TMI Blog2008 (12) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... actual expenses incurred earning of income from Indian operations and thereby, the question of invoking s. 44D does not arise; 3. failed to appreciate that appellant has a choice of being assessed as per art. 12 of DTAA and receipt could be taxed @ 10 per cent without deduction of any expenses;" 3. On the other hand, the Revenue has challenged the order of the learned CIT(A) deleting the interest levied by the AO under ss. 234B and 234C of the IT Act, 1961 ('the Act'). 4. The brief facts giving rise to these appeals and the cross-objections are these. The assessee is a non-resident company and tax resident of Germany. It is internationally renowned engineering company having its registered office in Germany which offers engineering consultant services for oil and gas pipelines transmission system. It has also set up a branch office in India to supplement its efforts and to have more active participation in the new investment plans in the infrastructure sector of the company. The assessee entered into an agreement with Dodsal Ltd. for providing consultancy services. The assessee had received advance fees of Rs. 20 lakhs in the asst. yr. 2000-01 and Rs. 80,94,740 in asst. yr. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r technical services received by the appellant for the services rendered to Dodsal is connected with the PE in India. Further, it was noted by him that as per art. 12(5) of the DTAA the income was to be computed as per the provisions contained in art. 7(3). After referring to the provisions of art. 7(3), it was observed by him that the expenditure relating to the PE are to be allowed in accordance with the domestic law. Since s. 44D of the Act prohibits the allowance of any expenditure against the income by way of royalty or fees for technical services, it was held by him that income was to be computed on the basis of gross fees received by the assessee. Applying the provisions of s. 115A, it was further held that the rate of tax to be applied was 20 per cent. Reliance was placed on the decision of AAR in the case of Ericsson Telephone Corporation India AB, In re (1997) 137 CTR (AAR) 301 : (1997) 224 ITR 203 (AAR) as well as in the case of Hyder Consulting Ltd., In re (1999) 151 CTR (AAR) 641 : (1999) 236 ITR 640 (AAR). The assessee had also challenged the levy of interest under ss. 234B and 234C before the lean1ed CIT(A) who. following the decision of the Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (2006) 150 Taxman 13 (Del)(Mag). 8. Proceeding further it is submitted that the view canvassed by him gets support from the fact that the Government has taken the steps in this direction by introducing s. 44DA by the Finance Act, 2004 which provides that income of non-resident by way of royalty/fees for technical service should be chargeable to tax on 'net basis' after allowing expenses and not on gross basis. Reliance is placed on Explanatory Memorandum to Finance Act, 2003. According to him, the intention of the legislature behind the insertion of s. 44DA is to harmonise the provisions of IT Act and the provisions of DTAA and to bring the non-resident at par with the resident assessee with respect to taxation of royalty or fees for technical services. Reliance is placed on the following decisions: (1) CIT vs. Raman Lal C. Hathi (2008) 217 CTR (SC) 105 : (2008) 171 Taxman 479 (SC); (2) CIT vs. Gold Coin Health Food (P) Ltd. (2008) 218 CTR (SC) 359 : (2008) 304 ITR 308 (SC); (3) Allied Motors(P) Ltd. vs. CIT (1997) 139 CTR (SC) 364 : (1997) 224 ITR 677 (SC) in support of the proposition that clarificatory provisions are to be applied retrospectively. 9. Without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Del) 265 : (2007) 105 ITD 679 (Del); (ii) DHV Consultants BV, In re (2005) 197 CTR (AAR) 105 : (2005) 277 ITR 97 (AAR); (iii) Ericsson Telephone Corporation India AB, In re; (iv) Advance Ruling P. No. 13 of 1995, ABC, In re (1997) 141 CTR (AAR) 542 : (1997) 228 ITR 487 (AAR). It was further submitted by him that the decision of the Hon'ble Supreme Court in the case of A. Sanyasi Rao Ors. cannot be applied with reference to the provisions of s. 44D in view of the decision of the AAR in the case of Timken India Ltd., In re (2005) 193 CTR (AAR) 610 : (2005) 273 ITR 67 (AAR). Regarding the provisions of art. 24(2), it has been submitted by him that such provisions itself protect the provisions contained in art. 7(3) and therefore discrimination clause would not apply to a case where income is computed under art. 7(3). It was also submitted that provisions of DTAA between India and Germany are not similarly worded with other treaties considered by the Tribunal in the C9-se of Herbalife International India (P) Ltd. and Metchem Canada Inc. and therefore those decisions would not be applicable. 12. Subsequently, the Bench came across with the decision of the Pune Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view taken by us also finds support from the decision of the Co-ordinate Bench of the Tribunal in the case of Steel Authority of India Ltd. wherein it has been held as under: "7.2 The learned counsel also argued that s. 44D was replaced by Finance Act, 2003, w.e.f. 1st April, 2004 which provides for deduction of expenditure or allowance in accordance with the provisions of the Act. Since the subject-matter of both the sections is same, the amendment should be taken as clarificatory in nature. We have considered this argument also, however, we are unable to agree with him for two reasons, namely,-(i) the provisions are substantive in nature and, therefore, s. 44DA applies prospectively to the proceedings of asst. yr. 2004-05 and onwards, and (ii) the new provision is made specifically applicable in respect of agreements made after 31st March, 2003. Thus the new provision is not applicable to the facts of the assessee's case. It does appear to us that the amendment was made prospectively in order to mitigate the hardship caused by the old provisions." 16. The judgment of the Hon'ble Supreme Court in the case of Gold Coin Health Food (P) Ltd. relied upon by the learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of the above discussion, the provisions of s. 44DA cannot be said to be clarificatory. Hence, the judgment of the apex Court in the case of Gold Coin Health Food (P) Ltd. does not help the assessee. It is held that the provisions of s. 44DA of the Act are to be construed prospectively and cannot be given retrospective effect. The contention raised by the assessee in this regard is therefore rejected. 19. Coming to the main contention raised by the learned counsel for the assessee, the question for our consideration is whether the assessee is entitled to deduction in respect of expenses incurred by non-resident assessee through its PE in India while computing the income by way of royalty or fees for technical services in view of the provisions of art. 7(3) of DTAA between India and Germany. There is no dispute between the parties that the amount received by the assessee amounts to fees for technical services as per the provisions of s. 9(1)(vii) of the Act and consequently the assessee is liable to pay the tax under the Act. It is also not in dispute that if the income is to be computed under the Act, then the provisions of s. 44D would apply and the assessee would be li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the expenses which are incurred for the purpose of business of PE but such deductions are also subject to the provisions of the domestic law of the Contracting State. The words 'according to the domestic law of the Contracting State in which the PE is situated' are the words of significance which, in our opinion, would only mean that the expenditures incurred by the non-resident assessee for the purpose of business of the PE in India would be allowable in accordance with the provisions of domestic law i.e., IT Act, 1961. The provisions of ss. 28 to 44C of the Act permits or allows deductions in respect of the expenditure incurred by the assessee for the purpose of business. However, such provisions cannot be read in isolation. Sec. 44D of the Act is a non obstante provisions and specifically overrides the provisions contained in ss. 28 to 44C. Therefore, such provisions must be read along with the provisions of s. 44D of the Act. According to s. 44D, the deductions permitted under ss. 28 to 44C are not to be allowed while computing income by way of royalty and fees for technical services. Thus, the combined reading of these provisions leads to only one conclusion that no de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 7-Business profits 1 ......... 2 ......... 3. In determining the profits of a PE, there shall be allowed as deductions expenses, which are incurred for the purposes of the PE, including executive and general administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the tax laws of that State." The first contention raised on behalf of the assessee was that the whole object of para 3 of art. 7 in treating the technical fees as business profits is to make available the deductions that are usually available in the process of computation of business profits. Thus, it would be ironical to read it as prohibitory in terms whatsoever. This contention was turned down by the said Authority by 09serving as under: "15..... Para (3) is not as he contends, a carte blanche provision for the allowance of all expenses against the receipts. It is also a limiting provision. It permits deductions against receipts sought to be assessed under art. 7 only to the same extent as would be permissible if an assessment were to be made under the Act. In the case of a foreign compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly fees for technical services. However, since they are receipts arising from business, they will be taxed in the same manner as business profits. Fees for technical services may arise in the course of a business or may arise from other sources. If they arise from a business........" 24. This issue again came up before the AAR in the case of Advance Ruling P. No. 13 of 1995. Various questions were raised before the said Authority. The questions relevant to our issue were these: "Q. 9 Whether, while computing the profits of the PE in India, the restrictions imposed by art. 7.3(a) of the DTAA would extend to only s. 44C of the Act or to any other provision of the Act? Q. 13 Whether the profits of the PE in India will be computed under the head 'Profits and gains of business or profession' as described in Chapter IV, Part D, of the Act and brought to tax at the rates applicable to a foreign company or the gross receipts will be subjected to tax at the rates prescribed under s. 115A of the Act?" Q. 9 was answered by the Authority as under: ".........It is clear from the language of sub-para (a) of para 3 of art. 7 of the DTAA which has been extracted earlier that in determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that section precludes the application of ss. 28 to 44C and s. 57 of the Act and renders certain types of income taxable at a specified rate, but subject to certain conditions." 25. In all the above decisions, the Tribunal as well as AAR have expressed the unanimous view that under art. 7(3), the deductions are to be allowed only in accordance with the provisions of domestic law. If the domestic law prohibits the deductions then such deductions would not be allowed. Sec. 44D has been considered to be part of the process of computation of business profits and therefore, restrictions provided therein would apply while computing the income by way of royalties or fees for technical services treating the same as 'business profits'. Accordingly, the assessee is not entitled to any deductions contained in ss. 28 to 44C of the Act in view of the specific non obstante provisions contained in s. 44D of the Act. Thus, the view expressed by us stands completely fortified by the aforesaid decisions. Therefore, the contention of the learned counsel for the assessee in this regard is rejected. 26. Before parting with this issue, we would like to mention that an argument was advanced on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Parliament, if we read down the provisions of s. 44AC instead of striking it down." 28. Subsequently, at p. 65, their Lordships observed as under: "We may mention that the theory of reading down is a rule of interpretation resorted to by Courts where a provision, read literally, seems to offend a fundamental right or falls outside the competence of the particular legislature." 29. The above observations make it clear beyond doubt that the theory of reading down the provisions of the statute can be applied only when the provision is found to be violative of the fundamental right guaranteed by the Constitution of India. The Tribunal, being an authority constituted under the IT Act, cannot deal with the issue regarding the violation of the fundamental rights and therefore such theory cannot be applied by the Tribunal. It is only the Hon'ble High Court or the Hon'ble Supreme Court which can decide such issue and apply the theory Of reading down the provision of the statute if it is so necessary. In view of the above discussion, the contention raised by the learned counsel for the assessee is rejected. 30. The next issue for consideration is whether the non-discrimination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and art. 12(5) which, for the benefit of the order, are being reproduced as under: "Article 12. Royalties and fees for technical services. 1......... 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 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 or the fees for technical services. 3......... 4......... 5. The provisions of paras 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a PE 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 PE or fixed base. In such case, the provisions of art. 7 or art. 14, as the case m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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