Order
Pramod Kumar, A.M.,
As these three appeals relate to the same assessee and involve somewhat identical issues, we are taking up all these appeals together, as a matter of convenience, for disposal by way of this consolidated order. In all the appeals, common ground of the revenue is that on the facts and in the circumstances of the case, the Commissioner (Appeals) has erred in concluding that ‘the assessing officer was not justified in refusing the NOC to the assessee’ and in directing that ‘the tax already deducted at source should be refunded to the assessee as it was not incumbent on the part of the assessee to deduct tax at source’. To put it in simple words, revenue is aggrieved that Commissioner (Appeals) erred in holding that no tax was required to be deducted from certain remittances made by the respondent.
2. We will first take up ITA Nos. 970 and 971/Cal/1998 which relate to the respondent’s liability of deducting tax at source from two payments, amounting to French Francs 5,14,790 and French Francs 3,14,950 covered by the respective appeals, made to one M/s Decoufle s.a.r.l., France, on account of installation and commissioning charges in respect of certain machineries purchased from this very French company.
3. Briefly stated, material facts of the case are that respondent, i.e., ITC Ltd. (hereinafter referred to as “the assessee tax-deductor”) imported two sets of machines from M/s Decoufle s.a.r.l., France, (hereinafter referred to as ‘Decoufle’). Decoufle also deputed its technicians, for installation and commissioning of these machines, 6-3-1995 to 10-7-1995 (146 days), and 15-3-1995 to 29-5-1995 (75 days), respectively. It was in connection with this installation and commissioning of machines that the assessee was to pay sums of French Francs 5,14,790 and French Francs 3,14,950 (net of taxes) to Decoufle. The assessee moved application under section 195 of the Income Tax Act (hereinafter referred to as ‘the Act’) and prayed for issuance of a ‘no objection certificate’ for remitting these sums without any deduction of tax at source. It was contended that installation and commissioning of machines does not constitute ‘technical services fee’ within meaning of Explanation 2 to section 9(1)(vii) of the Act and that it is in the nature of business profits. The assessee further contended that in view of article 5(3) of India France Double Taxation Avoidance Agreement, Decoufle did not have ‘permanent establishment’ (hereinafter referred to as ‘PE’) in India as installation project did not exceed six months. It was also submitted that unless the French company has a permanent establishment in India and unless the income arises from the business carried through the permanent establishment in India (article 7(2)1, the same cannot be brought to tax in India. A declaration by Decoufle regarding non-maintenance of PE in India was also filed before the assessing officer. The assessing officer, however, was far from impressed. The assessing officer observed that the installation and commissioning services were requisitioned by the assessee after the import of machines in questions and, therefore, such services cannot be said to be integral part of transaction. It was also observed that Explanation 2 to section 9(1)(vii) was not applicable to the facts of this case as the same covered only an assembly project whereas installation and commissioning in question cannot be termed as an assembly project. The assessing officer thus held the fees paid for installation and commissioning of machines as income of the French company taxable in India under section 5(2)(b) read with section 9(1)(vii) of the Act. It was also held that in view of the provisions of section 115A(1)(b) of the Act, the aforesaid income was taxable at the rate of 30 per cent. The assessing officer also mentioned that on earlier occasions also, the assessee-company had made payments under similar circumstances, to Decoufle and the NOCs (i.e., orders under section 195(2)] were issued on the conditions of deducting the tax at the rate of 30 per cent, which were never agitated by the assessee. Accordingly, assessing officer directed the assessee to deduct the tax at source from the payments made to Decoufle at the rate of 30 per cent. Aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals).
4. In appeal learned Commissioner (Appeals) observed that ‘there is no denying the fact that M/s Decoufle has supplied the machines to assessee-company’ and ‘it has also installed and commissioned the machine for operation’. It was, therefore, concluded that ‘it cannot be said that M/s Decoufle has provided technical consultancy service to the appellant’. The Commissioner (Appeals) further observed that Decoufle did not have any ‘permanent establishment’ (hereinafter referred to as PE) in India and that unless the Decoufle has a PE in India or unless the installation project takes more than six months time, income embedded in such payments was not taxable in India. It was stated that when there is no PE and the installation project does not take time beyond six months, the tax has to be paid in the country from which plant and machinery is purchased and from which the persons come for setting up and installing the plant and machinery. In support of this proposition, a reference was made to articles 5 and 7 of the India-France DTAA. It was in this background that the Commissioner (Appeals) came to the conclusion that the assessing officer was not justified in declining issuance of a no objection certification for remittances to Decoufle, without any deduction of tax at source. The Commissioner (Appeals) also directed the assessing officer that ‘refunds (of taxes already deducted) may be issued forthwith’. Revenue is aggrieved and in appeal before us.
5. We have conscientiously heard Smt. Lakra, learned Commissioner (DR), and Shri Rahul Mitra, learned Counsel for the assessee. We have also carefully perused the orders of the authorities below as well as paper book filed by the assessee, and duly deliberated upon the DTAA and judicial precedents cited at the bar. We find that it is an unambiguous legal position that by the virtue of section 90(2) of the Act, where the Central Government has entered into an agreement with the government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply only to the extent they are more beneficial to that assessee. Thus, provisions of such DTAA override the provisions of the Act, to the extent these agreements are more favourable to the assessee. In our considered view, therefore, only in the event of assessee’s case failing on the provisions of the DTAA, the question of examining provisions under the Income Tax Act arises. We may, in this regard, quote the following observations made by the Hon’ble jurisdictional High Court in the case of CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal)
“………… The conclusion is inescapable that, in case of inconsistency between the terms of agreement and the taxation statute, the agreement alone would prevail.
The CBDT has issued a Circular No. 333, dated 2-4-1982 (1982) 137 ITR (St) 1, on the question as to what the assessing officerwill do when they find that the provisions of the DTAA are not in conformity with the provisions of the Income Tax Act, 1961. Then it was laid down by the Board in the said circular as followed :
“The correct legal position is that where a specific provision is made in the DTAA, that provision will prevail over the general provisions contained in the Income Tax Act, 1961. In fact the DTAA which have been entered into by the Central Government under section 90 of the Income Tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement.
Thus, where a DTAA provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income Tax Act. Where there is no specific provision in the Agreement it is the basic law, i.e., the Income Tax Act, that will govern the taxation of income.’
In our view, the Circular reflected the correct legal position inasmuch as the convention or agreement is arrived at by the two contracting governments in deviation from the general principles of taxation applicable to the contracting States; otherwise, the double taxation avoidance agreement will have no meaning at all. ”
6. We will, therefore, firstly examine taxability of impugned payments to Decoufle, in the light of provisions of applicable India-France DTAA. In view of the provisions of article 30(1)(a)(i) of India-France DTAA dated 29-9-1992, which came in force on 1-8-1994, this DTAA is applicable with respect to income arising in India in the previous years beginning 1995-96, i.e., fiscal years beginning on or after 1st day of April following the calendar year in which convention enters into force. The DTAA, therefore, is clearly applicable on the present cases which relate to services rendered in the previous year ended 31-3-1996. We further find that article 7(1) of the aforementioned DTAA provides that the profits of an enterprise of one of the contracting States shall be taxable only in that contracting State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. Article 5(3) of this DTAA provides that a permanent establishment will inter alia include a installation or assembly project only where such site or project continues for a period of more than six months, but, as noted in para 3 above, in none of the cases the installation project continued for a period of more than six months. We also find that the cases before us are admittedly not covered by the scope of any other provisions regarding permanent establishment. However, article 7(6) of this DTAA clearly provides that where profits include items of income which are dealt with separately in other articles of this convention, then the provisions of those articles shall not be affected by the provisions of this article. Article 13(1) of the DTAA, separately dealing with fees for technical services, further provides that fees for technical services arising in a contracting State and paid to a resident of the other contracting State may also be taxed in that other contracting State according to the laws of that contracting State, though, if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 20 per cent of the gross amount of such fees for technical services. Accordingly, in our considered view, so far as the present cases of fees for technical services are concerned, the provisions of article 7 are not at all relevant. But then the question arises as to what is that connotation and scope of the expression ‘fees for technical services’.
7. Article 13(4) of the aforementioned DTAA defines the term “fees for technical services” as used in this article, to mean payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in article 15, in consideration for services of a managerial, technical or consultancy nature. At this stage, it is also important to refer to an extract from the protocol signed at the time of conclusion of the aforementioned India-France DTAA. The relevant portion is reproduced below :
PROTOCOL
“At the time of proceeding to the signature of the convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the convention.
7. In respect of article 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any convention, agreement or protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India Emits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this convention on the said items of income, the same rate or scope as provided for in that convention, agreement or protocol on the said items of income shall also apply under this convention, with effect from the date on which the present convention or the relevant India convention, agreement or protocol enters into force, whichever enters into force later.”
8. In our considered view, it is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein. Hon’ble Authority for Advance Ruling, relying upon Dr. Klaus Vogel’s commentary on Double Taxation Conventions and as reported in 242 ITR 208 (relevant portion at page 225), has observed that protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA are, therefore, required to be read with the protocol clauses and are subject to the provisions contained in such protocol, including the one reproduced above.
9. One of the implications of the above protocol clause is that the scope of expression ‘fees for technical services’; so far as Indo-France DTAA is concerned, cannot be wider than the scope of most restrictive DTAA that India has entered into with any OECD member after 1-9-1989. In this context, it has been pointed out to us that, after the cut off date of 1-9-1989 referred to in para 7 of protocol attached to and forming part of Indo-French DTAA, India has signed DTAAs with at least three OECD member countries which have narrower scope of the expression fees for technical services’. In all these DTAAs, fees for technical services does not include the fees received for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property. These agreements are as follows :
Name of country
Signing date of DTAA
Relevant article
Citation
United Kingdom
25th Jan., 1993
Article 13(5)(a)
(1994) 117 CTR (St) 189 : (1994) 206 ITR (St) 235
United States of America
12th Sept., 1989
Article 12(5)(a)
(1991) 91 CTR (St) 6 (1991) 187 ITR (St) 102
Switzerland
2nd Nov., 1994
Article 12(5)(a)
(1995) 125 CTR (St) 29 : (1995) 214 ITR (St) 223
10. In India-United Kingdom DTAA ((1994) 117 CTR (St) 189; (1994) 206 ITR (St)
2351, articles 13(4) and 13(5) provides as follows :
“Article 13(4)
For the purposes of para 2 of this article, and subject to para 5 of this article the term “fees for technical services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3(a) of this article is received; or
(b) are ancillary and subsidiary to the enjoyment of the property for which payment described in para 3(b) of this article is received; or
(c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
Article 13(5)
The definitions of fees for technical services in para 4 of this article shall not include amounts paid :
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in para 3(a)* of this article;
(b) for services that the ancillary and subsidiary to the rental or ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic;
(c) for teaching in or by educational institutions;
(d) for services for the private use of the individual or individuals making the payment; or
(e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in article 15 (Independent Personal Services) of this convention.
(*Article 3(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means or reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”
11. In India-United States DTAA [(1991) 187 ITR (St) 102], articles 12(4) and (5) provides as follows :
“Article 12(4)
For the purposes of this article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para (3) is received; or
(b) make technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
Article 12(5)
Notwithstanding para (4), “fees for included services” does not include amounts paid :
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in para (1)(a); *
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;
(c) for teaching in or by education institutions;
(d) for services for the personal use of the individual or individuals making the payment; or
(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in article 15 (Independent Personal Services).
(*Article 12(3)(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof).”
12. We have also noticed that articles 12(4) and 12(5) of the India- Switzerland DTAA provides as follows :
“Article 12(4)
For purposes of this article, the term “fees for included services” means :
(a) payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services are ancillary and subsidiary to the application or enjoyment of the right, for which a payment described in sub-para (b) of para 3 is received;
(b) payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services :
(i) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-para (a) of para 3 is received; or
(ii) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
Article 12(5)
Notwithstanding para 4, “fees for included services” does not include amounts paid :
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property;
(b) for teaching in or by educational institutions;
(c) for services for the personal use of the individual or individuals making the payment; or
(d) to an employee of the person making the payments or to any individual or firm of individual (other than a company) for professional services falling under article 14.
(*Article 120(a) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience;]”
13. One immediately discernible common factor in Indian DTAAs with UK, USA and Switzerland is that in all these treaties ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’ is outside the scope of ‘fees for technical services’ liable to separate treatment under the respective DTAA. In other words, in all these treaties, unless the ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’ is attributable to PE and fulfils the other requirements laid down under the relevant article dealing with business profits, the same cannot be taxed in the source country. The scope of expression ‘fees for technical services’, in these treaties, appear to be for more restricted than the scope of the same expression in Indo-French DTAA which broadly defines fees for technical services as to mean payments in consideration for services of a managerial, technical or consultancy nature. Therefore, whereas payments for all kind of technical services are to be treated as ‘fees for technical services’ for the purpose of article 13(4) of Indo-French DTAA, such payments cannot be treated as to be in the nature of ‘fees for technical services’, under respective articles in Indo-UK, Indo-US and Indo-Swiss DTAA, in case the same constitutes ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’. Clearly, therefore, scope of ‘fees for technical services’ is much more restricted in Indo-UK, Indo-US and Indo-Swiss DTAAs vis-a-vis the DTAA that India has entered into with France.
14. Our attention has also been invited to the CBDT Notification No. SO 650(E), dated 10-7-2000 [(2000) 244 ITR (St) 134] which inter alia states as follows :
Where the convention between the Republic of India and the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and the capital came into force on the 1-8-1994, after the Notification by both the contracting States to each other of the completion of the procedures required under their laws for bringing into force the said convention; ………..
And whereas para 7 of the Protocol dated 29-9-1992, to the aforesaid convention provides that if after the 1-9-1989, under any convention, agreement or protocol concluded between India and a third State which is a member of the Organization for Economic Cooperation and Development, India should limit its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this convention on the said items of income, then, as from the date on which the convention between India and France or the relevant Indian convention, agreement or protocol enters into force, whichever enters into force later, the same rate or scope as provided for in that convention, agreement or protocol on the said items of income shall also apply under this Convention;
And whereas in the convention between India and Germany which entered into force on the 26-10-1996, and the convention between India and the United States of America which entered into force on the 18-12-1990, which states are members of the Organisation for Economic Cooperation and Development, the Government of India has limited the taxation at source on dividends, royalties, fees for technical services and payments for the use of equipments to a rate lower or a scope more restricted than that provided in the convention between India and France on the said items of income;
Now, therefore, in exercise of the powers conferred under section 90 of the Income Tax Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the convention notified by the said Notification which are necessary for implementing the aforesaid convention between India and France, namely, ………..
IV. With effect from the 1-4-1995, for the existing para 2 of article 13 relating to ‘Royalties and fees for technical services and payments for the use of equipment’, the following paragraph shall be read :
“2. However, such royalties, fees and payments may also be taxed in the contracting State in which they arise and according to the laws of that contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed :
(a) in the case of royalties and fees 20 per cent of the gross amount of such royalties or fees; and
(b) in the case of payments referred to in para 5 of this article 10 per cent of the gross amount of such payments.”
V. With effect from the 1-4-1997, for para 2 of article 13 relating to ‘Royalties and fees for technical services and payments for the use of equipment’ referred to in para IV above, the following paragraph shall be read :
“2. However, such royalties, fees and payments may also be taxed in the contracting State in which they arise and according to the laws of that contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 10 per cent of the gross amount of such royalties, fees and payments.”
15. It has been pointed out by the learned counsel that, so far as ‘fees for technical services’ are concerned, while the Central Government has made amendment to the Indo-French DTAA with respect to the lower rate of withholding tax envisaged in the said tax treaties as compared to the rate of tax contained in Indo-French DTAA with respect to incomes of aforesaid nature, the Central Government has not taken note of the favourable provisions contained in the tax treaties signed by India with the OECD member countries. Our attention has also been invited to DTAAs that India has entered with Philippines and with Switzerland where similar provisions, for incorporation of favourable provisions contained in other tax treaties, are existent, but with the exception that in order to make the incorporation effective, the governments of two countries should first mutually decide of such incorporation in the form of amendment of tax treaty. It is thus argued that since there is no such requirement under the Indo-French DTAA, there was no need to amend the Indo-French DTAA by resorting to issuance of notification for that purpose. Learned counsel has also made rather elaborate submission about legal infirmities in the above notification and suggested that the amendment in notification is made ex abundanti coutela i.e., by way of abundant precaution. It has been contended that section 90 of the Act does not empower the Central Government to unilaterally amend a tax treaty and, therefore, a notification amending, in its own right the tax treaty is unsustainable in law. It has been submitted that the present amendment to the India-France DTAA by way of notification dated 10-7-2000, is a result of over anxiety of the Central Government to give effect to relevant paragraph of the protocol to the IndiaFrance DTAA and the same does not or not undermine the clear and ambiguous provisions of the India-France DTAA. According to the learned counsel, the above notification is clearly redundant and, in any event, does not whittle down or override the benefits which are otherwise envisaged in para 7 of the protocol to the Indo-French DTAA. As an alternate submission, and without prejudice to the above line of argument, reliance was placed on the order passed by a coordinate Bench of this Tribunal in the case Tata Iron & Steel Co. Ltd. v. Dy. CIT (1999) 69 ITD 292 (Mumbai-Trib) in support of the proposition that executive authority of the government cannot, by way of a notification, lay down provisions having retrospective effect. It is submitted that by way of notification dated 20-7-2000, no amendment allegedly impairing the existing rights guaranteed by the protocol cause in (sic) can be made in a treaty which will adversely affect the taxpayer’s rights effective from a date earlier than 20-7-2000. On the strength of these submissions, learned counsel submitted that the CBDT notification dated 20-7-2000 does not adversely affect the position of the assessee. Learned Departmental Representative, however, placed her bland reliance upon the notification issued by the CBDT.
16. A perusal of the aforesaid notification gives us a prima facie impression that it constitutes Central Government’s independent action to implement the understanding arrived at by the virtue of protocol clauses in the India-France DTAA. It is difficult to comprehend as to how the Central Government can unilaterally amend, in exercise of the powers under section 90 of the Income Tax Act, a bilateral agreement that a DTAA inherently is, but, for the present purposes and for the reasons we shall now state, it is not even necessary to be drawn into that controversy about legality of the aforesaid notification. We have noticed that the coordinate Bench of this Tribunal, in the case of Tata Iron & Steel Co. Ltd. v. Dy. CIT (supra), has inter alia observed that :
“The Honble Supreme Court in the case of Hukumchand v. Union of India (1973) 1 SCR 896, held that even under the rule-making powers, if it is having retrospective effect merely by placing it on the table of Lok Sabha it would not prevent courts from deciding its vires. In this case, there is no question of placing of notification on the table of the House. It is only a question of publishing the same in the Gazette. This power of the Central Government, CBDT & FTD cannot prevent us from reading down the notification with the protocol treaty so that it does not adversely affect the rights of this taxpayer till the date on which protocol is amended. Notification can have the effect from the date of its publication in the Gazette. This power, however, does not include a power to assign the notification with retrospective effect. In this case, as DTAA protocol is an act between two sovereign States, under no circumstances, the notification can take away the rights vested in the taxpayer with retrospective effect.”
17. In our considered view, therefore, it is clear that a notification cannot adversely affect the rights of this taxpayer with retrospective effect. Since the notification in question was issued on 20-7-2000, whereas the relevant previous year before us is the year ended 31-3-1996, the aforesaid notification, in our considered view, does not affect the issue in appeal before us. We, therefore, see no need to address ourselves to the broader questions about legality of the aforesaid notification or to deal with other similar contentions raised by the assessee. In any event, in our considered view, the benefit of lower rate of or restricted scope of ‘fees for technical services’ under the Indo-French DTAA is not dependent on any further action by the respective governments, unlike the situation envisaged in, for example, para 4 of protocol to Indo-Philippines DTAA or para 3 of protocol to Indo-Swiss. We leave it at that.
18. In the light of the above discussion, we are of the considered view that the same scope of fees for technical services’ as provided for in the India DTAAs with UK, USA and Switzerland, which is far more restricted vis-a-vis scope of this expression in Indo-French DTAA, shall also apply under Indo-French DTAA, with effect from the date on which the Indo-French DTAA or such other DTAA enters into force, whichever enters into force later. As all the three DTAAs discussed above entered into force on a date earlier than the commencement of the previous year 1995-96, the scope of technical services, for the purpose of Indo-French DTAA, cannot be broader than that envisaged in the above DTAAs. In this view of the matter, we hold that the ‘fees for services that are ancillary and subsidiary, as well as inextrically and essentially linked, to the sale of property’ are outside the scope of technical services so far as Indo-French DTAA is also concerned, even though no such specific exclusion clause is incorporated directly in the treaty itself, right from the time Indo-French DTAA entered into force. Accordingly, in the year in appeal before us, the ‘fees for technical services’ for the purpose of Indo-French DTAA, did not include ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’.
19. Coming back to the facts of the present case, we find that Decoufle had rendered services for installation and commissioning of machines sold by Decoufle to the assessee tax deductor. We have also noticed that proforma invoices issued by the Decoufle (copies placed at pages 7-8 and 32-33 of the paper book) it is clearly stated that Decoufle was to provide for installation and commissioning services. In any event, installation and commissioning of these machineries, in our considered view, constitutes services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of machines. We are, therefore, of the considered view that these services rendered by Decoufle to the ITC Limited are not covered by the scope of ‘fees for technical services’ referred to in article 13 of the India-France DTAA. We have already come to a conclusion, in para 6 above, that in the present cases, the income arising to the French company cannot be said to be includible in ‘business profits’ within meanings of article 7 of the DTAA as the same cannot be said to be attributable to permanent establishment referred to in article 5 of the DTAA. In view of this position, we are of the considered opinion that the installation and commissioning fees received by Decoufle, on the facts of the present cases, were not exigible to tax in India.
20. Under section 195(1) of the Act, any person making payment in the form of income to a non-resident required to deduct tax at source, from the said income, at the ‘rate in force’ which, in turn, has been explained under section 2(37A)(iii) as follows :
“for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90 whichever is applicable by virtue of the provisions of section 90”.
As we have earlier observed, provisions of the DTAA clearly override the provisions of the Act to the extent the provisions in such agreement are more favourable to the assessee. Therefore, in case a DTAA provides for lower rate, which includes ‘Nil’ rate, of taxes, such a rate will prevail over the rate given in the Act. As a natural corollary to this proposition, when, in terms of the provisions of a DTAA, an income is not exigible to income in India, no tax is required to be deducted under section 195 from the payment of such income to a non-resident. We have already held that, in terms of the provisions of applicable Indo-French DTAA, the income embedded in impugned payments to Decoufle was not liable to income-tax in India. Accordingly, in our considered view, the assessee tax deductor was not under any obligation to deduct tax at source from related remittances to the French company, i.e., Decoufle s.a.r.l.
21. For the detailed reasons set out above, we support the conclusions arrived at by the learned Commissioner (Appeals) and decline to interfere in the matter.
22. In the result, ITA Nos. 970 and 971/Cal/1998 are dismissed.
23. We now turn to ITA No. 973/Cal/1998 which relate to assessee’s liability of deducting tax at source from certain payments, amounting to UK 10,500, made to one M/s NTM Limited, United Kingdom (hereinafter referred to as NTM) on account of commissioning charges in respect of three machines purchased from this UK based company.
24. As far as this appeal is concerned, material facts of the case are that the assessee tax deductor purchased certain machineries, for use in its factories in Bangalore and Saharanpur, from NTM and, under the related agreement, the aforesaid machines were to be installed and commissioned only by the technicians of NTM. Accordingly, NTM deputed its technicians at Bangalore (from 18-9-1994, to 14-10-1994) and at Saharanpur (from 3-1-1995 to 22-1-1995) for rendering services in connection with such installation and commissioning of machines. In consideration of these services, the assessee tax deductor was required to pay UK 10,500 to NTM. The assessee tax deductor moved an application under section 195(2) of Act, before the assessing officer, and submitted that no tax are required to be deducted from the aforesaid payment. Reliance was placed on the provisions in the applicable Indo-UK Double Taxation Agreement. The assessing officer, however, ignored the provisions of the DTAA and held that, in view of provisions of Explanation 2 to section 9(1)(vii) read with section 115A(1)(B) of the Act, the aforesaid consideration for technical services is liable to be taxed at the rate of 30 per cent. On this basis, assessee tax deductor was directed to deduct tax at the rate of 30 per cent from payment to be made to NTM. Aggrieved, assessee carried the matter in appeal before the Commissioner (Appeals). In appeal, Commissioner (Appeals) observed that “since the machines were supplied by NTM Ltd. and the engineers certified that function of machines to be in order, it cannot be said that they were rendering technical services to the appellant company”. He further noted that “machines are supplied by M/s NTM Ltd. and the engineers certified, whether the machines are working properly or not has to be verified by M/s NTM Ltd. The function of the engineers was to verify that the machines were working as per specification.” It was in the backdrop of these observations that the Commissioner (Appeals) came to the conclusion that no technical services were rendered to NTM. It was thus held that no tax was required to be deducted from the payment made to NTM, in consideration of these services. Revenue is aggrieved and in appeal before us.
25. Rival contentions are conscientiously heard, orders of the authorities below carefully perused, and applicable legal position duly deliberated upon. We find that the ITC Ltd. had purchased certain machineries from NTM, vide invoice No. 1378-94, dated 14-2-1994 (copy placed at page 5 of the relevant paperbook), and it was for services rendered in connection with installation and commissioning of these machines that UK 10,500 were paid to NTM (copy of invoice No. 2738-95 dated 6-9-1995 placed at page 4 of the relevant paper book). It is also not in dispute that without installation and commissioning of these machines by the NTM’s technicians, these machines could not have been put to commercial use. It is thus clear that the technical services rendered by NTM were, to use the phraseology employed in tax treaties, ‘services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’. It is also not in dispute that in terms of Indo-UK DTAA, NTM did not have any ‘permanent establishment’ in India to which such income can be attributed. In this view of the matter, in view of the specified exclusion of fees for such services from the scope of ‘fees for technical services’ of the virtue of article 13(5)(a) of Indo-UK DTAA, we hold that the income arising to NTM from rendering these technical services will not be taxable in India. Accordingly in our considered view and relying upon the deliberations in paras 19 and 20 above, which are broadly applicable in this case also, the assessee tax deductor was not under any obligation to deduction at source from related remittances to NTM. For the reasons set out above, we support conclusions arrived at by the Commissioner (Appeals) and decline to interfere in the matter.
26. In the result, ITA Nos. 973/Cal/1998 is also dismissed.
27. To sum up, all the three appeals, filed by the revenue, are dismissed.