Mukul Kr.Shrawat, Member (J) -
(1.) THESE two appeals of two different appellants having identical legal issue filed by the Revenue arising from two separate orders of learned GIT(A) -XXI, Ahmedabad respectively Dt. 9th Feb., 2009 and 6th Feb., 2009. Parties appearing before us have informed at the outset that the case of M/s. Dholera Port Ltd. (ITA No. 1407/Ahd/2009) is the lead case, therefore, we shall take up the facts of that case to decide the identical legal points raised in the grounds of appeal in both the cases.
(A) ITA No. 1407/Ahd/2009 (in the case of Dholera Port Ltd.)
Grounds raised are reproduced below:
"1. The learned CIT(A) has erred in law and on facts in allowing the appeal of the assessee on the order passed by the AO under s. 201(1) and under s. 201(1A) r/w s. 195 of the IT Act, 1961.
2. THE learned CIT(A) has erred in law and on facts in not considering the remittance to non -resident as fees for technical services as 'make available' as per art. 13(c) of India -UK DTAA. The learned CIT(A) has erred in law and on facts in not accepting the deeming provisions as per Explanation to s. 9(1)(vii) inserted by Finance Act, 2007 with retrospective effect from 1st June, 1976.
3.ON the facts and in the circumstances of the case learned CIT(A) -XXI, Ahmedabad ought to have upheld the order of the AO."
1.1 Facts in brief as emerged from the corresponding order passed under s. 201(1) and 201(1A) r/w s. 195 of the IT Act, Dt. 16th Sept., 2008 were that the AO has observed that the assessee -company had made payment to one M/s. HR Wallingford Ltd., UK, a non -resident company of 40,635 GBP on 22nd May, 2007. It was noted by the AO that the said payment was in respect of Navigation Studies Phase -3 at Port of Dholera. Further, it was also noted by the AO that no tax was deducted while making the said payment. The assessee's explanation was that the said fees was not in the nature of "making available" of technical knowledge to the assessee. Assessee's plea was that as per art. 13 of DTAA between India and UK the said technical knowledge, skill or know -how was not "made available" to the service recipient, i.e., assessee. As against that, the AO has show -caused as to why the payment should not be treated as fees for technical services and, therefore, why the tax under s. 195 was not deducted, consequently to be recovered from the assessee in terms of s. 201(1) and 201(1A) of the IT Act. The assessee's reply was that the services provided by M/s. H.R. Wallingford Ltd., UK was not in the nature as prescribed in art. 13(4)(b) of India -UK DTAA.
1.2 The assessee has furnished an explanation in respect of the nature of work conducted by M/s. H.R. Wallingford Ltd., relevant portion is reproduced below:
"2.1 Assessee vide reply Dt. 27th March, 2008 (received on 31st March, 2008) the company is developing Dholera Port located in the State of Gujarat in this context, it awarded contract for "Navigation Studies Sedimentation" studies to M/s. HR Wallingford Ltd.. UK, covering rate of sedimentation, frequency of dredging, the impact of capital dredging work, shore protection on the hydrodynamic and morphology of the area etc., to having requisite technical knowledge and experience in the given field to assessee the viability of development work of the Dholera Port."
(2.) The assessee has further pleaded before the AO that even if the service would have fallen under the provisions of s. 9(1)(vii) of IT Act but the said services would not be treated as "fees for technical services" under art. 12 of DTAA with UK. Assessee has also mentioned art. 13 of DTAA between India and UK wherein it is prescribed that fees for technical services can be taxed in source country if it is established that the fees paid for services arise in the source country and it falls within the meaning of "fees for technical services" as defined in para 4 of art. 13. Relevant portion of the said article was also reproduced by the AO:
"Article 13 : Royalties and fees for technical services.
(3.) For the purposes of para 2 of this article, and subject to para 5 of this article, the term fees for technical services means payment of any kind of any person in consideration for rendering of any technical or consultancy services (including the provision of services of a 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 para 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 para 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."
2.1 Hence, it was argued that as per the terms of the art. 13 of India and UK treaty the fees for technical services is such if technical knowledge is made available. Since, the definition of "make available" is not prescribed in the Act or in any of the articles, therefore, the assessee has placed reliance on an order of Mumbai Tribunal pronounced in the case of Raymond Ltd. v. Dy. CIT : (2003) 80 TTJ (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai).
2.2 The assessee has also furnished a copy of engagement letter entered into between assessee -company on one hand and M/s. H.R. Wallingford Ltd., UK on the other hand, relevant portion is reproduced as under:
"Dholera Port - -Phase 2 Sedimentation Studies
Proposal prepared for the Adani Group
The Adani Group is contemplating participating in developing Dholera Port which is located between Ahmedabad and Bhavnagar in the Gulf of Khambhat. The proposed developments will include a deepened and realigned approach channel, a berthing area and associated shore protection works. Initial studies to be carried out are focused on the morphological and navigational aspects of the proposed developments.
Previous studies undertaken at this site have highlighted the prevailing environmental conditions, with strong tidal action (large tide range and strong tidal currents) occasional cyclone rapid coastal erosion which is likely to be lined to the configuration of the larger banks (in particular Mai Bank and Ronlo Island) and channels (in particular Malcolm Channel). A DPR study prepared by Frederick Harris in 2000 highlighted the morphological activity in the area and recommended regular surveys be undertaken to investigate this aspect further, noting that the main Dholera Channel would be subject to rapid shoaling in the event that upstream drainage channels are deviated by the bank migration."
2.3 However, the AO was not convinced and according to him the services provided by M/s. HR Wallingford Ltd., UK were nothing but fees for sedimentation studies, which according to him were in the nature of fees for technical services as defined in Expln. 2 of s. 9(1)(vii) of IT Act. A resident of India had made the payment for "on site sedimentation services" to a non -resident and such income in the hands of the nonresident was chargeable to tax in India under s. 9(1)(vii) of IT Act. The AO has also discussed s. 9 of Finance Act, 2007. The AO has concluded that the services rendered were in the nature of providing consultancy service which was made available to Dholera Port Ltd. The AO has computed the tax and interest thereon as under:
"6. To summarise, it is held that payment received by M/s. HR Wallingford, UK is taxable both as per the provision of the IT Act. 1961 and the tax treaty between India and UK. As the assessee -company has already remitted the total payment to the non -resident, the tax deducted at source has to be arrived by grossing under s. 195A of the Act. The assessee is also liable for interest as per s. 201(1A) of the Act, for the delay.
Tax under s. 201(1) and interest under s. 201(1A) of the Act payable by the assessee are as under:
3. When the matter reached to the first appellate authority, the matter was discussed at length in the light of few case laws, namely, CESC Ltd. v. Dy. CIT : (2003) 80 TTJ (Kol)(TM) 806 and Raymond Ltd. (supra) and ITO v. De Beers India Minerals (P) Ltd. : (2008) 113 TTJ (Bang) 101. After considering the arguments, learned CIT(A) has held as under:
"I have carefully considered the submissions of the appellant and I have also perused the order of the AO on this issue. The AO has held that the fees paid to HR Wallingford Ltd., a UK based company can be characterized as fees for technical services under art. 13(4) of India -UK DTAA. However, in doing so, he has ignored the fact that the appellant company was supposed to receive only a report on the pre -existing conditions. This report contains data and information about the morphological studies, navigation studies, etc., in relation to the Dholera Port whereby no technical knowledge, skill, know -how, etc., is made available to the assessee. The AO in reaching to this conclusion also relied on an example (reproduced on p. 8 of the order) forming part of the MoU appended to India -US Treaty in order to borrow the meaning of the term 'make available'. In doing so, he has himself applied the India -US Treaty because the art. 12 to India -US DTAA is pari materia with that of the art. 13(4) of India -UK DTAA. The AO has wrongly applied the said example for the reason that the US company has transferred the set of skill in the form of instructions which will assist the Indian to install the system. This individual will be in a position to render such or similar instructions to other people in India. Hence, the said services have readily been made available to the individual but there being a specific exemption under art. 12(5)(d) in respect of services utilized for personal purposes, the payment made shall not be characterized as fees for included services. Since in this case HR Wallingford Ltd., the UK based company has merely provided services in relation to morphological studies, sedimentation studies, etc no technical knowledge, skill experience or process is made available to the appellant company in the terms of art. 13(4)(c) of the India -UK treaty. The appellant will also not be in a position to render such services on its own to others. Thus, in terms of art. 13(4)(c) of the India -UK DTAA, the fees paid by the appellant company are not fees for technical services and they constitute business income in the hands of the British Company. Consequently, the appellant company would not be liable to withholding tax under s. 195(1) of the IT Act, 1961. Hence, this ground of appeal is partly allowed."
4. From the side of Revenue, learned Departmental Representative Mr. P.L. Kureel appeared. He has informed that the assessee had remitted a sum of Rs. 32,56,048 to a non -resident company, namely, M/s. HR Wallingford Company, UK for the technical services rendered. The assessee had not deducted the tax under s. 195 of IT Act while remitting the amount. The reason given for non -deduction of tax at source was that no services were made available by the said non -resident to the assessee as per the meaning assigned in art. 13 of DTAA between India and UK. But according to learned Departmental Representative the remittance was covered by the definition of "fees for technical services", and "that the amount remitted was chargeable to tax in the hands of the said nonresident". He has argued that the provisions of s. 9(1)(vii) were applicable on the fees paid for technical services because the services were rendered and utilized in India. The assessee was required to deduct the tax under s. 195 and the AO has rightly treated the assessee in default under s. 201(1) of IT Act by raising the demand of Rs. 3,61,783 as also charged interest under s. 201(1A) of Rs. 54,270.
4.1 Learned Departmental Representative has pleaded that as per the agreement entered into by Dholera Port and HR Wallingford, the said non -resident company was required to deliver a report on "Morphological and Navigation Studies" in respect of Dholera Port. The abstract of the agreement is reproduced as under:
"Phase 1 - -Morphological Studies
(i) Determine the rate of sedimentation and the quantity and frequency of dredging.
(ii) Agreement of channel alignment
(iii) Sedimentation and maritime dredging requirements for the berthing pocket.
(iv) Requirement and nature of any shore protection measures.
(v) The impact of capital dredging works and shore protection on the....."
4.2 Learned Departmental Representative has placed reliance on a judgment of Authority for Advance Rulings (Income -tax) (New Delhi) Dt. 9th Dec, 2011, AAR No. 869 of 2010 in the case of Perfetti Van Melle Holding B.V., in re [reported at : (2012) 246 CTR (AAR) 8 : (2012) 65 DTR (AAR) 12 - -Ed.], wherein the relevant observations were as under:
"2. Applicant submits that being a tax resident of the Netherlands the provision of India -Netherlands Double Taxation Avoidance Convention (DTAC) will apply to the extent they are more beneficial when compared to the provisions of the IT Act, 1961 (Act). Under para 5(b) of art. 12 of the DTAC, any service to qualify as fees for technical services (FTS), the service should be technical or consultancy in nature and the services should 'make available' technical knowledge, experience, skill, know -how or processes, or consist of the development and transfer of a technical plan or technical design. The definition of fees for technical services under the DTAC is more restrictive than under the Act and hence being invoked. Applicant submits that the term 'make available' has not been defined under the DTAC, but an inference may be drawn from India -USA DTAC which has an identical definition in para 4(b) of art. 12 for defining 'fees for included services'. Under the MoU of India -USA DTAC, 'make available' means that the person acquiring the services is enabled to independently apply the technology, that there should be transfer of technical knowledge, skill etc. from the service provider to the recipient in order for the services to qualify as making available technical knowledge, skill etc. [Ref. : Intertek Testing Services India (P) Ltd., in re : (2008) 220 CTR (AAR) 540 : (2008) 16 DTR (AAR) 93 : (2008) 307 ITR 418 (AAR), National Organic Chemical Industries Ltd. v. Dy. CIT : (2005) 96 TTJ (Mumbai) 765; C.E.S.C. Ltd. v. Dy. CIT : (2003) 80 TTJ (Kol)(TM) 806].........
Thus, we are of the opinion that services under the service agreement when read with TTLA, fall within the purview of art. 12.5(A) of the DTAC as such services 'are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 4 of this article is received..........
I fully agree with the ruling proposed by Member (R).
A convention is a treaty entered into by two sovereign States relating to rights and duties of subjects or citizens of the respective States in one another's possessions (see Ramanatha Aiyar - -Law Lexicon). A treaty is negotiated and entered into at political level and have several considerations as their base [see Union of India & Anr. v. Azadi Bachao Andolan & Anr. : (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC)]. A treaty is unique for the two nations that are parties to it. So, how can a treaty with one country, be interpreted in the light of the treaty with another country, subject of a bargain and mutual give and take with reference to the relationship with that particular country? If so, how can a MoU accompanying a treaty with another country, be used as an aid to interpret the treaty with a different country? I am of the view that the use of the MoU accompanying or supplementing the India -US Tax Convention cannot be used as an aid to understand the terms of the India -Netherlands treaty. The significance of the fact that such a Memorandum or a similar MoU does not supplement the convention with Netherlands cannot also be lost sight of. One possible inference is that India did not want the situation arising out of the MoU accompanying the India -US Double Taxation Avoidance Convention to prevail in the interpretation of its Convention with Netherlands. I am, therefore, not persuaded to accept the argument that the India -Netherlands Convention should be interpreted with the aid of the MoU accompanying the India -US Convention.
Article 12.5 of the Convention between India and Netherlands has to be interpreted on its terms, at best with reference to the protocol that accompanied that convention.
2. The expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know -how in future on his own. 'By making available the technical skills or know -how, the recipient of the same will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider.' [See Intertek Testing Services India (P) Ltd., in re : (2008) 220 CTR (AAR) 540 : (2008) 16 DTR (AAR) 93 : (2008) 307 ITR 418 (AAR)]. So when the expertise in running the industry run by the group is provided to the Indian entity in the group to be applied in running the business, the employees of the Indian entity get equipped to carry on that business model or service model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the service agreement on its expiry."
4.3 Some more case laws were referred from the side of the Revenue, as listed below:
1. Hindustan Shipyard Ltd. (ITA Nos. 204 & 205/Vizag/2011)
2. CGG Veritas Services SA, (2012) 18 taxmann.com 13 (Del)
3. SNC Lavalin International Inc., (2011) 11 taxmann.com 23 (Del)
4. Hindalco Industries Ltd. v. ITO, ITA No. 3773/Mum/1996 [reported at : (2004) 85 TTJ (Mumbai) 71 - -Ed.];