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Foster Wheeler France S.A. Versus The Dy. Director of Income-tax, International Taxation -1, Chennai

2016 (3) TMI 722 - ITAT CHENNAI

TDS liability - technical knowledge, expertise, knowhow, provided by Foster Wheeler USA - DTAA - Held that:- The technical knowledge, expertise, knowhow, provided by Foster Wheeler USA were very much made available to the assessee. Hence, the assessee is liable to deduct tax while making payment. Therefore, the assessee is also liable to pay interest under Section 234A and 234B of the Act. Accordingly, this Tribunal do not find any reason to interfere with the order of the lower authority and th .....

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rtaining to assessment years 2008-09 and 2009-10. Since common issue arises for consideration in both the appeals, we heard these appeals together and disposing of the same by this common order. 2. Sh. B. Ramakrishnan, the Ld. representative for the assessee, submitted that the assessee is a non-resident company incorporated in France. According to the Ld. representative, the assessee-company entered into an agreement for providing technical and engineering services in India. During the assessme .....

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m Limited, the assessee in turn entered into another agreement with Foster Wheeler USA to monitor and review the work done by the assessee s employees on an agreed consideration. The Ld. representative further submitted that the matter was referred to the Transfer Pricing Officer. The Transfer Pricing Officer found that there was no requirement for any adjustment with regard to above said transaction. The Assessing Officer passed the draft assessment order by disallowing the payment made to Fost .....

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ration, the Ld. representative submitted that sharing of best practices in engineering services in the form of written procedure, forms, specifications and details does not mean that technical knowledge has been made available to the assessee. Merely because certain procedures were given to the assessee in the form of documentation it does not mean that the assessee could apply such procedures in future without the aid of Foster Wheeler USA Corporation. Referring to Section 195 of the Act, the L .....

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echnical knowledge, expertise, skill, knowhow or process, etc. were made available to the assessee and the assessee could independently apply such technical knowledge, expertise, knowhow, etc. in future, the payment made by the assessee cannot be construed as fee for technical service. According to the Ld. representative, the key difference between the definition of fee for technical services in Indian Income-tax Act and Double Taxation Avoidance Agreement is that the technical knowledge, expert .....

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in Double Taxation Avoidance Agreement, the Ld. representative submitted that the technical service received by the assessee should make the assessee master in the subject. The Ld. representative further submitted that when the assessee does not get equipped with knowledge or expertise, it cannot be said that the knowledge or expertise was made available to the assessee by the service provider. In such a case it cannot be said that technical service was made available to the assessee. 4. The Ld .....

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ice as provided in Double Taxation Avoidance Agreement. Therefore, the payment made by the assessee is not liable for taxation. 5. Referring to judgment of Delhi High Court in Guy Carpenter & Co. Limited (ITA No.202/2012), the Ld. representative submitted that once technical knowledge was not made available to the assessee, it cannot be construed as fee for technical service. The Ld. representative has also placed his reliance on the decision of Pune Bench of this Tribunal in Sandvik Austral .....

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technical knowledge is transferred through technical service, then alone the payment is considered as fee for technical services and liable for taxation in India. When the assessee was not made available any technical knowledge or expertise of Foster Wheeler USA so that the assessee could perform its function independently in future, it cannot be said that what was paid by the assessee is fee for technical service. Hence, according to the Ld. representative, in view of the Double Taxation Avoid .....

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t source. Therefore, the provisions of Section 234A of the Act will not be applicable. Referring to Section 234B of the Act, the Ld. representative submitted that since the taxes on income chargeable to tax have to be deducted at source, there is no requirement to pay advance tax. Hence interest under Sections 234A and 234B cannot be levied. The Ld. representative placed his reliance on the judgment of Madras High Court in CIT v. Madras Fertilizers Limited (149 ITR 703). 7. On the contrary, Sh. .....

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uestion arises for consideration is whether the payment made by the assessee to Foster Wheeler France USA is taxable in India or not? Referring to Explanation 2 to Section 9(1)(vii) of the Act, the Ld. D.R. submitted that when the assessee paid fee for technical service for utilizing service in the business or profession carried on in India for the purpose of earning income, then it is deemed that the recipient-company earned income from India. The Ld. D.R. placed his reliance in Section 9(1)(vi .....

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ster Wheeler France USA. 8. Now coming Double Taxation Avoidance Agreement between India and USA, the Ld. D.R. pointed out that in order to classify a service as technical service , the expertise, skill or knowledge shall be made available to the assessee. In this case, according to the Ld. D.R., the assessee is executing engineering projects for Reliance Petroleum Limited. The assessee received best practices in different engineering specifications as well as engineering details to be adopted i .....

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Wheeler USA, the assessee-company can provide similar service in future to other companies including Reliance Petroleum Limited. Therefore, what was received by the assessee is not only technical services but also the technical knowledge, expertise and knowhow was made available to the assessee by Foster Wheeler USA. Once the technical knowledge, expertise, knowhow were made available to the assessee, according to the Ld. D.R., even under Double Taxation Avoidance Agreement, the payment made by .....

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d the relevant material on record. The assessee, a nonresident company incorporated in France, entered into an agreement with Reliance Petroleum Limited for providing technical, engineering services in the premises of Reliance Petroleum Limited in relation to delayed Coker Unit. For providing such services, the assessee-company has entered into another agreement with Foster Wheeler USA, an associate of the assessee-company. The assessee paid ₹ 3,34,99,151/- for the assessment year 2008-09 .....

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between the assessee and Foster Wheeler USA. Therefore, the Assessing Officer has not made any adjustment with regard to transaction between the assessee and Foster Wheeler USA, an associate concern at USA. While passing draft assessment order, the Assessing Officer found that the payment made by the assessee to the associate concern at USA was liable for deduction of tax at source under Section 195 of the Act. Since tax was not deducted, the Assessing Officer disallowed the entire payment made .....

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ee for technical services under Double Taxation Avoidance Agreement between India and USA. Therefore, the recipient-company, namely, Foster Wheeler France S.A is not liable to be taxed in India. Consequently, no tax needs to be deducted by the assessee. Hence, there cannot be any disallowance under Section 40(a)(i) of the Act. To appreciate the contention of the assessee, let s first examine whether the payment made by the assessee is liable for taxation under the Indian Income-tax Act. We have .....

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e in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day April, 1976, and approved by the Central Government. Explanation - 1. For the purposes of the foregoing proviso, an agreement made on or afte .....

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de consideration for any construction, assembly, mining or like project undertaken by the recepient or consideration which would be income of the recipient chargeable under the head "Salaries". We have also carefully gone through Explanation 2 to Section 9(1) of the Act, which reads as follows:- Explanation - For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the .....

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sident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident : 11. A bare reading of Explanation 2 to Section 9(1)(vii) and Explanation 2 to Section 9(1) clearly says that the payment made by the assessee with regard to managerial, technical and consultancy services is liable to be taxed in India since the services are utilized in the business for earning income in India. Therefore, this Tribunal is of the considered opinion that the inco .....

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uestion now arises for consideration is whether the technical knowhow, expertise, etc. were made available to the assessee by Foster Wheeler USA, the associate concern in USA. 13. We have carefully gone through the service rendered by Foster Wheeler USA. For the purpose of convenience, we are reproducing the service rendered by Foster Wheeler USA, the associate concern in USA, as reproduced by the Dispute Resolution Panel. (1) Engineering Support Service in the nature of Sit Engineering, Structu .....

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itten practices, procedures, forms, specifications and details. Review of information regarding technical reports, technical standards and quality management standards. Review and provide systems for meeting the project budget and client satisfaction. Review the work process and provide timely input for planned execution. Review of standards and job specifications indicating technical content. (2) Information Technology (IT) Services in the nature of computer software, hardware, help desk, suppo .....

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ceived the above services from Foster Wheeler USA. In fact, the assessee has received execution plans with schedules, specifications, etc. Foster Wheeler USA reviewed the working of the assessee in respect of its plans, execution and also provided time schedule with emphasis on key milestones. The assessee has also received systems for meeting the project budget and client satisfaction. The job specification was also given by the foreign company Foster Wheeler USA. 15. Let s examine whether Fost .....

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ribunal in US Technology Resources Pvt. Ltd. v. ACIT in I.T.A. No.222/Coch/2013 dated 27.09.2013. On identical set of facts, the Cochin Bench of this Tribunal found that the foreign company made available the technical knowledge, experience, experimentation to the assessee-cy. In fact the Cochin Bench of this Tribunal has observed as follows:- 28. Now the assessee here is admittedly making use of the advice, input, experience, experimentation and assistance rendered by the USA company in the dec .....

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ng use of the inputs, experience, experimentation, assistance and advice rendered by them for taking a better and possible decision in order to achieve the desired objectives / goal. Therefore, in the context of professional management and decision making process, the advice and service rendered by the USA company which was made use by the assessee in managerial decision making process is in the nature of technical services which facilitate the assessee to take correct and suitable decision towa .....

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making process is a highly complicated and technical one. Unless the assessee gets a technical input and advice from financial and risk management experts it may be difficult to select a right process for the growth of the company. It is not the case of the assessee that in a given set of facts / problem, the USA company gave its solution or advice. The solution or decision is admittedly taken by the assessee company on the basis of the advice, service rendered by the USA company. Therefore, it .....

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pany is made available to the assessee company, they may not be able to analyse the situation to avoid risk in the business. It is also necessary to note that apart from providing the input, service and advice, the USA company is also providing training to the employees of the assessee company. Therefore, this Tribunal is of the considered opinion that the service of technical input, advice, expertise, etc. rendered by the USA company are technical in nature as provided in clause 4(b) of Article .....

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ired loan. A non resident company offered its services as a financial advisor to the petitioner company s project.. The services offered by the non resident company includes financial structure and security package to be offered to the lender, study of various lending alternatives for the local and foreign borrowings, making an assessment of export credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the petitionercompany in loan negotiations .....

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ndering of service, the non resident Zurich company sent an invoice for payment of success fee to the extent of US$ 17,15,476.16 (Rs.5.4 crores). The assessee company approached the income-tax authorities in India for issuing a no objection certificate to remit the said amount claiming that the non resident company had no permanent establishment in India and all services were rendered from outside India. The Income-tax Officer refused to issue the certificate. On a writ petition before the High .....

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f the non resident company and pursuing the matter was that of the assessee company itself, and not that of the non resident company. Therefore, the office of the assessee company could not be treated as the place of business of the non-resident company. In those facts and circumstances, the Andhra Pradesh High Court found that the business connection between the assessee company and non resident company had not been established. However, it was found that the success fee would fall within the d .....

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to comment on the applicability of this judgment of the Andhra Pradesh High Court. The ld.counsel submitted that the Andhra Pradesh High Court had no occasion to consider the DTAA between India and USA. Therefore, the judgment of the Andhra Pradesh High Court is not applicable. No doubt, DTAA agreement between India and USA was not considered by the Andhra Pradesh High Court, but the ratio laid down by the Andhra Pradesh High Court clearly shows that advice given to procure loan to strengthen t .....

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TAA. 32. We have also carefully gone through the judgment of the Karnataka High Court in the case of De Beers India Minerals Pvt Ltd (supra). In the case before the Karnataka High Court, the assessee engaged in the business of prospecting and mining for diamonds and other minerals. The assessee entered into an agreement with Netherland company to engage their services for conducting airborne survey for high quality, high resolution, geophysical data suitable for selecting kimberlite targets. For .....

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t the Netherlands company has not imported any technology to the assessee and they have just used the technology and have gone back with the same. The CIT(A) further found that no technology has been made available to the assessee by the Netherlands company, therefore, the consideration paid does not fall within the definition of Article 12(5) between India and Netherlands. On further appeal by the revenue before the Tribunal it was held that the payment in question for services rendered would n .....

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e assessee was not being possessed with technical know how to conduct the prospecting operation. The maps and photographs which were made available to the assessee cannot be considered as technology made available. Therefore, the question of Netherlands company transferring any technical plan or technical design does not arise in the facts of the case. 33. As observed by the Karnataka High Court, the Netherlands company surveyed the area, prepared plan and photographs which are made available to .....

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any technical expertise. In fact, the decision was taken by the Netherlands company fixing the location for mining. In the case on our hand, the facts are entirely on different set of facts. The decision was not taken by the USA company. The USA company facilitated the assessee company for making decision in the managerial, financial and risk management system by providing their knowledge, expertise, experimentation to the assessee company. The entire experiment, knowledge, expertise was made av .....

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case before the Mumbai Bench of this Tribunal the assessee engaged in manufacturing suiting, engineers steel files and rasps and cement in India. With a view to muster funds it proposed to issue two types of Global Depository Receipts (GDRs) in the international market. The assessee company engaged a UK company as lead managers to the issue. The assessee paid necessary charges for the services rendered by the lead managers and the managers. However, no tax was deducted by the assessee company fo .....

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agers and managers are managerial or consultancy services within the meaning of section 9(1)(vii) r.w.s. Explanation 2 of the Act and therefore the payment made to managers are income by way of fees for technical services deemed to accrue or arise in India. Referring to the DTAA between India and UK, the Tribunal found that no technical knowledge, experience, skill, know how or process, etc. was made available to the assessee company by the non resident managers to the Global Depository Receipts .....

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ender service in connection with the issue of Global Depository Receipts for which they are entitled for remuneration. The Tribunal found that the services of the managers for issue of Global Depository Receipt were utilized outside India for the purpose of carrying on its business in India. Since the arrangement is only for marketing the Global Depository Receipt outside India, the Tribunal found that the commission paid to UK company cannot be considered to be fee for technical service, theref .....

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technical knowledge supplied by the foreign company remains with the assessee for ever and it could be even used in future for the business of the assessee in the process of management decision, financial decision making and risk management analysis. Therefore, the decision of the Mumbai Bench of this Tribunal in the case of Raymond Ltd (supra) is also not applicable to the facts of the case. 35. We have also carefully gone through the decision of the Pune Bench of this Tribunal in the case of S .....

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t the assessee has to make available required technical know how for solving the problem in the I.T. related problems. In the case before us, the USA company has to provide all expertise to the assesee company which would be utilized in the decision making process related to management, financial and risk management. Therefore, this decision of the Pune Bench of this Tribunal may also not be applicable to the facts of the present case. 36. We have also carefully gone through the decision of the .....

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al was essential in the nature of sharing management, experience and business strategy. Therefore, the Tribunal found that the services rendered by US company could not be termed as technical services in nature. In the case before us, it is not a case of sharing of experience and business strategy. It is a case of providing technical information for taking managerial and financial decision. The assessee also used that technology, information and expertise of USA company in management risk analys .....

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thority for Advance Ruling in Intertek Testing Services India (P) Ltd (supra). The Authority for Advance Ruling considered the DTAA between India and UK and found that rendering of service and making use of service go together. It was found that rendering of service and making use of the service are two sides of the same coin. After considering the word which the Authority for Advance Ruling found that rendering technical or consultancy service is followed by relative pronoun which and it has th .....

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he information, expertise and training provided by the USA company was absorbed by the assessee company in their decision making process and it was utilized for the purpose of business. The USA company made available all the technical data, information, expertise to the assessee company which was absorbed and made use of by the assessee company in their managerial and financial decision making process and other decision in the development of the business. Therefore, the expertise and technology .....

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case of Dee Beers India Minerals (P) Ltd. (supra), the assessee engaged in the business of mining for diamonds and other minerals. In the course of its business activity, the assessee before Karnataka High Court entered into an agreement with Nethrland company to engage its services in airborne survey for high quality, high resolution, geophysical data suitable for selecting the available minerals. The Netherland company gave data, maps and photographs by air borne survey and located the exact a .....

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details When the procedures and specifications are provided to the assessee, which is also a specialized company in engineering and execution of construction, this Tribunal is of the considered opinion that the specifications and details provided by foreign company can very well be used in the business of engineering and construction. It is not a case of air borne survey or providing guidelines for locating or identifying the potential area to locate centres which could not be done by the assess .....

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onds and other minerals was not transferred. Locating diamonds cannot be done by the assessee-company independently. The assessee-company before the Karnataka High Court is expertise only in excavation and not in performing air borne survey or locating the availability of the minerals. In this case, the assessee is also an expertise company in engineering and construction works. Therefore, when the specifications and other procedures are made available to the assessee-company and the foreign com .....

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arpenter & Co. Limited (supra). In the case of Delhi High Court, the assessee-company was an international reinsurance intermediary broker and was a tax resident of United Kingdom. The assessee before the Delhi High Court received commission from various insurance companies operating in India. The Assessing Officer found that the receipt of commission is fee for technical services. While illustrating the transaction, the High Court extracted the observation made by the Tribunal at para 11 of .....

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s for New India Assurance Co. will be entitled to 10% brokerage. The assesseecompany was rendering only an intermediary service while acting as a facilitator in getting the reinsurance cover for New India Insurance Co. The assessee is not doing any other work other than acting as an intermediary in the reinsurance process. In the case before us, It is not the case of the assessee that it is playing only an intermediary role. It is receiving technical services like specifications, procedures, pro .....

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hrough the case of Intertek Testing Services India (P.) Ltd. the decision rendered by Authority For Advance Rulings. The Authority For Advance Rulings found that technical knowledge and experience of service provider should be imparted and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the service provider. In this case also, the information, expertise, execution plan, project budget, technical standards and quality manage .....

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case before Pune Bench, the assessee-company providing IT support services to its group companies in the nature of help desk, administrative and maintenance of IT support. The assessee claimed before the Assessing Officer that the assessee was offering only IT support services and not imparting any technical knowhow and knowledge to its Indian companies. However, the Revenue disputed the claim of the assessee. The case of the Revenue before the Pune Bench is that the assessee-company not only re .....

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case before us, what was provided by Foster Wheeler USA is the service in the nature of tracking execution plans, schedules with emphasis on key milestones, written practices, procedures, specifications and details in execution of the project, furnished review of information regarding technical reports, technical standards and quality management standards, provided systems for meeting project budget and client satisfaction. On the basis of the technical knowledge, information provided by Foster .....

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ng project with Reliance Petroleum Limited, such knowledge is very much available with the assessee and the same can be implemented with other projects with other clients. It is to be remembered that the assessee is not a layman. The assessee company is expert in providing technical and engineering service. Therefore, the assessee is capable of observing the opinion / advice given by USA associate and implement the same vide their future project. Therefore, this Tribunal is of the considered opi .....

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