TMI Blog2019 (2) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... ited: [2010 (8) TMI 51 - DELHI HIGH COURT ]. Therefore on this ground too assessee deserves relief. 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.-2187/Del/2016 - - - Dated:- 12-2-2019 - SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER For The Revenue : Ms. Rinku Singh, Sr. (DR) For The Assessee : Shri Ved Jain, Advocate, Shri Ashish Goel, CA, Ms. Surbhi Goel, CA, Shri Kislaya Parashar, Advocate ORDER The present appeal has been filed by the assessee assailing the correctness of the order dated 15.12.2015 of CIT(A) 43 New Delhi pertaining to 2005-06 assessment year on the following grounds :- Ground No. 1 : Whether on the facts and circumstances of the case and law, the Ld. CIT(A) was not justified in deleting the addition made by the AO on account of the receipts of the assessee from National Highway Authority of India by holding that the same do not qualify as fees for technical services, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go through the record. In the second round the Ld. AR reiterated this submission. Sr. DR considering the material on record withdrew the request for time and relied upon the assessment order. However no contrary decision or fact or decision was cited. 4. We have heard the rival submissions and perused the material on record. For the sake of completeness the relevant facts and the background history as taken note of by the CIT(A) in the order under challenge is extracted hereunder which highlights the basis of reopening of the assessment resorted to by the Assessing Officer : 4.1 The appellant is a foreign company incorporated in USA.It was engaged in the business of providing services in connection with the construction of highways, transportation, water supply and waste management, etc. It had several project offices in India to carry out those activities. During the year under consideration, the appellant received income from consultancy and engineering services amounting to ₹ 3,21,42,907/-. Against this, it claimed a deduction of ₹ 2,84,75,905/-, being expenditure incurred during the year, and computed a profit of ₹ 36,67,002/-. The receipts included an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed that its receipts from the project were in the nature of business income and offered the income to tax from such project on net basis. The appellant contented that it was engaged in the business of construction and, therefore, covered by exclusion provided in definition of 'fee for technical service' given in Explanation 2 of section 9(1)(vii)of the Act. The appellant placed reliance on the judgment of the Delhi Tribunal in case of Agland Investment Services Inc. VS. ITO (1985) 22 Taxman 9 (Del) and Circular No. 202 dated 5th .July, 1976 (para 16.3) of CBDT. The appellant also relied upon the judgment of the Calcutta Tribunal in the case of DCIT vs. Schlumberger Seaco Inc. 1995 Tax L.R 486 (ITAT-Cal.).The appellant,- therefore, claimed that its income being in the nature of business profits, was not chargeable to tax under section 44D of the Act in view of Article 7 of the Double Taxation Avoidance Agreement entered into with USA(the treaty). 4.3 It is pointed out that the subject assessment order for AY 2005-06 was passed on 02.05.2013, u/s 147 read with section 143(3) and 144C(3).The reasons for reopening assessment as per the appellant are:- I, Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue notice u/ s 148 of the IT Act, 1961. 4.4 In assessment year 2007-08, similar issues presented in assessment order, where the matter went to Ld. CIT (A), who adjudicated the matter in appeal No. 174/10--11 vide order dated 01.12.2011. The grounds of appeal (except G. No. 6 which pertains to rectification u / s 154) in this year are similar to the grounds of appeal as were before my Ld. Predecessor in appeal for AY2007-08. 4.5 In that appeal order for AY 2008-09, made esteemed Predecessor had decided the issue in favor of the appellant/ assessee. Revenue is an appeal before the Horr'ble ITAT against said order of Ld. CIT (A) As informed, the appeal has not been disposed off by the Hon ble ITAT. While granting relief, my Ld. Predecessor had held in the operative portion of his order at Paras 7 and 8 as follows:- 7. I have considered the submission of the, appellant and the relevant case laws. As per the A.O The appellant was providing technical services and as such covered by the provisions of Section 9(1)(vii) read with Explanation 2 Of the Act. In this regard it will be relevant to refer to the relevant provision of section 9(i)(vii)which reads as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecially of asphalt concrete pavement, location and dimensions of bridges} box and pipe culverts etc. 7.2 In the case of Agland Investment Services Inc. (Supra) similar issue has come up. In that case, the appellant had entered in an agreement which provided for two activities, i.e., the expertise and technical assistance of consultants and technical assistance in connection with construction and assembly of hauling, drawing and processing factories and plants and also for managerial services thereof, the bid evaluation and engineering services connected with inviting tenders and for processing factory. The Court after analyzing these services has held that engineering and bid evaluation services were step-in-aid for construction of factories and hence outside the purview of section 9(1)(vii) read with explanation 2. 7. 3 The scope of work in the case of appellant was more closely linked to the day to day construction activity as compared to that in the case Aagland (Supra) i.e., the facts of case of appellant are on a stronger footing as compared to that 'in the case Aagland(Supra). Section 9 of the act is complete code in itself regarding taxability of income of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Pvt. Ltd. Reported at 2005 94 ITD 31 Mum. in the context of the Indo- Singapore Tax Treaty. It was held as under: that non-deduction of expenses under Section 44D, which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under section 115A. A somewhat similar scheme of taxability of royalties and fees for technical services on gross basis, but a lower rate, also finds place in most of the tax treaties including India-Singapore tax treaty. Article 12 provides for taxation of fees for technical services in the source country on gross basis, but at a lower tax rate of 15 per cent, barring the case of fees for technical services which. are ancillary an subsidiary to the enjoyment of property for which royalties under para 12(3)(b), which are taxed at an even lower rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided by 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.0. 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 not agree with the contention of the A. O. it was held that in case of receipts through permanent establishment in respect of which profits are to be deduction of expenses. The court further held that section 44D and for that matter explanation 2 to section 9(1)(vii)do not apply. 7.6 This controversy has now been laid to rest by insertion of new section 44DA in the act w.e.f 1.04.2004 by the Finance Act, 2003 where assessee 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 state that the section 44DA was inserted with a view to harmonize the scheme of taxation of royalty and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the fee for technical services in terms of the provisions of the treaties where such clause existed, i.e., similar to article 12(6) in this case. 7. 8 In view of discussions above, I am in agreement with the contention of the appellant that the limitation provided in article 7(3) of the treaty is with reference to the expenditures, if any, such as depreciation, etc. Article 7(3) does not mean that the whole concept of determination of the profit by deducting expenditure incurred from the receipt is ignored and income is computed under presumptive scheme prescribed under section 44D. Under Article 12, two options have been provided. First, where fee for included services are being provided without a PE and in that case the income is to be computed by applying a fixed rate of tax on the gross receipt under Article .12(2) and secondly, where fee for included services is being provided by a permanent Establishment, in that case the income is -to be computed under article 12(6) which is turn refers to article 7, i.e., income is required to be computed after deducting all expenditure from the gross receipts. In view of above judgments and the facts as analyzed above I am of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 explanation (2) of section 9(1) (vii) of the act which has also provided some exclusions. AO has failed to look in to those exceptions carved out in the right perspective. 2) The Section mentioned in TDS certificate and the disclosure in the return of income cannot determine whether the consultancy services are in the nature of Fees for technical services or otherwise. Therefore it is also not determinative of the nature of receipts. 9. For determining the nature of receipt , it is imperative to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for any construction etc or like projects undertaken by the recipient. Ld AO has failed to consider this exceptions carved out in definition of FTS, Therefore the attempt made by ld AO is on incomplete reading of that explanation 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 services rendered by the assessee are technical in nature but merely because the services are technical in nature they does not become fees for technical services in accordance with the provision of expl. 2 to section 9 (1) (vii) of the act. This technical service needs further examination whether they fall in the exception carved out therein or not. In our view the services do fall in the exceptions carved as construction activity and like projects. 14. Before AO asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for construction of factories and plants of the Corporation, hence, under section 9(1)( vii) read with Explanation 2 attached thereto the income is not taxable. We hold and direct accordingly. ₹ 84,456, as such, stands deleted from computation. The appeal succeeds and stands allowed. 15. Ld AO has rejected the contention of the assessee holding that the case of the assessee does not fall within the exception. Bereft of any reasoning that why the services rendered wrt construction of roads is not a construction activity or like projects. On reading the above decision we fully agree with the finding of CIT (A) that the case of this assessee 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 provision are as under :- SPECI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to section 9 (1) (vii) of the act. As we have already held that receipt of assessee is not fees for Technical 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 of AAR in case of Intertek testing Services India Private Limited (AAR No 751 of 2007). We failed to understand that how in this consultancy work the technology is made available‟ to NHAI would be able to utilize the knowledge or know how in future on his own without the aid of service provided. Assessee is providing the service sin relation to technical advice as set out in earlier paras. The averment of AO that it is made available to assessee is not correct and therefore we disregard the same. The term Make available‟ has been explained by Hon Karnataka High co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 (AAR) is also half hearted. In that ruling it is held that it does not change the character of receipt but it is chargeable under the different mechanism. We are on the issue of deciding the mechanism under which the receipt would be taxable under Domestic tax laws read with the Indo US Treaty. 20. On the other aspects of applicability of DTAA CIT (A) has held as under :- 7.4 However, let us examine the alternate plea of the appellant also regarding applicability of section 44D of the act. Article 12 (2) of the 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 business profit shall apply. The implication of Article 12(6) are that the fee for included services shall not be taxed on gross basis at the rate given in the treaty and shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tax Treaty, offer alternative but similar models of taxation of income from royalties and fees Page 11 of 13 from technical services. While these two sets of provisions dealing with taxability on gross basis may belong to the same genus of taxation models, but, at the same time, these are two independent, mutually exclusive, and therefore, competing sets of provisions. Once it is clear that these are competing models of taxation of royalties and fees for technical services on gross basis, in the IT Act and in 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed under article 12(3) of the DTAA, section 44D was not to be applied for the purpose of deduction of expenses. The court further held that section 44D and for that matter explanation 2 to section 9(l)(vii) do not apply. 7.6 This controversy has now been laid to rest by insertion of new section 44DA in the act w.e.f. 1.04.2004 by the Finance 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 was to be taxed on net basis under the provisions of the treaty, if there is existed such a clause in the treaty, i.e., similar to article 12(6) in the India-US treaty or India- Singapore treaty etc. The relevant para of Explanatory Notes to the Finance Act, 2003, which explains the intention behind the insertion of the new section, is extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness income of the assessee and assessment made u/s 143(3) of the Act. Principle of consistency has been accepted by the courts in many judicial precedents and some of the landmark decisions in the cases are of Radhasoami Satsang v. CIT: (1992) 193 ITR 321 (SC), CIT v. Lagan Kala Upwan: (2003) 259 ITR 489 (Del), Saurashtra Cement Chemical Industries v. CIT: (1980) 123 ITR 669 (Guj), Commissioner of Income Tax v. Paul Brothers: (1995) 216 ITR 548 (Bom) and Commissioner of Income Tax v. Modi Industries Limited: [2010] 327 ITR 570. Therefore on this ground too assessee deserves relief. 22. 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 -45 of ₹ 10354820/-is not Page 13 of 13 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). 5. It is seen that aforesaid issue again came for consideration before the ITAT as argued wherein the Coordinate Bench vide order dated 27/04/2016 in and ITA No. 2842/Del/2014 decided the identical issue in favour of the assessee by holding as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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