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Raytheon Ebasco Overseas Ltd. Versus Dy. CIT-11 Circle-2 (1) , Mumbai

2016 (3) TMI 501 - ITAT MUMBAI

Income accrued and arisen in India - whether the services rendered by the assessee could be termed FIS as per the provisions of Article 12 of the DTAA? - Held that:- Services rendered by the assessee cannot be taxed u/s.9(1)(vii)of the Act as unless the services were rendered and utilised in India the income could not be taxed in India

Perusal of the contracts, entered into by the assessee with JTPCL,reveal that the services provided by it under the contracts did not in any way make a .....

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re inextricably and essentially linked to the sale of property. In the case under consideration, in our opinion, the services provided by the assessee were linked inextricably and essentially to the start-up services and sale of equipment to JTPCL. Therefore, the payment received by it cannot be treated as FIS. In our opinion,payment received by the assessee under the contract constituted business profit within the meaning of article 7 of the Tax-treaty. As per article 7(1) of the treaty busines .....

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i Kanchan Kaushal, Dhanesh Bafna For The Revenue : Shri Jasbir Chauhan PER RAJENDRA, AM Order U/s.254(1) of the Income-tax Act, 1961 (Act) Challenging the order dated 30.8.2010 of CIT(A)-Mumbai, the assessee had filed the present appeal. 2. The assessee-company filed its return of income on 31.3.1991, declaring total income at Rs.nil. The Assessing Officer (AO) competed the assessment ,u/s. 143(3) of the Act,on 27.3.2001 determining the income of the assessee at ₹ 1,30,96,76,526/-. 3. The .....

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g drawing review to enable integration of the equipment and undertaking document of designs, that the services were split up under the head technical services, start-up services and overall responsibilities. The assessee submitted before the that AO the overall responsibility and management of the project was carried out by the assessee from outside India, that no Permanent Establishment(PE)was created in India, that the amounts received by the assessee for undertaking overall responsibility did .....

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. was received outside India, that portion of the amount received on account of supply of equipment/ spares was not assessable to tax in India either on receipt basis or on accrual /arising basis, that no part of the activity or the receipt was deemed to accrue or arise or was received in India.With regard to technical services it was stated that the entire conceptualisation of the project took place outside India, that the amounts payable related to the services rendered was to be paid outside .....

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of the assessee did not require the assessee to transfer the technology to JTPCL, that no technology,per se,was transferred to JTPCL, that the receipt would not be liable to tax in India.With regard to start up services the assessee contended that such services would arise only after JTPCL had imported the equipments, that the consideration would not involve any transfer of technology by the assessee, that in the absence of a PE the amount received by the assessee for providing start up support .....

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nt for taxation purposes was the place where the services had been actually utilised, that if the fee received by the assessee was for the services utilised in India income would deem to accrue and arise in India, that the Act used the words fee for services utilised in India and not the words fees for services rendered in India , that the power plant had been erected as per the requirements of the Indian Co., that the requirement of JTPCL involved services of the nature needing great technical .....

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tion of the plant, that the plant was one of the first that used corex gas, that it involved technology which was not available in India, that such a plant could not be made from specification sent in manuals or through occasional visits of personnel. With regard to, services under the head overall responsibility, the AO held that same were not just management responsibility, that the technical services could not be provided by the assessee from US, that the employees of the assessee had visited .....

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fee for included services , that the assessee was supplying drawings/ designs relating to construction of the power plant, that it was involved in the operation, maintenance, training of Indian employees, that all these services were made available, that the assessee had also made available technical plans and designs, that same was to be assessed as fees for included services. Finally, he held that services rendered by the assessee were fee for included services(FIS)as per Article 12 of the tr .....

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es as desired by its clients, that the payments received by it as per the agreement with JTPCL constituted business profit in its hand as per the provisions of Article 7 of Indo-US Tax Treaty, that the payment for rendering services had to be judged in the light of provisions of Article 12(4) of the Treaty, that the assessee had not received any royalty from JTPCL, that rendering of various services would not constitute included services , that the assessee had not made available technical knowl .....

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n in India to the assessee as per the amended provisions of section 9(2)of the Act, that FIS had been defined in the tax treaty to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services, that the payment made by Indian company to the assessee for obtaining engineering and design work fell within the definition of FIS under article 12(4)(b) of the treaty, that unless the assessee had provided and made available technical plant/technical .....

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nstructions and training for operation and maintenance of the plant, that in view of technical knowledge, experience and skill made available by the assessee to JTPCL through technical design and client it could be concluded that the assessee had earned FIS, that total income of the assessee was taxable in India as per the provisions of article 12 (4)(b) of the DTAA, that the AO had rightly assessed such FIS at the rate of 15%. 5. Before us, the Authorised Representative(AR)argued that most of t .....

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on applicability of provisions of section 9(1)(viii) of the Act, that the AO had not discussed as to how the services were made available, that the overall responsibilities were not on technical side and therefore same were not covered by the DTAA, that the assessee had not parted with any knowledge or drawing/design. Alternatively, it was argued that even if services were made available as envisaged under Article 12(4) of the Treaty, same was covered by the provisions of Article-12(5)(a) of the .....

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the project, that comprehensive knowledge was made available to the assessee. 5.We have heard the rival submission and perused the material before us. We find that JTPCL had invited bids for a installing a power plant in Karnataka, that the assessee had submitted bids that were accepted by JTPCL, that as per the bid letter the assessee was responsible for carrying out procuring of plant and equipment, basic engineering,review of detailed engineering and construction work at site including erecti .....

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uipments that were necessary for a power plant, that the equipments were to be designed by the identified manufacturers as suggested by the assessee, that it had to ensure that each section of the supply would be designed, specified and manufactured with the skill and care, that it had to ensure and co-ordinate the design of each section and equipment, that under the head start up services it had to deal with the complexities involved in executing the project, that the services under the head st .....

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02,94,536 for rendering services, that JTPCL approached the AO to issue a certificate, u/s.195(2)of the Act, to make payment to the assessee without deducting tax, that the AO concerned directed JTPCL to deduct tax at certain rates, that during the assessment proceedings the AO held that income amounting to ₹ 130.96 Crores was taxable under the head FIS as per the provisions of Article 12(4)(b)of the Indo-US DTAA r.w.s.9(1)(vii), that the FAA upheld the order of the AO. 5.1. Before proceed .....

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ngs to unable integration of the equipment to be supplied to JTPCL v.undertaking preparation of final document of the design of the plant and equipment necessary for the power plant The start-up-services provided by the assessee,under the contract, included the following: i).development of packages thereby the various instrumentation, electrical, mechanical and equipment listing were drawn up and were further broken down into subsystems for the purpose of commissioning by the start-up contract i .....

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case the assessee was engaged in the mining of lignite. It had entered in to an agreement with a Hungarian company for acquiring steam generating plant for more efficient running of its business. The AO held that income had accrued to Hungarian company in India and hence the Indian company was liable for deduction of tax. The Hon ble court decided the issue in favour of the assessee and held that receipts could not be brought to tax in India, that the payments made by it were not taxable under .....

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the agreement was for development, designing, engineering and procuring of equipments and to erect storage tank, that the contract involved offshore and onshore supply of equipments as well as offshore/ onshore supply of services. The Hon ble Supreme Court deciding the special leave petition filed by the assessee, against the ruling of the AAR, held that merely because the contract had been designed as turnkey it would not mean that entire contract must be considered as an integrated one for th .....

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cient territorial nexus with India with the services rendered, that distinction had to be made between rendition of services and utilisation thereof, that as per section 9 (1) (vii) deemed fees for technical services would accrue in India when such fees were paid by a resident, that the said section could not be interpreted so widely to bring to tax the income of a non-resident entity received outside India from a resident for services rendered outside India, that the test of residence was that .....

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aphs 68-72 of the judgments and same read as under: 68.Global income of a resident although is subjected to tax, global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of DTAA. 69. What is relevant is receipt or accrual of income, as would be evident from a plain reading of s. 5(2) of the Act. The legal fiction created although in a given case may be held to be of wide import, but it is trite that the terms of a cont .....

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DTAA, it may not be possible to give an extended meaning to the words 'income deemed to accrue or arise in India as expressed in s. 9 of the Act. Sec. 9 incorporated various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for technical services, thus, would not always come within the purview of s. 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis .....

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rendition of services and utilization thereof. 70. Sec. 9(1)(vii)(c) clearly states "where the fees are payable in respect of services utilized in a business or profession carried on by such person in India." It is evident that s. 9(1)(vii), read in its plain, same envisages the fulfilment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India and (ii) rendered in India. In the present case, both these conditions have not been .....

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ere connected with permanent establishment. Even in relation thereto, principle of apportionment shall apply. 72. The Authority, in our opinion, has committed an error in this behalf, as if services rendered by the head office are considered to be the services rendered by the permanent establishment, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated. It would be contrary to the intent and purport of the Double Taxa .....

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rritorial jurisdiction of a particular State determines its capacity to tax an event, has to be followed. (4) The fact that the contract was signed in India is of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore cannot be deemed to accrue or arise in the country. (5) There exists a distinction between a business connection and a permanent establishment. As the permanent establishment cannot be said to be involved in the transa .....

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ld not constitute sufficient 'business connection , and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Paragraph 6 of the protocol to the DTAA is not applicable, because, for the profits to be 'attributable .....

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t read with memo cannot be given a wide meaning so as to hold that the amendment was only to include the income of non-resident taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in international law also, is that of the taxpayer and not that of the recipient of such services. (5) For s. 9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in Indi .....

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as utilized in India. (8) Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the permanent establishment, and can thus not be attributable to the permanent establishment and therefore not taxable in India. (9) Applying the principle of apportionment to composite transactions which have some ope .....

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ably linked to the supply of goods, and it must be considered in the same manner. In our opinion, considering the above judgments, it can safely be held that services rendered by the assessee cannot be taxed u/s.9(1)(vii)of the Act. 6. Now,we would like to decide the issue as to whether the services rendered by the assessee could be termed FIS as per the provisions of Article 12 of the DTAA. At paragraph 5.1 of our order, we have given the details of services provided by the assessee under the h .....

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fulfilled i. the payments has to be in consideration for services of a managerial/technical/ consultancy nature ii. the services should fulfill the condition set out in any of the clause a or b of the Article. In our opinion, it will be useful to refer to the memorandum of understanding dated 15/5/1989 to the DTAA. As per the MOU technical and consultancy services are considered included services only to the following extent: i. if they are ancillary and subsidiary to the application or enjoyme .....

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f article 12 refers to technical or consultancy services that make available to the person acquiring the service, technical knowledge is, experience, skill, know-how or processes or consists of the development and transfer of technical plan or technical design to such person….. This category is narrower than the category described in paragraph 4(a) because it excludes any services that does not make technology available to the person acquiring the service. Generally speaking, technology w .....

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by obtaining the technical knowledge/ experience/ skill possessed by the service provider. It is possible that service provider may utilise its own technical knowledge in providing the services but that in itself would not render the services being treated as making available to the service receiver. We would like to refer to the judgement of De Beers India Minerals(P)Ltd.(346ITR467),wherein the world make available has been defined as under: 22. What is the meaning of "make available" .....

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technical knowledge, skill?, 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 .....

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y available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. If the twin test envisaged by the above judgment is applied to the facts of the case it has to be held that perusal of the contracts, entered into by the assessee with JTPCL,reveal that the services provided by it under the contracts did not in any way make ava .....

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ly and essentially linked to the sale of property. In the case under consideration, in our opinion, the services provided by the assessee were linked inextricably and essentially to the start-up services and sale of equipment to JTPCL. Therefore, the payment received by it cannot be treated as FIS. In our opinion,payment received by the assessee under the contract constituted business profit within the meaning of article 7 of the Tax-treaty. As per article 7(1) of the treaty business profit of a .....

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y for the said services without deducting tax at source, that the AO held the assessee to be in default under section 201 of the Act. The assessee argued that the US company was a tax resident of the USA, that it did not have any permanent establishment in India during the year under consideration as contemplated by article 5 of the DTAA, that the US company did not make available any technical knowledge to the assessee, that the payment made by it to the non-resident company was not taxable in .....

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same cannot be taxed in India. It was, therefore, necessary to ascertain whether the services rendered by could be termed as technical or consultancy services. In this regard it was observed that was a management guru. A perusal of the presentation made by him showed that the services rendered by were essentially in the nature of shading management experiences and business strategies and it had nothing to do with the Pharma industry in particular. The services rendered by CKP Inc., could not be .....

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ssee company by CKP, as the services rendered by it to the assessee company were merely in the nature of sharing management experience and business strategies…….. As per memorandum of understanding (MoU)to the India-US tax treaty consultancy services would fall in the definition of fees for technical services only if the same are technical in nature. Consultancy services which are non-technical in nature would not be covered by definition of fees for included services…. In v .....

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ia in the year under consideration the same was not chargeable to tax in its and in India consequently, the assessee company was not liable to deduct tax at source from the payment made to CKP and no liability could be fastened it under section 201/201 (1A). Therefore the impugned order of the Commissioner (Appeals) upholding the order of the assessing officer was to be reversed and the appeal of the assessee was to be allowed. The second issue was about payments made by the assessee to various .....

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