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2015 (7) TMI 475 - ITAT DELHI

2015 (7) TMI 475 - ITAT DELHI - [2015] 41 ITR (Trib) 449 (ITAT [Del]) - Non-deduction of tax at source in terms of section 195 - expenses incurred by the assessee to International Project Services Oy. (IPS) - Held that:- The income derived by a resident of Finland in respect of professional services or other independent activities of a similar character performed in India can be taxed in India if he is present in India for a period or periods aggregating to 90 days or more in the relevant fiscal .....

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ive individuals from Finland were not representing IPS and, in fact, there was no valid agreement between the assessee and IPS, then, what remains to be examined is such five residents of Finland on individual basis. The amounts payable to each of such five persons satisfying the duration test on individual basis would enable the ultimate triggering of Article 15 of the DTAA.

Only those Finland residents out of such five persons who independently and individually satisfy the conditio .....

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ection 9(1)(vii) read with section 5 of the Act. Since the relevant information for ascertaining the duration of stay of such residents of Finland in India is not available on record and, further, it is not clear whether they had a fixed base regularly available to them in India for performing such services, we cannot forthwith ascertain whether or not such a pre-requisite condition is fulfilled. Under such circumstances, we set aside the impugned order and remit the matter to the file of the ld .....

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assessment year 2009-10. 2. The only issue raised in this appeal is against the confirmation of disallowance made by the Assessing Officer (AO) for non-deduction of tax at source in terms of section 195 of the Income-tax Act, 1961 (hereinafter also called the Act ) on expenses incurred by the assessee amounting to ₹ 1,92,86,815/- to International Project Services Oy. (IPS) 3. Briefly stated, the facts of the case are that the assessee, an Indian company, is engaged in the business of prov .....

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n Avoidance Agreement between India and Finland (hereinafter called DTAA ) and as such there was no obligation to deduct tax at source. At the same time, the assessee admitted the taxability of the amount in the hands of the payee in terms of section 9 of the Act. The AO observed that the assessee started deducting tax at source after 1.4.2011 on payments made to this resident of Finland, for similar services at the applicable rates of tax. The assessee s contention that deduction of tax at sour .....

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r the said sum of ₹ 1.92 crore. The assessee reiterated similar submissions before the ld. first appellate authority in support of the contention that such expenses incurred by it were not chargeable to tax in India as income in the hands of IPS in terms of Article 13 of the DTAA. The ld. CIT(A) examined the Agreement dated 21.11.2008 between the assessee and M/s Sterlite, pursuant to which the assessee was to render supervisory services for erection, commissioning and training for the Dor .....

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ssee claimed to have outsourced such services from IPS to be provided to Sterlite. A copy of such four-page document claimed as Agreement, produced before the ld. CIT(A), had first two pages which did not bear any signature, stamp or seal of the parties. He required the assessee to produce the original Agreement, which the assessee failed to comply with. The ld. CIT(A) observed that the main terms and conditions of the Agreement were appearing on the first two pages, which were unsigned plain pa .....

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n, the assessee was required to furnish the details of payments made to IPS as per the terms of the so-called Agreement, which stipulated for the release of payment within 15 days from the date of receipt of invoice. The assessee submitted that no payment was made to IPS and the entire amount of ₹ 1.92 crore was outstanding at the end of the year. In view of the fact that the so-called agreement provided for realizing payment within 15 days from the date of receipt of invoices and there wa .....

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that the aspect of rendition of actual services by IPS was not examined by the AO. He further noticed an inconsistency in the date of the so-called Agreement between the assessee and IPS, being 1.11.2008, which was prior to the Agreement between the assessee and Sterlite dated 21.11.2008 for providing the supervisory services. The ld. CIT(A) wondered as to how an Agreement between the assessee and IPS could be made much in advance on 1.11.2008 for outsourcing the services which were to be render .....

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the so-called Agreement between the assessee and IPS was not genuine and it was simply a make-believe arrangement aimed at defrauding the Revenue. During the course of hearing before the ld. CIT(A), the assessee submitted a copy of the Certificate issued by IPS containing names of five engineers who were claimed to have been sent by it to Sterlite for rendering supervisory services. This certificate, again undated, was held to be self serving and hence unreliable. In the backdrop of such facts, .....

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conclude that the services given by five engineers from Finland were in the nature of Independent personal services covered under Article 15 of the DTAA. As the services were performed by these engineers in India by remaining present from 24.11.2008 to 24.04.2009, being a period of more than 90 days, the ld. CIT(A) held that such income was chargeable to tax in India in their hands under Article 15 of the DTAA. As the income was chargeable to tax in India, the assessee was held to be liable for .....

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of the Act. The factual matrix in a nutshell is that the assessee received a sum of ₹ 2.41 crore from Sterlite Industries (I) Ltd., for rendering of supervisory services in connection with erection, commissioning and training for their plant in Tuticorin. Such services were provided by the assessee by outsourcing the same and a sum of ₹ 1.92 crore was paid for that. The assessee claimed deduction for ₹ 1.92 crore, which the AO disallowed u/s 40(a)(i) as, in his opinion, the am .....

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in respect of interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India or in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction, has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed u/s 200(1) of the Act. Clause (B) of the Explanation to this provisio .....

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95(1) provides that: Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest ….. or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the r .....

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due deduction, then, the amount of expenditure incurred by such person responsible, ceases to be deductible in the computation of his total income under the head Profits and gains of business or profession. 7. Coming back to the facts of the instant case, it is observed that the assessee did credit a sum of ₹ 1.92 crore payable outside India without deduction of tax at source for which the AO invoked the provisions of section 40(a)(i) of the Act. The claim of the assessee is that the expe .....

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, by: (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India shall be deemed to accrue or arise in India. Explanation 2 to section 9(1)(vii) gives meaning to the expression fees for technical services , as under:- Explanation 2.-For the purposes of this clause, "fees for technical services" means .....

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fees for technical services means any consideration for the rendering of any managerial, technical or consultancy services. When we consider the nature of services provided to Sterlite by the nonresident, being the supervisory services for erection, commissioning and training for setting up a plant of M/s Sterlite Industries, it becomes patent that such services fall within the ambit of Explanation 2 to section 9(1)(vii), thereby making the payment of ₹ 1.92 crore as fees for technical ser .....

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er, contended that there was no liability of the assessee to deduct tax at source from such amount because of the applicability of DTAA which immunes from tax the amount towards fees for technical services as paid in the present circumstances to the non-resident. 9. Sub-section (1) of section 90 of the Act provides that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax in respect of income on which tax has been paid in t .....

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een entered into with another country, then the provisions of the Act shall apply only if they are more beneficial to the assessee. In simple words, if there is a conflict between the provisions under the Act and the DTAA on a point, the assessee will be entitled to be subjected to the more beneficial provision out of the two. If the provision of the Act on a particular issue is more beneficial to the assessee vis-a-vis that in the DTAA, then such provision of the Act shall apply and vice versa. .....

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discernible that if the provisions of the Treaty are more beneficial to the assessee vis-a-vis its counterpart in the Act, then the assessee shall be entitled to be ruled by the provisions of the Treaty. 10. Now, the question arises as to whether the fees for technical services payable by the assessee to the resident of Finland is chargeable to tax under the DTAA? Article 13 of the DTAA deals with Royalties and fees for technical services. The relevant part of the Article is reproduced hereunde .....

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h 5, 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 subparagraph (a) of paragraph 3 is received; or (b) are ancillary and subsidiary to the enjoyment of the property fo .....

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ined in Article 15". 6........ . 11. A perusal of the above Article deciphers that fees for technical services arising in India and paid to a resident of Finland may also be taxed in India. The term fees for technical services , which is relevant for Article 13, has been defined in para 4 of the Article to mean payment in consideration for rendering of any technical or consultancy services which: (c) make available technical knowledge, experience, skill, know-how or processes, or consist of .....

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of fees for technical services contemplates that the technical services should be of such a nature that the payer of the services comes to possess the technical knowledge so provided which enables it to utilize the same thereafter. The Hon ble Karnatka High Court in the case of CIT & Ors. Vs. De Beers India Minerals Pvt. Ltd. [2012 (346 ITR 467) (Karn)] has dealt with the concept of make available in the context of fees for technical services. It has been held that : "The expression  .....

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it is palpable that the technical knowledge will be considered as made available when the person acquiring such knowledge is possessed of the same enabling him to apply it in future at his own. If the services are consumed in the provision without leaving anything tangible with the payer for use in future, then it will not be characterized as making available of the technical services, notwithstanding the fact that its benefit flowed directly and solely to the payer of the services,. The Specia .....

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uture. In that view of the mater, it was held that the management and selling commission could not be taxed in India as per the DTAA because nothing was made available to the payer. It follows that in order to be covered within the expression make available , what is necessary is that the service provider should transmit the technical knowledge etc. to the payer so that the payer may use such technical knowledge in future without involvement of the service provider. 13. Adverting to the facts of .....

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land residents during the course of such erection and commissioning get consumed in the process and there remains nothing capable of any use in future. Going by the scope of Article 13 vis-à-vis the nature of actual services provided by the payees, it is manifested that such technical services do not fall within the purview of the definition of fees for technical services as given in para 4 of this Article, as nothing has been made available by the rendition of technical services for any .....

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that view of the matter, the assessment order considering payment of ₹ 1.92 crore to M/s IPS Finland for technical services as violating the provisions of section 195, thereby resulting into disallowance u/s 40(a)(i), cannot be countenanced. 14. It is noticed that when the matter was carried by the assessee in appeal before the ld. CIT(A), the latter opined that there was no genuine agreement between the assessee and the IPS Finland. In view of the fact that the assessee did incur ₹ .....

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e same issue. It goes without saying that the powers of the CIT(A) are co-terminus with that of the AO inasmuch as he, while hearing an appeal against the assessment order, has all the powers which vest with the AO on the issue before him. The Hon ble Summit Court in Jute Corp. of India Ltd. Vs. CIT (1991) 187 ITR 688 (SC) has held so. Even otherwise, section 251 dealing with the powers of the CIT(A) provides through sub-section (1) that : In disposing of an appeal, the Commissioner (Appeals) sh .....

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called Agreement between the assessee and IPS, a copy of which has been placed on pages 119 to 122 in the paper book. It can be observed that this document running into four pages is on plain papers. First two pages of this document do not bear signature of any party. These pages, in fact, define the scope of services and all other major terms and conditions. Going by this so-called Agreement, Clause 3 with the caption Terms of payment provides that: All payments shall be released within 15 days .....

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by IPS Finland stating that five of its employees were sent to India at the instance of the assessee. This document has been purportedly signed by one Mr. Erkko Virrankoski, the President of IPS, Finland. When we compare the signature on this supposed certificate with the signatures made on pages 3 and 4 of the so-called agreement, it can be easily deduced that both the signatures are entirely different. Apart from that, if IPS was to render services on a regular basis to Sterlite at the instan .....

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a sum of ₹ 1.92 crore, did not correspond at all on any aspect of the work assigned or to ascertain the progress of the work on a periodic basis. There is another interesting aspect of the matter. The assessee entered into Agreement with M/s Sterlite for providing supervisory services for erection and commissioning of their plant. There is no reference whatsoever in this Agreement with Sterlite that the services to be provided by the assessee could be sub-contracted or outsourced from som .....

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e agreement with Sterlite was itself signed, much later, on 21.11.08. The ld. AR was specifically asked if he could produce Agreement with IPS in original, which was responded in negative. To be precise, there is no documentary evidence divulging the rendering of services by IPS Finland in the erection and commissioning of plant of Sterlite. The above discussion leads us to an irresistible conclusion that IPS was nowhere involved in providing supervisory services to Sterlite for and on behalf of .....

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engineers from Finland during the period 24.11.08 to 24.4.2009. Once it is established that certain individuals from Finland rendered engineering supervisory services in the erection and commissioning of the plant in Tuticorin, the amount payable to such residents of Finland falls for consideration under Article 15 of the DTAA, which reads as under:- ARTICLE 15 Independent personal services 1. Income derived by a resident of a Contracting State in respect of professional services or other indep .....

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e services. 2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. 18. On going through the mandate of Article 15 of the DTAA, it can be seen that it covers professional services or other independent activities of similar character. The term professional services , inter alia, includes in .....

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again considered under Article 15. This argument was countered by the ld. DR by contending that the amount in question directly falls under Article 15 and hence the same should be retained here alone. 20. The argument of the ld. AR though looks attractive at the first blush but falls to the ground on a closer examination. The precise question is that which of the two Articles, namely, 13 or 15, should have primacy in the facts and circumstances as are instantly prevailing? In our considered opin .....

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sidents from Finland is covered only under Article 15 and not Article 13 of the DTAA. 21. Delving into the mandate of para 1 of Article 15 of the DTAA, we find that the income derived by a resident of Finland in respect of professional services or other independent activities of a similar character performed in India can be taxed in India if he is present in India for a period or periods aggregating to 90 days or more in the relevant fiscal year or has a fixed base regularly available to him in .....

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