Disallowance u/s 40(a)(i) unsustainable as payment is not taxable in India

DCIT Vs Acropetal Technologies Pvt. Ltd (ITAT Bangalore)

ITAT Bangalore disallowance u/s 40(a)(i) of the Income Tax Act for non-deduction of TDS for payments not qualifying as fees for technical services and not being business income taxable in India is sustainable

Facts-

The assessee filed the return of income for AY 2013-14 on 17.3.2014 by declaring an income of Rs.8,67,63,830 and the return for AY 2014-15 on 12.9.2014 declaring an income of NIL. The case was selected for scrutiny through CASS and notice u/s. 143(2) was duly served on the assessee. AO made disallowance u/s 14A r.w.r. 8D; addition towards foreign exchange gain; disallowance of expenses for setting up of office; disallowance u/s 40(a)(i) for non-deduction of TDS on onsite project expenses.

CIT(A) partially allowed the appeal of the assessee by deleting disallowance u/s 14A and section 40(a)(i). Being aggrieved, revenue has preferred the present appeal.

Conclusion-

Held that applying the ratio laid down by the Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra), we delete the addition made by the AO u/s. 14A for both the assessment years.

Held that the assessee is not liable to deduct tax at source for the reimbursement of the salary cost made to the vendor Datamatics Solutions Inc., USA for deployment of manpower. Further the vendor Link List Ltd., UAE does not have a permanent establishment in India and therefor the impugned payments cannot be taxed in India and thereby no tax is deductible at source on these payments. In view of these discussions as per the DTAA between India and USA / UAE, the impugned payments are not fees for technical services and not business income taxable in India. Therefore no disallowance is warranted u/s. 40(a)(i) for non-deduction of tax at source by the assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These appeals by the revenue is against the order of CIT(A)-1, Bangalore dated 24.9.2018 for the assessment years 2013-14 & 2014­15.

2. The common issue arising in both these appeals are as under:-

(i) Deletion of addition made u/s. 14A of the Act

(ii) Deletion of addition made u/s. 40(a)(i)

3. For the AY 2013-14, the revenue raised one more ground pertaining to CIT(Appeals) deleting the addition of Rs.9,74,734 made by the AO treating as capital in nature. During the course of hearing, the ld. DR did not press for this ground, therefore the same is dismissed a not pressed.

4. The assessee is into the business of manufacture and export of software. The assessee filed the return of income for AY 2013-14 on 17.3.2014 by declaring an income of Rs.8,67,63,830 and return for AY 2014-15 on 12.9.2014 declaring an income of NIL. The case was selected for scrutiny through CASS and notice u/s. 143(2) was duly served on the assessee. The AO made the following disallowances:-

• Disallowance u/s. 14A r.w. Rule 8D
• Addition towards foreign exchange gain
• Disallowance of expenses for setting up of office
• Onsite project expenses without TDS disallowed u/s. 40(a)(i)

5. Aggrieved, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) gave partial relief to the assessee by deleting the disallowances made u/s. 14A and section 40(a)(i). The revenue is in appeal against the order of the CIT(Appeals).

Disallowance u/s. 14A r.w. Rule 8D

6. The AO noticed during the course of assessment that the assessee has made certain investments the income from which is exempt from tax. The AO also noticed that the assessee has not worked out any disallowance towards income from investments exempt under the Act. The assessee submitted before the AO that during the year under consideration, it is not having any exempt income and therefore no disallowance u/s. 14A is warranted. However, the AO did not agree with the contention of the assessee and proceeded to invoke section 14A r.w. Rule 8D. In this regard, the AO relied on Circular No.5 / 2014 dated 11.2.2014 issued by the CBDT and also the decision of the ITAT, Kolkata in the case of M/s. Champion Commercial Co. Ltd. (ITA No.644/Kol/2012).

7. Before the CIT(Appeals), in addition to the submission that there is no exempt income earned, the assessee also submitted that the investments are made out of the proceeds of Initial Public Offer and equity capital and no interest expenses is incurred on these investments. The break-up of the investments are as follows:-

8. The assessee further submitted that the investments are strategic investments specialized in the areas of IT & ITeS in the process of acquiring major stake in those companies to have business interest. The CIT(A) allowed the appeal in favour of the assessee by stating that the investments are made out of the IPO funds and other resource and therefore no disallowance is called for. The CIT(Appeals) also relied on the coordinate Bench decision of the Tribunal in the case of J P Distilleries P. Ltd. v. ITO (ITA No.470/Bang/2017 dated 29.6.2018) wherein it was held that when there is no exempt income, no disallowance can be made u/s. 14A. Aggrieved, the revenue is in appeal before the Tribunal.

9. The ld. DR supported the order of the AO and contended that the explanation inserted to section 14A is clarificatory in nature and therefore even if the assessee does not have exempt income the AO is right in invoking the provisions of section 14A.

10. The ld AR brought to our attention the latest decision of the Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (ITA No.204/2022 dated 20.7.2022) where the Hon’ble High Court has held that the Explanation to section 14A is prospective in nature and therefore no disallowance is warranted in assessee’s case since there is no exempt income earned.

11. We notice that the Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra) held as follows:-

“5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow:

“4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income.

5. This amendment will take effect from 1st April, 2022.

6. It is also proposed to amend sub-section (1) of the said section, so as to include a non-obstante clause in respect of other provisions of the Income-tax Act and provide that no deduction shall be allowed in relation to exempt income, notwithstanding anything to the contrary contained in this Act.

7. This amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.”

(emphasis supplied)

6. Furthermore, the Supreme Court in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 has held that a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. The relevant extract of the said judgment is reproduced hereinbelow:

‘9. The High Court did not refer to the 1999 Explanation in upholding the inclusion of salary for the field break periods in the assessable income of the employees of the appellant. However, the respondents have urged the point before us.

10. In our view the 1999 Explanation could not apply to assessment years for the simple reason that it had not come into effect then. Prior to introducing the 1999 Explanation, the decision in CIT v. S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] was followed in 1989 by a Division Bench of the Gauhati High Court in CIT v. Goslino Mario [(2000) 241 ITR 314 (Gau.)]. It found that the 1983 Explanation had been given effect from 1-4-1979 whereas the year in question in that case was 1976-77 and said: (ITR p. 318)

“[I]t is settled law that assessment has to be made with reference to the law which is in existence at the relevant time. The mere fact that the assessments in question has (sic) somehow remained pending on 1-4-1979, cannot be cogent reason to make the Explanation applicable to the cases of the present assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand. “

11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years.

12. In this state of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read:

“Explanation.-For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for—

(a) service rendered in India; and

(b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India.”

The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change.

13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker.)] while following the Gujarat High Court’s decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an anterior period.

14. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz. whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding that it was a question of fact. (CIT v. SR Patton [(1998) 8 SCC 608] .)

15. Given this legislative history of Section 9(1)(ii), we can only assume that it was deliberately introduced with effect from 1-4­2000 and therefore intended to apply prospectively [See CIT v. Patel Bros. & Co. Ltd., (1995) 4 SCC 485, 494 (para 18) : (1995) 215 ITR 165]. It was also understood as such by CBDT which issued Circular No. 779 dated 14-9-1999 containing Explanatory Notes on the provisions of the Finance Act, 1999 insofar as it related to direct taxes. It said in paras 5.2 and 5.3.

“5.2 The Act has expanded the existing Explanation which states that salary paid for services rendered in India shall be regarded as income earned in India, so as to specifically provide that any salary payable for the rest period or leave period which is both preceded and succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India.

5.3 This amendment will take effect from 1-4-2000, and will accordingly, apply in relation to Assessment Year 2000-2001 and subsequent years”.

16. The departmental understanding of the effect of the 1999 Amendment even if it were assumed not to bind the respondents under section 119 of the Act, nevertheless affords a reasonable construction of it, and there is no reason why we should not adopt it.

17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.’ (emphasis supplied)

7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow:—

“22. Second, a retrospective provision in a tax act which is “for the removal of doubts” cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill Inc. v. CIT, (2005) 12 SCC 717 as follows :

17. As was affirmed by this Court in Goslino Mario [(2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute and Industries Ltd. v. CIT [(1980) 1 SCC 139].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24; Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”.

18. There was and is no ambiguity in the main provision of section 9(1)(ii). It includes salaries in the total income of an assessee if the assessee has earned it in India. The word “earned” had been judicially defined in SG. Pgnatale [(1980) 124 ITR 391 (Guj.)] by the High Court of Gujarat, in our view, correctly, to mean as income “arising or accruing in India”. The amendment to the section by way of an Explanation in 1983 effected a change in the scope of that judicial definition so as to include with effect from 1979, “income payable for service rendered in India”.

19. When the Explanation seeks to give an artificial meaning to “earned in India” and brings about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.” (emphasis supplied)

8. Consequently, this Court is of the view that the amendment of section 14A, which is “for removal of doubts” cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.

12. In the given case, on perusal of the statement of computation of income it is noticed that for the AYs 2013-14 & 2014-15 the assessee does not have any exempt income (page 2 and page 456 of paper book) and therefore applying the ratio laid down by the Hon’ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra), we delete the addition made by the AO u/s. 14A for both the assessment years.

Onsite project expenses without TDS disallowed u/s. 40(a)(i)

13. On verification of the financial statements of the assessee, the AO noticed that the asse has made payments towards certain onsite project expenses amounting to Rs.56,41,12,597towards reimbursement of salary expenses incurred outside India for the projects. The AO noted that these payments are made to Datamatics Solutions Inc. and Link List Ltd., where no TDS has been deducted at source. The assessee submitted before the AO that these companies mainly employ manpower services for the purpose to meet the objectives of clients. These companies do not impart any technical know-how, skill process or technical plan or design and therefore the amounts paid to these companies are neither fees for technical services (FTS) nor royalty. The AO rejected the contention of the assessee and concluded that the services rendered are highly technical and professional in nature and therefore withholding of tax within meaning of section 9(1)(vii) would be applicable and therefore disallowed the entire amount u/s. 40(a)(i).

14. Before the CIT(Appeals), the assessee submitted that the payments made to Datamatics Solutions Inc., USA and Link List Ltd., UAE (vendors) are for facilitating deployment of local employees to the assessee’s main customers and the payments consist of predominantly for salaries of the employees. With regard to the nature of services, the assessee submitted that it is a deputed employees who carry out the facilitating, networking and other related work and these employees are trained engineers. These employees carry out the work as per the instructions of the main customers and no special skill, technology/software are used for the work. The assessee also submitted that there is no make available of technology either by these companies or by the employees to the assessee and therefore, TDS provisions are not applicable against these payments.

15. The CIT(Appeals) after considering the various submissions made by the assessee allowed the claim of the assessee by holding that:-

“8.3.5 FINDINGS: In the impugned order and more so in the remand report, the AO has relied on the Master Services Agreements and other agreements entered by the appellant between the appellant and its clients M/s. Data Assured Communications Inc. Dubai, UAE and Tech Caliper Inc, Dallas, USA, and also with that of the Vendors Linklist & Dataassured, to define the nature of the technical services rendered by the appellant to its ultimate clients. The AO has discussed this issue in para 4 to 5.12 of the Remand Report. The AO is of the opinion that the agreements of the assessee company with vendor do not talk about the rights and liabilities of the manpower in delivering the software services. The payments, thus being made to these vendors, on account of remuneration of the employees, would be in the nature of Dependent Personal services and would be liable to TDS in India, which has not been deducted by the assessee, hence the same is not allowable as revenue expenditure under :he provisions of the Act.

8.3.6 In the rejoinder filed on 31-07-2018 to the findings of the AO in the remand report, the appellant has submitted essentially the following facts/ arguments:

i. Up to the financial year 2011-12 relevant to the Asst. Year 2012-13, the company was doing very well with the profit margin of about 30%. However, in the financial year 2012-13 relevant to the Asst. Year 2013-14, there has been a major set­back due to mis-management by the CEO which lead to high attrition of Senior technical staff, Managers, etc leaving the company abruptly. Because of this, the implementation and technical support at the onsite client’s places, got adversely impacted, consequently, the appellant could not execute. and complete the ongoing projects. The client’s had stopped the payment related to the contract.

ii. In order to keep the relationship with the ultimate clients; Tech Caliper Inc and Datassured Inc, intact and also to realize the payments for the work already completed, the appellant sought their help to find ways and means to complete the ongoing projects. Accordingly, the clients suggested some local vendors at their places (in USA & in Dubai) who could source technical manpower to complete the unfinished projects of the appellant, to tide over the crisis. For this, the appellant has produced supporting e-mail correspondences with the end clients.

iii. Under these circumstances, the terms and scope of work of the original (MSA) agreement has not been followed in this Asst. year and the new local vendors were engaged on the recommendation of the end clients at their overseas locations(USA & UAE). The facts during the Asst. year 2013­14 onwards are totally different from that of the Asst. year 2012-13 and earlier years and hence the original agreement’s terms and scope has changed substantially to suit the present situation. The payments were also made by the end customers to the local vendors, which substantiate the submissions of the appellant. From the above, it is established that the Appellant had to go against the original Master Service Agreement (MSA) for making this arrangement in order to complete the project, to address the peculiar operational issues created by the Internal crisis.

8.3.7 In the light of these submissions, I have verified the records of the appellant and also from the website about the company’s performance and financial conditions, etc, to find that the down fall of the company started from FY 2012-13 onwards, going through to FY 2016-17 when the operations of the company were finally stopped. The company started to incur huge losses from AY 2014-15 onwards and it is also seen that the appellant company has filed the Return of income for the Asst. year 2017­18 declaring Nil income and no business operations were reported.

8.3.8 It is an undisputed fact that the company was in a bad shape from FY 12-13 onwards and there was heavy retrenchment/attrition of the professionals, resulting in piling up of project work undertaken by it from its clients. Having completed most of the project work, to ease the situation, it had made the arrangement in consultation with the clients to engage the local professionals through the offshore vendors suggested by the clients, to carry out balance pending work. Accordingly, it had hired the. technical manpower from the market through the vendors Linklist Ltd., and Datamatics Solutions to provide required manpower directly to the client location abroad to complete the balance pending work under the supervision of the client’s Managers. This arrangement was not originally foreseen while signing the Master Services Agreement (MSA) with the ultimate clients Tech Caliper Inc, (ICI) and DataAssured Inc (DA). The e-mail and other correspondence exchanged between the end Clients with the appellant, establish the above beyond doubt. Therefore, it is not true that the appellant’s own employees were deputed for the onsite work and the vendors Linklist and Datamatics, have only facilitated the said deployment.

8.3.9 It is also true that the services were rendered by both the overseas third party service providers (Linklist Ltd., and Datamatics Solutions) directly at the client’s (TCI and DA) locations, without interaction with the appellant’s staff and considering the same, it cannot be said that any technology was transferred to the appellant to fulfil the definition of making available clause. The employees of the appellant having been laid off/retrenched, there was no active/passive connect of the employees of the appellant with that of the so called manpower hired abroad through the vendors. Thus, it can be safely concluded in the absence of any such contact with the employees of the appellant, no institutional memory was created, which is a must for any sort of transfer of technology/ technical knowledge. It is also stated that the operations of the appellant were shut after concluding these two projects, which were in final stages of completion, owing to the large scale attrition of the employees and also due to various financial difficulties. Further, it is also seen that the hired manpower was directly deployed at the client’s location without any training etc. to execute the pending work. Thereafter, they were discharged. The company remains to be operationally shut even today with almost all employees leaving the company, except three to four non technical staff remaining on the payrolls of the company. Thus, considering the developments happened in the company, it can he easily assumed that there was no possibility of any technology transfer in the arrangement made, in respect of which the payments under question was made for the supply of manpower from the local market through the vendors chosen by the clients and the payment was also made by the client’s, which was subsequently adjusted from the appellant’s billing. It is also true that the said services were engaged for hiring trained professionals in the overseas market to attend to the last leg of the project work under taken by the appellant for the ultimate clients (TCI & DA). Thus, the job works provided by these professionals for the ultimate clients at the client’s overseas location for one time project, that too in final stages, cannot transfer or create any institutional memory. Hence, it can be safely concluded that there is no making available of any sort of transfer of technology. The e-mail correspondence between the appellant, ultimate clients (TCI & DA) and the vendors link list and Datamatics Solutions and the invoices raised in this regard, make it clear that the services rendered by the vendors was only to locate/recruit train man power available in the overseas market and provide the same to the ultimate clients location to complete the pending work under supervision of their senior engineers. From this the services rendered by the vendors can be described as ‘pay roll services’, and for this purpose the vendors were billed on “service fee” plus the “reimbursement of the salaries of the manpower hired”. Thus, under these circumstances it can be said that the appellant being the recipient of services has not been enabled to use the technology which the service provider has used. Further, there was no new and sophisticated technology involved in the work as the deployment was for the untrained manpower hired from the local market abroad.

8.3.10 Considering the circumstantial evidence furnished, it is clear from the direct deployment of the Technical manpower engaged from the market and at the clients onsite (to get the work done), without any training or skill up-gradation, that the nature of the work to be ‘simple and basic entry level needed for the implementation and maintenance tech support work’. Therefore, the assumption drawn by the AO that highly skilled Technology services were rendered by the manpower to the Appellant is incorrect.”

16. Aggrieved the revenue is in appeal before the Tribunal.

17. We have considered the rival submissions and perused the material on record. The ground under which the AO is contending that TDS provisions are applicable to the payment made by the assessee to the vendors is that the manpower employed are doing highly technical job whereby the technical knowledge is ‘made available’ to the assessee. The payments made by the assessee to Datamatics Solutions Inc., USA need to be analysed from the applicability of article 12 of the Double Taxation Avoidance Agreement with US, which states that the provisions of fees for technical service would be attracted if services rendered ‘make available’ technical knowledge, experience, skill, know-how, or processes or consists of the development and transfer of a technical plan or technical design. The Hon’ble High Court of Karnataka in the case of CIT v. De Beers India Minerals (P.) Ltd., 346 ITR 467 has considered what is ‘make available” and held as follows:-

“21. Therefore from the aforesaid Judgments it is not possible to hold that there is a departure by the advance Ruling Authority in respect of its earlier views. It is in this background we have to look at the facts of this case, in order to find out whether the service provider has made available the technical knowledge to the assessee so as to foist the liability of payment of tax.

22. 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, skill?, 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 test of rendering services and making technical knowledge available at the same time is satisfied.

23. The agreement entered into between the assesses and the Fugro makes it clear that the objective of the survey will be to provide high quality, high resolution geophysical data suitable for selecting probable kimberlite targets. The assessees acknowledge the Fugro to be an expert in all aspects of the air borne survey and subsequent data processing. All operations, tests and calibrations have to be carefully undertaken to ensure the highest possible data quality and to meet or exceed the specifications described in the agreement. It is the responsibility of the Fugro to take the appropriate action to maintain the level of data quality. Survey areas are also mentioned in the agreement. The contract provides that all helicopter charges for the entire survey will be the responsibility and cost of the assessees.

24. The Fugro air borne services provides four varieties of applications of advanced geophysical mapping technologies. They are Electromagnetic, Aeromagnetic, Airborne Gamma-Ray Spectrometry, Airborne Gravity. In the instant case, Fugro air borne surveys helicopter borne time-domain EM system known as DIGHEM was adopted to carry out the survey. A copy of the survey report is also placed on record. The said report discloses that survey was conducted in 8 blocks. The particulars are clearly set out. It also sets out that the air borne data acquisition system utilized on the project consists of the sub-systems which are set out therein. A Bell 206L helicopter registration VT-DAK was used for the survey. The helicopter pilots and aircraft engineers were contracted from Deccan Aviation Pvt. Ltd., by the assessees. The DIGHEM compact system specifications are also provided. They have also set out the particulars such as EM Receiver and Logging Computer, GPS Receiver, Navigation System, Magnetometer, Altimeter, Radar Alitmeter and Barometric Altimeter. They also provided Ground Data Acquisition Equipment, GPS Base Station System, Magnetic Base Station System and Equipment Calibrations and Monitoring. Data from the air craft and base stations were transferred to the field processing computer by flash disk. Preliminary processing and quality was carried out on a daily basis. Data quality was verified by the assessees representative in the field on a daily basis. Photographs are taken. Tests and Calibrations report are also furnished. Text file indicating survey information co-ordinating system, processing techniques and equipment specifications are also provided.

25. From the aforesaid material it is clear that Fugro conducted air borne survey using its specilized equipments. Helicopter for the survey was hired by the assessees. All the logistics of the survey such as flight schedule, re-flights survey lines, control lines, positioning, etc., were set up by Fugro. Fugro deputed technical personnel for conducting the survey and the data collected from the survey was provided to the assessees in a particular format. The consideration paid under the agreement with Fugro was essentially for providing specific data for which Fugro was required to conduct the airborne survey. Fugro undertook all the operations, test and calibrations in order to provide the assessees with the highest possible data quality. Fugro has performed the surveys using substantial technical skills, knowledge and expertise. After completion of the said survey work, Fugro has delivered the following products:

(1) Raw XYZ file for each block with header.

(2) Final XYZ file for each block with header.

(3) Digital plot files for the RTP and 3kHz Resistivity maps for each block.

(4) Aircraft data for entire survey. Pseudocolour 3kHz resistively map for each block, Pseudo-sunshare RTP TMI map for each block;-. Acquisition and processing report. (Tests and Calibrations report), Analog rolls for the entire survey.

26. Thus, in terms of the contract entered into with Fugro, they have given the data, photographs and maps. But they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future. The Fugro has not made available the aforesaid technology with the aid of which they were able to collect the data, which was passed on to the assessees as a technical service. In other words, Fugro has rendered technical service to the assessees. They have not made available the technical knowledge with which they rendered technical service. There is no transmission of technical knowledge, expertise, skill, etc., from Fugro along with technical services rendered by them. The assessees are completely kept in dark about the process and the technologies which the Fugro adopted in arriving at the information/data which is passed on to the assessees as technical service. The assessee is unable to make use of the said technical knowledge by itself in its business or for its own benefit without recourse to Fugro. In fact, the question whether along with rendering technical services, whether the technical knowledge with which that services was rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services. If along with technical services rendered, if the service provider also makes available the technology which they used in rendering services, then it falls with the definition of fee for technical services as contained in DTAA. However if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is with-held, then, such a technical service would not fall within the definition of technical services in DTAA and not liable to tax.

27. In the background of the aforesaid principles and facts of this case, it is clear that assessees acknowledge the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. That is the technical services which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assesses to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vii) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue.

28. Fugro is engaged in providing services relating to collection and processing of the data. The contract is for providing of services and not for supply of technical design or plan. Fugro compiles the data and processes them for error correction and delivers it to the assessees in a computer readable media. Using this raw input data provided by Fugro, the assessees using further process in software technology, which are not owned or provided by Fugro, generates a report to determine probable targets. The reports and maps are only additional mode of representation of data and it is not a technical plan or design as understood in law. Para 1.15 of the agreement entered into between the assessees and the Fugro, makes it clear that the information and data to any site on which any work services are performed under the agreement shall belong exclusively to the assessees and its assigns and the Fugro shall keep such information strictly confidential. Therefore, the technical plan or design always belong to the ownership of the assessees. It never vested with Fugro. Under the terms of the agreement, the data collected is kept confidential under the supervision of the Government of India. Under the terms of the agreement, the ownership of the data collected or other documents vest with the assessees only and not with Fugro. Therefore the Fugro was never the owner of the said data and hence the question of transfer of such data does not arise. It is because the assessees were given the licence for prospecting under the provisions of Mines & Minerals (Development and Regulation) Act, 1957. By virtue of the aforesaid licence, the assessees were given the right to undertake reconnaissance, prospecting or mining operations in any area except under and in accordance with the terms and conditions of reconnaissance permit or of a prospecting licence as the case may be of a mining lease granted under the Act and the Rules made thereunder. Reconnaissance permit means permit granted for the purpose of undertaking the reconnaissance operations. Reconnaissance operations means any operations undertaken for preliminary prospecting of a mineral through regional, aerial, geophysical or geochemical surveys and geological mapping on a grid specified from time to time by the Central Government or sub-surface excavation. Prospecting operations means any operations undertaken for the purpose of exploring, locating or proving mineral deposits.

29. Rule 16 of Mineral Concession Rules, 1960 provides that lincensee shall submit to the State Government a six monthly report of the work done by him stating that number of persons engaged and disclosing in full the geological, geophysical or other valuable data collected by him during the period. Further sub-rule (3) makes it clearly obligatory that while submitting the report under sub-rule (1) or (2), the licensee may specify that the whole or any part of the report or data submitted by him shall be kept confidential and the State Government shall thereupon, keep the specified portions as confidential for a period of two years from the expiry of the licence or abandonment of operations or termination of the licencee, whichever is earlier.

30. It is because of the statutory obligation imposed on the licencee in the contract entered into between the assessees and Fugro, it is specifically provided in clause (15) that all information and data relating to any site on which any work or services are performed under the agreement shall belong exclusively to the assessees and its assigns and the contractor shall keep such information strictly confidential. All information recorded in digital and analog form and all products derived from information are the property of the assessees. The contractor agrees not to divulge any information to any person or organisation without the written permission of the assessees and only to be divulged to the assessee personnel who are specified by the assessees as appropriate persons to whom the contractor may provide information. Further clause (16) provides that the contractor shall not grant entry to any data site or aircraft to any person other than those authorised by the assessees and the contractor shall exercise all due care to preserve the integrity of all information.”

18. With regard to payments made by the assessee to Link List Ltd., UAE., we notice that as per the DTAA between India and UAE, there is no specific clause with regard to the taxability of fees for technical services, and therefore in our considered view the nature of income would take the character of Business Income which can be taxed only when there is a permanent establishment (PE) for the recipient of the payment. In this regard we place reliance on the decision of Ahmedabad Bench of Tribunal in the case of Dy. CIT (International Taxation) v. Welspun Corporation Ltd. [2017] 77 taxmann.com 165 (Ahd. – Trib.) where it is held that –

“28. As we hold so, we are alive to the fact that there is no specific taxability provision, under India Thailand tax treaty or, for that purpose, under India UAE tax treaty, with respect to taxability of fees for technicalservices. Profits earned by rendering fees for technicalservices are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts being altered, the fee for technicalservices is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technicalservices. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technicalservices. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technicalservices as well. With FTS article or without FTS article, the income by way of fees of technicalservices continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technicalservices.

29. In view of the above discussions, in our considered view, even if the receipts in question are in the nature of fees for technicalservices in the hands of Afras UAE and GMS Thailand, these receipts are not taxable in the hands of these entities, in terms of the respective tax treaties, in India. It is only elementary that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either.”

19. What follows from the above is that since DTAA provisions are more beneficial to the entities based in such countries, with which India has tax treaty, but such tax treaty do not have FTS clause, then there is no question of taxability of such receipts under the Income Tax Act, either as business income or other income. A similar view is held by the Pune Bench of the Tribunal in the case of Deputy Director of Income-tax, (International Taxation)-II, Pune vs Tetra Pak India (P.) Ltd. [2019] 111 taxmann.com 205 (Pune – Trib.)

20. Now we will consider the facts of the present case to decide the applicability of the above decisions to assessee’s case. From the perusal of the materials it is noticed that the assessee has entered into a contract with the vendors Linklist Ltd.,UAE and Datamatics Solutions Inc., USA to provide required manpower directly to the ultimate clients Tech Caliper Inc, (ICI) and DataAssured Inc (DA). The assesse could not carry out its commitment given to the customers due to the retrenchment /attrition of the professionals that resulted in project work not getting completed on time. The assessee entered into agreement with Datamatics Solutions Inc., USA and Link List Ltd., UAE for the purpose of using their services towards providing required manpower who would be directly employed in clients location in order to complete the pending project works. The CIT(Appeals) has made a note that this is substantiated by the email correspondence between the assessee and its customers. The CIT(Appeals) has also given a detailed finding which is extracted above to state that there is no transfer of technology by the employees of the vendor to the assessee. The scheme of arrangement as can be seen from the facts of this case is that the assessee has entered into agreement with Datamatics Solutions Inc., USA and Link List Ltd., UAE for supply of manpower to be employed in customer locations instead of assessee’s own staff being employed. It is also noticed that the vendor employees work as per the directions of the ultimate customers without much interaction with the assessee. Therefore, it can be said that the services rendered by third party vendors can be described as payroll services and in the invoices raised by the vendors the description is towards reimbursement of salaries of the manpower hired. Considering the nature of service rendered by the vendors to the assessee, there is no use of technology in the services provided. The vendor is not employing any technology but is providing manpower service to the assessee in order to enable the assessee to meet the project commitments given to the customers. Though the deployed employees may possess the technical knowledge to carry out the services to the customers, no technology is made available to the assessee. Therefore, following the ratio laid down by the jurisdictional High Court in the case of CIT v. De Beers India Minerals (P.) Ltd (supra), we hold that the assessee is not liable to deduct tax at source for the reimbursement of the salary cost made to the vendor Datamatics Solutions Inc., USA for deployment of manpower. Further the vendor Link List Ltd., UAE does not have a permanent establishment in India and therefor the impugned payments cannot be taxed in India and thereby no tax is deductible at source on these payments. In view of these discussions as per the DTAA between India and USA / UAE, the impugned payments are not fees for technical services and not business income taxable in India. Therefore no disallowance is warranted u/s. 40(a)(i) for non-deduction of tax at source by the assessee.

21. For the AY 2014-15, the assessee made payment of 42,42,99,232 under the same agreement with Datamatics Solutions Inc., USA and Link List Ltd., UAE and the amount is disallowed by the AO on the similar grounds u/s.40(a)(i). In view of our decision given in paragraphs 17 to 20 above with regard to the impugned payments made by the assessee to the third party vendors and on similar facts, we hold that the assessee was not liable to deduct tax at source and therefore no disallowance is warranted.

22. During the course of hearing, the ld. AR made alternate submissions with regard to the applicability of exception provided in Isection 9(1)(viib) of the Act for the payments made by the assessee to the vendors. Since we have allowed the claim of the assessee in the above paragraph, this alternate plea has become academic and does not warrant any adjudication.

23. In the result, both the appeals of the revenue are dismissed.

Pronounced in the open court on this 14th day of September, 2022.