9911796707
TMI Blog2018 (8) TMI 1817X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(3) of the Income Tax Act [ The Act ] dated 30.12.2010. In this appeal Assessee has raised a solitary ground against the confirmation of disallowance of Rs. 336150/- u/s 40(a)(i) by holding that payment made to a Dr. U. Thiele is "fees for technical services‟ covered under Article 12 of The Double Taxation Avoidance Agreement [ The DTAA] between India and Germany and therefore, assessee was required to deduct tax at source u/s 195 of the Act which the assessee failed, hence, disallowance was made. 4. Brief facts of the case are that the assessee is a company engaged in the business of manufacturing of master batches and engineering plastic compounds. It filed its return of income on 29.09.2008 declaring income of Rs. 54438260/-. The ld AO noted that assessee has paid a technical fees of Rs. 336150/- to one Dr. Thiele a German individual resident, which falls under the provision of section 40(a)(i)of the act as assessee has not deducted tax at source. The assessee submitted that the payment is made to an individual resident of Germany towards consultancy charges, who is a scientists engaged in developing new products by applying different chemistry of raw material used by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 to 15 of his order dated 26.06.2014 confirming the above disallowance as under:- "5. The only issue in the grounds of appeal is in respect of disallowance of Rs. 3,36,150/- u/s 40(a)(i). The amount of Rs. 3,36,150/- was pertaining to payment made to Dr. Thiele for technical rendered. 5.1. The appellant is in the business of manufacturing master batches and engineering plastic compounds. During the year, the AO noted that the appellant had paid Rs. 10,20,167/- to non residents out of which one amount of Rs. 3,36,150/- was paid to Dr. Thiele. 5.2. The appellant contended that Dr. Thiele was a scientist and engaged in developing new products by applying different chemistry to raw materials. Dr. Thiele was engaged in inventing different processes of PET/Polymers. The payment was made to Dr. Thiele for an independent scientific activity and fell under Article 14 of the DTAA between India and Germany and therefore the appellant stated section 9(l)(vii) was not applicable as Article 14 prevailed over the Act. 5.3. The AO on the other hand stated that Article 14 was not applicable. Further, the payment made to Dr. Thiele was "fees for technical services". The AO further state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 213; Explanation 1:- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2:- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. In view of this section therefore the payment made by the appellant to the non resident was income as it was received and deemed to accrue in India. 5.5. Section 9(l)(vii) states:- ―9. Income deemed to accrue or arise in India. -(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 services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence between technical services and scientific services. Section 9(l)(vii) explanation is clear about what would be covered and what would not be. 5.7. Explanation of section 9(l)(vii) talks of fees for technical services. No distinction has been made in respect of fees for scientific services rendered. Further explanation (2) defines fees for technical services which includes consultancy services. In my view the consultancy/scientific services rendered by the non resident would fall under this category. 5.8. I shall now quote section 195: "195. Other sums.-(l) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub¬section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.' 5.9. The main components of the section are that 1. any person 2. making payment of interest or any other sum (not being salary). 3. to a non resident or to a foreign company. 4. shall at the time of payment. 5. by any mode 6. deduct income tax. 5.10. The section applies to all person's resident or non resident and the persons may or may not have residence or place of business in India or any other presence in any manner in India. 5.11. It is clear from the above that the appellant has made payment of fees to a non resident and is therefore liable to deduct income tax as per section 195 of the Act. Since no income tax was deducted u/s 195 the amount of Rs. 3,36,150/- was rightly disallowed by the AO u/s 40(a)(i). 5.12. Further, the decision of the Hon'ble ITAT in A. Y. 2007-08 is clear The Hon'ble ITAT has clearly stated that the services were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in the form of invoices have been filed by the assessee. Therefore it shows that services have been provided as " independent scientific services‟ by Dr and all evidences for consulting fees has been provided. He further referred to the technical and research agreement dated 16th August 2006 between the assessee and Dr. Thiele to show the kind of services provided by Dr Theile. He submitted that services are provided by an individual, German Resident, in nature of scientific services, no fixed base is available to him, and he does not stay in India for 120 days or more. f. He further submitted that as the income is falling under the specific article 14 the article 12 is more general, hence, Article 14 should be applied which is more specific to the facts of the case. g. He further submitted that assuming while denying, that such income falls under Article 12, the assessee being a German national should get the benefit of MFN clause as these services were not " Make Available " to the assessee. 8. The ld DR vehemently relied upon the orders of the lower authorities and submitted that the impugned issue is squarely covered against the assessee by the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act, any income which accrues or arise or is deemed to accrue or arise to a Non Resident in India during the previous year forms parts of his total income. According to section 9(1)(vii) of the Act, the above income is income by way of fees for technical services as same is consideration for technical or consultancy services. Therefore, according to section 5(2) read with section 9(1)(vii) of the Act, the above services are chargeable to tax under the Indian Income Tax Act, 1961. This has also been confirmed in the case of the assessee for AY 2007-08 by the coordinate bench that such sum is chargeable to tax u/s 9(1) (vii) of the Act. It is also not the claim of the assessee that it is not chargeable to tax as per provisions of the Income tax Act. Hence there is no doubt about chargeability of such sum under Income tax Act, 1961. 11. Further, as the recipient of the income is a resident of Germany, therefore, the provision of DTAA between India and Germany applies to him and hence, he is entitled to the beneficial treatment, if available, under DTAA. Therefore, it is necessary to examine the provisions of articles of DTAA entered into by India and Germany and how the impugned i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8223; activities. The assessee has submitted the copy of the various trials conducted by Dr. Thiele, which are placed at paper book page NO. 38 to 61. The assessee further placed various exchange of emails between the assessee and Dr. Thiele at page No. 67 to 108 of the paper book. On perusal of these documents, it is apparent that same are for the trials conducted for the production of Cationic Dyable PET MBs. Page No. 81 of the paper book also shows the working protocol between the assessee and Dr. Thiele. On looking at those emails, it is apparent that Dr. Thiele is providing "independent scientific services‟ to the assessee. In view of this the services rendered by Dr. Thiele are "independent personal services‟ covered by Article 14 of the Indo-Germany DTAA. Therefore it is clear that same is governed by Article 14 of DTAA. In the immediately preceding year claim of article 14 was rejected by the coordinate bench for the only reason that assessee could not prove with evidence that the payments fall under the category of "Independent personal services‟ as per Article 14 of the DTAA. Such is not the case for this year as already mentioned. Assessee has pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a land or a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come covered under Article 15 i.e. "Dependent personal Services‟ and not income Covered under Article 14 of The DTAA. Therefore, if there can be many instances of such incomes derived by the individuals which can be characterized as " Fee For Technical services‟ may also be covered under Article 12 as well as Article 14 of The DTAA. Only distinguishing feature is that Article 12 is an omnibus provisions for such income where as article 14 is a specific provisions related to individuals. Further Article 14 is para material similar to Article 7 of the DTAA, the only difference being that Article 7 applies to all the enterprises of the states whereas the Article 14 applies to individual only who earn such income from sources state. Therefore, we hold that article 14 is a more Specific article applicable to the impugned income of the nonresident, same shall be applied and not the General Provision of Article 12 of The DTAA. In taking such a view we find support from the Decision of Honorable High courts in CIT v. Copes Vulcan Inc. [1987] 167 ITR 884; [1987] 30 Taxmann 549, [2004] 267 ITR 209 (Kar) in AEG AKTIENGESLLSCHAFT v. COMMISSIONER OF INCOME-TAX. Furthermore, we also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the non-resident were not liable to tax. The assessee, therefore, requested the ITO for a certificate under section 195(2) so that no tax need be deducted at source before making remittance to the non-resident. However, the ITO rejected the assessee‟s claim and the Commissioner (Appeals) also upheld the ITO‟s decision. According to the Commissioner (Appeals), the amounts payable were in the nature of fees for services rendered and the assessee, not being an agent of the non-resident, had no right to argue about the nature of income, its assessability or otherwise under the agreement, etc., since all these matters would be decided by the ITO only at the time of assessing the non-resident and would not be relevant to decide the question of deduction of tax at source. On these facts the bench held that Under the avoidance agreement, tax is not leviable only on industrial or commercial profits. This term cannot include income in the form of rent, royalties, interest, dividend, management charges, remuneration for labour or personal services, or income from the operation of ships or aircrafts. In the instant case, the assessee carried on an industrial ‗project', ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it for the same reasons. Further, with respect to applicability of Article 14 the coordinate bench has specifically held that the assessee has failed to demonstrate that the services rendered by Dr. Thiele are independent scientific services and therefore, it was held to be covered by Article 12 of the DTAA before us. The assessee has produced enough evidences placed at page NO. 29 to 108 of the paper book in the form of literature Thiele, various reports of different states of various development activities and exchange of several emails shows that the services provided by the German national is an independent providing scientific services. Therefore, the facts of the case in view of the several evidences produced before us for the current year are distinguished. However, the ld CIT(A) while deciding appeal of the assessee has simply followed the decision of the coordinate bench for Assessment Year 2007-08, without looking into the various evidence submitted by the assessee. In view of this, we hold that the payment made by the assessee to Dr. Thiele was chargeable to tax u/s 9(1)(vii) of the Act but by virtue of Article 14 of the DTAA income is chargeable to tax only in Germany. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-09 wherein, the disallowance u/s 40(a)(i) of the Act was made. Both the parties agreed before us that there is no change in the facts and circumstances of the case of the appellant as well as nature of the services and applicability of relevant articles of DTAA between India and Germany. It was further submitted by parties that these payment are also made to the individual for similar services. 21. We have considered the rival contentions and perused the orders of the lower authorities. The identical issue has been decided by us in the appeal of the assessee for Assessment Year 2008-09 wherein, we have held that such services are covered by the provision of section 9(1)(vii) of the Act and also by virtue of Article 14 of the DTAA such sum are chargeable to tax in Germany and hence, no tax is required to be withheld under section 195 of the Act. For the similar reasons, we direct the ld Assessing Officer to delete the disallowance of Rs. 268980/- u/s 40(a)(i) with respect to payment made to Dr. U Thiele. 22. The second issue involved in the same ground is with respect to disallowance u/s 40(a)(i) of Rs. 1082175/- made to Dr. Werner Stibal who is resident of Swiss Confede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r :- [ARTICLE 12] ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. - Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services. 3. The term "royalties" as used in this Article means 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 the use of, or the right to use, any industrial, commercial, or scientific equipment, or for information concerning industrial, commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents shall remain taxable according to the laws of such Contracting State, due regard being had to the other provisions of this Agreement. 27. According to Article 12 (5) (b) meaning of the Term "fees For Technical Services" specifically excludes income covered under Article 14 and 15 of the DTAA. Therefore, issue in this year is specifically covered in favour of the assessee by the decision of the coordinate bench in case of Graphite India [2003] 127 Taxman 90 (Kolkata)(MAG)/[2003] 86 ITD 384 (Kolkata)/[2003] 78 TTJ 418 (Kolkata) wherein identical issue with respect to Indo US DTAA was in question. The Coordinate bench held as under :- "7. The primary thrust of rival contentions before us has been in support of the assessee's contention that the impugned payment for consultancy fees is covered by the scope of expression 'independent personal services' within meanings of Article 15 of the Indo US DTAA, and, of course, in support of revenue's contention, that the impugned payment is covered by the scope of fees for technical services termed as 'fees for included services' within meanings of Article 12(4) of the same. On a careful analysis of the provisions of the Article 12, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this ground No. 1 of the appeal of the assessee is allowed. 29. Ground No. 2 of the appeal is not pressed therefore, it is dismissed. 30. Ground No. 3 of the appeal is with respect to the disallowance of Rs. 329767/- u/s 14A of the Act. 31. The brief facts of the issue show that during the year the assessee has earned exempt income of Rs. 686257/- as dividend. Assessee was asked to show the applicability of provisions of section 14A. The assessee submitted that it has received dividend from Dalmia Cement Bharat Ltd. the shares were purchased during the year and amount was invested from company‟s internal accrual. It was further stated that no expenditure were incurred by the assessee. The ld AO rejected the explanation of the assessee stating that the assessee is keeping consolidated accounts of its income and further the assessee is also using administrative, managerial and infrastructure set up for earning such income. He further held that assets of the company are also used by the assessee. Therefore, he held that component of interest of Rs. 234769/- and expenditure component of Rs. 94998/- totaling to Rs. 329767/- is disallowable u/s 14A of the Act. However, he w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there no efforts of the board and other committee members were used. However, with respect to disallowance of interest expenditure of Rs. 234769/-, we hold that assessee has own fund and non interest bearing funds amounting to Rs. 38 crores which is more than the investment of Rs. 3.8 crores it could have been presumed that the investment is made out of interest free funds available with the assessee. Therefore, respectfully following the decisions of the Hon‟ble Bombay High Court in case of CIT Vs. HDFC bank Ltd 366 ITR 505, we direct the ld AO to delete the disallowance of Rs. 234769/- on account of interest. With respect to the expenditure disallowance of Rs. 94998/- we find no force in the argument of ld AR and hence same is confirmed. Accordingly, out of total disallowance of Rs. 329767/- u/s 14A we uphold the disallowance of other expenses of Rs. 94998/- under Rule 8D (2) (iii) and delete the disallowance on account of indirect interest expense of Rs. 234769/- under rule 8D (2) (ii) read with section 14A of the Act. Accordingly, ground No. 3 of the appeal is partly allowed. 35. Accordingly, appeal of the assessee for Assessment Year 2009-10 is partly allowed. 36. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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