TMI Blog1995 (9) TMI 376X X X X Extracts X X X X X X X X Extracts X X X X ..... ject, etc., in December, 1993, May, 1994, and June, 1994. The applicant filed three applications under section 245Q(1) of the Income-tax Act, 1961 ( the I.T. Act ), on March 9, 1995, in respect of the above three agreements. It was stated by the applicant in its application that the company is based in UK having no branch, office or any local presence in India and that none of the services provided by the applicant to X had been utilised in India. It was also stated that all work on the contract awarded by the X to the applicant was carried out in England, using the applicant s own staff and consultants and that the company and its staff are subject to the tax jurisdiction of the United Kingdom. On these grounds it was claimed that the provisions of section 9(1)(vi)(b) of the I. T. Act do not apply, and, therefore, no tax should be levied on the applicant with regard to its contract with X . The facts and the questions raised in all the three applications are identical ; therefore, these were heard together and are being disposed of by this single order for the sake of convenience. For proper appreciation of the arguments the facts relating to these applications are set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viously, therefore, this agreement was drawn after the study had almost been completed. The payment for this was determined in US $ which was to be paid in four instalments. As in the first agreement the taxes and the duties were to be paid by the applicant. The work relating to the review of the oil fields covered by this contract was to be done in India and in terms of paragraph 9.2 of this agreement the payment was to be made partly in US dollars and partly in Indian rupees. The third agreement was drawn in June, 1994, and the scope of work covered in this agreement was to assist and advise X on methodology of evaluation of the tenders. This job included commercial and legal advice regarding acceptance of the tenders invited by X from different contractors on the basis of the reports submitted by the applicant in accordance with the earlier two agreements. This job was to be performed primarily in India as frequent consultation with the officers of X was needed. This work package was for a sum of US $ for a period of 30 days and a sum of US $ was to be paid as air tickets from the UK to India. Hotel accommodation and local transport was to be provided by X in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted to the payment made in June, 1994 ? Counsel argued on behalf of the applicant that X has erroneously deducted tax at 30 per cent. disregarding the provisions of section 44BB of the Income-tax Act. He submitted that the provisions of section 115A do not apply, because, section 115A has to be read with section 44D, which in turn provides for taxation of royalty in pursuance of an agreement. Therefore, only if the applicant had an agreement of this nature the provisions of section 44D would have been applicable. Counsel sought to distinguish between royalty , fees for technical service and business of rendering technical services . He claimed that the applicant was engaged in the business of providing services in connection with prospecting of mineral oil. Therefore, this case is squarely covered by the provisions of section 44BB of the Income-tax Act and that neither clause (vi) nor clause (vii) of sub-section (1) of section 9 would be applicable, because clause (vi) excludes payment in respect of services utilised for the purposes of a business or profession carried on outside India from the purview of the definition of income by way of royalty ; and, because the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource was deducted from the payment of 6.5 per cent., apparently on the basis of section 44BB, but that now the rate of tax deduction is proposed to be hiked up to 30 per cent., erroneously, according to the applicant. Counsel relied on a decision of the Calcutta Bench of the Income-tax Appellate Tribunal (ITAT) in the case of Deputy CIT v. Schlumberger Seaco Inc. (SSI) [994] 50 ITD 348 (Cal) holding, inter alia, that SSI possessed requisite expertise, experience and technical know-how in conducting wire line services and such expertise or experience was the result of a continuous course of activity in rendering such services to various persons engaged in the extraction of oil all over the world, and, because, it was continuously engaged in the above activity, it must be stated to have engaged itself in such business. In addition, they had also provided personnel to operate wire logging equipment. In such a situation it had to be seen whether the services or facilities are rendered or provided in such a manner as to constitute business. The very fact that section 44BB(1) also speaks of rendering of services shows that it cannot be stated that merely because the assessee has rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermanent establishment situated in India. However, he submitted that even if the profit is to be taxed under article 7 of the double taxation agreement, deduction for expenses incurred for the purposes of business, including executive and general administrative expenses whether in India or in UK, would have to be allowed. If this is done the rate of taxation would be much lower than the deemed rate of 30 per cent. provided in section 115A read with section 44D. He relied upon a decision of the Income-tax Appellate Tribunal, Bombay Bench in the case of Standard Chartered Bank v. IAC [1991] 39 ITD 57 relating to section 36(1)(viia) of the Income-tax Act read with article 23 of the earlier double taxation agreement between the UK and India. He submitted that the Income-tax Appellate Tribunal had held there that corporations have nationality in accordance with the country of their incorporation. Following the decision of the Supreme Court in the case of State Trading Corporation of India Ltd. v. CTO [1963] 33 Comp Cas 1057 ; AIR 1963 SC 1811, the Income-tax Appellate Tribunal observed that nationality and citizenship are distinct as, nationality has reference to the jural relationsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rewith which is more burdensome than the taxation and connected requirements to which the nationals of the other State in the same circumstances may be subjected. It was argued that the applicant should not be subjected to a tax at the rates of 30 per cent. under the Income-tax Act or 20 per cent. under the double taxation agreement on the gross payments because it would amount to discrimination between the applicant and a similarly placed national of India providing such services, as the latter would be taxed under the normal provisions of the Income-tax Act under the head Income from business or profession . It means that an Indian national would be taxed in India at a rate much lower than the presumptive rate of 20 per cent. or 30 per cent. on the gross payment. It was, therefore, urged that by virtue of the provisions of the non-discrimination clause of the double taxation agreement and the provisions of sub-section (2) of section 90 (which provides the applicant the option of being taxed at a rate more advantageous to it), the income of the applicant is liable to be assessed under normal provisions on net basis, i.e., gross receipts minus all eligible expenses incurred for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the foreign companies would now be taxed at flat rates specified in the newly introduced section 115A with effect from assessment year 1977-78. Accordingly, consequential amendments were also made in sections 9(1)(vi) and 9(1)(vii). On this basis, he pleaded that the intent of legislation was clear that such fees for technical services are to be taxed only under section 44D read with section 115A. He further submitted that the applicant s case is fully covered by section 9(1)(vii) because the applicant is receiving income by way of fees for technical services payable by the X , a resident person, in respect of services utilised by X in India. He contradicted the claim of learned counsel for the applicant that the case of the applicant gets covered by Explanation 2 to section 9(1)(vii) because the applicant had received the fees for technical services as consideration for the rendering of technical and consultancy services including provision of technical services and other personnel for survey, etc. On this basis, he argued that the rate of 30 per cent. provided under section 115A is applicable to the payments received by the applicant. As regards the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he double taxation agreement has effect. As regards the non-discrimination clause of the double taxation agreement, the Departmental Representative pointed out that paragraph 2 of article 26 is not applicable because the applicant does not have a permanent establishment in India. As regards paragraph 1, he submitted that non-discrimination is to be judged by comparing two classes of persons similarly placed and not two individuals or two companies. Under the Indian Income-tax Act, income of every person arising in India is to be taxed under the procedures and rates provided under the Income-tax Act. But for the double taxation agreement, the applicant would also have been subjected to tax under the Income-tax Act but it had claimed privilege under section 90(2) of the Income-tax Act and wants to be assessed in accordance with the double taxation agreement. Article 13 of the double taxation agreement provides a rate of only 20 per cent. of the total payment as against the rate of 30 per cent. leviable for similar payments covered under section 44D read with section 115A. Thus discrimination, if any, is in favour of the applicant by virtue of the provisions of the double taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Income-tax Act and the double taxation agreement apply to the present applicant. No distinction was made by the applicant regarding on-shore activities or off-shore activities and from a perusal of the contracts under reference in these three applications, it is evident that all the three applications are closely inter-related. All the three are related to the rendering of technical services to X and, therefore, the payments made under these three agreements have to be considered together for the purpose of taxation in India. Learned counsel for the applicant strongly pleaded that this case falls within the ambit of section 44BB of the Income-tax Act, therefore, the payments were taxable only at the rate of 5.5 per cent. of the gross payments (deemed profit of 10 per cent. on gross payments taxable at 55 per cent.). For a proper appreciation of the argument, the relevant provisions of sub-section (1) of section 44BB are given below: 44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.-(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign companies. Clause (b) of section 115A provides the machinery for taxation of such royalties and technical service fees. The relevant provisions of these sections are given below : 44D. Special provisions for computing income by way of royalties, etc., in the case of foreign companies.-Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,- (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern before the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent. of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property ; (b) no deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would have been chargeable had his or its total income been reduced by the amount of income referred to in sub-clause (i), sub-clause (ii) and sub-clause (iii) ; (b) a foreign company, includes any income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976, and where such agreement is with an Indian concern, the agreement is approved by the Central Government or where it relates to a matter included in the industrial policy, for the time being in force, of the Government of India, the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1A) and (2), the income-tax payable shall be the aggregate of,- (A) the amount of income-tax calculated on the income by way of royalty, if any, included in the total income, at the rate of thirty per cent. ; (B) the amount of income-tax calculated on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent. ; and (C) the amount of income-tax with which it would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey are clearly covered by the expression fees for technical services as defined in section 9(1)(vii). The agreement of the applicant with X does not include any consideration for any mining or like project undertaken by the applicant, though it does stipulate consideration for the rendering of technical or consultancy services in relation to the extraction or exploration of mineral oils by X . Learned counsel for the applicant wanted to make a fine distinction between fees for technical services and income from business of providing technical services. It is, therefore, essential to have a look at the definition of this expression in the aforesaid Explanation 2 to clause (vii) of section 9(1) : Explanation 2.-For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of taxation evolved after a good deal of thought and discussions between nations where double taxation is involved. The mode of taxation and relief provided in the double tax avoidance agreement, also shows that royalties and fees for technical services are taxed on a basis different from business except where they arise in the course of a business with a permanent establishment in India. Section 44BB and section 44D have thus both to be given effect to and the only way of doing it is by restricting section 44BB to income that does not fall within the scope of section 44D ; it is this that is made clear by the proviso to section 44BB(1) which specifically excludes any profits and gains of business or other income falling under section 44D from the purview of section 44BB. The decision of the Income-tax Appellate Tribunal in the case of Deputy CIT v. Schlumberger Seaco Inc. [1994] 50 ITD 348 (Cal), has been relied upon by learned counsel in support of the above argument. It has no doubt been generally observed by the Income-tax Appellate Tribunal in para. 7 of that order that while introducing Explanation 2 to section 9(1)(vii), the Legislature had in mind only those non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payments made by X to the applicant in terms of the three agreements would be taxable under section 44BB of the Act and we agree with the contention of the Departmental representative that by virtue of the proviso to section 44BB, the case of the applicant gets covered by the provisions of section 44D and section 115A. However, since fees for technical services are covered under article 13 of the double taxation agreement and the rate of tax prescribed in the double taxation agreement is 20 per cent., as against 30 per cent., prescribed under section 115A of the Income-tax Act, the applicant is entitled to the option available to him under sub-section (2) of section 90 of the Income-tax Act as the provisions of the double tax ation agreement between India and U.K. are beneficial to it. The expression fees for technical services has also been defined in paragraph 4 of article 13 of the double taxation agreement which has already been reproduced in para. 11.1 (page 385) of this order. Clause (c) of paragraph 4 fully covers the type of technical services rendered by the applicant to X , therefore, the payment received by the applicant for this service is fees for te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies and technical fees should be assessed, if at all, under article 7 as business income. This is one more reason for not considering section 44BB as applicable to the instant case for the provisions of the double taxation agreement will not only be relevant but will also govern the mode of taxability of a particular class of income. In other words, royalty and technical fees have to be assessed in the manner set out in article 13, unless it can be taken out of such treatment on the terms of article 13(6) or section 44D of the Act is clearly excluded. Counsel relied considerably on the provisions of article 26 of the double taxation agreement and used it, practically as what may be described as his trump card, for contending that whatever may be the statutory or other provision applicable in this case, the applicant cannot be taxed at more than 55 per cent. of the net income of the applicant from the contract computed as in the case of any other resident assessee on like income by virtue of the non-discrimination clause. He, however, stated that he was prepared to waive this argument, if the tax rate is kept at 5.5 per cent. of the gross receipts under section 44BB without going ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t section 36(1)(viia) of the Act meted out discriminatory treatment to non-nationals, for that exemption was also not available to other nationals such as non-scheduled Indian banks, as well as scheduled Indian banks engaged in operations outside India. Be that as it may, the decision no doubt lends support to the contention of counsel that the applicant should be treated as a U. K. national. The Tribunal in treating the Standard Chartered Bank as a national of U. K. relied upon the decision of the Supreme Court in the case of the State Trading Corporation of India Ltd. [1963] 33 Comp Cas 1057 ; AIR 1963 SC 1811. The question before the Supreme Court in that case was whether the corporation could be considered to be a citizen of India for purposes of article 19 of the Constitution and the Constitution Bench answered this question in the negative. The arguments on behalf of the petitioner started with the citation of a rule of English law that a company or an incorporated corporation has a nationality and the nationality is determined by the law of the country in which it is corporated and this rule was sought to be extended to the concept of citizenship as well but this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly define nationals to include legal persons deriving their status from the laws in force in a contracting State. A similar provision has also been engrafted in the double taxation agreements between India and some countries such as Belgium, GDR, Hungary, Japan, Korea, Libya, Malaysia, Singapore. The treaty with USA confines it to individuals . A third set of agreements, like the one with UK above left the term undefined. In the absence of a definition, it is not easy to say which of the criteria earlier referred to should be applied. We have therefore, to interpret the expression in the context of the other provisions of the double taxation agreement itself. Firstly, while para. 1 of article 26 deals with nationals, para. 2 deals with enterprises and a rule of non-discrimination against them is enunciated but is restricted only to enterprises having a permanent establishment in India. If the expression nationals included companies and other associations as well, the special provision regarding enterprises in para. 2 would not have been necessary at all. Secondly, it is significant that article 4 of the double taxation avoidance agreement defining the fiscal domicile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 115A(1) deal with non-resident assessees. Such persons may be Indian or foreign nationals but the concessional treatment under these sections will be available to both. Likewise section 44D and section 115A(1) and (2) deal with foreign companies which again may be run by Indian or foreign nationals. For instance, even if the appellant had been a company formed by Indian nationals and registered outside India, the provisions of section 44D and section 115A(2) would operate against it in the same manner. We, therefore, do not find any substance in the charge of discrimination under paragraph 1 of article 26. Reference can also be made to another angle of the applicant s charge of discrimination : The applicant s contention, based on the assumption that section 44D and section 115A are applicable only to foreign nationals, is that such a person will be called upon to pay tax at 30 per cent. or 20 per cent. where the double taxation agreement specifies a smaller rate as in the present case, on the total amount paid as royalties or technical fees, while such receipts will be business income in the hands of an Indian company taxable at the rate of 46 per cent. (including surchar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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