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Deputy Commissioner of Income-tax v. ITC Ltd.

Income Tax Appellate Tribunal

Dec 28, 2001

Judgment

CaseIQ

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Factual and Procedural Background

These consolidated appeals arise from revenue appeals against orders of the Commissioner of Income-tax (Appeals) (CIT(A)) concerning whether an Indian buyer (ITC Limited, the assessee-tax-deductor) was obliged to deduct tax at source under section 195 of the Income-tax Act on payments made to two foreign suppliers for installation and commissioning services.

There are three appeals consolidated: ITA Nos. 970 and 971/Cal./98 relating to payments to M/s. Decoufle s.a.r.l., France (French Francs 5,14,790 and 3,14,950 respectively) for installation and commissioning in connection with machinery purchases; and ITA No. 973/Cal./98 relating to a payment of UK £10,500 to M/s. NTM Limited, UK, for commissioning charges for machines purchased from that company.

The assessee applied under section 195(2) for "no objection certificate" (NOC) to remit these amounts without deduction of tax, contending that the payments were not taxable in India under the applicable Double Taxation Avoidance Agreements (DTAAs) as they did not constitute "fees for technical services" or business profits attributable to a permanent establishment (PE) in India. The Assessing Officer held the payments taxable (treating them as fees for technical services/business profits) and directed deduction of tax at source at the relevant rate (30% under section 115A(1)(b) in the Decoufle cases). CIT(A) reversed the Assessing Officer and directed refunds of tax already deducted; the Revenue appealed to the Tribunal, which heard both sides and delivered this consolidated order.

Legal Issues Presented

Whether the Assessing Officer was justified in refusing issuance of a no-objection certificate under section 195(2) and directing deduction of tax at source from payments to foreign suppliers for installation and commissioning services.
Whether the payments for installation and commissioning to Decoufle (France) and NTM (UK) constitute "fees for technical services" under the applicable India–France and India–UK DTAAs or are business profits attributable to a permanent establishment in India.
Whether, under the applicable India–France DTAA (and its protocol), the scope of "fees for technical services" is restricted by reference to more favourable (i.e., more restrictive) provisions of DTAAs entered into by India with certain OECD member countries, and whether any subsequent CBDT notification affects the taxability for the relevant year (1995–96).
Whether, given the DTAA position, the assessee was obliged to deduct tax at source under section 195 of the Income-tax Act in respect of the impugned remittances.

Arguments of the Parties

Revenue's Arguments

The Assessing Officer's conclusion that the payments were taxable should be upheld; the Assessing Officer held that the installation and commissioning fees were not an integral part of the sale transaction and thus did not fall within Explanation 2 to section 9(1)(vii) (i.e., were taxable as fees for technical services or as income under section 5(2)(b) read with section 9(1)(vii)).
The Assessing Officer applied a tax rate of 30% under section 115A(1)(b) to such income and directed deduction at source accordingly; revenue contended CIT(A) erred in directing refunds and holding no tax was required to be deducted.
The Revenue relied upon the Assessing Officer's view that prior NOCs in similar circumstances had required deduction at source at 30% and that those conditions were not previously disputed by the assessee.
The Departmental Representative placed reliance upon the CBDT notification/amendment and the Assessing Officer's analysis (as presented in the record) to sustain taxability and withholding obligations.

Assessee's Arguments

The payments for installation and commissioning were not "fees for technical services" within the meaning of Explanation 2 to section 9(1)(vii) and were in the nature of business profits arising from the sale of machinery; accordingly, they were not taxable in India unless attributable to a permanent establishment.
Under Article 5(3) of the India–France DTAA, an installation/assembly project constitutes a PE only if it continues for more than six months; the installation periods in these cases were less than six months; Decoufle did not maintain a PE in India and filed a declaration to that effect.
Even if Article 13 of the Indo–French DTAA deals with fees for technical services, the protocol to the treaty and subsequently more favourable DTAAs with certain OECD members restrict the scope of "fees for technical services" (excluding services ancillary and subsidiary, inextricably linked to the sale of property), which should be read into the Indo–French DTAA.
The assessee challenged the relevance/applicability of the CBDT notification to the tax year in question and argued that notification cannot retrospectively take away rights already accrued to the taxpayer; reliance was also placed on a Tribunal coordinate-bench decision (Tata Iron & Steel Co. Ltd. v. Dy. CIT) to contend limitations on retrospective effect of executive action.
The assessee sought refunds of tax already deducted, and CIT(A) directed refunds on the basis that no tax was required to be deducted under the DTAA position.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax v. Davy Ashmore India Ltd. [1991] 190 ITR 626	Principle that where there is inconsistency between a DTAA and domestic tax statute, the DTAA prevails; treaties/conventions prevail over general taxation statute provisions.	The Tribunal relied on this authority to emphasise that provisions of a DTAA override the Income-tax Act to the extent they are more favourable to the taxpayer and that the DTAA should be applied first when it is applicable to the assessee.
In re (AAR) [2000] 242 ITR 208 (Authority for Advance Ruling) (P. No. 28 of 1999) — relied upon via Dr. Klaus Vogel commentary reference	Protocol forms an integral, binding part of a tax treaty; protocol clauses must be read with the main treaty and have binding force equal to the principal treaty.	The Tribunal cited the AAR (and the commentary relied upon therein) for the proposition that the protocol to the Indo–French DTAA is an integral part of the treaty and binds the contracting parties and must be considered when interpreting the treaty's provisions.
Tata Iron & Steel Co. Ltd. v. Dy. CIT [1999] 69 ITD 292 (Mum.)	Coordinate-bench view that a notification cannot take away taxpayers' rights with retrospective effect and that executive notifications cannot retrospectively impair treaty-protocol rights.	The Tribunal referred to this decision in discussing the scope and retrospective effect of the CBDT notification; the Tribunal accepted the reasoning that notification cannot adversely affect rights of the taxpayer for earlier years.
Hukumchand v. Union of India [1973] 1 SCR 896 (Supreme Court)	General proposition on the vires of executive rule-making powers and discussion of limitations on retrospective effect of subordinate instruments (as cited in Tata Iron & Steel analysis).	The Tribunal referenced the Supreme Court's holding (as cited in the coordinate-bench decision) to support the view that executive notifications/rule-making powers do not permit impugned retrospective impairment of rights and that courts can decide vires despite procedural formalities.

Court's Reasoning and Analysis

The Tribunal proceeded in structured steps, applying treaty law principles and the facts of each payment:

Applicability of DTAA: The Tribunal first determined that the India–France DTAA (entered into force 1 August 1994) applied to the relevant previous year (1995–96) in the Decoufle matters (Article 30(1)(a)(i)). For NTM, the India–UK DTAA applied.
Primacy of DTAA over domestic law: Relying on section 90(2) of the Income-tax Act, the Tribunal reiterated that where a DTAA applies and is more favourable, its provisions override the domestic statute. The Tribunal quoted Davy Ashmore and the CBDT Circular No.333 (1982) to support that principle.
PE and business profits analysis: Article 7(1) of the Indo–French DTAA taxes business profits only if attributable to a PE. Article 5(3) includes an installation or assembly project as PE only where the project continues for more than six months. The Tribunal found the installation projects in the Decoufle cases lasted 146 days and 75 days (each less than six months as required) and thus did not create a PE under Article 5(3); Article 7 therefore did not permit taxation of profits in India.
Treatment of fees for technical services (Article 13): Although Article 13(1) of the Indo–French DTAA permits taxation of fees for technical services in the source state (subject to a maximum withholding rate), the Tribunal examined the definition in Article 13(4) and the treaty protocol. The protocol's paragraph 7 required that if India subsequently entered into a DTAA with an OECD member limiting taxation at source or narrowing scope, the same narrower scope would apply to the Indo–French DTAA from the later of the two dates.
Comparative treaty interpretation and protocol effect: The Tribunal compared Indo–UK, Indo–US and Indo–Swiss DTAAs (entered into force prior to the year in question) which explicitly exclude "services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property" from the definition of fees for technical services. The Tribunal held, by reading the Indo–French DTAA with its protocol, that the scope of "fees for technical services" under the Indo–French DTAA could not be broader than the more restrictive scope in those earlier OECD-country DTAAs.
Characterisation of the payments: Factual examination of invoices and the nature of the work established that Decoufle's and NTM's personnel performed installation and commissioning in connection with sale of machines, and that those services were "ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property." Consequently, such payments fell within the exclusion from "fees for technical services" under the more restrictive interpretation read into the Indo–French DTAA and directly under the Indo–UK DTAA.
CBDT notification and retrospective effect: The Tribunal reviewed the CBDT notification modifying application of the Indo–French DTAA (issued 10/20 July 2000) and noted submissions challenging its legality and retrospective effect. Citing the coordinate-bench authority (Tata Iron & Steel) and the principle that a notification cannot adversely affect taxpayer rights with retrospective effect, the Tribunal held that the notification (issued in 2000) did not affect the tax position for the year ended 31 March 1996 and therefore did not alter the conclusion.
Deduction obligation under section 195: Because the DTAA position led to the conclusion that the impugned payments were not exigible to income-tax in India (i.e., nil/ excluded), there was no obligation on the assessee to deduct tax under section 195. The Tribunal applied the statutory scheme that where a DTAA provides a nil or lower withholding obligation, that rate governs the deduction requirement.
Conclusion on appeals: On the above reasoning, the Tribunal agreed with the CIT(A)'s conclusions and declined to interfere with the CIT(A)'s directions (including refund of taxes already deducted).

Holding and Implications

Holding:

All three appeals filed by the Revenue are dismissed.

Implications and direct consequences:

The Tribunal upheld the CIT(A)'s finding that the Assessing Officer was not justified in refusing the issuance of NOCs and in directing deduction of tax at source for the payments to Decoufle (France) and NTM (UK).
The Tribunal held that, on the facts, the installation and commissioning services were ancillary and subsidiary and inextricably linked to the sale of machines; accordingly, such payments did not fall within the scope of "fees for technical services" taxable at source under the relevant DTAAs and were not exigible to tax in India for the years in question.
Because the payments were not exigible to tax in India under the applicable DTAAs, the assessee (ITC Limited) was not under any obligation to deduct tax at source under section 195 of the Income-tax Act for those remittances, and the CIT(A)'s directions to refund any tax already deducted were supported.
The Tribunal applied the principle that DTAA provisions (and their protocols) prevail over domestic law to the extent they are more favourable to the taxpayer; it also read the Indo–French DTAA with its protocol and, by reference to earlier DTAAs with OECD members, restricted the scope of "fees for technical services" in the Indo–French DTAA for the years in question.
The Tribunal did not finally decide broader legal challenges to the CBDT notification's legality in general; it held, however, that the notification dated July 2000 could not adversely affect taxpayer rights with retrospective effect for the year ended 31 March 1996 and thus did not alter the result in these appeals.

Show all summary ...

Per Pramod Kumar, A.M. - As these three appeals relate to the same assessee and involve somewhat identical issues, we are taking up all these appeals together, as a matter of convenience, for disposal by way of this consolidated order. In all the appeals, common ground of the revenue is that on the facts and in the circumstances of the case, the CIT(A) has erred in concluding that ‘the Assessing Officer was not justified in refusing the NOC to the assessee’ and in directing that ‘the tax already deducted at source should be refunded to the assessee as it was not incumbent on the part of the assessee to deduct tax at source’. To put it in simple words, revenue is aggrieved that CIT(A) erred in holding that no tax was required to be deducted from certain remittances made by the respondent.

2. We will first take up ITA Nos. 970 and 971/Cal./98 which relate to the respondent’s liability of deducting tax at source from two payments, amounting to French Francs 5,14,790 and French Francs 3,14,950 covered by the respective appeals, made to one M/s. Decoufle s.a.r.l., France, on account of installation and commissioning charges in respect of certain machineries purchased from this very French company.

3. Briefly stated, material facts of the case are that respondent i.e. ITC Limited (hereinafter referred to as "the assessee tax-deductor") imported two sets of machines from Decoufle s.a.r.l., France, (hereinafter referred to as ‘Decoufle’). Decoufle also deputed its technicians, for installation and commissioning of these machines, 6th March, 1995 to 10th July, 1995 (146 days) and 15th March, 1995 to 29th May, 1995 (75 days) respectively. It was in connection with this installation and commissioning of machines that the assessee was to pay sums of French Francs 5,14,790 and French Francs 3,14,950 (net of taxes) to Decoufle. The assessee moved applications under section section 195 of the Income-tax Act (hereinafter referred to as ‘the Act’) and prayed for issuance of a ‘no objection certificate’ for remitting these sums without any deduction of tax at source. It was contended that installation and commissioning of machines does not constitute ‘technical services fee’ within meaning of Explanation 2 to section 9 (1)(vii) of the Act and that it is in the nature of business profits. The assessee further contended that in view of Article 5(3) of India France Double Taxation Avoidance Agreement, Decoufle did not have ‘permanent establishment’ (hereinafter referred to as ‘PE’) in India as installation project did not exceed six months. It was also submitted that unless the French company has a permanent establishment in India and unless the income arises from the business carried through the permanent establishment in India [Article 7(2)], the same cannot be brought to tax in India. A declaration by Decoufle regarding non maintenance of PE in India was also filed before the Assessing Officer. The Assessing Officer, however, was far from impressed. The Assessing Officer observed that the installation and commissioning services were requisitioned by the assessee after the import of machines in questions and, therefore, such services cannot be said to be integral part of transaction. It was also observed that Explanation 2 to section 9(1)(vii) was not applicable to the facts of this case as the same covered only an assembly project whereas installation and commissioning in question cannot be termed as an assembly project. The Assessing Officer thus held the fees paid for installation and commissioning of machines as income of the French company taxable in India under section 5(2)(b) r.w.s. 9(1)(vii) of the Act. It was also held that in view of the provisions of section 115A(1)(b) of the Act, the aforesaid income was taxable @ 30%. The Assessing Officer also mentioned that on earlier occasions also, the assessee-company had made payments, under similar circumstances, to Decoufle and the NOCs [i.e. orders under section 195(2)] were issued on the conditions of deducting the tax @ 30%, which were never agitated by the assessee. Accordingly, Assessing Officer directed the assessee to deduct the tax at source from the payments made to Decoufle @ 30%. Aggrieved, the assessee carried the matter in appeal before the CIT(A).

4. In appeal, ld. CIT(A) observed that ‘there is no denying the fact that M/s. Decoufle has supplied the machines to assessee-company’ and ‘it has also installed and commissioned the machine for operation’. It was therefore concluded that ‘it cannot be said that M/s. Decoufle has provided technical consultancy service to the appellant’. The CIT(A) further observed that Decoufle did not have any ‘permanent establish- ment’ (PE) in India and that unless the Decoufle has a PE in India or unless the installation project takes more than six months time, income embed- ded in such payments was not taxable in India. It was stated that when there is no PE and the installation project does not take time beyond six months, the tax has to be paid in the country from which plant and machinery is purchased and from which the persons come for setting up and installing the plant and machinery. In support to this proposition, a reference was made to Article 5 and Article 7 of the India France DTAA. It was in this background that the CIT(A) came to the conclusion that the Assessing Officer was not justified in declining issuance of a no objection certification for remittances to Decoufle, without any deduction of tax at source. The CIT(A) also directed the Assessing Officer that ‘refunds (of taxes already deducted) may be issued forthwith’. Revenue is aggrieved and in appeal before us.

5. We have conscientiously heard Smt. Lakra, learned Commissioner of Income-tax (DR), and Shri Rahul Mitra, learned counsel for the assessee. We have also carefully perused the orders of the authorities below, as well as paper book filed by the assessee, and duly deliberated upon the Double Taxation Avoidance Agreements and judicial precedents cited at the bar. We find that it is an unambiguous legal position that by the virtue of section 90(2) of the Act, where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief to tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply only to the extent they are more beneficial to that assessee. Thus, provisions of such double taxation avoidance agreements over-ride the provisions of the Act, to the extent these agreements are more favourable to the assessee. In our considered view, therefore, only in the event of assessee’s case failing on the provisions of the DTAA, the question of examining provisions under the Income-tax Act arises. We may, in this regard, quote the following observations made by the Hon’ble jurisdictional High Court in the case of Commissioner Of Income-Tax v. Davy Ashmore India Ltd. [1991] 190 ITR 626 :

"......... The conclusion is inescapable that, in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail.

The Central Board of Direct Taxes has issued a Circular No. 333 on April 2, 1982 [see (1982) 137 ITR (St.) 1], on the question as to what the Assessing Officers will do when they find that the provisions of the Double Taxation Avoidance Agreement are not in conformity with the provisions of the Income-tax Act, 1961. Then it was laid down by the Board in the said Circular as follows :

‘The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will prevail over the general provisions contained in the Income-tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under section 90 of the Income- tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the Agreement.

Thus, where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the Agreement, it is the basic law, i.e., the Income-tax Act, that will govern the taxation of income.’

In our view, the Circular reflected the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the General principles of taxation applicable to the Contracting States; otherwise, the double taxation avoidance agreement will have no meaning at all."

6. We will, therefore, firstly examine taxability of impugned payments to Decoufle, in the light of provisions in applicable India France Double Taxation Avoidance Agreement. In view of the provisions of Article 30(1)(a)(i ) of India France DTAA dated 29th September, 1992, which came in force on 1st August, 1994, this DTAA is applicable with respect to income arising in India in the previous years beginning 1995-96 i.e. fiscal years beginning on or after 1st day of April following the calendar year in which convention enters into force. The DTAA, therefore, is clearly applicable on the present cases which relate to services rendered in the previous year ended 31st March, 1996. We further find that Article 7(1) of the aforementioned DTAA provides that the profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Article 5(3) of this DTAA provides that a permanent establishment will inter alia include a installation or assembly project only where such site or project conti-nues for a period of more than six months, but, as noted in paragraph 3 above, in none of the cases the installation project continued for a period of more than six months. We also find that the cases before us are admittedly not covered by the scope of any other provision regarding permanent establishment. However, Article 7(6) of this DTAA clearly provides that where profits include items of income which are dealt with separately in other Articles of this convention, then the provisions of those Articles shall not be affected by the provisions of this Article. Article 13(1) of the DTAA, separately dealing with fees for technical services, further provides that fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may also be taxed in that other Contracting State according to the laws of that Contracting State, though, if the recipient is the beneficial owner of these categories of income the tax so charged shall not exceed 20 per cent of the gross amount of such fees for technical services. Accordingly, in our considered view, so far as the present cases of fees for technical services are concerned, the provisions of Article 7 are not at all relevant. But then the question arises as to what is the connotation and scope of the expression ‘fees for technical services’.

7. Article 13(4) of the aforementioned DTAA defines the term "fees for technical services" as used in this Article, to mean payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature. At this stage, it is also important to refer to an extract from the protocol signed at the time of conclusion of the aforementioned India France DTAA. The relevant portion is reproduced below:

PROTOCOL

At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the Convention:

........................

7. In respect of Articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate of scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.

8. In our considered view, it is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein. Hon’ble Authority for Advance Ruling, relying upon Dr. Klaus Vogel’s commentary on Double Taxation Conventions and as reported in P. No. 28 of 1999, In re [2000] 242 ITR 208 (AAR) (relevant portion at page 225), has observed that protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA are, therefore, required to be read with the protocol clauses and are subject to the provisions contained in such protocol, including the one reproduced above.

9. One of the implications of the above protocol clause is that the scope of expression ‘fees for technical services’; so far as Indo France DTAA is concerned, cannot be wider than the scope of most restrictive DTAA that India has entered into with any OECD member after 1st September, 1989. In this context, it has been pointed out to us that, after the cut off date of 1st September, 1989 referred to in paragraph 7 of protocol attached to and forming part of Indo French DTAA, India has signed DTAAs with at least three OECD member countries which have narrower scope of the expression ‘fees for technical services’. In all these DTAAs, fees for technical services does not include the fees received for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property. These agreements are as follows:

Name of country	Signing date of DTAA	Relevant article ITR Citation
United Kingdom	25th January, 1993	Article 13(5)(a) 206 ITR St. 235
United States of America	12th September, 1989	Article 12(5)(a) 187 ITR St. 102
Switzerland	2nd November, 1994	Article 12(5)(a) 244 ITR St. 134

10. In India United Kingdom Double Taxation Avoidance Agreement (206 ITR St. 235), Article 13(4) and 13(5) provides as follows:

Article 13(4)

For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for 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.

Article 13(5)

The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid:

(a)for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a)* of this Article;

(b)for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic;

(c)for teaching in or by educational institutions;

(d)for services for the private use of the individual or individuals making the payment; or

(e)to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention.

[*Article 3 (a) refers to payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.]

11. In India United States Double Taxation Avoidance Agreement (187 ITR St. 102), Article 12 (4) and (5) provides as follows:

Article 12(4)

For the purposes of this Article, "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)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (3) is received; or

(b)make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

Article 12(5)

Notwithstanding paragraph (4), "fees for included services" does not include amounts paid:

(a)for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale or property other than a sale described in paragraph (3) (a);*

(b)for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c)for teaching in or by educational institutions;

(d)for services for the personal use of the individual or individuals making the payment; or

(e)to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).

[*Article 12(3)(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof].

12. We have also noticed that Article 12(4) and 12(5) of the India Switzerland Double Taxation Avoidance Agreement provides as follows:

Article 12(4)

For purposes of this Article, the term "fees for included services" means:

(a)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 are ancillary and subsidiary to the application or enjoyment of the right, for which a payment described in sub-paragraph (b) of paragraph 3 is received;

(b)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:

(i)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-paragraph (a) of paragraph 3 is received ; or

(ii)make available technical knowledge, experience, skill, know- how or processes, or consist of the development and transfer of a technical plan or technical design.

Article 12(5)

Notwithstanding paragraph 4, "fees for included services" does not include amounts paid:

(a)for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property;

(b)for teaching in or by educational institutions;

(c)for services for the personal use of the individual or individuals making the payment; or

(d)to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services falling under Article 14.

[*Article 12(3)(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience;].

13. One immediately discernible common factor in Indian Double Taxation Avoidance Agreements with UK, USA and Switzerland is that in all these treaties ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’ is outside the scope of ‘fees for technical services’ liable to separate treatment under the respective DTAA. In other words, in all these treaties, unless the ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’ is attributable to PE and fulfils the other requirements laid down under the relevant article dealing with business profits, the same cannot be taxed in the source country. The scope of expression ‘fees for technical services’, in these treaties, appears to be far more restricted than the scope of the same expression in Indo French DTAA which broadly defines fees for technical services as to mean payments in consideration for services of a managerial, technical or consultancy nature. Therefore, whereas payments for all kind of technical services are to be treated as ‘fees for technical services’ for the purpose of Article 13(4) of Indo French DTAA, such payments cannot be treated as to be in the nature of ‘fees for technical services’, under respective articles in Indo UK, Indo US and Indo Swiss Double Taxation Avoidance Agreements, in case the same constitutes ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’. Clearly, therefore, scope of ‘fees for technical services’ is much more restricted in Indo UK, Indo US and Indo Swiss DTAAs vis-a-vis the DTAA that India has entered into with France.

14. Our attention has also been invited to the CBDT notification No. S.O. 650 (E) dated 10th July, 2000 (244 ITR (St.) 134) which inter alia states as follows:

Where the Convention between the Republic of India and the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital came into force on the 1st day of August, 1994, after the Notification by both the Contracting States to each other of the completion of the procedures required under their laws for bringing into force the said Convention;

.................

And whereas paragraph 7 of the Protocol dated the 29th September, 1992, to the aforesaid Convention provides that if after the 1st day of September, 1989, under any Convention, Agreement or Protocol concluded between India and a third State which is a member of the Organisation for Economic Cooperation and Development, India should limit its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then, as from the date on which the Convention between India and France or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention;

And whereas in the Convention between India and Germany which entered into force on the 26th Oct., 1996, and the Convention between India and the United States of America which entered into force on the 18th December, 1990, which States are members of the Organisation for Economic Cooperation and Development, the Government of India has limited the taxation at source on dividends, interest, royalties, fees for technical services and payments for the use of equipments to a rate lower or a scope more restricted than that provided in the Convention between India and France on the said items of income;

Now, therefore, in exercise of the powers conferred under section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the Convention notified by the said Notification which are necessary for implementing the aforesaid Convention between India and France, namely :

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IV. With effect from the 1st April, 1995, for the existing paragraph 2 of Article 13 relating to ‘Royalties and fees for technical services and payments for the use of equipment’, the following paragraph shall be read:

"2. However, such royalties, fees and payments 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 these categories of income, the tax so charged shall not exceed:

(a )in the case of royalties and fees 20 per cent of the gross amount of such royalties or fees; and

(b)in the case of payments referred to in paragraph 5 of this Article, 10 per cent of the gross amount of such payments."

V. With effect from the 1st April, 1997, for paragraph 2 of Article 13 relating to ‘Royalties and fees for technical services and payments for the use of equipment’ referred to in paragraph IV above, the following paragraph shall be read:

15. It has been pointed out by the learned counsel that, so far as ‘fees for technical services’ are concerned, while the Central Government has made amendment to the Indo French DTAA with respect to the lower rate of withholding tax envisaged in the said tax treaties as compared to the rate of tax contained in Indo French DTAA with respect to incomes of aforesaid nature, the Central Government has not taken note of the favourable provisions contained in the tax treaties signed by India with the OECD member countries. Our attention has also been invited to Double Taxation Avoidance Agreements that India has entered with Philippines and with Switzerland where similar provisions, for incorporation of favourable provisions contained in other tax treaties, are existent, but with the exception that in order to make the incorporation effective, the Governments of two countries should first mutually decide of such incorporation in the form of amendment of tax treaty. It is thus argued that since there is no such requirement under the Indo French DTAA, there was no need to amend the Indo French DTAA by resorting to issuance of notification for that purpose. Learned counsel has also made rather elaborate submissions about legal infirmities in the above notification and suggested that the amendment in notification is made ex abundanti cautela i.e. by way of abundant precaution. It has been contended that section 90 of the Act does not empower the Central Government to unilaterally amend a tax treaty and therefore a notification amending, in its own right, the tax treaty is unsustainable in law. It has been submitted that the present amendment to the India France DTAA by way of notification dated 10th July, 2000 is a result of over anxiety of the Central Government to give effect to relevant paragraph of the protocol to the India France DTAA and the same does not or cannot undermine the clear and ambiguous provisions of the India France DTAA. According to the learned counsel, the above notification is clearly redundant and, in any event, does not whittle down or override the benefits which are otherwise envisaged in paragraph 7 of the protocol to the Indo French DTAA. As an alternate submission, and without prejudice to the above line of argument, reliance was placed on the order passed by a co-ordinate bench of this Tribunal in the case of Tata Iron & Steel Co. Ltd. v. Dy. CIT [1999] 69 ITD 292 (Mum.) in support of the proposition that executive authority of the Government cannot, by way of a notification, lay down provisions having retrospective effect. It is thus submitted that by way of notification dated 20th July 2000, no amendment, allegedly impairing the existing rights guaranteed by the protocol clause in question, can be made in a treaty which will adversely affect the taxpayer’s rights effective from a date earlier than 20th July, 2000. On the strength of these submissions, learned counsel submitted that the CBDT notification dated 20th July, 2000 does not adversely affect the position of the assessee. Learned Departmental Representative, however, placed her bland reliance upon the notification issued by the CBDT.

16. A perusal of the aforesaid notification gives us a prima facie impression that it constitutes Central Government’s independent action to implement the understanding arrived at by the virtue of protocol clauses in the India France DTAA. It is difficult to comprehend as to how the Central Government can unilaterally amend, in exercise of the powers under section 90 of the Income-tax Act, a bilateral agreement that a DTAA inherently is, but, for the present purposes and for the reasons we shall now state, it is not even necessary to be drawn into that controversy about legality of the aforesaid notification. We have noticed that a coordinate bench of this Tribunal, in the case of Tata Iron & Steel Co. Ltd. (supra), has inter alia observed that:

"The Hon’ble Supreme Court in the case of Hukumchand v. Union of India [1973] 1 SCR 896, held that even under the rule-making powers, if it is having retrospective effect merely by placing it on the table of Lok Sabha it would not prevent Courts from deciding its vires. In this case there is no question of placing of notification on the table of the House. It is only a question of publishing the same in the Gazette. This power of the Central Government, CBDT & FTD cannot prevent us from reading down the notification with the protocol treaty so that it does not adversely affect the rights of this taxpayer till the date on which protocol is amended. Notification can have the effect from the date of its publication in the Gazette. This power, however, does not include a power to assign the notification with retrospective effect. In this case, as DTAA protocol is an act between two sovereign states, under no circumstances, the notification can take away the rights vested in the taxpayer with retrospective effect."

17. In our considered view, therefore, it is clear that a notification cannot adversely affect the rights of this taxpayer with retrospective effect. Since the notification in question was issued on 20th July, 2000 whereas the relevant previous year before us is the year ended 31st March, 1996, the aforesaid notification, in our considered view, does not affect the issue in appeal before us. We, therefore, see no need to address ourselves to the broader questions about legality of the aforesaid notification or to deal with other similar contentions raised by the assessee. In any event, in our considered view, the benefit of lower rate of or restricted scope of ‘fees for technical services’ under the Indo French DTAA is not dependent on any further action by the respective Governments, unlike the situation envisaged in, for example, paragraph 4 of protocol to Indo Philippines DTAA (219 ITR (St.) 16) or paragraph 3 of protocol to Indo Swiss DTAA (214 ITR (St.) 223). We leave it at that.

18. In the light of the above discussions, we are of the considered view that the same scope of ‘fees for technical services’ as provided for in the Indian DTAAs with UK, USA and Switzerland, which is far more restricted vis-a-vis the scope of this expression in Indo French DTAA, shall also apply under Indo French DTAA, with effect from the date on which the Indo French DTAA or such other DTAA enters into force, whichever enters into force later. As all the three DTAAs discussed above entered into force on a date earlier than the commencement of the previous year 1995-96, the scope of technical services, for the purpose of Indo French DTAA, cannot be broader than that envisaged in the above DTAAs. In this view of the matter, we hold that the ‘fees for services that are ancillary and subsi-diary, as well as inextricably and essentially linked, to the sale of property’ are outside the scope of technical services so far as Indo French DTAA is also concerned, even though no such specific exclusion clause is incorporated directly in the treaty itself, right from the time Indo French DTAA entered into force. Accordingly, in the year in appeal before us, the ‘fees for technical services’ for the purpose of Indo French DTAA, did not include ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’.

19. Coming back to the facts of the present case, we find that Decoufle had rendered services for installation and commissioning of machines sold by Decoufle to the assessee tax deductor. We have also noticed that proforma invoices issued by the Decoufle (copies placed at pages 7-8 and 32-33 of the paper-book) it is clearly stated that Decoufle was to provide for installation and commissioning services. In any event, installation and commissioning of these machineries, in our considered view, constitutes services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of machines. We are, therefore, of the considered view that these services rendered by Decoufle to the ITC Limited are not covered by the scope of ‘fees for technical services’ referred to in Article 13 of the India France DTAA. We have already come to a conclusion , in paragraph 6 above, that in the present cases, the income arising to the French company cannot be said to be includible in ‘business profits’ within meanings of Article 7 of the DTAA as the same cannot be said to be attributable to permanent establishment referred to in Article 5 of the DTAA. In view of this position, we are of the considered opinion that the installation and commissioning fees received by Decoufle, on the facts of the present cases, were not exigible to tax in India.

20. Under section 195(1) of the Act, any person making payment in the form of income to a non resident is required to deduct tax at source, from the said income, at the ‘rate in force’ which, in turn, has been explained under section 2(37A)(iii) as follows:

"for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, whichever is applicable by virtue of the provisions of section 90".

As we have earlier observed, provisions of the DTAA clearly override the provisions of the Act to the extent the provisions in such agreements are more favourable to the assessee. Therefore, in case a DTAA provides for lower rate, which includes ‘Nil’ rate, of taxes, such a rate will prevail over the rate given in the Act. As a natural corollary to this proposition, when, in terms of the provisions of a DTAA, an income is not exigible to income-tax in India, no tax is required to be deducted under section 195 from the payment of such income to a non resident. We have already held that, in terms of the provisions of the applicable Indo French DTAA, the income embedded in impugned payments to Decoufle was not liable to income tax in India. Accordingly, in our considered view, the assessee tax deductor was not under any obligation to deduct tax at source from related remittances to the French company i.e. Decoufle s.a.r.l.

21. For the detailed reasons set out above, we support the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.

22. In the result, ITA Nos. 970 and 971/Cal./98 are dismissed.

23. We now turn to ITA No. 973/Cal./98 which relate to assessee’s liability of deducting tax at source from certain payments, amounting to UK £ 10,500, made to one M/s. NTM Limited, United Kingdom, (hereinafter referred to as NTM) on account of commissioning charges in respect of three machines purchased from this UK based company.

24. As far as this appeal is concerned, material facts of the case are that the assessee tax deductor purchased certain machineries, for use in its factories in Bangalore and Saharanpur, from NTM and, under the related agreement, the aforesaid machines were to be installed and commissioned only by the technicians of NTM. Accordingly, NTM deputed its technicians at Bangalore (from 18th September, 1994 to 14th October, 1994) and at Saharanpur (from 3rd January, 1995 to 22nd January, 1995) for rendering services in connection with such installation and commissioning of machines. In consideration of these services, the assessee tax deductor was required to pay UK £ 10,500 to NTM. The assessee tax deductor moved an application under section 195(2) of Act, before the Assessing Officer, and submitted that no tax are required to be deducted from the aforesaid payment. Reliance was placed on the provisions in the applicable Indo UK Double Taxation Agreement. The Assessing Officer, however, ignored the provisions of the DTAA and held that, in view of provisions of Explanation 2 to section 9 (1)(vii) r.w.s. 115A(1)(b)(B) of the Act, the aforesaid consideration for technical services is liable to be taxed @ 30%. On this basis, assessee tax deductor was directed to deduct tax @ 30% from payment to be made to NTM. Aggrieved, assessee carried the matter in appeal before the CIT(A). In appeal, CIT(A) observed that "since the machines were supplied by NTM Ltd. and the engineers certified that function of machines to be in order, it cannot be said that they were rendering technical services to the appellant company". He further noted that "machines are supplied by M/s. NTM Ltd. and the engineers certified, whether the machines are working properly or not has to be verified by M/s. NTM Ltd. The function of the engineers was to verify that the machines were working as per specification". It was in the backdrop of these observations that the CIT(A) came to the conclusion that no technical services were rendered by NTM. It was thus held that no tax was required to be deducted from the payment made to NTM, in consideration of these services. Revenue is aggrieved and in appeal before us.

25. Rival contentions are conscientiously heard, orders of the authorities below carefully perused, and applicable legal position duly deliberated upon. We find that the ITC Ltd. had purchased certain machineries from NTM, vide invoice No. 1378-94 dated 14th February, 1994 (copy placed at page 5 of the relevant paper-book), and it was for services rendered in connection with installation and commissioning of these machines that UK £ 10,500 were paid to NTM (copy of invoice No. 2738-95 dated 6th September, 1995 placed at page 4 of the relevant paper-book). It is also not in dispute that without installation and commissioning of these machines by the NTM’s technicians, these machines could not have been put to commercial use. It is thus clear that the technical services rendered by NTM were, to use the phraseology employed in tax treaties, ‘services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’. It is also not in dispute that in terms of Indo UK DTAA, NTM did not have any ‘permanent establishment’ in India to which such income can be attributed. In this view of the matter, and in view of the specific exclusion of fees for such services from the scope of ‘fees for technical services’ by the virtue of Article 13(5)(a) of Indo UK DTAA, we hold that the income arising to NTM from rendering these technical services will not taxable in India. Accordingly, in our considered view and relying upon the deliberations in paragraphs 19 and 20 above, which are broadly applicable in this case also, the assessee tax deductor was not under any obligation to deduct tax at source from related remittances to NTM. For the reasons set out above, we support the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.

26. In the result, ITA Nos. 973/Cal./98 is also dismissed.

27. To sum up, all the three appeals, filed by the Revenue, are dismissed.

90/127