TMI Blog2004 (12) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... heard the learned counsel for the assessee and are of the view that the objection raised by the assessee is not sustainable. It has been held by the Hon ble Delhi High Court in the case of MTNL vs. Chairman, CBDT (2000) 162 CTR (Del) 554 : (2000) 246 ITR 173 (Del) that an intimation under s. 143(1)(a) is not an assessment. Therefore, the plea of the assessee, which is primarily based on the argument that an intimation under s. 143(1)(a) results into an assessment on expiry of the period of 12 months from the end of the month in which a return of income is filed for issue of notice under s. 143(2), cannot be sustained. Consequently, the case of the assessee would fall within the parameters of s. 147, Expln. 2(b) of the Act. The reopening of assessment is, therefore, valid and the ground of appeal in all these appeals is dismissed. 3. Grounds of appeal 2 to 5 in all these appeals are identical (except for the quantum of the sum disallowed) and they read as follows: "2. That the CIT(A) erred on facts and in law in confirming the action of the AO in disallowing a sum of Rs. 26,20,807 payable to certain overseas parties for alleged failure of the appellant to deduct tax at source f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of failure of the appellant to deduct tax at source from the amounts payable to such parties was in order. 5. That the CIT(A) erred on facts and in law in holding that the copy of the agreement between the appellant and WQMN, UK, which was filed before the CIT(A), was in the nature of additional evidence and that the same was not admissible in absence of an application under r. 46A of the IT Rules for admission of the same." 4. The facts and circumstances under which the aforesaid grounds of appeal arise are as follows. The assessee is a company. M/s National Quality Assurance Ltd., UK (NQA, UK), was authorised to issue ISO Certification. The assessee entered into an MoU with NQA, UK, and was accredited to provide ISO certification to business and other organisations in India and abroad on behalf of NQA, UK. The assessee was to pay certain fees to NQA, UK, for this. Apart from the above, the assessee was also required to pay NQA, UK, certain fees in connection with rendering of services by NQA, UK, to the assessee in the matter of providing ISO Certification to customers in India. The assessee paid fees to NQA, UK, for rendering services as above. The assessee also pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification thereof (b) Providing lead assessors including associated assessors (c) Maintaining files, documents and correspondence (d) Issuing registration certificates (e) Appointing a liaison cell in the UK., etc. 4,07,735 3. M/s WQMN, UK (a) Representing the assessee in matters relating to co-ordination with accreditation bodies, i.e., ABCB, UKAS, etc. (b) Identification of suitably qualified and registered auditors (c) Payment of invoices for the professional services rendered (d) Handling all legal, technical and financial matters in UK 19,93,350 4. M/s Wakfield Construction Ltd. Not a non-resident 22,000 Total 26,20,000 Asst. yr. 1995-96: 1. M/s NQA Ltd., UK same as in asst. yr. 1994-95 30,570 2. M/s WQMN, UK same as in asst. yr. 1994-95 21,80,100 Total 22,10,670 Asst. yr. 1996-97: 1. M/s WQMN, UK same as in asst. yr. 1994-95 10,57,073 2. M/s SIRA, UK Audit services 67,360 Total 11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the assessee in the hands of the recipient in India is not the issue here. The issue is related to allowability of payment on account of royalty and fee for technical services in the light of the provisions of s. 40(a) and on this issue the case of the assessee does not hold any merit." The AO thus disallowed the claim for deduction of the aforesaid sums in the respective assessment years. 7. Aggrieved by the order of the AO, the assessee preferred appeals before CIT(A). Before CIT(A), it was contended by the assessee that the provisions of s. 40(a)(i) cover only payments of any interest, royalty, fees for technical services or other sum chargeable to tax under the IT Act, 1961 (the Act). Under the provisions of s. 195 of the Act also, there is an obligation on the part of the assessee to deduct tax at source when making payment to a non-resident of any such which is chargeable to tax under the provisions of the Act. The assessee contended that the payments to the non-residents/payments outside India were not chargeable to tax since these payments were taxable only in UK as per the DTAA between India and UK. Reference was made to the provisions of art. 13 of the Indo-UK DT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of services rendered by the non-residents? 2. Whether the payments made by the assessee to the non-resident for services rendered by them can be said to be royalties or fees for technical services rendered within the meaning of art. 13 of the Indo-UK DTAA? If yes, then they are taxable in India and consequently, the assessee would be obliged to deduct tax at the time of making such payment to the non-resident. 3. Whether the payments were in the nature of consideration paid for rendering professional services and, therefore, not taxable in India in view of art. 15 of the Indo-UK DTAA? If yes, then the payment is not taxable in the hands of the non-resident, provided they do not stay in India for a period exceeding 60 days during the previous year or they do not have a fixed base in India for carrying on their activity. 4. Whether the payments can be said to business profits of the non-resident which had accrued to them in India? If yes, even then such receipts are not taxable if the non-resident does not have a permanent establishment in India and these profits are not attributable to that permanent establishment directly or indirectly within the meaning of art. 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement between the assessee and M/s NQA Ltd., UK. The UK company, under this agreement, has agreed to provide the assessee with assessors to assess the quality assurance system existing with the assessee s customers. There is also non-competition clause and visit of the assessor to the place of assessee s customer, provision of training, etc. It is clear from this agreement that the nature of service rendered is purely advisory. The bills raised by this party also reveal that the charges relate to visits, meeting and surveillance. B. The services rendered by M/s WQMN Ltd., UK A copy of the agreement with this party is placed at pp. 100 to 101 of the assessee s paper book. The services, which were agreed to be rendered by this party, are also identical. There is also an obligation on the part of this party to train auditors of the assessee. The bills raised by this party also carried out liaison services on behalf of the assessee in fighting a case in UK Courts. There were some disputes between the assessee and M/s NQA Ltd., UK., which resulted in Court proceedings and this party also looked after them. C. The services rendered by Mr. Price: Copies of the bills raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical services defined in para 4(b) of this article, 10 per cent of the gross amount of such royalties and fees for technical services. 3. For the purpose of this article, the term "royalties" means (a) payments of any kind received as a consideration for the use of or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 4. For the purposes of para 2 of this article and subject to para 5 of this article the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services as used in the Indo-UK DTAA has been used in the Indo-US Treaty. The expression used in the Indo-US Treaty is, however, "fee for included services". There is a memorandum of understanding attached to the Indo-US DTAA explaining the meaning of the words "fees for included services". The relevant extract of the memorandum is as follows: "Para 4 (in general) This memorandum describes in some detail the category of services defined in para 4 of art. 12 (royalties and fees for included services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of para 4, or because, notwithstanding the fact that they meet the tests of para 4, they are dealt with under para 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For case of understanding, the examples in this memorandum describe US persons providing services to Indian persons, but the rules of art. 12 are reciprocal in application. Article 12 includes only certain technical and consultancy services. By t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical and individual engineering); 2. architectural services; and 3. computer software development. Example (7) Facts The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services? Analysis The fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in each case only so much of the income as is attributable to those services. 2. For the purposes of para 1 of this article, an individual who is a member of a partnership shall be regarded as being present in the other State during days on which although he is not present, another individual member of the partnership is so present and performs professional services or other independent activities of a similar character in that State. 3. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. 17. As far as the applicability of art. 15 of the Indo-UK DTAA is concerned, the same is relevant only in the case of fees paid to Mr. Price while narrating the nature of services rendered by Mr. Price. We have also referred to the nature of services referred and have concluded that these were professional services. These were not technical services. There is a marked difference between fees for technical services and fees for professional services. Professional services are a category distinct from techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were not chargeable to tax in India and consequently, there, is no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of s. 40(a)(i) were not attracted. 20. We may also make a brief reference to the various contentions raised on behalf of the learned Departmental Representative. The learned Departmental Representative submitted that the question whether the payments made by the assessee to the non-residents are taxable or not in India cannot be decided in the present proceedings. In this regard, he referred to the provisions of s. 195 of the Act and submitted that there was an obligation cast on the assessee to deduct tax at source while making payment. He also pointed out that even if the assessee omits to deduct tax at source under the provisions of s. 40(a)(i) of the Act, he could claim the same in the year in which the tax is so deducted at source. According to him, the onus was on the Department to determine the taxability or otherwise of the payments in the hands of the non-resident and the assessee cannot decide on this question on his own. The learned Departmental Representative in this regard relied on the decision of the Hon b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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