M/S WIFI NETWORKS PVT LTD ,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-17(1)(2), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE

BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA No.943/Bang/2017 Assessment Year : 2011-12 M/s. Wifi Networks P Ltd., The Deputy No. 427, 80 Feet Circular Commissioner of Road, vs. Income Tax, 6th Block, Koramangala, Circle 7 (1) (2), Bangalore – 560 095. Bangalore. PAN: AAACW5293L APPELLANT RESPONDENT Assessee by : Shri B.R. Sudheendra, CA Revenue by : Shri T.N. Prakash, Addl. CIT (DR)

Date of hearing : 01.04.2019 Date of Pronouncement : 05.04.2019

O R D E R Per Shri A.K. Garodia, Accountant Member This appeal is filed by the assessee and the same is directed against the order of ld. CIT(A), Mysore dated 30.06.2016 for Assessment Year 2011-12.

ITA No.943/Bang/2017 Page 2 of 12 learned CIT(A) has erred in confirming the action of the learned assessing officer. 2.3 Further, The learned CIT(A) has erred in concluding that the recipients Mr. Saabwe Paul Kisitu, Mr. Nicholas Lugonju and Mr. Timothy Nsubuga being residents of Uganda had a permanent establishment located in India. 2.4 The learned assessing officer and CIT(A) has erred in not appreciating that the provisions of section 40(a)(ia) are applicable only to the amounts of expenditure that were payable on the date of 31st march of every year. 2.4 On facts and circumstances of the case and law applicable, disallowance of payments made outside India amounting to Rs. 13,92,346 is bad in law and liable to be quashed. 3.1 Prayer:- In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed under section 143(3) be quashed OR IN THE ALTERNATIVE (I) Disallowance of payments made outside India to residents of Uganda amounting to Rs. 13,92,346 be deleted; The appellant prays accordingly.”

ITA No.943/Bang/2017 Page 3 of 12 consultancy services including the provision of services by technical or other personnel but it does not include payments for services mentioned in Articles 14 and 15 of this Convention. He submitted that therefore, before applying article 12(3)(b), it has to be seen as to whether article 14 is applicable or not. He submitted that article 14 is also available on pages 81 and 82 of paper book and it was pointed out that article 14 includes independent personnel services and it includes professional services or other activities of an independent character and it is provided that it has to be taxed in the contracting state of the recipient i.e. Uganda in the present case and it can be taxed in the source country i.e. India only if the assessee is having a PE in the source country i.e. India in the present case or if the assessee has stayed in the source country i.e. India in the present year for a period or periods aggregating 183 days or more in any 12 month period commencing or ending in the fiscal year concerned. He also placed reliance on the Tribunal order rendered in the case of Poddar Pigments Ltd. Vs. ACIT in ITA Nos. 5083 to 5086/Del/2014 dated 23.08.2018. He submitted a copy of this Tribunal order and in particular, our attention was drawn to para 14 of this Tribunal order and it was pointed out that it was held by the Tribunal in this case that article 12 is an omnibus provisions for such income whereas article 14 is a specific provisions related to individuals and it was also held that article 14 is para materia similar to article 7 of the DTAA and there is only difference being that Article 7 applies to all the enterprises of the states whereas the Article 14 applies to individual only who earns such income from source state. It was held that Article 14 is a more specific article applicable to the impugned income of the nonresident, and hence, the same shall be applied and not the General Provision of Article 12 of The DTAA. He submitted that as per this Tribunal order and in the facts of the present case, Article 14 should be applied in the present case and not Article 12. He submitted that once it is held that Article 14 is applicable, the income in question cannot be taxed in India. As against this, the ld. DR of revenue supported the order of CIT(A).

ITA No.943/Bang/2017 Page 4 of 12 5. We have considered the rival submissions. First of all, we reproduce the relevant paras 7 to 7.5 from the order of CIT(A) which are as under. “7. The Twenty-Fourth, Twenty-Fifth, Twenty-Sixth, Twenty- Seventh,Twenty-Eighth and Twenty-Ninth grounds pertain to the paymentmade by the appellant to the following Non-Residents amounting toRs. 13,92,346/=, which was claimed as a deduction but disallowed by the assessing officer. As per the admitted facts of the case,during the previous year relevant to the Asst. Year 2011-12, theAppellant made the followings payments:

Nameof the Person Placeof Amount Business Remitted (Rs.) SaabwePaulKisitu Uganda 820851 NicholasLugonjo Uganda 384540 Timothy Nsubuga Uganda 186955 Total 1392346 As the aforesaid non-residents were residents of Uganda, it wassubmitted that the appellant did not deduct taxes at source beforemaking the aforesaid payments amounting to Rs. 13,92,346/=. Atparagraph 6.1 of the assessment order, the assessing officer heldthat the aforesaid payment represented payment that was in thenature of fees for technical services as defined in explanation 2 tosection 9(1) (vii) of the Act and since the said payment which wasin the nature of fees for technical services was remitted withoutdeducting taxes at source, the assessing officer disallowed thededuction claimed for the expenditure incurred towards those payments by invoking the provisions of section 40(a)(i) of the Act. 7.1 During the course of the appellate proceedings, the authorizedrepresentative made the following submissions in this regard: "As regards payments to M/s. Saabwe Paul Kisitu,Nicholas Lugonjo and Timothy Nsubuga, they are residentsof Uganda and hence the DTAA with Uganda as per Notification: No. GSR 666(E), dated 12-10-2004 issued in terms of Agreementfor Avoidance of Double Taxation and Prevention of Fiscal Evasionwith Uganda will be applicable. As per clause 4 of the Article 12 regarding 'royalties and fees fortechnical services', if the beneficial owner of the royalties or feesfor technical services being a resident of a Contracting State,carries on business in the other Contracting State in which theroyalties or fees for technical services arise, through a permanentestablishment

ITA No.943/Bang/2017 Page 5 of 12 situated therein, or performs in that other Stateindependent personal services from a fixed base situated therein,and the right or property in respect of which the royalties or feesfor technical services are paid is effectively connected with suchpermanent establishment or fixed base. In such case theprovisions of Article 7 or Article 14, as the case may be, shallapply. As the nature of services performed by these persons residing inUganda, to whom the payments have been made are of personalnature, the Article 14 concerning 'independent personal services' may become applicable. And according to the Article 14, theamounts paid to the specified persons will be taxable only in theContracting State i.e. Uganda and not in India as they do not havea fixed base regularly available to him nor his stay was for aperiod aggregating 183 days or more, in India. However, the Article 7 which deals with 'business profits' may beapplied, since the Article 12 dealing with 'royalty and fees fortechnical services' is not applicable. The Appellant Company submits that it is a settled principle that business profit of aresident of a contracting state is not chargeable to tax in the othercontracting state unless the non-resident carried out the business through a PE in India. In the absence of a PE in India, thebusiness profit of the non-resident is not taxable in India.Accordingly, it is submitted that the payments made to M/sSaabwe Paul Kisitu, Nicholas Lugonjo and Timothy Nsubuga, theresidents of Uganda, during the assessment year 2011-12, asretainer fees was also not chargeable to tax in India and thereforethere was no liability to deduct tax at source in respect of thispayment, under section 195 of the Income Tax Act, 1961. Alternatively, it is submitted that the payments of Rs.38,71,485/- towards Retainer Fees were actually made during the previousyear and there was no amount payable as on 31.3.2011 and hence no disallowance under section 40(a)(i) of the Income taxAct, 1961 can be made. We rely on the decision of the ITATSpecial Bench in the case of Merilyn Shipplilg& Transports Vs Addl. CIT (2012) 16 ITR (Trib) 1, where the Special Bench bymajority held, "the provisions of section 40(a)(ia) of the Act areapplicable only to the amounts of expenditure which are payableas on the date 31st March of every year and It cannot be invoked to disallow which had been actually peta during the previous year, without deduction of TDS'.

7.2 The aforesaid submissions made on behalf of the appellant werecarefully considered. At paragraph 6.1 of the assessment order, the assessing officer has given a factual finding to the effect that Mr.Saabwe Paul Kisitu, Mr. Nicholas Lugonjo and Mr. Timothy

ITA No.943/Bang/2017 Page 6 of 12 Nsubugawere handling all the operations of the appellant, including services such, as technical coordination with the members of the Indianteams for the purpose of maintenance, rectification of problems,testing, upgrading/ supporting services to customers, contentproviders etc., that are in. the nature of technical services and therefore the assessing officer held that the payments amounting to Rs. 13,92,346/= made by the appellant without deduction oftaxes at source to Mr. Saabwe Paul Kisitu, Mr. Nicholas Lugonjoand Mr. Timothy Nsubuga, who were the residents of Uganda were in the nature of fees for technical services as defined in explanation2 to section 9(1) (vii) of the Act and accordingly subjected thededuction claimed for that expenditure to disallowance u/s 40(a)(i)of the Act. The Convention between the Government of theRepublic Of India and the Government of tile Republic Of Ugandafor the Avoidance of Double Taxation and for the prevention OfFiscal Evasion with respect to taxes on income states at Clause 3(b) of Article 12 as follows: "The term "fees for technical services" means payment ofany kind in consideration for tile rendering of anymanagerial, technical or consultancy services including theprovision of services by technical or other personnel butdoes not include payments for services mentioned in Articles 14 and 15of this Convention." The facts of the case indicate that the services rendered by Mr.Saabwe Paul Kisitu, Mr. Nicholas Lugonjo and Mr. TimothyNsubuga, residents of Uganda were in the nature of technical and consultancy services. Clauses 1 and 2 of Article 12 of. TheConvention between the Government of the Republic of India andthe Government of the Republic of Uganda for the Avoidance of Double Taxation and for the prevention Of Fiscal Evasion withrespect to taxes on income state as follows: ''1. Royalties or fees for technical services arising in a ContractingState and paid to a resident of the other Contracting State maybe taxed in that other State. 2. However, such royalties or fees for technical services may alsobe taxed in the Contracting State in which they arise, andaccording to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, thetax so charged shall not exceed 10 per cent of the gross amountof the royalties or fees for technical services. " 7.3 When a resident of Uganda earns income from a source in India,the possibility of double taxation arises because India taxes thatincome on the source principle whereas Uganda may tax it on theresidence principle. Generally, following the source based taxation,the Source Country is allocated the right to tax the income arisingtherein. While the Residence Country also taxes the

ITA No.943/Bang/2017 Page 7 of 12 incomefollowing the residence based taxation, the Residence Countrymitigates the effect of double taxation either by way of taxexemption or by way of tax credit. The profits of an enterprise ofone Contracting State are taxable in the other state, only if theenterprise maintains a Permanent Establishment (PE) in the laterstate and only to the extent such profits are attributable to the PE. The profits attributable to a PE are either exempted in State ofResidence or the State of Residence allows credit of taxes paid bythe PE on such profits. To this extent, the taxing jurisdiction by the State of Residence is said to be transferred to the State of Source,where the person needs to file his return of income and complywith the domestic tax laws. 7.4 In a landmark decision in the case of (IT Vs. Vishakhapatnam PortTrust cited in (1983) 144 ITR 146 (AP), on the subject of"Permanent Establishment", the Honourable Andhra Pradesh High Court observed as follows: "The words "PermanentEstablishment" postulate the existence ofa substantial element of an enduring or permanent nature of aforeign enterprise in another, which can be attributed to a fixed place of business in that country. It should be of such a naturethat It would amount to a virtual projection of the foreignenterprise of one country onto the soil of another country. " 7.5 In the case of the appellant, though Mr. Saabwe Paul Kisitu, Mr.Nicholas Lugonjo and Mr. Timothy Nsubuga were the residents ofUganda, their source of income for the technical services renderedby them, was located in India. Therefore, as per Clauses 1 and 2of Article 12 of the Convention between the Government of theRepublic of India and the Government of the Republic of Ugandafor the Avoidance of Double Taxation and for the prevention ofFiscal Evasion with respect to taxes on income, the paymentsamounting to Rs. 13,92,346/= made by the appellant in the nameof 'Retainer Fees' to the residents of Uganda viz. Mr. Saabwe PaulKisitu, Mr. Nicholas Lugonjo and Mr. Timothy Nsubuga forrendering technical services to the appellant company located inIndia ought to have been subjected to deduction taxes at sourcebecause, the permanent establishment (PE) was located in India.” 6. From the above paras reproduced from the order of CIT(A), it is seen that he has discussed only Article 12 and section 9(1)(vii) of IT Act and there is no discussion regarding Article 14. Hence for the sake of ready reference, we reproduce Article 12 and 14 of the DTAA between Uganda and India from pages 81 and 82 of the paper book.

ITA No.943/Bang/2017 Page 8 of 12 “ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, and films or tapes for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub- division, a local authority or a resident of that State. Where, however, the person paying such royalties or fees for technical services, whether he is resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

ITA No.943/Bang/2017 Page 9 of 12 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 14 INDEPENDENT PERSONAL SERVICES 1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State except in the following circumstances, when such income may also be taxed in the other Contracting State : (a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if his stay in the other State is for a period or periods aggregating 183 days or more in any 12-month period commencing or ending in the fiscal year concerned; in that case only so much of the income as is derived from his activities performed in that other State may be taxed in that other State. 2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.” 7. From the above two articles, it is seen that Article 12 specifies that Article 12(3)(b) does not include payments for services mentioned in Article 14 and 15 of this convention. It is also seen that Article 14 is in respect of individual personnel services and it includes professional services or other activities of independent character of the assessee. The ld. DR of revenue has drawn our attention to copy of agreement of the assessee with Mr. Saabwe Paul Kisitu available on pages 129 to 133 of paper book and it was submitted that as per this agreement, this person was to render services for handling

ITA No.943/Bang/2017 Page 10 of 12 all operations including Co-coordinating with Indian Teams for maintaining, rectifying problems testing, upgrading / supporting customers, content providers etc. at Uganda. It was the submission of the ld. DR of revenue that the nature of services specified in the agreement is clearly technical services and therefore, Article 12 is applicable and not Article 14. In our considered opinion, there is no merit in this argument of ld. DR of revenue because Article 14 is applicable for individuals and it includes professional services also. As per the services to be rendered by these three persons as per the agreement on record, it cannot be said that the services being rendered by these persons is not professional services. Professional services may be of technical nature also and only because the professional services are of technical nature, it cannot be said that Article 14 is not applicable. As per the Tribunal order cited by ld. AR of assessee having been rendered in the case of Poddar Pigments Ltd. Vs. ACIT (supra) also, similar issue was decided in favour of the assessee. Para 14 of this Tribunal order is relevant and hence, the same is reproduced hereinbelow for ready reference. “14. According to Article 12 of the DTAA, if the ‘Fees for Technical services’ is arising in India but paid to resident of Germany than such Income may be taxed in Germany. However, if he is beneficial owner of FTS , then such Income may also be taxed in India and according to the laws of India but not more than 10 % of the Gross amount. In the present case, the characterization of Income of Dr. Thiele is correctly made as „Fees for Technical services‟ and he is the beneficial owner of such consideration. Therefore, if the Income falls under Article 12, then it is chargeable to tax @ 10 % in India. Further, if the income as per article 14 is arising out of the fix base in India and if the services provider stays for 120 days or more in India, then such income shall be chargeable as per attribution rules pertaining to the activities or base in India. As Dr. Theile does not have any Fixed Base and does not satisfy the condition of the minimum stay in India, his income cannot be taxed in India but in Germany only as per Article 14 of the DTAA. From the above general analysis, it is clear on plain reading that the income is chargeable to tax under Article 14 as well as article 12 of The DTAA. It is also an established rule of the Interpretation of Treaties that specific or special provision in treaty shall prevail over and take precedence over the general ones. In the present case, the provision of article 14 of the DTAA is more specific as it applies specifically to „professional services‟ provided by the ‘Individual resident’, however, Article

ITA No.943/Bang/2017 Page 11 of 12 12 provides for residents of foreign countries, therefore, Article 12 is broader in scope and general in nature compared to Article 14 of DTAA. Further the meaning of the Term " fees For technical services‟ in Article 12 (4) of The DTAA excludes only income covered under Article 15 i.e. “Dependent personal Services” and not income Covered under Article 14 of The DTAA. Therefore, if there can be many instances of such incomes derived by the individuals which can be characterized as “ Fee For Technical services” may also be covered under Article 12 as well as Article 14 of The DTAA. Only distinguishing feature is that Article 12 is an omnibus provisions for such income where as article 14 is a specific provisions related to individuals. Further Article 14 is para material similar to Article 7 of the DTAA, the only difference being that Article 7 applies to all the enterprises of the states whereas the Article 14 applies to individual only who earn such income from sources state. Therefore, we hold that article 14 is a more Specific article applicable to the impugned income of the nonresident, same shall be applied and not the General Provision of Article 12 of The DTAA. In taking such a view we find support from the Decision of Honorable High courts in CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 ; [1987] 30 Taxmann 549, [2004] 267 ITR 209 (Kar) in AEG AKTIENGESLLSCHAFT v. COMMISSIONER OF INCOME-TAX. Furthermore, we also draw support from the Advance Ruling in Case of Dieter Eberhand Gustav Van Der Mark V CIT 235 ITR 698 (AAR) where it ruled that, if the applicant’s case falls under a more beneficial provision, it would be futile to stretch the interpretation to bring it under some other provision of the treaty or the Income-tax Act. This position is too well established to require any further elaboration. In this Case AAR was rendering advance ruling in identical case where the issue of interpretation of Treaty between India and Germany was involved where in article 12 does not specifically exclude income covered article 14 of the DTAA. Further ld AR has relied up on the Decision of The coordinate benches in case of 86 ITD 384 in case of Graphite India and another decision in case of 73 Taxmann.com 108 where the issue involved was Indo US Tax Treaty, where the Article 12(5)(e) specifically excluded income covered under Independent personal Services , therefore, they do not apply to the facts before us as there is no such specific exclusion in Article 12 of Indo German Tax Treaty.”

ITA No.943/Bang/2017 Page 12 of 12 received by the assessee from these three persons is covered by Article 14 and therefore, same cannot be included in Article 12 because as per Article 12(3)(b), it is specifically provided that the term ‘fees for technical services does not include payments for services mentioned in Articles 14 and 15 of this convention. We hold that in the present case, Article 14 is applicable and therefore, the receipt of these three persons cannot be considered under Article 12(3)(b) and as a consequence, the same is taxable in the country of resident i.e. Uganda and therefore, no TDS was deductible u/s 195 and consequently, disallowance u/s. 40(a)(i) is not justified and therefore, we delete the same.

Sd/- Sd/- (PAVAN KUMAR GADALE) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 05th April, 2019. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.