M/S.regenpowertech Pvt. Ltd.,7Th Floor, Krm Plaza, North Tower v. The Deputy Commissioner Of Income Tax,International Taxation - 2(1),Chennai

THE HIGH COURT OF JUDICATURE AT MADRASDATE: 04.07.2019Order Reserved on:Order delivered on:01.07.2019 04.07.2019 CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMANDTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.401 of 2019 M/s.RegenPowertech Pvt. Ltd.,7th Floor, KRM Plaza, North Tower,No.2, Harrington Road, Chetpet,Chennai - 600 031.(PAN: -TAN: CHER08858D)...Appellant -vs- The Deputy Commissioner of Income Tax,International Taxation - 2(1),Chennai....Respondent PRAYER: Tax Case Appeal filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal Chennai 'B' Bench, dated 28.02.2019 in ITANo.2721/CHNY/2017 for the Assessment year 2014-15, against theorder of the Commissioner of Income Tax(Appeals)-16, Chennai inITA.NO.60/CIT(A)-16/2016-17 dated 01/08/2017 for assessment year2014-15 filed against the order passed under section 201(1)/201(1A) of the Income Tax, International Taxation 2(1), Chennaidated 30/06/2016 for the Assessment year 2013-2014 against theorder passed by the Deputy Commissoioner of Income-Tax,International Taxation 2(1), Chennai in PAN AADC R5531M/CHER08858D. For Appellant: Mr.Raghav Rajeev Menon for Mr.R.Sivaraman For Respondent : Mr.Karthick Ranganathan Senior Standing Counsel JUDGMENT (Judgment was delivered by T.S.Sivagnanam, J.) This appeal filed by the assessee under Section 260A of theIncome Tax Act, 1961 ('the Act' for brevity) is directed againstthe order dated 28.02.2019 passed by the Income Tax AppellantTribunal, 'B' Bench, Chennai (hereinafter referred to as 'theTribunal') in I.T.A.No.2721/CHNY/2017 for the assessment year2014-15. 2.The present appeal has been filed raising the followingsubstantial questions of law: 1. Whether, on the facts and in the circumstancesof the case, the Tribunal was right in law inupholding the findings of the lower authoritieswithout taking into consideration that theservices for which payments are made by theAppellant without deduction of Tax at sourceare provided outside India and such entitieshave no permanent establishments in Indiathereby qualifying as exigible transactions inaccordance with Section 9(1)(vi) and Section 9(1)(vii)(b) of the Act? 2. Whether on the facts and in the circumstancesof the case, the Tribunal was right in law inupholding the findings of the lower authoritiesthat the Appellant is an assessee in defaultwithrespecttothepaymentofRs.1,19,47,013/8- paid towards the rent forleasing a crane in Srilanka, especially whenthe entire transaction has occurred outsideIndia and thereby exigible to tax as perArticle 7 of DTAA between India and Srilankaand Section 9(1)(vii) of the Act? 3. Whether, on the facts and in the circumstancesof the case, the Tribunal was right in law inupholding the findings of the lower authoritiesas the Appellant is an assessee in default withrespect to the payment of Rs.3,34,414/- paidtowards the service rendered by M/s.WingtecRotor Services-Germany, especially when theentire transaction has occurred outside Indiaand thereby exigible to tax as per Article 7 ofDTAA and Section 9(1)(vii) of the Act betweenIndia and Germany? 4. Whether, on the facts and in the circumstancesof the case, the Tribunal was right in law inupholding the findings of the lower authoritiesas the Appellant is an assessee in default withrespect to the payment of Rs.3,34,414/- paidtowards the consultancy service rendered byM/s.Earnst & Young especially when the entiretransaction has occurred outside India andthereby exigible to tax as per Articles 5, 7and 14 of DTAA between India and UAE? 4. Whether, on the facts and in the circumstancesof the case, the Tribunal was right in law inupholding the findings of the lower authoritiesas the Appellant is an assessee in default withrespect to the payment of Rs.3,34,414/- paidtowards the consultancy service rendered byM/s.Earnst & Young especially when the entiretransaction has occurred outside India andthereby exigible to tax as per Articles 5, 7and 14 of DTAA between India and UAE? 3.The assessee has its principal business of manufacturingand supplying wind turbines. During the year 2013-14, theassessee exported/supplied Wind Turbine Generators (WTG) totheir customers in Srilanka. The scope of work not only involvesupply but also erection and commissioning of the WTG in thepremises of the customers. The assessee engaged the services ofM/s.Windforce Private Limited, Srilanka (WFPL) for the purposeof erection and commissioning of WTGs at customers premises.The assessee effected payments for hiring of crawler crane forone month from 21.04.2013 to 20.05.2013 at the site at Srilankafor erection and commissioning of WTG in the premises of thecustomers and while effecting payment did not deduct TaxDeducted at Source (TDS). The Assessing Officer issued a showcause notice calling upon the assessee to explain as to why noTDS was made on the payment made to M/s.WFPL as the paymentamounts to Fee for Technical Services. The assessee in itsreply dated 08.02.2016 stated that they took the help ofM/s.WFPL for construction scope and the entire services wererendered outside India by M/s.WFPL and it has no PermanentEstablishment (PE) in Indian and the activity is in the natureof erection/assembly or shipment has entirely happended outsidethe Indian tax jurisdiction and has not accrued or arisen inIndia to M/s.WFPL in any way bringing it under the scope ofSection 9(1)(vii) r/w. explanation thereunder. It was furtherstated that the activity was undertaken outside India and inSrilanka and the income if any is taxable only in that Country. 4.The Assessing Officer did not agree with the stand takenby the assessee and in so doing referred to the work orderissued by the assessee to M/s.WFPL, the scope of work mentionedtherein and the various clauses contained in the work order andheld that the work being carried out in Srilanka is not mereconstruction, assembly or mining like project, installation ofwind turbine requires lot of technicality. M/s.WFPL arerequired to provide skilled technical assistants and siteengineers for executing the installation work. Thus theAssessing Officer held that the services of technical personnel are used in the Installation of Wind turbines and hence, theservices rendered by M/s.WFPL to the assessee for his projectsin Srilanka are in the nature of Fee for Technical Services.The Assessing Officer referred to Article 12 of India-SrilankaDTAA and stated that the royalty of Fee for Technical Servicesmay also be taxed in the contracting State in which they arise,according to the law of that State, but if the beneficial ownerof the royalties or Fees for Technical Services is a resident ofthe other Contracting State, the tax so charged shall not exceed10% of the gross amount of the royalties or Fees for TechnicalServices. It was stated that the services are rendered byM/s.WFPL to the assessee who is based in India and as per Clause(2) of Article 12 of DTAA the payments made towards servicesrendered by M/s.WFPL are liable to withholding tax at 10%.Without prejudice to the above finding, the Assessing Officerstated that the payments made by the assessee are also in thenature of royalty as it involves the payments for right to useindustrial, commercial or scientific equipment, as the paymentwas towards hiring of cranes and hence in the nature of right touse Industrial, commercial equipment and hence applicable rateof TDS is at 10%. 5.The other issue was with regard to the repair serviceextended by M/s.Wingtec Rotor Service, Germany (WRS). Theassessee engaged M/s.WRS for carrying out repair on the rotorblades by deploying its service technicians and had incurred anamount of Rs.3,34,414/- towards the same and the assessee hasnot deducted TDS on the said payment for the reason that thenature of remittance is towards repair charges. The AssessingOfficer held that the repairs are not mundane repairs, butrequire highly sophisticated techniques and hence in the natureof Technical Services as per Section 9(1)(vii) r/w. Explanation2 of the Act. Reference was also made to the India-GermanyDTAA. The other issue was with regard to Fee for ProfessionalServices. The assessee made a remittance of Rs.12,01,000/- toM/s.Ernst & Young, UAE (E&Y) in connection with a market studyfor Wind Energy rendered by M/s.E&Y and the assessee had notdeducted TDS on the ground that it is only a market study. Theassessee referred to Articles 5, 7 and 14 of the Indo UAE DTAAand stated that it is to be treated as business profits andtaxable in the receiving end and hence no TDS is required to bededucted on this. Services rendered outside India are nottaxable and M/s.E&Y do not have PE in India. The AssessingOfficer held that the market study being in the nature ofTechnical Services the remittances is treated as Fee forTechnical Services, income in the hands of M/s.E&Y and is liableto TDS. Without prejudice to the said conclusion the AssessingOfficer observed that the said market study is in the nature ofinformation concerning commercial experience and hence is Royalty under Indo UAE DTAA. On the above lines, the assessmentwas completed under Section 143(3) of the Act by order dated30.06.2016. 6.The assessee preferred an appeal before the Commissionerof Income Tax (Appeals)-16, Chennai (CIT(A)). The CIT(A)examined the nature of work and in this regard referred tovarious clauses in the work order and held that it is evidentthat the work being carried out in Srilanka is not mereconstruction, assembly or mining like project, installation ofwind turbine requires lot of technicality and hence, M/s.WFPLprovided skilled technical assistants and site engineers forexecuting the installation work, services of technical personnelare used in the installation of wind turbine and hence theservice rendered by M/s.WFPL to the assessee for its project inSrilanka are in the nature of Fee for Technical Services.Further, by referring to Article 12 of India-Srilanka DTAA, itheld that services are rendered by M/s.WFPL to the assessee whois based in India and hence as per Clause (2) of Article 12 ofIndia-Srilanka DTAA, the payments made towards services renderedby M/s.WFPL are liable to withholding tax at 10%. Accordinglythe finding of the Assessing Officer was upheld. With regard torepair services rendered by M/s.WRS, Germany, the CIT(A)referred to Article 12 of India-Germany DTAA and held that theservices being in the nature of Fee for Technical Services isrightly treated as income chargeable to tax in India and henceliable to TDS. With regard to payments effected to M/s.E&Y formarket study for Wind Energy in UAE, the CIT(A) held that themarket study being in the nature of Technical Services, theremittance is treated as Fee for Technical Services, the incomein the hands of M/s.E&Y and is liable to TDS. Accordingly, theappeal was dismissed. Aggrieved by the same, the assesseepreferred an appeal before the Tribunal. The Tribunal affirmedthe order passed by the CIT(A) on all the three issues and thisis how the assessee is before us by way of this appeal. 7.The learned counsel appearing for the assessee contendedthat the Tribunal erred in confirming the order passed by theCIT(A) and the Assessing Officer referring to the provisions ofSections 9(1)(vi) and 9(i)(vii)(B) of the Act which prima faciediscusses the accrual of income through royalty and Fees forTechnical Services respectively when such amount is payable by aresident. It is submitted that when fees are paid in respect ofservices employed in a business or profession carried on by suchperson outside India then the said provision would not apply.The assessee effected all payments for services provided outsideIndia and hence these payment do no come under the ambit of theaforesaid provision. So far as the addition made in respect of payments to M/s.WFPL, Srilanka and M/s.WRS, Germany, the saidCompanies do not have a PE in India and as such these incomesare not taxable in India keeping in line with Article 7 of theDTAA with Srilanka and Germany respectively read with Section 90of the Act. It is further submitted that the Tribunal committederror in observing TDS is deductible in respect of the paymentmade to M/s.WFPL, Srilanka merely because the business of theassessee is in India especially when the rent for the crane ispaid in Srilanka and the work has also been done in Srilanka andas such there is no incidence to tax as per the provision ofSection 9(1)(vii)(b) of the Act. Further, it is submitted thatthe Tribunal erroneously invoked the provision of Article 12(2)of the India-Srilanka DTAA by holding that the payment made bythe assessee towards mere rental of crane in Srilanka wouldqualify as payment made towards royalties or Fees for TechnicalServices. Further, the Tribunal has not rendered any reasonedfinding while holding that the payments made by the assessee toM/s.WRS, Germany are in the nature of Fees for TechnicalServices without appreciating the very nature of the paymentsbeing repair works effected in Germany which clearly qualifyunder Explanation 2 of Section 9(1)(vii) of the Act. It isfurther contended that the Tribunal ought to have deleted theaddition made on account of all payments effected to M/s.E&Ywhen the assessee was able to substantiate that the amount paidis towards consultancy services for market study done in UAE inrelation to business connection in UAE and hence cannot beconstrued to be payment made for royalties. Further it issubmitted that the payments made to M/s.E&Y are in the nature ofbusiness profits would fall under the purview of Article 5, 7and 14 of Indo UAE DTAA and such payments cannot be taxed inIndia. In support of his contentions, reliance was placed inthe decision of Evolv Clothing Company Pvt. Ltd. vs. AssistantCommissioner of Income Tax ([2018] 407 ITR 72(Mad)) andPrincipal Commissioner of Income Tax vs. Motif India Infotech(P) Ltd. ([2018] 409 ITR (Guj)). 8.The learned Senior Standing Counsel appearing for therevenue submitted that the Assessing Officer, CIT(A) and theTribunal have carefully analysed the terms and conditions of thecontract as contained in the work order and have rendered afactual finding and this Court exercising jurisdiction underSection 260A of the Act will decide the substantial question oflaw and will not embark upon a fact finding exercise. It issubmitted that the India-DTAA is very widelycouched and worded more or less on the lines of the Income TaxAct, 1961. The DTAA does not have a "make available clause" andtherefore the finding rendered by the authorities and theTribunal are legally valid. In this regard, the learnedcounsel has drawn the attention of this Court to Article 12(3) (a)(b) of the India-Srilanka DTAA. Further, the learned counselreferred to Section 991)(vii)(b) of the Act and submitted thatthe Indian Company shall have their persons outside India andthe manner in which the authorities and the Tribunal haveinterpreted Section 9(1)(vii)(b) of the Act considering thefacts of this case does not warrant any interference. Insupport of his contention, the learned Senior Standing Counselreferred to the decision in the case of Commissioner of IncomeTax vs. Havells India Ltd. [(2013) 352 ITR 376(Delhi)]. 9.We have heard the learned counsels for the parties andperused the materials placed on record. 10.There are three issues raised before us in this appeal.First relates to payments made by the assessee to M/s.WFPL,Srilanka, the second relates to payment made to M/s.WRS, Germanyand the third relates to payment made to M/s.E&Y, UAE. Theresult to be arrived in this appeal wholly revolves upon theterms and conditions of the contract entered into between theassessee and the three foreign entities. The Assessing Officerhas examined the terms and conditions minutely and has assignedreasons in support of his conclusion as to why the assesseeshould have deducted TDS while effecting such payments. thelearned Senior Standing Counsel for the revenue is right in hissubmission that we cannot embark upon a fact finding exercisebut we are required to answer the substantial question of law,if any arisen in this appeal. We would be well justified ininterfering with the order of the Tribunal if the assesseecontends that it suffers from perversity. The assessee has notraised such a ground in this appeal but seeks to assail thefindings of the Tribunal, vis-a-vis the interpretation given tothe type of contract/arrangement between the assessee and thethree foreign entities. Therefore, we are not expected to re-appreciate the factual position to arrive at a conclusion in thematter. Nevertheless, we noted the findings of the AssessingOfficer as affirmed by the CIT(A) and the Tribunal as well asthe work order issued by the assessee to M/s.WFPL, Srilankadated 25.03.2013. The assessee in their reply to the show causenotice dated 08.02.2016 contended that they took the assistanceof M/s.WFPL, Srilanka for construction scope to be performed inSrilanka. If we examine the terms and conditions mentioned inthe work order, more particularly the scope of work and thevarious clauses contained therein, we have no hesitation to holdthat the nature of activity done in Srilanka is not mereconstruction or assembly or mining like project. Admittedly,the installation of wind turbine is a highly skilled andtechnical work. The various clauses in the work order clearlydemonstrates the scope of work and therefore, we cannot but holdthat the Assessing officer was right in concluding that the services rendered by M/s.WFPL is in the nature of Fee forTechnical Services. Similarly, with regard to the servicesrendered by M/s.WRS, Germany was stated by the assessee to be arepair work. The Assessing Officer after taking note of what isthe type of repair work which would accrue in wind turbine,concluded that the repairs are not mundane repairs but requirehighly sophisticated techniques and accordingly held that it isin the nature of technical services. After analysing the typeof services rendered by M/s.E&Y at UAE, the Assessing Officerheld that the market study is in the nature of technicalservices and the remittance is to be treated as Fee forTechnical Services. We find that there is no error in the saidconclusion especially when it has been rendered on appreciationof the scope of work based on the documents placed by theassessee before the Assessing Officer. Therefore, we find thatthe conclusion arrived at by the two authorities and theTribunal on all the three issues does not call for interference. 11.The decision in the case of Evolv Clothing Company Pvt.Ltd. is clearly distinguishable on facts. In the said case, theassessee carried on business of export of garments entered intoagency agreements with a non-resident Italian agent forprocuring export orders for the assessee at a commission. TheAssessing Officer found that though the assessee had no businessoutside India, the assessee had made payments from sources whichare taxable in India. The non-residents did not file any returnin India or pay Indian taxes in respect of the services renderedby them nor obtained exemption under Section 195(2) of the Actand the amounts paid to the non-residents were therefore to bedeemed to be income that had arisen in India under Section 9(1)(vii) of the Act for which the assessee ought to have deductedTDS under Section 195 of the Act. The appeal preferred by theassessee to the CIT(A) was allowed and the revenue filed anappeal to the Tribunal. The Tribunal reversed the order of theCIT(A) and restored the order of the Assessing Officer. TheCourt after taking note of the findings rendered by the Tribunalheld that there is no factual finding of any activity on thepart of the payee in India as it is nobody's case that theservice rendered by the overseas agent was either managerial ortechnical but the payment was for research with regard to theneed for products was incidental to the job of procuring orderson commission basis. For such reasons and others assigned, theappeal filed by the assessee was allowed. As mentioned earlier,the decision can render no assistance to the assessee as thefactual position was entirely different. 12.The facts in the case of Motif India Infotech (P) Ltd.was that the assessee provided software related services to itsoverseas clients. The Assessing Officer came to the conclusionthat the assessee had failed to deduct TDS and the expenditure was required to be disallowed. The CIT(A) allowed theassessee's appeal on the ground that the services were utilizedoutside India in a business or profession carried outside Indiafor the purpose of earning any income outside India. Therevenue's appeal before the Tribunal was rejected, against whichan appeal was filed to the High Court. The appeal was dismissedby the High Court and in so doing pointed out that the CIT(A)and the Tribunal have accepted the assessee's factual assertionthat the payments were for technical services provided by a non-resident for providing services to be utilized for serving theassessee's foreign clients and thus, the Fees for TechnicalServices was paid by the assessee for the purpose of making orearning any income from any source outside India and clearly thesource of income, namely, the assessee's customers were theforeign based Companies. This decision also is clearlydistinguishable on facts as noted by us above and does notrender assistance to the case of the assessee. 13.In the case of Havells India Ltd, one of the substantialquestion of law framed for consideration was whether theTribunal is right in holding that Section 40(a)(ia) of the Actis not applicable to testing fee paid to a Company in Chicago asthere is no failure on the part of the assessee to deduct TDS?The question was answered in favour of the revenue and whiledoing so, the Court analysed Section 9(1)(vii)(b) of the Act inthe following manner: 13.In the case of Havells India Ltd, one of the substantialquestion of law framed for consideration was whether theTribunal is right in holding that Section 40(a)(ia) of the Actis not applicable to testing fee paid to a Company in Chicago asthere is no failure on the part of the assessee to deduct TDS?The question was answered in favour of the revenue and whiledoing so, the Court analysed Section 9(1)(vii)(b) of the Act inthe following manner: "13.Section 9(i)(vii)(b) contemplates a sourcelocated outside India. It is difficult toconceptualise the place/ situs of the person whomake payment for the export sales as the sourcelocated outside India from which assessee earnedprofits. The export contracts obviously areconcluded in India and the assessee"s products aresent outside India under such contracts. Themanufacturing activity is located in India. Thesource of income is created at the moment when theexport contracts are concluded in India. Thereafterthe goods are exported in pursuance of the contractand the export proceeds are sent by the importerand are received in India. The ITA 55/2012 &57/2012 Page 13 of 22 importer of the assessee"sproducts is no doubt situated outside India, but hecannot be regarded as a source of income. Thereceipt of the sale proceeds emanate from him fromoutside India. He is, therefore, only the source ofthe monies received. The income component of themonies or the export receipts is located orsituated only in India. We are making a distinctionbetween the source of the income and the source of the receipt of the monies. In order to fall withinthe second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and notthe receipt, should be situated outside India. Thatcondition is not satisfied in the present case. TheTribunal, with respect, does not appear to haveexamined the case from this aspect. Its conclusionthat the technical services were not utilised forthe assessee"s business activity of production inIndia does not bring the assessee"s case within thesecond exception in Section 9(1)(vii)(b) of theAct. It does not bring the case under the firstexception either, because in order to get thebenefit of the first exception it is not sufficientfor the assessee to prove that the technicalservices were not utilised for its businessactivities of production in India, but it isfurther necessary for the assessee to show that thetechnical services were utilised in a businesscarried on outside India. Therefore, we cannot alsoapprove of the Tribunal"s conclusion in para 29 ofits order to the extent it seems to suggest thatthe assessee satisfies the condition necessary forbringing its case under the first exception. Bethat as it may, as we have already pointed out,since the source of income from the export salescannot be said to be located or situated outsideIndia, the case of the assessee cannot be broughtunder the second exception provided in theSection." 14.In our considered view, the decision in the case ofHavells India Ltd. would apply with full force to the case onhand. In any event, as observed by us earlier the findingrendered by the Assessing Officer, affirmed by the CIT(A) andthe Tribunal revolves entirely on the interpretation of theterms and conditions of the work order/contract and in theabsence of any perversity, we decline to interfere in the matteras no substantial question of law arises for consideration. 15.In the result, the appeal fails and is dismissed. Nocosts. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar To 1.The Deputy Commissioner of Income Tax, International Taxation - 2(1), Chennai. International Taxation - 2(1), Chennai. 2.The Income-tax Appellate Tribunal, “B” Bench, Chennai. “B” Bench, Chennai. 3.The Commissioner of Income Tax(Appeals)-16,121, Mahathma Gandhi Road, Chennai-34.121, Mahathma Gandhi Road, Chennai-34. 15.In the result, the appeal fails and is dismissed. Nocosts. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar To 1.The Deputy Commissioner of Income Tax, International Taxation - 2(1), Chennai. International Taxation - 2(1), Chennai. 2.The Income-tax Appellate Tribunal, “B” Bench, Chennai. “B” Bench, Chennai. 3.The Commissioner of Income Tax(Appeals)-16,121, Mahathma Gandhi Road, Chennai-34.121, Mahathma Gandhi Road, Chennai-34. 4.The Deputy Commissioner of Income Tax,International Taxation 2(1), Chennai.International Taxation 2(1), Chennai. +1cc to Mr.Karthick Ranganathan, Advocate sr.56175+1cc to Mr.R.Sivaraman, Advocate sr.56418 T.C.A.No.401 of 2019 rgn(co)nr 27/08/2019