TMI Blog2020 (3) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... in whom the technology/ experience for the assembly of product and knowing the standards of company , for setting the bench mark and implementing the standards of assessee in India. No transfer of technology by sending the expert technical employees of the assessee to in India, as in the present case, rather there was an agreement for erection of power generation plant in India. But in the present case, the employees who are having the technical expertise are not only managing but also ensuring due adherence to the standards of the assessee, by continuously monitoring and mentoring the production. Hence the decision of Rolls Royce is factually distinguishable. Same is the case with regard to other decisions cited by the AR. The third argument raised in support of the first ground by the assessee was the argument of consistency. We have examined the order passed by the assessing officer for the earlier years and we do not find even a whisper or examination of the fact by the assessing officer were done and conclusion was drawn that the services rendered by the vice president manufacturing was in the nature of managerial service. There was complete silence on this issue by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT:- Order passed by the TPO for the subsequent years wherein the TPO has not computed the profit by marking-up 10% on the amount received by the assessee. Further, the analysis of the TPO was not premised on the applicability or otherwise of the method provided under the rules framed under Chapter X of the Act. The authorities below have not benchmarked the transactions on the basis of any comparable instances or otherwise. This dispute is now well settled that the benchmarking of transactions need to be done by using any of the prescribed methods in Rule 10B of the Rules, which in the instant case was admittedly not done by the lower authorities. We are of the opinion that the arguments raised by the assessee in support of ground nos. 5 to 8 are in accordance with the law and we have no hesitation to allow the same. Accordingly, ground nos. 5 to 8 raised by the assessee are allowed. Applicability of Section 234B - Respectfully following the decision of the Hon'ble Jurisdictional High Court in the case of Ngc Network Asia LLC [ 2009 (1) TMI 174 - BOMBAY HIGH COURT] and GE Packaged Power Inc [ 2015 (1) TMI 1168 - DELHI HIGH COURT] we allow the ground raised by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not accepting the argument of the Appellant that the AO erred in not providing any evidence that the transaction entered by the appellant with GMIL is not at arm s length. 8. Without prejudice to the above, the learned CIT(Appeals) erred in not accepting the argument that the AO erred in not providing any basis for mark up at 10% to the amount involved by the appellant to GMIL. Reversal of invoices raised in the earlier years 9. The learned CIT(Appeals) erred in rejecting the contention of the Appellant that the amount of US$ 2,19,132.16, being the invoices raised in the earlier years, offered to tax in earlier assessment years and reversed during the year is required to be reduced from the total income. Interest under Section 234B of the Act 10. The learned CIT(Appeals) erred in not accepting the claim of the Appellant that no interest under Section 234B of the Act was payable by the Appellant as the entire income of the Appellant was subject to withholding tax. Brief background I. The Appellant is a company incorporated in and tax resident of United States of America ('USA'). It is engaged in the business of providing management and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143 (2) and 142 (1) Of the Act and the assessee was called upon to file the copy of the service agreement of the Deputationist vide order sheet entry dated 20 February 2006. However despite that, the representative of the assessee had not filed the service agreement of the employees on deputation. X. The assessing officer left with no other option, had taxed the entire receipt of USD 28428828 as business income under article 7 of Indo US DTAA on gross basis. It was further noted in paragraph 8 of the assessment order that no profit on this receipt has been shown by the assessee claiming the same as reimbursement of cost . Further it was mentioned that as per Article 7 of the treaty, the income of PE is to be computed in accordance with domestic law as provided in paragraph 3 of Article 7. XI. Feeling aggrieved by the order passed by the assessing officer, the assessee preferred an appeal before the Commissioner (Appeals). However the CIT(A) had also decided the issue against the assessee. The finding recorded by the Ld. CIT(A) in paras 6 to 9 of the order dealing with the contention of the assessee in the order impugned before us were as under: 6. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able the person obtaining the services to apply the same. But in the case of appellant company, no expertise or knowhow has been made available to the Indian company by reason of rendering the said services. In this connection the appellant relied on the following decisions : 1) Raymond Ltd. v. Deputy Commissioner of Income Tax (86-ITD-791) 2) Intertek Testing Services India Pvt. Ltd. (AAR 760 of 2007) 3) ISRO Satellite Centre [ISAC] (AAR 765 of 2007) 4) De Beers India Minerals Pvt. Ltd. (297 ITR 176) 5) M/s. Cushman Wakefield (S) Pte. Ltd. (218 CTR 238) 8.1 The appellant further submitted that GMIL has a separate Technical Information Assistance Agreement with M/s. Adam Opel AG, a company incorporated in Germany. As per the said agreement, M/s. Adam Opel AG is to provide technology license and technical assistance, technical personnel and training to the employees of GMIL to produce vehicles at GMIL s production facilities in India and distribute those vehicles in the Territory, as per the engineering standards and designs established thereof by Adam Opel AG. 8.2 As per the aforesaid agreement, Adam Opel AG is to receive inter alia royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- a) Responsibility, duties and qualification of the personnel assigned under MPA - refer para 2 and 5 on page 41 to 42 of paper book 2 ... .... Under the management provision agreement, the applicant is to make available executive personnel for development of general management, finance and purchasing, service, marketing and assembly/manufacturing activities. The agreement indicates the responsibilities and duties of each of the five resident expatriates under the said agreement as under. (i) President and managing director -Will be the chief executive and operating officer of AB and will be responsible for overall management and direction of AB operations. The president and managing director will be formally appointed to such office by AB and will discharge his or her powers and duties from that office. (ii) Vice-president of marketing-Will be responsible for development and administration of AB's dealer network, sales and marketing of AB products and service. (iii) Vice-president of finance - Will be responsible for managing all the financial operations of 'AB . (iv) Vice-president of manufacturing engineering - Will be respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w thereon. XIV. The Ld.AR had also drawn our attention to section 245 S of the Income Tax Act,1961. This section provides that ruling of AAR passed in case of an applicant is binding on Income tax authorities in respect of such applicant. The relevant extract of the section is reproduced hereunder: 245S. (1) The advance ruling pronounced by the Authority under section 245R shall be binding only- (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction. (2) The advance ruling referred to in sub section (I) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced. As demonstrated above, given that all the above conditions are satisfied in instant case, the AAR ruling was binding on tax authorities and the Ld. AO and CIT(A) were bound to follow the same. Therefore, on this count also the order passed by Ld. AO and the CIT(A) to the extent it confirms the addition made by Ld. AO is not sustainable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Act and/ or DTAA. 15.5. Moreover, reference is invited to para 8(d) above, wherein it has been reproduced that AAR in its ruling had held that the amounts to be received by GMOC are not in nature of FTS under Article 12 of the DTAA. In view of the above, it is again reiterated that the amounts received by the Appellant under MPA from GMIL were not in nature of the FTS. Without prejudice to the above, the detailed analysis of chargeability of the aforesaid amount as FTS under the Act/DTAA has been provided hereunder. Under the Act 15.6. Under the Act, definition of FTS is provided under explanation 2 to section 9(1)(vii). The relevant extract has been reproduced below: For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . 15.7. The afo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xception mentioned in explanation 2 to section 9(1) (vii:) of the Act and therefore, the same cannot be regarded as FTS given in the definition of the term of FTS but as salary in the hands of the deputed employee only. The aforesaid view is also upheld by various judicial precedents reproduced under Annexure A. In view of the above, given that the payments made by the GMIL were taxable in the hands of the personnel under the head 'Salaries' the aforesaid exception was applicable in instant case. Thus, amounts charged by GMOC cannot be regarded as FTS under the Act. Under the DTAA 15.10. Without prejudice to the above, it is submitted that since GMOC is a tax resident of USA, it is entitled to be governed by provisions of DTAA to the extent more beneficial. In view of the same and before proceeding further, the Appellant has reproduced here under Article 12 of DTAA for ease of reference. 'fees for included services means 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: a)...or b) make availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the meaning of article 12. In view of the above and no contrary fact being brought on record by the Ld. AO it is submitted that the services rendered were 'managerial' services and thus not taxable as FTS under DTAA. 15.14. Further, with respect to applicability of condition (b) above, it is submitted that the Appellant fervently believes that this condition also is not satisfied in the instant case. However, as already submitted above, given that condition (a) and (b) above are to satisfied on cumulative basis and as discussed above condition (a) is not satisfied herein, the Appellant has not provided detailed submission on non-applicability of condition (b). In case required by your Honours, the Appellant would be pleased to file further submissions in this respect. XVIII. The Ld.AR relied upon the following decisions of the tribunal in support of his contention:- A. Co-ordinate Bench of Mumbai Tribunal in the case of Essar Oil Ltd reported in 7 SOT 216 B. Co-ordinate Bench of Delhi Tribunal in the case of Rolls Royce Indl Power (I) Ltd in ITA no 1410 / Del/2007 dated 5.10.2010 C. Co-ordinate Bench of Mumbai Tribunal in the case of Wockhardt Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GMIL under MPA qualifies as FTS, the Ld. AO erred in not appreciating that provisions of Article 12(6) would be applicable in instant case. For ease of reference, the relevant extract of Article 12(6) is reproduced hereunder. (Refer page 13 of paper book) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may he shall apply. 15.20. As per the aforesaid Article, in case receipts in nature of FTS arise through a PE in India, then provisions of Article 7 are applicable (and not Article 12). 15.21. In support, reliance is placed on the judgement rendered by jurisdictional Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the MPA would be equivalent to costs of the personnel assigned. Relevant extract is reproduced hereunder (refer para 2 on page 41 of paper book). 2... ......... ......The provision for management services was approved by the Ministry of Industry while approving the proposal for the setting up of the joint venture. The letter of approval said: D. Management services : It is noted that 'XYZ', a wholly owned subsidiary of 'B', USA, would be providing management services on a cost-as-incurred basis by deputing maximum of five of their employees to the joint venture, for a period up to three years, for providing management and technical service to the joint venture and would also train the personnel of the joint venture so that the service of the employees of the foreign collaborators could eventually be replaced by the Indian personnel. ... Grounds 5 To 8 XX. In support of these grounds, it was submitted by the Ld.AR, that the TPO for the subsequent assessment year that is for assessment years 2008 09 and 2009 10 , had considered the issue of markup and it was held by the authorities that as assessee had merely reimbursed the cost, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tached) Basis the same, the order of Ld. AO seems to be erred in law. 16.6. Moreover, in future years similar transactions were referred by the tax officer to the file of TPO. In such years, after going through the submissions filed by the Appellant and examining the matter, the TPO had accepted the cost to cost nature of the transactions and agreed with the contention of the Appellant that no mark-up is required to be imputed in such cases. 16.7. With respect to above, reference is again invited to order(s) passed by TPO in Appellant's own case for AY 2008-09 to AY 2010-11 (Reference is invited to pages 80 to 82 of paper book already filed). Relevant extract of TPO order for AY 2010-11 is also reproduced hereunder for ease of Your Honour's reference. (Refer page 82 of paper book) Considering the facts and circumstances of the case, the assessee's submission and documents furnished and the economic analysis carried out by this office, the value of international transactions with AE are not being disturbed 16.8. Under similar circumstances, jurisdictional Mumbai ITAT in the case of Morgan Stanley Asia (Singapore) Pte Ltd. (1TA No. 8595/Mum/2010) has also h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 210 is less than 90 percent of the assessed tax. 18.4. The use of the words such taxpayer in the second limb above shows that the same also applies only to an assessee who is liable to pay advance tax under section 208. Therefore, the charge of interest under section 208, pre-supposes a liability to pay advance tax under section 208 of the Act. 18.5. As per section 208 of the Act, a taxpayer would be liable to pay advance tax only if the amount of advance tax payable by him under Chapter XVII of the Act exceeds ₹ 5,000. The method of computation of advance tax under Chapter XVII is specified under section 209 of the Act [as applicable for subject year(s)] in the following manner: Under section 209(1)(a), taxpayer is required to first estimate his current income and calculate income-tax thereon at the rates in force in the financial year. Further, under section 209(1)(d), the income-tax as calculated above has to be reduced by the amount of income-tax which would be deductible at source during the financial year under any provision of the Act 18.6. Accordingly, a taxpayer would be liable to pay advance tax under section 208 only if the tax on the cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect :- i) President and Managing Director - will be the Chief Executive and Operating Officer of GMI and will be responsible for overall management and direction of GMI operations. The President and Managing Director will be formally appointed to such office by GMI and will discharge his or her powers and duties from that office. ii) Vice President of Marketing - will be responsible for development and administration of GMI s dealer network, sales and marketing of GMI products, and services. iii) Vice President of Finance - will be responsible for managing all the financial operations of GMI. iv) Vice President of Manufacturing Engineering - will be responsible for overall management of GMI facilities to manufacture and assemble products of GMI according to required standards and for production of such products according to those standards. v) Vice President of Supplier Development and Materials Management - will be responsible for managing the purchasing and GMI materials, including development of local suppliers. 2.1 It was submitted that from a bare perusal of the functions performed by these authorities, it cannot be said that the employees were pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n below para 6 to 9 of the order passed by the CIT(A), which is to the following effect :- 6. During the appeal proceedings, appellant further submitted the designation work profile of Mr. Aditya Vij (President and Managing Director) and Mr. Satyasree Veerapaneni (Vice President Manufacturing) as under. 1. Mr. Aditya Vij Qualification : Chartered Accountant and MBA Designation : President and Managing Director Work Profile : As per the MPA between GMIL GMOC work profile of President Managing Director is as under : President and Managing Director will be Chief Executive and Operating Officer of GMI and will be responsible for overall management and direction of GMI operations. The President and Managing Director will be formally appointed to such office by GMI and will discharge his or her powers and duties from that office. 2. Mr. Satya Veerapaneni Qualification : B. Tech. Designation : Vice President (Manufacturing) Work Profile : As per the MPA between GMIL GMOC work profile of Vice President (Manufacturing) is as under : Vice President of manufacturing Engineering will be responsible for overall management of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f by Adam Opel AG. 8.2 As per the aforesaid agreement, Adam Opel AG is to receive inter alia royalty and fees for services rendered from GMIL. 9. I have perused the fact of the case and also analysed para 2 and 4 of MPA. Further I have also analysed article 12 of the India-US treaty and various case laws submitted by appellant. Also, I have also gone through the Advance Ruling given in the case of the appellant wherein the services rendered by the expat at the post of Managing Director and Vice President (Manufacturing) was examined and after examining the said services, it was held that the services rendered by the expat is managerial services. In my view, the services rendered by the expat deputed by GMOC to India cannot be held as in the nature of fees for included services as per Article 12 of Indo-US DTAA since it does not make available any technological, experience, skill, know-how or process, which enable the person obtaining the services to apply the same. However, that payment has to be taxed under the head business income. Further, in the case of Vice President (Manufacturing), he is qualified, well experienced technical personnel. His services were made availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the VP (manufacturing) was rendering the services which were in the nature of technical or consultancy services within the meaning of Article 12 of Indo-Us treaty. 5. The first argument raised by the Ld.AR was that the finding recorded by the AAR was binding in nature. We had already reproduced the submissions of the Ld.AR and Ld.DR in this regard. Our attention was drawn to section 245 S of the Act for this purposes. A bare perusal of section 245S clearly shows that if ruling is given by the AAR, the same shall be binding, in respect of the transaction to the Commissioner and the income tax authorities subordinate to him. Further it is also provided in the provision that the ruling shall not be binding in case there is change in law or facts on the basis of which the finding was given by AAR. 6. We are of the opinion that the ruling given by the AAR though is binding on the Commissioner and income tax authorities subordinate to the Commissioner, however, the ruling given by the AAR is not binding on the Tribunal and is only having a persuasive value for the reason that Income Tax Appellate Tribunal is not an authority coming under the Commissioner . However the dispute woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e information or material to show/ examine what services were actually rendered by the employees. The AAR ruling on the services rendered by the VP (manufacturing) , in our understanding , was general non-conclusive finding, rather the power was given to authorities to examine the transaction/ actual conduct of parties . 9. As mentioned hereinabove, the lower authorities have given the show cause notice to the assessee to provide the service agreement and other document to show what actual services were rendered by the VP manufacturing, however the assessee had neither provided the same nor any other evidence explaining scope and ambit of the services rendered by the VP manufacturing. In the absence of any co-operation and supply of the document by the Assessee to AO, Assessing officer was left with no other option but to examine the Management Provision Agreement and also to draw adverse inference against the assessee about the services provided by the VP manufacturing. 10. AO and CIT(A) had examined the MPA , wherein, it was the responsibility of the assessee, as per Covenants in MPA at page 2, to Make Available the executive personnel for marketing and assembly /manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees. This can also be understood by example , if a pharmaceutical company XYZ which is into manufacturing of drugs and is having scientist AA who had experience to manufacture and develop the medicine BB . Later on AA is shifted to another jurisdiction AAH for developing /manufacturing the medicine BB in accordance with the standards of XYZ company, then it cannot be said that it was merely transfer of BB employees of XYZ rather it would be transfer of technology of XYZ to AAH by transferring the employees. 13. The reliance of on the decision of the Hon'ble Supreme Court in the matter of Columbia sportswear company(supra) by the assessee is not correct as it is nobody's case that the AAR ruling is not binding on the Commissioner. Rather the case of the revenue before us was that the AAR had not given any finding on the nature of the services rendered by the vice president manufacturing rather it was left open to the authorities to examine the services rendered by said vice president and decide whether it was FIS or not. Similarly the decision of the Hon'ble Jurisdictional High Court in the matter of Prudential Assurance Co Ltd ( supra) relied upon by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly or indirectly attributable to that permanent establishment. There is no dispute to the legal proposition that Article 7 speaks of profits and not gross receipts. The Revenue cannot misinterpret Article 7 to substitute the word receipts for the words profits . Profit would always be net of all legitimate expenditure incurred by an enterprise. The Revenue has invoked Article 7.5 for disallowing the entire expenditure. This again, is not justified as even according to Article 7.5, the deduction of expenses of the permanent establishment should be allowed, which are incurred for purposes of business of the permanent establishment including its executive and general administrative expenses so incurred. Now the difference arises in the last three lines of this Article 7.5 which states which are allowed under the provisions of and subject to the limitations of the domestic law of the other State in which the permanent establishment is situated. Thus where one want to restrict the expenditure, restriction cannot mean converting profits into gross receipts and disallowing the entire expenditure. Therefore, according to his interpretation, Article 7.5 could never envisage a situati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 paragraph 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 paragraph 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. 46. Now we deal with the judgments cited by CIT-DR Shri Ashwani Kumar in support of his case that the monies received by the assessee are FTS and should be taxed under 44D on gross basis as per rates given u/s 115A of the Income Tax Act. First case cited by him is CBDT v. Oberoi Hotels 231 ITR 148 (SC). He submitted that in this case the Oberoi Hotels was not only maintaining but also operating a hotel. Technical expertise was required for the same and the Hotel claimed deduction u/s 80-O of the Income Tax Act. The second case cited by CIT DR is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as made available when the person acquiring the service is enable to apply the technology. As stated above, the vice president manufacturing was knowing the technology and was having the experience to implement the standards of the assessee in India and by sending the said vice president in India , in fact the technology was made available in India by the assessee. The execution and implementation of technology in India can be possible even if the person knowing the technology are transferred in India or there is a technological transfer agreement for which the royalties are paid by the Indian counterpart to the assessee. In the garb of sending the technical experts in India, it cannot be permitted to say by the assessee that they were merely employees and the cost is reimbursed by the Indian counterpart to the assessee for the services rendered by such employee. In fact as noted herein above, the technology was transferred through the expert experienced technocrat by the assessee to Indian counterpart and therefore, in our view, the lower authorities were right in arriving at the conclusion that the assessee was liable for fees for included services. The facts of the Rolls-Royc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to ground No. 3 and 4, we may at the outset point out that the AAR has not given any finding on this issue as is clear from paragraph 30 reproduced hereinabove with emphasis supplied by us through underlining. The authorised representative appearing before the AAR, had submitted that the assessee does not want any ruling on this issue. 20. The learned AR drew our attention to para 3 of Article 7 of the Indo-US DTAA and submitted that the net profit is required to be taxed instead of the gross profit as was wrongly done by the Assessing Officer and confirmed by the CIT(A). It was submitted that the assessee has only received cost of expatriate employees on reimbursement and there is no profit element. It was submitted that the provisions of Article 7(3) of the DTAA are required to be applied. Further, the learned AR relied upon the decision of our coordinate bench in the matter of Rolls Royce Indl Power (I) Ltd. (supra) and Wockhardt Ltd. vs ACIT, [2011] 10 taxmann.com 208 (Mumbai) and our attention was drawn to para 53, 54 and 56 of the order in Rolls Royce Indl Power (I) Ltd. (supra), which is the following effect :- 53. In addition to our holding that the assessee is liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and the CIT DR has not been able to point out any provision in the contract wherein the assessee was to train Spectrum personnel. In the absence of any such training to be provided, it cannot be said that anything was made available by the assessee to Spectrum. What to talk of training, we have also seen from the contract that there was no personnel envisaged to be present in the facility during its operation by the assessee. There was no close coordination of the personnel of the assessee and Spectrum as was the case before the Supreme Court in Continental Construction and Oberoi Hotels. The basic element of passing of technical knowledge, skill to the client is wholly absent in this case. The Ericsson s case proceeded on completely different line wherein in that case 214 ITR page 211 para 2, the case proceeded on the basis that Ericsson was rendering consultancy and technical services to Indian companies in the field of its specialty and receiving remuneration therefor. There was no dispute in that case before AAR that it was fees for technical services. The dispute was as it was fees for technical services, would it under the Swedish Treaty be taxed on gross basis or net basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed on the profits of a similar enterprise of the first mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of the Convention. 54. In view of the above provision taxing of a non-resident U.K. company in a manner which is more burdensome vis- -vis an Indian company would lead to discrimination. This would also amount to unfavourable treatment being meted out to a U.K. company vis- -vis the Indian company doing identical business in India. Accordingly the assessee is entitled to protection of Art. 26 of the Indo-UK Treaty and should not have been subjected to tax on gross basis, but on net basis. The net profit was to be determined in accordance with the Indian Income Tax Act provisions for determining profits and gains of business from sections 28 to 43 B of the Income Tax Act i.e. limits laid down in the domestic law of allowance of expenditure u/s. 30,31,32,36,37,40,43B etc would have to be taken in to account. In our view this is the purport of Article 7.5 read with Article 26 of the DTAA between India and UK. 56. In the instant case, the assessee has undertaken a work contract for operation and mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprises, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than toward reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. Section 44D of the Act provides as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of computation of income by way of Royalty, FIS, etc., assessee is not entitled to any deduction. Once the domestic law prohibits allowing any deduction for the purpose of calculating fees for technical services/fees for included services , then, the same is not an allowable deduction and, therefore, the Assessing Officer and the CIT(A) were right in holding that the assessee was liable to be taxed on gross basis rather than on net basis. The argument that the provision which is beneficial to the assessee should be applied, i.e. treaty provision rather than the domestic law, is in accordance with Section 90 of the Act. We are afraid that this argument is to be noted but is summarily required to be rejected for the reason that if the domestic law prohibits grant of any deduction, the same cannot be granted. There is no contradiction in the treaty provision or domestic law, rather the treaty provisions provide by incorporation the applicability of domestic laws for computing the profit of the assessee. In view of the above, we do not find any merit in the contention of the assessee. With respect to the applicability of the judgment referred in the case of Rolls Royce Indl Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in 56 taxmann.com 190 (Del) , we allow the ground raised by the assessee. For the purpose of completeness, we are reproducing hereinbelow para 23 of the decision of GE Packaged Power Inc supra, which is to the following effect :- 23. For the above reasons, this Court finds that no interest is leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessees were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under Section 201, and the consequences delineated in that provision will visit the payer. The appeal of the Revenue is accordingly dismissed without any order as to costs. 25. In the result, the appeal of the assessee is partly allowed. 26. The facts of all the subsequent assessment years are similar to that of assessment year 2004-05 and, therefore, following our decision in the case of assessee for assessment year 2004-05, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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