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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI G S PANNU
आयकर अपीलीय अिधकरण “एल” �यायपीठ मुंबई म�। IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “L”, MUMBAI �ी जी एस प�ू, लेखा सद�य एवं �ी अिमत शु�ला, �याियक सद�य के सम� । BEFORE SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBERITA ITA No. : 283/Mum/2012 (Assessment year: 2008-09) टाटा चे�मक�स �ल�मटेड Vs Deputy Commissioner of Income Tax (International TATA CHEMICALS LIMITED, Taxation), टाटा चे�मक�स �ल�मटेड Scindia House Ballard Estate, Scindia House, Mumbai Ballard Estate, Mumbai -400 038 �थयी लेखा सं.:PAN: AAACT 4059 M अपीलाथ� (Appellant) ��यथ� (Respondent) Appellant by : �ी अतुल सुरैया Shri Atul Suraiya Respondent by : �ी राज� कुमार Shri Rajendra Kumar सुनवाई क� तार�ख /Date of Hearing : 15-03-2016 घोषणा क� तार�ख /Date of Pronouncement : 13-06-2016 आदेश ORDER �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the assessee against impugned order dated 30.10.2011, passed by Ld. CIT(Appeals)-11, Mumbai, in relation to the order passed under section 195(2) for the assessment year 2008-09. In the grounds of appeal, the assessee has raised following ground:
“1. The learned Commissioner of Income Tax (Appeals) erred in upholding the order of the learned Deputy
2 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 Commissioner of Income Tax (International Taxation) that the payment of Euro € 4,90,000 to M/s SnamProgetti towards purchase of Basic Engineering Design Package was subject to withholding tax attracting the provisions of section 195, being a payment for technical services”.
The facts in brief are that, assessee which is engaged in the business of manufacturing of fertilizers, urea and chemicals had entered into an agreement with SnamProgetti, SpA Italy (SP), a resident of Italy for supply of ‘Basic Engineering Design Package’ (BEDP) besides other work and services for its capacity augmentation for production of urea on 26th April, 2007. As per the agreement, SP Italy has to supply basic design of ‘Capacity Augmentation Project’, which has been termed as “BEDP”. All the work related to the “BEDP” was to be carried out by the SP in Italy. Thereafter a detailed engineering was to be done by a local engineering firm engaged by assessee on approval of SP in Italy. In terms of the agreement, the SP had granted non-exclusive and non-transferable right and licenses to be used in BEDP prepared on the basis of necessary information and documents supplied by the assessee to SP. A sum of € 490,000 has been paid to SP for providing BEDP. The entire scope of the work including BEDP in the agreement was defined as under: “Scope of Work SP’s scope of work for the CAPACITY AUGMENTATION PROJECT as per the terms of the AGREEMENT (“SCOPE OF WORK”) consists of the following: 2.1 Advance During Pre Basic Test: SP shall provide assistance services during Pre –Basic Test (“PBT”) to be carried out by TCL on the UREA PLANT in India as per para 2 of Appendix I to this AGREEMENT.
3 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 The PARTIES agree that the PBT already completed in June 2006 is considered valid and that SP has complied with its obligations in connection with the said PBT.
2.2 License: Subject to the terms and conditions of this AGREEMENT and to the full payment LICENSE FEE as per sub-clause 4.2, SP shall grant to TCL a non-exclusive non-transferable right and license: a) to have the CAPACITY AUGMENNTATION PROJECT designed and implemented using BEDP provided by SP under this AGREMENT; b) to practice SP PROCESS as may be required for operation of the CAPACITY AUGMENTATION PROJECT. To sell export to, or use in any country the urea produced in the CAPACITY AUGMENTATION PROJECT. Purview of existing Urea Plant SP shall review, in Italy, the documents of existing UREA PLANT as described in para 2 of Appendix I to this AGREEMENT.
2.4 Basic Engineering Design Package: SP shall perform the Basic Engineering Design Package (“BEDP”) for the CAPACITY AGUMENTATION PROJECT as specified in para 3 of Appendix I to this AGREEMENT (within the Battery Limits as defined in Appendix II to this AGREEMENT). Such BEDP shall be prepared in accordance with the contents of Appendix II to this AGREEMENT and will be supplied to TCL in accordance with the Delivery Schedule specified in Appendix IV to this AGREEMENT. Subject to the provisions of sub-clause 13.2 herein below, the BEDP shall be performed by SP in Italy.
4 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 2.5 Check of Detailed Engineering: SP shall at SP Home Offices in Italy the documents, indicated in para 4 Appendix I to this AGREEMENT relevant to detailed engineering, supplied by TCL, provided that such documentation shall be received by SP within the time limit defined in sub-clause 3.4 of this AGREEMENT. The purpose of such check is to verify said documents in terms of compliance with BEDP from the process point of view. Unless otherwise agreed, SP shall inform TCL of its comments with the suggested remedial measures, if any, within 15 (fifteen) days (official working days at SP’s office) form receipt of each item of technical documentation. The above check shall be performed by SP in Italy.
2.6 Technical Assistance Services (TAS): In accordance with the General Conditions specified in Appendix V to this AGREEMENT, SP shall provide mandatory, Technical Assistance Services (hereinafter referred to as “TAS”) during the implementation of the CAPACITY AUGMENTATION PROJECT as per para 5 of Appendix.”.
Thus, as per the agreement, for different work and services four different identified payments have to be made. So far as the payment for BEDP is concerned, for supply, drawing and design in Italy, the same was performed by SP in Italy and not in India which is evident from clause 2.4 as reproduced above. The assessee, accordingly, moved an application dated 23rd August, 2007 under section 195 before the Dy. Director of Income-tax (International Taxation)-2(1), Mumbai (AO). The AO held that, the amount paid is to be taxed in India as “fee for technical services” under section 9(1)(vii) and is governed by provisions of section 115A. The relevant observation and direction of the AO in his order under section 195(2) is reproduced hereunder:-
5 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012
“The applicant is purchasing such Basic Engineering Design Package for its capacity augmentation project and BEDP will be supplied by S.P. in Italy. Detailed engineering design will be prepared by local engineering firm engaged by the applicant. The applicant has made an application dt. 23.08.2007. In BEDP, SP will supply their standard design which they already have wherein it is stated that the specific core services are not liable to Income tax in India under the provision of Income Tax Act 1961. The taxability of fees for technical service u!s.9(1)(vii) is governed by provisions of section 115A. An overview of above provisions of section 9(1)(vii) read with provisions of section 115A which leads to the following interpretation: 1 Payment made by the M/s. Tata Chemical Ltd. Snampragetti SpA of Italy is in the nature of "fees for technical services" u/s.9(1)(vii) and 2. The aforesaid type of payment is taxable in India in the hands of SP of Italy @ 10.56% including surcharge and education cess as fees for technical services as per clause BB of section 115(1)(h) as the agreement is entered into after 11th June 2005.
Accordingly, I direct that applicant shall deduct tax at 10.56% on the payments made to M/s. SP of Italy.
This certificate is issued on the prima facie examination of details/documents/information available with me. This certificate is valid till 31 March 2008 unless cancelled earlier with prior intimation. This certificate is issued at the request of the applicant”.
6 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 4. Before the CIT(A), very exhaustive submissions were made from the side of the assessee stating that payment under consideration is for supply of drawing and design in Italy and, therefore, it cannot be treated as payment for rendering of any services but for supply of technical know-how. The assessee’s submissions along with the various clauses of the agreement has been incorporated by the CIT(A) from pages 9 to 27 of the appellate order. Sum and substance of the assessee’s contention that the payment made to SP Italy is not for rendering services have been captured by the CIT(A) in the following manner:-
“1. Payment is made to SP for supplying designs which is result of standard design package arising out of the commercial experience, skills, knowledge and technology of SP.
The payment made is for acquiring the BEDP design developed from the standard design which already exists with the SP, Italy. The SP, Italy has already performed all the required expertise, skills and technology in making the standard design. SP is not selling its technology, or giving the skills or expertise as to how designs were made to the appellant company but only supplying the BEDP after studying the documents supplied by the appellant company.
Further, SP Italy just has to reproduce the existing material after the requirements as laid down in the documents received from the appellant company by SP in Italy are matched with the designs available with the SP. Since the major activity of developing a standard designs have already been developed by SP therefore, no major expenditures are to be incurred for supplying the designs.
7 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 xxxxxxxx xxxxxxx xxxxxx xxxxxxxx xxxxxxxxx
The payment made was for the development and transfer of the design, and being an out and out transfer on sale of such designs and drawings, the payments for such would not constitute FTS. The contract was not a contract of service as in the case of service, the supplier undertakes to perform services, which required the use by the supplier of special knowledge, skills and expertise to the other party. The assessee distinguished the sale transaction from a service transaction by submitting that in the case of a sale, it presupposes the title tit goods as that of the transferor, prior to the same being conveyed to the buyer and whereas case of services, the property always belongs to the person who makes the payment for the services. The assessee has non-exclusive and a nontransferable right and license to use the BEDP provided by SP. As per the agreement the title and copyright of the BEDP will remain with the SP. Iii this regards we state that the payment made is not for the purchase of the title/rights/copyrights but for acquiring the copyrighted article”.
Thus, it was contended that the payment made is for the acquiring of technical know-how and not for rendering of any services in India. Besides this, various case laws were relied upon to contend that this firstly, payment made to SP Italy was not for FTS or any services and secondly, it is not taxable in India. Specific reliance for later proposition was made on Hon’ble Apex Court decision in Ishikawajma Harima Heavy Industries Ltd vs DIT, reported in [2007] 288 ITR 408.
8 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 5. The Ld. CIT(A), has dealt extensively with the assessee’s arguments; relevant clauses of the agreement; and the decisions relied upon by the assessee. In his detailed order, the Ld. CIT(A) has primarily held that the payment made by the assessee under the terms of the agreement and for BEDP is nothing but in the nature of ‘fee for technical services’. As regards the assessee’s reliance on the decision of Hon’ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd vs. DIT (supra) and various other High Courts including Jurisdictional High Court in Clifford Chance vs. DCIT, reported in [2009] 318 ITR 0237 and catena of Tribunal decisions that, if the services are rendered outside India though they have been utilized in India, then payment on such services is not taxable in India; Ld. CIT(A) held that these decisions have no more application in view of insertion of new Explanation to section 9(1)(vii) inserted with retrospective effect from 1.6.1976 by the Finance Act, 2010; and also the earlier Circular of the CBDT stating the same thing has also been withdrawn by the CBDT vide Circular No.7 dated 22.10.2009. The relevant observation of the Ld. CIT(A) in this regard is as under:-
“Since then Explanation 2 has been inserted with retrospective effect by Finance Bill 2007/2010 under section 9(2) of the Act and Circular No.23 has been withdrawn by the CBDT vide Circular No.7 dt. 22.10.2009. The Memorandum explaining the intent of Legislature behind Explanation 2 below section 9(2) clearly states that only 'Fees for Technical Services' paid for services, irrespective of situs of rendition of services, is taxable in India, if the services are utilized in a business of assessee in India. This explanation has been introduced with the sole objective to overcome the effect of judgment of Supreme Court in case of Ishikawajma Harima Heavy Industries Ltd. and
9 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 Karnataka High Court in case of Jindal Thermal Power Company Ltd”.
On the same reasoning, he did not follow the decisions of Hon’ble Jurisdictional High Court in the case of Clifford Chance vs DCIT, (supra) that this decision again is based on the same Supreme Court decisions and is not applicable in view of new Explanation (supra). Thereafter, he proceeded to analyze in detail as to why such a payment amounts to “fees for technical services” in terms of section 9(1)(vii). His detailed reasoning given in the order are not being dealt with us for the reason that the issue which has been contested before us by the parties is that, whether assessee can be held to be liable for deducting TDS or not in view of retrospective amendment brought in the statute from the subsequent date of the payment.
Before us, the Ld. Counsel has restricted his argument that, even if the said payment is reckoned to be payment for rendering of technical services, which though assessee has been denying all through, then one thing is absolutely clear that such services were not performed in India which is borne out from the agreement that the whole BEDP was performed by SP Italy only. Thus, at the time of making the payment, there was a settled law in India that if a payment has been made for rendering any services outside India then the same would not be held to be chargeable to tax in India. This law was settled in view of the decision of Hon’ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd (supra). Hence, assessee could not be expected to deduct TDS on such a payment. The law was amended by virtue of insertion of Explanation in section 9(1)(vii) with retrospective effect from 01.06.1976. In support, that assessee could not be expect to with hold tax for any payment made outside India for rendering services outside India, he strongly relied upon the decision of Mumbai ITAT
10 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 Bench in the case of Channel Guide India Ltd, reported in 139 ITD 49.
On the other hand Ld. DR submitted that such a nature of payment was always taxable in India. In any case, the Explanation brought with retrospective effect has to be taken as the law was always intended to be form the date for which law has been given effect to. He also relied upon a decision of ITAT Mumbai Bench in the case of Viacom 18 Media (P.) Ltd. vs ACIT, reported in [2015] 153 ITD 384, which was in the context of Explanation 6 to section 9(1)(vi) brought by way of retrospective amendment wherein it was held that, it was clarificatory in nature.
We have heard the rival submissions and perused the relevant finding given in the impugned order as well as the material relied upon before us. As observed in the foregoing paragraphs we are not entering into the semantics of rendering of technical services, that is, whether the payment made by assessee to SP Italy for BEDP is in the nature of ‘fee for technical services’ or not or is in the nature of providing knowhow, etc. The sole argument which has been raised before us is that, even if such payment is reckoned as “fee for technical services” as held by the AO as well as by the CIT(A), then whether the assessee was liable to deduct TDS even though admittedly the said payment was made for rendering of services outside India. As stated earlier, clause 2.4 of the ‘agreement’ with regard BEDP for which payment of € 490,000 was made by the assessee, has been made available by SP in Italy. Other payments which have been made with regard to other work and services in terms of other clauses is not in dispute before us, although the Ld. Counsel at the time of hearing has stated that the assessee has later on deducted TDS for all the payments. It is an admitted position that in wake of decision of Hon’ble Supreme Court in Ishikawajma Harima Heavy Industries
11 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 Ltd vs. DIT (supra) which has been followed by the Hon’ble jurisdictional High Court also in Clifford Chance vs DCIT (supra), the position of law as it stood then, including the taxing of the income under section 9(1)(vii) was that, if the services which are source of income is sought to be taxed, have to be rendered in India as well has to be utilized in India so as to be held to be taxable in India. Both the conditions have to be satisfied simultaneously, that is, the services which are source of income should be utilized in India and services should have been rendered in India. However, if the second limb is not satisfied that is, services have been rendered outside India, then same was held to be outside the purview of taxability in India. The Ld. CIT(A) has also admitted to this position, however, he held that the Explanation to section 9(1)(vii) inserted by the Finance Act, 2010 with retrospective effect from 01.06.1976 was brought specifically to overcome the said decisions of Hon’ble Supreme Court as well as the other Courts. Once this is an admitted position, then it is very difficult to comprehend that, assessee should have deducted TDS on such payment when law of the land did not permit so or envisage any withholding of tax, on the basis of law which was brought from subsequent date albeit with retrospective date stating that, now all such payment for services even rendered outside India is taxable in India. Here, the maxim of “lex non cogit ad impossibilia, is fully applicable that is, the law does not possibly compel a person to do something which is impossible, that is, when there was no provision for taxing an amount in India at the relevant time then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by the ITAT Mumbai Bench in the case of Channel Guide India Limited (supra) relied upon by the ld. counsel and catena of other decisions wherein, it has been held that, assessee cannot be held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Here in this case, the decision of
12 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 Hon’ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd vs. DIT (supra) was rendered on 4th January, 2007; agreement was entered by the assessee with SP Italy on 26th April; 2007; application was made before the AO on 23rd August, 2007 for the payment to be made in September, 2007; therefore, assessee had a valid reason and reasonable ground for not with holding the tax at that time, because as observed above, there was no such provision or any explanation in the statute. Thus, we hold that, assessee was not liable to deduct TDS under section 195, at the time of making the payment.
As regards the decision of ITAT Mumbai Bench in the case of Viacom 18 Media (P.) Ltd. (supra), relied upon by the ld. DR, the issue in case was with regard to scope and definition of ‘royalty’ as given in Article 12(3)(a) of India-US-DTAA and also the definition given in Explanation 6 to section 9(1)(vi). The Tribunal while dealing with the issue of ‘royalty’ held that retrospective amendment was clarificatory in nature and did not amend the definition of royalty as such. This decision has nothing to do with deduction of TDS on a payment prior to insertion of such a retrospective provision. Hence, this decision is clearly not applicable on the issue in hand.
10 Thus, in view of our above discussion, we hold that, assessee was not liable to deduct TDS on the payment of € 490,000 made to SP Italy for BEDP in the year 2007. The other reasoning given by the CIT(A), are not dealt with because the controversy which has +been raised before us is only for this limited issue only.
In the result, the appeal of the assessee is allowed.
13 टाटा चे�मक�स �ल�मटेड TATA CHEMICALS LIMITED ITA No. 283/Mum/2012 Order pronounced in the open court on 13th June, 2016.
Sd/- Sd/- (जी एस प�ू) (अिमत शु�ला) लेखा सद�य �याईक सद�य (G S PANNU) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 13th June, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -11, Mumbai. 4) The CIT-concerned__/DIT(Int. tax.)-I, Mumbai. 5) िवभागीय �ितिनिध “एल”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “L” Bench, Mumbai. 6) गाड� फाईल Copy to Guard File. आदेशानुसार/By Order / / True Copy / /
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, मुंबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च�हान व.िन.स *Chavan, Sr.PS