TMI Blog2018 (6) TMI 1278X X X X Extracts X X X X X X X X Extracts X X X X ..... xation fee for technical services. The Revenue’s plea therefore that such benefits can be imported from Indo-Portugal DTAA to Indo-Sweden DTAA only after necessary notification u/s 90(1) of the Act is devoid of merit since the protocol itself makes it clear that the said ‘MFN’ clause “shall apply” in India-Sweden DTAA. Issuance of a notification has nowhere been stipulated as a condition precedent therein. Section 90(1) is very clear that only a DTAA would be notified and not the application of such a ‘MFN’ clause. The Revenue’s next argument seeking to place reliance on section 9(1)(vii) Explanation does not carry any substance since the assessee is already covered under the relevant beneficial provisions of a DTAA . The Revenue has therefore failed to prove that assessee’s recipient was assessable to tax in India qua the impugned payments under Chapter-XVII of the Act. Hon’ble apex court’s landmark decision in GE India Technology Centre Pvt. Ltd. Vs CIT [2010 (9) TMI 7 - SUPREME COURT OF INDIA] settles the law that liability to deduct TDS applies only in case the payment in question is assessable to tax in overseas recipient’s hands in India under the provision of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efits to other similar countries in absence of a corresponding notification. 3. We now advert to the relevant facts. The assessee has admittedly made the impugned payments to its swedish payee involving the sum ,in question of ₹ 90,65,000/- without deducting TDS thereupon. This appears to be the second round of proceedings before the tribunal. The tax payer had earlier filed its appeal ITA No.458/Kol/2012 challenging correctness of the impugned section 40(a)(i) disallowance made in course of assessment framed on 30.12.2010 as affirmed by the CIT(A) in the first round lower appellate order dated 17.02.2012. A coordinate bench restored the assessee s appeal back to the CIT(A) with the following directions:- 3. So far as the first ground of appeal is concerned, the relevant material facts, as culled out from material on record, are like this. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has made a payment of Euros 1,60,440 (equivalent to INR 90,65,000) to a Sweden based entity by the name of Triginta Travels and Tours in respect of all inclusive tour in Scandinavia for 111 adults, 6 children and 1 tour manager. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty could be disallowed under section 40(a)(i) is quite premature inasmuch as the vicarious provisions of tax deduction at source can only be invoked when there is primary tax liability of the recipient; and when primary tax liability of the recipient has not at all been examined under the provisions of applicable tax treaty, it is premature to hold that the recipient indeed had a tax liability in India. Before invoking the provisions of Section 40(a)(i), it is sine quo non for the Assessing Officer to demonstrate that the non resident recipient of payment was taxable in respect of income embedded in that payment in India, and, in order to arrive at s eh a finding, it is necessary that the said income was, in addition to taxability under the Income Tax Act, also taxable in India in terms of the provisions of the applicable tax treaty. These aspects have not been examined of the authorities below, and we do not consider it appropriate with these treaty related issues when these issues have not been examined, for whatever reasons, by the authorities below, In this view of the matter, without addressing ourselves to the merits of the arguments advanced before us, we deem it fit and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention, agreement or protocol between India ' and a third state which is a member of the OECD India limits its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or scope more restricted than the rate or scope provided in this convention for on the said items of income, the same rate or scope as provided for in that convention, agreement or protocol on the said items of income was also apply under this convention. It has been brought to my attention that subsequent to signing of the DTAA with Sweden, India has entered into DTAA with Portugal which is also a member of the OECD. In the DTAA with Portugal, taxation of fees for services has been dealt with in Article-12 and the term used therein is 'fees for included services'. The definition of included services' given therein is quite restricted viz. ancillary services for enjoyment of right, property or information or services for making available of technical knowledge, experience, skill or knowhow or process or development and transfer of technical plan or technical design. As per the Protocol in the Indo- Swedish DTAA, the scope of taxability is to be examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India-Sweden Double Taxation Avoidance Agreement contains a protocol forming part of case records before us at pages 14 to 15. This protocol clause with reference to Articles 10, 11 and 12 specifically stipulates that if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. Article-12 of this India- Sweden DTAA deals with fees for technical services. The assessee is very fair in not challenging the CIT(A) s former findings on merits holding the payments in question to be fee for technical services. The sole question therefore is whether or not the CIT(A) has rightly held the relevant restricted assessment of fee for technical services in India-Sweden DTAA as stipulated in India Portugal DTAA even in absence of a corresponding notification. Its answer; has to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment under Section 90 of the IT Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement. Thus, where a DTAA provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the Agreement it is the basic law, i.e. the IT Act, that will govern the taxation of income.' In our view, the Circular reflected the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the general principles of taxation applicable to the Contracting States; otherwise, the double taxation avoidance agreement will have no meaning at all. 6. We will, therefore, firstly examine taxability of impugned payments to Decoufle, in the light of provisions of applicable India-France DTAA. In view of the provisions of Article 30(1)(a)(i) of India-Prance DTAA dt. 29th Sept., 1992, which came in force on 1st Aug., 1994, this DTAA is applicable with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature. At this stage, it is also important to refer to an extract from the protocol signed at the time of conclusion of the aforementioned India-France DTAA. The relevant portion is reproduced below : PROTOCOL At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the convention. ................. 7. In respect of Article 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1st Sept., 1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3(a) of this article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in para 3(b) of this article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Article 13(5) The definitions of fees for technical services in para 4 of this article shall not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in para 3(a)* of this article; (b) for services that the ancillary and subsidiary to the rental or ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pendent Personal Services). [*Art. 12(3)(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof). 12. We have also noticed that Article 12(4) and 12(5) of the India-Switzerland DTAA provides as follows ; Article 12(4) For purposes of this article, the term fees for included services means : (a) payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services are ancillary and subsidiary to the application or enjoyment of the right, for which a payment described in sub-para (b) of para 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services', in these treaties, appear to be for more restricted than the scope of the same expression in Indo-French DTAA which broadly defines fees for technical services as to mean payments in consideration for services of a managerial, technical or consultancy nature. Therefore, whereas payments for all kind of technical services are to be treated as 'fees for technical services' for the purpose of Article 13(4) of Indo-French DTAA, such payments cannot be treated as to be in the nature of 'fees for technical services', under respective articles in Indo-UK, Indo-US and Indo- Swiss DTAA, in case the same constitutes 'fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property'. Clearly, therefore, scope of 'fees for technical services' is much more restricted in Indo-UK, Indo-US and Indo-Swiss DTAAs vis-a-vis the DTAA that India has entered into with France. 14. Our attention has also been invited to the CBDT Notification No. SO 650(E), dt. 10th July, 2000 [(2000) 244 ITR (St) 134} which inter alia states as follows : Where the Convention between the Republic of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing paragraph shall be read : 2. However, such royalties, fees and payments may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed : (a) in the case of royalties and fees 20 per cent of the gross amount of such royalties or fees; and (b) in the case of payments referred to in para 5 of this Article 10 per cent of the gross amount of such payments. V. With effect from the 1st April, 1997, for para 2 of Article 13 relating to 'Royalties and fees for technical services and payments for the use of equipment' referred to in para IV above, the following paragraph shall be read : 2. However, such royalties, fees and payments may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 10 per cent of the gross amount of such royalties, fees and payments. 15. It has been pointed out by the learned counsel that, so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat executive authority of the Government cannot, by way of a notification, lay down provisions having retrospective effect. It is submitted that by way of notification dt. 20th July, 2000, no amendment allegedly impairing the existing rights guaranteed by the protocol cause in (sic) can be made in a treaty which will adversely affect the taxpayer's rights effective from a date earlier than 20th July, 2000. On the strength of these submissions, learned counsel submitted that the CBDT notification dt. 20th July, 2000 does not adversely affect the position of the assessee. Learned Departmental Representative, however, placed her bland reliance upon the notification issued by the CBDT. 16. A perusal of the aforesaid notification gives us a prima facie impression that it constitutes Central Government's independent action to implement the understanding arrived at by the virtue of protocol clauses in the India-France DTAA. It is difficult to comprehend as to how the Central Government can unilaterally amend, in exercise of the powers under Section 90 of the IT Act, a bilateral agreement that a DTAA inherently is, but, for the present purposes and for the reasons we shall no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r more restricted vis-a-vis scope of this expression in Indo-French DTAA, shall also apply under Indo-French DTAA, with effect from the date on which the Indo-French DTAA or such other DTAA enters into force, whichever enters into force later. As all the three DTAAs discussed above entered into force on a date earlier than the commencement of the previous year 1995-96, the scope of technical services, for the purpose of Indo-French DTAA, cannot be broader than that envisaged in the above DTAAs. In this view of the matter, we hold that the 'fees for services that are ancillary and subsidiary, as well as inextrically and essentially linked, to the sale of property' are outside the scope of technical services so far as Indo:French DTAA is also concerned, even though no such specific exclusion clause is incorporated directly in the treaty itself, right from the time Indo-French DTAA entered into force. Accordingly, in the year in appeal before us, the 'fees for technical services' for the purpose of Indo-French DTAA, did not include 'fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a DTAA, an income is not exigible to income in India, no tax is required to be deducted under Section 195 from the payment of such income to a non-resident. We have already held that, in terms of the provisions of applicable Indo-French DTAA, the income embedded in impugned payments to Decoufle was not liable to income-tax in India. Accordingly, in our considered view, the assessee tax deductor was not under any obligation to deduct tax at source from related remittances to the French company i.e., Decoufle s.a.r.l. 21. For the detailed reasons set out above, we support the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. 6. Hon ble Delhi high court s recent decision in Steria (India) Ltd vs CIT [2016] 72 taxmann.com 1 (Delhi) rejects Revenue s similar grievance in terms of India and France DTAA importing relevant corresponding articles of Indo-UK DTAA regarding taxation fee for technical services. The Revenue s plea therefore that such benefits can be imported from Indo-Portugal DTAA to Indo-Sweden DTAA only after necessary notification u/s 90(1) of the Act is devoid of merit since the protocol itself makes it clear that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X
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