TMI Blog2008 (6) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... India. There is no statutory basis for this conclusion. U/s 5(2)(b) of the Income-tax Act, the total income of a non-resident includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during the year. If the law laid down by the Supreme Court in the aforesaid judgment is applied to the facts of the present case, it is not possible to say that any income accrued or arose to the assessee-company in India by reason only of the fact that the processed data was utilised by RIL for its project in India. It is also to be noted that it is not necessary for the application of section 9(1)(vii) that the recipient of the fees for technical services should have any business connection in India. All that is required is that the source of the payment should be in India, from a resident of India. In this view of the matter, we agree with the ld CIT (DR) that the amount received by the assessee-company from RIL under the letter of award (the contract) is taxable u/s 9(1)(vii)(b) r/w Explanation 2 of the Income-tax Act, 1961. We do not see how RIL can be richer in the area of technical knowledge, experience, skill, etc., becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract for tax under this section. The applicability of this section does not depend upon the existence of any PE of the non-resident in India. Therefore, even though the assessee has no PE in India, the receipt under this contract is assessable u/s 44BB. In the present case, no arguments were advanced by the learned CIT (DR) to show how the assessee is covered by section 44D and how the revenues under the contract can be treated as royalty within the meaning of the above section read with Explanation 2 to section 9(1)(vi) of the Income-tax Act. The Instruction issued by the Board also rules out the applicability of section 44D read with section 115A of the Act. Therefore, there is no need or legal justification to examine the applicability of Article XII(3)(a) or (d) of the treaty between India and Australia. We have already held that the provisions of section 44BB are more appropriate to the present case. Accordingly, we hold that the assessee was right in contending and the CIT (Appeals) was right in accepting the contention that the revenues under the contract are assessable in India u/s 44BB of the Income-tax Act. We confirm his decision on this point and dismiss the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see offered the aforesaid amount to tax under section 44BB of the Income-tax Act, under which a sum equal to 10 per cent of the receipts shall be deemed to be profits gains of the business chargeable to tax under the head Profits gains of business . It may be noted that this section applies to a non-resident assessee. However, in the course of the assessment proceedings, the assessee took the stand that since it had no permanent establishment (PE) in India within the meaning of Article V of the agreement for avoidance of double taxation between India and Australia, the profits arising to it under the contract with RIL were not assessable in India as stipulated in Article VII of the double tax treaty. In accordance with this stand, it appears to have been contended before the Assessing Officer by letter dated Nil written in response to the notice issued under section 143(2), that the assessee was resiling from its earlier position that the revenues were taxable under section 44BB and that the stand taken in the return was erroneous. It was pointed out that the assessee did not have a PE in India and, therefore, the revenues were not taxable as business profits in India. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income-tax authorities that the same is not taxable as income in law. Reliance was placed on this judgment to contend that the assessee was not bound by the admission made in the return that the revenues under the contract were taxable under section 44BB of the Act. It was also explained in the written submissions that there was no permanent establishment (PE) of the assessee in India within the meaning of Article V of the double tax treaty and, therefore, even if the assessee is considered to have performed services in connection with the exploration/extraction of mineral oils within the meaning of section 44BB(1), since it did not have a PE in India, the revenues were not taxable in India. Reliance was placed on Article VII of the double tax treaty which says that the business profits of the Australian company cannot be taxed in India in the absence of a PE in India. It was submitted that the double tax treaty would override the provisions of the Income-tax Act insofar as they are beneficial to the assessee and support for this submission was taken from the judgments of the Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 65411. 137 Taxman 460. and Union of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the receipt was taxable under the domestic law (Indian tax law). Turning to the question whether the treaty between India and Australia exempted the receipt from taxation, he submitted that under clause (g) of Article XII(3) of the treaty the rendering of any services which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design would amount to royalty and would be subjected to tax though at a lower rate. In this behalf, he pointed out that it was significant to note that the treaty between India and Australia did not contain a specific provision relating to the fees for technical services and certain services which would normally be considered as technical services were placed under Article XII with the result that in substance the services which were listed under the said article was the same as those services which would otherwise normally be termed as technical services and the consideration therefor would be termed as fees for technical services . Mr. Shanker, the learned CIT(DR) raised another point. He drew our attention to Article VII(7) of the treaty which say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one has to go back to Article VII of the treaty and not to the domestic law (Income-tax Act, 1961) as contended by the learned CIT(DR). Once we go to Article VII, the result will be that since the assessee has no PE in India the receipt cannot be taxed as business profits. In support of this submission, Mr. Vohra relied on the order of the Mumbai Bench of the Tribunal in Dy. CIT v. Boston Consulting Group [2005] 94 ITD 31. 8. In reply to the assessee s arguments, the learned CIT (DR) submitted that even under the Indo-US Treaty, from which analogy was drawn by the learned counsel for the assessee, the services rendered by the assessee fell to be considered as engineering services as clarified by the memorandum of understanding concerning fees for included services in Article 12 of the Indo-US Treaty, reported in 187 ITR St. 102 at 138. It was explained by Mr. Devender Shanker that under Article 12(4)(b) of the Indo-US Treaty engineering services have been explained in the memorandum of understanding as typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used as a taxing enactment. The subsidiary principle is that where the non-resident is taxable under the domestic law but there is a provision in the treaty to exempt the transaction or reduce the rigour of taxation to the benefit of the non-resident, the provisions of the treaty override the provisions of the domestic law. These fundamental principles are well-settled by the judgments of the Supreme Court in P.V.A.L. Kulandagan Chettiar s case and Azadi Bachao Andalon s case. 10. In the present case, the contract in question provides that the assessee should undertake the work of 2D/3D seismic data processing to be completed as per agreed delivery schedule. The assessee shall carry out the total job at one processing centre, namely, Perth in Australia. RIL has to collect the data and it was the duty of the non-resident company (the assessee) to arrange to get all the tapes containing the data collected from RIL, Mumbai. After completion of the job, the assessee shall return the original tapes along with the processed tapes to RIL. There shall be a confidentiality or secrecy arrangement. The contract came into effect from 12-3-2001. Under clause 10.3 of the contract (described a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment is applied to the facts of the present case, it is not possible to say that any income accrued or arose to the assessee-company in India by reason only of the fact that the processed data was utilised by RIL for its project in India. The further question is whether the income can be deemed to accrue or arise to the assessee-company in India. That takes us to section 9 of the Act which was relied on by the learned CIT (DR). This section provides for Income deemed to accrue or arise in India . He put the case of the department on the source rule embodied in section 9(1)(vii)(b). This section says that income by way of fees for technical services shall be deemed to accrue or arise in India if it is paid by a resident of India, the resident in this case being RIL. The only exception is that if the services were utilised by the resident in a business carried on outside India or for the purpose of making or earning any income from any source located outside India then such payment is not to be deemed as income accruing or arising in India. It must be noted that this provision applies only to payment made as fees for technical services. The expression fees for technical servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of exploration, etc., of mineral oils in India. It applies to a non-resident engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting form, or extraction or production of, mineral oils. The section starts with a non-obstante clause and overrides anything to the contrary contained in sections 28 to 41 and sections 43 and 43A of the Act. Under clause (a) of sub-section (2), the amount paid or payable, whether in India or outside India, to the assessee for the provision of services and facilities in connection with the prospecting for or extraction or production of mineral oils in India shall be taxed in India, the profits and gains being determined at a sum equal to 10 per cent of the amount so received by the non-resident assessee. The assessee in the present case filed its return on the basis of section 44BB and offered 10 per cent of the gross receipt of Rs. 5,27,91,557 to tax but later resiled from that position and contended that since it did not have a PE in India within the meaning of Article V of the treaty, its business profits cannot be assessed in India as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BB applies and tax is payable thereunder. 15. The same position would hold good vis-a-vis the provisions of section 9(1)(vii)(b) read with Explanation 2 thereunder, but for a different reason. We have already seen that the above section refers to fees for technical services . We have also seen that the section is applicable to the assessee s case and the amount received by it under the contract with RIL represents fees for technical services, having regard to the Explanation 2. But that is not the end of the matter. We have to look into the treaty to find out if there is any provision therein which exempts or reduces the rigour of taxation - in other words, whether there is any provision in the treaty which is more beneficial to the assessee - and if there exists such a provision the benefit thereof has to be extended to the assessee. Article VII(7) of the treaty says that where the (business) profits include any item of income for which a specific provision is made in the treaty, then the provisions of the treaty dealing with such item of income shall remain unaffected by Article VII. According to the learned CIT(DR), Article XII, though it is titled royalties , in substance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any technical knowledge, experience, etc. A similar provision in the Indo-US Treaty was examined by the Mumbai Bench of the Tribunal in the case of Raymond Ltd. In that case, the Indian company was engaged in the manufacture of cement and it made a GDR issue and engaged a non-resident company to render services in connection therewith. The question was whether such services made available to the Indian company any technical knowledge, experience, skill, etc., within the meaning of Article 12(4)(b) of the Indo-US Treaty. The Tribunal held as under in paragraphs 92 and 93 of the order : 92. We hold that the word which occurring in the article after the word services and before the words make available not only describes or defines more clearly the antecedent noun ( services ) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilising the services is able to make use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made use of by RIL in future without reference to the assessee-company. In fact, in future if RIL undertakes a similar project in a different area, the seismic data collected from that area is most likely to be completely different from the data collected by it in the present area, with the result that the processed data will necessarily be completely different. The processed data received by RIL in connection with the present project will be of no use to it while undertaking a different project. Such a situation is covered by the decision in Raymond Ltd. s case. The processed tapes containing the processed data received by RIL from the assessee-company in connection with the present project may physically remain with RIL but the processed data will, for all practical purposes, be of no use in any future project to be undertaken by RIL. If RIL undertakes another project for prospecting or extracting mineral oil in another area, it has to collect data specific to that area and has to send that data to the assessee-company for being processed. We do not see how RIL can be richer in the area of technical knowledge, experience, skill, etc., because of the use of the processed data sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble minds, the position canvassed by the learned counsel for the assessee seems to be more logical than the view canvassed on behalf of the department. Fees for technical services are essentially business profits since the rendering of such services is the business of the non-resident. In order to take out an item of income from the business profits, it is necessary under Article VII(7) that there should be some other provision in the treaty dealing specifically with the item of income sought to be taken out from the business profits. If there is no other provision in the treaty or if the provision made in the treaty is not found applicable or to cover the item of income sought to be taken out from the business profits, for whatever reason, then it follows that the particular item of income should continue to remain under Article VII. 17. In light of the above discussion, we are of the view that the amount received by the assessee-company from RIL under the contract did not represent consideration for any technical services rendered to RIL which made available technical knowledge, experience, skill, etc., or consisted of the development and transfer of any technical plan or desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to render the services, the date of commencement and the duration. The services were to be performed at the work sites designated by RIL. The other provisions relating to invoicing, payment, etc., are not very relevant for our purpose. Annexure 2 is titled General conditions of contract . Clause 1 which is titled Description of services and compensation says that the assessee shall provide technical guidance and direction to RIL and/or third parties nominated by RIL for usage of the assessee s proprietary software tools so as to achieve quality levels compliant with the industry standards followed globally. It further provides that the assessee s representatives shall be fully qualified and experienced in carrying out the work as detailed in Annexure 1. Clause 2 of the Annexure provides that the assessee shall not be an agent of RIL in performing the services and maintaining complete control and responsibility over its employees. The other clauses of Annexure 2 refer to insurance, indemnity, etc., which are not relevant for our purposes. Clause 5 provides for confidentiality of data and says that the assessee shall maintain confidentiality of the data and documents related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to tax the revenues under section 44BB. 22. It is against the aforesaid decision of the CIT (Appeals) that the revenue has come in appeal. Referring to the agreement between assessee and RIL, it was contended by the learned CIT (DR) that Article XII(3)(a) or (d) of the treaty would apply to the facts of the case. It was argued that under clause (a) consideration for the use of the software, which was a copyright, was to be treated as royalty and under clause (d) consideration for the rendering of any technical service which is ancillary or subsidiary to the application of the software was taxable as royalty and that in the present case, both the clauses were applicable. It was contended that if the assessee has no PE in India the receipt cannot be assessed as business profits as per Article VII(1) of the treaty and if that is so neither section 44BB nor the Board s instruction based on the opinion of the Attorney General would apply, and therefore, the CIT (Appeals) was wrong in relying on the Board s instructions or section 44BB. Our attention was also drawn to the proviso to section 44BB(1) which excluded the applicability of the section where the case fell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... els in conformity with global industry standards. It would thus initially appear from the scope of the work that the assessee was rendering a technical service and the case is covered by Explanation 2 below section 9(1)(vii)(b). It is not clear as to how the assessee originally relied on Article XIII of the double tax treaty which provided for taxation of income or gains derived from the alienation of property. Be that as it may, the assessee resiled from that position before the Assessing Officer and offered to be assessed under section 44BB. As already noticed, if the provisions of domestic law cover the case, the non-resident has to be taxed accordingly. In case any specific provision in the double tax treaty is more beneficial to the assessee, then the assessee can take advantage of the same. The provisions of section 44BB are very wide and cover all services including technical services rendered by a non-resident, who is engaged in the business of providing such services, provided they are rendered in connection with the prospecting for or extraction or production of mineral oils in India. It is a well-known principle that a specific provision overrides a general provision. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. But the words used in Explanation 2 of section 9(1)(vii) are different. The Explanation 2 does not exclude the consideration for providing services in connection with the construction project. Instead, it excludes consideration for construction project which means that exclusion is only in respect of consideration paid for actual carrying on construction activities. The clarification given by the CBDT regarding the legislative intention behind inserting the Explanation 2 is also on the same lines. We are therefore, of the view that the various managerial technical and consultancy services provided by the foreign contractor from the foreign country in connection with the construction project without actually taking up any such activities in India, will not be covered within the meaning of the words used in the Explanation 2 to section 9(1)(vii). In other words, we agree with the view taken by the authorities below that payments made for various services provided from abroad by the foreign contractor will be taxable as income in the hands of the recipient under the provisions of the Act and accordingly the payments made by the assessee to the foreign contractor are liable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s case falls under section 44D, but he did not however elaborate the contention and explain how the assessee s case fell under section 44D. He however relied on Article XII(3)(a) and (d) of the treaty to contend that the amount received by the assessee under the contract represented consideration for the use of the Geolog software which was a copyright and also represented consideration for the rendering of technical or consultancy services (provision of personnel) which are ancillary and subsidiary to the application of the software. The contention, with respect, seems to overlook the basic principle that there can be no taxation under the double tax treaty. The treaty can come to the aid of the assessee if it is more beneficial or advantageous compared to the domestic law. However, the revenue has to first demonstrate that the case of the non-resident assessee falls under the domestic law and it is for the assessee to take advantage of any beneficial or advantageous provision in the double tax avoidance agreement. In the present case, no arguments were advanced by the learned CIT (DR) to show how the assessee is covered by section 44D and how the revenues under the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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