DDIT, NEW DELHI vs. M/S. MSV INTERNATIONAL INC., GURGAON

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI H.S.SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 1231/Del/2012 (Assessment Year: 2006-07)

DDIT, MSV International Inc., Circle-3(2), International D-7, South City-I, Taxation, New Delhi Vs. Gurgaon PAN:AADCM1304M (Appellant) (Respondent) ITA No. 1346/Del/2012 (Assessment Year: 2008-09)

DDIT, MSV International Inc., Circle-3(2), Room No.411, D-7, South City-I, Vs. International Taxation, Drum Gurgaon Shaped Building, PAN:AADCM1304M New Delhi (Appellant) (Respondent)

Assessee by : Sh. Ved Jain, Adv Revenue by:Sh.P Dam Kanunjna, Sr. DR

Date of Hearing 27.11.2015 Date of pronouncement 12.02.2016

O R D E R PER PRASHANT MAHARISHI, A. M. 1. These two appeals are filed by revenue against the order of learned CIT (A)-XXIX, New Delhi dated 30.11.2011 & 01.12.2011 passed for the assessment year 2006-07 and 2008-09. 2. The revenue has raised the following grounds of appeal for Assessment Year 2006- 07:- “1. On the facts and in the circumstances of the case, the ld CIT(A) has erred in deleting the addition made by the AO by holding that the income derived by the assessee from NH-45 project is to be computed under article 12(6) and article 7, after deducting all expenses from the gross receipts and not to be taxed as free for technical services in terms of explanation 2 of section 9(i) (vii) of the Act and also not alternatively under section 44D of the Act. DDIT V MSV International Inc. ITA No 1231 & 1346/Del2012 A.Y. 2006-07 & 2008-09

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Page 3 of 13 expenditure of that project proportionately is also incorrect. Aggrieved by the order of CIT (A) revenue is in appeal before us. 5. Before us Ld. DR submitted that according to Para no 3 of the assessment order assessee is carrying on the business of consultancy and therefore the provision of section 44D are applied and income is taxable as Fees for Technical services only and not as business income. He further submitted that according to Para no 7 of the order of CIT (A) he has wrongly reached at the conclusion that the gross receipt of the assessee is not FTS 6. Against this ld AR submitted that a. Assessee has been maintaining regular books of accounts and computed its income on the basis of audited books of accounts. The AO has not doubted the authenticity and the income computed as per books of accounts. b. The income of the assessee from NHAI is not in the nature of 'Fees for Technical Services', as the assessee is covered by exceptions to Explanation 2 of section 9(1)(vii) of the Act. c. The assessee, providing engineering services related to construction services, is covered by the Explanation 2 of the above section. The agreement entered into by the assessee with NHAI was for the implementation of the project, review and approve material, its design results and recommend special tests wherever required for materials, suggest substitutes for unsuitable materials, assess adequacy of inputs such as material and labour, supervise and check the setting out of the culverts, bridges, foundations, floor slabs, and all other work required for the project. Therefore, it is clear from the perusal of the said activities that the assessee company was involved in the construction activities, which include engineering and other related services. For this he relied up on the decision of Agland investments services Inc. Vs ITO 22 taxman 9 ( del) and DCIT V Schlumberger Seaco inc 1995 Tax LR 486 ( cal) ITAT). d. Circular No. 202 dated 5th July, 7976, wherein an amendment to the source rule for 'fees for technical services' has been made, and the services in the nature of engineering or other services related to construction have been excluded from the purview of the definition of 'fees for technical services'. e. Alternative, even if it is held that the case of the assessee is not covered under the exclusion provided in Explanation 2 to section 9(1)(vii) of the Act, the same could not be taxed u/s 44D of the Act, as the assessee is a foreign company, and its income would be chargeable to tax as per the provisions

Page 4 of 13 of the DTAA. Therefore on conjoint reading of article 12 and 7 of the Indo USA DTAA as assessee is providing services or carrying on a business in India through a PE, then its income is to be computed after deducting all the expenses incurred by it. The provisions of the said Article do not conclude that the income is to be taxed under presumptive scheme as per section 44D of the Act. For this he relied up on DCIT vs. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.) f. Assessee was carrying on similar activities in the preceding years as well, and the income earned form the said activities have been accepted by the Department as business income of the assessee. He submitted that in AY 2004-05 assessment order passed u/s 143(3) of the Act has also accepted the version of assessee. 7. We have carefully considered the rival contention as well as also perused the relevant documents relied up on by both the parties. The only issue that emerges in this appeal is that whether the amount received by the assessee from NH-45 project is chargeable to tax u/s 44D of the act or under the normal provision of taxation. If the amount is chargeable to tax as FTS u/s 44D then the assessee shall not be allowed any deduction for expenditure and the income shall be chargeable to tax @ 20 % u/s 44D rws 115A of the Act. According to the assessing officer it is chargeable to tax u/s 44D and according to assessee it s chargeable to tax under the normal provision of taxation as it is not fees for technical services as per section 9 (1) (vii) of the act. Further as the assessee is a non resident it is also claimed that it is entitled to the benefit of Indo US DTAA and therefore there is no presumptive tax there in provided for. 8. The following issue emerges for the consideration that whether the income received by the assessee on account of NH-45 is fees for technical services or not u/s 9 (1) (vii) of the Income tax Act. Assessing officer has merely gone on the presumption that as a. The contracts receipts are for the consultancy services it is covered in the definition of Fees for Technical services. b. He has also been lead by the classification of receipt in the TDS certificates where the deduction has been made u/s 194J of the act as consultancy fees. c. Assessee itself says in return of income that it is engaged in the business of consultancy.

Page 5 of 13 We are of the view that for the purposes of the characterization of the income of the assessee all the above criteria are not relevant for the reason that 1) The consultancy services are in general, “fees for technical services”. But AO need to examine it with respect to explanation (2) of section 9(1) (vii) of the act which has also provided some exclusions. AO has failed to look in to those exceptions carved out in the right perspective. 2) The Section mentioned in TDS certificate and the disclosure in the return of income cannot determine whether the consultancy services are in the nature of Fees for technical services or otherwise. Therefore it is also not determinative of the nature of receipts.

Page 6 of 13 services wrt highways, transport etc. Therefore it cannot be said that assessee is not carrying any business in India. 11. LD AO producing the provision of Explanation 2 to section 9 (1) (vii) has held that the receipts of the assessee is Fees For Technical services. The provisions of explanation 2 to section 9 ( 1) (vii) defines the scope of “Fees For Technical services” as under :- “Explanation 2.— For the purposes of this clause, "fees for technical services" means 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". 12. Therefore according to this any consideration which is for the rendering of any managerial technical or consultancy services is characterized as “ fees for technical services” . However some exceptions are carved out if the such managerial technical or consultancy consideration is for any construction etc or like projects undertaken by the recipient. Ld AO has failed to consider this exceptions carved out in definition of FTS, Therefore the attempt made by ld AO is on incomplete reading of that explanation ignoring exceptions. Hence It is necessary to examine the nature of work carried out by the assessee. From the nature of work carried out by the assessee it is apparent that it has got the consultancy work related to laying down of roads etc which is for construction activity or like project. 13. Ld AO has held that as assessee is rendering services with respect to various projects and therefore all the services are rendered by the assessee are technical nature. Undenyingly the services rendered by the assessee are technical in nature but merely because the services are technical in nature they does not become fees for technical services in accordance with the provision of expl. 2 to section 9 (1) (vii) of the act. This technical service needs further examination whether they fall in the exception carved out therein or not. In our view the services do fall in the exceptions carved as construction activity and like projects. 14. Before AO assessee aptly relied up on the decision of coordinate bench in case of AGLAND INVESTMENT SERVICES INC.V. INCOME-TAX OFFICER 1985] 22 TAXMAN 9 (DELHI - TRIB.) wherein coordinate bench interpreting the word “ construction” has held as under :-

Page 7 of 13 “5. The assessee has placed before us extracts from various dictionaries (international editions) to prove that 'construction' implies and includes engineering and bid evaluation since it is a step-in-aid to construction. The assessee also contends that 'construction' is not a mere physical activity or laying bricks and mortars to include something more, viz., mental process of step-in-aid and it includes engineering and bid evaluation. He also contends that bid evaluation and engineering amounts to a formulation and 'construction' includes formulation among other activities like erection, fabrication, fashioning, shifting devising and creation also. The learned departmental representative, on the other hand, supports the stand of the revenue and contends likewise as has been reasoned in the impugned orders of the lower authorities. 6. In our opinion, on the facts and in the circumstances of the case, the assessee must succeed, since section 9(1)(vii), when read with Explanation 2attached thereto, makes it clear and postulates a situation where fee for technical services is taxable as income but any consideration for any construction, assembling, mining or like project undertaken by an assessee is excluded from the purview of the said assessment and construction, assembling, mining or like project does include a step-in-aid thereto. The assessee, as has been stated above, entered into an agreement with the corporation and it provided for two separate activities, viz., to give to the said corporation the expertise and technical assistance of consultants and technical assistance in connection with construction and assembly of hulling, drying and processing factories and plants and also for management services thereof. The bid evaluation and engineering services are said to be connected with inviting tenders and for other process but the ultimate aim for those tenders and process is the construction of the corporation processing factory and plant and in this view of the matter, the step-in-aid included in these services, viz., engineering and bid evaluations, has to be held as a step-in- aid for construction of factories and plants of the Corporation, hence, under section 9(1)( vii) read with Explanation 2 attached thereto the income is not taxable. We hold and direct accordingly. Rs. 84,456, as such, stands deleted from computation. The appeal succeeds and stands allowed.” 15. Ld AO has rejected the contention of the assessee holding that the case of the assessee does not fall within the exception. Bereft of any reasoning that why the services rendered wrt construction of roads is not a construction activity or like projects. On reading the above decision we fully agree with the finding of CIT (A) that the case of this assessee stands on stronger footings than the case relied upon. Ld Dr could not point out any other judicial precedents against the assessee and also could not controvert the decision of coordinate bench in Agland Investment Inc V Ito the case of the assessee is not on stronger footing. 16. Provision of section 44D of the Income tax act provides special treatment of fees of technical services to be charged at gross presumptive rates and expenses incurred there on are not allowed as deduction. The provision are as under :-

“SPECIAL PROVISION FOR COMPUTING INCOME BY WAY OF ROYALTIES, ETC. IN THE CASE OF FOREIGN COMPANIES Notwithstanding anything to the contrary contained in sections 28 to 44C, in the case of an assessee, being a foreign company,-- (a) the deductions admissible under the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern before

Page 8 of 13 the 1st day of April, 1976, shall not exceed in the aggregate twenty per cent. of the gross amount of such royalty or fees as reduced by so much of the gross amount of such royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property; (b) no deduction in respect of any expenditure or allowance shall be allowed under any of the said sections in computing the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or with the Indian concern after the 31st day of March, 1976 but before the 1st day of April, 2003. Explanation For the purposes of this section,--

(a) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ;

(b) "foreign company" shall have the same meaning as in section 80B ;

(c) "royalty" shall have the same meaning as in the Explanation 2 to clause (vi) of sub-section (1) of section 9 ;

(d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976.

It is clear for the above provision that for invoking it the fees for technical services should have the same meaning as per explanation 2 to section 9 (1) (vii) of the act. As we have already held that receipt of assessee is not „fees for Technical services as defined under above explanation as it relates to construction activity , we are of the view that accordingly that receipt is out of the purview of presumptive taxability u/s 44D of the Income tax Act. 17. Further LD AO has also analyzed the provision of article 12 (4) of the Indo US DTAA and has held that consultancy services provided by the assessee are made available to the clients in form of reports which are used by such clients in their projects. He relied up on the order of AAR in case of Intertek testing Services India Private Limited (AAR No 751 of 2007). We failed to understand that how in this consultancy work the technology is „made available‟ to NHAI would be able to

Page 9 of 13 utilize the knowledge or know how in future on his own without the aid of service provided. Assessee is providing the service sin relation to technical advice as set out in earlier paras. The averment of AO that it is “ made available” to assessee is not correct and therefore we disregard the same. The term „Make available‟ has been explained by Hon Karnataka High court in case of CIT V De beers India P Ltd ( 346 ITR 467 ) ( kar) on Indo Netherland DTAA as under :-

“21. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied.” 18. Therefore on reading of the above exposition of the term “ make Available‟ it‟s is not the case of the AO that there is imparting of technical skill which is absorbed by the receiver so that NHAI can deploy the similar technology in future without depending on the provider. In view of above we are of the view that these payments do not qualify under article 12 (4) of the DTAA as the conditions of “ make Available” does not satisfy. 19. Regarding Reliance by Ld AO on the decision of AAR in Ericson Rulings 224 ITR 203 (AAR) is also half hearted. In that ruling it is held that it does not change the character of receipt but it is chargeable under the different mechanism. We are on the issue of deciding the mechanism under which the receipt would be taxable under Domestic tax laws read with the Indo US Treaty. 20. On the other aspects of applicability of DTAA CIT (A) has held as under :-

Page 10 of 13 7.4 However, let us examine the alternate plea of the appellant also regarding applicability of section 44D of the act. Article 12 (2) of the treaty provides that fee for included services may also be taxed in the source State. However, sub-article (6) carves out an exclusion and provides that provisions of sub-article (2) shall not apply if the beneficial owner of fee for included services was a resident of contracting State and carries on the business in the other contracting State in which the fee for included services arises through a PE situated therein. In such a case, the provisions of Article 7 regarding computation of business profit shall apply. The implication of Article 12(6) are that the fee for included services shall not be taxed on gross basis at the rate given in the treaty and shall be taxable as business profit if there is a permanent establishment. Article 7(2) provide that where an enterprise carries on business in the other contracting State through a Permanent Establishment situated therein, the profit attributable to that Permanent Establishment will be computed in a manner as if it were a distinct and independent enterprise. In determination of the profit of a permanent establishment, deduction shall be allowed for expenses incurred for the purpose of the business of the permanent establishment including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of the enterprise as a whole in accordance with the provisions of and subject to the limitation of the taxation laws of that State. The implication of the Article 7 read with sub-article (2) and sub-article (3) is that if a non-resident entity is providing services or carrying on a business in India through a PE then its income is to be computed after deducting all the expenses incurred by it in accordance with the domestic law. In this context, in my opinion, this limitation will apply to expenses, such as, rate of depreciation, various restrictions placed under section 36, proviso to section 37 regarding disallowance of unlawful expenses, limitation u/s 40(a)(i) and 43B etc .The limitation referred in Article 7(3) does not mean that income is to be taxed under presumptive scheme of computation u/s 44D. It would practically mean going back to article 12(2) of the treaty and render provisions of article 12(6) redundant. This issue was examined by Mumbai Tribunal in the case of DCIT vs. Boston Consulting Group Pte, Ltd. reported at 2005 94 ITD 31 Mum in the context of the Indo-Singapore Tax Treaty. It was held as under:

"that non-deduction of expenses under Section 44D, -which means that the taxability is on gross basis, is coupled with a special rate of tax for such income on gross basis under Section 115A. A somewhat similar scheme of taxability of royalties and fees for technical service on gross basis, but a lower rate, also finds place in most of the tax treaties including India-Singapore Tax Treaty. Article 12 provides for taxation of fees for technical services in the source country on gross basis, but at a lower tax rate of 15 per cent, barring the case of fees for technical services which are ancillary and subsidiary to the enjoyment of property for which royalties under para 12(3)(b), which are taxed at an even lower rate of 10 per cent. Section 44D r/w Section 1 ISA of the Indian IT Act, and Article 12 of the India-Singapore tax Treaty are, therefore, similar in nature. These alternate paradigms, contained in Section 44D r/w Section 115A and in Article 12 of the India-Singapore tax Treaty, offer alternative but similar models of taxation of income from royalties and fees

Page 11 of 13 from technical services. While these two sets of provisions dealing with taxability on gross basis may belong to the same genus of taxation models, but, at the same time, these are two independent, mutually exclusive, and therefore, competing sets of provisions. Once it is clear that these are competing models of taxation of royalties and fees for technical services on gross basis, in the IT Act and in the India-Singapore tax Treaty, it has to follow that the provisions of the IT Act cannot come into play unless these are more beneficial to the appellant. That certainly it is not the case here. The law is trite that the provisions of taxability under the IT Act, in preference over the provisions of the applicable tax Treaty, cannot be thrust upon an unwilling appellant. Therefore, the provisions of Section 44D cannot be applied in a situation in which the Revenue 's case for taxing the royalties and fees for technical services on gross basis under the tax Treaty on the sole ground that receipts in question are not in the nature of 'royalties and fees for technical services for the purposes of the said Treaty. This situation is quite distinct and different from the situation that the receipts are in the nature of 'royalties and fees for technical services' for the purpose of Treaty but are being taxed on the net basis because of the application of Article 12(6), i.e., on account of being attributable to the PE in the other Contracting State. In other words, in case a receipt is held to be not taxable as 'royalties and fees for technical services' under the provisions of the India-Singapore tax Treaty, the same cannot also be subjected to tax under Section 44D r/w Section 115A either." 7.5 Subsequently, the above judgment has been followed by the various courts, e.g., in the case of JCIT vs. Essar Oil Ltd. (2006) 7 SOT 216 and in the case of Cray Research India Ltd. vs. JCIT 136 TTJ 1 delivered on October, 2010. Similarly in the case of JCIT vs. Essar Oil Ltd. the Court has examined similar issue. In this case, a U.K. company entered into a contract with M/s Essar Oil Ltd. for supervision of construction and commissioning activities in India for the refinery complex being built at Jamnagar. The appellant company returned a loss of Rs.66,20,690/- after deducting all expenditure from the gross receipts. The main services provided by the appellant company were construction supervisory services of the project supervision of start up and commissioning of the project and material and warehouse management of the project. As per the A.O., these services fell within the ambit of the fee for technical services and taxed the income of the appellant by invoking the provision of section 44D of the Act despite the fact that the receipt of the appellant company were assessable under Article 7 of DTAA between India and U.K. The ITAT did not agree with the contention of the A.O. It was held that in case of receipts through permanent establishment in respect of which profits are to be computed under article 12(3) of the DTAA, section 44D was not to be applied for the purpose of deduction of expenses. The court further held that section 44D and for that matter explanation 2 to section 9(l)(vii) do not apply.

7.6 This controversy has now been laid to rest by insertion of new section 44DA in the act w.e.f. 1.04.2004 by the Finance Act, 2003 where aseesee has been given explicit option to compute its income on net basis if it has maintained books of account. The explanatory memorandum to the finance act stated that the section 44DA was inserted with a view to harmonize the scheme of taxation of royalty and fee for technical services under the act with the provisions of the treaty with various countries. It means that even prior to the insertion of section 44DA, the fee for technical services provided through a PE in India

Page 12 of 13 was to be taxed on net basis under the provisions of the treaty, if there is existed such a clause in the treaty, i.e., similar to article 12(6) in the India-US treaty or India- Singapore treaty etc. The relevant para of Explanatory Notes to the Finance Act, 2003, which explains the intention behind the insertion of the new section, is extracted below;

"With a view to harmonize the provisions relating to the income from royalty or fees for technical services attributable to a fixed place of profession or a permanent establishment in India -with similar provisions in the various Double Taxation Avoidance Agreement, the Bill proposes to insert a new section 44DA to provide that the income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after the 31 day of March, 2003, where such non- resident (not being a company) or a foreign company carries on business in India through a permanent establishment situated therein, or performs professional services from a fixed place of profession situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of profession, as the case may be, would be computed under the head "Profits and gains of business or profession" in accordance with the provisions of the Income-tax Act. However, it is provided that no deduction shall be allowed, in respect of any expenditure or allowance which is not wholly and exclusively incurred for the business of such permanent establishment or fixed place of profession in India; or in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to its head office or to any of its other offices. " 7.7 It can be inferred from the explanatory notes above that legislature was of the view that deduction for the expenditure incurred in connection with such fee for technical services was allowable against the fee for technical services in terms of the provisions of the treaties where such clause existed, i.e., similar to article 12(6) in this case.

There is no infirmity pointed out by the lD DR in the findings of CIT appeal regarding applicability of article 7 of the DTAA regarding taxability of the sum and its consequent taxability u/s 44D of the Act. 21. It is also not controverted that assessee was carrying on similar activities in the preceding years as well, and the income earned form the said activities have been accepted by the Department as business income of the assessee and assessment made u/s 143(3) of the Act. Principle of consistency has been accepted by the courts in many judicial precedents and some of the landmark decisions in the cases are of Radhasoami Satsang v. CIT: (1992) 193 ITR 321 (SC), CIT v. Lagan Kala Upwan: (2003) 259 ITR 489 (Del), Saurashtra Cement & Chemical Industries v. CIT: (1980) 123 ITR 669 (Guj), Commissioner of Income Tax v. Paul Brothers: (1995) 216 ITR 548 (Bom) and Commissioner of Income Tax v. Modi Industries Limited: [2010] 327 ITR 570. Therefore on this ground too assessee deserves relief. 22. In view of above, we are of the view that according to the provision of section 44D rws 9 (1) (vii) of the act assessee‟s receipt from NH -45 of Rs. 10354820/-is not

Page 13 of 13 taxable as FTS under that section but under normal provision of income tax act as business income. On this count we confirm the order of CIT (A). 23. In the result appeal of the revenue for both the years are dismissed. Order pronounced in the open court on 12 .02.2016. -Sd/- -Sd/- (H.S.SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 12/02/2016 A K Keot Copy forwarded to