COOPER STANDARD AUTOMATIVE INDIA PRIVATE LIMITED,CHENGALPUT vs. ACIT, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the Order dated

31.12.2013 of Commissioner of Income Tax (Appeals)(C)-II, Chennai, in

ITA No.390/13-14 for the AY 2003-04 and raised the following grounds:

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2.0 Ground Nos.1 & 2 are general in nature which do not require specific

adjudication.

3.0 Ground Nos.3 & 4 are related to the re-opening of assessment which

is not pressed by Learned Authorized Representative (in short ‘Ld.AR’) of

the assessee. Therefore, Ground Nos.3 & 4 are dismissed as not pressed.

4.0 Ground No.5 is related to the disallowance of professional charges of

Rs.6,52,000/- and Ground No.6 is related to the disallowance of corporate

maintenance charges of Rs.27,55,966/-. Both the disallowances are made

u/s.40(a)(i) of Income Tax Act (in short ‘the Act’) for belated remittance

of the TDS made u/s.195 of Income Tax Act. Ground Nos.7 & 8 are

supporting grounds of the above disallowances.

4.1 During the assessment proceedings, the Assessing Officer (in short

‘AO’) found that the assessee has made the payment of Rs.6,52,000/-

under the head professional charges in March, 2003 and the TDS u/s.195

was deducted on the same date. However, the assessee has remitted the

amount to the Government of India account in November, 2003 which is

beyond the due date specified u/s.200(1) of Income Tax Act.

4.2 Similarly, the assessee has paid a sum of Rs.27,57,966/- towards

corporate Management charges and deducted the TDS u/s.195 but

remitted the same beyond the due date specified u/s.200(1) of the Act.

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Therefore, the AO made the addition of Rs.6,52,000/- towards

professional charges and Rs.27,55,966/- under the corporate

management charges aggregating to Rs.34,07,966/- u/s.40(a)(i) of the

Act.

5.0 Aggrieved by the order of the AO, the assessee went on appeal

before the Ld.CIT(A) and the Ld.CIT(A) confirmed the addition made by

the AO. Therefore, the assessee filed appeal before this Tribunal.

6.0 During the appeal, the Ld.AR of the assessee made two fold

arguments. Firstly the AR argued that as per the provisions of the 40(a)(i)

of the Act, prior to amendment the word used in section was ‘tax has not

been paid or deducted’ and according to the Ld.AR the disallowance

u/s.40(a)(i) is applicable only in the case, where the tax has not been paid

or deducted under Chapter-XVII-B of Income Tax Act. In assessee’s

case, the assessee has deducted the TDS but paid to the Government of

India account in the subsequent year. According to the Ld.A.R, the

assessee has complied with the statute by deducting the tax and hence

the disallowance u/s.40(a)(i) does not arise.

6.1 The second argument of the assessee on this ground is that the

assessee is covered by the DTAA and the Ld.AR invited our attention to

the provisions of DTAA between India, Germany and UK more specifically

to Article-24 of the Indo-German Treaty and Article-26 of the Indo-UK

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Treaty and argued that both the treaties have provided for the non-

discrimination clause for the nationals of one of the Treaty countries will

not be subject to tax in other countries, which is more burdensome to

those foreign nationals than the residents of that country. The assessee

submitted that the provisions of disallowance for non-deduction of tax at

source do not apply to domestic payments in the year under appeal on

similar payments. Therefore, such disallowance cannot be made

applicable to non-domestic payments by virtue of non-discriminatory

clauses in the Treaties. On the other hand, the Ld.DR relied on the orders

of the lower authorities.

7.0 We heard the rival submissions and perused the material placed

before us.

The first argument made by the Ld.AR is Sec.40(a)(i) was amended

and prior to the amendment, the words used in Sec.40(a)(i) was ’tax has

not been paid or deducted’. Thus, according to the Ld.Counsel, it is

sufficient compliance of the statute, if the tax is paid or deducted under

Chapter-XVII-B of Income tax Act. Since the assessee has deducted the

tax, the assessee complied with the provisions of statute and no

disallowance is called for. The assessee also referred to Circular No.7

dated 05.07.2003 in explanatory notes and provisions relating to Direct

Taxes, wherein it was stated that ‘according to the existing provisions

disallowances were attracted for non-payment or non-deduction. Since,

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the assessee has deducted the tax at source and also made the payment

of the TDS no disallowance is warranted.

7.1 We have gone through the provisions of Sec.40(a)(i) before the

amendment which is applicable to the instant case and the same is

extracted as under:

Similarly, after the amendment the relevant Sec.40(a)(i) reads as

under:

Amounts not deductible.

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other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid 51[on or before the due date specified in sub-section (1) of section 139] : 52[Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.]

The provisions of Sec.40(a)(i) as stood prior to amendment by

Finance Act, 2003 prescribe the disallowance for non-deduction or non-

payment. The Proviso to Section clarifies that where the tax has been

deducted but paid in any subsequent year the same will be allowed as

deduction in the year in which tax has been paid or deducted. The

Circular No.7 referred to by the assessee also states the same. Therefore,

for allowing the deduction of the expenditure, not only deduction of tax at

source but also remittance to Government of India account is a mandatory

requirement. The Proviso to section 40(a)(i) makes it very clear that

expenditure is allowed in the year in which the tax has been remitted to

Government account. Thus, the assessee is entitled for claiming the

expenditure in the year in which it was paid. In the assessee’s case,

though the tax was deducted but remitted to the Government account in

the subsequent year. Therefore, the AO has rightly applied the

disallowance u/s.40(a)(i) and the Ld.CIT(A) has confirmed the

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disallowance. The assessee’s argument on this ground is not acceptable

and the same is dismissed.

8.0 The next argument taken by the assessee on the issue of

disallowance in non-discriminating Clause provided in DTAA with Indo-UK

Treaty. For ready reference, we re-produce the Aerticle-24 of DTAA

between India and Germany and Article-26 of Indo-UK treaty which reads

as under:

ARTICLE 24 - Non-discrimination-1: Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to nationals of that other State in the same circumstances and under the same conditions are or may be subjected.” Article 26 of the DTAA between India and UK: ARTICLE 26 - Non-discrimination-2: The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. The impugned payments under consideration are payments made to German/UK nationals. It is the contention of the appellant that both treaties provide that nationals of one of the treaty countries will not be subjected to taxes in the other country which are more burdensome on these foreign nationals than on the residents of that other country. It is the submission of the appellant that the provisions for disallowance for non-deduction of tax at source did not apply to domestic payments in the year under appeal. It is therefore the contention of the appellant that such disallowance cannot be made applicable to the non- domestic payments as well by virtue of the Non-discriminatory clauses in the two treaties.

It is the contention of the assessee that both the Treaties provides

the nationals of the one of the countries will not be subjected to tax which

is more burdensome than on the residents of the other country. The

assessee relied on the decision of the Hon’ble ITAT Delhi ‘A’ Bench in the

case of Millennium Infocom Technologies Ltd. vs. ACIT reported in [2009]

117 ITD 114 in Para No.8.13, 8.16 & 8.17 which reads as under:

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8.13 Another contention of learned Authorized Representative of the assessee is that the assessee is protected under art.26(3) of DTAA. Article 26 of India-US DTAA deals with “Non-discrimination”. Article 26(1) states that nationals of one Contracting State shall not be subjected in other Contracting State to any taxation or any requirement connected therewith which is much more burdensome than it is on the nationals of that other Contracting State. Article 26(2) provides against discrimination in the context of a PE in the other Contracting State. Article 26(3) is a general clause providing for indirect discrimination against a non-resident. It reads as below : 8.16 Now question arises as to whether the resident assessee could take advantage of provisions of art. 26(3) of DTAA. As already observed by us, the provisions of s. 40(a)(i) as it existed prior to its amendment by the Finance (No.2) Act, 2004, w.e.f. 1st April, 2005 and subsequent amendment by the Taxation Laws (Amendment) Act, 2006 with retrospective effect from 1st April, 2006, provided for disallowance of payments made to a non-resident only where tax is not deducted at source at the time of remittance. However, a similar payment to a resident does not result in disallowance in the event of non- deduction of tax at source. Thus, non-resident left with a choice of dealing with a resident or a non-resident in business would opt to deal with the a resident owing to the provisions of s.40(a)(i) of the Act. To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same condition as if the payment is made to a resident. Thus this clause in DTAA neutralizes the rigour of the provision of s.40(a)(i) of the Act. In this regard it would be relevant to refer to the provisions of s. 90(2) of the IT Act, 1961. It reads thus:

8.17 We therefore hold that in view of the provision of art. 26(3) of DTAA, the AO cannot seek to invoke the provisions of s.40(a)(i) of the Act for deduction while-computing the profits and gains of business or profession. A similar view was taken by Tribunal Delhi Bench in the case of International India (P) Ltd. (supra). To sum up, the payments made on account of rentals for hosting of websites on servers are not in nature of interest or royalties or fee for technical services or other sum chargeable to tax in India. CBDT has revised the procedure for deduction of tax at source on remittances made out of the country. The provisions of DTAA are also in favour of the assessee. Accordingly, the assessee was not required to deduct tax at source under s.195 of the Act while making payments outside India. We decide this issue in favour of the assessee.

In Para No.8.16 of the Order cited, the Co-ordinate Bench held that

similar payments in residents does not attract the disallowance in the

event of non-deduction of tax at source. Thus, taxing the amount

u/s.40(a)(i) for non-deduction of tax at source on similar amounts

tantamount to discrimination. Therefore, the DTAA and the decision relied

upon by the assessee for non-discrimination clause squarely applicable in

the assessee’s case and accordingly, we held that the disallowance

u/s.40(a)(i) would not be applicable in the case of the assessee. Hence,

we set-aside the orders of the lower authorities and deleted the addition.

Ground Nos.5 to 8 of the assessee appeal are allowed.

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9.0 Ground No.9 is related to the disallowance of Rs.7,32,960/-

u/s.40(a)(i) of the Act pertains to Server Maintenance Charges and

Ground No.10 is related to the disallowance of Rs.16,20,432/- u/s.40(a)(i)

the Act in respect of testing and development charges. Ground Nos.11 to

14 are supportive arguments to the server maintenance charges and

testing and development charges raised in Ground Nos.9 & 10.

9.1 During the assessment proceedings, the Assessing Officer found that

the assessee made the payment for server maintenance charges of

Rs.7,32,960/- and testing and development charges of Rs.16,20,432/-

and no tax was deducted at source as required u/s.195 of the Act, Hence,

the AO made the addition of Rs.23,53,392/- u/s 40(a)(i) of I.T. Act.

10.0 The assessee went on appeal before the Ld.CIT(A) and the

Ld.CIT(A) confirmed the addition made by the AO.

11.0 Aggrieved by the Order of the Ld.CIT(A), the assessee filed appeal

before this Tribunal.

Appearing for the assessee, the Ld.AR argued that the server

maintenance charges are paid for the usage access of the server

belonging to the parent company based at Germany. All the activities of

the parent company as well as its subsidiary companies based around the

world are routed through the Server. According to the Ld.AR, the Server

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Maintenance Charges are in the nature of reimbursement charges paid to

the parent company for using software related issues and cannot be held

as payment of fee for Technical Services and hence the TDS is not

applicable. The Ld.AR relied on the decision of ITAT, Chennai, in the case

of Cairn Energy Pvt. Ltd., reported in (2010) 2 ITR 38.

11.1 Similarly, in the case of Testing and Development Charges, the

Ld.AR argued that the assessee is using the output of technology without

human intervention. For holding the payment as Fee for Technical

Services(FTS) the element of human intervention is necessary. whereas

in the assesse’s case both for server maintenance and testing and

development charges there is no human involvement and thus the

payment cannot be held as Fee for technical services.

12.0 The nature of the services rendered by the parent company in

respect of Server maintenance and testing and development charges were

elaborately discussed by the Ld.CIT(A) in his Order which is extracted as

under:

Server maintenance: The appellant has submitted that the payments are not in the nature of fees for technical services. These payments were only towards cost of server maintenance shared by the appellant. The server belongs to the parent company of the appellant and is based in Germany. All the activities of the parent company as well as its subsidiaries based around the world (including the appellant) were routed through this server. The server enabled the administration of the Hyperion ERP across all the entities in the group. The activities included periodical data back-up, software up-gradation and renewal, inter-office communications like Messenger and communicator, etc., mail and user ID creation within the server and related backup, internet and intranet, anti-virus kits and trouble-shooting the software related issues. These services were utilized by the parent and the subsidiaries alone and no third party was allowed any usage or access. Based on the usage by each entity, the costs of the server maintenance were apportioned among them.

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It is the submission of the appellant that only actual costs were recovered by the parent company from the group constituents. There was no profit element and therefore no income in the hands of the parent company. As such the appellant submitted that Section 195 is not attracted since there is no income earned at all. Hence no disallowance was warranted.

Reliance has been placed on the decision of the Chennai Bench of the Income tax Appellate Tribunal in the case of Cairn Energy Pty Ltd. v. Assistant Commissioner of Income tax [2010] 2 ITR 38 (Chennai) where it was held that since no income arose out of the payments in the nature of reimbursements, Section 195 was not applicable and therefore the payments could not be disallowed by invoking the provisions of Section 40(a)(i).

Testing and development charges:

These charges were stated to have been paid by the appellant to Hutchinson Italy for the services that they rendered in the vendor location in Italy. The auto components manufactured by the appellant were manufactured in accordance with drawings and were subsequently sent to vendor location in Italy for testing on their efficiency and strength. This testing was largely done on machines and very little of human judgment or skill was involved. The only skill required was knowledge to operate the machines and to take readings. Any shortcoming found in the component was not set right by the testing company, but the component would be sent back to the appellant for rectifying. The only task of the non-resident was to give a report on the performance of the components by giving actual values based on readings against design specifications.

The appellant contended that the mere noting of actual readings against design specifications does not amount to rendering of technical services. The non-resident carried out the testing services in the normal course of its business. There was no involvement of the appellant and no interaction between the appellant and the non-resident apart from obtaining the reports. Moreover, the testing done was normal routine testing not involving any specialized treatment. Therefore, the appellant submitted that the payment was not made for technical services falling within the meaning of technical services envisaged in the DTAA between India and Italy or u/s 9(1)(vii) of the Income tax Act. The charges paid could only be considered as business profits of the non-resident.

The appellant further pointed out that Article 7 of the DTAA between India and Italy provides that the business income of a resident of one country arising from another country is chargeable to tax in the other country only if the entity has a Permanent Establishment in that country, and that too income is chargeable only to the extent of profits attributable to that Permanent Establishment. Hutchison Italy did not have a Permanent Establishment in India to which income from these testing and development activities could be attributed. Hence by virtue of the treaty, there was no income chargeable to tax in India.

The appellant has relied on the decision of the Delhi Bench of the Income Tax Appellate Tribunal in Lufthansa Cargo India (P) Ltd. v Deputy Commissioner Income tax [2004] 91 lTD 133 (Del), the decision of the Bangalore Bench of Income Tax Appellate Tribunal in Wipro Ltd. v Income tax Officer [2003] 80 TTJ (Bang) 191, and the decision of the Madras High Court in Skycell Communications Ltd. & Anr v Deputy Commissioner of Income tax & Anr [2001] 251 ITR 53 (Mad), to submit that mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to fee for technical services’. The appellant has also drawn attention to the decision of the Delhi High Court in Commissioner of Income tax v Bharti Cellular Ltd. [2009] 319 ITR 139(Del) to say that machine cannot be a manager and that fees for technical services would arise only where the technical service were rendered by a human being and not by machine, in the instant case the appellant submitted that human intervention was only to the extent of operating the machine. The studies and reading were automatically obtained from the machine and hence the service was rendered by the machine and not the human being. Consequently this could not be in the nature of fees for technical services.

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13.0 The Ld.AR brought our notice that the AO in the Assessment Order

of the AO stated that the technical fee payable outside India would be

deemed to accrue or arise in India whether or not the non-resident has a

place of business connection or the establishment in India by virtue of

amendment made to explanation to Sec.9(2) by Finance Act, 2007. The

assessee also brought to our notice that the decision of the Hon’ble Delhi

High Court in the case of the CIT v. Bharti Cellular Ltd., in respect of fee

for technical services and also relied on the decision of Skycell

Communications Ltd. & Anr. vs. DCIT & Ors. reported 251 ITR 53 (Mad).

On the other hand, the Ld.DR relied on the lower authorities orders.

14.0 We heard the rival submissions and perused the material placed

before us.

14.1 The Assessing Officer made the addition under the impression that

in respect of services rendered outside India is taxable, even though there

is no permanent establishment in India, by virtue of Amendment to

explanation of Section 9(2) of Income Tax Act the Fee for Technical

Services (FTS) payable outside India would be deemed to accrue or arise

in India and hence TDS is deductible.

14.2 The Ld.AR made Three fold arguments contesting additions made

u/s.40(a)(i) relating to the server maintenance charges and the testing

and development charges, the Ld.AR argued that the payment was not in

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the nature of FTS hence the TDS u/s 195 is not applicable. Further the

payments are covered by the DTAA between India and Italy and according

to the treaty unless the payee has Permanent Establishment(PE) in India

the business profits are not taxable u/s 9(1)(vii) of IT Act. Thirdly the

Amendment to Explanation-2 of Section 9(2) was made by Finance Act,

2007 with retrospective effect from 1976 and the assessee cannot

presume and deduct the tax at source.

15.0 The server maintenance charges are paid for usage of intranet,

internet, mail data backup, etc., located at Germany. The Server is

administered by parent company and the activities support the periodical

data backup, Software upgradation and renewal, Inter-office

communication like Messenger and communicator etc., The main thrust

of the argument of the assessee is that there is no element of human

involvement in case of server maintenance the machines are used for all

the above activities. The output of the technology is used by the

assessee and it was submitted that the it was like using the internet from

the Google website or using the telephone.

15.1 The fee for technical services is chargeable to tax u/s 9(1)(vii) of

Income tax act and the meaning of FTS is given in Explanation-2 of

section 9(1)(vii) reads as under: Explanation 57[2].—For the purposes of this clause, "fees for 58technical services" means any consideration (including any lump sum consi-deration) for the rendering of any managerial, technical or consultancy58 services (including the provision of services of technical or other personnel) but does not include consideration for any

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construction58, assembly, mining or like project undertaken by the recipient58 or consideration which would be income of the recipient chargeable under the head "Salaries".]

15.2 The expression fee for technical services is considered in the

case of Siemens Ltd. vs. CIT(A) by the Hon’ble ITAT, Mumbai, ‘L’ Bench in

142 ITD 1 (Mumbai) as under:

"In the said Explanation the expression "fees for technical services" means any consideration for rendering of any " managerial, technical or consultancy services" . The word " technical" is preceded by the word " managerial" and succeeded by the word " consultancy" . Since the expression " technical services" is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on the Interpretation of Statutes (Twelfth Edition) in the following words (page 289) : " Where two or more words which are susceptible of analogous meaning are coupled together, nosicutur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general." This would mean that the word " technical" would take colour from the words " managerial" and " consultancy" , between which it is sandwiched. The word " managerial" has been defined in the Shorter Oxford English Dictionary, Fifth Edition as : " of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc." The word "manager" has been defined, inter alia, as : " a person whose office it is to manage an organization, business establishment, or public institution, or part of one ;a person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc."

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It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager. 14. Similarly, the word "consultancy" has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. "Consultant" itself has been defined, inter alia, "as a person who gives professional advice or services in a specialized field". It is obvious that the word "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as " ask advice for, seek counsel or a professional opinion from; refer to (a source of information) ; seek permission or approval from for a proposed action" . It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant. 15. From the above discussion, it is apparent that both the words "managerial" and "consultancy" involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word "technical" as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1)(vii) of the said Act. This is so because the expression " technical services" takes colour from the expressions " managerial services" and " consultancy services" which necessarily involve a human element or, what is now a days fashionably called, human interface" This principle has been reiterated several times by various Courts and the Tribunals as have been highlighted by the learned Counsel during the course of hearing. Thus, one has to see whether any kind of human interface or human involvement is there for providing technical services by the PTL in this case.

"5. In the modern day world, almost every facet of one's life is linked to science and technology in as much as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service. When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider, for having used the bus. The electricity supplied to a

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consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the Revenue. Satellite television has become ubiquitous, and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments made to the cable operator. Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. 6. When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as "technical service" for the purpose of section 194J of the Act. 7. The use of the internet and the world wide web is increasing by leaps and bounds, and there are hundreds of thousands, if not millions, of subscribers to that facility. The internet is very much a product of technology, and without the sophisticated equipment installed by the internet service providers and the use of the telephone fixed or mobile through which the connection is established, the service cannot be provided. However, on that score, every subscriber of the internet service provider cannot be regarded as having entered into a contract for availing of technical ser- vices from the provider of the internet service, and such subscriber regarded as being obliged to deduct tax at source on the payment made to the internet service provider. Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that Pehla Testing Laboratory is rendering any kind of technical services to assessee. In our conclusion, we thus hold that payment made by assessee to the PTL in Germany is not in consideration for rendering of any kind of "technical services" either in the nature of managerial or technical or consultancy services. Therefore, it does not fall within the ambit of section 9(1)(vii).

15.3 In the case of Bharti Cellular also the Hon’ble Delhi High Court

examined the fee for technical services in Para No.13-15 as under:

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technical services’ means any consideration for rendering of any ‘managerial, technical or consultancy services’. The word ‘technical’ is preceded by the word ‘managerial’ and succeeded by the word ‘consultancy’. Since the expression ‘technical services’ is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable.

The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:

“Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.”

This would mean that the word ‘technical’ would take colour from the words ‘managerial’ and ‘consultancy’, between which it is sandwiched. The word ‘managerial’ has been defined in the Shorter Oxford English Dictionary, Fifth Edition as:

“of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc.”

The word ‘manager’ has been defined, inter alia, as:

“a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization etc.; a person controlling the activities of a person or team in sports, entertainment, etc.”

It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression ‘manager’ and consequently ‘managerial service’ has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.

ITA No.785/Mds/2016 :- 19 -:

15.4 From the judicial pronouncements discussed above the fee for

technical services involve human element and consideration is for

rendering the managerial, technical and consultancy services.

Consequently, applying the rule of noscitur a sociis the word ‘technical’ as

appearing in Explanation-2 to Section 9(1)(vii) would also have to be

construed as involving human element. But facility provided by the parent

company in the case of server maintenance charges was the usage of

various activities mentioned above and no human interface is involved.

According to the assessee, usage services are utilized by the parent

company and the subsidiary companies alone and no third party was

allowed any usage or access. It was also emphasized that only actual

costs are recovered by the parent company from group constituents and

there was no profit element. The AO and Ld.CIT(A) did not bring any

material to show human involvement in the activities explained by the

assessee. From the above facts it is observed that the assessee is merely

using the technology provided by the parent company and no managerial,

consultancy and technical services are provided by the parent company.

Therefore, we are of the considered opinion that the payment made is not

for FTS and the decisions cited in the above cases relied upon by the

Ld.AR are squarely applicable in the assessee,s case and we agree with

the assessee that the payment was for reimbursement of expenses and in

reimbursement of expenses, no tax is deductible u/s.195 of IT Act as held

by this Tribunal in Cairn Energy Pvt. Ltd. v. Assistant Commissioner of

Income tax [2010] 2 ITR 38 (Chennai). Accordingly, we delete the

ITA No.785/Mds/2016 :- 20 -:

addition made by the AO and set-aside the orders of lower authorities.

The assessee’s appeal on server maintenance charges is allowed.

16.0 In respect of testing and development charges, the payment was

made to Hutchinson Italy for the services rendered in the Vendor location

in Italy. The Auto components of Power steering system consisting of

three hoses ‘suction line, pressure line, and Return line’ are tested for • Hose Burst pressure • Noise Turning • Impulse testing • Brazing joint strength • NVH testing and • Durability

16.1 The assessee company manufactures the parts according to

drawing and specifications and designs of the company and subsequently

sent to Vendor location in Italy for testing on their efficiency and strength.

The Ld.A.R contended that the testing was largely done on machines with

very little of human judgment or skill. The only skill required was

knowledge to operate the machine and to take readings. The only task of

non-resident was to give a report on the performance of component by

giving actual values based on readings and design specifications.

16.2 The activity of testing, operating of the machine and noting of actual

reading , whether it suits to the design specifications or not is a

specialized activity only a technical person can do but not the machines

alone. The machine cannot discharge such functions and human expert

ITA No.785/Mds/2016 :- 21 -:

knowledge only can decide whether the parts are acceptable or not.

Beginning from the activity of sending the auto parts to the activity of

testing and development the human intervention and skill is necessary.

Mere machine operator cannot decide whether the auto parts are as per

the specifications and drawings or not? Therefore we are unable to agree

with the Ld.AR that the services are not in the nature of FTS and hold that

the payment is made for technical services.

16.3 Ld.AR argued that the assessee is covered by DTAA and as per the

Article-7 of DTAA between India and Italy only profits of the business are

chargeable to tax if the entity has a permanent establishment in that

country. In this case, the parent company has no permanent

establishment in India and hence no tax is required to be deducted.

16.4 The argument of the assessee is not acceptable since the Fee For

Technical services are covered by Article-13 of the DTAA (and not by

article -7) which reads as under:

ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and 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 and 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 20 per cent of the gross amount of the royalties or fees for technical services. 3. 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 film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

ITA No.785/Mds/2016 :- 22 -:

16.5 The assessee submitted that the services are rendered outside India

and to tax the income under section 9(1)(vii) of IT act in the year under

consideration the services should have been rendered in India and utilized

in India. The explanation to section 9(2) was introduced in 2007 with

effect from 1976 and the Assessment year under consideration is 2003-04

assessee cannot predict the amendment and deduct the TDS which is an

impossible task.

16.6 The payment was made for FTS and it is taxable as per the IT Act

and also as per the DTAA as per our discussion in the preceding

paragraphs of this order. However, the services are rendered outside India

and utilized in India. As per the decision of Hon’ble Supreme Court relied

ITA No.785/Mds/2016 :- 23 -:

upon by the Ld.AR in the case of Ishikawajima-Harima Heavy Industries

Ltd v/s DIT (2007) (288 ITR 408) , clarified that despite the deeming

fiction in section 9, for any such income to be taxable in India, there must

be sufficient territorial nexus between such income and the territory of

India. It further held that for establishing such territorial nexus, the

services have to be rendered in India as well as utilized in India. The

explanation to section 9(2) was introduced by Finance Act 2007

w.e.f.1976 and as on the date of assessment there was no provision to tax

the FTS rendered outside India and hence we agree with the Ld.A.R that

no tax is deductible u/s 195 and consequent disallowance is not called for.

This view is supported by the Co-ordinate Bench of ITAT (MUMBAI BENCH)

'L' (Mum.) Channel Guide India Ltd. v. Assistant Commissioner of Income-

tax, Circle 4(1) relied up on by the Ld.A.R. The respected coordinate

bench in the decision supra held as under:

ITA No.785/Mds/2016 :- 24 -:

sec.40(a)(i). In that view of the matter, we delete the disallowance made by the AO u/s.40(a)(i) and confirmed by Ld. CIT (A) and allow ground no.1 of the assessee's appeal.

Therefore, we hold that the payment made by the assessee for FTS

for the services rendered outside India are not taxable under section

9(1)(vii) of I.T. Act in the assessment year under consideration and the

disallowance is not called for and we delete the addition made by the AO

and set-aside the lower authorities orders. The assessee’s appeal on this

issue is allowed.

17.0 Ground No.15 is with regard to the levy of interest u/s.234 B which

is consequential in nature and no arguments are advanced by the

assessee. Therefore, this ground is dismissed.

18.0 In the result, the appeal of the assessee is allowed.

Order pronounced in the Open Court on 12th April, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) ("ड.एस. सु�दर $संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER चे�नई/Chennai, 5दनांक/Dated: 12th April, 2017. TLN आदेश क0 .�त$ल6प अ7े6षत/Copy to: 4. आयकर आयु8त/CIT 1. अपीलाथ-/Appellant 5. 6वभागीय .�त�न�ध/DR 2. ./यथ-/Respondent 6. गाड* फाईल/GF 3. आयकर आयु8त (अपील)/CIT(A)