IN THE ITAT MUMBAI BENCH ‘L’
TUV Bayren (India) Ltd.
Deputy Commissioner of Income-tax, Circle – 2(1)
IT APPEAL NOs. 4944 (MUM.) OF 2002 and 7588 (Mum.) of 2004
[ASSESSMENT YEARs 1998-99 and 2000-01]
JULY 6, 2012
Amit Shukla, Judicial Member
Both the appeals filed by the assessee are against separate orders dated 24-7-02 & 19-7-2004, for the assessment years 1998-1999 and 2000-2001, respectively passed by the CIT(A)-XXXI, Mumbai for the quantum of assessment passed under Section143(3). Since the common issues are involved in both the appeals, therefore, the same are being disposed off by this consolidated order. For the sake of ready reference, grounds of appeal in ITA No.4944/M/2002 (AY 1998-1999), are reproduced herein below :-
“1. The learned Commissioner of Income-tax (Appeals) erred in dismissing the appeal and confirming the assessment at Rs. 1,79,38,651/- as against the returned NIL income.
2. Fees for technical services :-
2.1 The learned Commissioner of Income-tax(Appeals) erred in holding that the certification income is fees for technical services.
2.2 The learned Commissioner of Income-tax(Appeals) erred in taking Rs. 1,79,38,651/- as certification income and as fees for technical services when in fact certification income is Rs. 1,00,45,871/- and the balance of Rs. 66,99,114/- is the reimbursement of expenses.
2.3 The learned Commissioner of Income-tax(Appeals) erred in taking Rs. 66,99,114/-,being reimbursement of expenses, as fees for technical services.
3. The learned Commissioner of Income-tax(Appeals) erred in holding that the provisions of section 44D are applicable in the instant case.
4. Rate of Tax :
4.1 The learned Commissioner of Income-tax(Appeals) erred in holding that the rate of tax applicable is 20% and not 10%.
4.2 The learned Commissioner of Income-tax(Appeals) failed to appreciate that in view of Article 12(2) of the DTAA the maximum rate of tax that the learned Assessing Officer would have applied is 10%.”
2. Besides this, the assessee has also taken additional ground on levy of interest under Section 234B, reading as under :-
“The learned Commissioner of Income-tax(Appeals) erred in levying interest under Sections 234B of the Act. The CIT(A) failed to appreciate that as the Appellant was a foreign company whose income was liable to deduction of tax at source, the appellant was not liable to pay advance tax and was consequently not liable to pay interest under Sections 234B of the Act .
The Appellant prays that the CIT(A) be directed to delete the interest based on the relief sought in the above grounds of appeal”
The aforesaid ground being purely a legal ground, which does not acquire any investigation of facts, hence, they are being admitted for adjudication.
3. At the outset, learned counsel for the assessee submitted that the issue raised in additional ground is covered by the decision of ITAT’s order in the case of assessee for the assessment year 2000-2001, passed in ITA No.7575/Mum/2004. Learned Senior DR fairly admitted that this issue is covered by the decision of the aforesaid order.
4. After carefully considering the submissions of the parties and also going through the Tribunal’s order, we find that this issue has already been decided in favour of the assessee after observing and holding as under :-
“6. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that in terms of sec.195 of the Act the entire income of the assessee is subject to deduction of tax at source. Accordingly, the assessee was not liable to pay advance tax. Recently the Hon’ble jurisdictional High Court in Director of Income tax (International Taxation) v. NGC Network Asia LLC  313 ITR 187(Bom.), on the identical issue, has held vide placitum 8 (at page 190 of the ITR) as under :-
“We are in respectful agreement with the view taken in the case of CIT v. Sedco Forex International Drilling Co. Ltd.  264 ITR 320, by the Uttaranchal High Court. We are clearly of the opinion that when a duty is cast on the payer to pay the tax at source, n failure, no interest can be imposed on the payee-assessee.”
In the absence of any distinguishing feature brought on record by the revenue, we, respectfully following the decision of the Hon’ble Jurisdictional High Court (supra) hold that when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the assessee and accordingly we are inclined to uphold the order of the ld. CIT(A) in deleting the interest charged u/s. 234B of the Act. The grounds taken by the revenue are therefore rejected.”
Respectfully following the aforesaid order, we hold that no interest under Section 234B can be levied in the case of the assessee and, accordingly, we direct the Assessing Officer to delete the interest so charged. In the result, additional ground taken by the assessee is allowed.
5. Now, coming to the main issue, wherein the assessee’s income from ‘ISO 9000 Certification’, is income from ‘fees for technical services’ under Article 12 or business income under Article 7 of Indo-German DTAA. The brief facts relevant for the issue involved are that the assessee is a company incorporated in Germany having a branch in India. The Indian branch is engaged in the business of audit and procedure of norms for ISO 9000 Certification. The services offered by the Indian branch are ISO 9000 quality system certification, wherien quality system auditor of the assessee company visits the company wanting to go in for ISO 9000 standard and certification. They carry out a pre-assessment audit after which a certification audit is conducted. A report is then prepared which is checked and verified by the assessee company in Germany and on receiving the reply from Germany, whether the company is fit for quality system certification or not then the company is given ISO 9000 Certificate, which is valid for 3 years. During these three years, a surveillance audit is conducted by the quality system auditor in every six months to make sure that the company is complying with the system as per the pre-assessment audit and certification audit. After expiry of three years validity of the certificate, the auditors visit the clients place once again the same process.
5.1 The Assessing Officer required the assessee to explain as to why such services and nature of activities should not be taxed as “fees for technical services” given in Article 12 of Indo-German DTAA, instead of “business profit” as has been requested by the assessee. Before the Assessing Officer, it was submitted that the services rendered do not come under “FTS” within the Article 12 of Indo-German DTAA and, therefore, its business income is to be computed in view of the Article 7 (1) as business was carried out through PE and the profit of the said PE can be taxed as is attributable to that PE.
5.2 The Assessing Officer rejected the contention of the assessee that its computation of business profit is to be made under section 28 to 44C and held that since the services rendered by the assessee is within the purview of FTS, hence, in view of Article 12(5), the income of the assessee has to be computed in view of Article 7(3), wherein the expenses has to be allowed in accordance with the domestic law of the contracting state and, therefore, provisions of Section 44D of the IT Act would be applied. Accordingly, he assessed the income after applying the tax rate of FTS i.e. at the rate of 20% in view of the Section 115A on the entire gross receipts of Rs. 1,79,38,651/-.
6. Before the CIT(A), details submissions were made regarding the nature of services and non-applicability of Section 44D in the assessee’s case and also objections were raised regarding the rate of tax applied by the Assessing Officer in view of the provisions of Section 115A. Learned CIT(A) did not agree with the submissions of the assessee and upheld the finding of the Assessing Officer, after holding that the part of the income of the assessee is taxable as per Article 12 of DTAA as royalty and “fees for technical services” and other part of income and expenses reimbursed which are linked with FTS, the same would also be taxable, being part of gross receipts and accordingly provisions of 44D will be applicable on whole of the gross receipts.
7. Learned counsel appearing on behalf of the assessee, at the outset submitted that out of Rs. 1,79,38,651/-, the certification income amounted to Rs. 1,00,45,871/- only and other receipts were mostly reimbursement of expenses. The break up of Rs. 1,79,38,651/- was given as under :-
|Fees & Reimbursements||Amount(Rs.)|
|(i) Seminar Income||1,07,500|
|(ii) Inspection Income||1,57,805|
|(iii) Interest Income||21,775|
|(iv) Administrative Charges||1,40,000|
|(v) Certification Income||1,00,45,871|
|(vi) Homoloyation Income||1,86,00|
|(vii) Reimbursed of Expenses (from Client)||66,99,114|
|(viii) Training Income||4,79,500|
|(ix) Other Income||1,085|
He pleaded that out of the aforesaid receipts, only income which is relevant for consideration is Rs. 1,00,45,871/- under the head “certification income” and the balance sum is either reimbursement or minor income which cannot be the subject mater of FTS.
7.1 Regarding certification income, he submitted that it is neither in the form of managerial nor technical, nor consultancy services within the meaning of Section 9(1)(vii) read with Explanation and Article 12 of the Indo-German DTAA. The certification income is purely an audit work which comes within the definition of professional services and, therefore, its income has to be computed as under Article 7(1) wherein the profits or the income attributable to the PE in India has to be computed as normal business income under Section 28 to 43 and accordingly 44D will not apply. He drew our attention to the provisions of section 194J, read with Explanation thereto which envisages a distinction between the ‘professional fee’ and ‘technical fee’. Further, placed a copy of the ‘Guidance documents’ issued by the International Accreditation Forum, INC on application of ISO. He specifically made reference to para G.2.1.35, therein which provides as under :-
“G.2.1.35 An auditor shall explain the audit findings and/or clarify the requirements of the assessment standard during the audit and/or at the closing meeting but shall not given prescriptive advice or consultancy as part of an assessment.”
and also para G.2.1.24, which reads as under :-
“G.2.1.24 Certification/registration bodies can carry out the following duties without them being considered as consultancy or necessarily creating a conflict of interest. However, all potential conflicts of interest should be dealt with in accordance with G.2.1.29..”
From this, he submitted that as per the IAF guidance note, the assessee was strictly prohibited in doing any consultancy work. He also referred to the reply filed before the Assessing Officer vide letter dated 27-2-2003 along with the annexures wherein details of nature and activities carried out by the assessee has been elaborated in detail. For this issue, he placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of Diamond Service International Private Limited v. Union of India, reported in  304 ITR 201, wherein payment made for similar certification for diamonds and certificate issued by the parent company was held to be neither transfer of technology or skill nor royalty. Alternatively, he submitted that if the payment received is to be treated as FTS, then the reimbursement of expenses part should be excluded as it pertains to travelling and do not form part of the FTS. In support of this proposition, he relied upon the decision of the Hon’ble Bombay High Court in the case of CIT v. Siemens Aktiongesellschaft, reported in  310 ITR 320 and specifically drew our attention to page 340 of the said judgment. Regarding applicability of the rate of tax of 20% as provided in the provision of Section 115A, he submitted that same will not be applicable in the assessee’s case as none of the condition mentioned in the section is satisfied in the assessee’s case. Instead rate of 10% should be applied if at all provisions of section 44D is applied.
8. Per Contra, learned Senior DR submitted that the assessee has not submitted any agreement either before the authorities below or before the Tribunal to ascertain the nature of work and services rendered by the assessee in connection with ISO certification. He filed a copy of website print out of the assessee about the nature of services rendered by it, wherein it has been mentioned that it has been providing host of services to various types of client which also included formulation of various strategic approach of policies, plans and actions to enable the clients’ business to set up an integrated management system. From the said print out, he pointed out that several types of services provided by the assessee are clearly in the nature of managerial and consultancy services. In absence of any agreement, the nature of services given in the profile of the company in the website has to be taken on the face of it. Once, the activities mentioned in the website is taken into consideration then definitely it is a case of pure consultancy, which comes within the purview of, not only under Section 9(1)(vii) but also under Article 12. Hence, the services rendered by the assessee has to be considered as FTS under Article 12 and, therefore, in view of the provisions of Article 12(b), article 7(3) will apply and consequently section 44D of IT Act. He also relied upon the catena of case laws and various tribunal’s decision. Copy of which have been placed before us. Heavy reliance was placed on the decision of DDIT v. Pipeline Engineering, reported in  125 TTJ (Mum) 534, in support of proposition of Article 7(3) & Section 44D. He further submitted that judgment of jurisdictional High Court in the case of Diamond Service International Private Limited (supra), will not be applicable as the issue there was only of royalty and diamond certification which in the case of the assessee is entirely different. He submitted that the agreement pertains to 1976 under the old treaty, wherein Article 12 was entirely differently worded. Regarding AR’s plea of exclusion of reimbursement of expenses, reliance was placed by him on the decision of CIT v. Siemens Aktiongesellschaft (supra). Lastly, he reiterated the findings of the Assessing Officer as well as the CIT(A), specifically the finding of the Assessing Officer wherein he has relied upon the CBDT circular and the judgment of the Hon’ble Kerala High Court, in the case of Cochin Refineries Ltd. v. Commissioner of Income-tax, reported in 222 ITR 354.
9. In rejoinder, the learned AR submitted that the matter given in website has not been considered earlier, therefore, the same should not be taken into consideration. Otherwise also the assessee provides partly audit services. Further, the audit work has to be done at the client’s place and if in that process some kind of consultation is given that a particular set up is not upto the mark, then it is incidental to audit work only and this cannot be considered to be in the nature of pure ‘consultancy’ within the meaning of section 9(1)(vii) or Article 12.
10. We have carefully considered the rival submissions and also perused the material placed on record. First of all, let us examine the nature of services and activities carried out by the assessee and the income derived by through its PE in India. The nature of assessee’s activities in India have been elaborated in Annexure-2 of the reply dated 27-2-2003, filed before the Assessing Officer, which is not in dispute, has been explained in the following manner :-
Quality System Audits :
Quality System Audits are conducted by TUV Auditors. A Quality System Audit is conducted at the Clients site where the TUV Auditor evaluates the Clients Quality System (or Environmental System) against a prescribed International Standard (ISO 9001/2, ISO 14001, QS 9000, etc.). The Auditor only assesses whether or not the clients manufacturing practices meet the International Requirements or not. The Auditor is not permitted to provide any technical assistance or advice to the company. Based on his findings, the auditor prepares a report stating compliance for the “Certification Body” in Munich. The Certification body issues the Certificate after reviewing the report for compliance. Audits are carried out in various stages.
A Pre-assessment audit is conducted to evaluate the feasibility of a successful certification audit. The company is informed whether or not they are ready for a Certification audit.
The certification audit is conducted to assess the clients’ conformity to an International Standard. A report is prepared and sent to Germany for review & issue of the Certificate.
The above certificate is valid for 3 years. Audits are carried out every 6 months (or 12 months) to assess if the company is continuing to meet the International standard. Reports of the audit are sent to the “Certification Body” in Germany for review & their decision to allow the certificate validity to continue.
The certificate is issued to the client by the “Certification Body” from Germany after reviewing the Auditor’s report. The Fee is charged at a flat rate to compensate the Certification Body for it’s activity of reviewing the reports, including the competence of the auditor, the parameters checked by him, and if all requirements of the international standard have been met. This certificate is valid for 3 years. The fees are recovered and paid to the German Company annually.
Once the client has been given a Certificate from German, it can use Logo during the validity of his certificate on marketing Materials, Advertisements, etc.
Testing of a product according to International Regulatory Standards e.g. Safety belts etc. The Tests are witnessed by our auditors and a report of the results is sent to Germany. If the product meets the requirements specified in the International Standard, then the client receives E marking as per International Standards.
Inspection is conducted on products e.g. Pumps supplies to UNICEF to be issued in the rural areas. Inspections are carried out to Customer specifications mentioned in the Purchase Order of the product or as per a drawing. A certificate on the result of the inspection is submitted to the customer.
Training Fees and Conducting Seminars
Training Programs on New International Standards are provided for the Public as well as on a private basis. These Training programs are designed to provide awareness on the latest International standards.
Annual Administration Charges
This charge is for the preparation of documents and sending to Germany.
Reimbursement of Expenses
This covers the actual expenditure incurred by the auditors for travelling, Lodging and Boarding and such other expenses.”
10.1 In the light of the above mentioned services rendered, let us examine Article 12(3), 12(4) & 12(5), which define the term royalties and ‘fees for technical services’ in the following manner :-
ARTICLE 12 – Royalties and Fees for Technical Services
|(1) and (2)**||**||**|
(3) The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
(4) The term “fees for technical services” as used in this article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement.
(5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical service arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.”
10.2 The assessee’s case does not in any manner comes within the meaning of ‘royalties’, as there is no right to use of any other items described therein. Here, we are concerned with the meaning of term “fees for technical services” as given in para 4 of Article 12. The FTS has been defined as the payment of any amount in consideration of service for ‘managerial’ or ‘technical’ or ‘consultancy’ in nature, which is quite similar to definition given in Explanation 2 to Section 9(1)(vii). Looking to the nature of services provided by the assessee as has been described above, it is amply evident that it is mostly in the nature of ‘audit work’ wherein the auditors of the assessee visit the sites of the client’s and evaluate the clients quality system as prescribed in International Standard for ISO 9001/2, ISO 14001, QS 9000 etc. Based on this audit work, a report is prepared which is sent to certification body to the assessee company in Munich, Germany, which provides a certificate for a certain period, after reviewing the report and several stages of audit work which has been carried out for this purpose. Nowhere from such services, it can be inferred that the assessee has been providing technical, managerial or consultancy services. Technical services require expertise in technology and providing the client such technical expertise which in this case no technology is transferred. Managerial services is used in the context of running and management of the business of the client, which herein this case, there is no management of client’s business, but evaluation of standards as per international guidelines. Consultancy is to be understood as advisory services wherein necessary advise and consultation is given to its clients for the purpose of client’s business. In an audit work there may be some incidence of advise at the timeof evaluation but certainly it cannot be termed as pure consultancy services as in the audit work the auditor has to only evaluate the quality system and environmental system.
10.3 Now, coming to the print out of the website of the assessee, provided by the Learned Senior DR, it is seen that the first kind of services mentioned therein, relates purely to audit work of ISO certification. Besides this, there are host of other services mentioned, which upto some extent can be considered to be in the nature of consultancy services. However, whether the assessee has been carrying out other services as mentioned therein besides audit for certification of ISO, is not borne out from the records as the same has neither been examined by the Assessing Officer nor by the CIT(A). Both the authorities have simply observed that even the audit work and certification work comes within the realm of FTS. From the print out of the website, it is also not very clear as to whether these kind of services were also rendered in the year 1997-1998. On the contrary in the IAF guidance note provided by the learned AR, it has been clearly prohibited that the auditor will not give any prescriptive advise or consultancy as a part of an assessment, which has been noted by us in the foregoing paragraphs. This goes to prove the assessee’s contention that it was not engaged in any kind of consultancy services. Thus, the entire nature of services and activities carried out by the assessee comes within the realm of ‘professional services’ and not within the meaning of ‘FTS’ as provided in the Article 12(4) and Section 9(1)(vii). Accordingly, we hold that services rendered by the assessee company are not covered under ‘fees for technical services’ under Article 12 of Indo-German DTAA.
11. Once we have held that it is not a case of an FTS, neither Article 12(5) nor Article 7(3) would be applicable and consequently income cannot be determined by applying the provision of Section 44D. Thus, the assessee’s income is to be computed in view of the Article 7(1) and resultantly as per Section 28 to 43 of the IT Act. Thus, grounds No.1 & 2 of the assessee are allowed.
12. The other issues relating to reimbursement of expenses and applicability of rate, becomes purely academic and, therefore, are rendered infructuous.
13. In the result, appeal filed by the assessee is allowed.
14. Since the issues involved in ITA No.7588/M/2004 for the Assessment Year 2000-2001 are exactly similar, therefore, the findings given in the ITA No.4944/M/2002 for the Assessment Year 1998-1999, applies mutatis mutandis.
15. In the result, both the appeals of the assessee are treated as allowed.