Section 195 - DTAA between India and Singapore

Last updated: 24 September 2007

Court :
IN THE ITAT MUMBAI BENCH ‘D’

Brief :
Section 195 of the Income-tax Act, 1961, read with article 12 of DTAA between India and Singapore - Deduction of tax at source - Payment to non-resident - Assessment year 2002-03 – Assessee, a public sector undertaking, was engaged in business of refining of crude oil and marketing of petroleum products - It had engaged one ‘P’ of Singapore for carrying out market study for updating its assessment of out look for domestic refining capacity throughout India - Assessee applied for issue of no objection certificate (NOC) for making payment to ‘P’ based on proposal agreed upon by assessee contending that scope of services rendered by ‘P’ fell out side ambit of article 12 of the DTAA between Indian and Singapore- Assessing Officer treated amount payable for services rendered by ‘P’ as fees for technical service and passed an order under section 195 authorising assessee to make payment to ‘P’ after deduction of income tax at source - He held that consultancy fees paid by assessee to P was chargeable to tax in India as per provision of article 12(4) of DTAA between India and Singapore - Whether since consultancy services or report submitted by ‘P’ to assessee did not contain an element of technical knowledge or any technology which could have been applied by assessee, remuneration paid by assessee to ‘P’ would not fall within definition of fees for technical services and as such, provisions of article 12(4) could not be attracted to tax payment of consultancy charges to ‘P’ - Held, yes - Whether therefore, assessee was not liable for any payment of taxes and was entitled to refund of TDS deducted and paid – Held, yes FACTS The assessee, a public sector undertaking, was engaged in the business of refining of crude oil and marketing of petroleum products. During the previous year, the assessee had engaged one ‘P’ of Singapore for carrying out market study for updating its assessment of the out look for domestic refining capacity throughout India. The assessee applied for issue of no-objection certificate (NOC) for making the payment to ‘P’ based on the proposal agreed upon by the assessee. In the application for NOC, the assessee contended that the scope of services rendered by ‘P’ fell out side the ambit of article 12 of the DTAA between India and Singapore. The Assessing Officer passed and order under section 195 authorising the assessee to make the payment to ‘P’ after deduction of income tax at source. The Assessing Officer treated the amount payable for the services rendered by ‘P’ as fees for technical service. The assessee, therefore, made the payment to ‘P’ after deducing tax at source and deposited the TDS with the department. On appeal, the Commissioner (Appeals) confirmed the impugned order. He held that the consultancy fees paid by the assessee to ‘P’ was chargeable to tax in India, as per the provisions of article 12 of DTAA between India and Singapore. On second appeal:

Citation :
BHARAT PETROLEUM CORPN. LTD v JOINT DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) - 1 (1), MUMBAI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND PRAMOD KUMAR, ACCOUNTANT MEMBER IT APPEAL NOS. 8323 AND 8324 (MUM) OF 2003

In the instant case, the assessee had engaged ‘P’ to make study updation on the basis of the available datas. The market study covered study of supply and demand analysis, domestic refining capacity, price forecast, etc. It had been repeatedly contended by the assessee that ‘P’ had to submit a report after processing the datas or information available with it and no technology was involved in the preparation of a report. In clause (4) of article 12 of the DTAA between India and Singapore, the fees for technical services has been defined and according to this clause fees for technical services means, payment of any kind to any person in consideration for services of managerial, technical or consultancy nature (including the provisions of such services through technical or other personal) if such services make available technical knowledge, experience, skill, know how or process, which enabled the person acquiring the services to apply the technology contained therein. [Para 13] Though the payment for consultancy services falls within the definition of fee for technical services in opening para of clause (4) of article 12, but it would be subject to certain conditions enumerated in sub-clauses (a)(b) and (c). Further the relevant sub-clause with regard to issue in dispute was sub-clause (b) and according to this sub-clause, the consultancy services shall make available technical knowledge, experience, skill, know how or process, which enabled the person acquiring the services to apply the technology contained therein. Meaning thereby, the consultancy services must have the element of technology which can be applied by the persons acquiring the services. If the consultancy services does not have any technical knowledge, the fees paid for it does not fall within the definition of ‘fees for technical services’ as per clause (4) of article 12. In the instant case, nothing had been brought out by the revenue that the consultancy services or the report submitted by ‘P’ to the assessee contained an element of technical knowledge or any technology, which could have been applied by the assessee. In the absence of an element of technology in the consultancy services, the remunerations paid for it would not fall within the definition of fees for technical services and, as such, the provision of article 12 (4) could not be attracted to tax the payment of consultancy charges to ‘P’. Since the assessee was not liable for any payment of taxes, it was entitled for the refund of the TDS deducted and paid. Hence, the impugned order of the Commissioner (Appeals) was set aside and the Assessing Officer was directed to refund to the assessee the TDS deposited by it along with the interest under section 244A. [Para 14]