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TMI Blog2012 (6) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard. The learned AR stated that the immediately preceding year, in which view was canvassed by the ld. first appellate authority against the assessee, came up for adjudication before the Tribunal. By placing on record a copy of the order passed by the Tribunal in ITA No.6600/ Mum/2002 dated 22.03.2004, the learned AR submitted that such issue has been decided in assessee's favour. The learned Departmental Representative was fair enough to concede this position. In view of the above it is clear that the facts of this ground for the current year are mutatis mutandis similar to those of immediately preceding year wherein such ground has been decided by the Tribunal in assessee's favour. Respectfully following the precedent, we uphold the impugned order on this issue. This ground is not allowed. 3. Ground no.3 is against the direction of the learned CIT(A) that the profit in respect of offshore supplies cannot be taxed in India. 4. After considering the rival submissions and perusing the relevant material on record we find that this issue has also been decided by the Tribunal in assessee's own case. Copy of the said order dated 24.12.2009 for assessment years 1996-97, 1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized contract revenues for PMC under the percentage of completion method using the cost incurred to date in relation to the estimated cost of the contract to measure the stage of completion. The assessee followed taxation on net income basis (i.e. revenues less expenses) in respect of its PMC revenues from MRPL, HPL and CFCL. The Assessing Officer observed that the activities of assessee under PMC did not amount to construction activities in India. It was opined that such project management services were liable to be considered as technical services inside India. He took into consideration the relevant clauses of the project management services contracts with MRPL, HPL and CFCL to observe that the same could not be considered as "construction activities" in India. It was also noticed that the responsibility of the assessee-company for providing project management consultation services comprised of deputing its technical personnel for carrying out the aforesaid works for all these contracts apart from rendering managerial and supervisory services in respect of such projects. The A.O. also observed that in all the these contracts the assessee-company was not doing any construction ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be done on "net income basis", that is in accordance with the provisions of sections 28 to 44C, was not accepted. The case of the assessee was held to be covered u/s 44D being special provision for computing income by way of fees for technical services on "gross income basis". The learned CIT(A) came to hold that the assessee's activities under project management contracts i.e. PMCs were closely linked to the actual construction of the projects and would hence qualify to be considered as 'construction acitivity' itself. In his opinion the term "construction" would also include engineering, bid evaluation etc., being the nature of services which were rendered by the assessee. He, therefore, finally held such receipts to be not in the nature of "fees for technical services" so as to attract the provisions of section 44D. He also relied on Circular No. 202 dated 5th July, 1976 for coming to the conclusion that the assessee's income was to be computed on 'net basis' i.e. after allowing deduction in respect of cost and expenditures incurred for earning the same and not gross basis i.e. section 44D. The Revenue is aggrieved against this finding given by the learned CIT(A). 10. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als approved by the Central Government before that date. Explanation 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 recipient or consideration which would be income of the recipient chargeable under the head "Salaries"." 10.2 Explanation 2 gives the meaning to the expression "fees for technical services" as any consideration for the rendering of any 'managerial, technical or consultancy services' including the provisions of services of technical or other personnel 'but does not include consideration for any construction, assembly, mining or like project' undertaken by the recipient. Thus we can split this Explanation into two parts viz., including and excluding - "including" the fees for 'managerial, technical or consultancy services' and "excluding" the 'consideration for any construction, assembly, mining or like project.' 10.3 Insofar as the 'exclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re details of services, such as under Project management services, the services are planning and scheduling, co-ordination, reporting etc. Under Local engineering supervision, there are supervision of detailed design and engineering, checking and reviewing key documents and drawings and schedule control and monitoring of major work etc. Under the Construction management and supervision services there are construction planning, cost control, material control and material tests etc. Under Start up assistance services there are assisting during pre-commissioning, commissioning and start up and performance of test of the plant etc. The learned AR took us through the agreement with MRPL to contend that the assessee offered to undertake overall management of the project including supervision. He highlighted certain clauses of the agreement to demonstrate that the assessee was appointed by the MRPL for overall management of the project. It is an admitted position that there is no qualitative difference between the agreement with MRPL on one hand and agreements with HPL and CFCL on the other insofar as the nature of activities performed by the assessee are concerned. In the light of such c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pervisions as envisaged in this CONTRACT." 10.6 Annexure 1 to the contract with MRPL has been placed on record on behalf of the assessee. Page 6 of this annexure provides in unequivocal terms that the quality personnel of the assessee shall be deputed to India. 10.7 On going through the above clauses of project management contracts with MRPL along with the nature of services rendered by the assessee as reproduced above from the assessment order, it becomes crystal clear that the responsibility for construction/erection of unit is solely that of the local contractor and not that of the assessee. The role of the assessee is confined to rendering managerial, technical and supervisory services in such construction done by the local contractor. 10.8 Reverting to Explanation 2 to section 9(1)(vii), we find that the exclusion part of "fees for technical services" refers to consideration for any 'construction, assembly, mining or like project' undertaken by the recipient. In the present case the consideration for construction or assembly of the project has gone from MRPL, HPL and CFCL to the local contractors, who were assigned the duty to, in fact, execute the construction/erection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. The nature of services provided by the assessee cannot be held as construction or assembly of any project so as to fall within the exclusion part of the Explanation 2. 10.9 In the like manner we do not find any force in the submissions advanced on behalf of the assessee that the supervisory, managerial or technical service performed by the assessee may be included within the ambit of "like project" employed in Explanation 2 to section 9(1)(vii). It is so for the reason that the terms "or like project" has been used after the words "construction, assembly, mining". Principle of ejusdem generis which is a well settled rule to find out the meaning of general words in the company of specific words, clearly contemplates that such general words shall draw their meaning from the words with which they are used. Such general words cannot have connotation independent of the specific words in whose company they are placed. When we view the term "like project", in the present text, it obviously refers to something like construction, assembly or mining. Further when we notice that the word 'project' has been used with the word 'like', it becomes manifest that it should be some project. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has rendered services in India. Admittedly MRPL, HPL and CFCL are residents of India and the amounts have been paid by them to the assessee, a non-resident which is in the nature of fees for technical services and such services have been utilized by them in business carried on in India or for earning any income from any source in India. The amount received by the assessee falls u/s 9(1)(vii) and hence will be deemed to accrue or arise in India. 10.12 Section 44D with the marginal note "Special provisions for computing income by way of royalties, etc., in the case of foreign companies" opens with the non-obstante clause - "Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company ". Admittedly the assessee is a foreign company. Clause (b) provides that no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections (i.e. 28 to 44C) in computing income by way of royalty or fees for technical services received inter alia from an Indian concern in pursuance of an agreement made by the foreign after 31.03.1976 but before 01.04.2003. From the prescription of above provision it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2 A bare perusal of the above provision indicates that where the Central Government has entered into DTAA with the Government of any other country for granting of relief in respect of income on which tax is payable both in India as well as the other country or for the purposes of avoidance of double taxation of income under this Act or under the corresponding law in force in that other country, then the assessee to whom such agreement applies shall be entitled to be governed by the provisions of DTAA or the provisions of the Act, whichever is more beneficial to the assessee. A plain language of this provision indicates, firstly, that the DTAA is entered into between two countries 'for granting relief of tax'. Secondly, the manner of granting relief is also enshrined in the provision itself which states that 'the provisions of this Act shall apply to the extent they are more beneficial to that assessee'. Ordinarily, but for such provision, an assessee to which the DTAA applies shall be subjected to tax in India as per the provisions of the Act. If, however, the provisions of the DTAA are more beneficial to the assessee, then such provisions, shall override the corresponding provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee towards project management services under the Act, we need to examine the position under Agreement of avoidance of double taxation with Japan (hereinafter called DTAA). Admittedly the assessee, a non-resident, is tax resident of Japan. As a result of Article 1, the provisions of DTAA apply on the assessee as well. The Assessing Officer has observed that since the assessee carries on business in India through a permanent establishment, the profits attributable to the permanent establishment are taxable in India. The assessee's contention about determination of net income on the basis of Article 7(3) of the DTAA was not found acceptable at the Assessing Officer's end on the ground that there was no express provision in the DTAA providing that the Indian taxation laws will not be applicable for computing taxable income of the permanent establishment. He further noted that the services rendered by the assessee were squarely covered under Article 12 (dealing with fees for technical services) of the DTAA. In view of the fact that the assessee had permanent establishment in India, the A.O. held that the business profits would be determined as per Article 7. In the light of hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In that view of the fact, the consideration received by the assessee falls within the scope of Article 12 of the DTAA. 12.2 At this juncture it is relevant to note that Article 7 of the DTAA deals with 'Business profits'. Para 7 of Article 7, which reads as under :- '7. Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article.' 12.3 Para 7 of Article 7 provides that where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article. This para embodies the rule of Generalia specialibus non derogant which means that the special provision overrides the general provisions. To put it simply, if there is a special provision on a particular subject then that shall override the general provisions in this regard. It is such special provision which will take the subject within its scope to the exclusion of the general provisions. The effect of para 7 of Article 7 is that if the otherwise 'Business profits' inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply." 12.8 The above para, to the extent we are concerned in the present appeal, provides that the provisions of paragraph 2 of Article 12 shall not apply if the following conditions are satisfied:- (a) Beneficial owner of the fees for technical services is a resident of contracting State (Japan in the present case). (b) Such person carries on business in the other contracting State in which any fees for technical services arises (India in the present case). (c) Such fees for technical services arises through a permanent establishment situated in the other contracting State (The fact of the assessee having PE in India has been accepted by the AO). 12.9 If the above referred three conditions are satisfied then the receipts which are otherwise covered under Article 12, being fees for technical services, shall be excluded from Article 12 and be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment situated in India. If the Japanese enterprise carries on business in India through PE, then the profit of the Japanese enterprise may be taxed in India but only so much of them as are directly or indirectly attributable to the PE in India. Para 2 of this Article provides that, subject to the provisions of para 3, for the purposes of determining profits of the Japanese enterprise (i.e. the General Enterprise [GE]) as are attributable to the Indian PE, it shall be considered as if the PE is totally independent of its GE. It means that the PE shall account for all the intra organizational transactions. In other words, if while carrying on the business in India, the PE has earned any income from its GE or incurred any expenditure to the GE, such income or expenditure shall also be taken into account while determining the profits of the PE. Para 3 of Article 7 provides that in determining the profit of a PE "there shall be allowed as deduction expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred " whether in India or elsewhere. 12.12 Paragraphs 6, 7 and 8 of the Protocol to the DTAA with Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to in para 1 of Article 7. Para 3 of Article 7 states that the profits of the PE shall be determined by allowing deduction for expenses which are incurred for the purposes of the PE including executive and general administrative expenses. Even though under the Act there is special provision for computing income by way of fees for technical services in the case of foreign enterprises as per section 44D on gross basis, but such restriction has not been adopted by the DTAA which simply provides that the expenses shall be allowed as deduction which are incurred for the purpose of the PE. Article 7 has been worded in several Treaties with other countries providing a limit on the deductibility of expenses subject to the limitations of the domestic law. For example the DTAA with Netherlands provides in para 3A of Article 7 that : "in determining the profit of a PE there shall be allowed as deductions, expenses which are incurred for the purposes of the PE, including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deductibility of expenses. On the other hand, where the DTAAs do not contain such clause, then the limitations as provided in the domestic law cannot be inferred on the ground that the DTAA does not specifically provide for the exclusion of the provisions of the domestic law. The essence of the matter is that when taxability is examined under the DTAA, the express and specific provisions of the DTAA are to be applied. If such provisions of the DTAA call for the applicability of the domestic law, then the domestic law is to be applied and that too only to the extent specified. Where any DTAA does not refer to the operation of the domestic laws, then provisions of the domestic law are to be ignored. It is the mandate of the relevant clauses of DTAA which is required to be followed. Turning to the DTAA between India and Japan, we find that there is no reference to limiting the deductibility of expenses in accordance with and subject to the provisions of the domestic law except as provided in certain paras of the Protocol. In such circumstances there is no scope for applying section 44D, which is rather a 'special provision for computing income' by way of fees for technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned to in para 8 cannot be allowed as deduction in computing the business profits earned by the PE. 12.16 At the same time, para 7 of the protocol stipulates that in India the deductions in respect of the executive and general administrative expenses shall be allowed in accordance with the domestic law of India, but such deductions shall in no case be less than what are allowable under the Indian Income-tax Act as effective on the date of signature of this Convention. Thus Para 7 of the Protocol places restriction in respect of the executive and general administrative expenses by providing that in India the deduction shall be allowed as per the provisions of the Income-tax Act. At this stage it is pertinent to note that executive and general administrative expenses can be classified into two parts, viz, (i) the head office expenses incurred as per section 44C of the Act incurred by the PE and (ii) other than such head office expenses. Section 44C deals with deduction of head office expenses in case of non-residents. It provides that notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it means that all remaining expenses shall be covered under the third category which are incurred for the purposes of the PE. Such expenses shall be allowed as deduction in full without any limit as per the provisions of the Act. 12.18 It is noticed that the Assessing Officer has proceeded on the applicability of section 44D i.e. charging the gross revenues. In that view of the matter, he had no occasion to consider the deductibility of expenses while determining the income on net basis. The ld. CIT(A) has accepted the assessee's claim under the Act and has not examined in niceties of the DTAA. As such the expenses so claimed by the assessee have remained unverified in terms of Article 7 read with paras 7 and 8 of Protocol. Under such circumstances we are of the considered opinion that it will be in fitness of things if the impugned order is set aside and the matter is restored to the file of AO. We order accordingly and direct the AO to work out the amount of expenses deductible as per the mandate of this order discussed in the preceding paras. Needless to say the assessee will be allowed a reasonable opportunity of being heard by the AO in the fresh proceedings. 13. The summary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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