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Dy. Commissioner of Income Tax, (International Taxation) -I, Ahmedabad Versus Joint Stock Company Zangas

2016 (9) TMI 10 - ITAT AHMEDABAD

Income derived from two pipeline projects - Rate of tax under Indo-Russia DTAA - business income OR fee for technical service - Held that:- The Tribunal decision rendered in the case of Voith Siemens Hydro (2010 (3) TMI 1112 - ITAT DELHI ) is squarely applicable in the present case and as per this decision of the tribunal in the light of the facts of the present case, the activities undertaken by the assessee does not fall within the exclusion category of Explanation (2) to Section 9(1)(vii) of .....

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ere as per the consortium agreement and as per the terms of contract awarded by GAIL to the consortium, the assessee has not done those extra activities and the consideration received by the assessee is as per the co operation agreement for the activities provided in the co operation agreement and having accepted by the A. O. the amount of consideration received by the assessee at 3% of gross receipts of the consortium, it has to be accepted that the same is for providing FTS as per the co opera .....

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versing Assessing Officer’s finding treating assessee’s income from the two pipeline projects as business income instead of that declared under the head fee for technical services. The Revenue’s sole substantive ground is declined. - ITA No.474/Ahd/2016 - Dated:- 26-7-2016 - SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER For The Appellant : Shri Albinus Tirkey, Sr. D.R. For The Respondent : Shri J.P. Shah, A.R. ORDER PER S.S. GODARA, J.M. This Revenue s appeal for ass .....

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iating the fact that the primary responsibility of the execution of the contract was of the assessee. Further the assessee company s responsibility was for the execution of the project right from the review of drawing, project management till the final commissioning of the project. Thus it is evident that the assessee company s role is much more than simply providing technical services thereby the receipts were treated as business income. (iii) The Ld. CIT(A) has erred in law and on facts in dir .....

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taxed @10% under Article 12 of the Indo-Russia Double Taxation Avoidance Agreement (DTAA) along with the above stated business loss taxable @ 14% amounting to ₹ 7,36,071/-. There is no dispute that assessee s receipts in the impugned assessment year have been derived from IOCL Dadri-Panipat Pipeline Project (DPPL) and GAIL s Vijaipur-Dadri-Bawana Pipeline Project (VDPL). It declared the above stated receipts as fee for technical services. The Assessing Officer sought to tax the same as bu .....

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solely. The Assessing Officer observed that the assessee overall supervised the above two pipeline projects thereby undertaking various responsibilities as per the corresponding letters of acceptance issued by the two oil Companies. He accordingly opined that all this amounted to business activities of construction of pipeline project of India and for this purpose only assessee had opened the branch office in India with prior approval. 4. The assessee filed reply to Assessing Officer s proposal. .....

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cause reasoning. He dealt with Indo Russian DTA clauses as well to opine that Article 12 (2 & 5) thereof provided for 10% rate of taxation in case of fee for technical services only in absence of a permanent establishment in the state of rendering the services in question. He accordingly applied Article 7 of the DTA applicable in case of business profit to be taxed in a case of an enterprise carrying out its activities attributable to the state of permanent establishment as it existed in the .....

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e ITAT, Ahmedabad for A.Y. 2007-08. 4.1 I agree with the appellant that between VDPL project and MMPL project there is no change in the facts. The MMPL project was also executed for BPCL and on the same lines as done for the VDPL project. 4.2 In the case, all the objections of the A.O. are based on the consortium agreements and agreements of the consortium with GAIL and it has been contended that since the appellant is the leader of consortium and as per the terms of contract with GAIL, the appe .....

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d in the case of Aditya Birla Nuvo Ltd. vs. ADIT as reported in 44 SOT 601 (Mumbai), it has decided that the activities undertaken by the appellant does not fall within the exclusion category of Explanation (2) to Section 9(1)(vii)of the Income Tax Act, 1961. 4 .4 The Hon ble Tribunal has observed that even if extra responsibility of the appellant is there as per the consortium agreement and as per the terms of contract awarded by GAIL to the consortium, the appellant has not done those extra ac .....

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not applicable in the present case as per which the income of the appellant with regard to PDPL project is liable to tax @ 10% as has been claimed by the appellant. The tribunal has therefore, directed the A.O. to apply the provisions of sub clause BB of clause (b) of subsection (1) of Section 115A alongwith section 9(1)(vii) of the Act. 4.6 As facts of the present assessment year is similar to facts before the Hon'ble ITAT and my predecessor CIT(A), the A.O. is directed to apply the provisi .....

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ee s income derived from the above stated two pipeline projects as its business income instead of fee for technical service as already declared at the latter s behest. We notice from Assessment Order that even the Assessing Officer is fair enough in observing that there is no distinction on facts in the impugned assessment year viz-a-viz assessment year 2007-08. This case file reveals that a co-ordinate bench in assessee s appeal ITA No.3399/Ahd/2010 for assessment year 2007-08 decided on 19.08. .....

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the issue in dispute before us are contained in Section 9(1)(vii) and also in Section 115A and the provisions of Section 44DA are also relevant. We, therefore, reproduce the provisions of Section 9(1)(vii), Section 44DA and section 115A of the Act: Section 9(1) : The following incomes shall be deemed to accrue or arise in India:- (vii): Income by way of fees for technical services payable by - (a) the Government ; or (b) a person who is a resident except where the fees are payable in respect of .....

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y of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1. - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2] - For the purposes of this clause, fees for technical s .....

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ed 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 31st day of March, 2003, where such non-resident (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 .....

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profession in India; or (if) 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: 115. [Omitted by She Finance Act, 1987, w.e.f. 1-4-1988.] [Tax on dividends, royalty and technical service fees In the case of foreign companies. 115A. [( 1) Where the total income of- (b) [a non-resident (not being a company) or a foreign company, includes any income by way of royalty or fee .....

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the agreement is in accordance with that policy, then, subject to the provisions of sub-sections (1 A) and (2), the income-tax payable shall be the aggregate of,- [(BB) 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 ten per cent if such fees for technical services are received in pursuance of an agreement made on or after the 1st day of June, 2005; and] 9. From the above provisions we find that as per .....

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not the case of the A.O. that the receipt in question is chargeable to tax under the head salary . The second exclusion is regarding those considerations, which are for any construction, assembly, mining or like project undertaken by the recipient i.e. the assessee in the present case. The case of the A.O. in the present case is that the amount received by the assessee is for construction project and hence, it is outside the definition of FTS and the claim of the assessee is that this objection .....

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s been prescribed in the ratio of 3% for the assessee, 96% for KPTL and the balance 1% was reserved for common expenses of the consortium. Regarding the 1% also, it was agreed afterwards that if there is any surplus, it will go to KPTL and ifs there is any deficit, it will be made good by KPTL. Hence it was agreed that 3% of gross receipt of consortium will go to the assessee company and the balance 97% will go to KPTL. KPTL will be responsible for all the arrangements of resources as well as ex .....

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angas Shall provide (he following design & engineering services under civil & structural head, based on the topographical and soil investigation data collected by KPTL (through an experienced & competent agency)- i) Review of Layout plan to enable finalization of Plot plan for - > Sectionalizing Valve Station - 9 Nos. > Intermediate Pigging Station - 1 Nos. ii) Review of Structural & Architectural design of Control Room for a typical > Sectionalizing Valve Station > S .....

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ng b. Electrical Review of Design & Engineering of Electrical system for each SV and Terminal station covering & including the following: > Single Line Diagram > Cable Layout > Earthing Grid Layout > Electrical Distribution Plan within the Building > incoming Power Pane) Design & Engineering > Design & Engineering of Distribution Panels & Boards > Switchgear and Safety Engineering > Light Engineering for Control Room, Guard Cabin, Operating Area > R .....

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shing System based on CO2 flooding and clean agent system, including the following:- > Data sheets of equipment > Review of vendor data > Review of constructional details given by vendor e. Pipeline Crossings > Review of Design & Engineering of HDD crossings > Design &.Engineering of Bored crossings f. Instrumentation Review off Design of field Instrumentation System as per Specifications including following :- > Material Take Off > Instrument Cable Layout > Detai .....

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for various aspects i.e. (a) Civil, & structural (b) Electrical, (c) Cathodic protection, (d) equipment Design & Engineering, (e) Pipeline Crossing and (f) Instrumentation. The 2nd item of activities included in the scope of work of the assessee company was preparation of welding procedure and welder qualification procedure, 3rd item is review of work procedure for pipeline laying and 4th responsibility is for deputation of experts for site review of implementation by KPTL and technical .....

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oith Siemens Hydro Kraftwerkstechnik GMBH & Co. (supra), it was held by the Tribunal that although as per the terms of contract with OHPC, the assessee could be assumed be liable to do assembly erection, testing and commissioning of power project as also the supervision thereof, in the absence of being any evidence that assessee having done any such activity other than supervision simplicitor, erection and testing and commissioning, the activities of the assessee cannot be said to fall withi .....

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sioning of power project as also the supervision thereof but the actual activities undertaken by the assessee company in that case was supervision simplicitor and assembly, erection, testing and commissioning and hence such activities of the assessee do not fall within the meaning of term construction and assembly as provided in the exclusion provided in Explanation (2) to section 9(1)(vii) of the Income tax Act, 1961. Hence, as per this Tribunal decision, the term contract alone is not the deci .....

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in the hands was done by the assessee and the assessee s activities are not confined to mere providing of FTS. But the assessee has brought on record the corporation agreement along with its Annexure 1 which outlines the scope of the activities of the assessee. As per the scope of activities as has been reproduced above, the assessee is required to provide design and engineering of various aspects and is also required for preparing the welding procedure and is also required to review the work p .....

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TL and technical services provided by the assessee and the entire construction work was to be undertaken by the KPTL. As per these activities included in the scope of work of the assessee company, we are of the considered opinion that on the basis of these facts, it cannot be said that the assessee is doing the construction work and the consideration received by the assessee is from doing the construction work. Nothing has been brought on record by the A. O. to show that anything extra was done .....

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tax Act, 1961. 13. The other Tribunal decision rendered in the case of Aditya Birla Nuvo Ltd. (supra), is also supporting the case of the assessee and as per this Tribunal decision also, the scope of work actually undertaken by the assessee company does not fall within the exclusion category of Explanation (2) to Section 9(1)(vii) of the act. 14. One aspect of cooperation agreement has also been accepted by the authorities below in so far as the amount of income of the assessee is concerned. The .....

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ome should have been quantified by him after considering the gross receipt of the consortium and after deducting al the expenses incurred for the purpose and the remaining income should have been distributed between the two partners of the consortium i.e. the assessee and KPTL on the basis of consortium agreement or on some reasonable basis. This has not been done by the A.O. and he has accepted the income declared by the assessee which is to the extent of 3% of gross receipt of the consortium o .....

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ration agreement. Hence, even if extra responsibility of the assessee is there as per the consortium agreement and as per the terms of contract awarded by GAIL to the consortium, the assessee has not done those extra activities and the consideration received by the assessee is as per the co operation agreement for the activities provided in the co operation agreement and having accepted by the A. O. the amount of consideration received by the assessee at 3% of gross receipts of the consortium, i .....

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