TMI Blog2015 (1) TMI 469X X X X Extracts X X X X X X X X Extracts X X X X ..... oked, the very purpose of PE provisions will stand defeated and it will be contrary to the UN Model Convention Commentary quoted earlier in this order, which, as a coordinate bench has held in the case of Graphite India Ltd Vs DCIT [2002 (10) TMI 232 - ITAT CALCUTTA-C], are in the nature of ‘contemporanea expositio’. Just because the assessee has accepted a taxability in respect of some other transaction, no matter howsoever related, the legal remedies available to the assessee cannot be negated. There cannot be, and there is no, estoppel against the law. In view of the above discussions, in our considered view, in a situation in which there are specific PE clauses in relation to a particular type of services, which are covered in the scope of servi ces covered by the scope of the ‘fees for technical services’ or ‘fees for included services’, the taxability of consideration for such services must remain confined to taxability of profits under the relevant specific PE clause. In our humble understanding, the provisions for taxability as FTS or FIS will not come into play in such cases. Installation, commissioning or assembly of a plant, machinery or equipment , or any supervis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign remittances, and were heard together. 2. The impugned orders in respect of the two assessment years, as passed by the Assessing Officer-TDS, are materially similar, but for variations in figures etc, and the appellate order passed by the CIT(A) is a consolidated order for both of these assessment years. As a matter of convenience, therefore, both of these appeals are being disposed of by way of this consolidated order. 2. Grievances raised by the assessee-appellant, as set out in the respective memorandum of appeal, are as follows: Assessment year 2010-11 1. For that on the facts and in the circumstances of the case, the CIT (A) erred in law and on facts in confirming the order passed by the ACIT (TDS), Jabalpur u/s 201 read with Sec. 195 of the I T Act and thereby confirming the demand of ₹ 1,40,10,757 raised on the appellant on account from non-deduction of tax on foreign remittances made for purchase of plant and machineries. 2. For that on the facts and in the circumstances of the case, the CIT (A) was unjustified in law and on facts in confirming the levy of interest u/s 201(1A) of the I T Act even though the appellant had no liability to deduct tax at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -12 1. For that on the facts and in the circumstances of the case, the CIT (A) erred in law and on facts in confirming the order passed by the ACIT (TDS), Jabalpur u/s 201 read with Sec. 195 of the I T Act and thereby confirming the demand of ₹ 8,74,26,178 raised on the appellant on account from non deduction of tax on foreign remittances made for purchase of plant and machineries. 2. For that on the facts and in the circumstances of the case, the CIT (A) was unjustified in law and on facts in confirming the levy of interest u/s 201(1A) of the I T Act even though the appellant had no liability to deduct tax at source in respect of foreign remittances made for purchase of plant and machineries. 3. For that on the facts and in the circumstances of the case, the authorities below were wholly unjustified in holding that the gross amounts paid by the appellant to the foreign suppliers of the plant and machineries represented income of the Non Residents accrued in India and thereby upholding the AO's order in which he had held that the appellant should have deducted tax @ 42.25% of the gross remittance amounts. 4. For that on the facts and in the circumstances of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction at source returns filed by the assessee, for the relevant financial period, the Assistant Commissioner of Income Tax-TDS, Jabalpur (AO-TDS in short) noticed that the assessee has made certain foreign remittances without deducting tax at source. When assessee was asked the reasons of doing so, it was explained to the AO-TDS that the income embedded in these payments was not chargeable to tax in India as these payments were for imports of plant, equipment and machinery. It was also contended that as the payments were made for purchases, which did not give rise to taxability of related income in India, there was no requirement of tax withholding requirement from these payments. The AO-TDS, however, did not share this perception of facts. He was of the view that the payment was not only for purchases but also for incidental services in connection with installation and commissioning of these machines, and, accordingly, the assessee was required to deduct tax at source from these payments. He was also of the view that even if a part of income included in these payments was liable to be taxed in India, it was incumbent upon the assessee to approach the Assessing Officer, under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and commissioning of the system, and noted that no taxes have been deducted at source from payments made to this supplier either. The AO-TDS then set out a list of similar cases by stating that following are the other companies whose agreements/orders have element of services, supervision, erection and commissioning part in addition to supply part . These cases, as listed by the AO-TDS, are as follows: 1-MMD Asia Pacific Limited, UK [order dated 12/3/2010], 2-Thermo Fisher Scientific Ecublens SAL Switzerland [order dated 8/5/2010], 3-Rexnord NV, Belgium [order of June 2010], 4-Tangshan Senpu Mine Equipment Co Ltd, China [order dated 16.8.2010] , 5-IKN GmbH, Germany [order dated 19.4.2007], 6-PARR Instrument Co, Ilionois [order dated 17.9.2009], 7-RHI AG, Austria [order dated 30.3.2009], 8-Shanyung Heavy Industries Co. Ltd, China [order dated 20.3.2007] , and 9-Polysius AG Germany [order dated 15.9.2009]. The AO-TDS, on the basis of the above discussions, concluded that the contract is a composite contract for supply of plant and machinery and also for ancillary services of installation, commission and erection of such plant and machinery. He referred to Hon ble Supreme Court s ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Polysius AG, Germany 11,50,11,953 3 Rexord NV, Belgium 13,18,491 4 Thermo Fisher Scientific Ecublens SARL, Switzerland 56,67,600 5 MMD Asia Pacific Ltd, UK 1,66,37,051 6 Shanyang Heavy Machinery Co Ltd, China 1,24,80,714 7 RHI AG, Austria 1,63,33,227 8 RHI AG, Austria 2,07,32,088 Total 20,70,23,865 The short deduction was computed @ 42.23% on ₹ 20,70,23,865 which thus worked out to ₹ 8,74,26,178. 5. Aggrieved by the demands so raised under section 201 read with section 195, aggregating to ₹ 10,14,36,935, treating the assessee as assessee in default for not having deducted tax at source from these payments, assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) rationalized the stand taken by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd second, that the TDS provision applies on the sum and not the income . Learned CIT(A) also opined that, the assessee goes on to deny that availing of services (which would convert the alleged supply contract into the alleged work contract) was an essential element of agreement (and that) it was purely optional and the contract was in the nature of contract for sale and not works contract . Learned CIT(A) s view was that the entire stated consideration for equipment and services should be accounted for, or deemed to have been accounted for, in the relevant financial years and tax should be deducted in respect from the same on the basis of treating it as a composite contract. This approach could be easily discerned from the following observations of the learned CIT(A): It is necessary to remind ourselves that in mercantile system of accounting, liability is to be accounted for as soon as it is recognized. It is not the case of the assessee that no such liability was accounted for in the final accounts of the impugned financial year. Hence, in the absence of any pleading/ evidence to the contrary, it has to be assumed that the liability as arisen was recognized and acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment in the case of Ishikawajma Harima Heavy Industries Ltd Vs DIT (288 ITR 408) and observed as follows: It is significant to note that if this line of reasoning is to be taken, the provisions of GAAR, which are to come into effect from 1.4.2016 too must be taken into account. Reference maybe made to the proposed chapter X-A Section 95, then s.96 about impermissible avoidance arrangements and s. 97 regarding arrangement to lack commercial substance as well as s. 98 about consequence of impermissible avoidance arrangement. 8. Learned CIT(A) then analyzed each of the purchase contract and noted that even though there is a mention about reimbursement of certain expenses and related per diem payments in the contracts, for visits in connection with the installation and commissioning, each of these contracts puts the vendors under certain obligations with respect to installation and commissioning. On this basis, he concluded that all the contracts are composite contracts for purchase of goods as also the related services for installation and commissioning etc. 9. Learned CIT(A), in this backdrop, discussed, in great detail, several judicial precedents right from the landma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tail, on the same. While it was fairly accepted that very detailed submissions were not made on this aspect of the matter, it was pointed out that the assessee had indeed made a submission, at point no. 69 in the written submission, that since the assessee did not have a permanent establishment in India, no part of its income could be taxed in India. This argument may not have been made in great detail, but the argument was advanced in principle. 13. Learned Departmental Representative, on the other hand, submitted that the onus was on the assessee to make claim for exemption under the provisions of a tax treaty, and the assessee not having discharged the same, opportunity should not be given to the assessee to make out a fresh claim. It was submitted that even though there is a vague reference to the non-existence of the permanent establishment, this aspect of the matter was neither argued in detail nor even specifically taken up before us in the grounds of appeal. 14. It was also pointed out that the revenue s case before us is not that taxes have not been deducted from the payments for installation, commissioning and supervision charges, but that a part of the payment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 2014. Hearing concluded. Reserved for orders. 18. Learned counsel s suggestion was that we should look at the treaties only when the case of the assessee fails on the provisions of the domestic law. Whether we examine that aspect of the matter at the stage one or stage two, arguments are nevertheless required to be made on that aspect of the mater as the assessee cannot abandon his reliance on the provisions of the applicable tax treaties. In any case, we are unable to see convincing merits in learned counsel s suggestion, even though we are alive to the fact that such an approach could be of convenience to many persons. As section 90 unambiguously states, so far as a assessees covered by a duly notified tax treaty is concerned, the provisions of the Income Tax Act, 1961 come into play only when those provisions are more beneficial to the assessee. Accordingly, when an assessee has no taxability on the basis of the provisions set out in the applicable treaty, there cannot be any occasion to look at the provisions of the Income Tax Act. 19. While on this aspect, we may also refer to the following observations made by a coordinate bench in the case of ACIT Vs Epcos AG (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. in a situation in which economic activities leading to earning an income are carried out in more than one jurisdiction, or in which the source of income and residence of the person earning such an income are in two different tax jurisdictions), first thing to be ascertained is the rights of the taxing jurisdictions over taxability full or partial of that income. As the Special Bench of this Tribunal, in the case of Motorola Inc. (supra) appropriately observes, a tax treaty certainly does not constitute an exemption system. Strictly speaking, a tax treaty may not even constitute alternative taxation regime, for the elemental reason that no tax treaty or DTAA, whatever one calls it, can ever impose taxes. A view is thus indeed possible that there cannot be an alternate taxation regime which does not impose taxes. Yet, a tax treaty can be said to be an alternate taxation regime in the sense that it allocates taxing rights of the competing tax jurisdictions. As far as the related tax jurisdictions are concerned, a tax treaty, first and foremost, allocates the rights of taxation of the tax jurisdictions over a tax object. In a cross-border tax situation, there is always a conflict be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the domestic tax laws of the source jurisdiction, it is useful to first check whether source jurisdiction has a right to tax that income at all. We would, therefore, prefer to follow the approach of first examining whether or not the source country has right to tax a particular cross-border income, and, in case the right is so established, to examine whether or not the domestic tax, laws of the source country provide for taxation of such an income, and if so, to what extent and in what manner. 18. .. We did not find any conceptual support or other material whatsoever for domestic law first approach, though, in all fairness, there is literature to support the proposition that this debate as to whether one should see the treaty first or domestic law first is a non-starter. Whichever path we follow, we reach the same destination anyway; whether or not a cross-border income is taxable in the source country in the light of the domestic tax laws read with the applicable tax treaty, it would not make difference, in the ultimate analysis, whether one examines the case on the touchstone of the scheme of the treaty first and domestic law later, or vice versa. Late Prof. Klaus Voge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce agreements, or the tax treaties- as these are often termed, are notified, such treaties form an integral part of the domestic tax legislation. To the extent a tax treaty applies on the facts of a case, the provisions of the Income Tax Act are applicable only to the extent that such provisions are more beneficial to the assessee. The binding nature of the provisions of the tax treaties is thus beyond any doubt or controversy. Yet, hyper technical objections were raised to even our taking into account the impact of the applicable treaty provisions. It is contended that since the assessee has not raised this aspect of the matter before any of the authorities below, the assessee should not be entitled to claim treaty protection to recipients of the payments made by the assessee. We are not inclined to uphold these objections. In our considered view, it was one of the most fundamental aspect which ought to have been examined by the AO-TDS himself, before raising a vicarious tax withholding demand, that the recipient non resident is liable to be taxed in India in respect of the income embedded in these payments, and for that purpose, examine the taxability of the recipient under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly a portion of the payment made represented income chargeable to tax in India , then it was necessary for him to make an application under Section 195(2) of the Act to the ITO(TDS) and obtain his permission for deducting TDS at lesser amount. Thus, it was held by this Court that if the payer had a doubt as to the amount to be deducted as TDS he could approach the ITO(TDS) to compute the amount which was liable to be deducted at source. In our view, Section 195(2) is based on the principle of proportionality . The said sub-Section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of income chargeable to tax in India. 22. In placing this reliance, what has been overlooked is the fact that in this case, as noted by Hon ble Supreme Court in GE Technology Centre s case above, (i)t was admitted that the erection and commissioning of plant and machinery in India gave rise to income taxable in India and that (i)t was, therefore, clear even to the payer that payments required to be made by him to the non-resident included an element of income which was exigible to tax in India . There can be little ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TD 793) 2004] and speaking through one of us (i.e. the Accountant Member), had summed up the implications of this judicial precedent as follows: 24. These observations do give a prima facie impression that, in the esteemed views of the Hon ble Supreme Court, whenever an application under s. 195(2), is not filed, the assessee tax deductor is under a statutory obligation to deduct tax at source computed on the entire payment to non-resident treating the same as income. However, in our considered view and for the reasons, we shall now state, such an interpretation will be fallacious. 25. While elaborating upon the ratio of the aforesaid judgment, a co-ordinate Bench of this Tribunal in the case of Raymonds Ltd. vs. Dy. CIT (2003) 80 TTJ (Mumbai) 120 relevant portion at p. 168) has observed as follows: A first reading of the judgment of the Supreme Court in the case of Transmission Corporation (supra) no doubt gives the impression that if no application is filed by the assessee under s. 195(2) seeking a determination of the appropriate portion of the sum remitted, income-tax on the gross sum has to be deducted and paid. However, penultimate paragraph of the judgment (p. 596 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is to say, receipts which . had the character of income chargeable itself as such to tax and receipts against which expenses had to be set off in order to determine whether there was any taxable income . Hon ble High Court was more specific in subsequent observations to the effect that if the amount payable to a non-resident appeared to be, say, income from property or profits and gains of business, profession or vocation or income from other sources, it would come within the purview of the section, but if it was an amount of a kind exempt (under the Indian IT Act) from tax, such as agricultural income, it would be outside its preview . It is thus a settled position that when an income is outside the scope of income taxable under the Indian IT Act, the question of application of s. 195, which is in material respects pari materia with s. 18(3B) of the 1922 Act that the High Court was in seisin of, does not arise. A fortiorari, when an income is not exigible to tax in India, by the virtue of the provisions of the applicable DTAA, the deduction of tax under s. 195 of the Act does not come to play at all. It leads us to the conclusion that the expression chargeable under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the revenue thus hinges on the fundamental question as to whether or not there is indeed an element of income, embedded in the impugned payments to the non residents, which can be brought to tax under the Indian Income Tax Act, 1961. Of course, by the virtue of Section 90 of the Act, in relation to the assessees to whom a double taxation avoidance agreement (i.e. tax treaties) applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee vis- -vis the provision of the related double taxation avoidance agreement. In effect thus, when such an assessee has no tax liability in India by the virtue of the provisions of a DTAA, there cannot be a tax liability under the provisions of the Act either. 28. We have noted that the basic plea of the Assessing Officer, based on which the impugned demands have been raised, is that since a part of consideration paid for the equipment and machinery is towards installation, commissioning or assembly of plant and equipment, such a consideration is liable to tax in India under section 4 and 5 of the Income Tax Act, 1961. These sections provide as follows: Section 4 - Charge of income-tax. 4. (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis that it is received or deemed to be received by him in India. 29. As Section 5(2)(b) read with Section 4(1) clearly provides, so far as taxability of income in India in the hands of a non-resident is concerned, it extends to, inter alia, income, from whatever source derived, accruing or arising to such a non-resident in India during the relevant previous year. 30. In a situation in which a part of the consideration for purchases of plant, machinery or equipment can be attributed to the installation, commissioning or assembly of the plant and equipment, or any supervision activity in connection thereto, to that extent, the consideration paid to the vendor can indeed be taxable in India under section 5(2)(b). That element of the income clearly accrues and arises in India since the related economic activity is performed in India. As the income accrues and arises in India, there is no need to look at the deeming fiction under section 9(1)(vii) which deals only with an income which is deemed to (Emphasis by underlining supplied by us) accrues or arises in India. Something which accrues and arises in India need not be deemed to accrue and arise in India as well. That precisely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, in our humble understanding, this is a wholly academic question. 33. We have noted that so far as the transactions impugned in these appeals are concerned, these transactions pertain to the vendors fiscally domiciled in (1) Austria, (2) Belgium, (3) China, (4) Germany, (5) Switzerland, (6) United Kingdom, and (7) United States of America. With all these seven tax jurisdictions, India has entered into double taxation avoidance agreements, and, therefore, the provisions of the Indian Income Tax Act, so far as non-residents eligible to the benefits of these tax treaties are concerned, to use the phraseology employed under section 90(2) of the Act, the provisions of this (i.e. the Income Tax Act, 1961) Act apply only to the extent they are more beneficial to the assessee . As a corollary thereto, when the assessee is not taxable under the provisions of the respective DTAA, there is no occasion to invoke the provisions of the Act. Let us, therefore, examine, in the light of the applicable DTAA provisions. the taxability of the income embedded in these transactions. 34. The recipients of these payments, as is the undisputed factual position, are engaged in the business of manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries 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 other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment. Article 7(1) of India Germany Double Taxation Avoidance Agreement [223 ITR (Stat) 130] hereinafter referred to as Indo German tax treaty ARTICLE 7 Business profits 1. The profits of an enterprise of a Contracting State 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 other State but only so much of them as are attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of these non-resident vendors had a place of business in India and as such a PE under the basic rule, i.e. Article 5(1). While taking note of this fact, it is useful to bear in mind, as was held in the landmark Special Bench decision in Motorola Inc s case (supra), DTAA is only an alternate tax regime and not an exemption regime and, therefore, the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA . There is not even whisper of a suggestion that the non-resident vendors had a place of business in India. We have carefully perused the material on record and the orders of the authorities below and we do not find that suggestion anywhere. The case of existence of the PE thus hinges on whether by the virtue of, what is normally termed as, installation PE as could come up by the nature of the activities leading to the income impugned before us . The related provisions in respect of all these jurisdictions above are as follows: Indo Austria tax treaty ARTICLE 5 Permanent Establishment 1. For the purposes of this Convention, the term perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment includes especially: . (i) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities continue for a period exceeding six months. . (Emphasis by underlining supplied by us; portion not reproduced not relevant for our purposes) India UK tax treaty ARTICLE 5 Permanent establishment 1. For the purposes of this Convention, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term permanent establishment shall include especially: (j) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stence are satisfied, and that onus is clearly not discharged. The assessee s contention is that no part of the income embedded in the impugned payments is in respect of the installation, assembly or commissioning activities of the plant, machinery and equipment purchased. There has to be something, apart from shallow prolixity, to even point in the direction that the consideration for installation or assembly project, or supervisory activities connected therewith, exceed 10% of the value of related plant, machinery or equipment. 40. These provisions with respect to permanent establishment on account on construction, installation and assembly activities, or supervisory activities connected therewith are broadly on the line of the model provisions in the UN Model Double Taxation Convention between the Developed and Developing Countries . While elaborating upon this model provision and recognizing, while rejecting, the legitimate concerns about erosion of tax base by the developing countries, the UN Model Convention Commentary has observed as follows: 10. A few developing countries oppose the six-month (or 183 days) thresholds in subparagraphs (a) and (b) of paragraph 3 altoge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that will facilitate a more permanent and substantial commitment later on, without becoming immediately subject to tax in that State . In our considered view, therefore, it is plain on principle that as long as threshold time limit for PE is not satisfied, the consideration for such installation or assembly activities, or supervisory activities in connection therewith, cannot be brought to tax in the source country. During the course of hearing and at the instance of the bench, learned counsel for the assessee has filed details of the work carried on at the installation and assembly site in respect of all the transactions, as it did take place in the relevant financial period, and, as evident from even a cursory look at these details, in none of these cases the conditions for creation of PE are satisfied. 42. In view of the above discussions, even if a part of the income, embedded in the impugned payments made to non-resident vendors, can indeed be attributed to the installation, assembly or commissioning activities of the plant, machinery or equipment purchased, such an income, on the facts of this case, cannot be brought to tax as business income under article 7 read with arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borne by such permanent establishment, or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. Indo Belgian tax treaty Article 12 Royalties and Fees for Technical Services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the royalties or fees for technical services shall remain taxable according to the laws of each Contracting State. Indo China tax treaty ARTICLE 12 Royalties and Fees for Technical Services 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. .. 4. The term fees for technical services as used in this Article means any payment for the provision of services of managerial, technical or consultancy nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Contracting State, due regard being had to the other provisions of this Agreement. Indo German tax treaty ARTICLE 12 Royalties and Fees for Technical Services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services. 3. 4. The term fees for technical services as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services referred to in sub-paragraph (b) of paragraph 4 of this Article: (i) during the first five taxable years for which this Agreement has effect, (A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and (B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services referred to in sub-paragraph (a) of paragraph 4 of this Article, 10 per cent of the gross amount of such royalties or fees for included services. 3. The term royalties as used in this Article means: (a) payments of any kind received as a consideration for the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt establishment situated therein and the contract in respect of which the royalties or fees for included services are paid is effectively connected with such permanent establishment. In such case, the provisions of Article 7 shall apply. 7. Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment, then such royalties or fees for included services shall be deemed to arise in the State in which the permanent establishment is situated. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 5. The definitions of fees for technical services in paragraph 4 of this article shall not include amounts paid : (a) for services t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. 9. The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties or fees for technical services are paid to take advantage of this Article by means of that creation or assignment. Indo US tax treaty ARTICLE 12 Royalties and fees for included services 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, fees for included services' does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the Convention. 44. One common factor in all the above treaty provisions is that the expression fees for technical services , which is also referred to as fees for included services in some the treaties i.e. Indo Swiss and Indo US tax treaties, describes these services in a rather general manner whereas the expression construction, installation or assembly project or supervisory activities in connection therewith find a specific mention in the PE clauses in all the related treaties. Generally speaking, and de hors the restricted meanings assigned by make available clause or exclusion clauses, installation or commission activities are a particular type of technical services. There is thus a general provision for rendering of technical services and a specific provision for rendering of technical services in the nature of construction, installation or project or supervisory services in connection therewith. 45. While on this issue, it is important to bear in mind the fact that when it comes to services PE , as in article 5(2)(l) of Indo US tax treaty or article 5(2)(k) of Indo UK tax treaty, any services which can be covered by the FTS or FIS clause in the respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion. 46. Similar views were also expressed in the case of ITO vs. Titagarh Steels Ltd [79 ITD 532 (2001)], wherein one of us, while articulating the views of Kolkata C Bench, had observed as follows : It is fairly well-settled in law that general provisions do not override specific provisions, as aptly described by the maxim 'generalia specialibus non derogant.' A special provision normally excludes the operation of a general provision and we are of the view that such a principle governs the instant case also. In the case of South India Corpn. (P) Ltd. vs. Secretary, Board of Revenue AIR 1964 SC 207, Hon'ble Supreme Court had an occasion to consider whether Art. 277 or Art. 372 of the Constitution of India should govern the particular situation involved therein. Their Lordships then pointed out that a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where specific provisions do not apply. 47. The same principle must apply in the treaty situations as well. What is the point of having a PE threshold time limit for construction, installation and assembly projects if such activities, whether cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odel Conventions, and Commentaries thereon, have key role in determining connotations of the expressions employed in art. 15. Hon ble Andhra Pradesh High Court has, in the case CIT vs. Visakhapatnam Port Trust (1984) 38 CTR (AP) 1 : (1983) 144 ITR 146 (AP), referred to OECD commentaries on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Radcliffe s observations in Ostime vs. Australian Mutual Provident Society (1960) AC 459, 480 : (1960) 39 ITR 210, 219 (HL), which have described the language employed in these documents as the international tax language . In view of the observations of Hon ble Andhra Pradesh High Court, in Visakhapatnam Port Trust s case (supra), these model conventions and commentaries thereon constitute international tax language and the meanings assigned by such literature to various technical terms should be given due weightage. In our considered view, the views expressed by these bodies, which have made immense contribution towards development of standardization of tax treaties between various counties, constitute contemporanea expositio inasmuch as the meanings indicated by various expressions in tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our humble understanding, the provisions for taxability as FTS or FIS will not come into play in such cases. 49. In additions to the reasons set out above, there are many more reasons why the impugned payments, even if partly attributable to the consideration for fees for technical services or fees for included services, cannot be brought to tax under FTS or FIS. 50. As is evident from a plain look at the above tax treaty provisions, so far as the tax treaties with UK and USA are concerned, the definition has a make available clause which implies that unless the services are such which enables the person acquiring the services to apply the technology contained therein, without recourse to the service provider, these services will not be covered by the definition of the fees for technical services. In other services, it is condition precedent for the taxability of an income under the head fees for technical services or fees for included services , under these tax treaties, that there should be a transfer of technology to the recipient of the service. This is what coordinate benches of this Tribunal have held, in a series of decisions including in the cases of Raymond Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of the FTS clause, as referred to in the protocol, is to be read into the tax treaty which is assured an MFN status as such. That was a case in which, by the virtue of MFN clause, narrower scope of FTS with respect to fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property' came into play, while right now we are concerned with the connotations of make available clause which restrict the scope of the FTS. The parameters so far as narrower scope of FTS is concerned are different but the principle and mechanism, on the basis of which MFN clause is given life and effect, remains the same. It is in this respect that we have taken note of the views of the coordinate bench. We are in considered agreement with the views so expressed by the coordinate bench, and, following the same approach, we hold that the provisions of the Indo US and Indo UK tax treaty, which came into force with effect from 1st April 1991 and 1st April 1995 respectively (i.e. after the cutoff date of 1st January 1990 set out in protocol to Indo Belgium tax treaty) and which restrict the taxability of only such fees for technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the fees for technical services and accordingly liable to be taxed in the source country. 24. The scheme of the tax treaty, so far as royalties and fees for technical services (termed as fees for included services in the India US tax treaty) is clearly like this. When principal transaction itself is such that it involves taxability in the source country, the transactions subsidiary and integral to such a transaction also give rise to the taxability of subsidiary transact ions in the source country. On the other hand, when principal transaction is such that it does not generally give rise to taxability in the source country, the transaction subsidiary and integral to such a transaction also does not give rise to taxability in the source country. In other words, the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation. That is the intent and purpose, in our understanding, of the provisions of art. 12(5)(a) .. 55. In view of these discussions, in our humble understanding, Installation, commissioning or assembly of a plant, machinery or equipment , or any supervision activity connected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that income, but it cannot be equated with final determination of tax liability in the hands of the recipient of such income. No doubt, in case of non-resident assessee, it is open to the regular AO to treat person from or through whom such assessee is in receipt of any income, as an agent under s. 163(1)(c) of the Act and, accordingly, assess such person in respect of that income as a representative assessee , but the case before us does not relate to such assessment under Chapter XV and we are only in seisin of the issue regarding tax deduction at source liability of the tax deductor company. The only relevant question, therefore, is as to at what point of time tax deduction at source liability under s. 195 crystallises in the present case at the time of payment of the franchise fees, at the time of crediting the same to the account of M/s Societe Des Hotels Meridien, or, as argued by the Revenue, at the time of the franchise fees accruing to the aforesaid company. The answer to this question is provided by the plain and unambiguous language of s. 195 itself which states that tax is to be deducted at the time of credit of such income to the account of the payee or at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctor. 57. Viewed thus, the FTS or FIS provisions cannot be invoked for taxing a nonresident on the basis of accrual of liability, whether credited or not, or on the notions of fiction of an element of FTS or FIS being embedded in the business receipts for sale of plant, equipment or machinery. The receipts in the hands of the vendors are in the nature of business income, and the deeming fiction, as sought to be canvassed by the revenue, has no application in the matter. The business income can be taxed under article 7 read with article 5, and, as we have seen earlier in this order, the conditions precedent for taxability under article 7 r.w.a. 5 are not fulfilled on the facts of this case. In many of the cases, as noted in the orders of the authorities below, the related installation and commissioning services, and supervision services in connection therewith, have been rendered by the domestic entities and payments made to those entities have already been subjected to tax withholding under other provisions of chapter XVII D but, disregarding this reality, the CIT(A) has proceeded on the basis that cost of services is also vested in the cost of material whether such services ..... X X X X Extracts X X X X X X X X Extracts X X X X
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