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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA
PER PRADIP KUMAR KEDIA - AM:
The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)-13, Ahmedabad (‘CIT(A)’ in short), dated 03.03.2016 arising in the assessment order dated 27.03.2014 passed by the
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Assessing Officer (AO) under s. 143(3) rws 144(C) of the Income Tax Act, 1961 (the Act) concerning assessment year 2011-12.
Grounds of appeal raised by the Revenue read as under:
“(1) The Ld. CIT(A) has erred in law and on facts in accepting assessee’s contention that remittances of Rs.76,456/- was actually reimbursement of expense, whereas actually this amount represented interest payment disallowed u/s 37(1) as well as Section 40(a)(ia) of the Act as no tax was deducted thereon. (2) The CIT(A) has erred in law and on facts by holding that the assessee was not required to withhold tax at source on consultancy fees paid to the extent of Rs.52,05,121/- treating the same as Independent personal Services.”
When the matter was called for hearing, the learned AR for the assessee fairly submitted with reference to Ground No.1 that he does not intend to contest the issue mainly on account of the smallness of amount. Apart from the consent readily given, we find force in the observations made by the AO that the interest expenditure incurred is susceptible to tax on gross basis as per the India-Canada Tax Treaty. The aforesaid expenditure towards interest in not in the nature of mere reimbursement as the interest has been claimed by the assessee as deductible expenditure. The reimbursement is only indirect payment through the head office at Canada and not reimbursement of expenditure per se. Accordingly, the order of the CIT(A) is set aside and the order of the AO is restored on issue.
In the result, Ground No.1 of the Revenue’s appeal is allowed.
Ground No.2 concerns reversal of disallowance of consultancy fees amounting to Rs.52,05,121/-.
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5.1 Briefly stated, the assessee is a foreign company incorporated in Canada and is engaged in providing technical consultancy for development of irrigation and water resources in India in the State of Chhattisgarh and Orissa. The assessee was awarded contract by Chhattisgarh Government for providing consultancy services under the Chhattisgarh Irrigation Development Project. The assessee has its permanent establishment at Raipur, India. In the course of scrutiny assessment, the AO observed that the assessee has claimed consultancy expenses of Rs.52,05,121/- on which the assessee has not deducted withholding tax. In response, the assessee contended before the AO that the consultancy fees were paid to several independent professionals of foreign origin hired for technical services and the services are in the nature of independent personal services governed by Article 14 of the respective Treaties. It was contended that ‘Independent Personal Service’ (IPS) are different from ‘fees for technical services’ (FTS). It was argued that the income of the aforesaid consultants being IPS were not susceptible to tax in India in view of exceptions provided in the treaties in this regard. In elaboration, it was submitted that the professionals rendering services have neither fixed base in India (source country) nor have any of the professionals stayed in India more than the threshold limit in terms of number of days (aggregate 90/183 days) of stay provided in the respective DTAA. The assessee accordingly submitted that in the absence of chargeability of such income in India having regard to beneficial provisions of respective treaties, there was no obligation on the assessee to deduct TDS/withhold tax on such remittances.
5.2 The AO however observed that the services rendered were admittedly technical/consultancy services by the professionals who
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are stated to be specialists in their respective domains and therefore, the services were in the nature of technical and consultancy services and would thus fall in the article related to FTS in contrast to the article concerning IPS. The AO further observed that the professionals rendering consultancy services were not independent per se and their scope of work and activities were regulated by contractual obligations or other form of employment. The services rendered by such professionals under contract were thus alleged to be relatable to FTS and not IPS. The AO accordingly concluded that in the absence of independence of such services, the assessee is entitled to benefit under IPS clause of treaty and consequently was under obligation to deduct TDS and failing to do so would invite automatic disallowance under s.40(a)(i) of the Act.
Aggrieved, the assessee preferred the appeal before the CIT(A). It was reiterated by the assessee before the CIT(A) that consultancy fees paid to the non-resident individuals is in the nature of IPS in the instant case as per DTAA between India and country of residence of the respective non-resident individuals. It was further contended by the assessee that similar payments were made in FY 2006-07 as well which was duly accepted by the department to be in the nature of IPS.
The CIT(A) observed that the essential controversy raised in the instant case by the assessee is that the consultants rendering services were not allegedly independent and are under contractual obligations to perform the activities as provided in the agreement entered with the respective consultant which obligations are alleged to exclude the services from the bracket of expression ‘independent’. The CIT(A) revisited the terms of the agreement as
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well as the judicial precedents cited in this regard as reproduced in the order of the CIT(A). On re-examination of the agreement and other relevant facts, the CIT(A) found that independence of the non- resident consultants towards rendition of services remained intact and the employer-employee relationship was absent. The contractual relationship was towards ‘contract for employment’ and not ‘contract of employment’. The CIT(A) also took note of the confirmatory letters of all the consultants to conclude that services were rendered to the assessee company by independent consultants. The CIT(A) accordingly found merit in the plea of the assessee for the services to be in the nature of ‘independent personal service’ and thus not chargeable to tax under Indian Laws owing to the conditions duly fulfilled for availing benefit as laid down by respective DTAA.
The relevant operative para of the order of the CIT(A) is reproduced hereunder for ready reference:
“23. I have gone through the assessment orders and observations of the Ld AO. I have also gone through the submission of the appellant and also perused agreements entered into with the consultants by the appellant submitted on page nos 345 to 394 of paper book. I have also gone through the agreement entered with Department of Water Resources (DOWR), Government of Orissa for consulting services as contained in Page no.65 to 168 of the paper book. The Ld AO has disallowed consulting fees on the ground that the consultants are not independent and therefore, the Article on IPS of relevant DTAA is not applicable. In other words, the Ld AO has on perusal of various clauses and in view of legal commentary held that personnel engaged by the appellant are dependents/employees. In the given context, the appellant vide its above submission has contended that the Ld AO has failed to appreciate the difference between "contract of employment" i.e. Employer-Employee relationship and "contract for employment" i.e. Owner-Consultant relationship to negate the observations of the Ld AO that the consultants hired by the appellant' are under contractual obligation to perform the activities and they are contractually liable to work performed which is evident from scope of work performed by them as provided in the agreement entered with them. 24. In the given backdrop, I have verified consulting agreement dated 26th August, 2009 entered into by the appellant with Mr Olaf Verheijen. (Same
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person referred by the Ld AO in the assessment order) . I have found that the title of the agreement is "Consulting agreement" and Mr Olaf Verheijen is referred as "a consultant of Netherlands". The total assignment period mentioned in Clause A2 in the agreement is 30 months over 7 to 10 missions i.e. in phased manner. Further, Clause GC-3 in Annexure-A of the agreement states that the Consultant shall not assign the contract to any other “consultant" without formal prior agreement with the appellant. The most significant aspect which proves independence of the said person vis a vis the appellant is that due to failure to exercise reasonable skill, care and diligence in discharging the terms of reference, the consultant causes loss or damage to the appellant which the consultant shall be liable towards the appellant to make good by making payment not exceeding consulting fees. This clause clearly distinguishes the relationship between the appellant and the consultant from "Employer - Employee relationship" to that of an independent contract between two independent persons. Further, Clause GC-6 states that the Consultant shall perform its services as per generally accepted professional standards. I have found that no where in the said clause GC- 6 it is mentioned that the services to be performed by the appellant would be under the supervision of the appellant. The clause GC-7 states that the consultant shall maintain insurance on his own during the period of assignment which could not be a case in employer-employee relationship. The above clauses in the agreement with consultant are standard clauses in all contracts entered with consultants which prove beyond doubt that the contracts between the appellant and the consultants are indeed "contract for employment" between independent parties and not "contract of employment" between employer and employee. Additionally, the appellant has drawn my attention the confirmatory letters of all the consultants wherein the consultants have confirmed working as Independent consultants for other parties in the same year in which services were rendered to the appellant. 25. Accordingly, I agree with the contentions of the appellant that no tax was required to be deducted at the time of making payment of consulting fees to the consultants as per Article on IPS of relevant DTAA being payment to independent consultants. Hence, I decide this ground of appeal No 8 in the favour of the appellant and thereby, delete the disallowance made by the Ld AO.”
Aggrieved, the Revenue is in appeal before the Tribunal on the issue.
10 The learned DR for the Revenue relied upon the order of the AO.
The learned AR for the assessee, on the other hand, relied upon the order of the CIT(A). In furtherance, the learned AR also
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referred to the contractual agreement entered into with one of the consultants namely Mr. Olaf Verheijen (OV) a resident of Netherlands as specimen contract. The learned AR submitted that the consultancy was rendered to the assessee as Advisor subject to certain terms and conditions in the ordinary course in any contract. To demonstrate the nature of contract, the learned AR submitted that Mr. OV was recognized as ‘Consultant’ and the terms of the contract would suggest that it was in the nature of contract for employment. For instance, Clause GC3 says that the contract cannot be assigned nor the services of the consultant can be assigned by him unlike employment in ordinary course. The consultants was also made liable for certain losses or damage as per Clause GC4 which is ordinarily not there in contract of employment. The learned AR submitted that the CIT(A) has rightly appreciated the services rendered by the consultancy to be IPS and no interference therewith is called for.
We have carefully considered the rival submissions. The controversy revolves around chargeability of consultancy payments remitted to non-resident Indian by the assessee company. The incidental issue that arises for consideration is whether the services rendered by the non-residents are in the nature of IPS or in the nature of fee for technical services. It is the case of the assessee that payments made to the non resident consultants were in the nature of IPS and therefore, not chargeable to tax in view of the shelter available under the respective DTAA as the none of the non resident Indian have either fixed base or their aggregate period of stay has exceeded stipulated period provided in the respective DTAA. It is further case of the assessee that in the absence of chargeability of remittance being IPS, the obligation to deduct TDS
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did not arise at all and therefore, there was no warrant for the AO to disallow the consultancy expenses by invoking Section 40(a)(i) of the Act. The AO on the other hand has held that the basic condition for applicability of article of IPS of relevant DTAA is that the consultant should be independent and in the assessee’s case, the consultants are alleged to be not independent and hence, the article on ‘fee for technical services’ of the relevant DTAA is squarely applicable requiring deduction of tax at source by the assessee.
To appreciate the facts in perspective, availing Services in source country, it will be relevant to reproduce the relevant details of non resident consultants and therefore respective period of stay as tabulated below:
Name of Citizenship Worked for Hydrosult Consultants No of days From To Days Total Days 01 Mr. Olaf Netherlands Fixed Base l-Apr-2010 24-Apr-2010 24 24 Verheijen or 183 days rule 02 Mr. Australia Fixed Base 16-May-2010 29- May- 14 32 Geoffrey or 183 days 2010 Leonard rule Wright 30-0ct-2010 7-Nov-2010 9
23- Mar- 31-Mar-2011 9 2011
03 Mr. Johan Netherlands Fixed Base l-Apr-2010 10-Apr-2010 10 35 Albert or 183 days Wormgoor rule
6-Mar-2011 30-Mar-2011 25
04 Mr. Jose Philippines Fixed Base l-Apr-2010 27-Apr-2010 27 27 Alfonso or 183 days Galvez rule
05 Mr. John UK Fixed Base 22-Aug-2010 3 Mov-2010 74 74 William or 90 days Dunn rule
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06 Mr. C M Newzealand Fixed Base 20-0ct-2010 20-Nov-2010 32 61 Wijayaratna or 183 days rule 4-Feb-2011 23-Feb-2011 20 23-Mar-2011 31-Mar-2011 9
It is the case of the assessee that the respective non-resident individuals have rendered professionals services of independent character and therefore liable to be taxed, if any, only in the contracting state of residence since none of such individuals have a fixed base available to them in India for the purposes of performing their respective activities and secondly, none of the non-residents have stayed in India for a period exceeding aggregate 183 days in the assessment year concerned as can be seen from the above tabulation. It is thus the case of the assessee that services rendered by the above tabulated non-residents are covered by Article 14 of DTAA with the respective country where the respective non- residents are residents of.
We find merit in the case of the assessee for eligibility of DTAA benefit under Article relating to IPS in view of the undisputed facts towards absence of fixed base and period of stay below threshold. We now turn to the another objection on behalf of the Revenue that the services rendered are not independent in character. In this regard, a bare look at the specimen agreement entered into between the assessee and one of the consultants namely Mr. OV of Netherlands gives an unmistakable impression that as per the agreement, the non-resident was to provide consulting services related to the project to the assessee. The non-resident has been contracted as an ‘Advisor’ for the purposes of implementing his advisory services. The responsibility or the risk for the results is
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with non-resident to a greater degree. Noticeably, the obligations arising from the contract cannot be assigned to some other persons unlike in the case of an employer. In the circumstances, it is difficult to read such contract to be lacking of independence. In view of risk fastened with the non-residents for their services, it is clear that the services are of independent nature. We do not see any trappings of alleged dependence in the contract. The CIT(A), in our view, has examined the issue in right perspective and has come to a rightful conclusion. We thus decline to interfere.
In the result, Ground No.2 of the Revenue’s appeal is dismissed.
In the result, the appeal of the Revenue is partly allowed.
This Order pronounced in Open Court on 31/01/2019
Sd/- Sd/- (MADHUMITA ROY) (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 31/01/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
प/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।