expertise and that these plans and designs are project specific and assessee specific and thus it is a case of professional service as defined in Section 9(1)(vii). He relied heavily on the order of the AO as well as that of the CIT(A) and submitted that the same may be upheld. He specifically pointed out that the words 'technical or consultancy service' have a very wide meaning and should be understood in the manner in which a businessman understands. He submitted that the drawings and designs are the end product of the technical services in question and they are not essence of the contract. He pointed out that the designs have been prepared according to the requirement of the project, its location, size, etc. and that it is a customized product and hence has an essential characteristic of a service contract. On the issue of a chartered accountant certificate, he submitted that it is not a substitute to the earlier requirement of a no objection certificate from the AO prior to remittance to the non-resident. He argued that in any event, the certificate from a chartered accountant cannot negate the AO's powers under Section 201 to demand tax where it was not deducted or short deducted. He prayed that the orders of the Revenue authorities be upheld.6. Rival contentions heard. On a careful consideration of the facts and circumstances of the case as well as on a perusal of the papers on record and on examination of case law cited by both the parties, we hold as under. The undisputed fact is that the non-resident does not have a PE in this country. The agreement stipulates that the entire work by the non-resident will be carried out in Singapore and that no part of the work will be carried out in India. The non-resident had developed project specific and client specific plans and designs and the document states that the entire designs and drawings will be transferred at Singapore to its clients or its agent. On these facts, we are unable to persuade ourselves to agree with the findings of the Revenue authorities that there is no sale of said plans and designs outside the country. Perusal of the order of the first appellate authority shows that the basis on which he had came to the conclusion that this is a service contract and not sale and transfer of design was: 6.1 The ground that this being a customized product, it should be held that it is a works contract, is misplaced. The Hon'ble Hyderabad Bench of the Tribunal in the case of AP State Road Transport Corporation v.Dy. CIT (2002) 74 TTJ (Hyd) 531 has dealt at length on the matter and after relying on a number of decisions of the Hon'ble Supreme Court has come to the conclusion that even though the product in question is a customer specific, it cannot be held as works contract. We are convinced with the arguments of the learned Counsel for the assessee that in the case of a service contract, the property in question always remains with the service receiver and whereas in the case of a sale, the property in goods is passed on to the buyer only on transfer. In this case, it cannot be said that the property in the designs and drawings at the conceptual and development stage belonged to the assessee. The contract specifically provides that the designs and drawings would be transferred to the assessee from the non-resident in Singapore.
6.2 Visakhapatnam Bench of the Tribunal in the case of Skoda Export Co.
Ltd. v. Dy. CIT (2003) 81 TTJ (Visakha) 633 has held as follows: Drawings and designs and technical documents supplied by the non-resident company (assessee) to an Indian company being in the nature of plant and machinery, receipts thereof cannot be considered as fee for technical services and consequently the SDR variations in respect of such designs and engineering charges are also not in the nature of fees for technical services and are not taxable in India.
For the proposition that drawings and designs constitute plant we relied on the decision of Hon'ble Supreme Court in the case of Scientific Engineering House (P) Ltd. v. CIT 6.3 The facts of the case on hand are identical with the facts of the case dealt by the Mumbai 'B' Bench of the Tribunal in ITA No.553/Mum/2000, order dt. 14th Dec., 2005 in the case of Indian Hotels Co. Ltd. v. ITO, wherein at para 7 it is held as follows: A careful reading of the above clauses of the agreement between the assessee company and M/s HBA clearly shows that the fees payable to M/s HBA are neither fee paid for technical services nor are in the nature of royalty as defined in various articles of the DTAA between India and Singapore. As per the various clauses of the said agreement it is clear that M/s HBA has to handover and transfer all layout plans and interior concepts in regard to the areas defined in the agreement and all the interior design, drawings and presentation material shall become the property of the assessee company. All design work submitted by M/s HBA is for the use solely on this project and cannot be used as part of any other design and the transfer of property in the interior design, drawing, presentation material shall take place in Singapore. It is specifically provided in Clause 4.5 of the agreement that all interior design, drawing and specifications shall become the property of the client and the same shall be used for any other purpose other than that covered by this agreement by the interior designer. The services were only to create 'design' and title in the design etc. has passed in this case to the assessee company. In these facts of the case, we hold that the fee payable to M/s HBA is not a fee for technical services and is not in the nature of royalty as per the articles of DTAA between India and Singapore and therefore, the assessee was not liable to deduct tax from remittances to M/s HBA (P) Ltd. The assessee company has purchased and acquired interior design and drawing from M/s HBA and the property therein has in fact passed to the assessee company. In this view of the matter, the issue is decided in favour of the assessee and the grounds of appeal of the assessee are allowed.
6.4 Section 9(1)(vii) deals with income by way of fees for technical services and Expln. (2) defines fees for technical services as "means for consideration for rendering of any managerial, technical or consultancy services". It also provides what is not to be included within such term. When a specific definition is given in the Act, it is not correct for the assessing authority to widen its scope and say that the meaning in general parlance has to be taken while considering this term.
6.5 Even otherwise, the undisputed fact is that no part of the work or service was done in India. The agreement specifically provides that the entire work will be carried out in Singapore and no part of the work will be carried out in India. There is no evidence with the Revenue that this covenant in the agreement has been violated. On this factual position, the legal aspects discussed in the case of AP Power Generation Corporation Ltd. v. Asstt. CIT Hyd. 'B' Bench in ITA Nos.
1057 to 1060/Hyd/2001 vide order dt. 7th March, 2006 [reported at (2007) 107 TTJ (Hyd) 685-Ed.] wherein at para 24 p. 52 it is held as follows: The next contention is whether the act of not making application under Section 195(2) to the ITO does empower the ITO to enforce deduction of tax from the gross sums of money. This issue has been decided by the jurisdictional High Court in favour of the assessee in the case of CTT v. Superintending Engineer, Upper Sileu it was observed by the Hon'ble Court as follows: We are unable to accept the contention of the learned Counsel for the Revenue that, because the assessee did not file an application under Section 195(2), the ITO is empowered to call upon the assessee to pay tax under Section 195 in respect of the entirety of the gross sum. It should be borne in mind that a person may be honestly under the impression that no part of the gross sum payable to the non-resident is chargeable to tax as income under the Act and hence, he does not find it necessary to make an application under Section 195(2). The ITO, on the other hand, may be again honestly under the impression that the gross sum of money includes some portion chargeable under the IT Act. Could it be said that, under such circumstances, the person responsible for making the payment could be punished or penalized by requiring him to pay the tax deductible on the entirety of the gross sum The answer is clearly negative.
We cannot accede to the contention of the learned Counsel for the Revenue that the ITO is entitled to call upon the electricity board to pay tax deductible under Section 195 in respect of the entirety of the payments made to M/s Charmillies Engineering Works Ltd. in RC 203 and to M/s Oerlikon Engineering Company in RC 205. It must be remembered that the order was passed under Section 201 of the Act.
For the purpose of determining the tax in respect of which the person responsible for making the payment could be deemed to be in default, the ITO must determine the tax only on the appropriate proportion of income chargeable under the Act.
There is no prohibition in Section 201 of the Act. In the fact of the ITO's own acquiescence that in respect of erection charges paid to the other companies, the net profit could not exceed 25 per cent, it is not possible to uphold the ITO's action in determining the tax with reference to the gross sums of money in RC 203 and RC 205. As already mentioned, the power to determine the appropriate amount of tax is referable to Section 201 of the Act and the fact that the assessee did not file an application under Section 195(2) for determination of such appropriate proportion is not relevant for the purpose. In any event, this is the only way the provisions contained in Section 195 and Section 201 can be harmoniously interpreted. We, therefore hold that the power of the ITO under Section 201 of the Act to deem the person responsible for paying any sum to the non-resident under Section 195 as being in default extends only to the proportion of income chargeable under the Act and forming part of the gross sum of money.
The obligation of the respondent-assessee to deduct tax under Section 195 is limited only to the appropriate proportion of the income chargeable under the. Act forming part of the gross sums of money paid to the three non-residents above referred.
Approving of this decision the Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT the obligation of the respondent-assessee to deduct tax under Section 195 is limited only to the appropriate proportion of income chargeable under the Act.
24.1 A combined reading of these two judgments clearly indicate that when there is no portion of income chargeable under the Act from out of gross sums of money paid, then Section 195 is not attracted. This view is fortified by the following Board's circulars: The following clarifications would be found useful in deciding questions regarding the applicability of the provisions of Section 9 in certain specific situations': 1. Non-resident exporter selling goods from abroad to Indian importer--No liability will arise on accrual basis to the non-resident on the profits made to him where the transactions of sale between the two parties are on a principal to principal basis.
In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them but where: (a) the purchases made by the resident are outright on his own account.
(b) the transactions between the resident and the non-resident are made at arm's length and at prices which would be normally chargeable to other customers.
(c) The non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or (d) The payment to the non-resident is made on delivery of documents and is not dependent in any way of the sales to the effected by the resident.
It can be inferred that the transactions are on the basis of principal to principal.
2. Non-resident company selling goods from abroad to its Indian subsidiary--(i) A question may arise whether the dealings between a non-resident parent company and its Indian subsidiary can at all be regarded as on a principal to principal basis since the former would be in a position to exercise control over the affairs of the latter.
In such a case, if the transactions are actually on a principal to principal basis and are at arm's length and the subsidiary company functions and carries on business on its own, instead of functioning as an agent of the parent company, the mere fact that the Indian company is a subsidiary of the non-resident will not be considered a valid ground for invoking Section 9 for assessing the non-resident.
3. Sale of plant and machinery to an Indian importer on instalment basis--Where the transaction of sale and purchaser is on a principal to principal basis and the exporter and the importer have no other business connection the fact that the exporter allows the importer to pay for the plant and machinery in instalments will not by itself render the exporter liable to tax on the ground that the income is deemed to arise to him in India. The Indian importer will not in such a case, be treated as an agent of the exporter for the purpose of assessment.
7. Extent of the profit assessable under Section 9 does not seek to bring into the tax net the profits of a non-resident which cannot reasonably be attributed to operations carried out in India. Even if there be a business connection in India, the whole of the profit accruing or arising from the business connection is not deemed to accrue or arise in India. It is only that portion of the profit which can reasonably be attributed to the operations of the business carried out in India, which is liable to income-tax.
2. The deduction of tax at source under Section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India. In this regard attention to CBDT Circular No. 23, dt.
23rd July, 1969 is drawn where the taxability of 'Foreign Agents of Indian Exporters' was considered along with certain other specific situations. It had been clarified then that where the nonresident 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 the expenditure on export commission and other related charges payable to a non-resident for services rendered outside India becomes allowable expenditure. On being apprised of this position the Comptroller and Auditor General have agreed to drop the objection referred to above.
The jurisdictional High Court has made it abundantly clear that the requirements for treating the assessee as being in default extends only to the portion of income chargeable under the Act. Thus, the issue is answered in favour of the assessee by applying the ratio of the judgment of the jurisdictional High Court. Thus, the argument of the learned Counsel for the assessee that at best, certain percentage of the amount received towards services which is 2.63 per cent in the case of main generation equipment and 2.91 per cent in the case of 400 KV Gas Insulated Switchgear can only be considered as income attributable to PE and this alone can form the basis for holding that the person is liable in terms of Section 195 of the Act is upheld.Thus, applying the propositions to the facts on hand, as no work is done in India, no portion of work is taxable in India and thus Section 201 r/w Section 195 is not attracted in this case.
6.6 Thus, for these reasons, we follow the decision of Mumbai Bench of the Tribunal in the case of India Hotels Company Ltd. (supra) and the judgment of the Hon'ble Supreme Court in the case of Transmission Corporation of AP v. CIT and uphold the contention of the assessee that the transaction in question is a transaction of sale and not a case of rendering technical services as contemplated under Section 9(1)(vii) of the Act and even otherwise no part of the service is rendered in India and thus, the assessee cannot be held to be an assessee in default for non-deduction of tax at source. Thus, this ground the appeal of the assessee is allowed.
6.7 As we have allowed the appeal of the assessee on this ground, we do not propose to go into the other contentions as it would be an academic exercise.