TMI Blog2022 (4) TMI 1489X X X X Extracts X X X X X X X X Extracts X X X X ..... na should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act. It is also to be noted that while passing the order u/s 201(1) and 201(1A) of the Act for assessment year 2012-2013, the Assessing Officer has calculated TDS liability at 10% as per the Indo-China DTAA. Therefore, ground is allowed. - IT(IT)A No.4/Bang/2014, IT(IT)A No.1182/Bang/2014 - - - Dated:- 11-4-2022 - Shri George George K, JM Ms.Padmavathy S, AM For the Appellant : Sri.Padam Chand Khincha, CA For the Respondent : Sri.Dilip, Standing Counsel for Department ORDER Per George George K, JM : These appeals at the instance of the assessee are directed against two orders of the CIT(A) and are pertaining to assessment years 2011-2012 and 2012-2013 (for assessment year 2011-2012, the CIT(A) s order is dated 28.11.2013 and for assessment year 2012-2013, the CIT(A) s order is dated 24.03.2014). The orders of the CIT(A) arise out of orders passed u/s 201(1) and 201(1A) of the I.T.Act. Common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order. 2. The adjudication of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices' under Article 12 of the Double taxation avoidance agreement (DTAA) between India - China. 6.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made to overseas subsidiary constitute 'royalty' as per Explanation 2 to section 9(1)(vi) of the Income tax Act, 1961. 6.2 Assuming without admitting that the payments made to overseas subsidiary constitute 'royalty' as defined in Explanation 2 to section 9(1)(vi), such payments, having been made in respect of right, property or information used or services utilised for the purposes of business carried on by the appellant outside India or for the purposes of making or earning any income from any source outside India, were outside the scope of section 9(1)(vi) of the Income tax Act, 1961 and consequently not liable for TDS under section 195 of the Act. 7.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made overseas subsidiary constitute 'royalty' u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held as outside the purview of section 9(1 )(vii) under the Income tax Act, 1961; (v) Payments made to overseas subsidiary be held as not in the nature of 'fees for technical services' under Article 12 of the DT AA between India - China; (vi) Payments made to overseas subsidiary to overseas subsidiary be held as not chargeable to tax in India under the provisions of the Income tax Act and the Treaty; (vii) Payments made to overseas subsidiary be held as not liable for deduction of tax at source under section 195 of the Act. (viii) In any case and without prejudice, section 206AA and the 20% rate of TDS mentioned thereunder be held as inapplicable in the present case. (ix) Interest levied under section 201(lA) be deleted. 4. Brief facts of the case are as follows: The assessee is an Indian company, engaged in the business of development and export of computer software and related services. Infosys Technologies (China) Co. Ltd. (hereinafter referred to as `Infosys China or `ITCL for the sake of brevity) is a company incorporated in China. It is a wholly owned subsidiary of the assessee. Pursuant to subcontracting agreement dated 01.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the services are' rendered by Infosys China in China. It does not have a PE in India. Details of sub contracting charges paid to Infosys China, with description of service, customer name, customer address and customer country for FY 2010-11 [AY 2011-12] and FY 2011-12 [AY 2012-13] are available at page 192 to 198 and page 199 to 205 of paper book filed on 22.1.2015. Out of these details only 2 payments were made to Infosys China in FY 2010-11 [A Y 2011-12] where the customer was in India [Sl No 13 and 69 at page 192 and 194 of the paper book] Similarly, during the FY 2011-12 [AY 20~2-13] only 3 payments were made to Infosys China, where the customer was in India [Sl No 12,13,117 at page 199 and 203 of the paper book]. All other payments were in respect of services rendered by Infosys Ltd to overseas customers. Save the instances referred to above, the balance payments to Infosys China were in relation to services rendered by Infosys Ltd to overseas customers, which were utilized outside India by Infosys Ltd for the purpose of (a) carrying on business outside India and / or (b) making or earning any income from any source outside India. Thus, these payments would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, the provision of services by Infosys China has to be in the other contracting state i.e., India. In the present case, it is an admitted fact that Infosys China did not render any service in India. Thus, the definition of 'Fees for technical services' under the DTAA is not satisfied. Consequently, the sub contracting charges paid to Infosys China cannot be regarded as 'Fees for technical services' under the Treaty. Without prejudice, For the AY 2011-12; sub contracting charges of Rs.16,74,44,314 was paid on 1.5.2010 [Page 19 of the paper book] which is prior to the enactment of Finance Act 2010. The said Act received the presidential assent on 8.5.2010. As the above payment was made before 8.5.2010, the law applicable on the date of payment is applicable. As per the decision of the Supreme Court in Ishikawajima Harima Heavy Industries Ltd v DIT 288 ITR 407, in order to attract 'fees for technical services' under section 9(1)(vii), the services must be rendered in India This position was overruled by the Finance Act 2010 w.e.f. 8.5.2010. The OGE to ITAT order passed for AY 2009-10 and AY 2010-11 has accepted the fact that services were rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income accrues or arises in India and hence taxable in India. 2. The above position has been laid down by the Hon'ble Supreme Court in the case of GVK Industries 371 ITR 453 (pages 1 to 12 in the paper book). 3. It is submitted that even as per Explanation to Section 9(1)(vii) of the Act, the payment would fall within the ambit of FTS. 4. It is further submitted that the assessee has claimed benefit of Section 10A/ 10B of the Act claiming to be export of software from specified unit from India. Hence it is not open to the assessee to contend that no services were rendered / utilised in India. 5. The reliance on the judgement of Hon 'ble Supreme Court In the case of Ishikawajma Harima Heavy Industries Ltd is not applicable in view of amendment to Section 9(1)(vii) r.w Explanation. In view of the amendment, rendering of services in India is no more requirement and so for as the utilisation is concerned as final product after utilisation of the partial services rendered by Infosys China being exported from India, the test of utilisation also satisfied. 6. The issue raised in the above appeal is covered by the decision of the ITAT Mumbai bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by such person outside India or for the purposes of making or earning any income from any source outside India will be deemed to accrue or arise in India. There is also no dispute that the fees received by the assessee is covered by the scope of fees for technical services under Explanation 2 to Section 9(1)(vii) which provides that for 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) . There is also no dispute that the exclusion clause set out in the said definition is not attracted. 6. The case of the assessee, however, is that since the services are not rendered in India, the provisions of Section 9(1)(vii) cannot be invoked. The support for this proposition is assessee s reliance on the Hon ble Bombay High Court s judgment in the case of Clifford Chance vs. DCIT6. It is, therefore, necessary to deal with this case in some detail. 7. In the case of Clifford Chance, the appellant, an English law firm, was rendering legal services in connection w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of a resident although is subjected to tax, the global income of a nonresident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule. As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a nonresident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words income deemed to accrue or arise in India as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a nonresident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical services will be deemed to have been accrued in the tax jurisdiction in which the person making the payment is located. The relevant finding of the Tribunal holding that the assessee is liable under the relevant DTAA read as follows:- 12. The next issue to be examined by us is whether or not the income earned by the Chinese company is liable to be taxed in India under Article 12 of the India China tax treaty. 13.Article 12 of the India China tax treaty provides as follows: Royalties and fees for technical services 1. Royalties or 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 Contracting State. 2. However, such royalties or fees for technical services 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 the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties of fees for technical services. 3. The term royalties as used in this Article means payment of any kind recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement. 14. A plain reading of the above treaty provisions show that under Article 12 (4) shows that what is covered by the basic definition of the expression fees for technical services is the Provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State. In other words, technical services being provided by resident of one of the contracting state in the other contracting state is what will be covered by the basic rule under Article 12 (4). The expression provision of services is not defined or elaborated anywh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary to go into the broader question about the merits of his arguments on the scope of Article 12(4) and proceed on the basis that the payments made by an Indian company will be deemed to have arisen in India even under the Indo China tax treaty, he has submitted that once a fees for technical service is not covered by the basic provisions of Article 12(4), which is confined to services having been rendered in the source state, there is no occasion of invoking Article 12 (6). It is submitted that the deeming provision for Article 12(6) is confined to what is already covered by royalties and fees for technical services which are neatly defined in Article 12(4) and it does not seek to extend the scope of the said basic definition. It is only after 12(4) is satisfied that the deeming fiction can be invoked. He invites our attention to corresponding article of China Pakistan tax treaty10 , i.e. Article 13, which does not have any such deeming fiction but which provides that the term fees for technical services , as used in this Article, means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices (emphasis supplied by us) , India China tax treaty refers to provision of services of managerial, technical or consultancy services . The scope the expression provision of services has to be something wider than provision of rendering of services . If at all this contrast with China Pakistan tax treaty shows something, this contrast shows that the India China tax treaty intends to follow the source rule, while China Pakistan tax treaty gives up the source rule for fees for technical services. The difference between these two clauses can hardly be missed, and it becomes all the more clear when one takes into account the fact that while there is a deeming fiction clause in Article 12(6) of India China tax treaty, taking care of the situations in which payments are made by persons not resident in the other contracting state, though they have a permanent establishment or fixed base in the other contracting state, there is no such corresponding clause in China-Pakistan tax treaty. It is thus clear, from the material placed before us, that while India China tax treaty follows the source rule in the matter of fees for technical services, Pakistan China tax treaty does not do so. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng must be avoided when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned. Words are to be understood with reference to the subjectmatter, i.e., verba accopoenda sunt secundum subjectum materiam. * It is inevitable that interpreter of a tax treaty is likely to be required to cope with disorganised composition instead of precision drafting. Therefore, the words employed in the treaty are to be given a general meaning general to lawyers and general to layman alike. * When a tax treaty does not define a term employed in it, and the context of the treaty so requires, it can be given a meaning different from domestic law meaning thereof. The meaning of the undefined terms in a tax treaty should be determined by reference to all of the relevant information and all on the relevant context. There cannot, however, be any residual presumption in favour of a domestic law meaning of a treaty term. (Emphasis supplied by us by underlining) 19. In view of the above, a literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to the clear and unambiguous schem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia is no more required. As regards the utilization is concerned as a final product after utilization of partial services rendered by Infosys China being exported by the assessee the test of utilization is satisfied. The learned AR has further made claim on non-applicability of TDS provision considering the beneficial provision the treaty between India and China. Since the said contention is centered around the applicability of Article 12 of the Treaty, the same is reproduced below:- Royalties and fees for technical services 1. Royalties or 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 Contracting State. 2. However, such royalties or fees for technical services may also taxed in the Contracting State in which they arise/ and according the laws of that Contracting State/ but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount the royalties or fees for technical services. 3. The term royalties as used in this Article means payment of a kind received as a conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. 9.3 The learned AR has directly taken a plunge into interpretation of Article 12(4) and juxtaposing it with Article 12(6), without any regard to para (2). Para 1 is dealing with primary right to tax which lies with resident country. As per para 2, the secondary right to tax fees for technical services lies with the source country in which such payments arise. With respect to definition of the term fees for technical services , reference may be made to Article 12(4) which also deals with general scope of the term accrual . With respect to deemed accrual, reference may be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptualise the place/ situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessees products are sent outside India under such contracts. The manufacturing activity is located in India. The source of income is created at the moment when the export contracts are concluded in India. Thereafter the goods are exported in pursuance of the contract and the export proceeds are sent by the importer and are received in India. The importer of the assessees products is no doubt situated outside India, but he cannot be regarded as a source of income. The receipt of the sale proceeds emanate from him from outside India. He is, therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situatedonly in India. We are making a distinction between the source of the income and the source of the receipt of the monies. In order to fall within the second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and not the receipt, should be situated outside India. That condition is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not of any assistance to the assessee in the present case since the contention here is that the source of income is the export sales and the export sales are located outside India. 15. For these reasons we are unable to hold that the assessees case falls under the second exception provided in Section 9(1)(vii)(b) of the Act. In other words, we are unable to accept that the fees for technical services were paid by the assessee to the US Company for the purpose of making or earning any income from any source outside India. 9.5 Further, the assessee has claimed benefit of section 10A / 10B of the I.T.Act for the export of software from the specified units from India. Hence, it is not open to the assessee to contend that no services were rendered or utilized in India. The learned AR had placed reliance on the judgment of the Hon ble Kerala High Court in the case of Device Driven (India) Pvt. Ltd. v. CIT reported in 126 taxman.com 25. The said judgment is not applicable to the facts of the present case, as the services rendered by Infosys China has been utilized by the assessee in India before exporting the software. The issue of claim of benefit of exception provided u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos.2 3/Bang/2014 (order dated 25.05.2016). The assessee has also placed on record the order giving effect to the ITAT order wherein it has been accepted that the services were rendered by Infosys China outside India only. Thus, applying the dictum laid down by the Hon ble Apex Court it was submitted that the assessee cannot be fastened with the liability u/s 201(1) of the I.T.Act in respect of contracting charges paid on 01.05.2010. The ITAT in assessee s own case for assessment years 2009-2010 and 2010-2011 had restored the issue of payments made prior to 08.05.2010 to the AO for de novo consideration. The relevant finding of the ITAT in assessee s own case (supra), reads as follows:- 11. Thus, it is clear that when the services are not rendered in India, then merely because of the retrospective amendment by which the pre-requisition condition of rendering of services in India had been done away, would not impose a liability on the assessee to deduct tax at source on the payment made prior to such retrospective amendment. Accordingly, we are of the view that retrospective amendment will not change withholding tax liability of the deductor on the payment made prior to such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in respect of services rendered by Chinese subsidiary, ITCL outside India. We further note that the CIT(Appeals) has taken note of the finding of the AO, however, despite the objection raised by the assessee regarding the finding of AO, the CIT(Appeals) has not given any finding on this factual aspect of the matter. Accordingly, in the facts and circumstances of the case, we find that this factual aspect has not been properly examined by the AO and therefore, we remit this limited issue, whether any part of the payment in question is relating to services rendered in India to the record of the AO and direct the AO to decide the same in view of our foregoing observations. We make it clear that the issue of nature of payment, whether it is FTS or not is left open. 9.7 In the light of the above order of the Tribunal, which had followed the dictum laid down by the Hon ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra), we restore the issue of taxability with regard to subcontracting charges paid on 01.05.2010, to the files of the AO. The AO is directed to take a decision in accordance with law after affording a reasonable opportunity of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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