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Elkem Technology, By Gpa Sponge Iron India Limited v. The Deputy Commissioner Of Income Tax, Assts
Factual and Procedural Background
The appellant is a non-resident company based in Norway which entered into a contract dated 19.04.1990 with M/s. Sponge Iron India Limited (Hyderabad) for the supply of equipment and for provision of engineering data and personnel services to establish a submerged arc furnace at Kothagudem, Andhra Pradesh. The contract provided for a total payable amount of NKR 6.257 million. The Indian company deducted tax at source of Rs. 20,95,500 before remitting consideration. During the relevant accounting year, the Indian company remitted Rs. 69,85,000 towards charges described as engineering and other services.
The appellant contended that the Rs. 69,85,000 was not taxable in India because (a) it was payment for construction/assembly undertaken by the recipient and therefore constituted business profits not taxable in India without a permanent establishment under the Double Taxation Agreement with Norway, and (b) the payment was made to the personnel supplied rather than to the appellant company. The appellant relied upon Explanation 2 to Section 9(1)(vii) of the Income Tax Act, 1961.
The Assessing Officer rejected the appellant's contention, concluding that the contract consideration, particularly under Clause II(1)(b), was mainly for provision of technical personnel and that the appellant was placing engineers at the disposal of the Indian company rather than undertaking construction/assembly itself. The AO completed assessment under Section 143(3) on 28.12.1993 and held Rs. 69,85,000 taxable at 15%. The Commissioner of Income-Tax (Appeals) confirmed the assessment. The Income Tax Appellate Tribunal (Hyderabad, Bench A) in ITA No. 669/Hyd/1995 dated 12.05.2000 confirmed the earlier orders. The present appeal (ITTA No.37 of 2001) under Section 260A challenges the Tribunal's order.
Legal Issues Presented
- Whether the payment of Rs. 69,85,000 described as charges for engineering and other personnel services paid by an Indian resident to a non-resident company falls within "income by way of fees for technical services" as defined in Explanation 2 to Section 9(1)(vii) of the Income Tax Act, 1961, and is therefore deemed to accrue or arise in India.
- Whether the payment could be excluded from the definition of "fees for technical services" under Explanation 2 because it was consideration for construction, assembly or similar project undertaken by the recipient (and thus would not be taxable as fees for technical services).
- Whether the appellant's factual contention that the payment was made to the personnel supplied by it (and not to the appellant company) was supported by appropriate pleading and could affect taxability.
- Whether the matter involves any substantial question of law warranting admission of the appeal under Section 260A.
Arguments of the Parties
Appellant's Arguments
- The Rs. 69,85,000 remitted by the Indian company was for construction/assembly undertaken by the recipient and therefore constituted business profits, not taxable in India in the absence of a permanent establishment under the India–Norway Double Taxation Agreement.
- The payments were not to the appellant company itself but to the individual personnel supplied by the appellant company.
- The appellant relied on Explanation 2 to Section 9(1)(vii) to contend that the payments did not qualify as "fees for technical services".
Revenue / Assessing Officer and Appellate Authorities' Position
- The Assessing Officer observed that Clause II(1)(b) of the contract showed the consideration was mainly for services of technical personnel; the appellant was supplying engineers to assist the Indian company rather than undertaking construction/assembly itself.
- The AO, confirmed by the Commissioner (Appeals) and the Tribunal, treated the Rs. 69,85,000 as consideration for engineering and personnel services which are "fees for technical services" under Section 9(1)(vii) and therefore deemed to accrue or arise in India.
- The appellate authorities noted the contract was a composite contract but that the components for supply of equipment and for engineering/personnel services were de‑marcated with separately stated consideration; the consideration for engineering/personnel services thus remained independent and taxable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Orissa Synthetics Ltd. vs. ITO | Establishes that the person claiming exclusion (that payment is not "fees for technical services") bears the burden of proof to show the payment falls within the exclusion in Explanation 2. | The court relied on this to emphasise that the appellant must establish that the payment was for construction/assembly (an excluded category); the opinion notes the appellant did not have the pleading to make this claim succeed. |
| Steffen, Robertson & Kirsten Consulting Engineers & Scientists vs. CIT | Holds that fees are liable to tax as income accruing or arising in India when payments are for services to be utilized in India, irrespective of where the preparatory or other work was carried out. | The court applied this principle to hold that even if some services were rendered abroad, fees paid for services utilized by the Indian company in India are taxable under Section 9(1)(vii). |
| Cochin Refineries Ltd. vs. CIT | Determined that foreign consultancy services and reimbursements to consultant personnel were technical in nature and within Explanation 2; reimbursements were part of the technical advice process and thus covered by the Explanation. | The court used this precedent to treat the payments (including parts characterized as personnel reimbursements) as part and parcel of technical services utilised in India and therefore taxable under Section 9(1)(vii). |
Court's Reasoning and Analysis
The court first noted a procedural infirmity: there was no pleading supporting the appellant's assertion that the payments were made to personnel supplied rather than to the appellant company (paragraph 4). This factual deficiency weakened the appellant's argument.
The court then turned to the statutory scheme. It set out Section 9(1)(vii) and Explanation 2 which defines "fees for technical services" as consideration for managerial, technical or consultancy services (including provision of technical or other personnel) but excluding consideration for construction, assembly, mining or like projects undertaken by the recipient, or sums which would be income chargeable under "Salaries".
The court explained the legal effect of clause (vii)(b) and Explanation 2: where an Indian resident pays consideration to a non-resident for managerial/technical/consultancy services (including provision of personnel) and such services are utilized in the resident's business in India, the consideration is deemed to accrue or arise in India. The court emphasised that the relevant statutory language focuses on services "utilized in India" rather than strictly where the services are rendered.
The opinion applied precedents to these statutory provisions. It relied on Orissa Synthetics to state that the onus is on the claimant to prove that the payment falls within the exclusion for construction/assembly carried out by the recipient. It relied on Steffen, Robertson & Kirsten to support the proposition that services rendered abroad but utilized in India are taxable. It relied on Cochin Refineries to show that payments (including reimbursements to personnel) that form part of technical advice fall within Explanation 2.
Factually, the court accepted the Tribunal's finding (quoted in the opinion) that the contract, while composite, clearly demarcated the supply-of-equipment component and the engineering/personnel-services component with separately stated considerations. Because the consideration for engineering and personnel services was independent of the equipment supply, those payments constituted fees for technical services utilized in India.
On this combined statutory and factual matrix, the court concluded that the Rs. 69,85,000 paid by the Indian company to the Norwegian company was part and parcel of utilizing technical services in India and therefore fell within the Explanation to Section 9(1)(vii).
Holding and Implications
HOLDING: The appeal was dismissed. The court held that the payment of Rs. 69,85,000 towards engineering and personnel services constituted "fees for technical services" within the meaning of Explanation 2 to Section 9(1)(vii) of the Income Tax Act, and therefore was deemed to accrue or arise in India. The court recorded that the Tribunal's and lower authorities' conclusions were justified.
DISPOSITION: ITTA No.37 of 2001 is dismissed with no order as to costs at the stage of admission.
Implications:
- The direct effect is that the Rs. 69,85,000 payment was treated as taxable in India under Section 9(1)(vii) as fees for technical services; the appellant's contention that the amounts were construction/assembly considerations or payments to personnel rather than to the company was not accepted (in part because it lacked pleading support).
- The court did not admit any substantial question of law for determination under Section 260A; it therefore did not treat the matter as raising a novel legal issue or lay down a new precedent beyond applying existing statutory interpretation and precedent.
1. This Appeal is directed against the Order of the learned Income Tax Appellate Tribunal, Hyderabad, Bench `A' dated 12.05.2000 in I.T.A.No.669/Hyd/1995.
2. The facts leading to the filing of this appeal be noted briefly as under :
The appellant is a non-resident company based in Norway. It entered into a contract with an Indian Company i.e., M/s.Sponge Iron India Limited, Hyderabad, Andhra Pradesh on 19.04.1990 for supply of equipments as well as engineering data besides personnel services for establishing a sub-merged Arc Furnace at Kothagudem in Andhra Pradesh. In terms of the contract, total amount of Rs.6.257 million NCK (Norwegian Currency) was payable by the Indian Company. The Indian Company deducted tax at source of Rs.20,95,500/- before remitting the consideration payable to the appellant company. The Indian Company filed a return of income as agent of the foreign company claiming that the amount received by the non-resident is not liable for Indian taxation. During the accounting year under consideration, the Indian Company remitted Rs.69,85,000/- towards charges for engineering and other services. The assessee claimed this amount as not taxable in its hands on the ground that the payment was for construction, assembly undertaken by the recipient and the same being business profits is not taxable in its hands since it did not have a permanent establishment in India in terms of the provisions of the Double Taxation Agreement between India and Norway. The assessee referred to Explanation 2 of Section 9(1)(vii) of the Income Tax Act,1961 (for short "the Act"), to claim that the payment does not come under the definition of `fees for technical services'.
The Assessing Officer has rejected the above contention of the assessee stating that in terms of Clause II(1)(b) of the Contract between the assessee and the Indian Company, the consideration is `mainly on account of provisions of the services of technical personnel'. The Assessing Officer pointed out that the appellant company was merely placing at the disposal of the Indian Company, the recommended engineers who will be assisting the Indian Company in establishing the furnace. The appellant company itself has not undertaken any construction, assembling, mining or like project so as to claim that the same is not taxable in terms of Double Taxation Agreement. The Assessing Officer completed the assessment under Section 143(3) on 28.12.1993 and held that the amount of Rs.69,85,000/- is liable for Indian Income Tax at 15%. The Order of the Assessing Officer was carried in appeal before the Commissioner of Income-Tax (Appeals-3), Hyderabad, who confirmed the assessment order. In further appeal, the learned Income Tax Appellate Tribunal in its order dated 12.05.2000 confirmed the order of the Commissioner of Income-Tax - 1st respondent appellate authority. It is against the said order, the above appeal is preferred in terms of Section 260A of the Act.
3. Sri A.V.Krishna Koundinya, learned counsel appearing for the appellant would submit that the Indian Company remitted Rs.69,85,000/- towards charges for engineering and other services and that amount is not taxable in its hands because the payment was for construction, assembly undertaken by the recipient and the same being business profits is not taxable in its hands. The learned counsel would also contend that the payment made by the Indian Company is not to the appellant company, but to the personnel supplied by the appellant company.
4. Before dealing with the contention of the learned counsel for the appellant, it has to be noticed at the threshold that there is no pleading at all in support of the contention of the learned counsel that the payment made was not to the appellant company, but to the personnel supplied by it.
5. Section 9 of the Act deals with the income deemed to accrue or arise in India. That Section among other things provides :
"9. Income deemed to accrue or arise in India :- (1) The following incomes shall be deemed to accrue or arise in India -
(i)xxx .......
(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 utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1 - For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2 - 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".
Section 9 applies to both residents and non-residents. Non-residents who may not be assessable in respect of income accruing or received outside India have been rendered chargeable by virtue of this section in respect of income deemed to accrue or arise in India. Similarly, resident but not ordinarily resident would also be chargeable in respect of income deemed to be accruing or arising in India under this section which otherwise would have been exempt by virtue of Section 5(1)(c). Section 9 would not, however, apply to cases where income actually accrues or is received in India.
6. Clause (vii) of Section 9(1) was inserted by the Finance Act, 1976, with effect from 1.6.1976 and a proviso was added to it by the Finance (No.2) Act, 1977, with effect from 1.4.1977. Under cl. (vii), income by way of fees for technical services would be deemed to accrue or arise in India where it is payable by the following :
(1) the Central Government or the State Government; or (2) an Indian resident; or (3) a non-resident where the fees are payable in respect of services, utilized in a business or profession carried on by him in India or for the purposes of making or earning income from any source in India.
Explanation 2 of Clause (vii) of Section 9(1) defines "fees for technical services" for the purposes of that clause. Accordingly, it 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". The question whether the payment would come within the exclusion part of this Explanation or not would have to be established by the person who claims the exclusion as held by the Orissa High Court in ORISSA SYNTHETICS LTD. vs. ITO1. From a combined reading of clause (vii)(b) and Explanation 2, it becomes abundantly clear that any consideration, whether lump sum or otherwise, paid by a person who is resident in India to a non-resident for rendering any managerial or technical or consultancy service would be income by way of fees for technical services and would, therefore, be within the ambit of "income deemed to accrue or arise in India". It is to be noted that under Section 9(1)(vii)(b), the expression used is "fees for services utilized in India" and not the expression "fees for services rendered in India". It may be that some of the services are rendered abroad by the personnel employed or deputed by non-resident company under collaboration agreement with the Indian Company. But if the fees are paid for services utilized by the Indian company in its business carried on by it in India, irrespective of the place where the services were rendered, the amounts of the fees should be deemed to accrue or arise in India. In STEFFEN, ROBERTSON & KIRSTEN CONSULTING ENGINEERS & SCIENTISTS vs. CIT2 where fees were paid in respect of preparatory studies carried out in South Africa, it was held that fees would be liable to tax as income accruing or arising in India, irrespective of whether these payments were made in India or abroad, when the payments were made for services to be utilized in India or abroad. In COCHIN REFINERIES LTD. vs. CIT3, the Refineries requested a foreign company to evaluate whether coke produced from a blend of vaccum bottoms and clarified oil from Bombay High crude was suitable for making anode for aluminium industry. The tests were carried out in USA in regard to which the assessee made a payment of Rs.7,69,614. The assessee also paid Rs.1,19,303 and Rs.38,271 which were payments in the nature of reimbursement of the payments made to the personnel of the said consultant. It was held that the services rendered by the foreign company would be in the nature of technical services and would, therefore, consequently be covered fully by the Explanation to section 9(1)(vii). Further, it was held even with regard to the two payments of Rs.1,19,303 and Rs.38,271 in the nature of reimbursement of payments made to the personnel, no different situation would be available because these payments would be part and parcel in the process of advice of a technical character and would fall for coverage only within the meaning of the above Explanation.
7. In this view of the matter, the payment of Rs.69,85,000/- made by the Indian company to the Norway company towards charges for engineering and other personnel services, it should be held, would be part and parcel in the process of utilizing those technical services in India and would fall for coverage within the meaning of Explanation to section 9(1)(vii). Therefore, the following observation of the learned Income Tax Appellate Tribunal is well justified.
"5. We considered the matter in detail. The subject contract in question was a composite contract for supply of equipments and for providing engineering and personnel services. The terms and conditions of these two segments have been clearly de-marcated in the contract. The consideration payable by the Indian Company was also de-marcated and separately stated in respect of supply of equipments and in respect of providing engineering and personnel services. Therefore, as observed by the learned Commissioner of Income-Tax (Appeals), the entire consideration for engineering and personnel services would remain independent of the consideration paid for the supply of equipments."
Therefore, there is no merit in the contention of the appellant that in terms of Clause II of the agreement the payments made by the Indian Company to the non-resident company were for the purchase of equipment and towards consideration for construction of the project and therefore Section 9(1)(vii) of the Act are not applicable and the Explanation 2 to the said provision would operate.
8. This appeal does not involve any question of law, much less, substantial question of law warranting its admission. In that view of the matter, we dismissing ITTA No.37 of 2001 with no order as to costs at the stage of admission itself.
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