Case Law Details
DCIT Vs Kalpataru Power Transmission Ltd. (ITAT Ahmedabad)
ITAT Ahmedabad held that in absence of FTS (Fees for Technical Service) clause in the India UAE Tax Treaty, payment for the FTS services cannot be taxed in India, unless it is established that the overseas company i.e. Oilstone UAE has a permanent establishment (PE) in India.
Facts- The assessee is an Indian Company engaged in the business of Engineering, Procurement and Construction (EPC) Contracts relating to infrastructure facilities comprising high power transmission line, transmission and distribution, laying of electrification of railway lines, cross country laying of oil & gas pipelines etc.
In one of the EPC Project executed by the assessee’s Branch Office in Uganda, the assessee has made payment for services of towers design including designing of its foundation and structural drawing to Oilstone Technologies DMCC of UAE (Oilstone UAE) and no tax has been deducted at source on such payment by the assessee on the ground that such payment was not chargeable to tax in India.
On verification, it was found by the TDS Officer that TDS was not deducted against certain payments made outside India. The assessee was issued show cause notice as to why the assessee should not be treated as “assessee in default” u/s.201(l) and u/s.201(lA) for non-deduction of tax on payments made to Oilstone UAE.
Post receipt of reply, as per the TDS Officer, it was case of royalty and not of FTS. Accordingly, the TDS Officer held that the assessee had made payment to Oil stone UAE for various services as mentioned in the Explanation 2 of Section 9(l)(vi) of the Act and that the payment was in the nature of royalty and since the assessee had failed to deduct tax on such payment.
Aggrieved with the aforesaid order, the assessee filed appeal before CIT(Appeals) challenging the additions made / treatment given by the TDS Officer. The Ld. CIT(Appeals) allowed the appeal of the assessee. Being aggrieved, revenue has preferred the present appeal.
Conclusion- In our considered view, Ld. CIT(Appeals) has correctly held that this was a case where the payments were made to Oilstone UAE to carry out the services of project specification study, preparation of tower designs, preparation of structural drawings of tower, preparation of tower test data documents etc. and various other services as mentioned in the service agreement and therefore, qualify as FTS and are not Royalty payments.
It is a well-settled law that if there is no FTS clause in the tax treaty, then the payments can be subject to tax in India only if the overseas company which has rendered the services has a permanent establishment (PE) in India and then such services may be taxed under Article 7 of India UAE Tax Treaty as business income.
Held that we are of the considered view that in absence of FTS clause in the India UAE Tax Treaty, payment for the aforesaid services cannot be taxed in India, unless it is established that the overseas company i.e. Oilstone UAE has a permanent establishment (PE) in India. In the instant facts, we observe that there is no allegation that the service provider i.e. Oilstone UAE has Permanent Establishment (PE)/business connection in India so as to hold that the services may be taxable in India under Article 7 of the India UAE Tax Treaty. Accordingly, since the payment do not qualify as FTS under the India UAE Tax Treaty in absence of FTS clause in the said treaty, we are of the considered view, that there was no requirement for the assessee to withhold taxes on such payments made to Oilstone UAE.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This is an appeal filed by the Revenue against the order of the ld. Commissioner of Income Tax (Appeals)-13, Ahmedabad, in proceeding u/s. 250 vide order dated 09/03/2020 passed for the assessment year 2018-19.
2. The Department has raised the following grounds of appeal:
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has red in deleting the demand of Rs 2,28,23,683/- by cancelling 201(a)/(1A) of the income-tax Act and allowing the appeal of the assessee.
2. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) has erred in law and on facts in holding that the payment for designing of towers made to Oilstone Technology, DMCC UAE, a foreign company was in the nature of FTS and not royalty
3. Ld CIT(A) end in not appreciating the detail findings of the AO that as per me of agreement dated 11.0.2016 between the assessee and Oilstone Technology DMCC, UAE, the work of designing of tower, including designing of foundation and nature of tower constitutes nature of way and not FTS.
4. Whether on the facts and circumstances of a case and in law, the Ld CIT(A) has erred in law and on facts that payment made for the work of designing of tower, including designing of Foundation and structure of tower is clearly in me nature of royalty in view of Explanation-2 to Section 9(1)(vi) of the Income Tax Act, Article 12(3) of DTAA between India and UAE and as per Section 2(b) r.w.s. 13(5) of the Copyright Act, 1957.
5. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in law and on facts that the tower designs were used for earning of income from a source outside India, therefore, not liable to tax in India despite the fact that the assessee affirmed to have manufactured tower in India using the design provided by Oilstone Technology DMCC, UAE and then transported the same to Uganda to complete EPC project.
6. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) based in not appreciating the fact that entire business/economic activity e completion of EPC project was conducted by the branch office of Indian company therefore source of earning of income was in India. In This regard Ld. CIT(A) also failed to appreciate the findings of Hon’ble Delhi High Court in the case of Havells India Ltd. 120131 352 TTR 376 (Delhi)
7. Whether on the facts and circumstances of the case and in law the Ld CIT(A) has erred in not appreciating the fact that as per Article 12(5) of DTAA between India and UAE, royally in taxable in the resident state of the payer therefore, the AO was correct in holding that payment made to Oiltone Technology DMCC, UAE on account of royalty is taxable in India.
8. That the department craves leave to add or alter any further grounds of appeal.”
3. At the outset, we observe that the appeal of the Department is time- barred by 278 days. The learned DR at time of hearing informed us that the order of Ld. CIT(Appeals) was communicated on 20-04-2020 and accordingly, the appeal was falling within the period of Covid pandemic. We observe that in view of the nation-wide lockdown from 24th March 2020, the Apex Court in Cognizance for Extension of Limitation, In re[2021] 127 taxmann.com 72 (SC), took suo motu cognizance of the situation arising out of the challenge faced by the country on account of COVID-19 Virus and resultant difficulties that could be faced by the litigants across the country. Consequently, it was directed vide order dated 23-3-2020 that the period of limitation in filing petitions/applications/suits/appeals/all other proceedings, irrespective of the period of limitation prescribed under the general or special laws, shall stand extended with effect from 15-3-2020 till further orders. The suo motu proceedings were, disposed of issuing the directions as to in computing the period of limitation for any suit, appeal, application or proceeding, the period from 15-3-2020 till 14-3-2021 shall stand excluded. Consequently, the balance period of limitation remaining as on 15-3-2020, if any, shall become available with effect from 15-3-2021. In view of the above, since the delay of 278 days in filing appeal is falling within the Covid pandemic period, the delay is hereby being condoned.
4. On merits, the brief facts the case are that the assessee is an Indian Company engaged in the business of Engineering, Procurement and Construction (EPC) Contracts relating to infrastructure facilities comprising high power transmission line, transmission and distribution, laying of electrification of railway lines, cross country laying of oil & gas pipelines etc. The major part of the assessee’s revenue constitutes income from carrying out various projects relating to power transmission and distribution lines in various parts of the world. In one of the EPC Project executed by the assessee’s Branch Office in Uganda, the assessee has made payment for services of towers design including designing of its foundation and structural drawing to Oilstone Technologies DMCC of UAE (Oilstone UAE) and no tax has been deducted at source on such payment by the assessee on the ground that such payment was not chargeable to tax in India. On verification of TDS deducted against foreign remittances u/s. 195 of the Act by the assessee during FY 2017-18, it was found by the TDS Officer that TDS was not deducted against certain payments made outside India and in this regard the assessee was asked to furnish 15CA/15CB certificates. From the details submitted by the assessee, it was noted by the TDS Officer that it had made payment to Oilstone UAE and no TDS was deducted on such payments, even though the payment was based on a service agreement between the assessee and Oilstone UAE and that the payment fell under the nature of royalty u/s. 9(l)(vi) of the Act. Accordingly, the assessee was issued show cause notice as to why the assessee should not be treated as “assessee in default” u/s.201(l) and u/s.201(lA) for non-deduction of tax on payments made to Oilstone UAE. The assessee contended before the TDS Officer that payment under consideration was fees for technical services (FTS) and not royalty, and therefore section 195 was not applicable if the sum was not chargeable to tax in India. Since, in the facts, the FTS payment was made to an overseas company based out of UAE for earning of income outside India, the payment to Oilstone UAE was not taxable in India as per India-UAE DTAA. The assessee’s submission was not found satisfactory by the TDS Officer and he held that the assessee is not justified in contending that the payment under consideration was FTS and not royalty because the agreement was about design of towers and the payments made by the assessee were in the nature of the royalty because the services were of project specification study and design preparation criteria, preparation of tower foundation designs, preparation of structural drawing of towers, preparation of tower test data documents and tower profiling charge and it was mentioned in the agreement itself that it was drawing of tower which falls under the copyright of the service provider. Accordingly, as per the TDS Officer, it was case of royalty and not of FTS. Accordingly, the TDS Officer held that the assessee had made payment to Oil stone UAE for various services as mentioned in the Explanation 2 of Section 9(l)(vi) of the Act and that the payment was in the nature of royalty and since the assessee had failed to deduct tax on such payment, it was in default and liable to provisions u/s. 201(1) & 201(1A) of the Act. The TDS Officer accordingly raised a demand of Rs.2,28,23,683/- u/s. 201(1) & 201(1A) of the Act on the assessee.
5. Aggrieved with the aforesaid order, the assessee filed appeal before CIT(Appeals) challenging the additions made / treatment given by the TDS Officer. The Ld. CIT(Appeals) allowed the appeal of the assessee by observing that the EPC contract was awarded to Sino Hydro Corporation, China by the Uganda Government for the Karuma hydropower plant and its associated transmission lines. Sino Hydro Corporation, China subcontracted the work of design, manufacture, testing and installation etc. to consortium between the assessee company and Henan Electric Power and Supply and Design Institute, China wherein the assessee was required to erect a transmission line in Uganda. Under the sub-contract arrangement, the assessee was required to procure transmission towers from China, including designing of its foundation and structural drawing. For the purpose, the branch office of the assessee company situated at Uganda obtained services from Oil Stone Technologies, UAE. The assessee entered into service agreement with Oil Stone UAE for carrying out project specification study, preparation of tower designs, preparation of structural drawings of tower, preparation of tower test data documents etc. The Ld. CIT(Appeals) observed that there was no existing design of tower structure which was supplied to the assessee, but in the instant facts it is a case of actual rendering of services where the Oilstone UAE was required to create a new design in the course rendering the service under the Service Agreement based on the specifications provided by the assessee. As per the agreement, once designs were prepared by Oil Stone UAE, the ultimate customer had the exclusive ownership of said design and all rights including in any of such design belonged to the ultimate customers i.e. entities of Uganda. The CIT(Appeals) held that from the facts it is evident that the assessee entered into a service agreement to generate designs and not for granting rights to the assessee to use an existing design and therefore, the payments made under service agreement cannot be regarded as royalty. Accordingly, in the light of the above facts, Ld. CIT(Appeals) held that in the instant facts, this is a contract for provision of services and it is not royalty contract. With regards to taxability of payments as fee for technical services, Ld. CIT(Appeals) held that since in this case the services were provided by OilStone, UAE to the assessee outside of India and also since the services were utilised for the purpose of the business of the assessee outside of India, the case of the assessee was covered by the exclusion clause provided in section 9(1)(vii)(b) of the Act and the payment was not chargeable to tax in India under domestic law as “fee for technical services”. Accordingly, Ld. CIT(Appeals) held that the AO is not justified in holding the assessee as an assessee default under section 201(1) and 201(1A) of the Act.
6. The Department is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) deleting the additions made by the TDS Officer. Before us, the DR primarily relied upon the observations made by the TDS Officer in the 201 order. The DR has reiterated that in the instant set of facts, the payments qualified as royalty payments and since the assessee company is based out of India, Ld. CIT(Appeals) erred in holding that in view of the exclusion clause in section 9 (1) (vii)(b) of the Act, the sum is not chargeable to tax in India and hence the assessee was not under an obligation to deduct tax at source. In response, the counsel for the assessee primarily relied upon the observations made by Ld. CIT(Appeals) in the appellate order. He further contended that the FTS clause is missing in the India UAE tax treaty and accordingly, this further supports the fact that the services are not chargeable to tax in India as FTS. Accordingly, the counsel for the assessee submitted that Ld. CIT(Appeals) has correctly held in the instant set of facts that the assessee was not liable to deduct tax at source in respect of the aforesaid payments.
7. We have heard the rival contentions and perused the material on record. The first issue for consideration before us is whether in the instant set of facts, Ld. CIT(Appeals) has correctly held that payment for designing of towers made to Oilstone UAE was in the nature of FTS and not royalty. In our considered view, Ld. CIT(Appeals) has correctly held that this was a case where the payments were made to Oilstone UAE to carry out the services of project specification study, preparation of tower designs, preparation of structural drawings of tower, preparation of tower test data documents etc. and various other services as mentioned in the service agreement and therefore, qualify as FTS and are not Royalty payments. We observe that there was no existing tower structure design or data etc. which was supplied to the assessee by Oilstone Technologies UAE, but in the instant facts it is a case of actual rendering of services where the Oilstone UAE was required to create a new design in the course rendering the service under the Service Agreement based on the specifications provided by the assessee. Therefore, clearly since fresh designs involve active rendering of services as per the specifications of the assessee in the service agreement, in our considered view, the aforesaid agreement does not qualify as royalty agreement and Ld. CIT(Appeals) has correctly inferred that in the instant set of facts, the payments are towards rendering of Technical Services. Now once having held that the payments qualify as “Fee for Technical Services”, the next issue for consideration before us is whether the assessee was under an obligation to withhold taxes in respect of aforesaid services. In this connection, we observe that there is absence of “Fee for Technical Services” clause under the India UAE Tax Treaty. Therefore, the issue for consideration is that whether in the absence of FTS clause in the India UAE Tax Treaty, whether the aforesaid services are subject to tax in India. It is a well-settled law that if there is no FTS clause in the tax treaty, then the payments can be subject to tax in India only if the overseas company which has rendered the services has a permanent establishment (PE) in India and then such services may be taxed under Article 7 of India UAE Tax Treaty as business income. In the case of ABB FZ-LLC v. ITO 75 taxmann.com 83 (Bangalore – Trib.), the ITAT held that once DTAA does not recognize any income as FTS or royalty, then classification of said income has to be as per other provisions of DTAA. In the case of Paramina Earth Technologies Inc v. DCIT 116 taxmann.com 347 (Visakhapatnam – Trib.), the ITAT held that there being no provision in DTAA between India and Philippines to tax Fees for Technical Services, payment made by assessee to avail technical service from its AE, would be taxed as per article 7 but, in absence to PE in India, same could not be taxed in India as business profits. In the case of DCIT v. TVS Electronics Ltd. 22 taxmann.com 215 (Chennai), the ITAT held that simply because Mauritius DTAA does not specifically provide for FTS, such payment will not automatically become business income; it is to be tested in view of provision of the Act. In the case of DCIT v. IBM India (P.) Ltd. 100 taxmann.com 230 (Bangalore – Trib.), the ITAT held that there being no provision in DTAA to tax fees for Technical Services, payment made by assessee to avail technical service of its AE, would be taxed as per article 7 but in absence of PE in India, said income was not chargeable to tax in India. In the case of Booz & Comypan (ME) FZ-LLC v. DDIT 90 taxmann.com 49 (Mumbai – Trib.), the ITAT held that FTS received by UAE Company from Indian company was business income in hands of said company as per DTAA between India and UAE and in absence of any PE of the said company in India, the business income could not be taxed in India. Accordingly, in light of the above decisions, we are of the considered view that in absence of FTS clause in the India UAE Tax Treaty, payment for the aforesaid services cannot be taxed in India, unless it is established that the overseas company i.e. Oilstone UAE has a permanent establishment (PE) in India. In the instant facts, we observe that there is no allegation that the service provider i.e. Oilstone UAE has Permanent Establishment (PE)/business connection in India so as to hold that the services may be taxable in India under Article 7 of the India UAE Tax Treaty. Accordingly, since the payment do not qualify as FTS under the India UAE Tax Treaty in absence of FTS clause in the said treaty, we are of the considered view, that there was no requirement for the assessee to withhold taxes on such payments made to Oilstone UAE. In the instant case, the assessee had also furnished declaration regarding “No Permanent Establishment in India” of Oilstone UAE to the assessing Officer during the course of assessment hearing. Further copy of Tax Residency Certificate (TRC) to the effect that Oilstone UAE is a tax resident of UAE was also furnished before the assessing Officer during the course of proceedings under section 201 of the Act. Therefore, in light of the above observations and the facts placed on record before us, we are of the considered view that the assessee was not under an abligation to withhold taxes on such payments made to Oilstone UAE. Accordingly, we find no infirmity in the order of Ld. CIT(Appeals) so as to call for any interference.
8. In the result, the appeal of the Department is dismissed.
Order pronounced in the open court on 21-03-2023
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