TMI Blog2016 (2) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... section 44D rws 9 (1) (vii) of the act assessee’s receipt from NH is not taxable as FTS under that section but under normal provision of income tax act as business income. On this count we confirm the order of CIT (A). - Decided against revenue - ITA No. 1231/Del/2012, ITA No. 1346/Del/2012 - - - Dated:- 12-2-2016 - Shri H. S. Sidhu, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Petitioner : Sh. Ved Jain, Adv For the Respondent : Sh. P Dam Kanunjna, Sr. DR ORDER Per Prashant Maharishi, A. M. 1. These two appeals are filed by revenue against the order of learned CIT (A)-XXIX, New Delhi dated 30.11.2011 01.12.2011 passed for the assessment year 2006-07 and 2008-09. 2. The revenue has raised the following grounds of appeal for Assessment Year 2006- 07:- 1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in deleting the addition made by the AO by holding that the income derived by the assessee from NH-45 project is to be computed under article 12(6) and article 7, after deducting all expenses from the gross receipts and not to be taxed as free for technical services in terms of explanation 2 of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering the various decisions has held that the gross receipts of the assessee is covered by the exclusion provided in the definition of fees for technical services as per explanation 2 of section 9 (1) (vii) of the Income tax act and therefore same cannot be taxed as fees for technical services. Resultantly he held that receipt from NH -45 is chargeable to tax as normal business profit of the assessee. He further examined the provisions of article 12(2) and article 7 of the DTAA between India USA held that income of the assessee is to be computed as normal business profit and disallowance of expenditure of that project proportionately is also incorrect. Aggrieved by the order of CIT (A) revenue is in appeal before us. 5. Before us Ld. DR submitted that according to Para no 3 of the assessment order assessee is carrying on the business of consultancy and therefore the provision of section 44D are applied and income is taxable as Fees for Technical services only and not as business income. He further submitted that according to Para no 7 of the order of CIT (A) he has wrongly reached at the conclusion that the gross receipt of the assessee is not FTS 6. Against this ld AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied up on DCIT vs. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.) f. Assessee was carrying on similar activities in the preceding years as well, and the income earned form the said activities have been accepted by the Department as business income of the assessee. He submitted that in AY 2004-05 assessment order passed u/s 143(3) of the Act has also accepted the version of assessee. 7. We have carefully considered the rival contention as well as also perused the relevant documents relied up on by both the parties. The only issue that emerges in this appeal is that whether the amount received by the assessee from NH-45 project is chargeable to tax u/s 44D of the act or under the normal provision of taxation. If the amount is chargeable to tax as FTS u/s 44D then the assessee shall not be allowed any deduction for expenditure and the income shall be chargeable to tax @ 20 % u/s 44D rws 115A of the Act. According to the assessing officer it is chargeable to tax u/s 44D and according to assessee it s chargeable to tax under the normal provision of taxation as it is not fees for technical services as per section 9 (1) (vii) of the act. Further as the assessee is a no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and pipe culverts. 10. LD AO has held that assessee is only providing services in those contracts and is not carrying any business India. It is admitted fact that assessee is engaged in the consultancy services but that is also the business of the assessee being carried on in India. This facts is apparent that AO himself has taxed ₹ 3629478/- as business income of the assessee. Act of providing services to the various clients in India is in fact the business of the assessee. This fact has also been admitted by Ld AO in Para no. 2 of the assessment order. Ld AO has made irrelevant analysis of disclosure in the return of income of the assessee as well as the nomenclature described in TDS certificate, when AO himself agrees that assessee is engaged in the business of services wrt highways, transport etc. Therefore it cannot be said that assessee is not carrying any business in India. 11. LD AO producing the provision of Explanation 2 to section 9 (1) (vii) has held that the receipts of the assessee is Fees For Technical services. The provisions of explanation 2 to section 9 ( 1) (vii) defines the scope of Fees For Technical services as under :- Explanation 2.- F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a step-in-aid to construction. The assessee also contends that 'construction' is not a mere physical activity or laying bricks and mortars to include something more, viz., mental process of step-in-aid and it includes engineering and bid evaluation. He also contends that bid evaluation and engineering amounts to a formulation and 'construction' includes formulation among other activities like erection, fabrication, fashioning, shifting devising and creation also. The learned departmental representative, on the other hand, supports the stand of the revenue and contends likewise as has been reasoned in the impugned orders of the lower authorities. 6. In our opinion, on the facts and in the circumstances of the case, the assessee must succeed, since section 9(1)(vii), when read with Explanation 2attached thereto, makes it clear and postulates a situation where fee for technical services is taxable as income but any consideration for any construction, assembling, mining or like project undertaken by an assessee is excluded from the purview of the said assessment and construction, assembling, mining or like project does include a step-in-aid thereto. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign 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 deduction in respect of any expenditure or allowance shall be allowed under any of 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 after the 31st day of March, 1976 but before the 1st day of April, 2003. Explanation For the purposes of this section,-- (a) fees for technical services shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ; (b) foreign company shall have the same meaning as in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the permanent establishment including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of the enterprise as a whole in accordance with the provisions of and subject to the limitation of the taxation laws of that State. The implication of the Article 7 read with sub-article (2) and sub-article (3) is that if a non-resident entity is providing services or carrying on a business in India through a PE then its income is to be computed after deducting all the expenses incurred by it in accordance with the domestic law. In this context, in my opinion, this limitation will apply to expenses, such as, rate of depreciation, various restrictions placed under section 36, proviso to section 37 regarding disallowance of unlawful expenses, limitation u/s 40(a)(i) and 43B etc .The limitation referred in Article 7(3) does not mean that income is to be taxed under presumptive scheme of computation u/s 44D. It would practically mean going back to article 12(2) of the treaty and render provisions of article 12(6) redundant. This issue was examined by Mumbai Tribunal in the case of DC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and different from the situation that the receipts are in the nature of 'royalties and fees for technical services' for the purpose of Treaty but are being taxed on the net basis because of the application of Article 12(6), i.e., on account of being attributable to the PE in the other Contracting State. In other words, in case a receipt is held to be not taxable as 'royalties and fees for technical services' under the provisions of the India-Singapore tax Treaty, the same cannot also be subjected to tax under Section 44D r/w Section 115A either. 7.5 Subsequently, the above judgment has been followed by the various courts, e.g., in the case of JCIT vs. Essar Oil Ltd. (2006) 7 SOT 216 and in the case of Cray Research India Ltd. vs. JCIT 136 TTJ 1 delivered on October, 2010. Similarly in the case of JCIT vs. Essar Oil Ltd. the Court has examined similar issue. In this case, a U.K. company entered into a contract with M/s Essar Oil Ltd. for supervision of construction and commissioning activities in India for the refinery complex being built at Jamnagar. The appellant company returned a loss of ₹ 66,20,690/- after deducting all expenditure from the gross re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a company) or a foreign company with Government or the Indian concern after the 31 day of March, 2003, where such nonresident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, would be computed under the head Profits and gains of business or profession in accordance with the provisions of the Income-tax Act. However, it is provided that no deduction shall be allowed, in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices. 7.7 It can be inferred from the explanatory notes above that legislature was of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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