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TMI Blog2012 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts present case? 2. The respondent assessee-Rio Tinto Technological Resources TY Limited, during the years in question i.e. the Assessment Years 1999-2000, 2000-01 and 2001-02 had operated in India through its division Rio Tinto Technical Services. The respondent-assessee had filed returns on 2nd February, 1999, 17th November, 2000 and 22nd October, 2001 declaring loss of Rs.2,00,970/-, positive income of Rs.23,88,700/- and Rs.12,50,930/- in respect of the three assessment years mentioned above. The three returns were taken up for regular assessment under Section 143(3) of the Act and the Assessing Officer vide assessment orders dated 25th February, 2002, 21st March, 2003 and 27th January, 2004 held that the payments received by the assessee from Rio Tinto India Private Limited and Rio Tinto Orissa Mining Limited (RTIPL and RTOML respectively, for short) were taxable as fee for technical services under Section 9(1)(vii) read with Section 115A of the Act and the gross receipts without any deduction were taxable at the rate of 20% in view of Section 44D of the Act. It was held that Articles 7 and 12 of the Double Taxation Avoidance Agreement between India and Australia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn independent capacity in India and the provisions of Sections 28 to 43C of the Act would be available to the assessee. What is to be understood here is that it is the business profits which are chargeable under Article 7 of the DTAA. So as to what the business of the assessee is, is also to be considered. The business of the assessee is as per the contracts entered into by the assessee with the various persons. The contracts are inclusive contracts of technical nature, as also drilling, etc., as extracted earlier. Thus, it cannot be said that he activities of the assessee is purely technical service. The drilling and excavation and testing cannot be de-linked from the evaluation and the feasibility studies. It is a consolidated activity. Thus, the activities of the assessee cannot be held to fall within Article 12 of the DTAA also. In these circumstances, the assessee having opted to be taxed under the DTAA, this option cannot be denied to the assessee and as per sub-clauses (2) and (3) of Article 7. The assessee is to be taxed as an independent enterprise in India and the regular provisions of the Indian tax Laws would apply to the exclusion of Section 9(1)(vii), section 44D and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on, through that permanent establishment. (2) Subject to the provisions of paragraph (3), where an enterprise of one of the Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment or with other enterprises with which it deals. (3) In the determination of the profits of a permanent establishment, there shall be allowed as deductions, in accordance with and subject to the limitations of the law relating to tax in the Contracting State in which the permanent establishment is situated, expenses of the enterprise, being expenses which are incurred for the purposes of the business of the permanent establishment (including executive and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trustee shall be deemed to be a business carried on in that other Contracting State by that resident through a permanent establishment situated therein and that share of business profits shall be attributed to that permanent establishment. Article 12---ROYALTIES (1) Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: (a) in the case of: (i) royalties referred to in sub-paragraph (3)(b); (ii) payments or credits for services referred to in sub-paragraph (3)(d), subject to sub-paragraphs (3)(h) to (I), that are ancillary and subsidiary to the application or enjoyment of equipment for which payments or credits are made under sub-paragraph (3)(b); or (iii) royalties referred to in sub-paragraph (3)(f) that relate to equipment mentioned in sub-paragraph (3)(b): 10 per cent. of the gross amount of the royalties; and (b) in the case of other royalties: (i) during the first five years of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or individuals making the payments or credits; or (l) to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in article 14. (4) The provisions of paragraphs (1) and (2) shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the property, right or services in respect of which the royalties are paid or credited are effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. (5) Royalties shall be deemed to arise in a Contracting State when the payer is that State itself or a political sub-division or local authority of that State or a person who is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 2.--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recepient or consideration which would be income of the recipient chargeable under the head "Salaries". Section 44D-- Special provisions for computing income by way of royalties, etc., in the case of foreign companies.--Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,-- (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent. of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Explanation.-For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India. 7. Section 90(2) mandates that where the Central Government has entered into a DTAA under sub-section 1 for granting relief of tax or, as the case may be, avoidance of doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lementation of the terms of DTACs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of DTAC. 8. At the outset, we may notice one fact that there is no dispute that the assessee had a PE in India as defined in Article 5 of the DTAA. This judgment proceeds on the said admitted fact, which is extremely relevant and material. 9. Articles 7 and 12 of DTAA make a distinction between income earned by way of ―royalties and ―business profits. The term ―royalty has been defined in Article 12 paragraph 3, which consists of sub-paragraph a to l. As noticed above, the tribunal has held that Article 12 of DTAA is not applicable as the payments received were of composite character for diverse work and were not covered by the term ―royalty as defined in paragraph 3 of Article 12. This is clear from the observations recorded by the tribunal on the nature of activity undertaken by the PE of the assessee in India mentioned in paragraph 4.3. On this aspect we have adversely commented and reversed the findings of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and conditions stated and stipulated in the Act with regard to deductions accordingly get attracted and retain their supremacy and are not obliterated/diluted in view of paragraph 3 of Article 7. In other words, paragraph 3 of Article 7 gives paramouncy and accepts that the deductions can be only claimed in accordance with and subject to limitations of the Act and not otherwise. 13. The net effect of the aforesaid conclusion is that to compute business profits under Article 7(3) of the DTAA, we have to examine whether a particular expense/expenses can be allowed as a deduction from the income earned in accordance with and is subject to the limitations relating to the deduction available to the assessee under the Act. This necessarily requires examination and consideration of the provisions of the Act to find out whether for computing taxable income, an expense can be claimed as a deduction under the Act. If deduction can be claimed under the Act, then the said deduction is permissible and has to be allowed but if an expense cannot be claimed as a deduction because of the stipulations in the Act in respect of the earned income, then the said expenditure is not to be allowed as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent or there is any prohibition or bar for claiming a deduction under the Act. This ―question is in built or a part of question No.3. 17. Business income in India is taxable under Chapter IV-D ―profits and gains of business or profession. Sections 28 to 44DB are under the said heading. Each Section and provision of the said part has to be considered and examined to find out whether a particular deduction or expenditure can be claimed when income is taxable under the head ―income from business. Section 44D has been quoted. The said Section begins with a non-obstante or overriding expression and states that Sections 28 to 44C would not be applicable and deductions under the said Sections cannot be allowed and are not admissible in case an assessee is a foreign company and has earned income by way of ―royalty or ―fee from technical services from Indian Government or Indian concern. For the purpose of Section 44D, the expression ―fee for technical services and ―royalty have the same meaning as defined in Explanation 2 to clause (vii) and (vi) of sub-section 1 of Section 9 of the Act. The term ―foreign company has also been defined in cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources modeling. Thus, this is not a case where a simple technical or consultancy service is provided, but it includes specific activities which are required to be done on site, i.e., by various activities such as the geological mapping, drilling, testing or quality, quantifying the possible quantity and resources, examining the environmental hazards. For the performance of the contract, it is noticed, the assessee has obtained necessary permission from the RBI, which is the sanctioning authority for opening a project office in India. It is an accepted fact that the asssessee has opened its project office in India and has entered into a contract to do business in line with the permission granted by RBI. It is also an accepted fact that he assessee does have a permanent establishment (PE) in India. 22. The tribunal has not specifically examined Explanation 2 to Section 9(1) (vii) and whether or not the said explanation is applicable and the income earned by the assessee is covered by the said explanation. The expression ―fees for technical services has been defined in Explanation 2 to Section 9(1)(vii) to mean any consideration including lumpsum payment for rendering manageri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable. In the present case, as per the clauses quoted above, the fee was paid to acquire technical and managerial information. 25. At this stage, it will be appropriate to notice and decide the contention of the assessee that Explanation 2 to Section 9(1)(vii) is not applicable in view of the exclusion i.e., the expression ― fee for the technical services, but does not include consideration for any construction, assembly, mining or like project undertaken by the assessee. The aforesaid exclusion states that the consideration received by an assessee for construction, assembly, mining or like project has to be excluded and is not fee for technical services. The use of the word ―project in the expression is relevant and significant. Construction, assembly or mining projects are normally and in common parlance not regarded as services relating to fee for technical services. Explanation 2 to Section 9(1)(vii) makes and draws a distinction between income earned by way of fee for technical services, which have been defined to mean any managerial, technical or consultancy services, including provision on services of technical and other personnel, in contradistinction to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve provision under challenge in the said case. The Supreme Court dealt with the said defence, observing as under:- ―Counsel for the Revenue brought to our notice sections 44B, 44BB, 44BBA and 44D and contended that there are other similar provisions in the Act. We should state that they relate to non-residents carrying on business in India and are not much relevant in construing sections 44AC and 206C of the Act. 28. It is clear from the aforesaid quote that the Supreme Court had drawn a distinction between not resident assessees and assessees who are resident in India, as far as taxation on gross receipt basis is concerned. It may be also noted that the rate of tax under Section 44D is 20%, whereas rate of tax at the normal rates in the years in question was much higher. In some cases, Section 44D may work to the advantage of an assessee and to the disadvantage of the Revenue and in other cases to the advantage of the Revenue and to the disadvantage of the assessee. This contention is rejected. 29. In view of the aforesaid findings, the questions of law mentioned above are answered as under: (1) Question No. 1 is answered in negative and it is held that Article 12 of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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