ORDER
R. ACHARYA, A.M.:
This is an appeal instituted by the Department against the order of the CIT(A) for the asst. yr. 1995-96 on the following grounds :
“1. Whether, on the facts and in the circumstances of the case, the learned CIT(A)-I, Calcutta, was justified in admitting the appeal against the intimation under s. 139(9) in view of express provision of s. 246(2) in which intimation under s. 139(9) is not included as an appealable order.
2. Whether, on the facts and in the circumstances of the case, learned CIT(A)-I, Calcutta was justified in treating the return filed without report under s. 44AB as a valid return.
3. Whether, on the facts and in the circumstances of the case, the learned CIT(A)-I, Calcutta, was justified in law in arriving at the conclusion that technical service fees are tax exempt in India without giving opportunity of hearing to the AO and also without allowing the AO to examine the relevant materials in the case.”
2. Briefly stated the facts of the case are that Voest Alpine Industrieanlagenbau. GmbH, Turmstrasse 44, 4020 Linz, Austria, a non-resident foreign company, filed its return of income for the asst. yr. 1995-96 on 6th May, 1996, showing the total income at NIL. On scrutiny of the return and other relevant papers filed along with the return, the AO found that the non-resident company received Rs. 26,25,74,694 from Larsen & Toubro Ltd. (hereinafter referred to as L&T) during the previous year relevant to the asst. yr. 1995-96 on account of “technical services fees”. According to the AO the assessee- company was under obligation to file a tax audit report as per the provisions of s. 44AB of the IT Act, 1961 within the due date as the total receipt exceeded the prescribed limit. He further pointed out that as the return did not accompany the tax audit report (TAR), it was defective one in terms of Expln. (bb) of sub-s. (9) of s. 139 of the Act. The AO, therefore, issued a letter, dt. 27th Nov., 1996, to the nonresident company in order to give the assessee an opportunity to remove the defect and to furnish the TAR. In response to the said letter L&T appeared on 6th Dec., 1996 before the AO and filed a written submission vide letter, dt. 5th Dec., 1996, contending therein that Voest Alpine Industrieanlagenbau. GmbH, Austria, a non-resident company, did not carry on any business in India and it did not maintain any permanent establishment in India. It was further submitted that such income of the non-resident was not subject to tax in India as per Double Taxation Avoidance Agreement (DTAA) and hence there was no scope for applicability of the provisions of s. 44AB of the Act. The AO considered the contentions of the assessee, examined the agreement and came to the conclusion that M/s Voest Alpine carried on business in India directly or indirectly being principal contractor and as per the provision of s. 9 of the IT Act, the income in connection with such contract did accrue or arise in India which was chargeable to tax in India. According to the AO, the provisions of s. 44AB were applicable in this case. He, therefore, declared the IT return filed on 6th May, 1996 as invalid in accordance with the provisions of s. 139(9) of the Act.
3. Being aggrieved, the assessee- company challenged the order of the AO before the CIT(A). It was submitted that the agreement, dt. 15th Sept., 1993, between L&T and the assessee- company, inter a~a, provided that the assesseecompany was described as the principal contractor. The assessee- company was to provide L&T with engineering know-how and L&T was to provide the assessee- company with all technical details and information. As per agreement, the assessee- company would carry out its work generally in its office in Linz, Austria. In pre-contract phase, the assessee- company was to provide basic data, engineering data, documentation, etc. at the assessee-company’s office in Austria and in Austria L&T was to pay to the assessee- company 7 per cent of the contract price net of taxes as technical fees. The assessee also submitted that in pursuance of the above agreement, dt. 15th Sept., 1993, the assesseecompany provided to L&T the pre-contract technical services and such services were rendered by the assessee-company entirely at its office in Linz, Austria. It was also clarified that the assessee- company had no office branch or any permanent establishment in India. The assessee further submitted that eventually, SAIL granted contract to the assessee-conpany-L&T combined in June, 1994, and as per the agreement L&T was to pay Rs. 30,89,11,400 to the assessee- company out of which it actually paid Rs. 26,25,74,690 in foreign exchange with the approval of RBI and the IT Department NOC which was issued on the basis of payment of advance-tax of Rs. 7,87,72,407 was under protest. It was further contended that the provisions of s. 44AB and 9 of the IT Act were not applicable as the total income declared in the return was nil and the assessee had claimed the amount deposited by L&T as refund. It was further submitted that the assessee had no income taxable in India because provisions of DTAA between India and Austria exempt the payment in question from taxation in India and, therefore, the assessee was not under any obligation to file any return under s. 139(l). It was also submitted that the refund of Rs. 7,87,72,407 was claimed under s. 237 through the prescribed Form 30 which was accompanied by a return under r. 41(2). The representative of the assessee also relied on DTAA between India and Austria, dt. 24th Sept., 1963, in general and on Arts. III(l), VII and XVII thereof, in particular, to argue that the payment in question was totally exempt from tax in India. The assessee relied on the decision in the case of Tekniskil (Sendirian) Berhard, In re (1996) 135 CTR (AAR) 292: (1996) 222 ITR 551 (AAR) for the proposition that as the assessee- company is not having any permanent establishment in India, the technical services fees under consideration was not taxable in India. It was also claimed that no official of the assessee- company visited India in connection with rendering of technical services and that a similar payment made by SAIL from Patna was allowed to be remitted without deduction of tax at source.
4. The CIT(A) considered the submissions and contentions of the assessee and came to the conclusion that the relevant provisions of the DTAA between India and Austria overrode the provision of tax laws in those countries to the extent such laws are repugnant to the provisions of DTAA or work to place the nonresident at a disadvantageous position as compared to what the DTAA lays down. He also examined Arts. III, VII, XVII of the agreement and concluded that such technical service -fees were exempt from tax in India as there being no activity at all carried out in India. According to the CIT(A) the AO had wrongly invoked the provisions of s. 9, as the said section stands naturally overridden by DTAA provisions. As regards the compulsory TAR under s. 44AB, he observed that it would be far-fetched to insist upon such audit report when one particular remittance to a non-resident assessee whose income is exempt from tax in India. According to him, the refund was actually claimed under s. 237 and so the return of income was one filed under r. 41(2) of the IT Rules, 1962, and, therefore, he held that there was nothing wrong in the return of income and the formal application for refund. He, therefore, annulled the impugned assessment order, dt. 11th Dec., 1996, and directed the AO to treat the return as a valid return furnished as per r. 41(2) along with the formal application for refund in Form No. 30 and thereby to deal with those as per law on the basis of the materials.
5. Being aggrieved by the aforesaid order of the CIT(A), the Revenue has preferred this appeal to the Tribunal.
6. The first ground of appeal is that whether the CIT(A) was justified in admitting the appeal against the intimation under s. 139(9) in view of express provision of s. 246(2) in which intimation under s. 139(9) is not included as an appealable order. The learned Departmental Representative argued that the intimation under s. 139(9) was not an appealable matter as it does not cover the provisions of sub-s. (2) of s. 246 or even by sub-s. (1) of s. 246 of the Act. According to the learned Departmental Representative, the CIT(A) did not give any reason about the appealability of the order/intimation under s. 139(9). He also pointed out that Voest Alpine (the assessee) is not the technical collaborator but is principal contractor. He further argued that the CIT(A) declared the return to be valid return filed for getting refund under r. 41(2) of the IT Rules, 1962; but he did not give proper justification. He also contended that the CIT(A) was wrong to declare the return as valid as it was a defective return under s. 139(9). He, therefore, urged that the impugned order of the CIT(A) should be vacated.
7. The learned counsel for the assessee, on the other hand, submitted that since the income of the assessee is exempt, the assessee- company was not liable to file the income-tax return in terms of s. 139(l) as the income did not exceed the prescribed limit. According to him, the assessee had filed the return under r. 41(2) r/w s. 237 along with the claim for refund in Form No. 30 and, therefore, the primary documents is claim for refund in Form No. 30 accompanied by a return as prescribed under r. 41(2). He further submitted that the provisions of s. 139(10)(0 also supports the case of the assessee. The learned counsel for the assessee, therefore, argued that since the return was filed in support of the refund claim and since the income was claimed to be exempt under the provisions of DTAA, the Department had wrongly declared the return invalid and defective. In the above backdrop, the learned counsel contended. that the refusal to grant refund was appealable under r. 30 of the IT Rules. According to him, the appeal was filed under s. 246(2)(b) r/w s. 246(l)(a) and s. 246(l)(k) of the Act as the order appealed against was: firstly, against the assessee; and secondly, it held the assessee’s income taxable in India and thirdly, its effect was not to process the claim of refund resulting in denial of refund. In order to support his argument and contention, the learned counsel relied on the following decisions:
(1) Sardar Bahadur Sardar Indra Singh Trust vs. CIT (1954) 26 TIR 670 (Cal);
(2) CIT vs. M Pyngore (1993) 109 CTR (Gau) 322: (1993) 200 1TR 106 (Gau); and
(3) CIT vs. Dalmia Cement (Bharat) Ltd. (1995) 128 CTR (SQ) 120: (1995) 216 ITR 79 (SQ).
According to the learned counsel the intimation under s. 139(9) to the assessee that the return was invalid implies refusal to process the refund and this enables the assessee to file an appeal.
8. We have carefully considered the rival contentions the relevant facts and the materials placed on record and we have also gone through the relevant provisions of the law and the decisions on which reliance is placed by the assessee’s counsel. We find that the assessee- company had filed return showing nil income on 6th May, 1996, and vide its forwarding letter addressed to the AO (copy is placed at pp. 38-39 of the paper-book) claimed that the remittance of technical service fees by L&T was exempt from income-tax in India in view of Arts. V11 of DTAA between India and Austria and hence withholding tax was not applicable in India. The assessee had also reproduced art. VII of DTAA in the forwarding letter and requested the AO in the last para of the letter as under:
“We are enclosing a duly filed in tax return indicating ‘Nil’ liability and request you to issue a refund voucher in favour of L & T Limited for an amount of Rs. 7,87,72,407. ”
The above letter also proves that the return was filed showing nil liability just for the purpose of obtaining refund vouchers. In the computation of total income, a copy of which is placed at p 41 of the paper-book, which was enclosed with the return, the following note is given by the assessee:
“Note: Technical services fees received by an Austria Enterprise from an Indian Enterprise is not taxable in India in view of Art. V11 of convention for avoidance of double taxation hence Rs. 26,25,74,690 paid by L & T Limited as a technical services fee to Voest Alpine Industrieanlagenbau GmbH is only taxable in Austria and not in India.”
In this computation of total income for the asst. yr. 1995-96 nil income has been shown from all the sources and heads of income.
9. Besides, the assessee- company also filed Form No. 30 (claim for refund of tax) following r. 41(2) of the IT Rules r/w s. 237 of the IT Act, 1961 as the primary document enclosing therewith the return and requested the AO for refund of Rs. 7,87,72,407 plus interest under s. 244A of the Act.
10. We find that while scrutinising the return and declaring the return invalid under s. 139(9), the AO has completely ignored these vital facts and important documentary evidence. He had sidetracked the main issue and main purpose for which the return was filed. In our opinion, this clearly amounts to refusal of refund to the assessee. Even otherwise, the intimation under s. 139(9) under consideration is wrongly and illegally issued by the AO as it was issued without examining as to whether the income claimed to be exempt was taxable in India and as to whether the claim of refund is worth granting or worth refusing. In view of this, all the contentions of the Revenue, in our opinion, do not survive and do not hold good. In our view, therefore, the CIT(A) has rightly declared that it is a valid return furnished as per r. 41(2) along with the formal application for refund in Form No. 30 and has rightly directed the AO to deal with the same as per law on the basis of materials. In view of above facts and legal position, the intimation under s. 139(9) does not legally survive in the eyes of law and automatically amounts to refusal of refund. The effect of intimation under s. 139(9) was not to process the claim of refund resulting in denial of refund due to the assessee. In this view of the matter, we find that the contention of the assessee that the appeal is filed under ss. 246(2)(b) r/w s. 246(l)(a) and 246(l)(k) is correct.
11. It is seen that the assessee has denied its liability to be assessed under this Act and, therefore, the intimation under s. 139(9) of the IT Act, 1961 is an order against the assessee and is appealable under s. 246(l)(a). Since the assessee has filed the return along with Form No. 30 under r. 41(2) r/w s. 237, it is also covered by s. 246(l)(k) as refusal of refund can be treated as an order under s. 237. As the provision of s. 246(2)(b) covers the provision of s. 246(l)(a) and 246(l)(k) the appeal before the CIT(A) was fully governed by the provisions of s. 246(2)(b) also. In view of this legal and factual position, in our view, the CIT(A) is well within his power and jurisdiction in entertaining the appeal filed before him by the assessee- company.
12. Our above view is duly supported by the Hon’ble Calcutta High Court decision in the case of Sardar Bahadur Sardar Indra Singh Trust (supra) wherein at p. 680 of the report it has been observed by their Lordships as under:
“Once the reply of the ITO said, as it did, that the income of the trust was not exempt as claimed, because there was no valid trust, it is difficult to see what remained to be said in order to refuse the claim of refund” and it was held as under at pp. 670-671-.
“Held, (i) that the requirements of rr. 36 and 37 of the IT Rules were mandatory as they were to be read as part of the Act, and, therefore, an application for refund of tax should be in the prescribed form signed and verified by the claimant himself and accompanied by a return of income,- and that as the letter of 18th Aug., 1945 was not in the prescribed form and was not signed and verified by the claimant and was not accompanied by a return of income, it was not a proper application for refund under s. 48 of the Act;”
(iii) that the order of the officer, dt. 24th,Nov., 1949, stating that the application was not entitled to the exemption claimed under s. 4(3)(i) was an order refusing refund and was therefore appealable under s. 30; ”
In the instant case, it is noticed that the application for refund of tax was in the prescribed Form No. 30 duly signed and verified by the assessee and accompanied by a return of income in accordance with the provisions of r. 37 and 41(2) r/w s. 237, and, therefore, since there was full compliance of the mandatory requirement of the rules, it was a proper application for refund and refusal of the same certainly results in an order which is appealable under the Act.
13. In the case of M Pyngore (supra), where the Tribunal and the AAC entertained an appeal by the assessee against the assessment order made under s. 143(l) accepting the return of income submitted by the assessee, and where the assessee had omitted to claim exemption in the return, the Hon’ble Gauhati High Court held that “even where such a contention has not been raised before the ITO, it is open to the assessee to raise such an objection by way of an appeal under s. 246(l)(c). Whenever such an objection is to be raised before the appellate authority, an appeal would lie”. In the case before us, we find that the assessee had denied the liability to be assessed under the Act at the stage of the AO itself and therefore, the ratio of decision of the Hon’ble Gauhati High Court (supra) is applicable to the instant case and the CIT(A) was justified in entertaining the assessee’s appeal on the facts and circumstances of the case. We uphold the order of the CIT(A) on this point.
14. Ground No. 2 is whether the CIT(A) was justified in treating the return filed without report under s. 44AB as a valid return. The learned Departmental Representative supported the order of the AO and submitted that since the total turnover of the assessee was more than Rs. 40 lakhs, it was the statutory duty of the assessee to get its accounts audited and submit the TAR along with the return as per the provisions of s. 44AB. According to him since the return was not accompanied by TAR, it was declared defective by the AO under s. 139(9). According to the learned Departmental Representative this was one of the conditions as per Expln. (bb) of sub-s. (9) of s. 139 that the return is accompanied by the report of the audit referred to in s. 44AB but since it was not accompanied the return was declared defective and the assessee was given an opportunity of removing the defect. He also argued that the assessee did not comply with the defect memo issued by the AO on the ground that the income of the assessee was not taxable and, therefore, the provisions of s. 44AB were not applicable. According to the learned Departmental Representative, the CIT(A) was not justified, on the facts and circumstances of the case, in treating the return filed without TAR under s. 44AB as a valid return.
15. The learned counsel for the assessee, on the other hand, contended that the assessee claimed the technical service fees to be not taxable and filed the claim of refund accompanied by the return. According to him, full tax as per s. 115A was paid on the gross amount of technical fees. He also pointed out that although the amount of fees exceeded the amount prescribed under s. 44AB but that alone could not be the basis for compulsory requirement to file the TAR. He further contended that since the return is not a return filed under s. 139(l), there is no need of filing TAR as it would not serve any purpose when the income is not taxable. He further pointed out that the gross amount of fees was considered by the Department without any deduction of expenses shown and tax calculated on the said gross amount. He further argued that the form of audit report under s. 44AB as prescribed under r. 6 (i.e. Form 30B) requires P&L a/c, books of accounts, balance sheet, etc. to be examined to perform only the empty formalities as all the columns would be nil. According to him, since the return is not filed under s. 139(l) but only to accompany the claim of refund in Form No. 30 r/w r. 41(2), the provisions of s. 139(9) are not attracted and, therefore, the return cannot be declared invalid in accordance with the provisions of s. 139(9) r/w Expln. (bb) thereto.
16. We have carefully considered the rival contentions, the relevant facts and the materials placed on record. It is an admitted fact that the assesseecompany had filed the return on 6th May, 1996, showing the total income as nil. Obviously, it is not a return under s. 139(l) as the income returned did not exceed the taxable income/limit. The AO declared the return as defective and thereafter as invalid in terms of Expln. (bb) of sub-s. (9) of s. 139 as the said return did not accompany the TAR as per the provisions of s. 44AB. On perusal of Expln. (bb) to sub-s. (9) of s. 139, we notice that it is the ‘return of income’ for the purpose of this sub-section which is to be considered or regarded as defective and not the return of ‘nil income’. Then, according to the provisions of s. 44AB, the main contention as indicated by the title or the heading of that section is that “every person,-carrying on business or profession” shall get his accounts audited. But in the instant case, the assessee- company had submitted in writing to the AO that Voest Alpine (the assessee), a non-resident, did not carry on any business in India and they did not maintain any permanent establishment in India. The AO has not controverted this contention of the assessee by adducing and producing any evidence or material and has rejected the same merely saying that being principal contractor the assessee carried on business directly or indirectly. Thus, the main contention that the assessee carried on business in India as not proved by the Department and, therefore, the provisions of s. 44AB were not applicable.
17. It is also noticed that the assessee- company vide letter, dt. 5th Dec., 1996, submitted that such income of the non-resident was not subject to tax in India as per DTAA and hence there was no scope of applicability of the provisions of s. 44AB. This contention of the assessee has also not been rebutted and controverted by the AO. He has rejected this contention merely on the ground that income in connection with such contract did accrue or arise in India. While doing so, the AO has completely ignored the provisions of arts. III, VE, XVII of the DTAA. Since now it is a settled law that the provisions of DTAA will prevail over the general provisions of the IT Act, the contention of the AO that business was carried on by the assessee directly or indirectly and income had accrued or arisen under s. 9 of the Act is not tenable and, therefore, cannot be accepted.
18. In view of foregoing discussion and for the reasons mentioned above, we come to the conclusion that the CIT(A) was justified in treating the return filed without TAR under s. 44AB as valid return.
19. Ground No. 3 is that whether the CIT(A) was justified in arriving at the conclusion that technical service fees were tax exempt in India without giving opportunity of hearing to the AO and without allowing the AO to examine the relevant materials. The learned Departmental Representative submitted that the CIT(A) declared the return to be valid on the ground that the income shown was not taxable in accordance with art. VII of DTAA. According to him art. H(g) of the DTAA is applicable and though the assessee- company was physically not present in India but it was practically coming and supervising and supplying technical assistance to L&T. He also pointed out that main place of work was in India and according to preamble the work will take place only in Bhillai. He also submitted that work was actually done and that is why payment had been made to the assessee. He also invited our attention to art. H(g) and submitted that the term “permanent establishment” means a fixed place of business in which the business of the enterprise is wholly or partly carried on. According to him, a person acting in one of the territories for or on behalf of an enterprise of the other territory shall be deemed to be a ‘permanent establishment’ of that enterprise in the first-mentioned territory.
20. The learned counsel for the assessee, on the other hand, invited our attention to the preamble of the agreement (a copy is placed at p. 3 of the paper-book) and submitted that the agreement was signed in Austria. He further submitted that according to the preamble, the assessee- company intended to submit an offer in co-operation with L&T for the project and to jointly carry out the project if the order is awarded to the parties in which case the assessee will be known as the principal contractor and L&T as Indian contractor. According to him, vital information was given to L&T to get the contract but that does not mean that the contract awarded and it may or may not materialis6. He also invited our attention to the Bill (copy placed at p. 29 of the paper-book) and submitted that services were rendered by the assesseecompany at Linz, Austria in regard to intimation or preparation of tenders, etc. and the price is paid for the work done outside India only. He a4so clarified that the price was not paid for any supervision or work done in India as wrongly contended by the learned Departmental Representative but it was for technical services rendered at Linz, Austria. The learned counsel for the assessee further submitted that the Bokaro Steel Plant needed new plant and technology and for that Austria qualified as it was capable of supplying technology and therefore the Steel Authority of India Ltd. (SAIL) issued the tender. He further clarified that no work had actually been done and the contract had not been worked out and according to the agreement, services were to be rendered outside India and the remittance of the technical fees was for the work done in Austria. The learned counsel for the assessee further submitted that the assessee became entitled to 7 per cent of the (,ontract price and for remittance of that money the assessee had to pay advance-tax under protest for obtaining no-objection certificates because the assessee followed DTAA and claimed that it was not liable to pay tax and to file return under s. 139(l).
21. The learned counsel for the assessee invited our attention to art. III, VII and XVII of the DTAA and claimed that as per the provisions of DTAA the assessee was not liable to pay income-tax in India as DTAA overrides the provisions of the IT Act. In order to support his contention and argument, the learned counsel for the assessee placed reliance on the following decisions:
(1) CIT vs. Visakhapatnam Port Trust (1984) 38 CTR (AP) 1 .- (1983) 144 ITR 146
(AP);
(2) CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal);
(3) CIT vs. R. M. Muthaiah (1993) 110 CTR (Kar) 153: (1993) 202 FTR 508 (Kar);
(4) Arabian Express Lin e L td. of United Kin gdom & Ors. vs. Union of In dia (1994) 120 CTR (Guj) 377.- (1995) 212 ITR 31 (Guj); and
(5) CIT vs. VR. S.R. M. Firm & Ors. (1994) 120 CTR (Mad) 427: (1994) 208 ITR 400 (Mad).
In view of the above arguments and contentions, the learned counsel for the assessee claimed that the technical services fees are exempt from tax in India.
22. The learned counsel for the assessee also submitted that all the documents were furnished to the AO and at every stage of his action, he has scrutinised all of them and has come to the conclusion only after examining the relevant materials and, therefore, this ground has to be rejected.
23. We have carefully considered the rival contentions, the relevant facts and the materials placed on the record. We have also gone through the agreement
as well as the case law on which reliance is placed by the assessee’s counsel. In order to appreciate the facts correctly, we quote the relevant portion of arts. III, VH and XVII of the DTAA as under:
Article Iff
” (1) Subject to the provisions of para. (3) below tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first maintained territory through a permanent establishment of the said enterprises situated in the firstmentioned territory. If profits are so denied tax may be levied in the first mentioned territory on the profits attributable to the said permanent establishment. ”
(3) The provisions of para (1) of this article shah not be construed as preventing the taxation in one of the territories in pursuance of the present convention and in conformity with the laws of that territory of income (e.g. dividends, interest, capital gains, fees for technical services, income from the operation of aircraft, rents or royalties or income from immovable property) derived from sources therein by a resident of the other territory even if such income is not attributable to a permanent establishment situated in that former territory.”
Art. V11
“Amounts paid by an enterprise of one of the territories for technical services furnished by an enterprise of the other territory shall not be subject to tax by the first-mentioned territory except insofar as such amounts are attributable to activities actually performed in the first-mentioned territory. In computing the income so subject to tax, there shall be allowed as deductions the expenses incurred in the first-mentioned territory in connection with the activities performed in that territory.”
Art. XV71
“The laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this convention.
(2) Income from sources within Austria which in accordance with this convention may be subjected to tax in Austria either directly or by deduction shall not be subject to Indian tax;
(3) Income from sources within India which in accordance with this convention may be subjected to tax in India either directly or by deduction shall not be subject to Austrian tax.”
24. It is seen that art. III of the DTAA exempts industrial or commercial profits
of a non-resident company from taxation in that country unless such profits are derived from a ‘permanent establishment’ in that country. We find that the assessee- company has no permanent establishment in India, as required by art. HI(l) and IH(3) of the DTAA and the said fees were not derived from any source in India as the assessee did not carry any activity in India and hence the income is not taxable in India under the DTAA.
25. Art. VH makes technical services fees taxable in a country only to the extent to which the said fees may be attributed to activities actually performed in that country. We find that the assessee- company has given in writing that technical services were performed by the assessee- company at Linz, Austria i.e., outside India and the technical service fees were received at Linz. As the assessee did not perform any activity in India the said fees were not attributable to activities actually performed in India and is, therefore, not taxable in India.
26. Art. XVH makes income from sources within Austria normally taxable in Austria and such income is exempt from tax in India. In view of these facts as well as in view of the provisions of DTAA, we conclude that technical service fees under consideration come within the ambit of art. VII and as there were no activity at all carried out in India by the assessee- company such technical service fees are exempt from tax in India.
27. We also find that the AO, inter alia, invoked the provisions of s. 9 of the IT
Act. But in our opinion, all the provisions of the IT Act, 1961 including that of s. 9 stand overridden by the provisions of the DTAA. This view of ours is duly supported by the following decisions:
(I.) CIT vs. Visakhapatnam Port Trust (supra): In this case it was held that the assessee was entitled to rely on the agreement before the Tribunal,
“(ii) that the agreement providing for supervision of the installation work did not amount to business connection nor did the agreement with the Poona company amount to business connection between the non-resident and resident within the meaning of s. 9 of the Indian IT Act. Even assuming that all the profits of the German company were to be deemed to have accrued or arisen in India by virtue of s. 9, the term of art. III of the Indo-German Agreement would prevail over s. 9.”
(2.) CIT vs. Davy Ashmore India Ltd. (supra): In this case it was held as under:
“In determining the liability of a non-resident company, if there is an DTAA entered into under s. 90 of the IT Act, 1961 the said agreement must prevail over the provisions of the IT Act. The circular of the CBDT, dt. 2nd April, 1982, makes this clear,”
(3.) In CIT vs. R.M Muthaiah (supra) on similar facts and circumstances of the case, it was held that.the provisions of DTAA will prevail over those of the IT Act.
(4.) In Arabian Express Line Ltd. of United Kingdom & Ors. vs. Union of India (supra) also the CBDT Circular No. 333, dt. 2nd April, 1982, was referred to and it was held that in view of specific provision in the DTAA “that provision will prevail over the general provisions contained in the IT Act, 1961 “.
(5.) In CIT vs. Vr. S.R.M Firm & Ors. (supra), it was held as under:
“(iii) that, on the facts and circumstances of the case, the decision of the Tribunal that the Malaysian income could not be subjected to tax in India was in conformity and in accordance with the provisions of the DTAA entered into between the Government of India and Malaysia and notified under Notification No. GSR 167(E), dt. 1st April, 1977.”
28. It is noticed that in most of the decisions referred to above, the Hon’ble High Courts have referred to the CBDT Circular No. 333, dt. 2nd April, 1982, 1(1982) 137 ITR (St.) 1] as to the same effect. It is imperative on our part to quote the relevant portion of the said circular as under:
“It has come to the notice of the Board that sometimes effect to the provisions of DTAA is not given by the AOs when they find that the provisions of the agreement are not in conformity with the provisions of the IT Act.
2. 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 IT Act, 1961. In fact, the DTAA which have been entered into by the Central Government under s. 90 of the IT 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, we find that CBDT Circular No. 333, dt. 2nd April, 1982, provides that where a specific provision is made in the DTAA that provision will prevail over the general provisions of the IT Act, 1961. In view of this, in the instant case, the provision of s. 9 of the IT Act, 1961, stands overridden by the provisions of DTAA between India and Austria. Therefore, the technical service fees are not taxable in India.
29. On perusal of records, we also find that the contention of the Department that no opportunity of hearing to the AO was granted by the CIT(A) and he was not allowed to examine the relevant material is not correct, as we find from beginning to the end of processing of refund, issuing of no objection certificate and declaring the return invalid under s. 139(9), the AO had examined all the materials placed on the record and had also gone through the correspondence made between the assessee and him (AO) and, therefore, this contention of the Department is also not tenable, In view of this, as well as for the reasons mentioned above, we hold that the order passed by the AO was illegal and contrary to the CBDT circular (supra) and the DTAA between India and Austria. We also hold that the CIT(A) was justified in- his decision that technical service fees were exempt from income-tax in India. Accordingly, this ground of the Department is also rejected. Consequently, the order of the CIT(A) is upheld.
30. In the result, the Departmental appeal is dismissed.