TMI Blog2012 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with and subject to limitation stipulated in the Act. Section 44D postulates non-applicability of Sections 28 to 44C in case of foreign company earning income by way of royalty or fees from technical services. Thus, Section 44D is applicable to compute taxable Income. - Decided against the Revenue - INCOME TAX APPEAL NOS. 486/2011, 491/2011 & 492/2011 - - - Dated:- 4-1-2012 - MR. JUSTICE SANJIV KHANNA, MR. JUSTICE R.V. EASWAR SANJIV KHANNA, JJ..: For Appellant: Mr. Sanjeev Sabharwal, Advocate. For Respondent: Mr. Salil Kapoor, Mr. Ankit Gupta, Mr. Sanat Kapoor Mr. Vikas Jain, Advocates. Revenue has preferred these appeals under Section 260A of the Income Tax Act, 1961 (Act, for short) and vide order dated 8th August, 2011 the following substantial questions of law were framed:- ― (1) Whether learned ITAT erred in holding that the assessee s activities are not FTS within the definition of FTS stated in Articles 12 of the Double Definition of FTS stated in Articles 12 of the Double Taxation Avoidance Agreement? (2) Whether learned ITAT erred in holding that Articles 7 of the Indo-Australia DTAA will be applicable and hence such income has to be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 7 of the DTAA which applies to the assessee s case in so far as the assessee has a PE in India. Thus, as per Article 7(2) of the DTAA, the PE of the assessee would have to be treated as a wholly independent enterprise, which is liable to be taxed in India. Once it is held that the assessee is liable to be taxed as per Article 7 of the DTAA, sub-clause (3) of Article 7 of the DTAA would come into play and deduction in accordance with the subject to the law relating to the tax in India would apply. Since it is held that Article 7 of the Act would no more be applicable as Article 7(2) of the DTAA specifies that the PE of the assesse is to be treated as a wholly independent enterprise and it is the profits of such PE in India which are to be taxed. Since Article 7 of the DTAA is applied, Section 44D and Section 115A of the Act also will not apply in so far as they relate to foreign companies, whereas clause (2) of Article 7 of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India. In such a situation, sub-clause (3) of Article 7 of DTAA would come into play and the income of the assessee would have to be assessed by applying the regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv) The contracts under which payments have been made were inclusive contracts of technical services and drilling and excavation etc. and, therefore, the activities of the assessee were not of purely technical nature. The activities of the assessee were consolidated activities of multifarious character and include drilling, excavation and testing. (v) In view of ―composite activities Article 12 of DTAA is not applicable. 6. In order to appreciate the controversy, it is important to examine and interpret Articles 7 and 12 of the DTAA and Sections 90, 9(1)(vii) and 44D of the Act. These have been reproduced below: ―AGREEMENT BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF AUSTRALIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME Article 7--BUSINESS PROFITS (1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s there is good and sufficient reason to the contrary. (7) Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. (8) Nothing in this Article shall affect the operation of any law of a Contracting State relating to tax imposed on profits from insurance with non-residents provided that if the relevant law in force in either Contracting State at the date of signature of this Agreement is varied (otherwise than in minor respects so as not to affect its general character) the Contracting States shall consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. (9) Where: (a) a resident of one of the Contracting States is beneficially entitled, whether directly or through one or more interposed trust estates, to a share of the business profits of an enterprise carried on in the other Contracting State by the trustee of a trust estate other than a trust estate which is treated in that other State as a company for tax purposes; and (b) in relation to that enterprise, that trustee would, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication or enjoyment of any such property or right as is mentioned in sub-paragraph (a), any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c); (e) the use of, or the right to use: (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; (f) total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e); or (g) the rendering of any services (including those of technical or other personnel) which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made: (h) for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; (i) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax, of each Contracting State, but subject to the other provisions of this Agreement. Income Tax Act, 1961 Section 9-- Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India X X X X (vii) income by way of fees for technical services payable by-- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day April, 1976, and approved by the Central Government. Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976. Section 90. Agreement with foreign countries.--(1) The Central Government may enter into an agreement with the Government of any country outside India-- (a) for the granting of relief in respect of (i) income on which have been paid both income-tax under this Act and income-tax in that country ; or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d:- ―21. The provisions of Sections 4 and 5 of the Act are expressly made ―subject to the provisions of this Act, which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income Tax Act and a notification issued under Section 90, is no longer res integra. XXXXX 28. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections ―subject to the provisions of the Act. The very object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Paragraph 3 of Article 7 is the edifice which is to be examined to answer the substantial question No.3 mentioned above. A careful examination of the said paragraph shows that to determine the profits of a PE, the assessee is to be allowed deductions ―in accordance with and subject to limitations of the law relating to tax in the contracting State, i.e., in the present case Income Tax Act in India. It further stipulates that expenses incurred for the purpose of the business of a PE would include executive and general administrative expenses so incurred regardless whether they have incurred in any contracting State, i.e., India/Australia or elsewhere. However, the material words in paragraph 3 of Article 7 are ―the assessee shall be allowed as deduction, in accordance with and subject to limitation of the law relating to tax (i.e., the Income Tax Act, 1961) in the contracting State (i.e., India) in which the permanent establishment is situated. What is stipulated and stated in paragraph 3 of Article 7 is that the expenses incurred by the assessee can be claimed as a deduction but only in accordance with and subject to limitation stipulated in the Act. The provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the contracting State. To this extent paragraph 3 of Article 7 will override and will have primacy over any stipulation in the Act, if any, that executive and general administrative expenses outside India cannot be taken into consideration. 15. In view of the reasoning given above, it is not possible to agree with the conclusion and the findings recorded by the tribunal that once Article 7 applies, Section 44D read with Section 115A is not applicable. The tribunal has overlooked and not given due credence and importance to paragraph 3 of Article 7 of the DTAA. The said paragraph as noticed above, states that the provisions relating to the tax enactment on the question of deduction of expenditure are fully protected; are to be enforced and are applicable. Deduction can only be claimed in accordance with and subject to the limitations of the Act in the contracting State, i.e., India or Australia, as the case may be. In this manner, Paragraph 3 of Article 7 has given primacy to the provisions stipulated in the domestic tax legislation while computing business income under Article 7(3) in case the assessee has a PE in the non-resident country. 16. In view of the aforesaid reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jectives of the pre-feasibility phase 2 programme are to: Improve the knowledge of the ore body and ore characteristics by a bulk sampling and drilling programme; Investigate preliminary metallurgical and treatment characteristics, define options and estimate costs; Investigate infrastructure requirements and existing capacities, define option and estimate costs; Carry out a preliminary environmental assessment; Identify major issues which might prevent the project proceeding; Identify major options for further study; Prepare the Phase 2 Pre-feasibility study report encapsulating all of the above listed elements, including preliminary mining plan, flow sheets, and costs, and indicative financial analysis. 21. Immediately after extracting the portion of the one of the contracts, the tribunal in paragraph 4.1 has observed as under:- ―4.1 A reading of portion extracted above shows that the primary objective is technical work for the evaluation of iron ore resources and the corresponding feasibility study for transportation of ore by rail and the development and handling of ship loading capacities as the specified process. The evaluation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain tests, mapping and studies. Drilling for tests as to evaluate is to gain information and knowledge. The payment which is received is for furnishing of information and not ―business income or composite income including ―business income as held by the tribunal. The assessee may be carrying on manufacturing or trading activities but can enter into a contract to furnish technical information for a fee to a third party. Technical information which is furnished may be a result of the knowledge, experience and expertise gained by the assessee as a result of business or trading activity; or tests, mapping etc. may be required for furnishing the said information, but this is immaterial. The fee received from the third party in such cases is fee for technical services, if it satisfies and is covered by the Explanation 2 to Section 9(1)(vii). The payment made is to acquire technical information. Therefore it is ―fee for technical services. It will be immaterial whether the assessee had acquired and gained the said technical information because of business or trading activity or after conducting tests, mapping etc. The nature and character of the information furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... project or a mining project or a like project undertaken by the recipient and the consideration paid should be on the said account. It is apparent and the clauses of the agreement do not disclose that the assessee had undertaken any mining project or a construction project. There is no such finding recorded by the tribunal also. 26. Learned counsel for the petitioner assessee had relied upon decision of the Supreme Court in Union of India and Another versus A. Sanyasi Rao and Others, (1996) 219 ITR 330 and has submitted that Section 44D is a draconian provision and should be read down as an option available to an assessee and is not a mandatory provision. It is submitted that taxation on gross income basis is unconscionable. 27. Constitutional validity of the said provision is not challenged before us and cannot be examined in an appeal under Section 260A of the Act. We have to decide the appeal on the basis that this Section is constitutionally valid, though courts can read down a section while interpreting a provision in case of ambiguity/doubt to ensure that the provision does not fall foul of the constitutional limits. It may be relevant to note that taxation of non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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