Outotec India Pvt. Ltd., New Delhi vs Assessee

This appeal by the assessee arises out of the order passed by the

CIT(A) on 28.12.2012 in relation to the assessment year 2009-10. ITA No.1177/Del/2013

2. The only issue raised in this appeal is against the confirmation of

disallowance made by the Assessing Officer (AO) for non-deduction of

tax at source in terms of section 195 of the Income-tax Act, 1961

(hereinafter also called 'the Act') on expenses incurred by the assessee

amounting to Rs.1,92,86,815/- to International Project Services Oy.

(IPS)

3. Briefly stated, the facts of the case are that the assessee, an Indian

company, is engaged in the business of providing marketing, supervision

and support services for the mining metallurgical as well as metals,

minerals and chemical processing industry. A sum of Rs.1,92,86,815/-

was claimed as deduction under the head 'Supervision charges.' On

being called upon to explain as to why no deduction of tax at source was

made in respect of such payments credited to non-resident, the assessee

stated that such amount was not chargeable to tax in the hands of the

recipient as per Article 13 of the Double Taxation Avoidance Agreement

between India and Finland (hereinafter called 'DTAA') and as such

there was no obligation to deduct tax at source. At the same time, the

2 ITA No.1177/Del/2013

assessee admitted the taxability of the amount in the hands of the payee

in terms of section 9 of the Act. The AO observed that the assessee

started deducting tax at source after 1.4.2011 on payments made to this

resident of Finland, for similar services at the applicable rates of tax.

The assessee's contention that deduction of tax at source was started

after 1.4.2011 because of the later amendment in the DTAA, did not

persuade the AO. In the final analysis, the AO came to hold that the

amount of Rs.1.92 crore incurred for supervisory services was deemed

income accruing or arising in India to the resident of Finland and, hence,

was chargeable to tax. In the absence of the assessee deducting tax at

source u/s 195 of the Act, the AO held that the provisions of section

40(a)(i) were attracted. He, therefore, made an addition for the said sum

of Rs.1.92 crore. The assessee reiterated similar submissions before the

ld. first appellate authority in support of the contention that such

expenses incurred by it were not chargeable to tax in India as income in

the hands of IPS in terms of Article 13 of the DTAA. The ld. CIT(A)

examined the Agreement dated 21.11.2008 between the assessee and

M/s Sterlite, pursuant to which the assessee was to render supervisory 3 ITA No.1177/Del/2013

services for erection, commissioning and training for the Dore metal

plant of Sterlite in Tuticorin. He required the assessee to produce the

Agreement dated 1.11.2008 with IPS under which the services required

to be rendered to Sterlite were outsourced from IPS for a consideration

of Rs.1.92 crore. The ld. CIT(A) went through the Agreement between

the assessee and Sterlite and noted the scope of services to be provided.

He also took into consideration a copy of the so-called Agreement dated

1.11.2008 between the assessee and IPS, under which the assessee

claimed to have outsourced such services from IPS to be provided to

Sterlite. A copy of such four-page document claimed as Agreement,

produced before the ld. CIT(A), had first two pages which did not bear

any signature, stamp or seal of the parties. He required the assessee to

produce the original Agreement, which the assessee failed to comply

with. The ld. CIT(A) observed that the main terms and conditions of the

Agreement were appearing on the first two pages, which were unsigned

plain papers without any page number, date, seal or stamp. He,

therefore, refused to accept the authenticity and genuineness of such

Agreement. The assessee was called upon to furnish the weekly time 4 ITA No.1177/Del/2013

sheets in respect of the services rendered by IPS, Finlay, which was

supposed to be approved by the assessee. In view of the fact that such

weekly time sheets were the only pieces of evidence of rendering of

actual services, the ld. CIT(A) insisted on its production, which the

assessee failed to submit. Then, the assessee was required to furnish the

details of payments made to IPS as per the terms of the so-called

Agreement, which stipulated for the release of payment within 15 days

from the date of receipt of invoice. The assessee submitted that no

payment was made to IPS and the entire amount of Rs.1.92 crore was

outstanding at the end of the year. In view of the fact that the so-called

agreement provided for realizing payment within 15 days from the date

of receipt of invoices and there was no payment whatsoever made by

the assessee to IPS throughout the year, the ld. CIT(A), prima facie,

inferred that there was no evidence of rendering of any services by IPS.

Then, the ld. CIT(A) required the assessee to furnish copies of its

correspondence with IPS about the requirement of services to be

rendered, nature of services rendered and the correspondence during and

after the rendition of services. The assessee admitted that no such 5 ITA No.1177/Del/2013

correspondence was available. The ld. CIT(A) noticed that the aspect

of rendition of actual services by IPS was not examined by the AO. He

further noticed an inconsistency in the date of the so-called Agreement

between the assessee and IPS, being 1.11.2008, which was prior to the

Agreement between the assessee and Sterlite dated 21.11.2008 for

providing the supervisory services. The ld. CIT(A) wondered as to how

an Agreement between the assessee and IPS could be made much in

advance on 1.11.2008 for outsourcing the services which were to be

rendered in pursuance of Agreement with Sterlite, which itself was dated

21.11.2008. Under such circumstances, he refused to accept the

genuineness of the Agreement with IPS and treated it as a camouflage.

The contention of the assessee that the invoices were raised by IPS and

hence the assessee was absolved from discharging the burden cast upon

it to establish that the services were rendered by IPS, was also held to be

of no substance. Considering the totality of the facts, it was held that a

copy of the so-called Agreement between the assessee and IPS was not

genuine and it was simply a make-believe arrangement aimed at

defrauding the Revenue. During the course of hearing before the ld. 6 ITA No.1177/Del/2013

CIT(A), the assessee submitted a copy of the Certificate issued by IPS

containing names of five engineers who were claimed to have been sent

by it to Sterlite for rendering supervisory services. This certificate,

again undated, was held to be self serving and hence unreliable. In the

backdrop of such facts, the ld. CIT(A) reached a conclusion that no

services were provided by IPS. However, from the weekly time sheets

issued by the assessee and approved by Sterlite and the invoices raised

by the assessee on Sterlite, he observed that the services were rendered

by these five engineers, residents of Finland, from 24.11.2008 to

24.04.2009. The factum of rendering of actual supervisory services by

the above five engineers from Finland and the absence of any services

given by IPS, led the ld. CIT(A) to conclude that the services given by

five engineers from Finland were in the nature of `Independent personal

services' covered under Article 15 of the DTAA. As the services were

performed by these engineers in India by remaining present from

24.11.2008 to 24.04.2009, being a period of more than 90 days, the ld.

CIT(A) held that such income was chargeable to tax in India in their

hands under Article 15 of the DTAA. As the income was chargeable to 7 ITA No.1177/Del/2013

tax in India, the assessee was held to be liable for withholding of tax at

source. In view of the non-deduction of tax at source, the ld. CIT(A)

held that the provisions of section 40(a)(i) were attracted and,

consequently, the disallowance of Rs.1.92 crore was upheld. The

assessee is aggrieved against the sustenance of this addition.

4. We have heard the rival submissions and perused the relevant

material on record. The short controversy in this appeal is the

sustainability or otherwise of disallowance of Rs.1.92 crore made u/s

40(a)(i) of the Act. The factual matrix in a nutshell is that the assessee

received a sum of Rs.2.41 crore from Sterlite Industries (I) Ltd., for

rendering of supervisory services in connection with erection,

commissioning and training for their plant in Tuticorin. Such services

were provided by the assessee by outsourcing the same and a sum of

Rs.1.92 crore was paid for that. The assessee claimed deduction for

Rs.1.92 crore, which the AO disallowed u/s 40(a)(i) as, in his opinion,

the amount so paid was chargeable to tax in the hands of the recipient

8 ITA No.1177/Del/2013

and, on the failure of the assessee to deduct tax at source in terms of

section 195 of the Act, the disallowance was called for u/s 40(a)(i).

5. At this juncture, it is relevant to note the mandate of section

40(a)(i), which provides that notwithstanding anything to the contrary in

sections 30 to 38, no deduction shall be allowed to an assessee in the

computation of income under the head 'Profits and gains of business or

profession' in respect of interest, royalty, fees for technical services or

other sum chargeable under this Act, which is payable outside India or 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 u/s 200(1) of the Act. Clause (B) of the Explanation to this

provision states that: 'Fees for technical services' shall have the same

meaning as in Explanation 2 to clause (vii) of sub-section (1) of section

9. The crux of this provision is that if any interest, royalty, fees for

technical services or any other sum chargeable under this Act is payable

9 ITA No.1177/Del/2013

outside India or in India to a non-resident on which tax has not been

deducted at source, etc., then, no deduction for such expenditure shall be

allowed in the computation of Business income of the payer.

6. Section 195(1) provides that: `Any person responsible for paying to

a non-resident, not being a company, or to a foreign company, any

interest ..... or any other sum chargeable under the provisions of this

Act (not being income chargeable under the head "Salaries") shall, at the

time of credit of such income to the account of the payee or at the time

of payment thereof in cash or by the issue of a cheque or draft or by any

other mode, whichever is earlier, deduct income-tax thereon at the rates

in force....'. A conjoint reading of sections 40(a)(i) and 195 brings to

the fore that it is a duty of the person responsible for paying, to deduct

income-tax at source from any amount paid/payable to a non-resident or

a foreign company which is 'chargeable under the provisions of this

Act.' If the person responsible fails to deduct tax at source on any such

amount paid/payable to a non-resident or to a foreign company without

deduction of tax at source or fails to deposit the same after due

10 ITA No.1177/Del/2013

deduction, then, the amount of expenditure incurred by such person

responsible, ceases to be deductible in the computation of his total

income under the head 'Profits and gains of business or profession.'

7. Coming back to the facts of the instant case, it is observed that the

assessee did credit a sum of Rs.1.92 crore payable outside India without

deduction of tax at source for which the AO invoked the provisions of

section 40(a)(i) of the Act. The claim of the assessee is that the expense

so incurred payable in Finland is not chargeable to tax in the hands of

IPS. On the other hand, the AO has made out a case that the amount in

question is income of the Finland resident by way of `fees for technical

services' in terms of section 9(1)(vii) read with section 5 of the Act. In

order to appreciate the rival claims, it is befitting to take note of the

prescription of section 9(1)(vii) of the Act, which provides that any

income by way of fees for technical services payable, inter alia, by: `(b)

a person who is a resident, except where the fees are payable in respect

of services utilized in a business or profession carried on by such person

outside India or for the purposes of making or earning any income from

11 ITA No.1177/Del/2013

any source outside India' shall be deemed to accrue or arise in India.

Explanation 2 to section 9(1)(vii) gives meaning to the expression '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"."

8. On circumspection of Explanation 2 to section 9(1)(vii), it

transpires that 'fees for technical services' means any consideration for

the rendering of any managerial, technical or consultancy services.

When we consider the nature of services provided to Sterlite by the non-

resident, being the 'supervisory services for erection, commissioning

and training' for setting up a plant of M/s Sterlite Industries, it becomes

patent that such services fall within the ambit of Explanation 2 to section

9(1)(vii), thereby making the payment of Rs.1.92 crore as 'fees for

technical services' covered u/s 9(1)(vii) of the Act. Once an Indian

enterprise pays fees for technical services to a non-resident, the amount

12 ITA No.1177/Del/2013

so paid becomes chargeable to tax in the hands of such non-resident and

the failure to withhold tax from such payment magnetizes the

disallowance u/s 40(a)(i) of the Act. The ld. AR was fair enough to

candidly concede that the amount payable by the assessee to the non-

resident is in the nature of 'fees for technical services' as per section

9(1)(vii) of the Act. He, however, contended that there was no liability

of the assessee to deduct tax at source from such amount because of the

applicability of DTAA which immunes from tax the amount towards

fees for technical services as paid in the present circumstances to the

non-resident.

9. Sub-section (1) of section 90 of the Act provides that the Central

Government may enter into an agreement with the Government of any

other country for the granting of relief of tax in respect of income on

which tax has been paid in two different tax jurisdictions. Sub-section

(2) of section 90 unequivocally provides that where the Central

Government has entered into an agreement with the Government of any

country outside India under sub-section (1) for granting relief of tax or

13 ITA No.1177/Del/2013

for avoidance of double taxation, then, in relation to the assessee to

whom such agreement applies, `the provisions of this Act shall apply to

the extent they are more beneficial to that assessee'. The crux of sub-

section (2) is that where a DTAA has been entered into with another

country, then the provisions of the Act shall apply only if they are more

beneficial to the assessee. In simple words, if there is a conflict between

the provisions under the Act and the DTAA on a point, the assessee will

be entitled to be subjected to the more beneficial provision out of the

two. If the provision of the Act on a particular issue is more beneficial to

the assessee vis-a-vis that in the DTAA, then such provision of the Act

shall apply and vice versa. The Hon'ble Supreme Court in the case of

CIT v. P.V.A.L. Kulandagan Chettiar [(2004) 267 ITR 654 (SC)] has

held that the provisions of sections 4 and 5 are subject to the contrary

provision, if any, in DTAA. Such provisions of a DTAA shall prevail

over the Act and work as an exception to or modification of sections 4

and 5. Similar view has been taken by the Hon'ble Bombay High Court

in CIT v. Siemens Aktiongesellschaft [(2009) 310 ITR 320 (Bom.)]. In

the light of the foregoing discussion it is discernible that if the 14 ITA No.1177/Del/2013

provisions of the Treaty are more beneficial to the assessee vis-a-vis its

counterpart in the Act, then the assessee shall be entitled to be ruled by

the provisions of the Treaty.

10. Now, the question arises as to whether the 'fees for technical

services' payable by the assessee to the resident of Finland is chargeable

to tax under the DTAA? Article 13 of the DTAA deals with 'Royalties

and fees for technical services.' The relevant part of the Article is

reproduced hereunder:-

`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 the tax so charged shall not exceed.......

3. ......

4. For the purposes of paragraph 2, and subject to paragraph 5, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which:

15 ITA No.1177/Del/2013 (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-

paragraph (a) of paragraph 3 is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in sub-paragraph (b) of paragraph 3 is received; or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

5. The definitions of fees for technical services in paragraph 4 shall not include amounts paid:

(a), (b), (c), (d),................

(e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15".

6........'.

11. A perusal of the above Article deciphers that 'fees for

technical services' arising in India and paid to a resident of Finland

may also be taxed in India. The term 'fees for technical services',

which is relevant for Article 13, has been defined in para 4 of the

Article to mean payment in consideration for rendering of any

technical or consultancy services which: `(c) make available

technical knowledge, experience, skill, know-how or processes, or

consist of the development and transfer of a technical plan or

16 ITA No.1177/Del/2013

technical design.' It is not the case of the Revenue that clauses (a)

and (b) of para 4 of Article 13 are attracted in this case. The above

definition of 'fees for technical services' for the purposes of the

DTAA makes it vivid that it refers to payment of any kind for

rendering of any technical or consultancy services which make

available technical knowledge, skill or know how, etc. to the payer.

12. The expression 'make available' in the context of 'fees for

technical services' contemplates that the technical services should be of

such a nature that the payer of the services comes to possess the

technical knowledge so provided which enables it to utilize the same

thereafter. The Hon'ble Karnatka High Court in the case of CIT & Ors.

Vs. De Beers India Minerals Pvt. Ltd. [2012 (346 ITR 467) (Karn)] has

dealt with the concept of 'make available' in the context of fees for

technical services. It has been held that : "The expression 'make

available' only means that the recipient of the service should be in a

position to derive an enduring benefit and be in a position to utilise the

knowledge or know-how in future on his own. By making available the

17 ITA No.1177/Del/2013

technical skills or know- how, the recipient of the same will get

equipped with that knowledge or expertise and be able to make use of it

in future, independent of the service provider .......". From the above

enunciation of law by the Hon'ble Karnataka High Court, it is palpable

that the technical knowledge will be considered as `made available'

when the person acquiring such knowledge is possessed of the same

enabling him to apply it in future at his own. If the services are

consumed in the provision without leaving anything tangible with the

payer for use in future, then it will not be characterized as `making

available' of the technical services, notwithstanding the fact that its

benefit flowed directly and solely to the payer of the services,. The

Special bench of the tribunal in Mahindra & Mahindra Ltd. VS. DCIT

(2009) 122 TTJ (MUM)(SB) 577 has discussed the concept of `make

available'. In that case, the lead managers had rendered technical,

managerial or consultancy services in the GDR issue, which services

were not made available to the assessee inasmuch as the payer only

derived the benefit from the technical services provided by the lead

managers without getting any technical knowledge, experience or skill 18 ITA No.1177/Del/2013

in its possession for use in future. In that view of the mater, it was held

that the `management and selling commission' could not be taxed in

India as per the DTAA because nothing was made available to the payer.

It follows that in order to be covered within the expression 'make

available', what is necessary is that the service provider should transmit

the technical knowledge etc. to the payer so that the payer may use such

technical knowledge in future without involvement of the service

provider.

13. Adverting to the facts of the instant case, we find that the technical

services provided by the non-resident are simply in the nature of

supervisory services by the engineers for erection, commissioning of the

plant of M/s Sterlite in Tuticorin. By rendering such services, nothing

has been made available by the payee to the assessee/Sterlite, which

could be used in future without involvement of such residents of

Finland. Once the plant is erected and commissioned, the supervisory

engineering services rendered by the Finland residents during the course

of such erection and commissioning get consumed in the process and

19 ITA No.1177/Del/2013

there remains nothing capable of any use in future. Going by the scope

of Article 13 vis-à-vis the nature of actual services provided by the

payees, it is manifested that such technical services do not fall within the

purview of the definition of 'fees for technical services' as given in para

4 of this Article, as nothing has been `made available' by the rendition

of technical services for any future use. If the provisions of Article 13 of

DTAA are exhausted and it is not the case of the AO that the amount be

considered under any other Article of the DTAA, it would mean that

albeit the amount is chargeable to tax in the hands of the non-residents

as per section 9(1)(vii) read with section 5(2) of the Act, but, the

chargeability will be waived because of the inapplicability of Article 13

of the DTAA, which is a more beneficial provision than section 9 read

with section 5 of the Act. In that view of the matter, the assessment

order considering payment of Rs.1.92 crore to M/s IPS Finland for

technical services as violating the provisions of section 195, thereby

resulting into disallowance u/s 40(a)(i), cannot be countenanced.

14. It is noticed that when the matter was carried by the assessee in

20 ITA No.1177/Del/2013

appeal before the ld. CIT(A), the latter opined that there was no genuine

agreement between the assessee and the IPS Finland. In view of the fact

that the assessee did incur Rs.1.92 crore to certain persons which was

duly confirmed by M/s Sterlite, the ld. CIT(A) attributed the amount to

the five engineers of Finland, covered under Article 15 of the DTAA.

15. In principle, we do not find any infirmity in the order of the ld.

CIT(A) in examining the genuineness of the Agreement with IPS

Finland and then finally holding the amount payable by the assessee to

the five engineers as covered under Article 15 of the DTAA, thereby

changing the point of the view of the AO on the same issue. It goes

without saying that the powers of the CIT(A) are co-terminus with that

of the AO inasmuch as he, while hearing an appeal against the

assessment order, has all the powers which vest with the AO on the

issue before him. The Hon'ble Summit Court in Jute Corp. of India Ltd.

Vs. CIT (1991) 187 ITR 688 (SC) has held so. Even otherwise, section

251 dealing with the powers of the CIT(A) provides through sub-section

(1) that : ` In disposing of an appeal, the Commissioner (Appeals) shall

21 ITA No.1177/Del/2013

have the following powers-- (a) in an appeal against an order of

assessment, he may confirm, reduce, enhance or annul the

assessment.....'. As such, we do not see any embargo on the power of

the CIT(A) in approaching the issue before him in a different manner

from that of the AO.

16. As the assessee has assailed the findings given by the ld. CIT(A)

with regard to the credibility of the Agreement with IPS, it becomes

imperative for us to decide about the genuineness or otherwise of the so-

called Agreement between the assessee and IPS, a copy of which has

been placed on pages 119 to 122 in the paper book. It can be observed

that this document running into four pages is on plain papers. First two

pages of this document do not bear signature of any party. These pages,

in fact, define the scope of services and all other major terms and

conditions. Going by this so-called Agreement, Clause 3 with the

caption 'Terms of payment' provides that: "All payments shall be

released within 15 days from the date of receipt of invoice." On a

specific query, it was accepted by the ld. AR that IPS Finland is a non-

22 ITA No.1177/Del/2013

related party. Despite there being a specific Clause for making payment

within 15 days from the date of receipt of invoice, the assessee admitted

before the authorities below that no amount was paid to IPS during the

whole of the year and the entire amount of Rs. 1.92 crore was payable.

Page 153 of the paper book is a copy of a certificate allegedly issued by

IPS Finland stating that five of its employees were sent to India at the

instance of the assessee. This document has been purportedly signed by

one Mr. Erkko Virrankoski, the President of IPS, Finland. When we

compare the signature on this supposed certificate with the signatures

made on pages 3 and 4 of the so-called agreement, it can be easily

deduced that both the signatures are entirely different. Apart from that,

if IPS was to render services on a regular basis to Sterlite at the instance

of the assessee, it is but natural that the assessee would have assigned

some duties in specific and monitored regularly by interacting with the

Finland concern. As against that, the assessee miserably failed to place

copies of any correspondence whatsoever with IPS. The assessee

admitted before the ld. CIT(A) that no such correspondence in the form

of letters or e-mails was available. We are at loss to appreciate as to how 23 ITA No.1177/Del/2013

is it possible that a party to whom the assessee was to allegedly pay a

sum of Rs.1.92 crore, did not correspond at all on any aspect of the work

assigned or to ascertain the progress of the work on a periodic basis.

There is another interesting aspect of the matter. The assessee entered

into Agreement with M/s Sterlite for providing supervisory services for

erection and commissioning of their plant. There is no reference

whatsoever in this Agreement with Sterlite that the services to be

provided by the assessee could be sub-contracted or outsourced from

some third party. If such services in erection and commissioning of

plant were actually to be provided by IPS to Sterlite, then, there should

have been some tripartite agreement amongst the assessee, Sterlite and

IPS, which is actually not the case. There is one more aspect. The so-

called four-paged Agreement between the assessee and IPS is dated

1.11.2008. We are at loss to comprehend as to how the assessee could

enter into agreement with IPS for rendering supervisory services on

1.11.2008, when the agreement with Sterlite was itself signed, much

later, on 21.11.08. The ld. AR was specifically asked if he could

produce Agreement with IPS in original, which was responded in 24 ITA No.1177/Del/2013

negative. To be precise, there is no documentary evidence divulging the

rendering of services by IPS Finland in the erection and commissioning

of plant of Sterlite. The above discussion leads us to an irresistible

conclusion that IPS was nowhere involved in providing supervisory

services to Sterlite for and on behalf of the assessee. The view

canvassed by the ld. CIT(A) on this aspect of the matter is, ergo,

upheld.

17. Be that as it may, there is no denial of fact that the assessee, in fact,

caused to be provided services to M/s Sterlite for which it received a

sum of Rs.2.41 crore. Discussion in the immediately preceding para

divulges that no services were rendered by IPS. From the weekly time

sheets issued by the assessee and approved by M/s Sterlite, it is clear

that the services were rendered by five engineers from Finland during

the period 24.11.08 to 24.4.2009. Once it is established that certain

individuals from Finland rendered engineering supervisory services in

the erection and commissioning of the plant in Tuticorin, the amount

25 ITA No.1177/Del/2013

payable to such residents of Finland falls for consideration under Article

15 of the DTAA, which reads as under:-

ARTICLE 15

Independent personal services

1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character may be taxed in that State. Such income may also be taxed in the other Contracting State if such services are performed in that other State and if:

(a) he is present in that other State or a period or periods aggregating to 90 days or more in the relevant fiscal year; or

(b) he has a fixed base regularly available to him in that other State for the purpose of performing his activities;

but in each case only so much of the income as is attributable to those services.

2. The term "professional services" includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

18. On going through the mandate of Article 15 of the DTAA, it can

be seen that it covers professional services or other independent

activities of similar character. The term `professional services', inter

alia, includes independent activities of engineers. Five engineers from

Finland rendered engineering services in the erection and 26 ITA No.1177/Del/2013

commissioning of the plant of Sterlite. Such services fall within the

domain of the `Professional services' of Article 15 of the DTAA.

19. The ld. AR contended that since the services contracted for the by

the assessee with non-residents fall within the meaning of Article 13 but

get excluded because of not `making available' any technical knowledge

etc., then such services cannot be once again considered under Article

15. This argument was countered by the ld. DR by contending that the

amount in question directly falls under Article 15 and hence the same

should be retained here alone.

20. The argument of the ld. AR though looks attractive at the first

blush but falls to the ground on a closer examination. The precise

question is that which of the two Articles, namely, 13 or 15, should have

primacy in the facts and circumstances as are instantly prevailing? In our

considered opinion, the answer to this question is not too far to seek.

Relevant part of Para 5 of Article 13, as reproduced above,

unambiguously states that the definition of fees for technical services in

paragraph 4 shall not include amounts paid `..... (e) to any individual ....

27 ITA No.1177/Del/2013

for professional services as defined in Article 15". When we read para 5

of Article 13 in conjunction with Article 15, there remains absolutely no

doubt that the amount payable by the assessee to certain individual

residents from Finland is covered only under Article 15 and not Article

13 of the DTAA.

21. Delving into the mandate of para 1 of Article 15 of the DTAA,

we find that the income derived by a resident of Finland in respect of

professional services or other independent activities of a similar

character performed in India can be taxed in India if he is present in

India for a period or periods aggregating to 90 days or more in the

relevant fiscal year or has a fixed base regularly available to him in

India for the purpose of performing his activities. It is noticed that the

ld. CIT(A) has computed the period of 90 days by considering the

presence of these persons in India from 24.11.2008 to 24.4.2009. The

ld. AR contended that the ld. CIT(A) has considered total period of stay

of all the five persons taken together without considering it on individual

basis. We find force in the submission of the ld. AR in this regard.

28 ITA No.1177/Del/2013

Once it is held that five individuals from Finland were not representing

IPS and, in fact, there was no valid agreement between the assessee and

IPS, then, what remains to be examined is such five residents of Finland

on individual basis. The amounts payable to each of such five persons

satisfying the duration test on individual basis would enable the ultimate

triggering of Article 15 of the DTAA. In other words, only those

Finland residents out of such five persons who independently and

individually satisfy the condition about their presence in India for a

period of 90 days or more in the relevant fiscal year or having a fixed

place regularly available to them in India for the purpose of performing

the supervisory functions, can be brought within the purview of Article

15. If, however, this condition is found wanting qua some individuals,

then the amount payable to such individual residents of Finland, would

cease to be chargeable to tax in terms of Article 15 of the DTAA

notwithstanding its taxability under section 9(1)(vii) read with section 5

of the Act. Since the relevant information for ascertaining the duration

of stay of such residents of Finland in India is not available on record

and, further, it is not clear whether they had a fixed base regularly 29 ITA No.1177/Del/2013

available to them in India for performing such services, we cannot

forthwith ascertain whether or not such a pre-requisite condition is

fulfilled. Under such circumstances, we set aside the impugned order

and remit the matter to the file of the ld. CIT(A) for deciding this aspect

of the matter and, thereafter, determining the question of disallowance

u/s 40(a)(i) of the Act. Needless to say, the assessee would be allowed a

reasonable opportunity of hearing in such proceedings.

22. In the result, the appeal is allowed for statistical purposes.

The order pronounced in the open court on 08.07.2015.

Sd/- Sd/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated, 08th July, 2015. dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.

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