Rajendra Singh, A.M. - (1.) THESE appeals by the assessee are directed against different orders dated 28-10-2005 of Commissioner (Appeals) for the assessment year 2006-07. As the issue raised is common, all these appeals are being disposed of by a single consolidated order. The only issue raised which is common in all these appeals is whether on the facts and in the circumstances of the case, the assessing officer was justified legally to direct the assessee to deduct tax at source in respect of payments made to M/s. Project Systems International Ltd. (hereinafter to be referred as 'PSIL') the foreign contractor.
(2.) The facts of the case in brief are that that the assessee company which is engaged in the business of operating and maintaining hotels was constructing Lodhi Hotel at New Delhi. For this purpose, the assessee had entered into an agreement dated 14-2-2003 with PSIL under which the latter was required to render project management services in relation to construction of the said hotel. The various services to be provided by the PSIL were listed at exhibit A of the agreement and which included the following: Al.1 Pre-design services: Assist in preparation of project brief, Prepare consultants' Agreement. Develop preliminary programme for design and construction. A1.2 Design management andpre-construction planning: Develop the design management strategy. Review consultants designs for compliance with the budget, the brief and construction strategy. Review and analyze contractors' work programme. A1.3 Management and quality control of construction: Establish procedures for the management of the construction process, information flow, documentation, etc. Establish and review testing procedures, shop drawing submission and review, etc. A1.4 cost control: Establish and maintain a budget/contract/payment tracking systems. Continue review of drawings and specifications to reduce costs. Analyze programme and develop cash flows. A1.5 Programme control: Develop the master project schedule. A1.6 Reporting and communications: Establish standard criteria for daily, weekly and monthly reports. Establish an early warning system to avoid cost overruns and time extensions. Prepare and submit the monthly progress report to client and team. Prepare and submit monthly executive brief. 2.1 The assessee filed application dated 27-5-2005 before the assessing officer requesting to pass an order under Section 195(2) so as to enable the assessee to make payment to PSIL without making any deduction of tax at source on the ground that the said payments were not taxable in the hands of the latter in view of the exemption provided in Explanation (2) of Section 9(1)(vii), which defines 'fees for technical services' which are taxable in the hands of the non-residents. The said Section is reproduced below for the sake of clarity: 9(1)(vii) - income by way of fees for technical services payable by (a) the government; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1-4-1976, 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". 2.2 The assessee submitted before the assessing officer that the services rendered by PSIL were step in aid to the process of construction as ultimate aim of the services rendered was the construction of hotel building. Such services were therefore to be excluded from the definition of fees for technical services in view of exception provided in Explanation (2) of Section 9(1)(vii). The assessee placed reliance on the decision of Delhi Bench of the Tribunal in case of Agland Investment Services Inc. v. ITO (1985) 22 Taxman 9 (Del) in which it was held that construction included services/activities which were step in aid to the construction. The assessing officer however, did not accept the plea of the assessee and observed that the Agland Investment Services Inc.'s case (supra) was different. It was held by him that payment made by the assessee was for the various management services and not for construction of hotel and the case was, therefore, not covered by the exception provided in Explanation (2) of Section 9(1)(vu). Accordingly, he directed the assessee to deduct tax at source at the rate of 20 per cent of the gross payment. This was disputed by the assessee. 2.3 In appeal, the Commissioner (Appeals) agreed with the view taken by the assessing officer that the PSIL was responsible only for certain project management services and that the payment had not been made by the assessee for construction of hotel and, therefore, the case of the assessee was not covered by the exclusionary clause in Explanation (2). It was observed by him that provisions of the Act are required to be interpreted on the basis of words employed therein as held by Hon'ble Supreme Court in case of CAIT v. Plantation Corpn. of Kerala Ltd. (2001) 247 ITR 155 (SC). It was clear from the provisions contained in Explanation (2) that exception has been provided only in respect of payment for construction projects, etc. As PSIL had not undertaken the construction of the hotel, the case was not covered by Explanation (2). Commissioner (Appeals) distinguished the case of Agland Investment Services Inc. (supra) on the ground that it was not clear whether in that case entire construction project was undertaken by the payer or the payee. 2.4 Commissioner (Appeals) further observed that the new Clause (viz) of Section 9(1) had been inserted by the Finance Act, 1976 in order to incorporate the fees for technical services received by non-residents for the purpose of taxation. The explanatory note on the said newly inserted clause had been circulated by Central Board of Direct Taxes vide Circular No. 202 dated 5-7-1976 in which the said provision was explained as under: The expression 'fees for technical services' has been defined to mean anyconsideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services including the provisionof services of technical or ot her personal. It however does not include feesfor the following types namely: 1. any consideration received for any construction, assembly mining orlike project undertaken by the recipient. Such consideration has been excluded from the definition on the ground that such activities virtually amount to carrying on the business in India for which considerable expenditure will have to be incurred by a non-resident and accordingly it will not be fair to tax such consideration in the hands of the foreign company on gross basis or to restrict the expenditure incurred forearning the same to 20 per cent of gross amount as provided in new Section 44D. Consideration for any construction, assembly, mining or like project will therefore be chargeable to tax on net basis, i e., after allowingdeduction in respect of costs and expenditure incurred for earning thesame and charge to tax at the rates applicable to the ordinary income ofnon-resident as specified in the relevant Finance Act. 2.5 Commissioner (Appeals) noted that the Central Board of Direct Taxes circular mentioned above had clarified the legislative intent behind the insertion of Clause (vii) in Section 9(1) by the Finance Act, 1976. The circular made it clear that payment for construction etc. were excluded as such activity virtually amounted to carrying on business in India. Thus, he concluded that only the payment for actual construction, assembly, mining etc. undertaken by the recipient had to be excluded and not the fees for various management services which do not amount to carrying on business in India. Commissioner (Appeals) accordingly upheld the decision of the assessing officer to deduct tax at source. Aggrieved by the said decision, the present appeals have been filed by the assessee before the Tribunal. Before us, the learned Authorized Representative for the assessee reiterated the submissions made before the lower authorities. It was pointed out that in earlier assessment years, i.e., assessment years 2004-05 and 2005-06, the assessee had made request for exemption for deduction of tax relying on the same decision of the Tribunal in case of Agland Investment Services Inc. (supra) and the assessing officer vide orders dated 9-10-2004 and 6-5-2004 had authorised the assessee to make payment to the PSIL without deduction of tax at source. But in assessment year 2006-07, which is in appeal, the assessing officer changed the stand and directed the assessee to deduct tax at source which were not legally in order. The assessing officer has not pointed out any change in factual or legal position to warrant a different view. The principle of consistency is a well settled legal position as per which decision taken in the earlier year cannot be deviated if factual and legal positions remained the same. It was further submitted that the assessee had subsequently obtained a letter from Agland Investment Services Inc. regarding nature of services rendered in that case and the said letter had been filed before Commissioner (Appeals) but he did not consider the same and confirmed the order of the assessing officer. Nature of services rendered in the case of the assessee, were similar. The learned Authorized Representative argued that basically, the issue to be decided was whether the exception provided in Explanation 2 of Section 9(1)(vii) would apply only when the entire construction project had been undertaken by the recipient or it would apply even when only some services in relation to the said project had been undertaken by the recipient. Referring to the dictionary meaning, it was submitted that the word "project" meant the "process" which in turn meant "systematic series of actions directed towards some end" and, thus, the word "project" was much wider in scope than the actual construction activity and, therefore, the various management services rendered by the recipient in relation to the construction project would be covered within the meaning of exceptions provided in Explanation 2. 3.1 In this context, the learned Authorized Representative also referred to the provisions of Section44BB which provided for computation of profit and gain in connection with business of exploration etc. of mineral oil in case of non-residents. The said Section did not apply when the profits were required to be computed under the provisions of Sections 42,44D 115A and 293A. Section 115A provided for taxability of fees for technical services and the definition of 'fees for technical services' for the purpose of the said Section was the same as in case of Section 9(1)(vii). In other words, this meant that fees for technical services as defined for the purposes of Section 9(1)(vii) were not covered within the meaning of the provisions contained in Section 44BB. The learned Authorized Representative referred to the following decisions of the Tribunal in which the services similar to those undertaken by the recipient in the case of the assessee had been held to be taxable under Section 44BB, which meant that such services are not to be considered as 'fee for technical services': (i) In case of ONGCas representative of Petro Chemicals, Switzerland. [IT Appeal No. 3085/99-00 assessment year 1997-98]. (ii) In case of Dy. CIT v. ONGC as agent of Foramer Firms (1999) 70 ITD 468 (Del). (iii) ONGC v. Asstt. CIT (2007) 12 SOT 584 (Delhi). (iv) In case of ONGC v. Asstt. CIT [IT Appeal No. 3086 (Del) of 2000 assessment year 1997-98]. 3.2 In view of the above decisions as well as the decision of the Tribunal in case of Agland Investment Services Inc. (supra), it was submitted that all services which were step-in-aid to the construction project were covered within the exception provided in Explanation(2) and therefore, authorities below were not correct in directing the assessee to deduct tax at source. 3.3 The learned Commissioner Departmental Representative appearing for the revenue on the other hand strongly defended the orders of authorities below. It was argued by him that principle of res judicata does not apply to income-tax proceedings and therefore, direction to not deduct tax in the earlier year cannot act as binding precedent for the subsequent years, Each sum remitted by the tax payer to the non-resident has to be examined independently while issuing order under Section 195(2). Referring to the Agland Investment Services Inc. !s case (supra), it was pointed out that the case was distinguishable on facts as in that case services were with regard to bid evaluation for construction which formed an integral part of construction activity whereas in the present case, the services provided by the non-resident were of technical design and management services, which are entirely different from the construction activity. It was further submitted by him that the CBDT Circular No. 202 dated 5-7-1976 had explained the intention behind the instruction of Clause (vii) of Section 9(1) regarding fees for technical services. It was clear from the said circular that the exception provided were only in relation to construction, mining projects etc. which virtually amounted to carrying on business in India. Coming to the provisions of Section 44BB referred to by the learned Authorized Representative, it was submitted that the said Section applies to non-residents engaged in the business of providing services or facilities in connection with prospecting for or extraction or production of mineral oils and therefore, was entirely different from the provisions of Section 9(1)( vii). Therefore, the decision of the Tribunal relating to Section 44BB relied upon by the learned Authorized Representative were not applicable to the facts of the case. It was accordingly submitted that: the decision of Commissioner (Appeals) was legally in order and should be upheld
(3.) WE have perused the records and considered the rival contentions carefully. The issue raised in this appeal is regarding deductibility of tax at source in respect of payments made by the assessee to PSIL, the foreign contractor. The assessee was constructing Lodhi Hotel at New Delhi and payment to PSIL had been made for various technical and management services provided by the latter as per agreement dated 14-2-2003. Details of these services have been mentioned in para 2 of this order. Under the provisions of Section 195(1), any person responsible for paying interest or any other sum chargeable under the provisions of this act to a nonresident or a foreign company, is required to deduct Income-tax at the rates in force at the time of payment or credit of such income to the account of the payee. The issue to be determined first, therefore, is whether the payments made by the assessee to PSIL for various technical and management services is chargeable under the provisions of the Act because in case the sum is chargeable to tax in the hands of foreign company, the tax is required to be deducted. Any fees for technical services is deemed to accrue or arise in India and is thus taxable in the hands of the non-resident payee under the provisions of Section 9(1)(vii). The phrase "fees for technical services" has been defined in the Explanation 2 to Section 9(1)(vii) which has been reproduced in para 2.1 of this order and which, means "any consideration [including any lump sum consideration] for the rendering of any managerial, technical or consultancy services but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient." There is no doubt that the foreign contractor had provided managerial, technical or consultancy services in relation to the construction of hotel but whether the payment for such services can be considered as consideration for any construction project because in that case, it will be covered by the exception provided in Explanation 2 and such payment could not be considered as taxable income in the hands of the foreign contractor. 4.1 The case of the assessee is that the construction project is a wider term and it also includes any managerial, technical and consultancy services provided in connection with the construction and therefore, the case of the assessee will be out of the purview of Section 9(1)(vii). The assessee has relied on the decision of the Tribunal in case of Agland Investment Services Inc. (1985) 22 Taxman 9 in which, it was stated that similar services had been considered as step-in-aid to the construction and thus covered within the exceptions provided in Explanation. The Commissioner (Appeals) has distinguished the said case on the ground that it was not clear whether in that case entire construction project was undertaken by the payee or the payer. The learned Commissioner Departmental Representative has further pointed out that the said case was distinguishable on facts as in that case services provided were with regard to bid evaluation for construction which formed an integral part of construction activity whereas in the present case, services provided by the non-resident were of the nature of technical design and management services which were entirely different from the construction activity. 4.2 The learned Authorized Representative for the assessee on the other hand, submitted that the services were similar and the assessee had obtained the list of services rendered directly from Agland Investment Services Inc. and placed before Commissioner (Appeals) but the said document had not been considered by the latter. A copy of the said letter was also produced before us for our perusal but we find that the said letter had not been signed by any officer of the company. No reliance can therefore, be placed on such document and may be because of this reason, Commissioner (Appeals) had not considered the same as fresh evidence. Under these circumstances, we are not in a position to arrive at any definite conclusion whether the case of the assessee could be covered by the Agland Investment Services Inc.'s case (supra). It is also pertinent to mention here that the Tribunal in Agland Investment Services Inc. s case (supra), had not considered the circular of CBDT clarifying the legislative intention behind the exclusion provided in Explanation 2 to Section 9(1)(vii). WE, therefore, proceed to decide the issue independently. 4.3 The learned AR has pointed out that the assessing officer in the earlier two years based on the same facts and following the same decision of the Tribunal in case of Agland Investment Services Inc.(supra) had exempted the assessee from deduction of tax at source and, therefore, principle of consistency demanded that the decision should be followed in the subsequent year also. WE have examined this aspect also. WE have gone through the orders dated 9-10-2002 and 6-5-2004 of the assessing officer for the assessment years 2004-05 and 2005-06 in which exemption had been granted from deduction of tax on source. WE find from the perusal of the said orders that the assessing officer had allowed the exemption without examining the matter in detail. Neither the services rendered in case of Agland Investment Services Inc. (supra) were obtained and examined nor any reference had been made to the Circular No. 202 of Central Board of Direct Taxes explaining the scope of the Explanation 2 to Section 9(1)(vii) providing exception in certain cases. Such order therefore, cannot act as a binding precedent for the subsequent years. In the year under appeal, on the other hand, assessing officer has taken the decision to deduct tax at source after detailed examination and after referring to the Circular No. 202 of CBDT which had not been considered by the assessing officer earlier. 4.4 There is no dispute that the payee in this case had provided managerial, technical and consultancy services in connection with the construction project undertaken in India. Such services are fees for technical services chargeable to tax under Section 9(1)(vii). The only point to be considered is whether payment for such services can be considered as consideration for any "construction project" so as to exclude it from the definition of" fees for technical services" as provided in Explanation 2. In our view, payment for such services cannot be considered as "consideration for construction project"' because "consideration for construction project' will mean consideration for actual construction activities undertaken in India and not consideration for any services in connection with construction project. Had it not been so, the Legislature would have provided exception in respect of "consideration for any services in connection with construction project" which is not so as exception has been provided in respect of "consideration for construction project". The position has also been explained by the CBDT Circular No. 202 dated 5-7-1976, which has clarified that "consideration for construction project" had been excluded on the ground that such activities virtually amounted to carrying on business in India. The circular thus makes the intention of the Legislature clear that the word "construction project" mentioned in the explanation means the actual carrying on of business activities in relation to construction project, which will be taxable on net income basis. This is not so in the present case as the services in this case had been provided from the foreign country without actually undertaking any activities in India in relation to the construction of the hotel. 4.5 The learned Authorized Representative for the assessee has referred to certain decisions of the Tribunal as mentioned in para 3.1 of this order earlier which relate to provisions of Section 44BB but we find that the provisions contained in Section 44BB which relate to computation of profit and gain in connection with business of exploration, etc. of mineral oil have been differently worded. As per these provisions, services and facilities provided in connection with prospecting for or extraction or production of mineral oils are covered for separate computation of income under Section 44BB. It was because of the words used "services or facilities provided in connection with" that in the decisions of the Tribunal cited, various services provided in connection with exploration of mineral oil such as comprehensive geological and geophysical studies, supply of supervisory staff and personnel having expertise in operation and management of drilling rigs, imparting training etc. were held to be covered under the provisions of Section 44BB and not separately considered as fees for technical services. But the words used in Explanation 2 of Section 9(1)(vii) are different. The Explanation 2 does not exclude the consideration for providing services in connection with the construction project. Instead, it excludes consideration for construction project which means that exclusion is only in respect of consideration paid for actual carrying on construction activities. The clarification given by the Central Board of Direct Taxes regarding the legislative intention behind inserting the Explanation 2 is also on the same lines. WE are therefore, of the view that the various managerial, technical and consultancy services provided by the foreign contractor from the foreign country in connection with the construction project without actually taking up any such activities in India, will not be covered within the meaning of the words used in the Explanation 2 to Section 9(1)(vii). In other words, we agree with the view taken by the authorities below that payments made for various services provided from abroad by the foreign contractor will be taxable as income in the hands of the recipient under the provisions of the Act and accordingly the payments made by the assessee to the foreign contractor are liable for the deduction of tax at source. Accordingly, we uphold the orders of Commissioner (Appeals) and dismissed the appeals filed by the assessee.;