Citation Codes

Equivalent Citations

citation codes

Case Number

ITTA No. 37 of 2001

Judges

S.R Nayak
S. Ananda Reddy, JJ.

Acts

2 of Section 9(1)(vii) of the Income Tax Act, 1961 (for short "the Act"),
India. Explanation 2 of clause (vii) of Section 9(1)
India. 8. Clause (vii) of Section 9(1)
Section- 5(1)(c). Section 9
Finance (No.2) Act, 1977,
Section 9(1)(vii)(b),

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Smart Summary

Comprehensive Summary of the Opinion in ITA No.669/Hyd/1995 (Order dated 12-5-2000)

Factual and Procedural Background

The appellant is a non-resident company based in Norway which entered into a contract dated 19-4-1990 with M/s. Sponge Iron India Limited, Hyderabad, for supply of equipment, engineering data and personnel services to establish a submerged arc furnace at Kothagudem, Andhra Pradesh. The contract price was stated as "Rs.6-257 million NCK (Norwegian Currency)" in the opinion. The Indian company deducted tax at source amounting to Rs.20,95,500 before remitting the consideration. During the accounting year under consideration, 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) the payment was for construction/assembly undertaken by the recipient and therefore constituted business profits not taxable in India under the Double Taxation Agreement between India and Norway, and (b) the payment was not to the appellant but to the personnel supplied by it. The appellant relied on Explanation 2 to Section 9(1)(vii) of the Income Tax Act, 1961 to argue that the payments did not constitute "fees for technical services."

The Assessing Officer rejected the appellant's contentions, noting that Clause II(1)(b) of the contract showed the consideration to be mainly on account of provision of services of technical personnel and that the appellant had placed personnel at the disposal of the Indian company rather than undertaking construction/assembly itself. The Assessing Officer completed assessment under Section 143(3) on 28-12-1993 holding the Rs.69,85,000 liable to Indian income tax at 15%. The Commissioner of Income Tax (Appeals) confirmed the assessment. The Income Tax Appellate Tribunal, Hyderabad (Bench 'A') by its order dated 12-5-2000 affirmed the appellate authority's order. The present appeal under Section 260-A of the Act challenges the ITAT order.

Legal Issues Presented

Whether the payment of Rs.69,85,000 made by the Indian company to the Norwegian non-resident constitutes "income by way of fees for technical services" within the meaning of Section 9(1)(vii) read with Explanation 2 of the Income Tax Act, 1961.
Whether the exclusion in Explanation 2 (that "fees for technical services" does not include consideration for any construction, assembly, mining or like project undertaken by the recipient) applies to the payment, thereby rendering it not taxable in India.
Whether the characterisation that the payment was made to the personnel supplied by the appellant (and not to the appellant company) affects the taxability under Section 9(1)(vii) and whether that contention was properly pleaded and available for adjudication.
Whether the appeal involves any question of law, especially a substantial question of law, warranting admission under Section 260-A.

Arguments of the Parties

Appellant's Arguments

The Rs.69,85,000 remitted by the Indian company were charges for engineering and other services which are not taxable in the appellant's hands because they were payments for construction/assembly undertaken by the recipient; thus they should be treated as business profits not taxable in India under the India–Norway Double Taxation Agreement.
The payment was not made to the appellant company but to the personnel supplied by the appellant-company (implying these payments should not attract taxation as fees for technical services payable to a non-resident entity).

Revenue / Assessing Officer's Position (as reflected in the opinion)

The contract (Clause II(1)(b)) showed that the consideration was mainly on account of provision of services of technical personnel; the appellant was placing engineers at the disposal of the Indian company to assist in establishing the furnace.
The appellant did not itself undertake construction, assembling or the like project; hence the exclusion in Explanation 2 (for construction/assembly undertaken by the recipient) is not applicable.
Accordingly, the Assessing Officer treated the Rs.69,85,000 as income by way of fees for technical services and assessed it to tax at 15% under Section 9(1)(vii). The CIT(A) and the ITAT confirmed that view.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Orissa Synthetics Ltd. v. ITO (Orissa High Court)	Held that the question whether payment falls within the exclusion in Explanation 2 must be established by the person who claims the exclusion.	The court relied on this principle to note that the burden lies on the appellant to prove the applicability of the construction/assembly exclusion; the appellant did not discharge that burden.
Steffen, Robertson and Kirsten Consulting Engineers and Scientists v. CIT	Held that fees paid for preparatory studies abroad were liable to tax as income accruing or arising in India when the payments were for services to be utilised in India (emphasising "utilised in India" over place of rendition).	Used to support the proposition that services rendered abroad but utilised in India are taxable under Section 9(1)(vii) and fall within the Explanation defining "fees for technical services."
Cochin Refineries Ltd. v. CIT	Held that services rendered by a foreign company (tests carried out in USA) were technical services covered by Explanation to Section 9(1)(vii); reimbursements to personnel were also part of the technical advice and covered by the Explanation.	The court cited this case to justify treating the Rs.69,85,000 (including amounts in the nature of payments to personnel or reimbursements) as part of technical services utilised in India and therefore taxable under Section 9(1)(vii).

Court's Reasoning and Analysis

The court's reasoning proceeded by a close reading of Section 9(1)(vii) and Explanation 2 to that provision. Section 9(1)(vii) deems to accrue or arise in India "income by way of fees for technical services" payable by specified categories of payers (including Indian residents). Explanation 2 defines "fees for technical services" to include consideration for managerial, technical or consultancy services (including provision of services of technical or other personnel) but expressly excludes consideration for any construction, assembly, mining or like project undertaken by the recipient.

Key analytical steps the court took:

Statutory interpretation: The court emphasised the wording in Section 9(1)(vii)(b) that refers to "fees for services utilised in India" rather than "fees for services rendered in India." The court drew the legal consequence that the place where services are rendered is not decisive; rather the focus is on whether the services are utilised in an Indian business.
Burden of proof: Relying on the Orissa High Court authority, the court noted that a person claiming the exclusion in Explanation 2 must establish that the payment is consideration for construction/assembly undertaken by the recipient. The court observed that the appellant had not pleaded or proven that the payments were to personnel (rather than to the appellant company) or that the exclusion applied.
Application of precedent: The court referred to Steffen, Robertson and Kirsten and Cochin Refineries to illustrate that payments to foreign consultants or reimbursements to personnel for services rendered abroad can still be treated as fees for technical services taxable in India if those services are utilised in India; reimbursements or payments in the nature of personnel costs formed part of technical advice and fell within Explanation 2's scope for taxation purposes.
Contractual analysis: The contract in question was a composite contract covering both supply of equipment and the provision of engineering and personnel services. The terms and consideration for the two segments were demarcated and separately stated. The court accepted the Tribunal's observation that the consideration for engineering and personnel services remained independent of the consideration for supply of equipment, meaning the payments for services could be treated separately and were not absorbed into a non-taxable equipment transaction.
Conclusion from facts and law: Given that the payments were for engineering and personnel services utilised in India, and the appellant did not establish the applicability of the construction/assembly exclusion, the court concluded that the Rs.69,85,000 constituted income by way of fees for technical services under Section 9(1)(vii) and therefore was taxable in India.

The court also recorded that the appellant had no pleading supporting the contention that the payments were to the personnel and not to the appellant company; this procedural deficiency weighed against the appellant's claim.

Holding and Implications

Holding:

DISMISSED. The appeal (ITTA No.37 of 2001) was dismissed at the admission stage with no order as to costs. The Income Tax Appellate Tribunal's order dated 12-5-2000 (confirming the assessment treating the Rs.69,85,000 as liable under Section 9(1)(vii)) was upheld.

Implications:

The direct effect on the parties is that the payment of Rs.69,85,000 made by the Indian company to the Norwegian company for engineering and personnel services is to be treated as income by way of fees for technical services under Section 9(1)(vii) and is taxable in India; the assessment at 15% as made by the Assessing Officer (and confirmed by subsequent authorities) stands.
The court did not accept the appellant's contention that the payment was for construction/assembly undertaken by the recipient and excluded from "fees for technical services," noting that the appellant failed to plead or prove that case.
The opinion states explicitly that the appeal does not involve any question of law, let alone a substantial question of law, that would warrant admission under Section 260-A; accordingly the matter was dismissed at the admission stage. The opinion does not purport to set a broader new precedent beyond applying existing authorities and the statutory language to the facts.

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Elkem Technology v. Deputy Commissioner Of Income Tax, (Assts.), Spl. Range-3, Hyd.

1. This appeal is directed against the Order of the learned Income Tax Appellate Tribunal, Hyderabad, Bench 'A' dated 12-5-2000 in ITA 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 19-4-1990 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 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 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'.

3. The Assessing Officer has rejected the above contention of the assessee stating 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 12-5-2000 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 260-A of the Act.

4. 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.

5. 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.

6. 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 utilised 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 utilised 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".

7. 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 of 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.

8. 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 clause (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, utilised 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. v, ITO, . 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 utilised 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 nonresident company under collaboration agreement with the Indian Company. But if the fees are paid for services utilised 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 and Kirsten Consulting Engineers and Scientists v. CIT, , 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 utilised in India or abroad. In Cochin Refineries Ltd v. CIT, , the Refineries requested a foreign company to evaluate whether coke produced from a blend of vacuum 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.1,19,3037- 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.

9. 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 utilising 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 demarcated in the contract. The consideration payable by the Indian Company was also demarcated 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.

10. 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.

Elkem Technology v. Deputy Commissioner Of Income Tax, (Assts.), Spl. Range-3, Hyd.

Comprehensive Summary of the Opinion in ITA No.669/Hyd/1995 (Order dated 12-5-2000)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Revenue / Assessing Officer's Position (as reflected in the opinion)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Elkem Technology v. Deputy Commissioner Of Income Tax, (Assts.), Spl. Range-3, Hyd.

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