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2016 (2) TMI 667 - ITAT DELHI

2016 (2) TMI 667 - ITAT DELHI - [2016] 51 ITR (Trib) 428 - Amount received from NH-45 project - chargeable to tax u/s 44D or under the normal provision of taxation - Held that:- It is not controverted that 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 and assessment made u/s 143(3) of the Act. Principle of consistency has been accepted by the courts .....

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ground too assessee deserves relief. - In view of above, we are of the view that according to the provision of 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, Accounta .....

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ition 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 section 9(i) (vii) of the Act and also not alternatively under section 44D of the Act. 3. The revenue has raised the following grounds of appeal for Assessment Year 2008- 09:- 1. On the facts and in the circumstances of the .....

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acts for AY 2006-07. The facts in brief of the case are that the assessee is a foreign company incorporated in USA and is engaged in the business of providing consultancy services in the areas of highways, transportation, water supply, waste management etc. The assessee has set up several projects offices in India to carry on its activities in India. For AY 2006-07 assessee filed its return of income declaring an income of ₹ 51,26,472/- on 06.12.2006. The case was selected for scrutiny and .....

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see has shown profit before tax of ₹ 48,81,274/-. Ld. AO has taxed an amount of ₹ 10354820/- shown under the head consultancy charges and engineering services accrued from NH-45 Projects of the assessee @ 20 % u/s 44D RWs 115 A of the act and also proportionate expenses in relation to that receipt ₹ 8857826/- were disallowed as the income is required to be taxed on gross basis and no expenditure to be allowed u/s 44D of the act. Assessee being aggrieved with the order of AO pre .....

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ipt 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 i .....

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accounts. The AO has not doubted the authenticity and the income computed as per books of accounts. b. The income of the assessee from NHAI is not in the nature of 'Fees for Technical Services', as the assessee is covered by exceptions to Explanation 2 of section 9(1)(vii) of the Act. c. The assessee, providing engineering services related to construction services, is covered by the Explanation 2 of the above section. The agreement entered into by the assessee with NHAI was for the imple .....

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s, which include engineering and other related services. For this he relied up on the decision of Agland investments services Inc. Vs ITO 22 taxman 9 ( del) and DCIT V Schlumberger Seaco inc 1995 Tax LR 486 ( cal) ITAT). d. Circular No. 202 dated 5th July, 7976, wherein an amendment to the source rule for 'fees for technical services' has been made, and the services in the nature of engineering or other services related to construction have been excluded from the purview of the definitio .....

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India through a PE, then its income is to be computed after deducting all the expenses incurred by it. The provisions of the said Article do not conclude that the income is to be taxed under presumptive scheme as per section 44D of the Act. For this he 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 b .....

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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 non resident it is also claimed that it is entitled to .....

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by the classification of receipt in the TDS certificates where the deduction has been made u/s 194J of the act as consultancy fees. c. Assessee itself says in return of income that it is engaged in the business of consultancy. We are of the view that for the purposes of the characterization of the income of the assessee all the above criteria are not relevant for the reason that 1) The consultancy services are in general, fees for technical services . But AO need to examine it with respect to e .....

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examine the scope of the work to be carried out by the assessee which is extracted by CIT (A) as under :- 7.1 As per the scope of work defined in the agreement , the appellant was required to provide its services for implementation of the project , review and approve material, its design results and recommend special test wherever required for materials , suggest substitutes for unsuitable materials , assessee adequacy of inputs such as material and labour, supervise and check the settings out o .....

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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 .....

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or 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 "Salaries". 12 .....

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xplanation ignoring exceptions. Hence It is necessary to examine the nature of work carried out by the assessee. From the nature of work carried out by the assessee it is apparent that it has got the consultancy work related to laying down of roads etc which is for construction activity or like project. 13. Ld AO has held that as assessee is rendering services with respect to various projects and therefore all the services are rendered by the assessee are technical nature. Undenyingly the servic .....

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ion of coordinate bench in case of AGLAND INVESTMENT SERVICES INC.V. INCOME-TAX OFFICER 1985] 22 TAXMAN 9 (DELHI - TRIB.) wherein coordinate bench interpreting the word construction has held as under :- 5. The assessee has placed before us extracts from various dictionaries (international editions) to prove that 'construction' implies and includes engineering and bid evaluation since it is a step-in-aid to construction. The assessee also contends that 'construction' is not a mere .....

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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 cons .....

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eering services are said to be connected with inviting tenders and for other process but the ultimate aim for those tenders and process is the construction of the corporation processing factory and plant and in this view of the matter, the step-in-aid included in these services, viz., engineering and bid evaluations, has to be held as a step-inaid for construction of factories and plants of the Corporation, hence, under section 9(1)( vii) read with Explanation 2 attached thereto the income is no .....

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ee stands on stronger footings than the case relied upon. Ld Dr could not point out any other judicial precedents against the assessee and also could not controvert the decision of coordinate bench in Agland Investment Inc V Ito the case of the assessee is not on stronger footing. 16. Provision of section 44D of the Income tax act provides special treatment of fees of technical services to be charged at gross presumptive rates and expenses incurred there on are not allowed as deduction. The prov .....

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h 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 proper .....

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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 section 80B ; (c) "royalty" shall have the same meaning as in the Explanation 2 to clause (vi) of sub-section (1) of section 9 ; (d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be de .....

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hnical services as defined under above explanation as it relates to construction activity , we are of the view that accordingly that receipt is out of the purview of presumptive taxability u/s 44D of the Income tax Act. 17. Further LD AO has also analyzed the provision of article 12 (4) of the Indo US DTAA and has held that consultancy services provided by the assessee are made available to the clients in form of reports which are used by such clients in their projects. He relied up on the order .....

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. The term Make available has been explained by Hon Karnataka High court in case of CIT V De beers India P Ltd ( 346 ITR 467 ) ( kar) on Indo Netherland DTAA as under :- 21. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of .....

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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 .....

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exposition of the term make Available it s is not the case of the AO that there is imparting of technical skill which is absorbed by the receiver so that NHAI can deploy the similar technology in future without depending on the provider. In view of above we are of the view that these payments do not qualify under article 12 (4) of the DTAA as the conditions of make Available does not satisfy. 19. Regarding Reliance by Ld AO on the decision of AAR in Ericson Rulings 224 ITR 203 (AAR) is also hal .....

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treaty provides that fee for included services may also be taxed in the source State. However, sub-article (6) carves out an exclusion and provides that provisions of sub-article (2) shall not apply if the beneficial owner of fee for included services was a resident of contracting State and carries on the business in the other contracting State in which the fee for included services arises through a PE situated therein. In such a case, the provisions of Article 7 regarding computation of busines .....

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d independent enterprise. In determination of the profit of a permanent establishment, deduction shall be allowed for expenses incurred for the purpose of the business 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 Stat .....

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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 DCIT vs. Boston Consulting Group Pte, Ltd. reported at 2005 94 ITD 31 Mum in the context of the Indo-Singapore Tax Treaty. It was held as .....

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basis, but at a lower tax rate of 15 per cent, barring the case of fees for technical services which are ancillary and subsidiary to the enjoyment of property for which royalties under para 12(3)(b), which are taxed at an even lower rate of 10 per cent. Section 44D r/w Section 1 ISA of the Indian IT Act, and Article 12 of the India-Singapore tax Treaty are, therefore, similar in nature. These alternate paradigms, contained in Section 44D r/w Section 115A and in Article 12 of the India-Singapore .....

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n the India-Singapore tax Treaty, it has to follow that the provisions of the IT Act cannot come into play unless these are more beneficial to the appellant. That certainly it is not the case here. The law is trite that the provisions of taxability under the IT Act, in preference over the provisions of the applicable tax Treaty, cannot be thrust upon an unwilling appellant. Therefore, the provisions of Section 44D cannot be applied in a situation in which the Revenue 's case for taxing the r .....

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, 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 Cra .....

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the appellant company were construction supervisory services of the project supervision of start up and commissioning of the project and material and warehouse management of the project. As per the A.O., these services fell within the ambit of the fee for technical services and taxed the income of the appellant by invoking the provision of section 44D of the Act despite the fact that the receipt of the appellant company were assessable under Article 7 of DTAA between India and U.K. The ITAT did .....

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Act, 2003 where aseesee has been given explicit option to compute its income on net basis if it has maintained books of account. The explanatory memorandum to the finance act stated that the section 44DA was inserted with a view to harmonize the scheme of taxation of royalty and fee for technical services under the act with the provisions of the treaty with various countries. It means that even prior to the insertion of section 44DA, the fee for technical services provided through a PE in India .....

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profession or a permanent establishment in India -with similar provisions in the various Double Taxation Avoidance Agreement, the Bill proposes to insert a new section 44DA to provide that 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 a non-resident (not being 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 co .....

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; 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 infer .....

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