Vildirect: IncomeTax-caselaws-1996-VIL-15--DT

1996-VIL-15--DT

Equivalent Citation: [1996] 222 ITR 551 (AAR)

AUTHORITY FOR ADVANCE RULINGS

A. A. R. No 254 of 1995.

Date: 30.04.1996

TEKNISKIL (SENDIRIAN) BERHARD

COMMISSIONER OF INCOME-TAX

N. A. Dalvi, B. S. Raut and S. H. Kapadia, for the appellant

BENCH

S. RANGANATHAN D. B. LAL AND R. L. MEENA, J.

JUDGMENT

This is an application under section 245Q(1) of the Income-tax Act, 1961 ("the Act"). The applicant was incorporated as a company at Kuala Lumpur in Malaysia on November 28, 1978. A certificate of residency in Malaysia from the Inland Revenue Department at Kuala Lumpur has also been produced. The memorandum of association of the company authorised it, inter alia, to carry on the following objects :

" (1) To engage and hire or otherwise procure mechanical, electrical, civil, professional, clerical, manual and other staff and workers and to allocate their services to any person, firm or company requiring the same and to establish and maintain an employment agency.

(a) To provide or procure the provision by others of every and any service need want or requirement of any business nature required by any person, firm or company in or in connection with any business carried on by them."

On September 8, 1993, the applicant, Tekniskil (Sendirian) Berhard (hereinafter referred to as "TSB") entered into a contract with Hyundai Heavy Industries Co. Ltd. (hereinafter referred to as "HHI"), having its registered office in Korea. The agreement recites that HHI had been awarded certain contracts in the Neelam Process Complex and NQP Process Complex in the territory of Bombay High by the Oil and Natural Gas Commission of India. It had to execute these projects involving offshore installation works from the end of September, 1993. For carrying out the above work, HHI needed the services of skilled labour and requested TSB to supply the skilled labour necessary to carry out the above works. Under the agreement, TSB had to supply in time necessary labour force duly qualified to carry out the projects in question. Under the schedule to the contract TSB had to provide 56 welders, 24 riggers, 4 winch operators, 6 barge oilers, 6 mechanics and 4 electricians (in all 100) and HHI was to pay for these workmen, wages at the rates mentioned in the Schedule. The work of the labourers had to be executed on two barges belonging to HHI and the work done had to be supervised by one experienced supervisor on the main barge and a working supervisor on the second barge. It was the responsibility of TSB to have the workmen (particularly, welders) duly certified by an appropriate agency by providing all materials, equipment, consumables, NDT testing films, radiography reports, inspection_third party fee and all associated test cost which was reimbursed by HHI at a particular rate per workman. The workmen were to function under the directions and supervision of HHI which could disqualify and demobilize any of the workers in the event of their services not being satisfactory on certain grounds stated in the contract. TSB was to pay salary, insurance premium, charges for mobilization to Bombay and demobilization from Bombay, all taxes, medical treatment at onshore sites including transportation by helicopter, application for visa and passport to enter India and work permit and security pass issued by HHI. The charges paid by HHI apparently included a margin to cover all the expenses incurred by the applicant in the procurement of the necessary labour. It is stated that work under the contract which commenced on October 8, 1993, came to a conclusion in April, 1994. It is not quite certain whether the duration of the contract exceeded six months.

HHI applied to the Deputy Commissioner of Income-tax, Special Range-46, Bombay, on December 11, 1993, requesting the latter to determine the appropriate portion of the gross consideration payable to TSB in terms of this contract which is chargeable to income-tax in India and the percentage of tax required to be deducted from the payments made to TSB. On December 23, 1993, the Deputy Commissioner of Income-tax passed an order under section 195(2) of the Act directing HHI to deduct income-tax at the rate of 6.5 per cent. on payments relatable to work done in India and 0.65 per cent. of the payments relatable to work done outside India. Not satisfied with this, TSB applied to the Deputy Commissioner of Income-tax, Dehradun, on April 4, 1995, praying for a certificate under section 197 of the Act permitting HHI to make payment to TSB without deducting any tax at source under section 195 of the Act since, in its opinion, no portion of the amounts paid by HHI to TSB under the contract would be chargeable to income-tax. The Deputy Commissioner of Income- tax, however, by a letter dated April 10, 1995, dismissed the application as misconceived.

It is in these circumstances that TSB has made this application on November 22, 1995, to the authority seeking its ruling on the following questions :

" (a) Whether based on the stated facts of the case, the amounts received by the applicant outside India are taxable in India ?

(b) Whether based on the stated facts of the case, the nature of activities performed by the applicant in India, constitute a permanent establishment (PE) in India as per the provisions of article 7 of the Double Tax Avoidance Agreement (DTAA) between India and Malaysia ?"

It may perhaps be stated at the very outset that the order passed under section 195(2) by the Deputy Commissioner of Income-tax, Bombay, on December 23, 1993, was based on the provisions of section 44BB of the Act, the relevant portion of which reads thus :

" 44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. _ (1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent. of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head 'Profits and gains of business or profession' :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely :-

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India ; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils outside India."

Reference may also be made to the charging provision contained in section 9(1)(vii) of the Act which is in the following terms :

" Section 9(1).- The following incomes shall be deemed to accrue or arise in India . . . .

(vii) income by way of fees for technical services payable by _

(a) the Government ; or

(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : . . . .

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'."

On the strength of these two provisions, the case of the Department appears to be that the entire amount of fees received by TSB from HHI would be chargeable under section 9(1)(vii) as income accruing or arising in India and that in any event even assuming that the applicant is engaged in a business, the profits and gains of such business chargeable to tax under the Act under the head "Profits and gains of business or profession" would be ten per cent. of the aggregate amounts specified in sub-section (2) of section 44BB.

On behalf of the applicant, however, a complete exemption of the payment received from HHI is claimed on the basis of the provisions of the Double Taxation Avoidance Agreement between India and Malaysia (DTAA) which was entered into with retrospective effect from April 1, 1973, though the agreement was signed only on October 25, 1976. Attention is invited to article 7 of the agreement which in so far as is relevant for our present purposes reads as follows (see [1977] 107 ITR (St.) 41 ) :

"Article 7 Business profits

(1) The income or profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State, unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, tax may be imposed in that other Contracting State on the income or profit of the enterprise but only on so much of that income or profits as is attributable to that permanent establishment.

(2) Where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment, the income or profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. . . .

(6) Where income or profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article. . . ."

To appreciate the purport of this paragraph, it is also necessary to refer to the definition of the expression "permanent establishment" which is contained in article 5 of the agreement and reads as follows :

" Article 5-Permanent establishment

(1) For the purposes of this agreement, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on.

(2) The term 'permanent establishment' shall include especially :

(a) a place of management ;

(b) a branch ;

(d) a factory ;

(e) a workshop ;

(f) a warehouse ;

(g) a mine, oil-well, quarry or other place of extraction of natural resources ;

(h) a building site or construction, installation or assembly project which exists for more than six months ;

(i) a farm or plantation ;

(j) a place of extraction of timber or forest produce. . . .

(4) An enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State, if :

(a) it carries on supervisory activities in that other Contracting State for more than six months in connection with a construction, installation or assembly project which is being undertaken in that other Contracting State ;

(b) it carries on a business which consists of providing the services of public entertainers (such as stage, motion picture, radio or television artistes and musicians) or athletes in that other Contracting State unless the enterprise is directly or indirectly supported, wholly or substantially, from the public funds of the Government of the firstmentioned Contracting State in connection with the provision of such services. . . ."

Based on the above provisions, the argument addressed on behalf of the applicant is that the fees derived by it from HHI arise out of a business in the supply of skilled labour carried on by it. The taxability of this kind of income is governed by article 7 of the DTAA which is unequivocal that the income cannot be taxed in India unless the applicant is found to have a permanent establishment in India and the profits are attributable to such permanent establishment. Article 5(1), which defines a "permanent establishment" for the purposes of the DTAA envisages a fixed place of business in which the business of the enterprise is wholly carried on. According to the applicant, it has no place of business at all in India, much less a fixed place of business. It follows, therefore, counsel says, that the fees received by TSB from HHI are not taxable in India.

The Department's counter to this plea is two-fold. It is said that the applicant's income is by way of "fees for technical services" a category or head of income which is sui generis and which along with royalties is given a treatment different from business income under various double tax treaties. If there is no such special provision in the DTAA with Malaysia, it is said, the normal provisions of the Act will govern their taxability_ in the present case section 9(1)(vii) read with section 44BB and the provisions of article 7 which pertains to a different head of income altogether should not be brought in. Secondly, it is said, even if article 7 were to apply, the fees received will still be taxable in India as they are connected with the applicant's permanent establishment in India. It is pointed out that the skilled workers provided by TSB work on two barges which are in Indian territory. These constitute, according to the Department, a fixed place of business in India from which the applicant is carrying on its business.

The authority is of the opinion that neither of these contentions put forward by the Department can be accepted. It is true that the income derived by the TSB under the agreement can be described as fees for technical services though that specific expression does not find a place in the contract. But this makes no difference because that description is not sufficient to take it out of the purview of article 7 which makes the income or profits of an enterprise of a State taxable only in that State, unless the enterprise carries on business in the other State through a permanent establishment situated therein. To say that TSB is not carrying on a business and that income by way of technical services has not been specifically provided for by the DTAA may indeed be fatal to the case of the Department because by virtue of article 7 all the income or profits of an enterprise in a State are taxable only in that State save in two cases. The two exceptions are : (a) the profits of a business carried on through a permanent establishment in another State and attributable to such permanent establishment ; and (b) income or profits which are dealt with separately in other articles of the agreement. That apart, there can be no doubt, whatsoever that the supply of skilled labourers to other companies is in the nature of a business activity. In its application dated April 4, 1995, under section 197, the applicant has stated that it is engaged in the business of supplying skilled labour for execution of offshore projects for jacket and riser installations. The contract with HHI was entered into in the course of its business. No details of any contracts of similar nature entered into by the applicant with other parties have been furnished. Still, the very nature of the contract is such that it spells out a business. The assessee is to engage skilled labour and supplies the labourers to other companies requiring such labour. It gets paid on the basis of certain rates per unit of labour employed and, by effecting economies in the scale of wages it offers to its employees, earns a margin of profit for itself. This is clearly in the nature of a business and article 7 will be attracted.

The fact that the remuneration paid to the assessee may be in the nature of technical fee within the scope of section 9(1)(vii) does not make a difference. Fees of this nature can be earned in business or otherwise. If earned in the course of business, they constitute income from business. There is no incompatibility between recognising the receipts as royalties or technical fees and also looking upon them as the profits of a business. Judicial decisions have recognised the principle in regard to other types of receipts such as dividends and interest. That being so, when technical fees are received in the course of business, one cannot deny them the treatment envisaged by article 7, specially intended for application to business income. That apart, as pointed out earlier, there are several DTAAs which prescribe different modes of taxation for business and for royalties and fees for technical services but they are clear that the provisions of the "business" clause of the treaty (article 7 here) will govern where such technical fees are earned in the course of a business with a permanent establishment in the State in question. See for e.g., the DTAAs between India and Australia [article 11(4)], Canada [ article XIII(SC) ] or U. S. A. [ article 12(6) ]. These indicate that even where royalties and fees for technical services receive separate treatment under a DTAA, it is the article relating to computation of business income that would apply where such royalties or fees arise in the course of a business carried on by the recipient. For these reasons, the payments received by TSB in this case from HHI have to be taxed under article 7 of the DTAA.

It follows, therefore, that the receipts can be taxed only if they are attributable to a permanent establishment of the applicant in India. It is asserted on behalf of the applicant that it has no fixed place of business in India within the meaning of article 5(1) of the DTAA or even any of the other types of nexus included in the definition in paragraph (2) of article 5. At first blush, it appears that the applicant can be said to have a fixed place of business in India as the labourers supplied by it to HHI work on two barges located in Indian territory. It was put to counsel for the applicant why a business of labour contract for work to be done by such labour on barges located in Indian territory could not be considered to be an enterprise with a fixed place of business in India. The reply was that this would not be so because the applicant's job was only to despatch the labourers recruited by it to India and this involved no operations in India. The installation work done in India was that of HHI and the labourers, though recruited and paid by the applicant, were really executing the work of HHI, under its supervision and control and at the "site" provided by it. It is a pity that, though the present application was filed long after the contract itself had been completely executed, no details have been furnished by the applicant as to the modus operandi of the assessee. It, however, appears from the papers filed that all of the labourers were foreigners (possibly Malaysians) and that they were transported to the mainland of India from abroad and taken back on demobilisation at the applicant's cost. According to the applicant's counsel, TSB was not at all concerned with any operations in India except to look after the welfare of the labourers. The applicant's job was to supply labourers but it was not concerned with the details of the work to be done by them, the spot where the work was to be done or the actual control of the labour supplied, vis-a-vis the work to be done by them. The authority is of the view that there is some substance in this contention but the broad proposition put forward on behalf of the applicant needs to be qualified in some respects. If all that the applicant has done is to recruit foreign labour abroad and make them available to HHI in India, the profits of the applicant can be said to have no relation to a permanent establishment in India. But it is possible, on the facts of a particular case, for the "labour contractor" to have other activities in India, the location of which may amount to a permanent establishment within the meaning of articles 5(1) and (2). Such activities may take, inter alia, the following forms : a recruitment office for the labour ; an establishment or organisation to impart training or to conduct tests and examinations or to issue qualification certificates ; an organisation making arrangements for the reception, boarding and lodging of the labourers before they are taken by HHI to the barge ; field arrangements or establishment to look after the payment, insurance, health and medical treatment of the labourers supplied to HHI and the like. But it is asserted on behalf of the applicant that it has no such activities in India. It would have been better if the applicant had described the detailed working of its mechanism in these respects in greater detail but, in the absence thereof, we proceed on the basis of the statement of fact by the applicant that it has no such activities in or around any location in India which could constitute a permanent establishment within the meaning of article 5(1) or 5(2).

In the application submitted by the applicant under section 197, there is some debate as to the possible application to the present case of clause (a) of paragraph 4 of article 5 on the ground that the applicant is carrying on some supervisory activities in connection with the project which is undertaken in India. The authority agrees with the applicant's counsel that there are no such activities. Paragraphs 5.1, 7.2 and 9.6 of the agreement make it sufficiently clear that the entire control and supervision over the workers' execution of their work is with HHI. Article 2.4 of the agreement, no doubt, refers to the applicant supplying two experienced supervisors but they are only a higher category of the work force supplied by the applicant and the supervision done by them of the work of others is also done for and on behalf of HHI. There is no reason to hold that the provisions of article 5(4)(a) of the DTAA are attracted in the present case.

Based on the stated facts of the case and in the light of the aforesaid discussion, the authority makes the following :

Ruling
(a) Whether based on the stated facts of the case, the amounts received by the applicant outside India are taxable in India ?	No
(b) Whether based on the stated facts of the case, the nature of activities performed by the applicant in India, constitute a permanent establishment (PE) in India as per the provision of article 7 of the Double Tax Avoidance Agreement (DTAA) between India and Malaysia.	No"

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