TMI Blog2012 (6) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... ut only in providing services and hence the revenues from PMCs were liable to be considered u/s 9(1)(vii) being fees for technical services – Held that:- From the nature of services rendered by the assessee to MRPL, HPL and CFCL, it can be seen that the same are not at all related with the direct construction/ erection of units, the assessee's services are in the nature of managing or supervising the construction/erection of units and not directly entering into such activity - parties 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, thus the amount received by the assessee falls u/s 9(1)(vii) and hence will be deemed to accrue or arise in India - since revenues are found to be covered u/s 9(1)(vii), the natural consequence would be the attraction of section 44D - admittedly the assessee, a non-resident, is tax resident of Japan position under DTAA need to be examined - as such the expenses so claimed by the assessee have remained unverified in terms of Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1997-98 and 1998-99 has been placed on record. The relevant discussion has been made in paras 20 onwards. After taking note of the elaborate arguments put forth by both the sides, the Tribunal has held that it is a case of an offshore supply of equipment on CIF basis outside India for which payment was also made outside India and hence no income accrued or arose in India. The facts of this ground for the instant are admittedly similar to those already considered and decided by the Tribunal in the afore-noted order. Respectfully following the precedent, we uphold the impugned order on this issue. This ground is not allowed. 5. Ground no.2 reads as under:- "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the revenues from Project Management Contract are to be taxed on net income basis without appreciating that :- ( i ) The assessee is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised 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 activity whatsoever. As such, the assessee was called upon to throw light on nature of services rendered by it resulting into revenues from PMC. The assessee made submissions about the character of services rendered by it, which have been summarized by the AO on page 5 of the assessment order as under:- "The scope of services under the project management contracts executed by Toyo with MRPL, HPL and CFCL primarily include the following services: * Project management services. - planning and scheduling; - co-ordination with owner and other service providers; - cost control; - reporting; - quality assurance. * Local engineering supervision. - supervision of detailed design and engineering and the procurement services performed by other service providers including, assuring consistency of and confirming the engineering basis of other service providers, ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Revenue is aggrieved against this finding given by the learned CIT(A). 10. We have heard the rival submissions at length and perused the relevant material on record. It is obvious that the assessee offered the revenues from PMCs on the basis of percentage completion method as business profits and computed income as per sections 28 to 44C. The view point of the AO under the provisions of the Income-tax Act, 1961 (hereinafter also called 'the Act') was that the revenues from PMC were 'fees for technical services' covered u/s 9(1)(vii) and hence income was liable to be computed u/s 44D on gross basis in contrast to the assessee's claim of determination of its income on net basis in terms of sections 28 to 44C of the Act. The learned CIT(A) approved the assessee's stand. 10.1 In order to decide as to whether the revenues from PMCs should be taxed on net income basis or gross receipts basis under the Act, we firstly need to determine as to whether such revenues are in the nature of fees for technical services or not. If such revenues are found to be covered u/s 9(1)(vii), the natural consequence would be the attraction of section 44D. On the other hand, if section 9(1)(vii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for any construction, assembly, mining or like project.' 10.3 Insofar as the 'exclusion' part is concerned which is covered in the later part of Explanation 2 , it can be seen that any consideration for any construction, assembly, mining or like project undertaken by the recipient has not been included in the fees for technical services. Circular No. 202 dated July 5, 1976, which has been relied on by the learned CIT(A) also, provides that any consideration received for any construction, assembly, mining or like project undertaken by the recipient shall be excluded from the definition of fees for technical services, which shall be chargeable to tax on net basis i.e. after allowing deductions in respect of costs and expenses incurred for earning the same and not u/s 44D. It has been fairly admitted by the learned AR that the actual execution of contracts was carried out in India by local contractors who were appointed by the Indian entities but on the advice of the assessee. On a specific query from the Bench, it was also admitted that the local contractors had entered into agreements with the Indian entities for construction/erection of the units. There is neither a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther insofar as the nature of activities performed by the assessee are concerned. In the light of such clauses of the agreement it was contended that the assessee was responsible for the overall construction/erection of units for MRPL and hence consideration for the same fell within the exclusion clause of Explanation 2 to section 9(1)(vii). 10.4 We are unable to accept this contention. From the nature of services rendered by the assessee to MRPL, HPL and CFCL, it can be seen that the same are not at all related with the direct construction/erection of units. For the purpose of construction/erection of the units, MRPL, HPL and CFCL have engaged the services of the local contractors. The assessee's services are in the nature of managing or supervising the construction/erection of units and not directly entering into such activity. When we peruse the above four broad categories with the sub-categories of the services, there remains absolutely no doubt that these are only in the nature of technical, management and supervision. There is no actual doing of erection or construction work of the project. Clause D of agreement with MRPL provides that the assessee has been appointed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom MRPL, HPL and CFCL to the local contractors, who were assigned the duty to, in fact, execute the construction/erection of the unit. By no stretch of imagination the services rendered by the assessee, which are purely managerial and technical can be brought within the purview of "construction or assembly" of any project. This exclusion part refers to consideration for construction or assembly etc. of the project and not managerial or technical service de hors actual construction or assembly of the project. The situation would have been different if the assessee had carried out the actual construction/erection of the project and in the course of such construction/assembly it had provided such management or technical services in connection with such construction or assembly of the project. In that case the overall amount paid to the assessee for such 'construction or assembly' comprising of the some part relating to the management and/or technical services would have been called consideration for any construction or assembly of projects because of these services becoming incidental and ancillary to the actual construction or assembly of the project. Since the managerial and tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining. Further when we notice that the word 'project' has been used with the word 'like', it becomes manifest that it should be some project. Rendering of technical services, cannot be held as a project. Thus the consideration for the projects of construction, assembly or mining etc can be placed with in the exclusion part and not any amount which is neither for a project nor akin to construction, assembly or mining. As such we are unable to bring supervisory, managerial or technical services provided by the assessee within the purview of "like project" used in the exclusion part of Explanation 2 to section 9(1)(vii). 10.10 Now we turn to the 'inclusion' part of Explanation 2 , which refers to "consideration for the rendering of any managerial, technical or consultancy services including the provision for technical or personnel services". All the requisite conditions of this part of the Explanation are duly satisfied by the assessee because the nature of services rendered by it are those of managerial, technical and consultancy services. Apart from that the assessee has also deputed its personnel for supervision of the construction/erection work to be done by the local con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 abundantly clear that the operation of sections 28 to 44C has been freezeed in respect of fees for technical services received by a foreign company from an India concern. Further Explanation to section 44D provides that for the purpose of this section "fees for technical services" shall have the same meaning as given in Explanation 2 to clause (vii) of sub-section (1) of section 9. As such it becomes manifest that the amount received by the assessee squarely falls within the purview of fees for technical services as per Explanation 2 to section 9(1)(vii) and that being the position, its income is liable to be computed only u/s 44D without having any regard to provisions of sections 28 to 44C. There is hardly any need to accentuate on the settled legal proposition that when a special provision is enacted in a statute, it overrides the other general provisions qua that specific subject for which it is enacted. Not only the Act has provided special provision for income by way of fees for technical services in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax 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 provisions of the Act. On the other hand, if the provisions of the Act are more beneficial to the assessee, these are such provisions which shall apply notwithstanding less beneficial provision in the DTAA. The logic behind it is simple that the DTAA is intended to grant relief of tax and not create any fresh tax liability, which is not provided under the Act. To state simply, if a particular income falls under the tax net as per the Act, the same shall be chargeable to tax in the hands of the assessee to whom DTAA applies, unless it is shown that the provisions of DTAA provide for some relief in this regard. If there is a beneficial provision under the DTAA, then such provision as contained in the DTAA shall prevail over the provision under the Act. It shows that the legislature has given an option to the assessee to be governed by the provisions either of the Act or of the DTAA, which is more beneficial to it. The corollary that follows is that one needs to firstly examine as to whether the particular sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 his opinion that there is no provision in the DTAA expressly laying down that the Income-tax Act, 1961 will not apply, he came to hold that the business profits would be calculated as per the limitations under the Act and as a result of that section 44D read with section 115A will apply. Since the contract with MRPL, HPL were not approved by the Central Government, the A.O. held that the provisions of section 115A will not be applicable and tax on the same would be calculated at the rate of 48% on the gross basis. However in the case of CFCL project, section 115A was held to be applicable as the agreement was approved by the Central Government. He, therefore, held that income from such contract with CFCL would be taxable at 30% on gross amount. When the matter came up before the learned CIT(A), the assessee argued at length about the applicability of Article 7 and resultantly the computation of income as per treaty alone and not section 44D. Such submissions have been incorporated on page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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' include an item of income which falls under the specific Articles of the DTAA, such as Dividends under Article 10, Interest under Article 11 or Royalties and fees for technical services under Article 12, then such income shall be excluded from the 'Business Profits' under Article 7 and come up for consideration under such specific Articles such as Article 10, Article 11 or Article 12, as the case may be. 12.4 Adverting to the facts of the instant case, it is noticed that the assessee received fees for technical services, which is in the nature of services referred to in Article 12. As such, by the operation of para 7 of Article 7, the income received by the assessee on account of fees for technical services shall be liable to be considered under Article 12 of DTAA. 12.5 Para 1 of Article 12 provides that fees for technical services arising in a contracting State and paid to a resident of other contracting State may be taxed in that other contracting State. Para 2 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted 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 considered under the provisions of Article 7 or Article 14, as the case may be. It is nobody's claim that Article 14 is applicable in the instant case. Since the assessee received fees for technical services which was even though in the nature of its 'Business Profits', but such amount being covered under Article 12 was dispatched out of the ambit of Article 7 by virtue of para 7 and came to be covered under Article 12. However, the provisions of para 5 of Article 12 have again sent such fees for technical services back to Article 7. The net effect of para 7 of Article 7 in juxtaposition to para 5 of Article 12 of the DTAA is that though the assessee received fees for technical services but the same shall be considered under Article 7 itself. 12.10 Let us examine the mandate of Article 7, the relevant paras of which are as under:- "ARTICLE 7 - 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses 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 Japan are relevant in the present discussion, which are as under:- "6. With reference to paragraph 1 of article 7 of the Convention, it is understood that by using the term 'directly or indirectly attributable to the permanent establishment', profits arising from transactions in which the permanent establishment has been involved shall be regarded as attributable to the permanent establishment to the extent appropriate to the part played by the permanent establishment in those transactions. It is also understood that profits shall be regarded as attributable to the permanent establishment to the above-mentioned extent, even when the contract or order relating to the sale or provision of goods or services in question is made or placed directly with the overseas head office of the enterprise rather than with the permanent establishment. 7. With reference to paragraph 3 of article 7 of the Convention, it is understood that in India the deductions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 . When we compare para 3 of Article 7 of DTAA with Japan and para 3A of Article 7 of DTAA with Netherlands it is observed that the language of this para in both the Treaties is almost similar but for the exclusion of : "in accordance with the provisions of and subject to the limitations of the taxation laws of that State" in the DTAA with Japan. The addition of the last part of para 3A of Article 7 of DTAA with Netherlands has made it clear that all the expenses incurred for the purposes of the PE shall be allowed as deduction but these deductions will have to be within the limits provided under the Act. Thus it can be noticed that in the DTAA with Japan there is no reference to the granting of deductions subject to the limitations provided under the Act. The AO proceeded on the premise that in all DTAAs it is specifically provided in Article 7(3) that the allowances or expenses attributable to the permanent establishment wherever incurred would only be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 etc. in the case of foreign companies. It is axiomatic that there is difference between 'deducting the expenses' and 'computing the income'. In fact, the process of 'computation of income' is a wider concept, which may encompass the 'deducting of expenses'. However, the deducting of expenses does not include the determination of income, though it may only be a step in such determination of income. In no case can it be said that both are one and the same thing. Scope of Article 7 contains the chargeability at the first instance and then the determination of the such chargeable amount. Para 3 of Article 7 deals with the deductibility of expenses in determining the profits of permanent establishment. When we talk of granting deduction for expenses in terms of Article 7(3), it should not be confused with the computation of income per se . Section 44D is a provision for computation of income and not for granting specific deduction for expenses. Obviously secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 made, in computing the income chargeable under the head "Profits and gains of business or profession", in respect of so much of the expenditure in the nature of head office expenditure as is in excess of 5% of adjusted total income or the amount of such expenditure in the nature of head office expenses incurred by the assessee as is attributable to the business of the assessee in India, whichever is the least. 'Head office' expenses have been defined in Explanation (iv) to section 44C to mean ' executive and general administrative expenditure' incurred by the assessee outside India , including expenditure incurred in respect of (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity etc. paid or allowed to any person employed in any office outside India ; (c) travelling by any employee or other person employed in, or ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of our conclusion on this ground is as under:- A. Under the Act : ( i ) The receipts from project management contracts are in the nature of fees for technical services covered u/s 9(1)(vii). ( ii ) Income from such fees for technical services is required to be computed u/s 44D. B. As per section 90(2), the assessee is entitled to be governed by the provisions of the Act or DTAA whichever is more beneficial to him. In the present case the provisions of the DTAA are more beneficial and hence the assessee shall be entitled to the computation of its income from PMCs as per the DTAA. C. Under DTAA : ( i ) The amount received by the assessee on account of PMC is chargeable as business profits under Article 7. ( ii ) Business profits are to be computed in terms of para 3 of Article 7 read with paras 7 and 8 of the Protocol. 14. Last ground is against the direction of the learned CIT(A) for not charging interes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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