M/S. SKAPS INDUSTRIES INDIA PVT. LTD.,,AHMEDABAD vs. ITO, INTL-II,, AHMEDABAD

These two appeals pertain to the same assessee tax-deductor, involve a common issue spread over two assessment years, and were heard together. As a matter of convenience, therefore, we disposing of both the appeals by way of this consolidated order. The orders impugned are two separate but materially identical orders passed by the CIT(A), both dated 22nd January 2018, in the matter of tax withholding demands under section 201 r.w.s. 195 of the Income Tax Act, 1961, for the assessment years 2013-14 and 2014-15.

Grievance of the assessee tax-deductor, in substance, is that, on the facts and in the circumstances of the case, learned CIT(A) erred in confirming the action of the Assessing Officer in treating the payment aggregating to Rs 74,70,220 (AY 2013-14) and Rs. 2,97,45,710 (AY 2014-15), made to Teems Electric Inc USA, as liable to tax withholding under section 195 of the Act, and in raising resultant tax withholding demands under section

The issue in appeals lies in a rather narrow compass of material facts. The assessee tax-deductor has made certain payments to a US based entity by the name of Teems Electric Inc. (“TEI” or “the US entity”, in short). These payments are made in consideration for the services rendered by TEI’s personnel for installation and commissioning of certain equipment purchased by the assessee. The Assessing Officer was of the view, that these payments being in the nature of “payment for electrical labour and mechanical labour by the assessee, to Teems Electric Co Inc USA, is for services of engineers in India and is covered by the definition of fees for technical services under section 9(1)(vii) of the Income Tax Act, and the assessee was liable for withholding of tax”. With respect to the treaty protection sought by the assessee under the Double Taxation Avoidance Agreement between India and USA [Indo US tax treaty, in short; (1991) 187 ITR (Stat) 102], the stand of the assessee was that there were four independent reasons for which the fees so paid by the Indian company was not taxable in India- (a) “the installation and commissioning activities were inextricably linked to the purchase of the equipment”; (b) “there was no transfer of technology” or “technology being made available”; and (c) “the entire installation charges were capitalized”. As regards the installation and commissioning services being inextricably linked to the purchase of equipment, the Assessing Officer was of the view that the transaction of purchasing the equipment and availing the installation and commissioning services were not interdependent transactions in the sense that these were from different vendors, that these were separate commercial transactions and that the services rendered by TEI went well beyond the scope of installation and commissioning activity. It was thus concluded that “the services provided by Teems Electric Co Inc were not at all linked to the sale of the property”. As regards the plea of the assessee that these services donot, in any event, satisfy the ‘make available’ test in Article 12(4)(b) of the India US Double Taxation Avoidance Agreement, the Assessing Officer rejected this plea on the ground that TEI “is the only source of obtaining such high degree of technical expertise that irrespective of (who supplies the plant) materials supply, only it has the desired level of expertise is installing and commissioning of a particular machine owned by the assessee” and “therefore, the services provided by Teems Electric Co Inc USA clearly fall within the clause 4(a) as well as clause 4(b) of Article 12 of the (applicable) tax treaty”. It was in this backdrop that the assessee was treated as an assessee in default for not deducting tax at source from these payments, and, accordingly, a demand under section 201 r.w.s, 195 was raised on the assessee. Coming to the plea with respect to capitalization, the Assessing Officer was of the view that this plea is “irrelevant from the point of view of tax deductibility” as “the character of receipt has to be seen in the hands of the receiver and not the payer” and that “it may be that the services are being utilized in setting up of a plant but for the US entity, it is an income on the revenue account”. The judicial precedents cited by the assessee were distinguished on facts. It was in this backdrop that the Assessing Officer held that the assessee was taxable in India in respect of the fees for technical services under section 9(1)(vii) read with Section 115A, and the applicable tax rate under section 115A at 10% being lesser than the tax rate at 15% envisaged by the Indo US tax treaty. The payment having already been made by the assessee without deducting tax at source, the Assessing Officer also directed the assessee to apply section 195A for grossing up of the tax liability. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Quite to the contrary, there were some new issues which were taken up, for the first time, by the CIT(A) with respect to (a) tax residency certificate requirement

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

The first question that we must address, at the threshold itself, is whether the TEI, i.e. the US entity to which the payments were made by the assessee company, was entitled to the benefits of Indo US tax treaty. There are two aspects to this fundamental question- first, whether the treaty protection could be declined to TEI simply on the short ground that the TEI was not able to, or did not, furnish the tax residency certificate under section 90(4) of the Act; second, whether TEI did not, on merits, satisfy the requirements of the Indo US tax treaty. As for the first aspect, the stand of the learned Departmental Representative is that non furnishing of the Tax Residency Certificate under section 90(4) itself, on a standalone basis, can be reason enough for declining the treaty protection. In support of this proposition, reliance is placed on the wordings of Section 90(4) which provide that “An assessee, not being a resident, to whom an agreement referred to in sub section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case maybe, is obtained by him from the Government of that country or specified territory”. It is thus contended that furnishing of the tax residency certificate is a condition precedent for invoking the treaty protection under section 90(2) of the Act. As we deal with this aspect of the matter and proceed to adjudicate upon the arguments of the parties on the same, let us take a quick look at the statutory provisions of Section 90 which deal with the double taxation avoidance agreements entered into by India. The statutory provision, as it stands now, is as follows: Section 90- Agreement with foreign countries or specified territories. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

A plain look at the above provisions would show that Section 90(2) is somewhat unique in providing an unqualified, what is, in India, often termed as, ‘treaty override’ in the sense that no matter what be the provisions of the Income Tax Act, 1961, in respect of a person to whom an agreement entered into under section 90(1) applies, “the provisions of this Act shall apply (only) to the extent they are more beneficial to that assessee”. Going by the plain words of the statute, the provisions of the Act, in a situation covered by the tax treaty, cannot put the assessee to any greater burden than the burden placed by the provisions of applicable tax treaty. The only limitation placed on this unqualified, rather almost unqualified- post insertion of sub section 2(A), is that “(n)otwithstanding anything contained in sub-section (2), the provisions of Chapter X-A (dealing with the General Anti Avoidance Rules) of the Act shall apply to the assessee even if such provisions are not beneficial to him”. Section 90(2A) is the only statutory provision in the Income Tax Act, 1961, which starts with a non-obstante clause vis-à-vis the provisions of Section 90(2), and, in that sense, it is the only rider to the treaty override provision set out in Section 90(2). That is the only rider to the superiority of tax treaty provisions vis-à-vis the provisions of the Indian Income Tax Act, 1961, is the exception carved out for the application of general anti avoidance rules set out in Chapter X-V.

In the light of our this analysis, when we turn to Section 90(4), as indeed other sub sections of Section 90, we find that these provisions do not start with a obstante clause vis-à- vis Section 90(2) and, therefore, these sub sections cannot be construed as limitation to, or rider to, somewhat unqualified treaty override stipulated in Section 90(2). Whatever interpretation one assigns to this sub section, essentially the fundamental approach has to be that this sub section will be applicable only when the same are more beneficial to the assessee vis-à-vis the provisions of the applicable tax treaty; that principle of treaty override, as set out in Section 90(2), remains unaffected by these provisions. As we hold so, we make it clear that whether the same position will also apply with respect to Explanations to Section 90 or not is still an open question, uninfluenced by these discussions, as Explanations to Section 90 may perhaps not have the same legal connotations as the sub sections to Section 90. We leave it that for the time being.

Whatever may have been the intention of the lawmakers and whatever the words employed in Section 90(4) may prima facie suggest, the ground reality is that as the things stand now, this provision cannot be construed as a limitation to the superiority of treaty over the domestic law. It can only be pressed into service as a provision beneficial to the assessee. The manner in which it can be construed as a beneficial provision to the assessee is that once this provision is complied with in the sense that the assessee furnishes the tax residency certificate in the prescribed format, the Assessing Officer is denuded of the powers to requisition further details in support of the claim of the assessee for the related treaty benefits. Approving this approach, Hon’ble Punjab & Haryana High Court, in the case of Serco BPO Pvt Ltd Vs Authority for Advance Ruling [(2015) 379 ITR 256 (P&H)], has observed as follows: 32. (Learned counsel’s) reliance in this regard upon the proposed amendment to section 90 of the Act is well founded. It sets at rest the doubt, if any, in this regard. (A) Section 90(4) of the Act as is stood at the relevant time i.e. in respect of the assessment year 2010-11 reads as under:— "90 (4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless [a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory." (B) The Finance Bill, 2013 as introduced in the Lok Sabha on 28.02.2013 was to give effect to the financial proposals of the Central Government for the financial year 2013- 14. Clause 21 of the bill proposed the following amendment:— "21. In section 90 of the Income Tax Act,— (a) to (b)** ** ** (c) after sub-section (4) and before Explanation 1, the following sub-section shall be inserted, namely:— (5) The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in sub-section (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein." The proposed sub section (5) was not implemented. Parliament was obviously, therefore, conscious of the Circular No. 789 of 2000 and the effect thereof, namely, that the certificate of Residence issued by the Mauritian authorities would constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the DTAC accordingly. Though an amendment in the Finance Bill was proposed which would affect the circular, the same was never implemented. (C) The reason for Parliament not implementing the amendment is also evident from the clarification dated 01.03.2013 issued by the Finance Ministry specifically regarding Tax Residency Certificates. It is necessary to set out the entire circular as it is of vital importance. It establishes beyond doubt now that the Circular No. 789 was in full force and ought to have been given effect to. The circular reads as under:— "Finance Ministry Clarification Regarding Tax Residency Certificate (TRC) March 2, 2013

The judicial approval was, therefore, to the use of Section 90(4) in favour of the assessee in the manner set out above. In view of the provisions of Section 90(2), there cannot be any controversy on this aspect. That is qualitatively much different from the stand of the CIT(A) called into question before us. Our research did not indicate any judicial precedent which has approved the interpretation in the manner sought to be canvassed before us i.e. Section 90(4) being treated as a limitation to the treaty superiority contemplated under section 90(2), and that issue is an open issue as on now. In the light of this position, and in

That, however, is not the end of the matter

As learned Departmental Representative rightly suggests, even if in a rather simplistic way, irrespective of whether Section 90(4) applies or not, there has to be reasonable evidence about entitlement of the US entity to the benefits of the Indo US tax treaty. He submits that just a US address cannot per se be sufficient to claim the protection of Indo US tax treaty, and that once the issue about treaty entitlement has been raised by the learned CIT(A), it has to be taken to a logical conclusion. We see merits in this plea. In other words, even if we are to hold that Section 90(4) is inapplicable, we have to, on the peculiar facts of this case, give a finding whether the US entity was entitled to the treaty protection, and that would only be possible when there is some material to come to the conclusion that the US entity was required to be treated as a resident of United States under the provisions of the Indo US tax treaty. Having held that an eligible assessee cannot be declined treaty protection under section 90(2) simplicitor on the ground that he has not complied with the provisions of Section 90(4), it is also important to bear in mind the fact that de hors the statutory provision under Section 90(4), the assessee has to satisfy his eligibility for treaty protection nevertheless and the onus of satisfying the same by any other mode, i.e. other than a TRC, appears to be much more demanding than furnishing of a TRC. To be entitled for Indo US tax treaty benefits in India, a foreign enterprise has to establish that it is a resident of the other contracting state, i.e. the United States. While on this issue, it will be useful to take a look at Article 4(1) of the Indo US tax treaty, which provides as follows:

The purpose of form W9, which is given under US Internal Revenue Code, is for providing the correct TIN to the person who is required to file an information return with the IRS. The information contained on the US IRS website points out that “An individual or entity (Form W-9 requester) who is required to file an information return with the IRS must obtain your correct taxpayer identification number (TIN) which may be your social security number (SSN), individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or employer identification number (EIN), to report on an information return the amount paid to you, or other amount reportable on an information return”. In plain words, it is merely a declaration so as to provide inputs to the tax-deductor for fulfilling reporting obligations to the US IRS. It has no relevance in the present context. It is thus important to appreciate that even from a US tax law and practice perspective, form W 9 is wholly irrelevant in respect of tax withholdings outside

Even on the merits of the contents of form W9, the appellant does not get any relief either. We have noted that form W 9 does state that the US entity is a “C corporation”- an expression which is, in US taxation context, used to distinguish this type of company from transparent entities, as “its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code”, and but then what it does not state is whether the said company is fiscally domiciled in the United States or not. Similarly, the statement made in W9 is that it is not a single member LLC or S corporation so as to have a pass-through status could only be relevant when it is a company fiscally domiciled, for tax purposes, in United States. In any event, W9 is just a statement made by the US entity and it is not supported by any evidences in support of the contents of form W9. In any event, as learned CIT(A) rightly points out, the information pertains to a later year and there is nothing to even indicate, leave aside establish, that this will hold good for the relevant period as well. a change in those facts for different years. Keeping Section 90(4) aside for a minute, even on merits, there is nothing to establish the treaty entitlement of the US entity.

It is difficult to comprehend the conceptual justification for litigation on such a procedural issue. The entire controversy about 90(4) being a limitation to Section 90(2), from the point of view of reasonableness, is a non-issue. Whether Section 90(4) is a legally valid limitation on Section 90(2) or not, a TRC can be obtained by the US entity, as the public information on US IRS website indicates, for a modest user fee of US $ 85 and a statutory form being filed by the US entity. In our humble understanding, whatever its worth, TRC is certainly a far easier mode of discharging the onus about establishing residential status, under a tax treaty, of a foreign enterprise. Yet, we have a litigation including this facet as well.

Learned counsel has thus succeeded in his legal submissions but, for all practical purposes, this success is rather hollow, on the facts of this case, inasmuch as it does not bring any relief, as on this stage, to the assessee tax-deductor. Even when we keep the requirements of Section 90(4) aside, the eligibility of TEI for Indo US tax treaty entitlement is not established, and, therefore, all the erudite arguments of distinguished senior counsel, on the scope of various provisions of Indo US tax treaty are, at this stage, purely academic and wholly infructuous.

In all fairness, however, we must also remain alive to the fact that at no stage was the assessee asked to submit evidences in support of his residential status so as to satisfy the conditions laid down under article 4(1). The Assessing Officer did not deal with this aspect of the matter at all, and simply proceeded to apply law on the assumption that the US entity was entitled to the benefits of the Indo US tax treaty, and while learned CIT(A) was indeed conscientious to take note of this legal requirement, she only asked the assessee to produce a tax residency certificate under section 90(4) which, as we have held earlier in this order, does not dilute the superiority of the treaty law over the domestic law. Even this requisition was made shortly before the hearing was concluded by the learned CIT(A). On these facts, we are of the considered view that the opportunity granted, on this aspect, by the learned CIT(A) to the assessee was less than reasonable and less than fair. We have also noted that there

In the light of these discussions, we are of the considered view that the matter should be remitted to the file of the CIT(A) for fresh adjudication, inter alia, after (i) giving the assessee a fresh opportunity of furnishing evidences not limited to, but including, the tax residency certificate under section 90(4), in support of US entity’s entitlement to the benefits of Indo US tax treaty benefits; (ii) taking into account the information furnished by the assessee with respect to the time spent by the representatives of the US entity and all such other information and submissions as may be filed by the assessee; and (iii) giving the assessee yet another opportunity of hearing while giving effect to these directions.

As the matter is being remitted to the file of the CIT(A) for fresh adjudication, inter alia, on the fundamental aspect of treaty entitlement, it would not be appropriate for us to deal with other questions with respect to the treaty provisions which seem to academic as on this stage. We cannot address ourselves to such academic issues. However, now that the matter is going back to the CIT(A) for fresh adjudication in the terms indicated above, we also deem it proper to add that all the issues will remain open for fresh consideration by the CIT(A) and the assessee is at liberty to raise all such issues as he deem fit and the CIT(A) will dispose of the same, in accordance with the law, by way of a speaking order and after giving assessee a reasonable opportunity of hearing to the parties.

In the result, the appeals are allowed for statistical purposes in the terms indicated above. Pronounced in the open court today on the 21st day of June 2018.