DALMIA CEMENT (BHARAT) LTD.,NEW DELHI vs. ITO (INTERNATIONAL TAXATION), NEW DELHI

This appeal is preferred by the assessee against order dated 30.12.2015 passed by the Ld. Commissioner of Income Tax (Appeals)-42, New Delhi (CIT{A}) for Assessment Year 2011-12.

Dalmia Cement Bharat Ltd. vs ITO 2.0 The brief facts of the case are that as per the information available with the Income Tax Department, it was seen that the assessee had made remittances to foreign countries and in respect of some of the remittances tax had not been deducted at source by the assessee or had been deducted at incorrect rates. Accordingly, the case was selected for inquiry and notice was issued to the assesee requiring the assessee to provide the desired information. The assesee was asked to explain as to why the assessee had not deducted tax at the rates provided in section 206AA of the Income Tax Act, 1961 (hereinafter called ‘the Act’) as it was claiming the benefit of rates provided in the Act instead of the prescribed rate in the Double Taxation Avoidance Agreement (DTAA) between India and USA in respect of remittance of Rs. 74,19,732/- sent outside India as payment to M/s. Dragon Fly LLC. The Assessing Officer (AO) was of the opinion that there was a liability on the assessee company to deduct tax at source @ 15% instead of 10.30% as had been done by the assesee. It was the assessee’s submission before the AO in response to the show cause notice that the assesee was entitled to the benefit of section 90(2) of the Act and the assessee’s

Dalmia Cement Bharat Ltd. vs ITO liability was to deduct the tax at source at the rate which was lower of either (i) the rate prescribed in section 115A (1)(b)(BB) of the Act or (ii) the rate prescribed of Article 12 of DTAA between India and USA. It was further submitted by the assessee that since the rate of tax was 10% in section 115A(1)(b)(BB) and 15% as per Article 12 of DTAA, the assessee had made a choice to deduct tax @ 10% plus 3% on account of educational cess as it was more beneficial to the assessee. However, the AO was of the opinion that the assessee could have taken the benefit of deducting tax at a lower rate only if the payee i.e M/s. Dragan Fly LLC had communicated its Income Tax PAN allotted by the Income Tax Department in India to the assessee company. It was further observed by the AO that since the same had not been intimated, the assessee was to be visited with a liability to deduct tax at source @ 20%. The AO went on to hold the assessee company in default and created a liability of Rs. 4,88,219/- towards liability of differential tax and interest.

2.1 The assessee’s appeal before the Ld. CIT (A) was also dismissed. Now, the assesee is before the Tribunal challenging

Dalmia Cement Bharat Ltd. vs ITO the action of the Ld. CIT (A) by raising the following grounds of appeal:

1. That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has grossly erred in holding that the services rendered by Dragon Fly LLC to the appellant company are chargeable to tax in India as they are in the nature of consultancy services covered under the definition of Fees for included services" within the meaning of the said term given in paragraph 4 between India and USA as Dragon Fly LLC has developed and transferred of Article 12 of the Double Taxation Avoidance Agreement entered into technical plan to the appellant company.

2. That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has grossly erred in not appreciating the fact that the information provided by Dragon Fly LLC to the appellant company does not amount to development and transfer of technical plan or technical design to the appellant company as a copyright or licence enabling it to use the same exclusively in the course of its business transactions.

3. That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has grossly erred in directing the Assessing Officer to take the applicable rate u/s 195 of the Act at 20% as provided u/s 206AA of the Act for the purposes of deduction of tax at source from payment made by Dalmia Cement Bharat Ltd. vs ITO the appellant company to M/s. Dragon Fly LLC instead of the rate of 10.30% at which appellant deducted the tax at source, due to procedural default made in terms of the provisions of section 206M of the Act.

4. That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has grossly erred in enhancing the tax liability of the appellant company without issue of show cause notice and without affording it an opportunity of being heard in contravention of the principle of natural justice.

5. That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has grossly erred in holding that the provisions of section 206AA of the Act overrides all other provisions of the Act including the beneficial provisions contained in section 90(2) of the Act and those contained in Double Taxation Avoidance Agreements entered into between India and other countries for avoidance of double taxation on the same income.

6. That on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has grossly erred in holding that the provisions of section 90(2) of the Act are not applicable in the case of the appellant company as it is a resident and therefore, the appellant is not covered under the provisions of Indo -USA DTM.

Dalmia Cement Bharat Ltd. vs ITO 7. That on the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has grossly erred in holding that for the purposes of grossing up of the income payable to Dragon Fly LLC u/s 195A of the Act has to be done @ 20% provided in section 206M of the Act and not at the rates in force during the relevant financial year.

are without prejudice to one another.

11. That appellant craves leave to add to, or vary, any of the grounds of appeal if it becomes necessary to do so in the interest of justice.” 3.0 The Ld. Authorised Representative submitted that Dragon Fly LLC, USA was hired by the assessee company (DCBL) to provide advisory services regarding financial advice/services relating to various financing strategies available for growth. These mainly entailed discussions regarding innovative financing concepts, risks attached to various modes of financing including

Dalmia Cement Bharat Ltd. vs ITO quantification to enable clear risk appetite decision making ete. It was submitted that the main scope of work ultimately boiled down to identification of various approaches available to DCBL for financing purchase of new cement plants through various supplier partnership options. It was further submitted that as the tax on the aforesaid payment was to be borne by the assessee company, tax withholding rate was finalized as per the provision of section 195 A of the of the Act i.e. withholding tax rate was determined by grossing up the payment. It was submitted that Section 90(2) of the Act provides the option to an assessee whose income is doubly taxed, to take advantage of either the provisions of the Act or the provisions of DTAA entered into by the Central Government with Government or specified territory, whichever is beneficial. It was also submitted that section 90 of the Act overrides all other provisions of the Act including charging provision under section 4 of the Act. This is, inter alia, for the reason that section 90 aims to give effect to international fiscal agreements entered into between India and other Governments. The Constitutional mandate backing these treaties requires the provisions of the Indian tax laws to give way to the treaty law.

Dalmia Cement Bharat Ltd. vs ITO The Ld. AR submitted that in view of the position stated above, the Company applied the rate of deduction of tax of 10% provided under section 115A of the Act from the payment made by it to Dragon Fly LLC as this rate was lower than the rate of deduction of tax of 15% provided in the DTAA with USA as it was beneficial to the recipient in terms of the provisions of section 90(2) of the Act.

3.1 The Ld. AR further stated that the AO in his order held that he is not disputing the fact that the beneficial provisions contained in section 90(2) of the Act will not apply but according to him, since the recipient did not have Permanent Account Number, the provisions of section 206AA of the Act would come into operation and as per the said section, the rate under the Income Tax Act for the purposes of the aforesaid remittance will be 20% and not 10% as prescribed under section 115A (1) (BB) of the Act, as applied by the assessee company. It was further stated that, accordingly, the AO held that the recipient will be entitled to claim the beneficial provisions contained in section 90(2) of the Act but for that purposes, the comparison has to be made between the rate of tax of 20% u/s 206AA of the Act and Dalmia Cement Bharat Ltd. vs ITO article 12 of DTAA between India and USA and since, the rate of 15% provided under article of DTAA is more beneficial to the recipient, the assessee company should have deducted tax @ 15% provided under the Article 12 of DTAA.

3.2 It was submitted by the Ld. AR that Section 195 of the Act casted an obligation on the taxpayer to withhold tax on the sum payable to non-residents, if such sum is chargeable to tax in India in the hands of non-resident. The tax is required to be withheld as per the rates mentioned under the Act or under the treaty entered between India and country of residence of non- resident recipient, whichever is more beneficial to the non- resident. It was argued that in the instant case, DCBL was required to withhold tax on the payments to be made to overseas consultants if such payments are chargeable to tax in India in the hands of such overseas consultants.

3.3 It was further submitted that as per Article 12(3) of the DTAA with USA, "fees for included services" (FTS) means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including

Dalmia Cement Bharat Ltd. vs ITO 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- haw, or processes, or consist of the development and transfer of a technical plan or technical design .

3.4 The Ld. AR further argued that the scope of the term 'make-available' has been elaborated under the protocol to India- US tax treaty. The Ld. AR submitted that basically the following aspects need to be considered for interpreting make available:

(a) Technology will be considered to be 'made available' when the person acquiring the service is able to apply such technology on his own.

(b) The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service.

Dalmia Cement Bharat Ltd. vs ITO 3.5 It was, thus, submitted that "make available" means that the recipient acquires a means to an end, i.e. he acquires the technical knowledge, experience, skills, know-how or processes from the provider which acts as a means and enables him to use the same for achieving a further end.

3.6 It was submitted that in the present context, Dragon Fly LLC has provided information regarding various financing strategies available for growth like the various modes of financing CAPEX for new proposed plants to DCBL including financing the CAPEX through supplier finance under mode of supplier partnership option. They have also given details in respect of risk associated with same. Our attention was drawn to the copy of invoice placed in the Paper Book and it was submitted that a bare perusal of the bill raised by Dragon Fly LLC along with the scope of work would reveal that the services to be rendered by them would not equip the service recipient (i.e. DCBL) to acquire technical knowledge/skill/experience so as to enable it to undertake such services independently on its own in future. It was submitted that Dragon Fly LLC has promised to Dalmia Cement Bharat Ltd. vs ITO utilize its contacts/information while providing services, which are not in public domain.

3.7 The Ld. AR further submitted that the Hon’ble Karnataka High Court in the case of De Beers India Minerals Pvt. Ltd (2012-TIOL-17-HC-KAR-INTL) held that "making available" would apply only if the technical knowledge, experience, skills remain with the recipient even after the contract ends and can be deployed independent of the provider. It was submitted that in view of the above, the 'make available' test is not satisfied in respect of payment to Dragon Fly LLC and hence, consideration received by them from DCBL will not qualify as FTS under the India-USA tax treaty. Accordingly, the consideration received by Dragon Fly LLC from DCBL is not at all taxable in India under the India-USA tax treaty. It was argued that the Ld. CIT (A) had erred in law in holding so.

3.8 The Ld. AR reiterated that DCBL was not at all under any obligation to withhold tax at source while making payment to Dragon Fly LLC as the said payment was not at all chargeable to tax in India. Accordingly, provisions of Section 206AA were also not applicable to aforesaid payment as the said

Dalmia Cement Bharat Ltd. vs ITO section is attracted only if Tax is required to be Deducted at Source under Chapter XVIIB as it is to be applied only for determining the rate of deduction of tax at source and not for determining the chargeability under the Act. It was argued that the AO had grossly erred in holding DCBL as "assessee in default" and in coming to conclusion that the assessee should have deducted tax @ 15%.

3.9 It was further submitted that without prejudice to the above contentions and without admission, it is submitted that the company, as a matter of abundant precaution, decided to deduct tax at source as per provision of section 115A (1} (BB) of the Act read with section 90(2) of the Act. It was reiterated that as per section 90(2) of the Act, the taxability of non-resident is governed by the provisions of the Act or respective tax treaty, whichever is more beneficial to the non-resident. It was further submitted that accordingly, DCBL has not made any default in deduction of tax at source on payment to be made to Dragon Fly LLC.

3.10 The Ld. AR also drew our attention to the relevant provision of the DTAA between India and USA. The Ld. AR also Dalmia Cement Bharat Ltd. vs ITO placed reliance on the judgment of the Hon’ble Delhi High Court in the case of Danisco India Private Limited vs. Union of India and others in WP(C)5908/2015 vide order dated 5.2.2018 and contended that it has been laid down that the Double Taxation Avoidance Agreement acquires primacy in such cases where reciprocating states mutually agree upon acceptable principles for tax treatment and that the provision in section 206AA of the Act has to be read down to mean that where the deductee whose Government has entered into a Double Taxation Avoidance Agreement with India , the rate of taxation would be as dictated by the provision of the treaty. Reliance was also placed on order of the special bench of the ITAT Hyderabad in the case of Nagarjuna Fertilisers & Chemicals Ltd. vs. ACIT in and 1188/Hyd/2014 and reported in 2017 185 TTJ wherein it had been held that charging provisions control and override the machinery provisions dealing with tax deduction at source and similarly the provisions of DTAA, by virtue of section 90(2) of the Act to the extent more beneficial to the assesee, override the provisions of domestic law. It was submitted that the Hyderbad Special Bench went on to hold that since section 206AA falls in Dalmia Cement Bharat Ltd. vs ITO Chapter XVII-B dealing with tax deduction at source, it shows that the treaty provisions which override even the charging provision of domestic law by virtue of section 90(2) would also override the machinery provisions of section 205AA irrespective of non obstante clause contained therein and the same is required to be restricted to that extent and read down to give effect to the relevant provisions of DTAA which are overriding being beneficial to the assesee. It was further submitted that even ITAT Ahmadabad Bench in the case of Uniphos Environtronic (P) Ltd. vs DCIT reported in 2017 79 Taxman .com 75 (Ahmadabad Tribunal had adjudicated on identical lines.

3.11 The Ld. AR also submitted that all these judicial precedents were pronounced subsequent to the order of the Ld. CIT (A) and, therefore, he did not have the benefit of these judgements.

4.0 In response, Ld. Sr. DR placed reliance on order of the lower authorities.

5.0 We have heard the rival submissions and have also perused the material on record. The essential questions for adjudication by us are (i) whether the Ld. CIT (A) was correct in 15

Dalmia Cement Bharat Ltd. vs ITO holding that the services rendered by Dragon Fly LLC to the assessee company was chargeable to tax in India as they were in nature of consultancy services covered under the definition of fees for included services within the meaning of the said term given in paragraph 4 of Article 12 of Indo-US DTAA; and (ii) whether the provision of section 206AA would override the provision of section 90(2) and the Indo-US DTAA.

5.1 As far as the first question is concerned it is seen from records that Dragan Fly LLC has provided information regarding various financing strategies available for growth like the various modes of financing CAPEX for new proposed plants to DCBL including financing the CAPEX through supplier finance under mode of supplier partnership option. As per the invoice raised by the Dragon Fly LLC, it is evident that the services rendered by them would not equip the service recipient i.e. the assessee company to acquire technical knowledge/skill/ experience so as to enable the company to undertake such services independently on its own in future. The Hon’ble Karnataka High Court in the case of CIT vs. De Beers India Minerals (P.) Ltd. reported in 2012 21 taxman.com 214

Dalmia Cement Bharat Ltd. vs ITO (Karnataka) had held that making available would apply only if the technical knowledge, experience, skills remain with the recipient even after the contract ends and can be deployed independent of the provider. Therefore, after going through the records and the submissions/evidences placed before the Ld. CIT (A) by the assesee (which are contained in pages 1 to 155 of the assessee’s paper book), we are of the considered opinion that ‘making available’ is not satisfied in respect of the payment to Dragon Fly LLC and, therefore, the consideration received by them from the assesee company will not qualify as fee for technical services under the Indo-US treaty.

5.2 Secondly, now it is settled law that provisions of section 206AA do not have an overriding effect and the provisions of treaty will override section 206AA to the extent they are beneficial to the assesee by virtue of 90(2) of the Act. The judgment of the Hon’ble Delhi High Court in the case of Danisco India Private Limited vs. Union of India and others (supra) has explicitly laid down that DTAA acquires primacy over the provision of section 206AA and that section 206AA has to be read down and the rate of taxation to be applied would be as dictated

Dalmia Cement Bharat Ltd. vs ITO by the provision of the treaty. The Special Bench of ITAT Hyderabad in Nagarjuna Fertilizers & Chemicals Ltd vs. ACIT (supra) has also rendered a decision on similar lines. Therefore, in view of the settled judicial precedent, as mentioned above, we are unable to agree with the adjudication arrived at by the Ld. CIT (A) and we set aside the order and direct the AO to delete the demand.

6.0 In the final result the appeal of the assessee stands allowed.