Vildirect: IncomeTax-caselaws-1991-VIL-118-ITAT-

1991-VIL-118-ITAT-

Equivalent Citation: ITD 039, 355,

Income Tax Appellate Tribunal BOMBAY

Date: 08.07.1991

CHRISTIANI AND NIELSEN COPENHAGAN.

FIRST INCOME-TAX OFFICER.

BENCH

Member(s) : R. D. AGRAWALA., R. P. GARG.

JUDGMENT

Garg, AM--This is an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals) for assessment year 1984-85. The only dispute in this appeal is regarding the taxability of Rs. 20,11,527 being the fee received by the assessee under the agreement dated 8-4-1982 for conducting preliminary studies, collection and assimilation of data and finally preparing a feasibility report with regard to Trans-Harbour Communication Link between the Island city of Bombay and the Mainland.

2. Assessee is a Public Limited Company registered in Denmark. It entered into an agreement with an Indian concern, Steering Group, constituted vide Resolution No. BML-1081/D-32 dated 27-2-1981 by the Government of Maharashtra within J.R.D. Tata as its Chairman. The Special Secretary to the Government of Maharashtra, Shri M.S. Palnitkar, the Secretary to the Government of Maharashtra, Shri R.T. Atre, the Vice-Chairman of Maharashtra State Road Transport Corporation, Shri P.G. Patankar, the President and Managing Director of Taj Group of Hotels, Shri Ajit Kerkar, the former Chairman of State Industrial & Investment Corpn. of Maharashtra, Shri N.M. Wagle, and the Chief Engineer, Public Works Department, Government of Maharashtra, Shri N.V. Merani, as members. On scrutiny of the agreement with specific reference to clauses 2, 4 and 7, the Income-tax Officer concluded that the agreement gave clear-cut impression that the assessee had to carry out the work of surveying the land, preparing the designs and furnishing the technical know-how and about the finalisation of Bombay Mainland Link Project for which the assessee-company had to be paid fees for technical services/consultancy services rendered. On reading the agreement, according to him, one could easily form an opinion that the role of the assessee-company was of consultants for which they were paid fees. The assessee's claim that the fees earned by the assessee was not chargeable to income-tax in view of article III of the Avoidance of Double Taxation Agreement with Denmark (hereinafter referred to as 'AADT'), was not accepted and according to him, the payment received by the assessee was covered by clause (1) of article XIV of AADT as these were received for professional services rendered by the assessee-company in India and were in the nature of technical services, for which the assessee-company had received fees. He also observed that if the assessee had no permanent establishment in India, there could be no question of carrying on of business in India and, consequently, invoking of provisions of article III did not arise. He also held that provisions of section 9(1)(vii) of the Income-tax Act, 1961 were applicable inasmuch as the s ource of activity of the assessee-company was in India, the agreement was made in India and that the arbitration suit in case, of a dispute could be filed in India. 3. The CIT( Appeals) upheld the order of the Income-tax Officer for the detailed discussion in paragraph 15 of his order wherein he proceeded on the basis that the fees received by the assessee was for technical services. Assessee's claim that it was an industrial and commercial profit, and, therefore, was not taxable in India in view of the provisions contained in article III of AADT was not accepted on the plea that fee for technical services could be treated as industrial and commercial profit. He also upheld the taxability of the receipt under article XIV of AADT as well as section 9(1)(vii) of the Income-tax Act, 1961.

4. The learned counsel of the assessee, Shri S.E. Dastur, submitted that the receipts of the assessee, which have been held by the departmental authorities to be in the nature of fees for technical services, were in the nature of industrial and commercial profits. The term "industrial and commercial profit" is a wider concept than the term 'business'. An assessee may not be doing business but may have the receipts which are in the nature of "industrial and commercial profit" within the meaning of article III of AADT. Article III(3) excludes from the ambit of industrial or commercial profit rents, royalties, interest, dividends management charges, remuneration for labour or personal services etc., and not the fees for technical services. That the fees for technical services form part of industrial and commercial profit. In this connection, he referred to the Special Bench decision of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.). He further submitted that wherever the fees for technical services have been subject to a special treatment, they have been specifically excluded from the term "industrial and commercial profit". He referred to, in this connection, the Belgium Treaty - Article VII(6), French Treaty - Article III(5), The Japanese Treaty - Article III(6). As regards article XIV(1) applied by the departmental authorities, he submitted that the said article has no application to the facts of the case. That article, he submitted, applies to the profits or remuneration from professional services or services as an employee derived by an individual who is a resident of one of the territories. The assessee being a corporate entity is not an individual and, therefore, the said article has no application. He referred to sub-clauses (2) and (3) of the said article and submitted that the term 'individual' has been used only with respect to a living person and not to an artificial person like a company as the requirement of the presence of the individual in either of the countries for a period or periods not exceeding 183 days could not have been possible for a person other than individual.

5. He also referred to the Joweth Dictionary, Second Volume, page 1355 wherein the term 'Personal' has been used with reference to individual and also the Black's Law Dictionary, Volume 4, page 1300 referring it to human being.

6. The learned departmental representative, Shri Keshav Prasad, submitted that the assessee had surveyed the land prepared and given the technical data and reports to the assessee and, therefore, it would be a fees for technical services assessable under section 9(1)(vii) of the Act read with Explanation 2 thereto of the Income-tax Act. He further submitted that there is no specific provision in AADT to deal with the taxation of fees for technical services and, therefore, the provisions of the Income-tax Act would apply and the fees received by the assessee would be taxable under section 9(1)(vii). Referring to article III(3), he stated that this clause excludes remuneration for labour and personal services and the fees received by the assessee could be covered under either of the terms. If article XIV does not apply to the receipts in this particular case, that would mean that there is no provision in AADT for bringing the receipts to tax and, therefore, it would be taxable under section 9(1)(vii). Adverting to sub-clauses (2) and (3) of article XIV, he submitted that the word 'he' has been used in connection with employees, which is one of the entities referred to in the said article. He submitted that article XIV deals with profits or remuneration from professional services or from services as an employee. Whereas the professional service is not qualified with any entity, the service of an employee is qualified to have been rendered by an individual. He, accordingly, submitted that clause XIV would cover the fees received by the assessee and, accordingly, the assessment made by the departmental authorities should be upheld.

7. We have heard the parties and considered their rival submissions. The issue raised by the Income-tax Officer that if there was no permanent establishment of the assessee in India, there could be no question of carrying on of business in India and consequently invoking the provisions of article III did not arise, has no force. Article III of AADT reads as under :--

" III.--(1) Subject to the provisions of paragraph (3) below, tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.

(2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the establishment may be estimated on a reasonable basis.

(3) For the purposes of this agreement the term "industrial or commercial profits" shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft but shall include rents or royalties in respect of cinematographic films." The prohibition is to levy tax in one of the territories on the profits earned by a concern unless the profits are derived through a permanent establishment of the said enterprise situated in that territory. It is not that if there is no permanent establishment of an enterprise in the territory, the provisions of article III would not apply. On the contrary, as stated above, article III provides exemption from taxability of profits in one of the territories in case the profits are derived from a. permanent establishment. Having accepted the fact that the assessee had no permanent establishment in India, the Income-tax Officer was not justified in stating that the question of application of article III would not arise. It would arise only then when the assessee had a permanent establishment. We, therefore, reject this contention of the revenue.

8. The next question, which arise for our consideration, is whether the fees received by the assessee was industrial or commercial profits within the meaning of clause (3) of article III. The term "industrial or commercial profit" has not been defined. Clause (3) of article III only excludes certain items of income from its ambit. They are rents, royalties, interest, dividend, management charges, remuneration for labour or personal services etc. The receipts by the assessee, according to the revenue, are in the nature of fees for technical services. They are not in the nature of industrial or commercial profits and, therefore, one could say that there is no specific provision dealing with the taxability of fees for technical services and, in such circumstances, the provisions of Income-tax Act, 1961, particularly section 9(1)(vii) would apply and the fees would be taxable in India. We do not find any force in this contention of the revenue as will. As stated by the Special Bench in the case of Siemens Aktiengesellschaft, one has to understand the general meaning of the term 'royalty', in this case the "fees for technical services". The "fees for technical services" in the normal business parlance is a part of the profits earned by an enterprise. It is earned through a systematic series of activities carried on by the assessee, i.e. in preparing the project by conducting preliminary studies, collection and assimilation of data and finally preparing the feasibility report and, in this case, with regard to Trans-Harbour Communication Link between the Island city of Bombay and the Mainland. In the general sense of its meaning, it would be a part of the industrial and commercial profits and, therefore, it cannot be said that there is no specific provision for dealing with such kind of profit in AADT. The contention of the revenue that the provisions of section 9(1)(vii) are applicable is liable to be rejected. Furthermore, wherever the Governments of the two States have intended to deal separately with the fees for technical services, a specific provision has been made in the treaties entered into between the two countries. Say, for example, in a Belgium treaty, Article VII(6), which reads as under--

"(6) The term "industrial or commercial profits" means income derived by an enterprise from the conduct of a trade or business, but does not include income in the form of rents, royalties, fees for technical services, interest, dividends, capital gains, remuneration for labour or personal (including professional) services or income from the operation of ships or aircraft. The items of income so excluded shall be dealt with in accordance with the provisions of the other Articles of this Agreement." [Emphasis supplied]

In French treaty, Article III(5) reads as under :--

"(5) The term 'industrial or commercial profits', as used in this Article, shall not include income in the form of dividends, interest, rents, royalties, and similar payments as referred to in paragraph (2) of article VII, capital gains, remuneration for personal services, or fees for technical services." [Emphasis supplied]

And in Japanese treaty, Article III(6) reads as under :--

" The term 'industrial or commercial profits' as used in this Article shall not include income in the form of dividends, interest, rents, royalties and similar payments as referred to in' paragraph (e) of article X, capital gains remuneration for personal services, or fees for technical services as referred to in paragraph (k) of article X." [Emphasis supplied]

Looking to all these circumstances together, we are of the opinion that the fees for technical services would form part of industrial and commercial profits under the AADT with Denmark, which is under consideration before us, particularly because, unlike under other Treaties for avoidance of double taxation with other countries, fees for technical services have not been specifically excluded from the term "industrial and commercial profits" defined in article III(3) thereof.

9. The next question for our consideration is whether the fees received by the assessee could be termed as profits or remuneration for labour or personal services within the meaning of article XIV and thereby excluded from the term "industrial or commercial profits" by article III(3) of AADT. Here also, we do not find any merit in the revenue's contention. Article XIV reads as under :--

" XIV.--(1) Profits or remuneration from professional services (including services as a director) or from services as an employee derived by an individual who is a resident of one of the territories may be taxed in the other territory only if such services are rendered in that other territory.

(2) An individual who is a resident of India shall not be taxed in Denmark on profits or remuneration referred to in paragraph (1) if

(a) he is temporarily present in Denmark for a period or periods not exceeding in the aggregate 183 days during a taxable year,

(b) the services are rendered for or on behalf of a resident of India,

(d) the profits or remuneration are not deducted in computing the profits of an enterprise chargeable to Danish tax.

(3) An individual who is a resident of Denmark shall not be taxed in India on the profits or remuneration referred to in paragraph (1) if

(a) he is temporarily present in India for a period or periods not exceeding in the aggregate 183 days during a relevant 'previous year'.

(b) the services are rendered for or on behalf of a resident of Denmark,

(d) the profits or remuneration are not deducted in computing the profits of an enterprise chargeable to Indian tax.

(4) Where an individual permanently or predominantly renders services on ships or aircraft operated by an enterprise of one of the territories such services shall be deemed to be rendered in that territory."

On a bare reading of this Article, one could say that it applies only to the profits or remuneration derived by an individual who is a resident of one of the territories. This conclusion gets support from clauses (2) and (3), which provide for the exemption of tax in Denmark and India respectively if certain conditions are fulfilled by an individual. Sub-clause (a) of clause (2) of this Article and sub-clause (a) of clause (3) of this Article state that be, i.e. the 'individual', is temporarily present in Denmark/ India for a period or periods not exceeding in aggregate 183 days during a taxable year. The word 'he' and his presence for 183 days could only be referred to a living person not to an artificial person like the assessee-company before us. Again, the term " remuneration for labour or personal services" could be only by an individual and not by an artificial person as has been stated to have a reference to an individual in the Joweth Dictionary and also in the Black's Law Dictionary referring it to the services of a human being. We, therefore, do not find any force in the contention of the revenue that the fees received by the assessee would be taxable under article XIV of AADT. Emphasis has been given by the CIT (Appeals) on the word 'person', which, according to him, includes a company. It is true that a 'person' may include a company but the personal services would mean the services of a human being or a living person as, in our opinion, no personal services could be rendered by a person other than individual or a living person.

10. In the result, for the discussion aforesaid, we are of the opinion that the fees received by the assessee was in the nature of industrial and commercial profit and assessee having no permanent establishment in India, the fees received would not be taxable in India by virtue of article III of AADT with Denmark.

11. In the result, the appeal is allowed

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