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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI N.V.VASUDEVAN, JM & DR. A.L.SAINI, AM
आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: The captioned appeal filed by the Assessee, pertaining to Assessment Year 2010-11, is directed against the fair order of assessment dated 26.5.2015 passed by the Deputy Commissioner of Income-Tax, Circle 11(1), Kolkata u/s.144C(13) read with Sec.143(3) of the Income Tax Act, 1961, (hereinafter referred to as the ‘Act’), which incorporates the directions of the Dispute Resolution Panel (DRP), Kolkata, dated 30.12.2014.
The Assessee is a company. It was incorporated on 3.10.2008 under the Companies Act, 1956 for the purpose of carrying on construction of integrated steel plant. The Assessee is a wholly owned subsidiary of Ershishanye Construction Group Co. Ltd. (ECGCL), which is a company incorporated under the laws of China and a tax resident of People’s Republic of China. ECGCL entered into an Agreements dated 1st July, 2008, & 28.7.2008 with Electrosteel Integrated Limited with respect to onshore services and construction contract for construction of an integrated steel plant project, at Bokaro, Jharkhand. By tripartite agreements all dated 31.10.2008 between the Assessee, ECGCL and Electrosteel Integrated Ltd., it was agreed that the onshore services and construction contract would be carried out in India by the Assessee instead of ECGCL.
2 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. 3. For the purpose of steel plants, the Assessee wanted to use services of engineers from China. The Chinese Engineers had to be trained in English language, Safety Standards which is to be followed by steel plants in India as per Indian law and to attend Visa interview. Hunan Province Overseas Working Training Centre (hereinafter referred to as “Hunan”), an entity in China is engaged in providing services with regard to training for the purpose of communicating in English language, safety standards to be followed for construction of steel plant, answering questions that may be asked before issue of Visa by other countries. The Assessee engaged the services of Hunan for the purpose of training Engineers in China conversant in the setting up of steel plants. An Agreement dated 12.10.2008 was entered into between the Assessee and Hunan. The nature of services to be rendered by Hunan under the aforesaid agreement is set out in Schedule 1 to the said Agreement which is as follows:
“Schedule 1 to Agreement dated 12th October, 2008 1. The Second Party shall train the persons English language to facilitate communication in India. 2. The Second Party shall train the persons India safety rules required to be followed for working in India in construction of steel plant. 3. The Second party shall provide the persons broad specification requirements and work operating essentials as per the Indian standards for working in India in construction of steel plant. 4. The second party shall train the persons to appear for visa interview and carry out mock visa interview. 5. The second party shall on completion of the training conduct tests and issue training certificate to qualifying persons as per local laws of China for employment visa.”
The consideration for rendering of the aforesaid services payable to Hunan of Rs.4,20,09,163/- was paid by ECGCL. There was an agreement between the Assessee and ECGCL dated 10.5.2009 whereby ECGCL agreed to make payment of certain expenses of the Assessee which the Assessee agreed to reimburse ECGCL. It is not in dispute that the consideration payable to Hunan was paid by ECGCL and the Assessee in turn paid ECGCL the sums ECGCL had paid to Hunan.
3 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. 4. Apart from the above, the Assessee under an Agreement dated 24.06.2009
engaged the services of Hunan Junwei law Firm (hereinafter referred to as
“Hunan Law”), an entity in China having its registered office at 75 Wuyi Road,
Changsha City, Hunan, China. The purpose of this agreement was to ensure
that the onshore construction contract between the Assessee and
M/s.Electrosteel Integrated Ltd., is performed in accordance with the laws of
India. The nature of services to be rendered by Hunan Law as per this
agreement is as follows :- “1. Party B's Service Scope
1.1 Legally advise and design for Party's decisive issue about production, management and operation and make legally feasible study. 1.2 Provide legal guidance to Party A for incorporating company in India. 1.3 Guide and train India labor laws and polices. 1.4 Guide and train India tax laws and polices. 1.5 Assist in Party A to make out internal management rules arid standardize Party A's internal organization and management. 1.6 Assist in Party A to manage economy contract and other contracts and also supervise the performance and execution. 1.7 Provide law training to Party A's staff to portend law risk. 1.8 Issue the lawyer's letter to concerning company or individual as to protect Party A's legitimate rights and interests. 1.9 Other legal service required by Party A.
Legal Service commissioned by Party B
2.1 As Defender or Attorney in concerning criminal proceedings. 2.2 As Attorney in civil, economic, administrative proceedings or arbitration proceeding involved by party A.”
The consideration for rendering of the aforesaid services payable to Hunan law of Rs.14,00,000/- was paid by ECGCL as per the agreement between the Assessee and ECGCL dated 10.5.2009 whereby ECGCL agreed to make payment of certain expenses of the Assessee which the Assessee agreed to reimburse ECGCL. It is not in dispute that the consideration payable to Hunan Law was paid by ECGCL and the Assessee in turn paid ECGCL the sums ECGCL had paid to Hunan Law.
4 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. 6. The Assessee did not deduct tax at source at the time of making payment of the aforesaid sums to ECGCL. The question before the AO was as to whether there was an obligation to deduct tax at source at the time of making payment by the Assessee to ECGCL and consequently, the said amount could not be allowed as a deduction in computing “Income from Business”, for the failure of the Assessee to deduct tax at source by invoking the provisions of Sec.40(a)(i) of the Act. Sec.40(a)(i) of the Act which reads thus:
“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— ( a) in the case of any assessee— ( i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or 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 during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of Section 200:”
It can be seen from the aforesaid provisions that the said provision is attracted when the payment made by any person towards interest, royalty, fees for technical services or other sum is chargeable under this Act, which is payable outside India on which tax is required to be deducted at the time of payment under Chapter XVIIB of the Act. Both the AO and the DRP held that the payments in question was in the nature of “Fees for Technical Services” (FTS) and therefore the Assessee was under an obligation to deduct tax at source and since, the Assessee failed to deduct tax at source the sums in question could not be allowed as deduction in computing “Income from Business” as provided under the provisions of Sec.40(a)(i) of the Act. The directions of the DRP in this regard were incorporated by the AO in his fair order of assessment wherein the aforesaid amounts were disallowed and added to the total income of the Assessee. Aggrieved by the aforesaid additions made in the
5 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. fair order of assessment by the AO, the Assessee has preferred the present appeal before the Tribunal.
Before proceeding to discuss the contentions put forth by the Assessee before us, it is necessary to notice that the obligation to deduct tax at source on the part of the Assessee will arise only if the payment in question is considered as a payment made by the Assessee to Hunan and Hunan Law and not as a mere reimbursement by the Assessee to ECGCL. Further the sums paid to Hunan and Hunan Law should be chargeable to tax in the hands of Hunan and Hunan Law respectively in India under the Act. Since Hunan and Hunan Law are non-residents in India and tax residents of the People’s Republic of China, the sums in question will be chargeable to tax in their hands in India only if the sums are considered as payment made towards FTS under the India-China DTAA. Therefore the main issue to be decided in this appeal will be as to whether the payments made by the Assessee to Hunan and Hunan Law through ECGCL would constitute FTS within the meaning of the India China DTAA. We will now deal with the grounds of appeal and the arguments advanced before us.
The grounds of appeal raised by the Assessee before the Tribunal reads thus: “1. That on the facts and circumstances of the case, the Learned Dispute Resolution Panel and the Learned Assessing Officer erred in disallowing reimbursement of employee training expenses of Rs.42,009,163/- under section 40(a)(ia) of the Act, without considering the fact that the same is allowable as per the Act and the India-China Double Taxation Avoidance Agreement.
That on the facts and circumstances of the case, the Learned Dispute Resolution Panel and the Learned Assessing Officer erred in law in disallowing reimbursement of legal & consultancy expenses of Rs.1,400,000/- under section 40(a)(ia) of the Act, without considering the fact that the same is allowable as per the Act and the India-China Double Taxation Avoidance Agreement.
That the appellant craves leave to add, alter and amend the grounds of appeal during the course of hearing.”
6 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. 10. We shall first take up for consideration Gr.No.1 with regard to payment made to Hunan. The issues that need to be analyzed with regard to the aforesaid ground of appeal are as follows:- i) Whether the payment by assessee to ECGCL holding company in China is purely reimbursement which do not attract TDS provisions? ii) Whether the payment in question constitutes FTS or business profit in the hands of Hunan? If it is held to be not FTS and was in the nature of business profit then there is no TDS obligation because Hunan, admittedly does not have Permanent Establishment (PE) in India and as per Article 7(1) of India China DTA, the business profit is taxable in the other state only if the enterprise of contracting state carries on business through PE in India. iii) Whether, as per India- China DTA, the Fees for Technical Services (FTS) can be charged to tax in India, only if the services are rendered in India. iv) What is the effect of amendment to Section 9(1)(vii) by the Finance Act 2010 with retrospective effect from 1st June, 1976 in the contex of Section 40(a)(ia) of the Act. 11. So far as issue No.( i) is concerned, the payment in question cannot be regarded as purely reimbursement of expenses incurred by ECGCL for and on behalf of the Assessee so as to take the payment in question out of the rigors of the provisions of Sec.40(a)(i) of the Act. The undisputed facts are that the training of engineers in China was done by Hunan for and behalf of the Assessee and for the specific purpose of execution of the onshore services and construction of steel plant in India. The Assessee was bound to make payment for such services to Hunan. The fact that ECGCL made payment one behalf of the Assessee which was subsequently repaid by the Assessee to ECGCL will not make the payment in question as pure reimbursement which did not involve any element of income in the hands of the recipient. In fact on identical facts the Mumbai “L” Bench of the Tribunal in the case of C.U.Inspections (I) Pvt. Ltd. Vs.
7 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. DCIT ITA No. 577/Mum/2011 order dated 6.3.2013 held that if the Indian
subsidiary company incurs expenses or makes purchases or avails any service
from some third party abroad and the payment to such third party is routed
through its holding or related company abroad, the provision for deduction of tax
at source apply as if the assessee has made the payment to such independent
party de hors the routing of payment through the holding company. The
remission of amount to the holding or related company for finally making
payment to the third person will be considered as payment to third party. It
cannot be termed as reimbursement of expenses to the holding company. The
Mumbai Tribunal further held that if the contention of the Assessee is accepted
and the payment to third party, routed through its related concern, is considered
as reimbursement of expenses to the related party then probably all the relevant
provisions in this regard will become redundant. We are of the view that the
decision rendered by the Mumbai Bench would apply to the facts of the present
case. We therefore hold that the payments in question cannot be regarded as
mere reimbursement of expenses by the Assessee to ECGCL which do not
attract the provisions of Sec.40(a)(i) of the Act.
As far as issue No.(ii) is concerned, the question for consideration is as to
whether the payment by the Assessee to Hunan Law through ECGCL would
constitute FTS within the meaning of the India China DTAA. The learned DR
relied on the order of the AO/DRP and the learned counsel for the Assessee
reiterated submission made before the revenue authorities.
Article 12 of the India-China DTAA deals with FTS and its taxability and it
reads thus:
8 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. 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 Contracting State.
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 Contracting 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.
xxxxx
The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k ) of Article 5 and Article 15 of the Agreement.
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 Contracting State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for the 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.
Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political sub-division, a local authority thereof or a resident of that Contracting State. Where, however, the person paying the royalties or fees for technical services, whether he is a 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 Contracting State in which the permanent establishment or fixed base is situated. 7. xxxxx
9 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. Explanation 2 to Sec.9(1)(vii) of the Act defines FTS for the purpose of the Act
to mean any consideration (including any lump sum consideration) for the
rendering of any managerial, technical or consultancy services (including the
provision of services of technical or other personnel) but does not include
consideration for any construction , assembly, mining or like project undertaken
by the recipient or consideration which would be income of the recipient
chargeable under the head "Salaries". Therefore the definition of FTS under the
Act and India-China DTAA are one and the same i.e., the payment should be
one for rendering services which are in the nature of managerial, technical or
consultancy.
We have already set out the nature of services rendered by Hunan by
referring to the Schedule to the Agreement for rendering training, in the earlier
part of this order. The main purpose for which Hunan was employed was to
train Chinese Engineers who were to visit India for carrying out the onshore
services and construction of integrated steel plant in India, in English language,
acquaint them with the Safety Standards which is to be followed by steel plants
in India as per Indian law and to enable them to answe questions that may be
asked before issue of Visa by Indian authorities.
The question whether training expenses would constitute FTS was
considered by the Tribunal Mumbai in the case of Lloyds Register Industrial
Services (India) Pvt.Ltd. (2010) 36 SOT 293 (Mumbai). The Mumbai Bench
held that going by common sense training expenses cannot be called as "fee for
technical services". The Mumbai Bench went on to hold that even highly
qualified personnel might require training to carry out the job for which they are
10 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. recruited and the person imparting training cannot be said to be rendering technical, managerial or consultancy service. It was held that such training was a continuous process because technology is changing very fast and one needs to keep touch with such technology and therefore, expenses incurred towards training cannot be termed as "fee for technical services". In the case of Cosmic Global Ltd., 48 taxmann.com 365 (Chennai.Trib), the question for consideration was as to whether an Assessee who got translation of the text from one language to another could be said to be rendering Technical service. The Chennai Bench of the Tribunal held that
■ The expression "technical services" has not been defined anywhere in the Act. However, "fees for technical services" has been defined in Explanation 2 to section 9(1)(vii). [Para 7] ■ In the present case, the assessee is getting the translation of the text from one language to another. The only requirement for translation from one language to other is, the proficiency of the translators in both the languages, i.e. the language from which the text is to be translated, to the language in which it is to be translated. The translator is not contributing anything more to the text which is to be translated. He is not supposed to explain or elaborate the meaning of the text. Apart from the knowledge of the language, the translator is not expected to have the knowledge of applied science or the craft or the techniques in respect of the text which is to be translated. ■ A bare perusal of Explanation 2 to section 9(1)(vii), which explains "fees for technical service" and the dictionary meaning of the word "technical" makes it unambiguously clear that translation services rendered by the assessee are not technical services. Therefore, the payment made by the assessee to the non-resident translators would not fall within the scope of "fees for technical, managerial or consultancy service" as mentioned in Explanation 2 to section 9(1)(vii). The Commissioner (Appeals) has travelled beyond the definition of "fees for technical service" to bring the translation services within the compass of the term "fees for technical services". [Para 8] ■ Thus, the payments made by the assessee to non-residents on account of translation services do not attract the provisions of section 194J. The disallowance made under section 40(a)(i) is deleted. This ground of appeal of the assessee is allowed. [Para 9]
11 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd.
We are of the view that the facts of the Assessee’s case are identical to the facts of the case decided by the Chennai Bench of ITAT in as much as the imparting training in language was the main nature of service in both the cases. Therefore, considering the factual position and precedents cited above, the payment of Rs. 42,009,163/- cannot be said to be FTS and was therefore not chargeable to tax under the Act in the hands of Hunan and consequently does not require TDS to be deducted under section 195 of the Act. The said training expenses disallowed by the AO U/s 40(a) (ia) of the Act, and confirmed by the ld.CIT(A), needs to be deleted. Accordingly, we delete the addition of Rs. 4,20,09,163/-.
Since we have come to the conclusion that the payment of Rs.4,20,09,163/- is not in the nature of FTS, the other two issues whether services are required to be performed in India to attract the provisions of Article 12(4) of the India-China DTAA and the question as to what is the effect of amendment to Section 9(1)(vii) by the Finance Act 2010 with retrospective effect from 1st June, 1976 in the contex of Section 40(a)(ia) of the Act, does not require any adjudication.
We shall now take up Gr.No.2 for consideration which is with regard to the payment of Rs.14,00,000/- by the Assessee through ECGCL to Hunan Law. The learned DR relied on the order of the AO/DRP and the learned counsel for the Assessee reiterated submission made before the revenue authorities .
The nature of services rendered by Hunan Law which is already set out in the earlier part of this order would show that it is in the nature of consultancy services and thus would fall within the purview of Article 12(4) of the DTAA. It is not disputed that Hunan Law is a tax resident of People’s Republic of China and carries on profession of rendering legal services. It does not have a fixed base regularly available to it in India for the purpose of performing its activities. They did not have physical presence for more than 183 days during the previous year.
12 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. The question for consideration is whether the payment will fall within the Article 12(4) of India China DTA and Article 14 of India China DTA. If income falls within Article 14, then only People’s Republic of China has right to levy tax on the said income and not India. Article 14 of the India-China DTAA reads as follows: 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 Contracting State except in one of 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 Contracting State; b) if his stay in the other Contracting State is for a period or periods exceeding in the aggregate 183 days in the taxable year concerned; in that case, only so much of the income as is derived from his activities performed in that other Contracting State may be taxed in that other Contracting 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, dentists and accountants.
Identical question as to whether Article governing FTS identical to 12(4) of
India-China DTAA or Article 14 of India-China DTAA will govern taxation of
income derived from independent professional services in the context of
rendering of legal services by non-resident came up for consideration before the
ITAT, Mumbai, in the case of Maharashtra State Electricity Board, 90 ITD 793
(Mum), wherein it was held that the relevant Article of India-UK DTAA dealing
with FTS was a general provision while the relevant Article of the India-UK
DTAA dealing with fees for independent personal services was a specific Article
and that the specific article in the DTAA would override the general article.
Similar ruling in the context of India-USA DTAA was rendered by the Mumbai
13 ITA No.756/15 Ershisanye Construction Group India Pvt. Ltd. ITAT in the case of DCIT Vs. Chandbourne & Parke LLP (2005) 2 SOT 434 (Mum). In the light of the aforesaid decisions, we have no hesitation in holding that Article 14 would apply in so far as payments made to Hunan Law is concerned and since the condition precedent for taxing such receipts in the hands of Hunan Law in India are not satisfied, the said payment is not chargeable to tax in India in the hands of Hunan Law and therefore there was no obligation on the part of the Assessee to deduct tax at source u/s.195 of the Act. The consequent disallowance made u/s.40(a)(i) of the Act is directed to be deleted and ground no. 2, is allowed. 20. In the result, the appeal by the Assessee is allowed. Order pronounced in the open court on this 12/04/2017. Sd/- Sd/- (N.V.VASUDEVAN) (DR. A.L.SAINI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER कोलकाता /Kolkata; �दनांक Dated 12/04/2017 �काश �म�ा/Prakash Mishra,Sr.PS. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant-Ershisanye Construction Group India Pvt. Ltd. 2. ��यथ� / The Respondent.- DCIT, Circle-11(1), Kolkata 3. आयकर आयु�त(अपील) / The CIT(A), Kolkata. 4. आयकर आयु�त / CIT 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाईल / Guard file. स�या�पत ��त //True Copy//
आदेशानुसार/ BY ORDER,
सहायक पंजीकार (Asstt. Registrar) आयकर अपील�य अ�धकरण, कोलकाता / ITAT, Kolkata