Category Archives: Taxation

Taxing Law in India

Note

 

1.  Accounting Standards U/s 145(2) of IT Act
2. Authority for Advance Rul¬ings (Procedure) Rules, 1996
3. Authority for Advance Rulings (Procedure for Appointment as Chairman and Vice-Chairman) Rules, 2016
4. Bank Term Deposit Scheme, 2006 – U/s 80C(2)(xxi)
5. Banking Cash Transaction Tax
6. Banking Cash Transaction Tax Rules, 2005
7. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
8. Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015
9. Capital Gains Accounts Scheme, 1988
10. Centralised Processing of Statements of Tax Deducted at Source Scheme, 2013
11. Commodities Transaction Tax
12. Commodities transaction tax rules, 2013
13. Condonation of Delay in Filing Refund Scheme
14. Direct Tax Dispute Resolution Scheme Rules, 2016
15. Electoral Trusts Scheme, 2013
16. Electronic Filing of Re¬turns of Tax Collected at Source Scheme, 2005
17. Electronic Filing of Returns of Tax Deducted at Source Scheme, 2003
18. Electronic Furnishing of Return of Income Scheme, 2004
19. Electronic Furnishing of Return of Income Scheme, 2007
20. Employees’ Stock Option Plan or Scheme
21. Equalisation levy Rules, 2016
22. Equity Linked Savings Scheme, 2005
23. European Economic Community International Institutional Partners (ECIIP) Scheme, 1993
24. Expenditure-tax Act, 1987
25. Expenditure-tax Rules, 1987
26. Furnishing of Return of Income on Internet Scheme, 2004
27. Guidelines for providing train¬ing by Shipping Companies opting for Tonnage Tax scheme under Chapter XII-G
28. Income Declaration Scheme Rules, 2016
29. Income Tax Ombudsman Guidelines 2010
30. Income-tax (Appellate Tribunal) Rules, 1963
31. Income-tax (Certificate Proceedings) Rules, 1962
32. Income-tax (Dispute Resolution Panel) Rules, 2009
33. Income-tax Act, 1961
34. Income-tax Rules, 1962
35. Income-tax Settlement Commission(Procedure) Rules 1997
36. Income-tax Welfare Fund Rules
37. Industrial Park Scheme, 2002
38. Industrial Park Scheme, 2008
39. Interest-tax Act, 1974
40. Investment Deposit Account Scheme, 1986
41. Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993
42. Kisan Vikas Patra Rules, 1988
43. National Savings Certificates (VIII Issue) Rules, 1989
44. National Savings Scheme Rules, 1992
45. POST OFFICE (MONTHLY INCOME ACCOUNT) RULES, 1987
46. Pradhan Mantri Garib Kalyan Deposit Scheme, 2016.
47. PROHIBITION OF BENAMI PROPERTY TRANSACTIONS ACT, 1988
48. Prohibition of Benami Property Transactions Rules, 2016.
49. Public Provident Fund Scheme, 1968
50. Rajiv Gandhi Equity Savings Scheme, 2012
51. Rajiv Gandhi Equity Savings Scheme, 2013
52. Reduction or Waiver of Interest u/s 234A/234B/234C
53. REVERSE MORTGAGE SCHEME, 2008
54. Rules
55. Scheme for Bulk Filing of Returns by Salaried Employees, 2002
56. Scheme for Filing of Returns by Salaried Employees through Employer, 2004
57. Scheme for Furnishing of Paper Returns of Tax Collected at Source, 2005
58. Scheme for Furnishing of Paper Returns of Tax Deducted at Source, 2005
59. Scheme to develop, operate and maintain special economic zones under section 80-IA of Income-tax Act read with rule 18C(2) of Income-tax Rules
60. Schemes
61. Securities Lending Scheme, 1997
62. Securities Transaction Tax
63. Securities Transaction Tax Rules, 2004
64. Site Restoration Fund Scheme, 1999
65. Social Security Certificates Rules, 1982
66. Software Technology Parks Scheme
67. Sovereign Gold Bonds Scheme, 2015
68. Tax Return Preparer Scheme, 2006
69. Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana Rules, 2016
70. Wealth Tax Act, 1957
71. Wealth Tax Rules, 1957
72. Wealth Tax Settlement Commission(Procedure) 1997

Offences and Prosecution under Income Tax Act 1961

jUDGE

Collection and recovery of Income Tax

Income Tax Act 1961

Note

Appeal and revision under Income Tax Act 1961

Note

Procedure For Assessment of Income Tax in India

Income Tax Act 1961

ACCOUNTING

Income Tax Authorities

INCOME TAX ACT 1961

Note

Indian Oil Corporation Ltd. Vs. State of Bihar & ANR.[SC 2017 NOV]-Taxation

KEYWORDS : Entry Tax

Capture

The enacting part of Section 3(2), the Appellant is certainly a dealer liable to pay tax under the VAT Act, in that it is a registered dealer falling within Section 3(1) of the said Act. Therefore, any argument based on gross turnover is wholly unnecessary to include the Appellant under Section 3(2) of the Entry Tax Act.

ACT: ENTRY TAX-Bihar Value Added Tax Act, 2005 (VAT Act)

DATE: November 14, 2017.

BENCH:  (R.F. Nariman)  (Sanjay Kishan Kaul)


SUPREME COURT OF INDIA

Indian Oil Corporation Ltd. Vs. State of Bihar & ANR.

[Civil Appeal No.3018 of 2017] [Special Leave Petition (Civil) No.15875 of 2017]

[Special Leave Petition (Civil) No.15893 of 2017] [Special Leave Petition (Civil) No.15896 of 2017] [Special Leave Petition (Civil) No.15899 of 2017] [Special Leave Petition (Civil) No.15900 of 2017] [Special Leave Petition (Civil) No.15926 of 2017] [Special Leave Petition (Civil) No.16192 of 2017]

R.F. Nariman, J.

1. The present appeal and special leave petitions arise out of demands made from the Appellant for payment of Entry Tax under the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 (hereinafter referred to as the Entry Tax Act).

2. The Appellant has its marketing division in the State of Bihar with branches, inter alia, at Barauni and Patna. It is from these branches that sales of petroleum products are effected. The Corporation receives crude oil, which is imported from outside the State of Bihar, which then enters Bihar, where the Corporation has its oil refinery; and after undergoing certain processes, crude oil is converted into petroleum products, like High Speed Diesel, Petrol etc.

The products manufactured in the Bihar oil refinery are then sent to a branch in Patna, mainly through a pipeline constructed specifically for this purpose. Some part of these petroleum products, namely, High Speed Diesel and Petrol are sold by the Appellant to two other oil marketing companies (OMCs), namely, Bharat Petroleum Corporation Ltd. (BPCL) and Hindustan Petroleum Corporation Ltd. (HPCL), who then take the products from the depot of the Corporation situated in Patna and thereafter sell the products to their retail dealers or through their petroleum outlets.

The Appellants, apart from the sales made to these OMCs, also sell the aforesaid petroleum products to local retailers and through petroleum outlets in Patna. The Appellant pays Entry Tax at the rate of 16% when the product enters the local area of Patna and 24.5% VAT is paid and set off against the Entry Tax under Section 3(2) second proviso of the Entry Tax Act for sales made within the local area.

The grievance of the Appellant in the present appeals is that when a sale is made to the OMCs, after payment of Entry Tax, VAT is not set off against the Entry Tax. VAT is not actually paid by the Appellant by reason of a notification dated 4th May, 2006 under the Bihar Value Added Tax Act, 2005 (VAT Act), where, in case of petroleum products sold by the Appellant to OMCs, the levy itself is at the point of sale by the aforesaid OMCs to their retailers or directly to their consumers, and this being the case, the set off of such VAT paid, as claimed by the Appellant, was allowed until the year 2014.

However, pursuant to certain audit objections raised by the Accountant General, Bihar, the aforesaid set offs that were allowed to the Appellant, were re-opened with effect from the assessment year 2008-09, as a result of which set offs that were allowed were now disallowed. The Entry Tax demand arising from such disallowance for the assessment years 2008- 09 till 2014-15 amount to Rs.1,683.03 crores.

3. In Civil Appeal No.3018 of 2017, the impugned judgment dated 22nd October, 2013 of the Patna High Court agreed with the Advance Rulings Authority, and rejected the case of the Appellant under Section 3(2) second proviso of the Entry Tax Act, stating that the set off would not be allowable under the aforesaid proviso.

4. In the seven Special Leave Petitions before us by, a common judgment dated 19th April, 2017, a Division Bench of the Patna High Court framed five questions as follows:

“i) Whether the second proviso to Section 3(2) of the Entry Tax Act is ultra vires to the Constitution?

(ii) Whether interest can be levied in the matter of late payment of entry tax under the Entry Tax Act, by virtue of the provisions of the Bihar Finance Act, and, with the aid of Section 8 of the Entry Tax Act?

(iii) Whether entry tax is liable to be paid when the goods only enter the local area and after such entry is subjected to sell only without there being any use of consumption of the goods in the local area?

(iv) Whether based on audit objection as contemplated under the provisions of Section 33 of the VAT Act, assessment can be re-opened with the aid of Section 8 of the Entry Tax Act?

(v) Whether the assessment undertaken under Section 33 of the VAT Act is permissible after a period of four years in view of the provision of Section 31 of the VAT Act?”

5. Questions 1, 3, 4 and 5 were answered against the assessee, but question 2 was answered in its favour by stating that since there was no substantive provision by which interest could be levied, interest that was charged to the Appellant by the assessment orders in question would have to be set aside.

6. Shri Arvind Datar, learned Senior Advocate appearing on behalf of the Appellant, has referred in copious detail to various provisions of the VAT Act, Rules made thereunder and Form 5 RT-1 made under the VAT Act. He also referred in detail to various provisions of the Entry Tax Act. It is his case that the Entry Tax Act in Bihar, unlike other Entry Tax Acts, was essentially to ensure that VAT was collected under the VAT Act in the State. According to him, the moment products contained in Schedule IV of the said Act suffer tax, the scheme of the Entry Tax Act is that a set off on such goods, which bear VAT, is allowable. According to the learned counsel, Section 3(2) second proviso should be construed in such a manner as would accord with this object and set off, as claimed by the Appellant, cannot, therefore, be denied to it.

According to the learned counsel, it is clear that this practice of allowing set off was followed right up to 2014, showing that both the Government as well as the assessee were clear that the provision had to be worked in this fashion. The reason for retrospectively reopening the assessments made from 2008-09 is due to an audit objection raised only in the year 2014, after which the assessee has so arranged its affairs that set off would be claimable and has, in fact, been allowed by the authorities. According to the learned counsel, the audit objection was itself only on the footing that a 2006 amendment had changed the definition contained in Section 2(1)(c) of the Entry Tax Act of the “entry of goods” and it is for this reason that set off was disallowed, and not the reasons given later by the State.

According to the learned counsel, what has to be seen is the overall picture qua the goods under the Entry Tax Act and once it is clear that the aforesaid goods suffer VAT, then a set off becomes payable. According to the learned counsel, a large portion of Rs.1,683.03 crores that is demanded relate to sales that are made by HPCL and BPCL outside the local area of Patna, which would, therefore, not attract Entry Tax at all. This has not been segregated, and if segregated, the demand for the assessment years in question would fall by at least Rs.1,000 crores. The Appellants were given no opportunity to demonstrate this in detail, despite the fact that they were able to give certificates by HPCL and BPCL for all the assessment years in question that those companies had, in fact, effected sales worth over a thousand crores outside the area of Patna.

7. According to Shri Datar, if this Court were to decide against the appellant on the construction of Section 3(2) second 7 proviso, then, in any case, he would be liable to succeed, as the said proviso should be read down to make it constitutionally valid, as otherwise it would fall foul of Article 14 of the Constitution of India. According to the learned counsel, the same goods cannot bear different rates of tax which are ultimately passed on to the consumers and this ex facie discrimination would, therefore, make the proviso bad in law requiring this Court to read it down, so that, at least so far the Appellant is concerned, a set off would be granted. Also, according to him, in any case, the matter should go back to the Appellate Tribunal to determine as to how much of the sales made by HPCL and BPCL would be outside the Patna area and, therefore, not exigible to Entry Tax at all.

8. Shri S. Ganesh, learned Senior Advocate, appearing on behalf of the Revenue, has countered each of these submissions. According to the learned counsel, a plain reading of Section 3(2) second proviso of the Entry Tax Act would make it clear that the provision is assessee based and not goods based. According to the learned counsel, none of the conditions of the second proviso have been met by the Appellant and only if the said provision is completely rewritten, can the Appellant be given relief. Re-writing of the aforesaid provision, being a legislative function, would, therefore, be outside the judiciary’s ken. According to the learned counsel, in any case, VAT and Entry Tax are separate taxes levied under separate Entries of List II of the Seventh Schedule.

The granting of set off is a matter of indulgence and cannot be claimed as a matter of right. It is of essence that the same person should have paid both Entry Tax and VAT to claim set off. In the present case, the Appellant admittedly pays only Entry Tax and no VAT as there is no levy on the Appellant when it sells oil to other OMCs. According to the learned counsel, Article 14 of the Constitution cannot be invoked in the present case for the reason that there is no clear and hostile discrimination, which is the requirement of several judgments of this Court, before Article 14 can be used to strike down tax legislation. In any event, according to the learned counsel, striking down the second proviso would only result in no set off being claimable at all and would be counterproductive.

The learned counsel made a fervent plea that interest by way of restitution, at least, should be given to the Government since the Writ Petitions that were filed in 2014 resulted in stay orders which have continued till date, making it impossible for the State to recover interest on the demands made. He cited a number of judgments to support all these propositions.


9. Having heard learned counsel for both the parties, it is necessary to set out some of the provisions of the two Acts in question. Since we are directly concerned with the Bihar Entry Tax Act, the following provisions need to be adverted to:

“2. Definitions.-

(1) In this Act unless the context otherwise requires,-

(c) “Entry of goods”, with all its grammatical variations and cognate expressions, means, entry of goods:

(i) into a local area from any place outside such area,

(ii) into a local area from any place outside the State,

(iii) into a local area from any place outside the territory of India, for consumption, use or sale therein. Provided that in case of such goods which are liable to tax under Section-12(1) of the Bihar Finance Act, 1981, entry of goods shall mean entry of goods into local area from any place outside the State for consumption, use or sale therein.

Explanation- Entry of goods into a local area for consumption, use or sale therein from any place outside the territory of India shall also be deemed to be an entry of goods for the purposes of this Act.

3. Charge of Tax-

(I) There shall be levied and collected a tax on entry of scheduled goods into a local area for consumption, use or sale therein for the purpose of development of trade, commerce and industry in the State, at such rate, not exceeding twenty percent, of the import value of such goods, as may be specified by the State Government in a notification published in a official gazette subject to such conditions as may be prescribed:

Provided different rates for different scheduled goods may be specified by the State Government.

Provided further, that if an importer claims that he imported goods notified under sub-section (1) not for the purpose of consumption, use or sale, the burden of proving that the import was for purposes other than for consumption, use or sale shall be on importer importing such goods and making such claim. Provided further, that if an importer claims that he imported goods notified under sub-section (1) not for the purpose of consumption, use or sale, the burden of providing that the import was for purposes other than for consumption, use or sale, shall be on importer importing such goods and making such claim.

(IA) The tax under sub-section (1) shall be continued to be levied till such time as is required to improve infrastructure within the State such as power, road, market condition etc. with a view to facilitate better market condition for trade, commerce and industry and to bring it to the level of, National average.

(2) The tax leviable under this Act shall be paid by every dealer liable to pay tax under Bihar Value Added Tax Act, 2005 or any other person who brings or causes to be brought into the local areas such scheduled goods whether on his own account or on account of his principal or takes delivery or is entitled to take delivery of such goods on such entry:

Provided no tax shall be leviable in respect of entry of such scheduled goods effected by a person other than the dealer if, the value of such goods does not exceed one thousand in a year. Provided further that where an importer of Scheduled goods liable to pay tax under the Act, incurs tax liability, at the rate specified under Section 14 of the Bihar Value Added Tax Act, 2005 (Act 27 of 2005), by virtue of sale of imported Scheduled goods or sale of goods manufactured by consuming such imported Scheduled goods, his tax liability under the Bihar Value Added Tax Act, 2005 (Act 27 of 2005) shall stand reduced to the extent of tax paid under the Act: Provided also that if the sale of such scheduled goods is exempted from tax under any notification issued under Section 7 of the Bihar Value Added Tax Act, 2005, reduction of his liability under the Bihar Value Added Tax Act, 2005, as provided in this section or any notification there under, issued shall not be made.

(1) The amendment made in section 3 of the said Act shall be deemed to be, and to always have been, for all purposes, as validity and effectively in force at all material times (w.e.f. 25.2.1993) (2) Any assessment, collection, adjustment, reduction or computation made or any other action taken or anything done or purported to have been taken or done under the Bihar Finance Act, 1981 12 and the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale Therein Act, 1993 and notifications issued and rules made there under shall be deemed to be and to have always been, for all purposes, as validly and effectively, assessed, collected, adjusted, reduced, computed or taken or done as if the said Act as amended by this Ordinance had been in force at all material times and accordingly, notwithstanding anything contained in any judgment, decree, or order of any court, or tribunal or other authority:-

(a) no suit or other proceedings shall be maintained of continued in court or tribunal or other authority for the refund of any amount received or realized by way of such tax;

(b) no court, tribunal or other authority shall enforce any decree or order directing the refund or any amount received or realized by way of such tax;

(c) recoveries shall be made in accordance with the third proviso to subsection (2) of Section 3 of the Bihar Tax on Entry of Goods Into Local Areas for Consumption, Use or Sale Therein Act, 1993 of all amounts which could have been collected as tax under the said Act by reason of amendment made in Section 3 by this Ordinance but which had not been collected.

(3) For the removal of doubts, it is hereby declared that no act or omission on the part of any person shall be punishable as an offence which would not have been so punishable if this section has not come into force. Provided that in case of a manufacturer the reduction in tax liability as aforesaid shall only be allowed to industrial units of the small scale sector, the medium scale sector and sick industrial units:

Provided that the said reduction in tax shall be available to manufacturer if the imported scheduled goods are used or consumed in the manufacture of goods which are sold within the State of Bihar or in the course of inter-State trade and commerce or in the course of export out of the territory of India. In case only a part of the goods manufactured out of imported Scheduled goods are sold within the State of Bihar or in the course of inter-State trade and commerce or in the course of export out of the territory of India, the claim for reduction in tax liability shall stand proportionately reduced:

Provided further that such reduction from the tax liability shall be admissible only if the dealer specifically mentions in the returns, filed under Section-24 of the Bihar Value Added Tax Act, 2005 (Act 27 of 2005), the Number, date and the amount of the Challan by which the payment of Entry tax in relation to which the reduction has been claimed, has been made.

(3) The liability to pay tax on Scheduled goods shall only be at the point of first entry into a local area and any subsequent entry or entries into any other local area or areas of the said Scheduled goods shall not be subject to tax provided the subsequent importing dealer produces before the assessing officer the original copy of the cash memo, invoice, bill or challan issued to him by the dealer from whom he purchased or received the said Scheduled goods, and files a true and complete declaration in the Form and manner prescribed: Provided that no tax shall be levied and collected in respect of any motor vehicle which was registered in any other State or Union Territory under the Motor Vehicles Act, 1988 for a period of fifteen months or more before the date on which it is registered in the State under that Act.

THE BIHAR TAX ON ENTRY of GOODS INTO LOCAL AREA RULES, 1993

8. Manner for claiming reduction in the liability to pay sales tax.-

(1) A claim for reduction in the liability to pay sales tax shall be made by registered dealer who is entitled to claim such reduction under sub-section (1) of section 4 or in accordance with the notification issued under sub-section (1) of Section 3 of the Act.

(2) The claim shall be valid only when the amount of entry tax has been paid on the concerned goods. (3) The burden of proving the claim for reduction of sales tax shall be on the dealer.

(4) Such claim shall be made by furnishing a statement in triplicate in Form ET-X which shall be filed along with the quarterly return.

(5) On receipt of the claim in Form ET-X, the authority prescribed for assessment of tax shall scrutinize the same before the date for filing of the next quarterly return and shall satisfy itself regarding the correctness of the claim. He shall make appropriate endorsement in the assessment record of the dealer and sign the certificate in the said form.

(6) Two copies of the statement containing certificate of the assessing authority shall be returned to the dealer. He shall furnish one copy of the form to the authority prescribed under the Bihar Value Added Tax Act, 2005 to enable it to reduce the dealers liability at the time of assessment of sales tax payable under the said Act and shall keep other copy as evidence with himself.

FORM E.T.-X 15

(See Rule 8)

Statement of claim for reduction in the liability of sales tax payable under the Bihar Finance Act, 1981 consequent upon payment of entry tax.

(To be furnished in triplicate)

1. Name of the dealer.

2. Style of business & full address

3. Registration number under the B.T. on E. of G. into L.A. Ord., 1993

4. Registration No. under the Bihar Finance Act, 1981.

5. Period to which the claim relates. I ………… (Full name of the dealer) hereby request for reduction in my liability of sales tax payable under the Bihar Finance Act, 1981 in accordance with the provision of sub-section (1) of section 4 of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Ordinance, 1993 the notification issued under sub-section (12) of section 3 in respect of the goods on which entry tax has been paid by me/us and which have been sold subsequently and sales tax under the Bihar Finance Act, 1981 has become payable.

PARTICULARS

Sl. No.

Description of schedule goods on which entry tax has been paid by the dealer

Concerned Bill / Invoice / Challan No. & date in case of Motor Vehicles mention Chassis no. & Engine No. also

Quantity

Value.

Amount of entry tax paid (Quote T.C. No. & date)

Period during which sold

C.M. Bills / Invoice no. & date relating to sale

Sales tax payable

Sale tax payable after reduction of liability

Remarks

I hereby declare and certify that the above particulars are collect and complete to the best of my knowledge and belief.

I further certify that the amount of entry tax shown in this statement has been paid by me. Signature of the dealer or his declared manager.

CERTIFICATE

(To be signed by the assessing officer)

Certified that the particulars furnished in this statement have been scrutinised by me and found to be correct. The amount of entry tax on the goods concerned, to the extent of which the liability of sales tax under the Bihar Finance Act, 1981 has been claimed to be reduced has been duly paid by the dealer.

Signature & designation of the authority.”

10. So far as the Bihar VAT Act is concerned, it is necessary to refer to the following provisions:

“3. Charge of tax.-

(1) Every dealer who is registered under the Bihar Finance Act, 1981 (Bihar Act 5 of 1981), as it stood before its repeal by section 94, shall be liable, on or after the commencement of this Act, to pay tax under this Act on sale or purchase, made by him.

(2) Every dealer to whom the provisions of subsection (1) do not apply and whose gross turnover of sales calculated from the commencement of the year ending on the day immediately before the commencement of the Act, exceeds the specified quantum, as applicable to him under the Bihar Finance Act, 1981, as it stood before its repeal by Section 94, on the last day of such year shall, in addition to the tax, if any, payable by him under any other provision of this Act, be liable to pay tax under this Act on all his sales.

(3) Every dealer to whom the provisions of subsection (1) or sub-section (2) do not apply, shall be liable to pay tax under this Act –

(a) on all his sales of goods which have been imported by him from any place outside Bihar, with effect from the day on which he effects first sale of such goods;

or (b) in any other case, from the date on which his gross turnover, during a period not exceeding 18 twelve months, first exceeded such taxable quantum as may be prescribed: Provided that the taxable quantum as may be prescribed under this sub-section shall not exceed ten lakh rupees. Provided further that different taxable quantum may be prescribed for different classes of dealers.

13. Point or points in series of sales at which Sales Tax shall be levied.-

(1) (a) Subject to the provisions of section 16 and section 17, tax on sale of goods shall be levied at each point in a series of sales in Bihar by a dealer liable to pay tax under this Act.

(b) Where the tax is levied at each point of sale, the tax payable by a dealer at any point shall be the amount arrived at after deducting, the input tax credit specified under section 16 or section 17, from the tax computed at that point of sale.

(2) (a) Notwithstanding anything contained in subsection (1), the tax on the sale of goods specified in Schedule IV shall be levied at such point or points in a series of sales in the State as the State Government may, by notification, specify.

(b) Where by a notification published under clause (a), the State Government specifies, in respect of any goods specified in Schedule IV, that the tax shall be levied at the first point of their sale in the State of Bihar by a dealer, subsequent sales of the same goods in the State of Bihar shall not be levied to tax, if the dealer making subsequent sale produces before the prescribed authority the original copy of the cash memo, or invoice or bill issued to him and files a true and complete declaration in the form and in the manner prescribed.

(c) Where by a notification published under clause (a), the State Government specifies, in respect of any goods specified in Schedule IV, that the tax shall be levied at more than one point or on all points of sale, the amount of tax paid at each preceding stage of sale shall be adjusted against the amount of tax payable at each subsequent stage of sale in the manner prescribed.

(d) The declaration referred to in clause (b) shall be issued by the selling dealer to the purchasing dealer not later than the 30th day of September of the year following the year to which such sales relate.

(3) If upon information, the prescribed authority has reasons to believe that the selling dealer has, without reasonable cause, failed to issue to the purchasing dealer the declaration referred to in subsection (2), he shall, after giving the selling dealer a reasonable opportunity of being heard, direct that the selling dealer shall pay, by way of penalty, a sum of rupees five thousand per month for every month of default or the amount of tax involved, whichever is less.

14. Rate of Tax.-

(1) Tax shall be payable on the sale price of-

(a) the goods specified in the Schedule II, at the rate of one percent;

(b) the goods specified in the Schedule III, at the rate of six percent;

(bb) the goods specified in the Schedule IIIA, at the rate of five percent;

(c) the goods specified in the Schedule IV, at the rate not below ten percent and not exceeding fifty percent and subject to such conditions and restrictions, as the State Government may, by notification specify.

(d) any other goods, not specified in the Schedules I, II, III, IIIA and IV, at the rate of fifteen percent.

(2) The State Government may, by notification, alter any Schedule to this Act. 16. Input Tax Credit (3) No input tax credit under sub-section (1) shall be claimed or be allowed to a registered dealer –

(a) in respect of goods specified in Schedule-IV or such other goods as may be prescribed; 35. Taxable Turnover.-

(1) For the purposes of this Act, the taxable turnover of a dealer shall be that part of his gross turnover which remains after deducting therefrom –

(f) sale price at the subsequent stages of sale of such goods as are specified in Schedule IV of the Act as being subject to tax at the first point of their sale in the State of Bihar, if necessary evidence as required by sub-section (2) of section 13 are filed with the return filed by the dealer under sub-section (3) of section 24.

Schedule-IV

(See section 14)

Goods

1.

Country liquor including spiced country liquor.

2.

Portable spirit, wine or liquor whether imported or manufactured in India.

3.

High Speed Diesel Oil and Light Diesel Oil.

4.

Motor Spirit.

5.

Natural Gas.

6.

Aviation Turbine Fuel

7.

Tobacco and tobacco products, except biri and unmanufactured tobacco (commonly known as “Khaini”), and other unmanufactured tobacco used in manufacture of biri.

Bihar Value Added Tax Rules, 2005

18. Taxable turnover- For purposes of section 35 the taxable turnover of the dealer shall be that part of his gross turnover which remains after deducting therefrom:

(6) Sale price at the subsequent stages of sale of such goods:

(a) specified in Schedule IV of the Act as being subject to tax at the first point of their sale in Bihar, or

(b) on the sale whereof tax at the maximum retail price has been paid at the first point of its sale in Bihar, if necessary evidence as required by sub-section (2) of section 13 is annexed with the return required filed by the dealer under sub-section (1) of section 24.

19. Returns. –

[(2) Every registered dealer, other than a dealer paying tax under sub-section (1) or sub-section (1A) or sub-section (4) of Section 15, shall furnish to the authority specified in Rule 62:-

(a) A quarterly return in Form RT-I in duplicate; (b) An annual return in Form RT-III in duplicate. Provided that every registered developer, who has opted to pay compounding tax under the provisions 22 of Section-15C of Bihar Value Added Tax Act, 2005 in lieu of tax payable under the Act shall furnish to the authority specified in Rule 62-

(a) a quarterly return in Form RT-IA;

(b) an annual return in Form RT-IIIB.

FORM RT-I

[See Rule 19(2)]

Quarterly Return under Section 24 of the Bihar

Value Added Tax Act, 2005

Name and style of the dealer:

TIN: Period of Return (Quarter and Year):

Part I (Details of turnover/transfers)

Gross Turnover (including value of debit notes):

1

Deductions:

2

Sales in the course of inter-state trade and commerce

3(i)

Value of sales outside the State under Section 4 of the Central Sales Tax Act, 1956

3(ii)

Value of stock transfer to outside the State

4

Value of sales return of goods within 6 months of sale under the Act

5

Export sales

6

Amount of other allowable deductions [As per Box A]

7

Total of deductions [2+3+4+5+6]

8

Taxable turnover [1-7]

Box A (other allowable deductions)

Deduction on account of:

Value

(ii)

Sale of Petrol, Diesel, ATF and Natural Gas by an Oil Company to another Oil Company (a list of different goods to be annexed to this return separately alongwith their respective sales values) [Details of goods sold to different companies to be submitted as per Box E-2]

11. A notification dated 4th May, 2006 issued under Section 13(2)(a) of the VAT Act reads as follows: “In exercise of the powers conferred by clause (a) of sub-section (2) of section 13 of the Bihar Value Added Tax Act, 2005 the Governor of Bihar is pleased to direct that tax on the sale of goods specified in column 2 of the table appended hereto shall be levied at point or points in a series of sales specified in column 3 of the said table subject to the conditions and restrictions specified in column 4 of the said table.

Table

Description of Goods

Stage at which said tax is to be levied

Conditions and Restrictions

1

Motor spirit (Petrol)

(A) At the point of sale by importer if the goods are imported from outside Bihar or at the point of sale by 24 manufacturer if the goods are manufactured in Bihar or,

(b) at the point of sale by oil companies to the retailer or direct to the consumers, if goods are sold by these companies.

2

High Speed Diesel Oil and Light Oil

Do

12. Since the set off in question depends upon the interpretation of Section 3(2) of the Entry Tax Act, it is necessary to state, at the outset, that the following conditions need to be satisfied for claim of set off under the said provision:

(i) First and foremost, under Section 3(2) itself, the tax leviable by way of Entry Tax can only be paid by every dealer liable to pay tax under the VAT Act;

(ii) The set off can only be granted if the assessee is an importer of scheduled goods, who is liable to pay tax under the VAT Act;

(iii) The assessee must incur tax liability at the rates specified under Section 14 of the VAT Act;

(iv) This must only be by virtue of the sale of imported scheduled goods; and

(v) “His” tax liability under the VAT Act will then stand reduced to the extent of tax paid under the Act. 13. It will be seen that the tax leviable under the Entry Tax Act shall be paid by every dealer liable to pay tax under the VAT Act. Under Section 3(1) of the VAT Act, all persons who are registered dealers under the Bihar Finance Act, 1981, as it stood before its repeal, are liable to pay tax under the said Act on sales and purchases made by them. There is no dispute that the Appellant is a registered dealer under the Bihar Finance Act, 1981 and is thus liable to pay tax under the VAT Act.

Condition (i), therefore, is certainly fulfilled.

14. So far as Condition (ii) is concerned, the Appellant is an importer of scheduled goods, viz., petroleum products. Words and expressions that are not defined under the Entry Tax Act shall have the meaning assigned to them under the VAT Act, (See Section 2(2) of the Entry Tax Act). Under the VAT Act, “importer” is defined as follows:

“2. Definitions- In this Act, unless the context otherwise requires: (p) “importer” means a dealer who brings any goods into the State of Bihar or to whom any goods are despatched from any place outside the State of Bihar.” It can be seen from the aforesaid definition that an importer would necessarily refer to a dealer who imports scheduled goods from outside the state. The question arises as to whether, on such goods, the Appellant, as importer, is liable to pay tax under the VAT Act.

15. As is clear from Section 13(1) of the VAT Act, all sales of Schedule II and III goods have to suffer a levy of tax at each point in the series of sales by a dealer liable to pay tax under the said Act. This is subject, however, to Section 16, by which once the goods have suffered tax, input tax credit is given at every stage thereafter. This scheme applies generally down the line to all Schedule II and III goods. However, when it comes to tax on the sale of goods specified in Schedule IV, Item of which includes High Speed Diesel oil and light diesel oil, the levy under the said Act is only at such point as the State Government may, by notification, specify.

This takes us to the notification dated 4th May, 2006, which clearly states that when it comes to motor spirit, High Speed Diesel oil and light diesel oil, the levy is at the point of sale by oil companies to the retailer or direct to the consumer. On a reading of the aforesaid notification, it is clear that when a sale is effected by the Appellant to BPCL and HPCL, there is no levy of any VAT that is contemplated at this point. The VAT gets levied only at the next point in the chain of sales, which is the sale from BPCL and HPCL to their retailers and/or consumers. Thus, it is clear that the second condition is not fulfilled as the importer of the scheduled goods i.e. the Appellant is not at all liable to pay tax under the VAT Act. 16. So far as the Condition (iii) is concerned, there being no levy on the Appellant, the Appellant does not incur any tax liability at the rates specified under Section 14 of the VAT Act.

17. So far as Condition (iv) is concerned, in any case, this must be by virtue of sale of the very imported scheduled goods, which means that the sale must be by the Appellant itself and not by the other OMCs. This becomes clear from the second 28 part of this provision which reads: “………. or sale of goods manufactured by consuming such imported scheduled goods………”

18. Further, Condition (v) must be that “his” i.e. the Appellant’s tax liability under the VAT Act will then stand reduced, and this is only to the extent of tax paid under the Act. This condition is also not met inasmuch as the set off is person specific and not goods specific, as is correctly contended by Shri Ganesh, learned Senior Advocate, appearing on behalf of the Revenue. 19. Thus, it will be seen that on a literal reading of Section 3(2) second proviso, the Appellant would not be entitled to claim set off. However, Shri Datar relied strongly on the judgment in Associated Cement Companies Ltd. v. State of Bihar & Ors., (2004) 7 SCC 642.

In this judgment, two manufacturing units of the Appellant, post-bifurcation of the State of Bihar, fell into the State of Jharkhand. Thanks to an industrial policy to give incentives to existing units to encourage additional production, the Appellant was exempted in terms of the aforesaid policy from payment of sales tax on additional production for the period in question. The Entry Tax Act, as it then stood, was set out in the judgment and this Court held that, despite the fact that sales tax on cement was exempted, the Appellant was held to be a person who was liable to pay tax as the question of exemption would arise only when there is a liability to pay tax in the first place.

The Appellant was liable to pay tax but for the exemption, and since it paid tax on the original production, apart from the additional production, it would be entitled to set off of tax paid under the Entry Tax Act. In our opinion, it is clear that this judgment would have no direct application in the facts of the present case, inasmuch as the aforesaid judgment related to exemption of sales tax on production of additional cement in order that production of cement be boosted in the State.

The expression “liable to pay tax” was held to apply because the question of exemption would arise only if there is a liability to pay tax in the first place. Cement was, at the relevant time, “scheduled” goods and, therefore, sales tax was liable to be paid on such goods. It is only on account of an exemption notification issued under 30 Section 7 of the Act, as it then stood, that additional production of cement stood exempted from payment of sales tax. In the present case, there is no exemption at all. The present is a case where the importer under the second proviso must first be liable to pay tax under the Act. We have already seen that the Appellant is a registered dealer under Section 3(1) of the VAT Act and would be a dealer liable to pay tax under the aforesaid Act within the meaning of the enacting part of Section 3(2) of the Entry Tax Act.

However, it is clear that as importer of scheduled goods, the Appellant must be liable to pay tax under the VAT Act. As has already been found, the Appellant as an importer of scheduled goods is not liable to pay tax as the levy of tax is itself postponed when the Appellant sells the oil to another OMC, and VAT is leviable only on the transaction between the said OMC and its retailer or other customers. In the ACC (supra) case, the levy on cement was always there, being a scheduled item, an exception to which by way of exemption was allowed only on additional production of cement. It is also important to note that the expression “by virtue of sale of imported scheduled goods or sale of goods manufactured by consuming such imported scheduled goods …….” was added later by way of amendment and was not contained in Section 3(2) second proviso which was construed in the ACC (supra) case.

This condition has clearly not been met in the present case as has been held by us hereinabove. In any case, the effect of the aforesaid judgment has been nullified by the addition of a third proviso to Section 3(2) by the Bihar Finance Act, 2006, which specifically provides that exempted goods will not be entitled to set off. For all these reasons, we are of the view that this judgment does not take the Appellant’s case very much further.

20. Shri Datar also heavily relied upon The State of Tamil Nadu v. M.K. Kandaswami & Ors., (1975) 4 SCC 745, in which this Court, while construing Section 7A of the Madras General Sales Tax Act, referred with approval to a Kerala High Court judgment to hold that a dealer selling goods may still be liable to pay tax in circumstances in which no tax is payable under the Act. We must remember that this Court was dealing with a provision which was stated to be a charging as well as a remedial provision, the main object being to plug leakage and prevent evasion of tax. It is in this situation that the aforesaid provision was given a purposive interpretation. In the present case, Section 3(2) second proviso is neither a charging section nor a prevention of evasion of tax section. It is a section which gives a certain concession as to set off, provided its conditions are fulfilled. This judgment, therefore, also does not avail the Appellant.

21. Shri Datar also relied upon A.V. Fernandez v. The State of Kerala, 1957 SCR 837, for the proposition that the gross turnover of the dealer should be looked at for finding out whether a dealer is liable to pay VAT and clearly all sums payable, including sums by way of inter-State sales and exports, are taken into account for calculating gross turnover which would then show that the dealer would be liable to pay tax. This case again need not detain us any further because we are not concerned with dealers liable to pay tax, but with importers of scheduled goods who are liable to pay tax in order that Section 3(2) second proviso is attracted. We have already held that in the enacting part of Section 3(2), the Appellant is certainly a dealer liable to pay tax under the VAT Act, in that it is a registered dealer falling within Section 3(1) of the said Act. Therefore, any argument based on gross turnover is wholly unnecessary to include the Appellant under Section 3(2) of the Entry Tax Act.

22. Shri Datar then referred to State of Bihar & Ors. v. Bihar Chamber of Commerce & Ors., (1996) 9 SCC 136, for the proposition that the Objects and Reasons appended to the Bill of the Entry Tax Act showed that it was with a view to make the provision of the Bihar Finance Act more workable. From this it can scarcely be held that this being the object, the second proviso must be completely altered in order that it subserves such object. We have already held that a literal reading of the second proviso, which gives a concession by way of set off, cannot possibly be held to be altered qua every material condition, so that the Appellant be entitled to claim a set off. Consequently, this judgment and other judgments cited by the Appellant, such as Commissioner of Income Tax, Bangalore v. J.H. Gotla, Yadagiri, (1985) 4 SCC 343, to buttress the plea of purposive interpretation cannot be held to apply in the facts and circumstances of this case.

23. Shri Datar’s next plea was that a literal reading of the second proviso would lead to a situation where the same goods would suffer different rates of tax and this would be discriminatory. We are afraid that this plea also does not avail the Appellant for the simple reason that there are two taxes which are levied in the present case, one is VAT and the other is Entry Tax. In one case, VAT is set off against the Entry Tax and in another, VAT is not so set off. Any anomaly arising from the aforesaid position would not lead to a charge of clear and hostile discrimination.

24. When it comes to taxing statutes, the law laid down by this Court is clear that Article 14 of the Constitution can be said to be breached only when there is perversity or gross disparity resulting in clear and hostile discrimination practiced by the legislature, without any rational justification for the same. (See The Twyford Tea Co. Ltd. & Anr. v. The State of Kerala & Anr., (1970) 1 SCC 189 at paras 16 and 19; Ganga Sugar Corporation Ltd. v. State of Uttar Pradesh & Ors., (1980) 1 SCC 223 at 236 and P.M. Ashwathanarayana Setty & Ors. v. State of Karnataka & Ors., (1989) Supp. (1) SCC 696 at 724- 35 726).

25. We must also not forget that no assessee can claim set off as a matter of right and the levy of Entry Tax cannot be assailed as unconstitutional only because set off is not given. (See Godrej & Boyce Mfg. Co. Pvt. Ltd. & Ors. v. Commissioner of Sales Tax & Ors., (1992) 3 SCC 624 at para 9 and State of Karnataka v. M.K. Agro Tech Pvt. Ltd, C.A. 15049-15069 of 2017 decided on 22nd September, 2017, at para 31).

26. However, Shri Datar referred to observations contained in Ayurveda Pharmacy & Anr. v. State of Tamil Nadu, (1989) 2 SCC 285, Aashirwad Films v. Union of India & Ors., (2007) 6 SCC 624, State of Uttar Pradesh & Ors. v. Deepak Fertilizers and Petrochemical Corporation Ltd., (2007) 10 SCC 342 and Union of India & Ors. v. N.S.Rathnam and Sons, (2015) 10 SCC 681. Each of these judgments concerned taxation rates that were ex-facie arbitrary and/or discriminatory, in that the very same tax was levied at different rates without any rational justification for the same and were, thus, struck down as being arbitrary and/or discriminatory. None of these judgments would have any application to the facts of the present case, in which it is clear that the plea of discrimination is qua a set off of one tax against a separate and independent tax imposed. This fact circumstance would be sufficient to distinguish the said judgments from the facts of the present case.

27. Since we have found that the plea of discrimination must fail on the aforesaid grounds, no question of reading down the provisions would then arise.

28. However, when it comes to the levy of interest, the impugned judgment dated 19th April, 2017, held that there can be no levy of interest as there is no substantive statutory provision for the same. The assessee succeeded on this point and the State has not filed any appeal against the same. Therefore, the finding qua interest, having become final, cannot be interfered with by us.

29. However, Shri S. Ganesh, learned Senior Advocate appearing for the Revenue, has argued before us that, as a matter of restitution, interest must be granted in favour of the 37 Revenue for the period for which stay orders have been obtained in writ petitions filed in 2014 and 2015. This Court has held that, if a party ultimately succeeds, it must be put back in the same position as if no such stay orders have been passed, and for this purpose he referred to and relied upon State of Rajasthan & Anr. v. J.K. Synthetics Limited & Anr., (2011) 12 SCC 518 at paras 18 and 23 and Nava Bharat Ferro Alloys Limited v. Transmission Corporation of Andhra Pradesh Limited & Anr., (2011) 1 SCC 216 at paras 16 to 27.

30. It will be noticed, on a reading of para 23 of Bharat Ferro Alloys (supra), that ultimately restitution is not a matter of right, but is a matter of discretion, and that hardships on both sides must be looked at in order to find a pragmatic solution by way of restitution. Given the fact that the State continued with the grant of set off till the year 2014, and reopened assessments beginning from 2008-09 based on an audit objection, we are of the view that it would be highly inequitable at this juncture to allow the State to charge interest, which would arise as a result of stay orders being passed in the writ petitions.

The principal amount also is not something that the Appellant was able to pass on to the ultimate consumer in the peculiar facts of this case. Had the Appellant known, from the assessment year 2008-09, and had the Department raised an objection in that very year, it would have arranged its affairs in such a manner as to avail of set off under the Entry Tax Act, which it did after 2014, when the audit objections were raised for the first time. On the facts of this case, therefore, we are not inclined to exercise our discretion to grant restitutional interest to the Revenue.

31. The matter, however, does not end here. Shri Datar pointed out that after the audit objections; a show cause notice dated 16th April, 2014 was issued by the authority, which was replied to by letters dated 16th June, 2014 and 27th June, 2014, in which the assessee repeatedly asked for time to make a detailed objection on the merits of the case. Finally, by a letter dated 22nd August, 2014, the assessee was able to muster certain certificates for the assessment years in question given by BPCL and HPCL to show that a large amount of the sales made by them in turn to their retail consumers and though retail outlets were outside the local area of Patna, and, therefore, not exigible to Entry Tax at all.

We find that, without asking for further data and back up details, the Assistant Commissioner of Commercial Taxes passed an assessment order immediately thereafter, on 27th August, 2014, and issued demand notices on the very same date. We are of the view that the Revenue appeared to have been in a great hurry to issue the aforesaid demand notices, and since we are dealing with OMCs who have complete details of sales made for the years in question to their retail customers and outlets outside the area of Patna, we feel that Shri Datar is right in asking that we give an opportunity to the Appellant to produce all relevant documentary material, which would show that a large amount of the demand for these years (of Rs.1,683.03 crores), would be liable to be done away with as Entry Tax would not be leviable on these transactions at all as the consumption, use or sale of petroleum products has taken place outside the local area of Patna.

Indeed, all these sales must have suffered Entry Tax in the local area outside Patna, where such retail sales were made, provided, of course, that they were made within the State of Bihar. We are, therefore, of the view that the Appellant will approach the Appellate Tribunal with all relevant materials in this behalf, and the Appellate Tribunal will render a finding as to how much of the demand of Entry Tax for the assessment years in question would have to be struck down, in that sales made by HPCL and BPCL to their retail consumers and to others are made outside the local area of Patna. We give the Appellants 12 weeks’ time to approach the Appellate Tribunal with all details as aforesaid and request the Appellate Tribunal to render findings as required by this judgment, as expeditiously as possible thereafter. The stay orders granted in the writ petitions, which have been continued till date, will continue till the decision of the Appellate Tribunal.

32. With these observations, the Civil Appeal and the Special Leave Petitions are disposed of.

Union of India & Ors. Vs. Bengal Shrachi Housing Development Ltd. & ANR [SC 2017]

Date: November 07, 2017

• Keywords:-Taxable person vs Taxable event ⇒

Supreme Court-min

It is thus clear, on a conspectus of the authorities of this Court, that service tax is an indirect tax, meaning thereby that the said tax can be passed on by the service provider to the recipient of the service. Being a tax on service, it is not a direct tax on the service provider but is a value added tax in the nature of a consumption tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts.

Acts: Service Tax Act of 1994


SUPREME COURT OF INDIA

Union of India & Ors. Vs. Bengal Shrachi Housing Development Ltd. & ANR.

Bench :  (R.F. Nariman) (Sanjay Kishan Kaul)

Dispute: Since disputes and differences arose between the parties as to who was liable to pay service tax for the aforesaid commercial premises.

[Civil Appeal No.9952 of 2017]

R.F. Nariman, J.

1. The present appeal arises from service tax payable under a clause in the deed of lease dated 1.9.2012, between the Appellants (lessee) and the Respondents (lessor). By this deed of lease between the lessor and the lessee for a period of three years at a rent of Rs.16,34,967/- per month, it was agreed that:

“6. The lessor/lessors shall pay all rates, taxes, assessment, charges and other outgoings whatsoever of every description which under the statutes are primarily leviable upon the lessor and shall keep the premises free from all encumbrances and interference in this behalf. Rates and taxes  primarily leviable upon the occupier shall be paid by the Government.”

2. Since disputes and differences arose between the parties as to who was liable to pay service tax for the aforesaid commercial premises, a writ petition was filed by the Respondents-herein before the Calcutta High Court, in which it was prayed that a Writ of Mandamus be issued commanding the Appellants to make payment of service tax for the aforesaid premises.

The learned single Judge by his judgment dated 15.5.2014, referred to the aforesaid Clause 6 in the deed of lease between the parties, and further went on to refer to a judgment of the Delhi High Court in Pearey Lal Bhawan Association v. M/S. Satya Developers Pvt. Ltd., (2010) 173 DLT 685, in which it was held that as the authorities in that case did not visualize that a service tax levy would be made in respect of lease or rentals of commercial properties and that since the levy was made effective only from 2007 onwards, it was held that as service tax is essentially an indirect tax, the user of the premises who avails the service has to bear it.

This being the case, on the facts of that case, it was held that the lessee should be made to pay service tax. A judgment of the Allahabad High Court dated 16.01.2013 in M/s Bhagwati Security Services (Regd.) v. Union of India, to the same effect was also followed by the learned single Judge. The single Judge, therefore, held that liability to bear service tax being that of the recipient of the service, there cannot be an escape from the conclusion that the Appellants i.e. the Union of India would be liable to pay the said tax.

3. An appeal to the Division Bench yielded the same result. The Division Bench, in the impugned judgment dated 9.9.2014, referred to various provisions of the Finance Act, 1994 and adopted the same reasoning as that of the learned single Judge and, therefore, held that Clause 6, if properly construed, would yield the same result as was found by the learned single Judge and, therefore, dismissed the appeal.

4. Shri A.K. Sanghi, learned senior counsel appearing on behalf of the Appellants, has referred in detail to various provisions of the Finance Act, 1994 along with amendments thereto and has argued that the person primarily liable to pay service tax under the Act read with the Service Tax Rules, 1994, is the service provider i.e. the lessor in the present case. He, therefore, stated that on a proper reading of Clause 6, it is clear that service tax being “primarily leviable on the lessor” within the meaning of Clause 6, would have to be borne by the lessor alone and not his client.

5. On the other hand, Shri Jaideep Gupta, learned senior counsel appearing on behalf of the Respondents, supported the judgments of the courts below. According to him, on a proper reading of the said clause, since service tax, by its essential nature is an indirect tax, being nothing other than a value added tax on consumption of service, the levy under the Service Tax Act of 1994, as amended, would fall upon the lessee. In any case, according to the learned counsel, on a reading of various judgments of this Court, it is clear that the person on whom this tax is primarily leviable is the lessee and that, therefore, it is the Appellant who should bear this tax.


6. Having heard learned counsel for both the parties, it is necessary to first advert to the relevant statutory provisions.  Service tax was introduced by Chapter 5 of the Finance Act of 1994. Under Section 65 thereof, an assessee is defined to mean:

“Section 65. Definitions In this Chapter, unless the context otherwise requires, —

(7) “assessee” means a person liable to pay the service tax and includes his agent;” Under Section 65 (105), “taxable service” means any service provided or to be provided – “….. (zzzz) to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or for furtherance of, business or commerce.”

7. Under Section 66, as it stood substituted by the Finance Act of 2007, the tax was leviable in the following manner:

“66. Charge of service tax – There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g,) (h), (i), (j),(k), (l), (m), (n), (o), (p), (q), (r), (s), (t), (u), (v), (w), (x), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk),(zl), (zm), (zn), (zo), (zq), (zr), (zs), (zt), 5 (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf), (zzg), (zzh), (zzi), (zzk), (zzl), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt), (zzu), (zzv), (zzw), (zzx), (zzy), (zzz), (zzza), (zzzb), (zzzc), (zzzd), (zzze), (zzzf), (zzzg,) (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn), (zzzo), (zzzp), (zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb), (zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn), (zzzzo), (zzzzp),(zzzzq) (zzzzr) (zzzzs) (zzzzt),(zzzzu), (zzzzv) (zzzzv) and (zzzzw) of clause (105) of section 65 and collected in such manner as may be prescribed:

Provided that the provisions of this section shall not apply with effect from such date as the Central Government may, by notification, appoint.”

8. On and from 1.7.2012, under Section 66B, the tax was levied in the following manner: “66B. Charge of Service Tax – There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.” It is this last Section with which we are directly concerned as the lease deed between the parties is dated 1.9.2012.

9. Section 68 is important and reads as follows:-

“68. Payment of service tax. –

(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

(2) Notwithstanding anything contained in subsection (1), in respect of such taxable service as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service: Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

10. The Service Tax Rules, 1994 have been made in exercise of powers under the rule making Section, namely, Section 94 of the Finance Act, 1994 which came into force on 1.4.1994. Rule 2(1)(d) is important from our point of view and reads as follows:-

“2. Definitions (1) In these rules, unless the context otherwise requires, – ….

(d) “person liable for paying service tax”, –

(i) in respect of the taxable services notified under sub-section (2) of section 68 of the Act, means,- ……. (E) in relation to services provided or agreed to be provided by Government or local authority except,-

(a) renting of immovable property, and

(b) services specified sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994, to any business entity located in the taxable territory, the recipient of such service; ……

(ii) in a case other than sub-clause (i), means the provider of service.”

11. Under Rule 4 of the aforesaid Rules, every person liable to pay service tax is to apply for registration under the Act, and under Rule 7, every such assessee shall submit a half yearly return in the relevant form prescribed therein.

12. A reading of the Act and the Rules, therefore, makes it clear that “assessee”, as defined, means the person liable to pay service tax under the Act. In the present case, we are concerned with the taxable service of renting of immovable property.

It is clear that under Section 66B, the levy of service tax at the rate of 12% is on the value of the service of renting of immovable property that is provided or agreed to be provided by one person to another and collected in such manner as may be prescribed. Section 68 whose marginal note reads – “payment of service tax”, makes it clear that it is the person providing the taxable service to another, who is to pay service tax at the rate specified in Section 66B, in such manner and within such period as may be prescribed, unless otherwise specified by the Central Government. Therefore, the person liable for paying service tax is to be determined on a reading of the Rules.

13. When we come to the Rules, it is clear that under Rule 2(1)(d), the person liable for paying service tax, where the service of renting immovable property is agreed to be provided by the Government, is the provider of such service. Even in a converse situation, which is the situation in the facts of the present case, it is the provider of the service alone, who is liable for paying service tax.

14. The question with which we are faced is the meaning to be given to the expression “primarily leviable on the lessor” in Clause 6 of the deed of lease dated 1.9.2012.

15. This Court has, in several judgments delineated the extent of and the meaning of service tax. Thus, in Tamil Nadu Kalyana Mandapam Assn v. Union of India & Ors., (2004) 5 SCC 632 at 637, this Court held as follows:-

“4. Service tax is an indirect tax and is to be paid on all the services notified by the Government of India for the said purpose. The said tax is on the service and not on the service provider. However, under Section 68 of the Finance Act, 1994 as amended by the Finance Act, 1997 read with Rule 2(1)(d)(ix) of the Service Tax Rules, 1994, the service provider (in the present case the mandap-keeper) is expected to collect the tax from the client utilizing his services.”

16. In All India Federation of Tax Practitioners & Ors. v. Union of India & Ors., (2007) 7 SCC 527 at 536, 542, this Court held as follows:

“Reason for imposition of service tax

4. Service tax is an indirect tax levied on certain services provided by certain categories of persons including companies, associations, firms, body of individuals, etc. Service sector contributes about 64% to GDP.

“Services” constitute a heterogeneous spectrum of economic activities. Today services 10 cover wide range of activities such as management, banking, insurance, hospitality, consultancy, communication, administration, entertainment, research and development activities forming part of retailing sector. Service sector is today occupying the centre stage of the Indian economy. It has become an industry by itself. In the contemporary world, development of service sector has become synonymous with the advancement of the economy. Economists hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs.

5. In the late seventies, the Government of India initiated an exercise to explore alternative revenue sources due to resource constraints. The primary sources of revenue are direct and indirect taxes. Central excise duty is a tax on the goods produced in India whereas customs duty is the tax on imports. The word “goods” has to be understood in contradistinction to the word “services”.

Customs and excise duty constitute two major sources of indirect taxes in India. Both are consumption specific in the sense that they do not constitute a charge on the business but on the client. However, by 1994, the Government of India found revenue receipts from customs and excise on the decline due to WTO commitments and due to rationalisation of duties on commodities. Therefore, in the year 1994-1995, the then Union Finance Minister introduced the new concept of “service tax” by imposing tax on services of telephones, non-life insurance and stockbrokers. That list has increased since then. Knowledge economy has made “services” an important revenue earner. Findings (i) Meaning of “service tax”

22. As stated above, the source of the concept of service tax lies in economics. It is an economic concept. It has evolved on account of service industry becoming a major contributor to the GDP of an economy, particularly knowledge-based economy. With the enactment of the Finance Act, 1994, the Central Government derived its authority from the residuary Entry 97 of the Union List for levying tax on services. The legal backup was further provided by the introduction of Article 268-A in the Constitution vide the Constitution (Eightyeighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States.

Simultaneously, a new Entry 92-C was also introduced in the Union List for the levy of service tax. As stated above, as an economic concept, there is no distinction between the consumption of goods and consumption of services as both satisfy human needs. It is this economic concept based on the legal principle of equivalence which now stands incorporated in the Constitution vide the Constitution (Eighty-eighth Amendment) Act, 2003.

Further, it is important to note, that “service tax” is a value added tax which in turn is a general tax which applies to all commercial activities involving production of goods and provision of services. Moreover, VAT is a consumption tax as it is borne by the client.”

17. In Association of Leasing & Financial Service Companies v. Union of India, (2011) 2 SCC 352 at 367-368, this Court under the caption “nature and character of service tax” held as follows:-

“38. In All-India Federation of Tax Practitioners case [(2007) 7 SCC 527] this Court explained the concept of service tax and held that service tax is a value added tax (“VAT”, for short) which in turn is a destination based consumption tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer. That, service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs.

Today with the technological advancement there is a very thin line which divides a “sale” from “service”. That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is inbuilt into the concept of service tax under the Finance Act, 1994. That service tax is, therefore, a tax on an activity. That, service tax is a value added tax.

The value addition is on account of the activity which provides value addition, for example, an activity undertaken by a chartered accountant or a broker is an activity undertaken by him based on his performance and skill. This is from the point of view of the professional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation, etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of Section 65(105)(zm) of the Finance Act, 1994 (as amended). Thus, the taxable event is each exercise/activity undertaken by the service provider and each time service tax gets attracted.

39. The same view is reiterated broadly in the earlier judgment of this Court in Godfrey Phillips India Ltd. v. State of U.P. [(2005) 2 SCC 515] in which a Constitution Bench observed that in the classical sense a tax is composed of two elements: the person, thing or activity on which tax is imposed. Thus, every tax may be levied on an object or on the event of taxation. Service tax is, thus, a tax on activity whereas sales tax is a tax on sale of a thing or goods.”

18. It is thus clear, on a conspectus of the authorities of this Court, that service tax is an indirect tax, meaning thereby that the said tax can be passed on by the service provider to the recipient of the service. Being a tax on service, it is not a direct tax on the service provider but is a value added tax in the nature of a consumption tax on the activity which is by way of service. It is settled by various judgments of this Court that, in order to have conceptual clarity, the taxable event and the taxable person are distinct concepts.

Thus, in Babu Ram Jagdish Kumar & Co. v. State of Punjab, (1979) 3 SCC 616, this Court made it clear that, in the case of a purchase tax, the “taxable event” is the purchase of paddy, whereas the “taxable person”, who is the person liable to pay the tax, is the purchaser. In the present case, therefore, the “taxable event” is the provision of the service of renting out immovable property, and the “taxable person”, that is the person liable to pay tax, is the service provider, namely the lessor.

19. It needs to be clarified at this juncture that our Constitution, unlike the British North America Act of 1867, makes no distinction, constitutionally speaking, between direct and indirect taxes.

20. In Chhotabhai Jethabhai Patel and Co. v. The Union of India and Anr.,1962 Supp. (2) SCR 1 at 20-21, this Court was faced with the challenge of the levy of a retrospective excise duty. One of the arguments made against the levy of such duty is that excise duty being indirect, which is that it is ultimately to be passed on to the consumer, a retrospective levy would be ultra vires the legislative competence of Parliament as it could not possibly be passed on. This argument was repelled in the following terms: 1 Section 92(2) provides for a provincial legislature exclusively making laws in relation to direct taxation within the province “in order to the raising of a revenue for provincial purposes”.

“There is no doubt that excise duties have been referred to by the economists and in the judgments of the Privy Council as well as in the Australian decisions as an instance of an “indirect tax”, but in construing the expression “duty of excise” as it occurs in Entry 84 we are not concerned so much with whether the tax is “direct” or “indirect” as upon the transaction or activity on which it is imposed. In this context one has to bear in mind the fact that the challenge to the legislative competence of the taxlevy is not directed to the imposition as a whole but to a very limited and restricted part of it. This challenge is confined

(a) to the operation of the tax between the period March 1, 1951, and April 28, 1951, and

(b) even in regard to this limited period, it is restricted to the imposition of the additional duty of six annas per lb. which was levied, beyond the eight annas per lb. collected from the appellants by virtue of the Finance Bill under the provisions of the Provisional Collection of Taxes Act, 1931.

It would seem to be rather a strange result to achieve that the tax imposed satisfies every requirement of a “duty of excise” in so far as the tax operates from and after April 28, 1951, but is not a “duty of excise” for the duration of two months before that date. Learned Counsel conceded, as he had to, that even on the decision relied upon by him, the fact that owing to the operation of economic forces it was not possible for the taxpayer to pass on the burden of the tax, did not alter the nature of the imposition and detract from its being a “duty of excise”.

For instance, the state of the market might be such that the duty imposed upon and collected from the producer or manufacture might not be capable of being passed on to buyers from him. Learned Counsel urged that this would not matter, as one had to have regard to “the general tendency of the tax” and “the expectation of the taxing authority” and to the possibility of its being passed on and not 16 to the facts of any particular case which impeded the operation of natural economic forces. The impediment to the duty being passed on might be due not merely to private bargains between the parties or abnormal economic situations such as the market for a commodity being a buyers’ market. Such impediments may be brought about by the operation of other laws which Parliament might enact, such for instance, as control over prices.

If in such a situation where the price which the producer might charge his buyer is fixed by the statute, say under the Essential Supplies Act, and a “duty of excise” is later imposed on the manufacturer, it could not be said that the duty imposed would not answer the description of an “excise duty”. Learned Counsel had really no answer to the situation created by such a control of economy except to say that it would be an abnormal economic situation. It could hardly be open to argument that a tax levied on a manufacturer could be stated not to be a “duty of excise”, merely because by reason of the operation of other laws the tax payer was not permitted to pass on the tax-levy. The retrospective levy of a tax would be one further instance of such inability to pass on, which does not alter the real nature or true character of the duty.”

21. It is thus clear that the judgments of this Court which referred to service tax being an indirect tax have reference only to service tax being an indirect tax in economic theory and not constitutional law. The fact that service tax may not, in given circumstances, be passed on by the service provider to the recipient of the service would not, therefore, make such tax any the less a service tax. It is important to bear this in mind, as the main prop of Shri Jaideep Gupta’s argument is that service tax being an indirect tax which must be passed on by virtue of the judgments of this Court, would make the recipient of the service the person on whom the tax is primarily leviable.

22. Let us now examine some of the judgments relating to another indirect tax, namely excise duty. Like service tax, excise duty is also in the economic sense, an indirect tax. The levy is on manufacture of goods; and the taxable person is usually the manufacturer of those goods. In the matter of the Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 RCP, A.I.R. 1939 Federal Court 1, the Federal Court decided, through Chief Justice Maurice Gwyer, that excise duty under the Government of India Act, 1935 is a power to impose duty of excise upon the manufacturer of excisable articles at the stage of or in connection with manufacture or production. In a separate judgment, Jayakar J. held that all duties of excise are levied on manufacture of excisable goods and can be levied and collected at any subsequent stage up to consumption.

23. In R.C. Jall vs. Union of India, 1962 Supp. (3) SCR 436 at 451, this Court after referring to the judgment in Central Provinces and Berar Sales (supra) and certain other judgments held: “With great respect, we accept the principles laid down by the said three decisions in the matter of levy of an excise duty and the machinery for collection thereof. Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer.

Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. Whether in a particular case the tax ceases to be in essence an excise duty, and the rational connection between the duty and the person on whom it is imposed ceased to exist, is to be decided on a fair construction of the provisions of a particular Act.”

24. In the present case, it is clear that the expression “primarily leviable upon” has reference to the “taxable person”, i.e. the person who is liable to pay the tax. The tax that is levied on “service” may be collected either from the service 19 provider or the recipient of the service. The person assessed to tax, who is primarily liable to pay the tax is, on the facts of this case, the lessor.

25. Shri Gupta cited a judgment of this Court in Peekay Re- Rolling Mills (P) Ltd. v. Assistant Commissioner and another, (2007) 4 SCC 30, for the well worn distinction between levy and collection of a tax. What is important to note from this judgment is that the expression “levy” would include “assessment”, though it would not include “collection”. This being the case, it is clear that the expression “primarily leviable upon the lessor” makes it clear that the lessor should be the person upon whom levy takes place – in the sense that “assessment” has to be of such person. “Levy”, in all cases of indirect taxes, is never upon an individual – it is upon a specific aspect of what is sought to be taxed. In the case of a service tax, like the present, the activity of renting out immovable property is sought to be taxed. Therefore, when the expression “primarily leviable” is used in relation to a person and not an activity, it has reference to the assessee upon whom assessment is made under the Act. Thus construed, it is clear that, in the present case, the person liable to pay the tax, who is the assessee under the said Act, in all cases like the present, is only the service provider and not the recipient of the service.

26. Shri Gupta then referred to Section 83 of the Finance Act, 1994, by which Section 12B of the Central Excise Act, 1944, so far as may be, would apply in relation to service tax as it applies in relation to a duty of excise. Section 12B is set out hereinbelow:

“12B – Presumption that incidence of duty has been passed on to the buyer – Every person who has paid the duty of excise on any goods under this Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such duty to the buyer of such goods.”

27. Based on this Section, Shri Gupta has argued, in support of the Division Bench judgment, that since there is a presumption that the incidence of duty has been passed on to “the buyer”, who is the recipient of the service in the present case, unless the contrary is proved, such passing on shall be deemed in law to have occurred and, therefore, it is the Appellant before us who is the person on whom the duty is primarily leviable.

This argument, which found favour with the Division Bench, is again incorrect for the basic reason that the reason for extending Section 12B of the Central Excise Act to service tax is for the reason that when refund of service tax is claimed in case the tax paid is found to be in excess or not payable at all, the same cannot be made over to the assessee unless the assessee proves that the said tax is not passed on to the recipient of the service.

This Section only casts the burden of proof upon the service provider to prove negatively that he has not passed on the incidence of the tax to the recipient of the service. This Section, which is part of the machinery for refund, can in no way help Shri Gupta to determine as to who is the person primarily liable to pay service tax which has to be determined on a reading of the Act and the Rules.

28. Shri Gupta then relied upon the judgment of the learned Single Judge in Pearey Lal (supra). In that case, clause 5 of the lease deed read as follows:

“5. That the lessor shall continue to pay all or any taxes, levies or charges imposed by the MCD, DDA, L & DO and/or Government, Local Authority, etc.”

29. In para 12, the learned Single Judge made the significant observation that there is no dispute that the parties did not visualize that service tax would be imposed when they entered into the lease. This being the case, the learned Single Judge held: “It is true, that the contracts entered into between the parties in this case, spoke of the Plaintiff lessor’s liability to pay municipal, local and other taxes, in at least two places. The Court, however, is not unmindful of the circumstance that service tax is a species of levy which the parties clearly did not envision, while entering into their arrangement.

It is not denied that leasing, and renting premises was included as a “service” and made exigible to service tax, by an amendment; the rate of tax to be collected, is not denied. If the overall objective of the levy – as explained by the Supreme Court, were to be taken into consideration, it is the service which is taxed, and the levy is an indirect one, which necessarily means that the user has to bear it. The rationale why this logic has to be accepted is that the ultimate consumer has contact with the user; it is from them that the levy would eventually be realized, by including the amount of tax in the cost of the service (or goods).”

30. In an appeal to the Division Bench of the Delhi High Court, the Delhi High Court was more specific in rejecting the plea that service tax should be borne by the lessor. Thus, the Division Bench in Satya Developers Pvt. Ltd. and Ors. v. Pearey Lal Bhawan Association and Ors, (2015) 225 DLT 377 stated:

“31. Thus a contract has to be construed by looking at the document as a whole and the meaning of the document has to be what the parties intended to give to the document keeping the background in mind and conclusion that flouts business commonsense must yield unless expressly stated. In the present case it will also have to borne in mind whether the parties intend to include taxes which were not contemplated at the time of the agreement as indubitably the agreements between the parties in the three suits were entered into prior to the Finance Act, 2007 coming into force w.e.f. June 01, 2007.

xxx xxx xxx

33. As regards the lease deed and the agreement of maintenance of common services and facilities between Satya and PLBA Clause 5 of the lease deed as noted above provides that the lessor shall continue to pay all or any taxes, levies or charges imposed by the MCD, DDA, L & DO and or Government, Local Authority etc. By use of the words “Lessor shall continue to pay” it is evident that the parties contemplated the existing taxes, levies or charges and not future. Even as per the agreement of maintenance of common service facilities though the same has no application to the service tax however, still the said clause II(1) cannot be said to exclude HDFC Bank from paying future service tax.”

A reading of these two judgments would, therefore, show that, on facts, it was held that since payment of service tax was not contemplated by the parties and it was agreed that the lessor shall continue to pay taxes, it was evident that the parties contemplated only existing taxes and not taxes which may arise in the future. This being the overwhelming circumstance in that case, any observations made on law have to be read in light of the facts of that case.

31. Shri Gupta then adverted to another judgment of the Division Bench of the Delhi High Court in Raghubir Saran Charitable Trust v. Puma Sports India Pvt. Ltd., 2013 SCC OnLine Del 1972, decided on 15.5.2013. In this judgment, clauses 7 and 9 of the lease deed read as follows:

“7. MAINTENANCE, ELECTRICITY; WATER

7.1. It is agreed by and between the Parties that the Lessor shall be liable to pay property taxes and other outgoings in respect of the Premises, whatsoever payable and as levied from time to time promptly and timely, including any revisions thereto, directly to the authorities concerned and no claim for contribution towards such taxes, cesses, levies and increases shall be made by the Lessor or be entertained by the Lessee.

xxx xxx xxx

9. COVENANTS OF THE LESSEE

The Lessee, for itself, its successors and permitted assigns and to the intent that its obligations may continue through the term hereby created, but not exceeding the Initial Term, covenants with the Lessor as follows:

xxx xxx xxx

(d) To pay all taxes necessary for carrying on its business within the Premises, other than municipal taxes and other related property taxes.”

32. An arbitration award construed the aforesaid clauses stating that service tax would have to be paid by the lessor. This, according to the Division Bench, was not a possible construction inasmuch as the Division Bench bifurcated taxes that were payable by the lessor and the lessee. Clause 7 being confined to property taxes and clause 9 referring to taxes other than property taxes, the judgment of the Division Bench stated:

“………Thus, Clause 7.1 is clearly confined to property taxes or other outgoings in respect of the ‘premises’. It has to be a tax on the premises or the property. Such a tax may be of any nature whatsoever and thus even a new tax on the premises would be covered by this clause and absolves the lessee of the liability in this behalf, this clause nowhere envisaging an indirect tax of the nature of a service tax. The aforesaid view is further reinforced by Clause 9 (d) which in fact puts the responsibility on the lessee to pay all taxes necessary for carrying on its business within the premises other than the municipal taxes and related property taxes.

Thus, any tax on the business activity is on the lessee and the only exclusion made is of municipal tax and related property taxes for which there is a specific Clause 7.1. It is not as if there is a singular clause relating to taxes in the agreement being the Lease Deed which puts the burden on the lessor alone. The nature of taxes if bifurcated into two categories; one borne by the lessor and the other to be borne by the lessee.

The aforesaid becomes important in the context of the nature of service tax which is a tax on the commercial activity and to that extent would, thus, fall within the parameters of Clause 9 (d) and not Clause 7.1. We thus have not the slightest of doubt that these are not clauses which can brook of any two interpretations, but there can by only one interpretation on a plain reading of the clauses. The language of a clause cannot be twisted to come to a conclusion as is sought to be done by the learned Arbitrator. It appears that Clause 9 (d) seems to have been completely lost by the learned Arbitrator. ……….”

33. In this view of the matter, the arbitration award was set aside. This judgment again turned on the language of the particular clauses in the lease deed and would have no application to the facts of the present case.

34. At the fag end of the argument, however, Shri Gupta referred us to a sanction letter dated 27th April, 2012 and a letter dated 30th April, 2012. The sanction letter of 27th April, 2012 issued by the Government of India conveying sanction for hiring of the lease premises in the present case to the Director General, Indian Coast Guard, specifically states: “…… The registration charges, stamp duty, service taxes, etc. (if applicable) is the liability of the lessee……”

35. The letter dated 30th April, 2012, written by the Deputy Inspector General, Chief Staff Officer, to the Respondent, in turn, in paragraph 3(c) reiterated the same position as that of the sanction letter. The learned single Judge in dealing with the letter dated 30th April, 2012 has held:

“12. Turning to the facts of the present case, it appears that clause 6 extracted supra delineated the respective obligations of the lessor and the lessees. The parties agreed that the rates and taxes primarily leviable upon the occupier would be paid by the Government. That the respondents were not oblivious of their obligation to bear service charge is reflected from the letter dated April 30, 2012. Although the said deed does not specifically refer to service tax, the letter dated April 30, 2012 expressly provides that Government of India had sanctioned the terms and conditions of hiring including, inter alia, the liability of the “lessee in respect of registration charges, stamp duty, service tax etc., (if applicable)”. The words “if applicable” in brackets follows “etc.” and not “service tax”.

Therefore, it is not a case that if obligation to make payment of service tax arises, the respondents would have discretion to foist the responsibility on the lessor (the first petitioner). Liability to bear service tax being that of the person receiving service, there can be no escape from the conclusion that the respondents are liable to bear service tax.

36. This being the case, though in law and under clause 6 of the lease deed the Appellant is not required to pay service tax, we are loathe to upset the finding of the learned single Judge based upon a letter by the Appellant to the Respondent in which the Appellant has expressly stated that it was liable to pay service charges. Having thus clarified the legal position, given the sanction letter of 27th April, 2012 and the letter dated 30th April, 2012, in which it was made clear that the Union of India alone will bear the service charges, we refuse to exercise our discretion under Article 136 of the Constitution of India in favour of the Union of India. Thus, the impugned Division Bench judgment is set aside on law, but the appeal fails on the facts of the present case.

Sedco Forex International Inc. through it’s Constituted Attorney Mr. Navin Sarda Vs. Commissioner of Income Tax, Meerut & ANR[SC 2017]

Keywords:-Non-resident assessees-Mobilization fee

SC INDEx

Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the 44 Act as well.

SUPREME COURT OF INDIA

[Civil Appeal No. 4906 of 2010]* 

BENCH: (A.K. SIKRI)  (ASHOK BHUSHAN)

ACTS: Section 44BB of the Income Tax Act, 1961.Sections 28 to 41, 43 and 43A of the Act

History: The assessees herein had entered into contracts primarily with Oil and Natural Gas Commission (ONGC), a public sector company, for hire of their rig for carrying out oil exploration activities in India. For this purpose, they were paid mobilisation fee as well, for and on account of 10 mobilisation/movement of rig from foreign soil/country to the off-shore side at Mumbai (India). The issue that has fallen for consideration is as to whether aforesaid amount received is to be included for computation of deemed profits and gains of the business, chargeable to tax under Section 44BB of the Act. Right from the Assessing Officer (AO) till the High Court, all the fora have answered this question in affirmative holding that this amount is to be included for computing profits and gains of the businesses of the assessees.

A.K. SIKRI, J.

1. Leave granted in SLP(C) No. 2955 of 2012, SLP(C) No. 11560 of 2014, SLP(C) No. 20000 of 2015, SLP(C) No. 22343 of 2012, SLP(C) No. 22833 of 2012, SLP(C) No. 39683 of 2013 and SLP(C) No. 21939 of 2017.

2. In all these appeals filed by different appellants (hereinafter referred to as the ‘assessees’) except Civil Appeal No. 3695 of 2012 which is filed by Director of Income Tax (Revenue), the question of law which arises for consideration is identical and pertains to the scope and interpretation of Section 44BB of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

3. For computation of profits and gains of a business, to make it exigible to tax under the Act, provisions contained in Chapter IV, from Sections 28 to 41, 43 and 43A of the Act apply. However, in those cases where the assessee is a non-resident and specifically engaged in the business of exploration etc. of mineral oil, special mechanism is provided in Section 44BB of the Act for computation of profits and gains, on which the tax is charged.

It, however, gives choice to such non-resident assessees to opt for computation formula provided under Section 44BB or to be covered by normal computation mechanism contained in Sections 28 to 41, 43 and 43A of the Act. Section 44BB of the Act stipulates that a sum equal to 10% of the ‘aggregate of the amounts specified in sub-section (2)’ shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘profits and gains of business or profession’.

Thus, concessional rate of 10% is charged as tax, which is admittedly much less than the normal tax rate payable on profits and gains of business or profession. However, this tax @10% is on the aggregate of the amounts specified in sub-section (2) which are “deemed” profits and gains of such business. Thus, insofar as calculation of profits and gains of the business under Section 44BB of the Act is concerned, on which 10% tax is payable, it is worked out on fictional basis by adopting the formula laid down in sub-section (2). Sub-section (2) mentions those amounts aggregate whereof is to be treated as deemed profits and gains of such a business.

4. At this juncture, we reproduce the provisions of Section 44BB of the Act, as reading of this provision is necessary before spelling out the nature of dispute which had arisen in these appeals. This section reads as under:

“44BB. Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils.

(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits and gains of business or profession” :

Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 44DA or section 115A or section 293A apply for the purposes of computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely :-

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral 7 oils in India; and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

(3) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.

Explanation.-For the purposes of this section,-

(i) “plant” includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;

(ii) “mineral oil” includes petroleum and natural gas.”

5. A bare reading of the aforesaid provision brings out the following salient features thereof:

(a) Sub-section (1) is a non-obstante clause, starting with the expression ‘notwithstanding anything to the contrary contained in Sections 28 to 41 and Sections 43 and 43A’. Thus, once we apply this special provision for computation of profits and gains, provisions for computation of such profits as contained in Sections 28 to 41 and Sections 43 and 43A of the Act stand excluded.

(b) In order to attract the provisions of Section 44BB of the Act, two conditions are to be specified, namely,

(i) assessee has to be a non-resident; and

(ii) assessee should be engaged in the business of exploration etc. in mineral oils of the nature specifically spelled out in the provision.

(c) Choice is given to such an assessee under sub-section (3) of the Act to either claim lower profits and gains than the profits and gains specified in sub-section (2) and covered by normal provisions of computing profits and gains of business or profession, subject to fulfilling the conditions of audit etc. as mentioned therein or to be governed by Section 44BB of the Act.

(d) In case the twin conditions mentioned above are satisfied, the assessee can take the benefit of paying the tax as per the provisions of Section 44BB on “deemed profits and gains” of its business and such profits and gains are to be calculated as per the formula provided in sub-section (2) thereof. Pertinently, it is a ‘deemed’ provision for calculating profits and gains of business or profession, which means that such profits and gains are to be arrived at fictionally, as per provisions contained in sub-section (2).

(e) Sub-section (2) mentions the amounts which are to be added up, and the aggregate of those amounts is deemed to be profits and gains on which 10% tax is charged as component of income tax.

6. Coming to the lis that is involved in these appeals, it may be seen that sub-section (2) mentions two kinds of amounts which are to be treated as profits and gains of the business. In clause (a) of sub-section (2), the amount referred to are those which are paid or payable to the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils in India. It is immaterial whether the said amount is paid or payable in India or out of India. Second kind of amounts mentioned in clause (b) of sub-section (2) are those sums which are received or deemed to be received by or on behalf of the assessee on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, extraction or production of mineral oils outside India. Here, however, only those sums which are paid or payable in India are to be included.

7. The assessees herein had entered into contracts primarily with Oil and Natural Gas Commission (ONGC), a public sector company, for hire of their rig for carrying out oil exploration activities in India. For this purpose, they were paid mobilisation fee as well, for and on account of 10 mobilisation/movement of rig from foreign soil/country to the off-shore side at Mumbai (India). The issue that has fallen for consideration is as to whether aforesaid amount received is to be included for computation of deemed profits and gains of the business, chargeable to tax under Section 44BB of the Act. Right from the Assessing Officer (AO) till the High Court, all the fora have answered this question in affirmative holding that this amount is to be included for computing profits and gains of the businesses of the assessees.

8. Civil Appeal Nos. 4906 of 2010, 4907 of 2010, 4915 of 2010 filed by Sedco Forex International Inc., M/s Transocean Offshore Inc., M/s Sedco Forex International Drilling Inc. respectively were taken up as lead matters and, therefore, for the sake of brevity, we recapitulate the factual matrix from the said appeals, as it would suffice for answering the question involved.

9. During the years under consideration, the assessees are engaged in executing the contracts all over the world including India in connection with exploration and production of mineral oil. The assessees are companies incorporated outside India and, therefore, non-resident within the meaning of Section 6 of the Act. The assessees entered into agreements with ONGC, Enron Oil and Gas India Ltd. The aforesaid agreements provided for the scope of work along with separate consideration for the work undertaken. Since the dispute is about mobilisation charges, clauses in respect thereof are as under:

“Operating Rate – Receipts for undertaking drilling operations computed by per day rates provided in the contract. The operating rates shall be payable from the time the drilling unit is jacked-up and ready at the location to spud the first well. Mobilisation – charges for the transport of the drilling unit from a location outside India to a location in India as may be designated by ONGC.” In addition to the above, assessees also received amounts from the operator towards reimbursement of expenses like catering, boarding/lodging, fuel, customs duty, the supply of material etc., with which we are not concerned.

10. The assessees filed their return of income declaring income from charter higher of the rig. The same was offered to tax under Section 44BB of the Act. In the case of Sedco Forex International Inc., the assessee did not include the amount received as mobilisation charges to the gross revenue for the purpose of computation under Section 44BB of the Act. In the case of Transocean Offshore Inc., the assessee included 1% of the mobilisation fees. The mobilisation fees were offered to tax on a 1% deemed profit basis on the ratio of the CBDT Instruction No. 1767 dated July 1, 1987.

11. The AO included the amounts received for mobilisation/demobilisation to the gross revenue to arrive at the “profits and gains” for the purpose of computing TAX under Section 44BB of the Act. The Commissioner of Income Tax (Appeals) {hereinafter referred to as the ‘CIT(A)’} confirmed the action of the AO. The Income Tax Appellate Tribunal (hereinafter referred to as the ‘ITAT’) in the case of Sedco Forex International Inc. dismissed the appeal of the assessee and the action of the AO was upheld insofar as the mobilisation charges were concerned. In the case of Transocean Offshore Inc., the ITAT upheld the view taken by the assessee and directed the AO to assess the profits on mobilisation charges at 1% of the amount received.

This was done following the Circular of CBDT Instruction No. 1767 dated July 1, 1987 and decision of the third Member in the case of Saipem S.P.A. v. Deputy Commissioner of Income Tax. The High Court has held that the mobilisation charges reimbursed inter alia even for the services rendered outside India were taxable under Section 44BB of the Act as the same is not governed by the charging provisions of Sections 5 and 9 of the Act. Even on the issue of reimbursement in M/s. Sedco Forex International Drilling Inc. (Civil Appeal No. 4915 of 2010), the High Court followed its earlier judgments dated September 20, 2007 and May 22, 2009 to hold that reimbursement of expenses incurred by the assessee was to be included in the gross receipts, and taxable under Section 44BB of the Act. 1 88 ITD 213 (Del)

12. From the aforesaid brief narration of facts, it may be discerned that following three types of payments were given by the ONGC to the assessees:

(i) Mobilisation/demobilisation advance.

(ii) Custom duty reimbursement.

(iii) Operational charges reimbursement.

13. The High Court has held that these payments be also included as amounts received for computation of aggregate of amounts specified in sub-section (2) as deemed to be the profits and gains of the businesses of the assessees, chargeable to tax under the said provision.

14. Mr. Porus F. Kaka, learned senior advocate appearing in some of these appeals submitted that the aforesaid amounts were, in fact, towards reimbursement of expenses actually incurred by the assessees. According to him, the work undertaken was, in fact, the obligation of the ONGC and it was for ONGC to provide such facilities/material under the contract. Still the assessees performed the said task at the request of the ONGC and ONGC simply reimbursed these expenses which did not have any profit element.

It was emphasised by Mr. Kaka that insofar as the assessee-Sedco Forex International Inc. is concerned, the expenditure incurred on mobilisation was much higher than the actual payment received. Thus, this assessee had, in fact, suffered loss on this transaction. He also pointed out that the agreement separately provided for consideration/remuneration for mobilisation and demobilisation of drilling unit and reimbursement of cost incurred on behalf of the operator of ONGC. It was submitted that as this was the nature of the amount received, namely, reimbursement of expenses without there being any profit element, it could not be treated as ‘amount’ within the meaning of sub-section (2) of Section 44BB of the Act.

15. Explaining the taxation of income scheme enumerated under Sections 4, 5 and 9 of the Act, Mr. Kaka submitted that globally the tax systems can be classified broadly into two models; Worldwide and Territorial system. India follows a territorial system of taxation specially qua business income of non-residents, which is taxed only as it is attributable to operations within the Indian territory. This, according to him, was clear from the conjoint reading of Sections 4, 5 and 9 of the Act. Section 4 is the charging section for levying a tax on income of any person under the Act which provides that income tax shall be levied at the rates provided by the Finance Act on the ‘total income’ of the previous year.

Scope of total income is provided under Section 5 of the Act which deals with total income of residents as well as non-residents. The learned senior counsel pointed out that insofar as non-residents are concerned, total income as per Section 5(2) of the Act is the income which is received or deemed to be received in India in such year or on 15 behalf of such person; or income which accrues or arises or is deemed to accrue or arise in India during such year.

He, thus, argued that in respect of non-residents only that income which is received or deemed to be received in India or which accrues or arises or deemed to accrue or arise in India is taxable. In order to locate the income which is deemed to accrue or arise in India, Section 9 is the concerned provision. Section 9 acknowledges principle of attribution of income under the Act. Section 9 lays down two broad categories of taxable of income i.e.

(a) business income; and

(b) income from interest or royalty or fees for technical services.

Insofar as business income is concerned, it becomes taxable and only that income becomes chargeable to tax in India which is attributable to operations carried out in India. Insofar as second category, namely, income in the nature of interest, royalty or fees for technical services is concerned, such income would be deemed to accrue or arise in India, irrespective of situs of the services. The learned senior counsel argued that insofar as payment for mobilisation which was received by the assessee is concerned, it is neither income receipt nor deemed to be received in India. It is in respect of services outside India and, therefore, does not accrue or arise or deemed to accrue or arise under Section 5 read with Section 9 of the Act.

16. Proceeding further on the aforesaid line of argument, he submitted that, in the first instance, it has to be determined that income accrues or 16 arises or is deemed to accrue or arise in India. Only when that is established, the next step is to compute the total income based on other provisions of the Act and here Chapter IV of the Act which deals with computation of income from ‘Profits and Gains of Business or Profession’ gets triggered. It was submitted that, no doubt, Sections 44B, 44BB, 44BBB etc. provide for special mechanism for computing the income in the case of non-residents on presumptive basis.

However, even when the income is to be computed under any of these provisions, first pre-requisite is to find out as to whether a particular income has accrued or arisen or deemed to accrue or arise in India. If that threshold is not met, the question of treating such payments as ‘income’, merely because the income is to be computed under special provision, is of no consequence. Mr. Kaka also referred to Circular No. 495 dated September 22, 1987 issued by the Central Board of Direct Taxes (CBDT) which, according to him, explains the Legislature intent behind inserting Section 44BB in the Act.

According to the circular, the computation of taxable income of a non-resident assessee engaged in the business of exploration etc. of mineral oils in accordance with the general mode of computation under Sections 28 to 43A involved a number of complications. As a measure of simplification, Section 44BB was inserted by the Finance Act, 1987 with retrospective effect from April 1, 1983 for determination of income of such tax payers on a presumptive basis, at 10% of the amounts mentioned in sub-section (2) thereof. Relevant portion of that circular is as under:

“21.1 A number of complications are involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. With a view to simplifying the provisions, the Amending Act has inserted a new Section 44BB which provides for determining of the income of such taxpayers at 10 percent of the aggregate of certain amounts which have been specified. This amount will include the amounts received or due to be received in India on account of such services or facilities or supply of plant and machinery.”

17. After arguing that the provisions have to be read in the aforesaid manner, proposition advanced by the learned senior counsel is that Section 44BB of the Act is only a computation provision and does not override Sections 4 and 5 of the Act. For this purpose, he referred to the judgment of this Court in Union of India & Anr. v. A. Sanyasi Rao & Ors.2 wherein Section 44AC of the Act has been interpreted in a similar manner holding that Section 44AC read with Section 206C is the only machinery provision and not charging Section.

18. Towing the aforesaid line of argument, another submission of Mr. Kaka was that since Section 44BB is a computation provision under the head ‘income’, it cannot override the charging section. For this purpose, he relied upon the judgment of Bombay High Court in Commissioner of Income Tax v. F.Y. Khambaty3. Mr. Kaka also relief upon the following judgments:

(a) Anglo-French Textile Company, Ltd., by Agents M/s Best & Company, Ltd., Madras v. Commissioner of Income Tax, Madras

(b) Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai5

(c) Carborandum & Co. v. CIT, Madras6

(d) Commissioner of Income Tax, Madras v. Best and Company (Private) Ltd., Madras7

19. He also cited judgments on the proposition that CBDT Circulars are binding on tax authorities; reimbursement of actual expenses does not represent income and, therefore, cannot be taxed; and normal concept of income cannot be taken away by presumption provisions.

20. In nutshell, as can be seen from the aforesaid arguments, the proposition advanced by learned senior counsel are as follows:

(a) Principle of apportionment between India and outside India is a basic principle of income tax law. Where payments are made to a non-resident outside India, for services rendered outside India, 3 (1986) 159 ITR 203 4 (1954) 25 ITR 27 (SC) 5 (2007) 288 ITR 408 (SC) = (2007) 3 SCC 481) 6 (1977) 108 ITR 335 (SC) 7 (1966) 60 ITR 11 (SC) 19 namely mobilization charges for drilling rigs from a foreign location to a location in India, the same is not chargeable to tax in India under Sections 5 and 9 of the Act and the same cannot be made chargeable to tax under Section 44BB of the Act.

(b) A computation provision like Section 44BB cannot override the charging provisions of Sections 4 and 5. It is so stated in the instruction No. 1767 dated July 1, 1987 issued by the CBDT. The understanding of the CBDT is binding on the Revenue.

(c) The charges were reimbursed for services rendered outside India. Services rendered outside India cannot be chargeable to tax under the Act. There should be sufficient territorial nexus between the rendering of services and the territorial limits of the Act to make the income taxable.

(d) Where the actual expenditure incurred by the assessee for the mobilization of the rigs was higher than the amount reimbursed, there cannot be any income chargeable to tax under the Act.

(e) Reimbursement of actual expenditure, which was the obligation of the operator/company cannot be included in receipts under Section 44BB of the Act as the income tax is levied on income. Further, the fact of such reimbursements being devoid of any profit element has not been disputed by the Revenue.

21. Mr. Vohra, learned senior counsel appearing for the appellant Pride Foramer S.A. (Civil Appeal No. 4543 of 2013) stated that the appellant in the said case is a non-resident company incorporated in the Republic of France. It also entered into contract with ONGC for hire of its rig for carrying out oil exploration activities by ONGC in India. The rig was located in Singapore and accordingly, under the contract, mobilization fees of US$1 million (equivalent to Rs.4,31,10,000/-) was payable by ONGC to the appellant for and on account of mobilization/ movement of rig from Singapore to the offshore site at Mumbai.

In case of delay, liquidated damages @0.5% of operating day rate subject to a maximum of 5% of the annual operating charges was payable by the appellant to ONGC. In Assessment Year 2000-01, during the year under consideration, the appellant received outside India, net mobilization charges of US$ 6,42,300 (equivalent to Rs.2,76,89,533/-) after deduction of liquidated damages for delay, for mobilization from Singapore to the offshore site (in India).

22. On the aforesaid facts, he submitted that net mobilization charges received outside India could not be taxed in India, more so, when these were in the nature of reimbursement of expenses on account of mobilization/movement of rig from Singapore to the offshore site at Mumbai. His primary contention was that before this payment could be included while making computation under Section 44BB of the Act, it had to be ‘income’ which is taxable in India in the first instance.

His submissions on the scheme of Sections 4, 5 and 9 of the Act were the same as that of Mr. Kaka, already noted above. Additionally, he submitted that insofar as Section 44BB of the Act is concerned, it only provides a simplified computation mechanism for computing profits and gains in case of non-resident assessee engaged in activities relating to business of exploration of mineral oil etc.

Thereby, overriding the normal computation mechanism contained in Sections 28 to 41, 43 and 43A of the Act. His emphasis was that this provision does not override charging provisions as contained in Section 4 read with Sections 5 and 9 of the Act, thereby bringing to tax an amount which is not at all taxable under the provisions of the Act. In addition to Circular No. 495 dated September 22, 1987 (already noted above), he also relied upon Instruction No. 1767 dated July 1, 1987 issued by CBDT explaining the computation of business income in case of a contractor engaged in business of exploration of oil where part of the activities are carried out in India and part of the activities are carried on outside India. It has been stated as under:

“3. On these facts, it is clear that income accruing or arising to the non-resident contractor should be apportioned between the various activities carried on by it, some of which would be within India and some outside. Where the ownership in the platform, terminal, treatment plant or other facilities passed outside India, the non-resident will be taxable only in respect of the activities performed in India by way of installation, hook-up and commissioning etc., of the facilities acquired by the Indian enterprises engaged in oil exploration or production…”

23. In support of the aforesaid submissions, Mr. Vohra relied upon the following judgments:

(i) Commissioner of Income Tax and Anr. v. Hyundai Heavy Industries Co. Ltd.

(ii) State Bank of Travancore v. Commissioner of Income Tax, Kerala


24. To summarise, proposition advanced by Mr. Vohra are as under:

(i) Mobilization fee was in respect of activities carried outside India prior to coming into existence of the PE in India and, therefore, this mobilization fee was not taxable at all, in view of Article 7 of Double Taxation Avoidance Agreement (DTAA) between India and France, the relevant portion whereof is as under:

“1. 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. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment….”

(ii) In case the payment is held liable to tax in India, then the same has to be computed in terms of Sections 4, 5 and 9 read with Section 44BB of the Act. In that situation, only the mobilization fee pertaining to voyage within the territorial waters of India can be subjected to tax. 8 (2007) 7 SCC 422 9 (1986) 158 ITR 102 (SC) 23

(iii) Without prejudice to the aforesaid, it is alternatively submitted that since the appellant only received mobilization fee amounting to Rs.2,76,89,533/- (equivalent to US$ 6,42,300), after deduction of liquidated damages, the AO erred in bringing to tax the gross amount of US$1 million under Section 44BB of the Act.


25. Mr. Lakshmikumaran and Mr. Jay Savla, learned advocates appearing for some other assessees treaded the same path by adopting same line of arguments.

26. M/s. Chidananda and Arijit Prasad, learned advocates appearing for the Revenue put up an emphatic defence to the judgment of the High Court which has accepted the position taken by the Revenue. It was argued that assessee Sedco, which is a non-resident company, had entered into a composite/indivisible contract with ONGC to provide a drilling unit to carry out drilling operations. A finding of fact to this effect i.e. a composite/indivisible contract was entered into, was arrived at by the ITAT and, therefore, matter had to be proceeded on that basis. Submission was that, as per this contract, it was the obligation of the assessee to mobilise its resources for the purpose of drilling operations.

According to them, since the payments were made by ONGC to the assessee in terms of indivisible contract for the purposes of drilling operations, it was not open to the assessee to claim that mobilisation 24 fee/charges and it should not be included in the aggregate receipts for the purposes of Section 44BB of the Act and their plea that they are not actual charges but expenses in the nature of reimbursement by ONGC was not permissible. It was submitted that though, mobilisation fee/charges have been separately indicated in the said contract, the payments have been made by ONGC for supply of drilling unit including the rigs, for operating these rigs and for providing experts and other personnel for operating the rigs etc.

Therefore, it is a misnomer to term payment of mobilisation fee/charge as ‘reimbursement’. They are payments made pursuant to an indivisible contract. Assuming, for the purposes of argument that it amounts to reimbursement, the same will not make any difference for the reason that parties may agree to divide the total amount as a direct payment by way of fees and some part of the consideration by way of expenses, but this arrangement between the parties would not alter the character of receipts. A receipt will remain as such and will not partake the character of an expenditure. According to the learned counsel, the mobilisation fee/charges paid by ONGC to assessee amounts to income chargeable to tax.

27. For this purpose, reliance was placed on the definition of “income” as contained in Section 2(24) of the Act which defines the said expression in an inclusive manner. Attention was also drawn to Section 2(45) of the Act which defines “total income” to mean total income referred to in Section 5, computed in the manner laid down in the Act. It was, thus, argued that income had to be computed as per the provisions of the Act. Even Section 4 of the Act, which is a charging section, clearly points out that income tax is to be paid ‘in respect of the total income of the previous year’. Likewise, Section 5 of the Act which deals with ‘scope of total income’ includes all income from whatever the source derived.

It was submitted that, in this hue, Section 9 which deals with income deemed to accrue or arise in India, had to be looked into. According to the learned counsel, the assessee had business connection in India through the equipment owned by it, operating in India and its employees, experts etc. working in India. Its assets are employed/used in India and the source of income is in India. Therefore, the ingredients of Section 9(1)(i) are fulfilled. Thus, assessee has territorial nexus in India. Further, in a given case, if the assessee fulfils these requirements and a DTAA applies, this will also constitute a Permanent Establishment (PE) through which an assessee operates its business in India.

Further, the rigs/equipment are mobilised for its business operations in India and that source of income is in India, therefore, the question of apportionment. Thus, the mobilisation fee/charges paid by ONGC to assessee is an income chargeable to tax from a conjoint reading of Sections 4, 5 and 9. Therefore, the submission of the assessee that Section 44BB seeks to tax an event 26 which the charging sections does not seek to tax is incorrect.

28. Adverting to the provisions of Section 44BB of the Act which finds place in Chapter IV dealing with ‘computation of income’ in respect of business or profession, it was submitted that the scope and effect of Section 44BB has been explained in Departmental Circular No. 495 dated September 22, 1987. It has been mentioned in the said circular that a number of complications were involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of plant and machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. Section 44BB was introduced with a view to simplifying the relevant provisions which provide for determining the income of such taxpayers at 10 per cent of the aggregate of certain amounts, which have been specified in the said section. It was submitted that Section 44BB provides for “presumptive income determination”.

It is a complete code in itself for determining the taxable income in the case of an assessee, being a non-resident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils. It replaces Sections 28 to 41 and Sections 43 and 43A (which otherwise mandates assessee to maintain accounts, claim and prove expenses).

Only the 27 receipts are taken into account. Even if the actual profits and gains of the assessee are more than 10%, only 10% is presumed to be its income. Thus, 10% is the income and the rest 90% is allowed as expenditure/allowable claims of the assessee. Assuming that Section 44BB was not on the statute book, assessee would have shown mobilisation fee as receipt and claimed the actual expenditure and arrived at the net taxable income. Now, Section 44BB presumes that only 10% of the aggregate receipts is income and the remaining 90% is expenditure.

It was also argued that in the case of presumptive income determination like Section 44BB, items of expenditure cannot be claimed separately, otherwise it would lead to double deduction as Section 44BB presumes that only 10% of the aggregate receipts is income and the remaining 90% is expenditure. It was pleaded that when all the authorities including the final fact finding authority as well as the High Court have recorded their concurrent findings on consideration of relevant material, this Court may not disturb those findings. Reliance was placed on Avasarala Technologies Limited v. Joint Commissioner of Income Tax, Special Range 1, Bangalore10 and Commissioner of Income Tax Bihar and Orissa, Patna v. Ashoka Marketing Co.11

29. Before we appreciate the rival submissions made by counsel for 10 (2015) 14 SCC 732 11 (1972) 4 SCC 426 28 the parties on both sides, it would be apposite to go into the raison d’etre behind the orders of the ITAT as well as the High Court.

30. The ITAT in its order has taken note of the relevant clauses of the agreements entered into between ONGC and assessee (Sedco) pertaining to mobilisation and mobilisation fee. Clause 3.2 of the Agreement dated September 3, 1985 relating to providing the Shallow Dash Water Jack Up Rig covering this aspect reads as under: “Mobilisation Operator shall pay to Contractor a mobilisation fee of eight hundred thousand United States Dollars (US $ 800,000) (“Mobilisation Fee”) for the mobilisation of the Drilling Unit from its present location in Setubal, Portugal to the first well location designated by Operator, Offshore Bombay, India.

Operator will notify Contractor no later than fifteen (15) days from the execution of this Agreement if it desires to mobilize the Drilling Unit to another location offshore India and no additional costs shall be charged to Operator for mobilisation to such other location. In the event that Operator desires to mobilize the Drilling Unit to another location offshore India and it fails to notify Contractor by such date, any additional costs incurred by Contractor for such mobilisation in excess of the Mobilisation Fee shall be borne by the Operator.

Contractor shall invoice Operator for payment of the Mobilization Fee after the Drilling Unit is jacked-up on the first well location and ready to spud the well. Operator shall make payment to Contractor no later than thirty (30) days after receipt of the invoice.”

31. Clause 4.2 of the Agreement dated July 12, 1986 relating to Mobilisation of the Drilling Unit (including Rig 21) is also reproduced hereunder: “Mobilisation and Mobilisation Fee Contractor shall notify Operator when it is prepared to commence mobilisation of the Drilling Unit from Muscat, Oman. Within thirty days of receipt of Contractor’s notice of readiness, Operator shall instruct Contractor to commence mobilisation, and Contractor shall forthwith ship the Drilling Unit to the port of entry (Kandla or Bombay). Contractor shall be compensated for the mobilisation of the Drilling Unit from its place of origin by a mobilisation fee payable within thirty days following the commencement date.”

32. It also noted that apart from the aforesaid mobilisation fee stipulated in the aforesaid two contracts, the ONGC had undertaken to pay compensation based on operating rate of US $ 24,550 per 24 hours a day for all operating time and US $ 24,060 as non operating rate per day relating to Sedco 252 Rig. Similarly operating rate – R1 and stand by rate – R2 was also separately stipulated in the other contract dated July 12, 1986 relating to Rig-21 etc.

33. Thereafter, the ITAT pointed out that even as per the assessee, there was no dispute about the applicability of Section 44BB of the Act in relation to payments made by the ONGC under the aforesaid agreements by way of operating charges and other payments made by ONGC to the assessee except in relation to mobilisation fee and reimbursement of certain other expenses as according to the assessee, these payments were not in the nature of fee (income) but reimbursement of expenses only.

This argument is dealt with by the ITAT, taking note of the provisions of Section 44BB of the Act. The ITAT 30 concluded that it was a special provision for computing profits and gains in connection with the business of exploration of mineral oils, effect whereof was explained in Departmental Circular No. 495 dated September 22, 1987.

It further noted that agreements between ONGC and the assessee were indivisible in nature as per which entire payments had been agreed to be made by ONGC for supply of drilling unit including the rigs, for operating those rigs, and for providing experts and other personnel for operating those rigs. Therefore, all these payments were deemed to be the profits and gains of business for the purposes of Section 44BB of the Act and 10% thereof was to be treated as income chargeable to tax. Section 44BB of the Act does not provide that separate consideration mentioned in the Agreement for transportation of the drilling units/rigs from their present location to the designated location in India would be excluded from the correct amount of gross receipts on which 10% profit rate is required to be applied. The ITAT held that the mobilisation fee paid by ONGC to the assessee had no nexus with the actual amount incurred by the assessee for transportation of drilling units/rigs and, therefore, it could not be said that this payment was made for reimbursement of actual expenditure.


34. This is the summary of the rationale given by the ITAT in support of its conclusion, as can be seen from the following detailed discussion:

“2.14 The aforesaid Sec. 44BB making a special provision for 31 computing profits and gains in connection with the business of exploration of mineral oils has been inserted by the Finance Act, 1987 with retrospective effect from 1st April, 1983. The scope and effect of new Sec. 44BB was explained in Departmental Circular No. 495 dated 22nd September, 1987.

It has been mentioned in the said Circular that a number of complications were involved in the computation of taxable income of a taxpayer engaged in the business of providing services and facilities in connection with or supply of Plant & Machinery on hire, used or to be used in the exploration for and exploitation of mineral oils. Section 44BB was introduced with a view to simplifying the relevant provisions which provide for determining the income of such tax-payers at 10% of the aggregate of certain amounts, which have been specified in the said Section.

The provisions of Section 44BB were amended by the Finance Act, 1988 with retrospective effect w.e.f. 1st April, 1983 which clarifies that applicability of Section 44BB will be restricted to the cases of only non-resident tax-payers. It is clear from the language used in Section 44BB(2)(a) that the amount referred to in Section 44BB(1) on which profits have to be calculated @10% will be the aggregate of amounts paid or payable to the taxpayer or to any person on his behalf whether in or out of India on account of the provisions of such services or facilities.


2.15 A perusal of the relevant Agreements executed between the appellant company and ONGC clearly reveals that both the Agreements are indivisible contracts. It is true that mobilisation fee and operating charges have been separately indicated in the said Agreements but the entire payments have been agreed to be made by ONGC for supply of the Drilling Unit including the Rigs, for operating these Rigs, and for providing experts and other personnel for operating those rigs etc. Section 44BB specifically provides that the aggregate of the amounts referred to in sub-section (2) of Section 44BB will be adopted as the basis for calculating profits @10%, which shall be deemed to be the profits and gains of such business chargeable to tax under the head “Profits & Gains of Business or Profession”.

It does not provide that separate consideration mentioned in the Agreement for transportation of the Drilling Unit/Rig from their present location to the designated location in India will be excluded from the aggregate amount of gross receipts on which 10% profit rate is required to be applied.

ONGC has made the entire payment including the mobilisation fee, operating charges, daily hire on non operating days etc. for availing the services and facilities and the supply of Plant & Machinery on hire agreed to be provided by the appellant company to ONGC.

The mobilisation fee paid by ONGC to the appellant company has no nexus with the actual amount incurred by the appellant company for transportation of the Drilling Unit/Rigs to the specified drilling location in India. Even if the actual expenditure incurred by the appellant company would have been substantially less, ONGC was liable to pay the fixed amount of mobilisation fee stipulated in the respective Agreements.”

35. Before the High Court, argument of the assessee was that amount of mobilisation charges cannot be included in the amount referred to under sub-section (2) of Section 44BB of the Act as the mobilisation charges represent reimbursement of expenses incurred for transportation of drilling units of rigs from outside India to designated drilling places in India and the payment has also not been made in India. In support of his submission, apart from other judgments, heavy reliance was placed on the decision of this Court in Ishikawajima-Harima Heavy Industries Ltd. case.

The High Court noted that in the said case, the assessee was a Japanese company, inter alia, engaged in the business of construction of storage tanks as also engineering etc. It formed consortium along with few other Japanese companies and one subsidiary company of the Japanese company. This consortium had entered into an agreement with an Indian company on January 19, 2001 for setting up a Liquefied Natural Gas (LNG) receiving, storage and degasification facility at Dahej in the State of Gujarat. A supplementary agreement was also entered by the parties on March 19, 2001. It was a turnkey project.

At the same time, role and responsibility of each member of the consortium was separately specified and each of the members of the consortium was to receive separate payments. Insofar as appellant-assessee is concerned, it was to develop, design, engineer and procure equipment, materials and supplies to reject and construct storage tanks of 5 MMTPA capacity, with potential expansion of 10MMTPA capacity at the specified temperature, i.e., 200 degree celsius.

The arrangement also included marine facilities (jetty and island breakwater) for transmission and supply of LNG to purchaser; to test and commission facilities relating to receipt and unloading, storage and regasification of LNG and to send out regasified LNG by means of a turnkey fixed lump sum price time certain engineering procurement, construction and commission contract.

The contract indisputably involved:

(i) offshore supply,

(ii) offshore services,

(iii) onshore supply,

(iv) onshore services and

(v) construction and erection.

The price was payable for offshore supply and offshore services in US dollars, whereas that of onshore supply as also onshore services and construction and erection partly in US dollars and partly in Indian rupees.

36. The High Court noted that while determining the tax liability of the said foreign company, this Court had taken into consideration Section 5(2), Section 9(1)(i) and Section 9(1)(vii) of the Act and considered the question of imposition of tax on income arising from a business connection of the assessee. Holding that income is not taxable in India, 34 the Court premised the conclusion, inter alia, on the ground that as per clause (a) of Explanation 1 to Section 9(1)(i) of the Act, only such part of income as is attributable to the operations carried out in India, is taxable in India and further that sufficient territorial nexus between the rendition of services and territorial limits of India is necessary to make the income taxable. As far as offshore supply and offshore services in US$ are concerned, it was done outside the territory of India and the payment was also made to the assessee (a foreign company) in US$ outside India, said payment was not taxable as it was not “income” arising from a business connection of the said assessee.

37. The High Court, after taking note of the aforesaid judgment, has held that it is not applicable in the instant case. Reason given is that in Ishikawajima-Harima Heavy Industries Ltd., the Court had dealt with the assessment of a non-resident company on its income as per the provisions of Sections 5 and 9 of the Act and these sections are not attracted in the instant case, as the same is governed by Section 44BB of the Act. This is the material distinction, in the opinion of the High Court, the manner in which the same is discussed needs to be reproduced.

Thus, we hereby quote the relevant portion of the said discussion: “…..Therefore, section 5 and section 9 both are aimed a the income for the taxability under section 4 of the Act, while section 44BB does not take into Account the income for calculating the aggregate amount t calculate 10 percent profit 35 and gains. Profit and gains is a type of income to be taxed under a legal fiction, i.e., @10 percent of the amount specified in sub-section (2) of section 44BB. Section 44BB is a special provision relating to non-resident assessee who is providing services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in or outside India.

The section is a complete code in itself. Thus, the reliance placed by Sri Porus Kaka, learned Counsel for the assessee, is misplaced as we have observed that the amount referred in sub-section (2) of Section 44BB are four types of amounts and all the four types of amounts are mutually inclusive and has to be taken into account either all of them or any of them and its clauses themselves provide that whether the payment is made inside India or outside India.

17.In the present case, a finding has been recorded by the ITAT that it was not in dispute before the Tribunal that the payment was made to the appellant company outside India and the mobilization fee as claimed by the assessee was paid to the appellant by ONGC has no nexus with the actual amount incurred by the appellant company for transportation of drilling units of rigs to the specified drilling locations in India.

Hence, the mobilization fee is not the reimbursement of expenditure. ONGC was liable to pay a fixed sum as stipulated in the contract regardless of actual expenditure which may be incurred by the assessee company for the purpose. In view of the fictional taxing provision contained under Section 44BB, the Assessing Officer was right in adding the amount of Rs. 99,04,000/- for the Assessment Year 1986-87 and amount worth Rs. 64,64,530/- for the Assessment Year 1987-88 received by the assessee towards mobilization charges for the purpose of imposing income tax and CIT (Appeals) and ITAT were also right in upholding the order of the Assessing Officer.”

38. We feel that High Court may not be entirely correct in law in excluding the provisions of Sections 5 and 9 in those cases where the assessment is opted by the assessee under Section 44BB of the Act. Submissions of learned counsel for the assessees are justified to the extent that Section 44BB of the Act is a special provision providing computation mechanism for computing profits and gains in case of 36 non-resident assessee engaged in activities relating to business of exploration of mineral oil etc. At the same time Sections 4,5 and 9 of the Act which deal with charging section, total income and income of non-resident which arises or deem to arise in India cannot be sidetracked.

These are the provisions which bring a particular income within the net of income tax. Therefore, it is imperative that a particular income is covered by the charging provisions contained in Section 5 of the Act. Indian Income Tax Act, admittedly, follows a territorial system of taxation. As per this system only that income of a non-resident is taxable in India which is attributable to operations within the Indian Territory. Therefore, in the first instance it is to be seen whether a particular income arises or accrues or deem to arise or accrue within India.


In order to seek this answer, the principles contained in Section 9 have to be applied only when it becomes an income taxable in India as per Section 9, in case of non-resident, the question of computation of the said income would arise. To recapitulate the scheme of the Act in this behalf, it may be stated that Section 4 is the charging section for levying a tax on the income of any person under the Act and provides that income-tax shall be levied at the rates provided by the Finance Act on the ‘total income’ of the previous year of every person. The expression ‘total income’ has been defined in Section 2(45) of the Act to mean the total amount of income referred to in Section 5 computed in the manner laid down under the Act.

39. The scope of the total income of any person, which could be subjected to tax under the provisions of the Act, is defined under Section 5 of the Act and dependent upon the residential status of the persons. Section 5(1) provides the scope of ‘total income’ in the case of residents, whereas Section 5(2) provides the scope of ‘total income’ in the case of non-residents. As per Section 5(2) of the Act, subject to the provisions of this Act, the ‘total income’ of any previous year of non-resident includes:

  • Income which is received or deemed to be received in India in such year or on behalf of such person; or
  • Income which ‘accrues or arises’ or is deemed to accrue or arise to him in India during such year.

40. Section 9 enumerates the income which is deemed to accrue or arise in India. There are two broad categories of taxability of income provided under this Section, i.e., Business Income and income from interest or royalty or fees for technical services (FTS).

41. Section 9(1)(i) provides that income is to be deemed to have accrued or arising in India if the income is accruing directly or indirectly through any business connection in India or from any property in India or from any asset or source of income in India or any capital asset situated 38 in India (referred as business income). Explanation 1(a) to Section 9(1)(i) of the Act provides an exclusion in the case of operations which are not carried out in India. The explanation provides that the income of the business deemed under this clause to accrue or arise in India shall be only that part of the income as is reasonably attributable to the operations carried out in India. Thus, business income earned by non-resident is chargeable to tax in India only to the extent reasonably attributable to the operations carried out in India.

42. It is, however, pertinent to point out that Section 44BB(2) makes certain receipts as “deemed income” for the purposes of taxation in the said provision. Therefore, aid of this provision is to be necessarily taken to determine whether a particular amount will be “income” within the meaning of Section 5 of the Act. Likewise, Section 44BB(2) also acts as guide to determine whether a particular income is attributed as income occurred in India. Section 44BB of the Act provides for special provision for computing profits and gains. However, that would not mean that if the income is to be computed under this provision, we have to give a go-by to Sections 5 and 9 of the Act. To this extent, remarks of the High Court may not be correct. Law in this behalf is settled by the judgment of this Court in A. Sanyasi Rao case as can be discerned from the following discussion in the said judgment.

“We are further of the view that the basis of a charge relating to income tax is laid down in Sections 4 to 9 of the Act. Section 4 is the charging section. Income-tax is levied in respect of the total income of the previous year of every person. Section 5 deals with the scope of total income. Section 6 deals with the residence in India. Section 7 deals with the income deemed to be received. Section 8 deals with dividend income. Section 9 deals with the income deemed to accrue or arise in India.

xxx xxx xxx

The crucial words in Section 9(1) to the effect that “all income accruing or arising , whether directly or indirectly, through or from any business connection” occurred in Section 42 of the Income Tax Act, 1922 as well. The said section came up for consideration before this Court in Anglo-French Textile Co. Ltd. v. CIT [(1953) 23 ITR 101…

xxx xxx xxx

The counsel for the revenue Dr. Gaurishankar vehemently contended before us that Section 44AC read with Section 206C are only machinery provisions and not charging sections. We see force in this plea. The charge for the levy of the income that accrued or arose is laid by the charging sections, viz., Sections 5 to 9 and not by virtue of Section 44AC or section 206C… xxx xxx xxx However, the denial of relief provided by sections 28 to 43C to the particular businesses or trades dealt with in Section 44AC calls for a different consideration. Even, according to the revenue, the provisions (sections 44AC and 206C) are only ‘machinery provisions’. If so, why should the normal reliefs afforded to all assessees be denied to such traders?

Prima facie, all assessees similarly placed under the Income Tax Act are entitled to equal treatment. In the matter of granting various reliefs provided under sections 28 to 43C, the assessees carrying on business are similarly placed and should there be a law, negativing such valuable reliefs to a particular trade or business, it should be shown to have some basis and fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in section 44AC are denied the reliefs available to others. No plea is put forward by the revenue that these trades are distinct and different even for the grant of reliefs under 40 Sections 28 to 43C. The denial of such reliefs to trades specified in section 44AC, available to other assessees, has no nexus to the object sought to be achieved by the Legislature.

(emphasis supplied)”

43. Having corrected the position in law, by emphasising that Sections 4, 5 and 9 of the Act are to be kept in mind even in those cases where assessment is done under Section 44BB of the Act, we are of the opinion that the argument of the assessees that Section 44BB is only a computation provision, is also not entirely justified.

44. In the first blush, assessees may appear to be correct in their contentions that Section 44BB falls in Chapter IV of the Act. Insofar as computation of income from ‘Profits or Gains of Business or Profession’ is concerned, it has to be computed as per the provisions of Sections 28 to 43D(2). However, certain provisions are made for providing special mechanism for computing the income on presumptive basis in case of non-resident and it includes Section 44BB as well.

45. Having put the law in prospective, we need to examine as to whether mobilisation charges received by the assessees can be treated as ‘income’ under Section 5 of the Act and would fall within the four corners of Section 9, namely, whether it can be attributed as having arisen or deemed to arise in India. Argument of the learned counsel appearing for the assessees is that the amount was received by way of reimbursement of expenses for the operation carried outside India and the payment was also received outside India. It is on this premise, entire edifice is built to argue that it is not an “income” and, in any case, not taxable in India at the hands of the assessees which are foreign entities.

46. We have already reproduced above Clause 3.2 of the Agreement dated September 3, 1985 and Clause 4.2 of the Agreement dated July 12, 1986. Clause 3.2 of the Agreement dated September 3, 1985 pertains to providing the Shallow Dash Water Jack Up Rig against which payment was made to the assessees. This Clause says that the assessees shall be paid ‘mobilisation fee’ for the mobilisation of drilling unit from its present location in Portugal to the well location designated by ONGC, offshore Mumbai, India. Fixed amount is agreed to be paid which is mentioned in the said Clause.

The aforesaid mobilisation fee was payable to the assessees after the jacking up of the drilling at the designated location and ready to spud the well. After the aforesaid operation, assessees were required to raise invoice and ONGC was supposed to make the payment within 30 days of the receipt of this invoice. Insofar as Clause 4.2 of Agreement dated July 12, 1986 is concerned, it related to mobilisation of drilling unit. Here again, ‘mobilisation fee’ was payable for the mobilisation of the drilling unit from the place of its origin to the port of entry (Kandla Port, Mumbai).

What follows from the above is that a fixed amount of mobilisation fee was  payable under the aforesaid contracts as “compensation”. Contracts specifically describe the aforesaid amounts as ‘fee’. In this hue, we have to consider as to whether it would be treated as “income” under Section 5 of the Act and can be attributed as income earned in India as per Section 9 of the Act. For this purpose, Section 44BB(2) has to be invoked.

47. Section 44BB starts with non-obstante clause, and the formula contained therein for computation of income is to be applied irrespective of the provisions of Sections 28 to 41 and Sections 43 and 43A of the Act. It is not in dispute that assessees were assessed under the said provision which is applicable in the instant case. For assessment under this provision, a sum equal to 10% of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘profits and gains of the business or profession’.

Sub-section (2) mentions two kinds of amounts which shall be deemed as profits and gains of the business chargeable to tax in India. Sub-clause (a) thereof relates to amount paid or payable to the assessee or any person on his behalf on account of provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used in the prospecting for, or extraction or production of, mineral oils in India. Thus, all amounts pertaining to the aforesaid activity which are received on account of 43 provisions of services and facilities in connection with the said facility are treated as profits and gains of the business.

This clause clarifies that the amount so paid shall be taxable whether these are received in India or outside India. Clause (b) deals with amount received or deemed to be received in India in connection with such services and facilities as stipulated therein. Thus, whereas clause (a) mentions the amount which is paid or payable, clause (b) deals with the amounts which are received or deemed to be received in India. In respect of amount paid or payable under clause (a) of sub-section (2), it is immaterial whether these are paid in India or outside India. On the other hand, amount received or deemed to be received have to be in India.

48. From the bare reading of the clauses, amount paid under the aforesaid contracts as mobilisation fee on account of provision of services and facilities in connection with the extraction etc. of mineral oil in India and against the supply of plant and machinery on hire used for such extraction, clause (a) stands attracted.

 

Thus, this provision contained in Section 44BB has to be read in conjunction with Sections 5 and 9 of the Act and Sections 5 and 9 of the Act cannot be read in isolation. The aforesaid amount paid to the assessees as mobilisation fee is treated as profits and gains of business and, therefore, it would be “income” as per Section 5. This provision also treats this income as earned in India, fictionally, thereby satisfying the test of Section 9 of the 44 Act as well.

49. The Tribunal has rightly commented that Section 44BB of the Act is a special provision for computing profits and gains in connection with the business of exploration of mineral oils. Its purpose was explained by the Department vide its Circular No. 495 dated September 22, 1987, namely, to simplify the computation of taxable income as number of complications were involved for those engaged in the business of providing services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral etc.

Instead of going into the nitigrities of such computation as per the normal provisions contained in Sections 28 to 41 and Sections 43 and 43A of the Act, the Legislature has simplified the procedure by providing that tax shall be paid @10% of the ‘aggregate of the amounts specified in sub-section (2)’ and those amounts are ‘deemed to be the profits and gains of such business chargeable to tax…’.

It is a matter of record that when income is computed under the head ‘profits and gains of business or profession’, rate of tax payable on the said income is much higher. However, the Legislature provided a simple formula, namely, treating the amounts paid or payable (whether in or out of India) and amount received or deemed to be received in India as mentioned in sub-section (2) of Section 44BB as the deemed profits and gains.

Thereafter, on such deemed profits and gains (treating the same as income), a concessional flat rate of 10% is charged to tax. In these circumstances, the AO is supposed to apply the provisions of Section 44BB of the Act, in order to find out as to whether a particular amount is deemed income or not. When it is found that the amount paid or payable (whether in or out of India), or amount received or deemed to be received in India is covered by sub-section (2) of Section 44BB of the Act, by fiction created under Section 44BB of the Act, it becomes ‘income’ under Sections 5 and 9 of the Act as well.

50. It is stated at the cost of repetition that, in the instant case, the amount which is paid to the assessees is towards mobilisation fee. It does not mention that the same is for reimbursement of expenses. In fact, it is a fixed amount paid which may be less or more than the expenses incurred. Incurring of expenses, therefore, would be immaterial. It is also to be borne in mind that the contract in question was indivisible.

Having regard to these facts in the present case as per which the case of the assessees get covered under the aforesaid provisions, we do not find any merit in any of the contentions raised by the assessees. Therefore, the ultimate conclusion drawn by the AO, which is upheld by all other Authorities is correct, though some of the observations of the High Court may not be entirely correct which have been straightened by us in the above discussion. For our aforesaid reasons, we uphold the conclusion. Resultantly, all the appeals of the 46 assessees are dismissed.

51. In this batch of appeals, Civil Appeal No. 3695 of 2012 is the solitary appeal which is preferred by the Director of Income Tax, New Delhi (Revenue) against the judgment of the High Court of Uttarakhand. The computation of income of the assessee was done under Section 44BB of the Act. However, the amount which was sought to be taxed was reimbursement of cost of tools lost in hole by ONGC. It is, thus, clear that this was not the amount which was covered by sub-section (2) of Section 44BB of the Act as ONGC had lost certain tools belonging to the assessee, and had compensated for the said loss by paying the amount in question. On these facts, conclusion of the High Court is correct. Even otherwise, the tax effect is Rs.15,12,344/-. Therefore, filed by the Revenue is dismissed.

NEW DELHI;

OCTOBER 30, 2017


*[Civil Appeal No. 2166 of 2012] [Civil Appeal No. 17388 of 2017 arising out of SLP (C) No. 2955 of 2012] [Civil Appeal No. 4908 of 2010] [Civil Appeal No. 2631 of 2013] [Civil Appeal No. 4910 of 2010] [Civil Appeal No. 4911 of 2010] [Civil Appeal No. 4907 of 2010] [Civil Appeal No. 4913 of 2010] [Civil Appeal No. 4543 of 2013] [Civil Appeal No. 5005 of 2014] [Civil Appeal No. 17389 of 2017 arising out of SLP (C) No. 11560 of 2014] [Civil Appeal No. 4920 of 2010] [Civil Appeal No. 4919 of 2010] [Civil Appeal No. 4921 of 2010] [Civil Appeal No. 4916 of 2010] [Civil Appeal No. 4918 of 2010] [Civil Appeal No. 4917 of 2010] [Civil Appeal No. 5015 of 2015] [Civil Appeal No. 4925 of 2010] [Civil Appeal No. 4924 of 2010] [Civil Appeal No. 4922 of 2010] [Civil Appeal No. 5437 of 2016] [Civil Appeal No. 5154 of 2011] [Civil Appeal No. 5152 of 2011] [Civil Appeal No. 5153 of 2011] [Civil Appeal No. 5089 of 2015] [Civil Appeal No. 5090 of 2015] [Civil Appeal No. 4923 of 2010] [Civil Appeal No. 8627 of 2013] [Civil Appeal No. 5155 of 2011] [Civil Appeal No. 6573 of 2014] [Civil Appeal No. 4909 of 2010] [Civil Appeal No. 5935 of 2010] [Civil Appeal No. 5934 of 2010] [Civil Appeal No. 6651 of 2014] [Civil Appeal No. 17390 of 2017 arising out of SLP (C) No. 20000 of 2015] [Civil Appeal No. 17391 of 2017 arising out of SLP (C) No. 22343 of 2012] [Civil Appeal No. 17392 of 2017 arising out of SLP (C) No. 22833 of 2012] [Civil Appeal No. 4914 of 2010] [Civil Appeal No. 4915 of 2010] [Civil Appeal No. 8595 of 2010] [Civil Appeal No. 9188 of 2013] [Civil Appeal No. 8665 of 2013] [Civil Appeal No. 10294 of 2016] [Civil Appeal No. 10295 of 2016] [Civil Appeal No. 10296 of 2016] [Civil Appeal No. 4926 of 2010] [Civil Appeal No. 267 of 2013] [Civil Appeal No. 268 of 2013] [Civil Appeal No. 17393 of 2017 arising out of SLP (C) No. 39683 of 2013]

[Civil Appeal No. 3695 of 2012] [Civil Appeal No. 435 of 2017] [Civil Appeal No. 10382 of 2017] [Civil Appeal No. 10385 of 2017] [Civil Appeal No. 10383 of 2017] [Civil Appeal No. 10384 of 2017] [Civil Appeal No. 10386 of 2017] [Civil Appeal No. 17394 of 2017 arising out of SLP (C) No. 21939 of 2017] [Civil Appeal No. 12365 of 2017] [Civil Appeal No. 12366 of 2017]

Direct Tax Made easy

CODE OF CRIMINAL PROCEDURE (2)

Direct Tax Laws
  1. Black Money (Undisclosed Foreign Income and Assets) Imposition of Tax Act, 2015
  2. Central Duties of Exercise (Retrospective Exemption) Act, 1986
  3. Direct Tax Laws (Miscellaneous) Repeal Act, 2000
  4. Expenditure Tax Act,1987
  5. Finance Act,2013
  6. Income Tax Act,1961
  7. Interest Tax Act,1974
  8. National Tax Tribunal Act,2005
  9. Undisclosed Foreign Income and Assets (Imposition of Tax) Act,2015
  10. Wealth Tax Act,195

INDIA US DOUBLE TAXATION AVOIDANCE TREATY

54.

Agreement for avoidance of double taxation of income with USA Whereas the annexed Convention between the Government of the United States of America and the Government of the Republic of India for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income has entered into force on the 18th December, 1990 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 of the said Convention in accordance with paragraph 1 of Article 30 of the said Convention ;
Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961) and section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1964), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.
Further in exercise of the powers conferred by section 44A(b) of the Wealth-tax Act, 1957 (27 of 1957) and section 44(b) of the Gift-tax Act, 1958 (18 of 1958), the Central Government also directs that the provisions of Article 28 of the said Convention shall be given effect to in the Union of India.


Notification: No. GSR 990(E), dated 20-12-1990.


ANNEXURE

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF INDIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

The Government of the United States of America and the Government of the Republic of India, desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows :

ARTICLE 1 – General Scope – 1. This Convention shall apply to persons who are residents of one or both of the Contracting States, except as otherwise provided in the Convention.

2. The Convention shall not restrict in any manner any exclusion, exemption, deduction,
credit, or other allowance now or hereafter accorded:
(a) by the laws of either Contracting State ; or
(b) by any other agreement between the Contracting States.

3. Notwithstanding any provision of the Convention except paragraph 4,
a Contracting State may tax its residents [as determined under Article 4 (Residence)], and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

4. The provisions of paragraph 3 shall not affect—
(a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), under paragraphs 2 and 6 of Article 20 (Private Pensions, Annuities, Alimony, and Child Support), and under Articles 25 (Relief from Double Taxation), 26 (Non-Discrimination), and 27 (Mutual Agreement Procedure) ; and
(b) the benefits conferred by a Contracting State under Articles 19 (Remuneration and
Pensions in respect of Government Service), 21 (Payment received by Students and
Apprentices), 22 (Payments received by Professors, Teachers and Research Scholars)
and 29 (Diplomatic Agents and Consular Officers), upon individuals who are neither
citizens of, nor have immigrant status in, that State.

ARTICLE 2 – Taxes covered – 1. The existing taxes to which this Convention shall apply are :
(a) in the United States, the Federal income taxes imposed by the Internal Revenue Code
(but excluding the accumulated earnings tax, the personal holding company tax, and
social security taxes), and the exercise taxes imposed on insurance premiums paid to
foreign insurers and with respect to private foundations (hereinafter referred to as
“United States Tax”); provided, however, the Convention shall apply to the exercise
taxes imposed on insurance premiums paid to foreign insurers only to the extent that the
risks covered by such premiums are not reinsured with a person not entitled to
exemption from such taxes under this or any other Convention which applies to these
taxes ; and
(b) in India :
(i) the income-tax including any surcharge thereon, but excluding income-tax on
undistributed income of companies, imposed under the Income-tax Act ; and
(ii) the surtax
(hereinafter referred to as “Indian tax”).
Taxes referred to in (a) and (b) above shall not include any amount payable in respect of any
default or omission in relation to the above taxes or which represent a penalty imposed
relating to those taxes.
2. The Convention shall apply also to any identical or substantially similar taxes which are
imposed after the date of signature of the Convention in addition to, or in place of, the
existing taxes. The competent authorities of the Contracting States shall notify each other of
any significant changes which have been made in their respective taxation laws and of any
official published material concerning the application of the Convention.

ARTICLE 3 – General definitions – 1. In this Convention, unless the context otherwise
requires:
(a) the term “India” means the territory of India and includes the territorial sea and air space above it, as well as any other maritime zone in which India has sovereign rights,other rights and jurisdictions, according to the Indian law and in accordance with international law ;

(b) the term “United States”, when used in a geographical sense means all the territory of the United States of America, including its territorial sea, in which the laws relating to United States tax are in force, and all the area beyond its territorial sea, including the sea bed and subsoil thereof, over which the United States has jurisdiction in accordance with international law and in which the laws relating to United States tax are in force ;

(c) the terms “a Contracting State” and “the other Contracting State” mean India or the
United States as the context requires ;
(d) the term “tax” means Indian tax or United States tax, as the context requires ;
(e) the term “person” includes an individual, an estate, a trust, a partnership, a company,
any other body of persons, or other taxable entity ;
(f) the term “company” means any body corporate or any entity which is treated as a
company or body corporate for tax purposes ;
(g) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting
State” mean respectively an enterprise carried on by a resident of a Contracting State
and an enterprise carried on by a resident of the other Contracting State ;

(h) the term “competent authority” means, in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative, and in the case of the United States, the Secretary of the Treasury or his delegate ;

(i) the term “national” means any individual possessing the nationality or citizenship of a
Contracting State ;
(j) the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely
between places within the other Contracting State ;
(k) the term “taxable year” in relation to Indian tax means “previous year” as defined in the Income-tax Act, 1961.
2. As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a common meaning pursuant to the provisions of Article 27 (Mutual Agreement Procedure), have the meaning which it has under the laws of that State concerning the taxes to which the Convention applies.

ARTICLE 4 – Residence – 1. For the purposes of this Convention, the term “resident of a
Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of
incorporation, or any other criterion of a similar nature, provided, however, that
(a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and
(b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries.
(2) Where by reason of the provisions of paragraph 1, an individual is a resident of both
Contracting States, then his status shall be determined as follows :
(a) he shall be deemed to be a resident of the State in which he has a permanent home
available to him; if he has a permanent home available to him in both States, he shall be
deemed to be a resident of the State with which his personal and economic relations are
closer (centre of vital interests) ;
(b) if the State in which he has his centre of vital interests cannot be determined, or if he
does not have a permanent home available to him in either State, he shall be deemed to
be a resident of the State in which he has an habitual abode ;
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;
(d) if he is a national of both States or of neither of them, the competent authorities of the
Contracting States shall settle the question by mutual agreement.

3. Where, by reason of paragraph 1, a company is a resident of both Contracting States, such company shall be considered to be outside the scope of this Convention except for purposes of paragraph 2 of Article 10 (Dividends), Article 26 (Non-Discrimination), Article 27 (Mutual Agreement Procedure), Article 28 (Exchange of Information and Administrative Assistance) and Article 30 (Entry into Force).

4. Where, by reason of the provisions of paragraph 1, a person other than an individual or a company is a resident of both Contracting States, the competent authorities of the Contracting States shall settle the question by mutual agreement and determine the mode of application of the Convention to such person.

ARTICLE 5 – Permanent establishment – 1. For the purposes of this Convention, the term
“permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
2. The term “permanent establishment” includes especially :
(a) a place of management ;
(b) a branch ;
(c) an office ;
(d) a factory ;
(e) a workshop ;
(f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural
resources ;
(g) a warehouse, in relation to a person providing storage facilities for others ;
(h) a farm, plantation or other place where agriculture, forestry, plantation or related
activities are carried on ;
(i) a store or premises used as a sales outlet ;
(j) an installation or structure used for the exploration or exploitation of natural resources,
but only if so used for a period of more than 120 days in any twelve-month period ;
(k) a building site or construction, installation or assembly project or supervisory activities
in connection therewith, where such site, project or activities (together with other such
sites, projects or activities, if any) continue for a period of more than 120 days in any
twelve-month period ;
(l) the furnishing of services, other than included services as defined in Article 12
(Royalties and Fees for Included Services), within a Contracting State by an enterprise
through employees or other personnel, but only if:
(i) activities of that nature continue within that State for a period or periods
aggregating more than 90 days within any twelve-month period ; or
(ii) the services are performed within that State for a related enterprise [within the
meaning of paragraph 1 of Article 9 (Associated Enterprises)].
3. Notwithstanding the preceding provisions of this Article, the term “permanent
establishment” shall be deemed not to include any one or more of the following :
(a) the use of facilities solely for the purpose of storage, display, or occasional delivery of
goods or merchandise belonging to the enterprise ;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage, display, or occasional delivery ;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise ;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods
or merchandise, or of collecting information, for the enterprise ;
(e) the maintenance of a fixed place of business solely for the purpose of advertising, for
the supply of information, for scientific research or for other activities which have a
preparatory or auxiliary character, for the enterprise.
4. Notwithstanding the provisions of paragraphs 1 and 2, where a person—other than an
agent of an independent status to whom paragraph 5 applies – is acting in a Contracting State
on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to
have a permanent establishment in the first-mentioned State, if :
(a) he has and habitually exercises in the first-mentioned State an authority to conclude on
behalf of the enterprise, unless his activities are limited to those mentioned in paragraph
3 which, if exercised through a fixed place of business, would not make that fixed place
of business a permanent establishment under the provisions of that paragraph ;
(b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise ; or
(c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise.

5. An enterprise of a Contracting State shall not be deemed to have a permanent
establishment in the other Contracting State merely because it carries on business in that
other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.
6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

ARTICLE 6 – Income from immovable property (real property) – 1. Income derived by a
resident of a Contracting State from immovable property (real property), including income from agriculture or forestry, situated in the other Contracting State may be taxed in that other State.
2. The term “immovable property” shall have the meaning which it has under the law of the
Contracting State in which the property in question is situated.
3. The provisions of paragraph 1 shall also apply to income derived from the direct use,
letting, or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable
property of an enterprise and to income from immovable property used for the performance
of independent personal services.

ARTICLE 7 – Business profits – 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business
as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of
them as is attributable to (a) that permanent establishment ; (b) sales in the other State of
goods or merchandise of the same or similar kind as those sold through that permanent
establishment ; or (c) other business activities carried on in the other State of the same or
similar kind as those effected through that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries
on business in the other Contracting State through a permanent establishment situated therein,
there shall in each Contracting State be attributed to that permanent establishment the profits
which it might be expected to make if it were a distinct and independent enterprise engaged
in the same or similar activities under the same or similar conditions and dealing wholly at
arm’s length with the enterprise of which it is a permanent establishment and other
enterprises controlling, controlled by or subject to the same common control as that
enterprise. In any case where the correct amount of profits attributable to a permanent
establishment is incapable of determination or the determination thereof presents exceptional
difficulties, the profits attributable to the permanent establishment may be estimated on a
reasonable basis. The estimate adopted shall, however, be such that the result shall be in
accordance with the principles contained in this Article.
3. In the determination of the profits of a permanent establishment, there shall be allowed as
deductions expenses which are incurred for the purposes of the business of the permanent
establishment, including a reasonable allocation of executive and general administrative
expenses, research and development expenses, interest, and other expenses incurred for the
purposes of the enterprise as a whole (or the part thereof which includes the permanent
establishment), whether incurred in the State in which the permanent establishment is situated
or elsewhere, in accordance with the provisions of and subject to the limitations of the
taxation laws of that State. However, no such deduction shall be allowed in respect of
amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the
permanent establishment to the head office of the enterprise or any of its other offices, by
way of royalties, fees or other similar payments in return for the use of patents, know-how or
other rights, or by way of commission or other charges for specific services performed or for
management, or, except in the case of a banking enterprises, by way of interest on moneys
lent to the permanent establishment. Likewise, no account shall be taken, in the determination
of the profits of a permanent establishment, for amounts charged (otherwise than toward
reimbursement of actual expenses), by the permanent establishment to the head office of the
enterprise or any of its other offices, by way of royalties, fees or other similar payments in
return for the use of patents, know-how or other rights, or by way of commission or other
charges for specific services performed or for management, or, except in the case of a
banking enterprise, by way of interest on moneys lent to the head office of the enterprise or
any of its other offices.
4. No profits shall be attributed to a permanent establishment by reason of the mere purchase
by that permanent establishment of goods or merchandise for the enterprise.
5. For the purposes of this Convention, the profits to be attributed to the permanent
establishment as provided in paragraph 1(a) of this Article shall include only the profits
derived from the assets and activities of the permanent establishment and shall be determined
by the same method year by year unless there is good and sufficient reason to the contrary.
6. Where profits include items of income which are dealt with separately in other Articles of
the Convention, then the provisions of those Articles shall not be affected by the provisions
of this Article.
7. For the purposes of the Convention, the term “business profits” means income derived
from any trade or business including income from the furnishing of services other than
included services as defined in Article 12 (Royalties and Fees for Included Services) and
including income from the rental of tangible personal property other than property described
in paragraph 3(b) of Article 12 (Royalties and Fees for Included Services).

ARTICLE 8 – Shipping and air transport – 1. Profits derived by an enterprise of a
Contracting State from the operation by that enterprise of ships or aircraft in international traffic shall be taxable only in that State.
2. For the purposes of this Article, profits from the operation of ships or aircraft in
international traffic shall mean profits derived by an enterprise described in paragraph 1 from  the transportation by sea or air respectively of passengers, mail, livestock or goods carried on
by the owners or lessees or charterers of ships or aircraft including—
(a) the sale of tickets for such transportation on behalf of other enterprises;
(b) other activity directly connected with such transportation ; and
(c) the rental of ships or aircraft incidental to any activity directly connected with such
transportation.
3. Profits of an enterprise of a Contracting State described in paragraph 1 from the use,
maintenance, or rental of containers (including trailers, barges, and related equipment for the
transport of containers) used in connection with the operation of ships or aircraft in
international traffic shall be taxable only in that State.
4. The provisions of paragraphs 1 and 3 shall also apply to profits from participation in a
pool, a joint business, or an international operating agency.
5. For the purposes of this Article, interest on funds connected with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft, and the provisions of Article 11 (Interest) shall not apply in relation to such interest.
6. Gains derived by an enterprise of a Contracting State described in paragraph 1 from the alienation of ships, aircraft or containers owned and operated by the enterprise, the income from which is taxable only in that State, shall be taxed only in that State.

ARTICLE 9 – Associated enterprises – 1. Where :
(a) an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State ; or
(b) the same persons participate directly or indirectly in the management, control, or capital
of an enterprise of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their
commercial or financial relations which differ from those which would be made between
independent enterprises, then any profits which, but for those conditions would have accrued
to one of the enterprises, but by reason of those conditions have not so accrued, may be
included in the profits of that enterprise and taxed accordingly.
2. Where a Contracting State includes in the profits of an enterprise of that State, and taxes accordingly, profits on which an enterprise of the other Contracting State has been charged to tax in that other State, and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall, if necessary, consult each other.

ARTICLE 10 – Dividends – 1. Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the company
paying the dividends is a resident, and according to the laws of that State, but if the beneficial
owner of the dividends is a resident of the other Contracting State, the tax so charged shall
not exceed :
(a) 15 per cent of the gross amount of the dividends if the beneficial owner is a company
which owns at least 10 per cent of the voting stock of the company paying the dividends.
(b) 25 per cent of the gross amount of the dividends in all other cases.
Sub-paragraph (b) and not sub-paragraph (a) shall apply in the case of dividends paid by a
United States person which is a Regulated Investment Company. Sub-paragraph (a) shall not
apply to dividends paid by a United States person which is a Real Estate Investment Trust,
and sub-paragraph (b) shall only apply if the dividend is beneficially owned by an individual
holding a less than 10 per cent interest in the Real Estate Investment Trust. This paragraph
shall not affect the taxation of the company in respect of the profits out of which the
dividends are paid.
3. The term “dividends” as used in this Article means income from shares or other rights, not
being debt-claims, participating in profits, income from other corporate rights which are
subjected to the same taxation treatment as income from shares by the taxation laws of the
State of which the company making the distribution is a resident ; and income from
arrangements, including debt obligations, carrying the right to participate in profits, to the
extent so characterised under the laws of the Contracting State in which the income arises.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the
dividends, being a resident of a Contracting State, carries on business in the other Contracting
State, of which the company paying the dividends is a resident, through a permanent
establishment situated therein, or performs in that other State independent personal services
from a fixed base situated therein, and the dividends are attributable to such permanent
establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or
Article 15 (Independent Personal Services), as the case may be, shall apply.
5. Where a company which is a resident of a Contracting State derives profits or income from
the other Contracting State, that other State may not impose any tax on the dividends paid by
the company except insofar as such dividends are paid to a resident of that other State or
insofar as the holding in respect of which the dividends are paid is effectively connected with
a permanent establishment or a fixed base situated in that other State, nor subject the
company’s undistributed profits to a tax on the company’s undistributed profits, even if the
dividends paid or the undistributed profits consist wholly or partly of profits or income
arising in such other State.

ARTICLE 11 – Interest – 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of
the other Contracting State, the tax so charged shall not exceed :
(a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution
(including an insurance company) ; and
(b) 15 per cent of the gross amount of the interest in all other cases.
3. Notwithstanding the provisions of paragraph 2 of this Article, interest arising in a
Contracting State :
(a) and derived and beneficially owned by the Government of the other Contracting State, a
political sub-division or local authority thereof, the Reserve Bank of India, or the
Federal Reserve Bank of the United States, as the case may be, and such other
institutions of either Contracting State as the competent authorities may agree pursuant
to Article 27 (Mutual Agreement Procedure) ;
(b) with respect to loans or credits extended or endorsed
(i) by the Export Import Bank of the United States, when India is the first-mentioned
Contracting State ; and
(ii) by the EXIM Bank of India, when the United States is the first-mentioned
Contracting State ; and
(c) to the extent approved by the Government of that State, and derived and beneficially
owned by any person, other than a person referred to in sub-paragraphs (a) and (b), who
is a resident of the other Contracting State, provided that the transaction giving rise to
the debt-claim has been approved in this behalf by the Government of the firstmentioned
Contracting State ;
shall be exempt from tax in the first-mentioned Contracting State.
4. The term “interest” as used in this Convention means income from debt-claims of every
kind, whether or not secured by mortgage, and whether or not carrying a right to participate
in the debtor’s profits, and in particular, income from Government securities, and income
from bonds or debentures, including premiums or prizes attaching to such securities, bonds,
or debentures. Penalty charges for late payment shall not be regarded as interest for the
purposes of the Convention. However, the term “interest” does not include income dealt with
in Article 10 (Dividends).
5. The provisions of paragraphs 2 and 3 shall not apply if the beneficial owner of the interest,
being a resident of a Contracting State, carries on business in the other Contracting State in
which the interest arises, through a permanent establishment situated therein, or performs in
that other State independent personal services from a fixed base situated therein, and the
interest is attributable to such permanent establishment or fixed base. In such case the
provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as
the case may be, shall apply.
6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself or
a political sub-division, local authority, or resident of that State. Where, however, the person
paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting
State a permanent establishment or a fixed base, and such interest is borne by such permanent
establishment or fixed base, then such interest shall be deemed to arise in the Contracting
State in which the permanent establishment or fixed base is situated.
7. Where, by reason of a special relationship between the payer and the beneficial owner or
between both of them and some other person, the amount of the interest, having regard to the
debt-claim for which it is paid, exceeds the amount which would have been agreed upon by
the payer and the beneficial owner in the absence of such relationship, the provisions of this
Article shall apply only to the last-mentioned amount. In such case the excess part of the
payments shall remain taxable according to the laws of each Contracting State, due regard
being had to the other provisions of the Convention.
ARTICLE 12 – Royalties and fees for included services – 1. Royalties and fees for included
services arising in a Contracting State and paid to a resident of the other Contracting State
may be taxed in that other State.
2. However, such royalties and fees for included services may also be taxed in the
Contracting State in which they arise and according to the laws of that State; but if the
beneficial owner of the royalties or fees for included services is a resident of the other
Contracting State, the tax so charged shall not exceed :
(a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for
included services as defined in this Article [other than services described in subparagraph
(b) of this paragraph] :
(i) during the first five taxable years for which this Convention has effect,
(a) 15 per cent of the gross amount of the royalties or fees for included services
as defined in this Article, where the payer of the royalties or fees is the
Government of that Contracting State, a political sub-division or a public
sector company ; and
(b) 20 per cent of the gross amount of the royalties or fees for included services in
all other cases ; and
(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for
included services ; and
(b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for
included services as defined in this Article that are ancillary and subsidiary to the
enjoyment of the property for which payment is received under paragraph 3(b) of this
Article, 10 per cent of the gross amount of the royalties or fees for included services.
3. The term “royalties” as used in this Article means :
(a) payments of any kind received as a consideration for the use of, or the right to use, any
copyright or 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, trade mark, 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 ; and
(b) payments of any kind received as consideration for the use of, or the right to use, any
industrial, commercial, or scientific equipment, other than payments derived by an
enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from
activities described in paragraph 2(c) or 3 of Article 8.
4. For 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 paragraph 3 is received ; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or
consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding paragraph 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 paragraph 3(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 educational institutions ;
(d) for services for the personal use of the individual or individuals making the payments ;
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).
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties
or fees for included services, being a resident of a Contracting State, carries on business in
the other Contracting State, in which the royalties or fees for included services arise, through
a permanent establishment situated therein, or performs in that other State independent
personal services from a fixed base situated therein, and the royalties or fees for included
services are attributable to such permanent establishment or fixed base. In such case the
provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as
the case may be shall apply.
7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State
when the payer is that State itself, a political sub-division, a local authority, or a resident of
that State. Where, however, the person paying the royalties or fees for included services,
whether he is a resident of a Contracting State or not, has in a Contracting State a permanent
establishment or a fixed base in connection with which the liability to pay the royalties or
fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included
services shall be deemed to arise in the Contracting State in which the permanent
establishment or fixed base is situated.
(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one
of the Contracting States, and the royalties relate to the use of, or the right to use, the right or
property, or the fees for included services relate to services performed, in one of the
Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.
8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included
services paid exceeds the amount which would have been paid in the absence of such
relationship, the provisions of this Article shall apply only to the last-mentioned amount. In
such case, the excess part of the payments shall remain taxable according to the laws of each
Contracting State, due regard being had to the other provisions of the Convention.
ARTICLE 13 – Gains – Except as provided in Article 8 (Shipping and Air Transport) of this
Convention, each Contracting State may tax capital gains in accordance with the provisions
of its domestic law.
ARTICLE 14 – Permanent establishment tax – 1. A company which is a resident of India may
be subject in the United States to a tax in addition to the tax allowable under the other
provisions of this Convention.
(a) Such tax, however, may be imposed only on :
(i) the portion of the business profits of the company subject to tax in the United
States which represents the dividend equivalent amount ; and
(ii) the excess, if any, of interest deductible in the United States in computing the
profits of the company that are subject to tax in the United States and either
attributable to a permanent establishment in the United States or subject to tax in
the United States under Article 6 [Income from Immovable Property (Real
Property)], Article 12 (Royalties and Fees for Included Services) as fees for
included services, or Article 13 (Gains) of this Convention over the interest paid by
or from the permanent establishment or trade or business in the United States.
(b) For purpose of this Article, business profits means profits that are effectively connected
(or treated as effectively connected) with the conduct of a trade or a business within the
United States and are either attributable to a permanent establishment in the United
States or subject to tax in the United States under Article 6 [Income from Immovable
Property (Real Property)], Article 12 (Royalties and Fees for Included Services) as fees
for included services or Article 13 (Gains) of this Convention.
(c) The tax referred to in sub-paragraph (a) shall not be imposed at a rate exceeding :
(i) the rate specified in paragraph 2(a) of Article 10 (Dividends) for the tax described
in sub-paragraph (a)(i) ; and
(ii) the rate specified in paragraph 2(a) or (b) (whichever is appropriate) or Article 11
(Interest) for the tax described in sub-paragraph (a)(ii).
2. A company which is a resident of the United States may be subject to tax in India at a rate
higher than that applicable to the domestic companies. The difference in the tax rate shall not,
however, exceed the existing difference of 15 percentage points.
3. In the case of a banking company which is a resident of the United States, the interest paid
by the permanent establishment of such a company in India to the head office may be subject
in India to a tax in addition to the tax imposable under the other provisions of this Convention
at a rate which shall not exceed the rate specified in paragraph 2(a) of Article 11 (Interest).
ARTICLE 15 – Independent personal services – 1. Income derived by a person who is an
individual or firm of individuals (other than a company) who is a resident of a Contracting
State from the performance in the other Contracting State of professional services or other
independent activities of a similar character shall be taxable only in the first-mentioned State
except in the following circumstances when such income may also be taxed in the other
Contracting State :
(a) if such person has a fixed base regularly available to him in the other Contracting State
for the purpose of performing his activities; in that case, only so much of the income as
is attributable to that fixed base may be taxed in that other State; or
(b) if the person’s stay in the other Contracting State is for a period or periods amounting to
or exceeding in the aggregate 90 days in the relevant taxable year.
2. The term “professional services” includes independent scientific, literary, artistic,
educational or teaching activities as well as the independent activities of physicians,
surgeons, lawyers, engineers, architects, dentists and accountants.
ARTICLE 16 – Dependent personal services – 1. Subject to the provisions of Articles 17
(Directors’ Fees), 18 (Income Earned by Entertainers and Athletes), 19 (Remuneration and
Pensions in respect of Government Service), 20 (Private Pensions, Annuities, Alimony and
Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments
received by Professors, Teachers and Research Scholars), salaries, wages and other similar
remuneration derived by a resident of a Contracting State in respect of an employment shall
be taxable only in that State unless the employment is exercised in the other Contracting
State. If the employment is so exercised, such remuneration as is derived therefrom may be
taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a
Contracting State in respect of an employment exercised in the other Contracting State shall
be taxable only in the first-mentioned State, if :
(a) the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 days in the relevant taxable year ;
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the
other State ; and
(c) the remuneration is not borne by a permanent establishment or a fixed base or a trade or
business which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect
of an employment exercised aboard a ship or aircraft operating in international traffic by an
enterprise of a Contracting State may be taxed in that State.
ARTICLE 17 – Directors’ fees – Directors’ fees and similar payments derived by a resident of
a Contracting State in his capacity as a member of the board of directors of a company which
is a resident of the other Contracting State may be taxed in that other State.
ARTICLE 18 – Income earned by entertainers and athletes – 1. Notwithstanding the
provisions of Articles 15 (Independent Personal Services) and 16 (Dependent Personal
Services), income derived by a resident of a Contracting State as an entertainer, such as a
theatre, motion picture, radio or television artiste, or a musician, or as an athlete, from his
personal activities as such exercised in the other Contracting State, may be taxed in that other
State, except where the amount of the net income derived by such entertainer or athlete from
such activities (after deduction of all expenses incurred by him in connection with his visit
and performance) does not exceed one thousand five hundred United States dollars ($ 1,500)
or its equivalent in Indian rupees for the taxable year concerned.
2. Where income in respect of activities exercised by an entertainer or an athlete in his
capacity as such accrues not to the entertainer or athlete but to another person, that income of
that other person may, notwithstanding the provisions of Articles 7 (Business Profits), 15
(Independent Personal Services) and 16 (Dependent Personal Services), be taxed in the
Contracting State in which the activities of the entertainer or athlete are exercised unless the
entertainer, athlete, or other person establishes that neither the entertainer or athlete nor
persons related thereto participate directly or indirectly in the profits of that other person in
any manner, including the receipt of deferred remuneration, bonuses, fees, dividends,
partnership distributions, or other distributions.
3. Income referred to in the preceding paragraphs of this Article derived by a resident of a
Contracting State in respect of activities exercised in the other Contracting State shall not be
taxed in that other State if the visit of the entertainers or athletes to that other State is
supported wholly or substantially from the public funds of the Government of the firstmentioned
Contracting State, or of a political sub-division or local authority thereof.
4. The competent authorities of the Contracting States may, by mutual agreement, increase
the dollar amounts referred to in paragraph 1 to reflect economic or monetary developments.
ARTICLE 19 – Remuneration and pensions in respect of Government service – 1. (a)
Remuneration, other than a pension, paid by a Contracting State or a political sub-division or
a local authority thereof to an individual in respect of services rendered to that State or subdivision
or authority shall be taxable only in that State.
(b) However, such remuneration shall be taxable only in the other Contracting State if the
services are rendered in that other State and the individual is a resident of that State who :
(i) is a national of that State ; or
(ii) did not become a resident of that State solely for the purpose of rendering the services.
2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political subdivision
or a local authority thereof to an individual in respect of services rendered to that
State or sub-division or authority shall be taxable only in that State.
(b) However, such pension shall be taxable only in the other Contracting State if the
individual is a resident of, and a national of, that State.
3. The provisions of Articles 16 (Dependent Personal Services), 17 (Directors’ Fees), 18
(Income Earned by Entertainers and Athletes) and 20 (Private Pensions, Annuities, Alimony
and Child Support) shall apply to remuneration and pensions in respect of services rendered
in connection with a business carried on by a Contracting State or a political sub-division or a
local authority thereof.

ARTICLE 20 – Private pensions, annuities, alimony and child support – 1. Any pension,
other than a pension referred to in Article 19 (Remuneration and Pensions in respect of
Government Service), or any annuity derived by a resident of a Contracting State from
sources within the other Contracting State may be taxed only in the first-mentioned
Contracting State.
2. Notwithstanding paragraph 1, and subject to the provisions of Article 19 (Remuneration
and Pensions in Respect of Government Service), social security benefits and other public
pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.
3. The term “pension” means a periodic payment made in consideration of past services or by way of compensation for injuries received in the course of performance of services.
4. The term “annuity” means stated sums payable periodically at stated times during life or
during a specified or ascertainable number of years, under an obligation to make the
payments in return for adequate and full consideration in money or money’s worth (but not for services rendered).
5. Alimony paid to a resident of a Contracting State shall be taxable only in that State. The
term “alimony” as used in this paragraph means periodic payments made pursuant to a
written separation agreement or a decree of divorce, separate maintenance, or compulsory
support, which payments are taxable to the recipient under the laws of the State of which he is a resident.
6. Periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separate maintenance or compulsory support, paid by a resident of a Contracting State to a resident of the other Contracting State, shall be taxable only in the first-mentioned State.

ARTICLE 21 – Payments received by students and apprentices – 1. A student or business
apprentice who is or was a resident of one of the Contracting States immediately before
visiting the other Contracting State and who is present in that other State principally for the
purpose of his education or training shall be exempt from tax in that other State, on payments
which arise outside that other State for the purposes of his maintenance, education or training.
2. In respect of grants, scholarships and remuneration from employment not covered by
paragraph 1, a student or business apprentice described in paragraph 1 shall, in addition, be
entitled during such education or training to the same exemptions, reliefs or reductions in
respect of taxes available to residents of the State which he is visiting.
3. The benefits of this Article shall extend only for such period of time as may be reasonable
or customarily required to complete the education or training undertaken.
4. For the purposes of this Article, an individual shall be deemed to be a resident of a
Contracting State if he is resident in that Contracting State in the taxable year in which he
visits the other Contracting State or in the immediately preceding taxable year.
ARTICLE 22 – Payments received by professors, teachers and research scholars – 1. An
individual who visits a Contracting State for a period not exceeding two years for the purpose
of teaching or engaging in research at a university, college or other recognised educational
institution in that State, and who was immediately before that visit a resident of the other
Contracting State, shall be exempted from tax by the first-mentioned Contracting State on
any remuneration for such teaching or research for a period not exceeding two years from the
date he first visits that State for such purpose.
2. This Article shall apply to income from research only if such research is undertaken by the
individual in the public interest and not primarily for the benefit of some other private person
or persons.
ARTICLE 23 – Other income – 1. Subject to the provisions of paragraph 2, items of income
of a resident of a Contracting State, wherever arising, which are not expressly dealt with in
the foregoing Articles of this Convention shall be taxable only in that Contracting State.
2. The provisions of paragraph 1 shall not apply to income, other than income from
immovable property as defined in paragraph 2 of Article 6 [Income from Immovable
Property (Real Property)], if the beneficial owner of the income, being a resident of a
Contracting State, carries on business in the other Contracting State through a permanent
establishment situated therein, or performs in that other State independent personal services
from a fixed base situated therein, and the income is attributable to such permanent
establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or
Article 15 (Independent Personal Services), as the case may be, shall apply.
3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a
Contracting State not dealt with in the foregoing articles of this Convention and arising in the
other Contracting State may also be taxed in that other State.
ARTICLE 24 – Limitation on benefits – 1. A person (other than an individual) which is a
resident of a Contracting State and derives income from the other Contracting State shall be
entitled under this Convention to relief from taxation in that other Contracting State only if :
(a) more than 50 per cent of the beneficial interest in such person (or in the case of a
company, more than 50 per cent of the number of shares of each class of the company’s
shares) is owned, directly or indirectly, by one or more individual residents of one of the
Contracting States, one of the Contracting States or its political sub-divisions or local
authorities, or other individuals subject to tax in either Contracting State on their
worldwide incomes, or citizens of the United States ; and
(b) the income of such person is not used in substantial part, directly or indirectly, to meet
liabilities (including liabilities for interest or royalties) to persons who are not resident of
one of the Contracting States, one of the Contracting States or its political sub-divisions
or local authorities, or citizens of the United States.
2. The provisions of paragraph 1 shall not apply if the income derived from the other
Contracting State is derived in connection with, or is incidental to, the active conduct by such
person of a trade or business in the first-mentioned State (other than the business of making
or managing investments, unless these activities are banking or insurance activities carried on
by a bank or insurance company).
3. The provisions of paragraph 1 shall not apply if the person deriving the income is a
company which is a resident of a Contracting State in whose principal class of shares there is
substantial and regular trading on a recognized stock exchange. For purposes of the preceding
sentence, the term “recognized stock exchange” means :
(a) in the case of United States, the NASDAQ System owned by the National Association
of Securities Dealers, Inc. and any stock exchange registered with the Securities and
Exchange Commission as a national securities exchange for purposes of the Securities
Act of 1934 ;
(b) in the case of India, any stock exchange which is recognized by the Central Government
under the Securities Contracts Regulation Act, 1956 ; and
(c) any other stock exchange agreed upon by the competent authorities of the Contracting
States.
4. A person that is not entitled to the benefits of this Convention pursuant to the provisions of
the preceding paragraphs of this Article may, nevertheless, be granted the benefits of the
Convention if the competent authority of the State in which the income in question arises so
determines.
ARTICLE 25 – Relief from double taxation – 1. In accordance with the provisions and subject
to the limitations of the law of the United States (as it may be amended from time to time
without changing the general principle hereof), the United States shall allow to a resident or
citizen of the United States as a credit against the United States tax on income—
(a) the income-tax paid to India by or on behalf of such citizen or resident ; and
(b) in the case of a United States company owning at least 10 per cent of the voting stock of
a company which is a resident of India and from which the United States company
receives dividends, the income-tax paid to India by or on behalf of the distributing
company with respect to the profits out of which the dividends are paid.
For the purposes of this paragraph, the taxes referred to in paragraphs 1(b) and 2 of Article 2
(Taxes Covered) shall be considered as income taxes.
2. (a) Where a resident of India derives income which, in accordance with the provisions of
this Convention, may be taxed in the United States, India shall allow as a deduction from the
tax on the income of that resident an amount equal to the income-tax paid in the United
States, whether directly or by deduction. Such deduction shall not, however, exceed that part
of the income-tax (as computed before the deduction is given) which is attributable to the
income which may be taxed in the United States.
(b) Further, where such resident is a company by which a surtax is payable in India, the
deduction in respect of income-tax paid in the United States shall be allowed in the first
instance from income-tax payable by the company in India and as to the balance, if any, from
surtax payable by it in India.
3. For the purposes of allowing relief from double taxation pursuant to this article, income
shall be deemed to arise as follows :
(a) income derived by a resident of a Contracting State which may be taxed in the other
Contracting State in accordance with this Convention [other than solely by reason of
citizenship in accordance with paragraph 3 of article 1 (General Scope)] shall be deemed
to arise in that other State ;
(b) income derived by a resident of a Contracting State which may not be taxed in the other
Contracting State in accordance with the Convention shall be deemed to arise in the
first-mentioned State.
Notwithstanding the preceding sentence, the determination of the source of income for
purposes of this article shall be subject to such source rules in the domestic laws of the
Contracting States as apply for the purpose of limiting the foreign tax credit. The preceding
sentence shall not apply with respect to income dealt with in article 12 (Royalties and Fees
for Included Services). The rules of this paragraph shall not apply in determining credits
against United States tax for foreign taxes other than the taxes referred to in paragraphs 1(b)
and 2 of article 2 (Taxes Covered).
ARTICLE 26 – Non-discrimination – 1. Nationals of a Contracting State shall not be
subjected in the other Contracting State to any taxation or any requirement connected
therewith which is other or more burdensome than the taxation and connected requirements
to which nationals that other State in the same circumstances are or may be subjected. This
provision shall apply to persons who are not residents of one or both of the Contracting
States.
2. Except where the provisions of paragraph 3 of article 7 (Business Profits) apply, the
taxation on a permanent establishment which an enterprise of a Contracting State has in the
other Contracting State shall not be less favourably levied in that other State than the taxation
levied on enterprises of that other State carrying on the same activities. This provision shall
not be construed as obliging a Contracting State to grant to residents of the other Contracting
State any personal allowances, reliefs and reductions for taxation purposes on account of civil
status or family responsibilities which it grants to its own residents.
3. Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph
7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for Included
Services) apply, interest, royalties, and other disbursements paid by a resident of a
Contracting State to a resident of the other Contracting State shall, for the purposes of
determining the taxable profits of the first-mentioned resident, be deductible under the same
conditions as if they had been paid to a resident of the first-mentioned State.
4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State,
shall not be subjected in the first-mentioned State to any taxation or any requirement
connected therewith which is other or more burdensome than the taxation connected
requirements to which other similar enterprises of the first-mentioned State are or may be
subjected.
5. Nothing in this article shall be construed as preventing either Contracting State from
imposing the taxes described in Article 14 (Permanent Establishment Tax) or the limitations
described in paragraph 3 of Article 7 (Business profits).

ARTICLE 27 – Mutual agreement procedure – 1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or national. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention.
2. The competent authority shall endeavour, if the objection appears to it to be justified and if
it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement
with the competent authority of the other Contracting State, with a view to the avoidance of
taxation which is not in accordance with the Convention. Any agreement reached shall be
implemented notwithstanding any time limits or other procedural limitations in the domestic
law of the Contracting States.
3. The competent authorities of the Contracting States shall endeavour to resolve by mutual
agreement any difficulties or doubts arising as to the interpretation or application of the
Convention. They may also consult together for the elimination of double taxation in cases
not provided for in the Convention.
4. The competent authorities of the Contracting States may communicate with each other
directly for the purpose of reaching an agreement in the sense of the preceding paragraphs.
The competent authorities, through consultations, shall develop appropriate bilateral
procedures, conditions, methods and techniques for the implementation of the mutual
agreement procedure provided for in this Article. In addition, a competent authority may
devise appropriate unilateral procedures, conditions, methods and techniques to facilitate the
above-mentioned bilateral actions and the implementation of the mutual agreement
procedure.
ARTICLE 28 – Exchange of information and administrative assistance – 1. The competent
authorities of the Contracting State shall exchange such information (including documents) as
is necessary for carrying out the provisions of this Convention or of the domestic laws of the
Contracting States concerning taxes covered by the Convention insofar as the taxation
thereunder is not contrary to the Convention, in particular, for the prevention of fraud or
evasion, of such taxes. The exchange of information is not restricted by Article 1 (General
Scope). Any information received by a Contracting State shall be treated as secret in the same
manner as information obtained under the domestic laws of that State. However, if the
information is originally regarded as secret in the transmitting State, it shall be disclosed only
to persons or authorities (including Courts and administrative bodies) involved in the
assessment, collection, or administration of, the enforcement or prosecution in respect of or
the determination of appeals in relation to, the taxes which are the subject of the Convention.
Such persons or authorities shall use the information only for such purposes, but may disclose
the information in public Court proceedings or in judicial decisions. The competent
authorities shall, through consultation, develop appropriate conditions, methods and
techniques concerning the matters in respect of which such exchange of information shall be
made, including, where appropriate, exchange of information regarding tax avoidance.
2. The exchange of information or documents shall be either on a routine basis or on request
with reference to particular cases, or otherwise. The competent authorities of the Contracting
States shall agree from time to time on the list of information or documents which shall be
furnished on a routine basis.
3. In no case shall the provisions of paragraph 1 be construed so as to impose on a
Contracting State the obligation :
(a) to carry out administrative measures at variance with the laws and administrative
practice of that or of the other Contracting State;
(b) to supply information which is not obtainable under the laws or in the normal course of
the administration of that or of the other Contracting State;
(c) to supply information which would disclose any trade, business, industrial, commercial,
or professional secret or trade process, or information the disclosure of which would be
country to public policy (ordre public).
4. If information is requested by a Contracting State in accordance with this Article, the other
Contracting State shall obtain the information to which the request relates in the same manner
and in the same form as if the tax of the first-mentioned State were the tax of that other State
and were being imposed by that other State. if specifically requested by the competent
authority of a Contracting State, the competent authority of the other Contracting State shall provide information under this Article in the form of depositions of witnesses and
authenticated copies of unedited original documents (including books, papers, statements,
records accounts and writings), to the same extent such depositions and documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes.
5. For the purposes of this Article, the Convention shall apply, notwithstanding the provisions
of Article 2 (Taxes Covered) :
(a) in the United States, to all taxes imposed under Title 26 of the United States Code; and
(b) in India, to the income-tax, the wealth-tax and the gift-tax.

ARTICLE 29 – Diplomatic agents and consular officers – Nothing in this Convention shall
affect the fiscal privileges of diplomatic agents or consular offices under the general rules of international law or under the provisions of special agreements.

ARTICLE 30 – Entry into force – 1. Each Contracting State shall notify the other Contracting State in writing, through diplomatic channels, upon the completion of their respective legal procedures to bring this Convention into force.
2. The Convention shall enter into force on the date of the letter of such notifications and its provisions shall have effect :
(a) in the United States—
(i) in respect of taxes withheld at source, for amounts paid or credited on or after the
first day of January next following the date on which the Convention enters into
force;
(ii) in respect of other taxes, for taxable periods beginning on or after the first day of
January next following the date on which the Convention enters into force; and
(b) in India, in respect of income arising in any taxable year beginning on or after the first day of April next following the calendar year in which the Convention enters into force.

ARTICLE 31 – Termination – This Convention shall remain in force indefinitely but either of the Contracting States may, on or before the thirtieth day of June in any calendar year
beginning after the expiration of a period of five years from the date of the entry into force of the Convention, give the other Contracting State through diplomatic channels, written notice of termination and, in such event, this Convention shall cease to have effect :
(a) in the United States—
(i) in respect of taxes withheld at source, for amounts paid or credited on or after the
first day of January next following the calendar year in which the notice of termination is given; and
(ii) in respect of other taxes, for taxable periods beginning on or after the first day of
January next following the calendar year in which the notice of termination is
given; and
(b) in India, in respect of income arising in any taxable year beginning on or after the first day of April next following the calendar year in which the notice of termination is given.
In witness whereof, the undersigned, being duly authorised by their respective Governments, have signed this Convention.
Done at New Delhi in duplicate, this 12th day of September, 1989, in the English and Hindi languages, both texts being equally authentic. In case of divergence between the two texts, the English text shall be the operative one.

For the Government of                                                 For the Government of the
the Republic of India :                                                   United States of America :
Sd/-                                                                                     Sd/-
N.K. Sengupta                                                                   John R. Hubbard
Secretary to the                                                                Ambassador
Government of India


PROTOCOL

At the signing today of the Convention between the United States of America and the
Republic of India for the Avoidance of Double Taxation and the prevention of Fiscal Evasion
with respect to Taxes on Income, the undersigned have agreed upon the following provisions,
which shall form an integral part of the Convention :
I. AD ARTICLE 5 – It is understood that where an enterprise of a Contracting State has a
permanent establishment in the other Contracting State in accordance with the provisions of
paragraph 2(j), 2(k) or 2(l) of Article 5 (Permanent Establishment), and the time period
referred to in that paragraph extends over two taxable years, a permanent establishment shall
not be deemed to exist in a year, if any, in which the use, site, project or activity, as the case
may be, continues for a period or periods aggregating less than 30 days in that taxable year. A
permanent establishment will exist in the other taxable year, and the enterprise will be subject
to tax in that other Contracting State in accordance with the provisions of Article 7 (Business
Profits), but only on income arising during that other taxable year.
II. AD ARTICLE 7 – Where the law of the Contracting State in which a permanent
establishment is situated imposes, in accordance with the provisions of paragraph 3 of Article
7 (Business Profits), a restriction on the amount of executive and general administrative
expenses which may be allowed as a deduction in determining the profits of such permanent
establishment, it is understood that in making such a determination of profits the deduction in
respect of such executive and general administrative expenses in no case shall be less than
that allowable under the Indian Income-tax Act as on the date of signature of this Convention.
III. AD ARTICLES 7, 10, 11, 12, 15 and 23 – It is understood that for the implementation of
paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 4 of Article 10 (Dividends),
paragraph 5 of Article 11 (Interest), paragraph 6 of Article 12 (Royalties and Fees for
Included Services), paragraph 1 of Article 15 (Independent Personal Services), and paragraph
2 of Article 23 (Other Income), any income attributable to a permanent establishment or fixed
base during its existence is taxable in the Contracting State in which such permanent
establishment or fixed base is situated even if the payments are deferred until such permanent
establishment or fixed base has ceased to exist.
IV. AD ARTICLE 12 – It is understood that fees for included services, as defined in
paragraph 4 of Article 12 (Royalties and Fees for Included Services) will, in accordance with
United States law, be subject to income-tax in the United States based on net income and,
when earned by a company, will also be subject to the taxes described in paragraph 1 of
Article 14 (Permanent Establishment Tax). The total of these taxes which may be imposed on
such fees, however, may not exceed the amount computed by multiplying the gross fee by the
appropriate tax rate specified in sub-paragraph (a) or (b) whichever is applicable or paragraph
2 of Article 12.
V. AD ARTICLE 14 – It is understood that references in paragraph 1 of Article 14
(Permanent Establishment tax) to profits that are subject to tax in the United States under
Article 6 [Income from Immovable Property (Real Property)], under Article 12 (Royalties
and Fees for Included Services), as fees for included services as defined in that Article, or
under Article 13 (Gains) of this Convention, are intended to refer only to cases in which the
profits in question are subject to United States tax based on net income (i.e., by virtue of
being effectively connected, or being treated as effectively connected, with the conduct of a
trade or business in the United States). Any income which is subject to tax under those
Articles based on gross income is not subject to tax under Article 14.
IN WITNESS WHEREOF, the undersigned, being duly authorised by their respective
Governments, have signed this Protocol.
DONE at New Delhi in duplicate, this 12th day of September, 1989, in the English and Hindi
languages, both texts equally authentic. In case of divergence between the two texts, the
English text shall be the operative one.
For the Government of For the Government of the
the Republic of India : United States of America :
Sd/- Sd/-
N.K. Sengupta John R. Hubbard
Secretary to the Ambassador
Government of India
Embassy of United States of America
New Delhi, September 12, 1989.
Excellency :
I have the honour to refer to the Convention between the Government of the United States of
America and the Government of the Republic of India for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income which was signed
today (hereinafter referred to as “the Convention”) and to confirm, on behalf of the
Government of the United States of America, the following understandings reached between
the two Governments :
Both sides agree that a tax sparing credit shall not be provided in Article 25 (Relief from
Double Taxation) of the convention at this time. However, the Convention shall be promptly
amended to incorporate a tax sparing credit provision if the United States hereafter amends its
laws concerning the provision of tax sparing credits, or the United States reaches agreement
on the provision of a tax sparing credit with any other country.
Both sides also agree that, for purposes of paragraph 4(c) of Article 5 (Permanent
Establishment) of the Convention, a person shall be considered to habitually secure orders in
a Contracting State, wholly or almost for an enterprise, only if :
1. such person frequently accepts orders for goods or merchandise on behalf of the enterprise;
2. substantially all of such person’s sales related activities in the Contracting State consist of
activities for the enterprise;
3. such person habitually represents to persons offering to buy goods or merchandise that
acceptance of an order by such person constitutes the agreement of the enterprise to supply
goods or merchandise under the terms and conditions specified in the order; and
4. The enterprise takes actions that give purchasers the basis for a reasonable belief that such
person has authority to bind the enterprise.
I have the honour to request Your Excellency to confirm the foregoing understandings of
Yours Excellency’s Government.
Accept, Excellency, the renewed assurances of my highest consideration.
His Excellency Sd/-
Dr. N.K. Sengupta, John R. Hubbard
Secretary (Revenue), Ambassador
Ministry of Finance,
New Delhi.
Secretary, Government of India
Ministry of Finance (Department of Revenue)
New Delhi, September 12, 1989.
Excellency :
I have the honour to acknowledge receipt of Your Excellency’s Note of today’s date, which
reads as follows :
“I have the honour to refer to the Convention between the Government of the United
States of America and the Government of the Republic of India for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
which was signed today (hereinafter referred to as “the Convention”) and to confirm, on
behalf of the Government of the United States of America, the following understandings
reached between the two Governments :
Both sides agree that a tax sparing credit shall not be provided in Article 25 (Relief from
Double Taxation) of the Convention at his time. However, the Convention shall be
promptly amended to incorporate a tax sparing credit provision if the United States
hereafter amends its laws concerning the provision of tax sparing credits, or the United
States reaches agreement on the provision of a tax sparing credit with any other country.
Both sides also agree that, for purposes of paragraph 4(c) of Article 5 (Permanent
Establishment) of the convention, a person shall be considered to habitually secure orders in a
Contracting State, wholly or almost wholly for an enterprise, only if :
1. such person frequently accepts orders for goods or merchandise on behalf of the
enterprise ;
2. substantially all of such person’s sales related activities in the Contracting State consist of
activities for the enterprise ;
3. such person habitually represents to persons offering to buy goods or merchandise that
acceptance of an order by such person constitutes the agreement of the enterprise to supply
goods or merchandise under the terms and conditions specified in the order; and
4. the enterprise takes actions that give purchasers the basis for a reasonable belief that such
person has authority to bind the enterprise.
I have the honour to confirm the understandings contained in Your Excellency’s Note, on
behalf of the Government of the Republic of India.
Accept, Excellency, the renewed assurances of my highest consideration.
His Excellency Sd/-
Dr. John R. Hubbard N.K. Sengupta
Ambassador of the
United States of America
New Delhi.
Embassy of the United States of America
New Delhi, September 12, 1989.
Excellency :
I have the honour to refer to the Convention signed today between the United States of
America and the Republic of India for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with respect to taxes on Income and to inform you on behalf of the United
States of America of the following :
During the course of the negotiations leading to conclusion of the Convention signed today,
the negotiators developed and agreed upon a memorandum of understanding intended to give
guidance both to the taxpayers and the tax authorities of our two countries in interpreting
aspects of Article 12 (Royalties and Fees for Included Services) relating to the scope of
included services. This memorandum of understanding represents the current views of the
United States Government with respect to these aspects of Article 12, and it is my
Government’s understanding that it also represents the current views of the Indian
Government. It is also my Government’s view that as our Government gain experience in
administering the Convention, and particularly Article 12, the competent authorities may
develop and publish amendments to the memorandum of understanding and further
understandings and interpretations of the Convention.
If this position meets with the approval of the Government of the Republic of India, this letter
and your reply thereto will indicate that our Governments share a common view of the
purpose of the memorandum of understanding relating to Article 12 of the Convention.
Accept, Excellency, the renewed assurances of my highest consideration.
His Excellency Sd/-
Dr. N.K. Sengupta, John R. Hubbard
Secretary (Revenue), Ambassador
Ministry of Finance,
New Delhi.
Government of India, Ministry of Finance
(Department of Revenue)
New Delhi, September 12, 1989.
Excellency :
I have the honour to acknowledge receipt of Your Excellency’s Note of today’s date, which
reads as follows :
“I have the honour to refer to the Convention signed today between the United States of
America and the Republic of India for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and to inform on behalf
of the United States of America of the following :
During the course of the negotiations leading to conclusion of the Convention signed
today, the negotiators developed and agreed upon a memorandum of understanding
intended to give guidance both to the taxpayers and the tax authorities of our two
countries in interpreting aspects of Article 12 (Royalties and Fees for Included Services)
relating to the scope of included services. The memorandum of understanding represents
the current views of the United States Government with respect to these aspects of
Article 12, and it is my Government’s understanding that it also represents the current
views of the Indian Government. It is also my Government’s view that as our
Governments gain experience in administering the Convention, and particularly Article
12, the competent authorities may develop and publish amendments to the memorandum
of understanding and further understandings and interpretations of the Convention.
If this position meets with the approval of the Government of the Republic of India, this
letter and your reply thereto will indicate that our Governments share a common view of
the purpose of the memorandum of understanding relating to Article 12 of the
Convention.”
I have the honour to confirm the understanding contained in Your Excellency’s Note, on
behalf of the Government of the Republic of India.
Accept, Excellency, the renewed assurances of my highest consideration.
His Excellency Sd/-
Dr. John R. Hubbard Dr. N.K. Sengupta,
Ambassador of the
United States of America
New Delhi.


May 15, 1989

U.S. – INDIA TAX TREATY

Memorandum of understanding concerning fees for included services in Article 12
Paragraph 4 (in general)
This memorandum describes in some detail the category of services defined in paragraph 4 of
Article 12 (Royalties and Fees for Included Services). It also provides examples of services
intended to be covered within the definition of included services and those intended to be
excluded, either because they do not satisfy the tests of paragraph 4, or because,
notwithstanding the fact that they meet the tests of paragraph 4, they are dealt with under
paragraph 5. The examples in either case are not intended as an exhaustive list but rather as
illustrating a few typical cases. For case of understanding, the example in this memorandum
described U.S. persons providing services to Indian persons, but the rules of Article 12 are
reciprocal in application.
Article 12 includes only certain technical and consultancy services. But technical services, we
mean in this context services requiring expertise in a technology. By consultancy services, we
mean in this context advisory services. The categories of technical and consultancy services
are to some extent overlapping because a consultancy service could also be a technical
service. However, the category of consultancy services also includes an advisory service,
whether or not expertise in a technology is required to perform it.
Under paragraph 4, technical and consultancy services are considered included services only
to the following extent: (1) as described in paragraph 4(a), if they are ancillary and subsidiary
to the application or enjoyment of a right, property or information for which are royalty
payment is made; or (2) as described in paragraph 4(b), if they make available technical
knowledge, experience, skill, know-how, or processes, or consist of the development and
transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy
services which are not of a technical nature cannot be included services.
Paragraph 4(a)
Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and
subsidiary to the application or enjoyment of any right, property, or information for which a
payment described in paragraph 3(a) or (b) is received. Thus, paragraph 4(a) includes a
technical and consultancy services that are ancillary and subsidiary to the application or
enjoyment of an intangible for which a royalty is received under a licence or sale as described
in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of
industrial, commercial, or scientific equipment for which a royalty is received under a lease
as described in paragraph 3(b).
It is understood that, in order for a service fee to be considered “ancillary and subsidiary” to
the application or enjoyment of some right, property, or information for which a payment
described in paragraph 3(a) or (b) is received, the service must be related to the application or
enjoyment of the right, property, or information. In addition, the clearly predominant purpose
of the arrangement under which the payment of the service fee and such other payments are
made must be the application or enjoyment of the right, property, or information described in
paragraph 3. The question of whether the service is related to the application or enjoyment of
right, property, or information described in paragraph 3 and whether the clearly predominant
purpose of the arrangement is such application or enjoyment must be determined by reference
to the facts and circumstances of each case. Factors which may be relevant to such
determination (although not necessarily controlling) include :
1. The extent to which the services in question facilitate the effective application or
enjoyment of the right, property, or information described in paragraph 3 ;
2. The extent to which such services are customarily provided in the ordinary course of
business arrangements involving royalties described in paragraph 3 ;
3. Whether the amount paid for the services (or which would be paid by parties operating at
arm’s length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3 ;
4. Whether the payment made for the services and the royalty described in paragraph 3 are
made under a single contract (or a set of related contracts) ; and
5. Whether the person performing the services is the same person as, or a related person to,
the person receiving the royalties described in paragraph 3 [for this purpose, persons are
considered related if their relationship is described in Article 9 (Associated Enterprises) or if
the person providing the service is doing so in connection with an overall arrangement which
includes the payer and recipient of the royalties].
To the extent that services are not considered ancillary and subsidiary to the application or
enjoyment of some right, property, or information for which a royalty payment under
paragraph 3 is made, such services shall be considered “included services” only to the extent
that they are described in paragraph 4(b).
Example 1
Facts :
A U.S. manufacturer grants rights to an Indian company to use manufacturing processes in
which the transferor has exclusive rights by virtue of process, patents or the protection
otherwise extended by law to the owner of a process. As part of the contractual arrangement,
the U.S. manufacturer agrees to provide certain consultancy services to the Indian company
in order to improve the effectiveness of the latter’s use of the processes. Such services
include, for example, the provision of information and advice on sources of supply for
materials needed in the manufacturing process, and on the development of sales and service
literature for the manufactured product. The payment allocable to such services do not form a
substantial part of the total consideration payable under the contractual arrangement. Are the
payments for these services fees for “included services” ?
Analysis :
The payments are fees for included services. The services described in this example are
ancillary and subsidiary to the use of manufacturing process protected by law as described in
paragraph 3(a) of Article 12 because the services are related to the application or enjoyment
of the intangible and the granting of the right to use the intangible as the clearly predominant
purpose of the arrangement. Because the services are ancillary and subsidiary to the use of
the manufacturing process, the fees for these services are considered for included services
under paragraph 4(a) of Article 12, regardless of whether the services are described in
paragraph 4(b).
Example 2
Facts :
An Indian manufacturing company produces a product that must be manufactured under
sterile conditions using machinery that must be kept completely free of bacterial or other
harmful deposits. A U.S. company has developed a special cleaning process for removing
such deposits from that type of machinery. The U.S. company enters in to a contract with the
Indian company under which the former will clean the latter’s machinery on a regular basis.
As part of the arrangement, the U.S. company leases to the Indian company a piece of
equipment which allows the Indian company to measure the level of bacterial deposits on its
machinery in order for it to known when cleaning is required. Are the payments for the
services fees for included services ?
Analysis :
In this example, the provision of cleaning services by the U.S. company and the rental of the
monitoring equipment are related to each other. However, the clearly predominant purpose of
the arrangement is the provision of cleaning services. Thus, although the cleaning services
might be considered technical services, they are not “ancillary and subsidiary” to the rental of
the monitoring equipment. Accordingly, the cleaning services are not “included services”
within the meaning of paragraph 4(a).
Paragraph 4(b)
Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to
the person acquiring the services, technical knowledge, experience, skill, know-how, or
processes, or consist of the development and transfer of a technical plant or technical design
to such person. (For this purpose, the person acquiring the service shall be deemed to include
an agent, nominee, or transferee of such person). This category is narrower than the category
described in paragraph 4(a) because it excludes any service that does not make technology
available to the person acquiring the service. Generally speaking, technology will be
considered “made available” when the person acquiring the service is enabled to apply the
technology. The fact that the provision of the service may require technical input by the
person providing the service does notper se mean that technical knowledge, skills, etc., are
made available to the person purchasing the service, within the meaning of paragraph 4(b).
Similarly, the use of a product which embodies technology shall not per se be considered to
make the technology available.
Typical categories of services that generally involve either the development and transfer of
technical plants or technical designs, or making technology available as described in
paragraph 4(b), include :
1. Engineering services (including the sub-categories of bio-engineering and aeronautical,
agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial
engineering) ;
2. Architectural services ; and
3. Computer software development.
Under paragraph 4(b), technical and consultancy services could make technology available in
a variety of settings, activities and industries. Such services may, for examples, relate to any
of the following areas :
1. Bio-technical services ;
2. Food processing ;
3. Environmental and ecological services ;
4. Communication through satellite or otherwise ;
5. Energy conservation ;
6. Exploration or exploitation of mineral oil or natural gas ;
7. Geological surveys ;
8. Scientific services ; and
9. Technical training.
The following examples indicate the scope of the conditions in paragraph 4(b) :
Example 3
Facts :
A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for
interior walls of houses which is more durable than the standard products of its type. An
Indian builder wishes to produce this product for its own use. It rents a plant and contracts
with the U.S. company to send experts to India to show engineers in the Indian company how
to produce the extra-strong wallboard. The U.S. contractors work with the technicians in the
Indian firm for a few months. Are the payments to the U.S. firm considered to be payments
for “included services” ?
Analysis :
The payments would be fees for included services. The services are of a technical or
consultancy nature; in the example, they have elements of both types of services. The
services make available to the Indian company technical knowledge, skill and processes.
Example 4
Facts :
A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder
hires the U.S. company to produce wallboard at that plant for a fee. The Indian company
provides the raw materials, and the U.S. manufacturer fabricates the wallboard in its plant,
using advanced technology. Are the fees in this example payments for included services ?
Analysis :
The fees would not be for included services. Although the U.S. company is clearly
performing a technical service, no technical knowledge, skill, etc., are made available to the
Indian company, nor is there any development and transfer of a technical plant or design. The
U.S. company is merely performing a contract manufacturing service.
Example 5
Facts :
An Indian firm owns inventory control software for use in its chain of retail outlets
throughout India. It expands its sales operation by employing a team of travelling salesmen to
travel around the countryside selling the company’s wares. The company wants to modify its
software to permit the salesmen to assess the company’s central computers for information on
what products are available in inventory and when they can be delivered. The Indian firm
hires a U.S. computer programming firm to modify its software for this purpose. Are the fees
which the Indian firm pays treated as fees for included services ?
Analysis :
The fees are for included services. The U.S. company clearly performs a technical service for
the Indian company, and it transfers to the Indian company the technical plan (i.e., the
computer programme) which it has developed.
Example 6
Facts :
An Indian vegetable oil manufacturing company wants to produce a cholesterol-free oil from
a plant which produces oil normally containing cholesterol. An American company has
developed a process for refining the cholesterol out of the oil. The Indian company contracts
with the U.S. company to modify the formulas which it uses so as to eliminate the
cholesterol, and to train the employees of the Indian company in applying the new formulas.
Are the fees paid by the Indian company for included services ?
Analysis :
The fees are for included services. The services are technical, and the technical knowledge is
made available to the Indian company.
Example 7
Facts :
The Indian vegetable oil manufacturing firm has mastered the science of producing
cholesterol-free oil and wishes to market the product world wide. It hires an American
marketing consulting firm to do a computer simulation of the world market for such oil and to
adverse it on marketing strategies. Are the fees paid to the U.S. company for included
services ?
Analysis :
The fees would not be for included services. The American company is providing a
consultancy service which involves the use of substantial technical skill and expertise. It is
not, however, making available to the Indian company any technical experience, knowledge
or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian
company through the service contract is commercial information. The fact that technical
skills were required by the performer of the service in order to perform the commercial
information service does not make the service a technical service within the meaning of
paragraph 4(b).
Paragraph 5
Paragraph 5 of Article 12 describes several categories of services which are not intended to
be treated as included services even if they satisfy the tests of paragraph 4. Set forth below
are examples of cases where fees would be included under paragraph 4, but are excluded
because of the conditions of paragraph 5.
Example 8
Facts :
An Indian company purchases a computer from a U.S. computer manufacturer. As part of the purchase agreement, the manufacturer agrees to assist the Indian company in setting up the computer and installing the operating system, and to ensure that the staff of the Indian
company is able to operate the computer. Also, as part of the purchase agreement, the seller
agrees to provide, for a period of ten years, any updates to the operating system and any
training necessary to apply the update. Both of these service elements to the contract would
qualify under paragraph 4(b) as an included service. Would either or both be excluded from
the category of included services, under paragraph 5(a), because they are ancillary and
subsidiary, as well as inextricably and essentially linked, to the sale of the computer ?
Analysis :
The installation assistance and initial training are ancillary and subsidiary to the sale of the
computer, and they are also inextricably and essentially linked to the sale. The computer
would be of little value to the Indian purchaser without these services, which are most readily
and usefully provided by the seller. The fees for installation assistance and initial training,
therefore/are not fees for included services, since these services are not the predominant
purpose of the arrangement.
The services of updating the operating system and providing associated necessary training may well be ancillary and subsidiary to the sale of the computer, but they are not inextricably
and essentially linked to the sale. Without the upgrades, the computer will continue to operate as it did when purchased, and will continue to accomplish the same functions. Acquiring the
updates cannot, therefore, be said to be inextricably and essentially linked to the sale of the
computer.
Example 9
Facts :
An Indian hospital purchases an X-ray machine from a U.S. manufacturer. As part of the
purchase agreement, the manufacturer agrees to instal the machine, to perform an initial
inspection of the machine in India, to train hospital staff in the use of the machine, and to service the machine periodically during the usual warranty period (2 years). Under an
optional service contract purchased by the hospital, the manufacturer also agrees to perform certain other services throughout the life of the machine, including periodic inspections and
repair services, advising the hospital about developments in X-ray film or techniques which
could improve the effectiveness of the machine, and training hospital staff in the application
of those new developments. The cost of the initial installation, inspection, training and
warranty service is relatively minor as compared with the cost of the X-ray machine. Is any
of the services described here ancillary and subsidiary, as well as inextricably and essentially
linked, to the sale of the X-ray machine ?
Analysis :
The initial installation, inspection, and training services in India and the periodic service
during the warranty period are ancillary and subsidiary, as well as inextricably and essentially
linked, to the sale of the X-ray machine because the usefulness of the machine to the hospital
depends on the service, the manufacturer has full responsibility during this period and this
cost of the services is a relatively minor component of the contract. Therefore, under
paragraph 5(a) these fees are not fees for included services, regardless of whether they
otherwise would fall within paragraph 4(b).
Neither the post-warranty period inspection and repair services, nor the advisory and training
services relating to new developments are “inextricably and essentially linked” to the initial
purchase of the X-ray machine. Accordingly, fees for these services may be treated as fees
for included services if they meet the tests of paragraph 4(b).
Example 10
Facts :
An Indian automobile manufacturer decides to expand into the manufacturer of helicopters. It
sends a group of engineers from its design staff to a course of study conducted by the
Massachusetts Institutes of Technology (MIT) for two years to study aeronautical
engineering. The Indian firms pays tuition fees to MIT on behalf of the firm’s employees. Is
the tuition fee a fee for an included service within the meaning of Article 12 ?
Analysis :
The tuition fee is clearly intended to acquire a technical service for the firm. However, the fee
paid is for teaching by an educational institution, and is, therefore, under paragraph 5(c), not
an included service. It is irrelevant for this purpose whether MIT conducts the course on its campus or at some other location.
Example 11
Facts :
As in Example 10, the automobile manufacturer wishes to expand into the manufacturer of
helicopters. It approaches an Indian university about establishing a course of study in
aeronautical engineering. The university contracts with a U.S. helicopter manufacturer to
send an engineer to be a visiting professor of aeronautical engineering on its faculty for a
year. Are the amounts paid by the university for these teaching services fees for included
services ?
Analysis :
The fees are for teaching in an educational institution. As such, pursuant to paragraph 5(c),
they are not fees for included services.
Example 12
Facts :
An Indian wishes to install a computerized system in his home to control lighting, heating
and air-conditioning, a stereo sound system and a burglar and firm alarm system. He hires an
American electrical engineering firm to design the necessary wiring system, adapt standard
software, and provide instructions for installations. Are the fees paid to the American firm by
the Indian individual fees for included services ?
Analysis :
The services in respect of which the fees are paid are of the type which would generally be
treated as fees for included services under paragraph 4(b). However, because the services are
for the personal use of the individual making the payment, under paragraph 5(d) the
payments would not be fees for included services.
Indo-US Double Taxation Avoidance Convention (DTAC) – Suspension of Collection
during Mutual Agreement Procedure
Article 27 of the Indo-USA DTAC provides for Mutual Agreement Procedure (MAP) for
avoidance of double taxation. Paragraph 4 of article 27 authorises the competent authorities
to develop appropriate bilateral procedures, conditions, methods and techniques for
implementation of MAP provided for in the article. Accordingly, with a view to avoid the
unintended hardship to the taxpayers, as well as for the efficient management of collection of
revenue, the Competent Authorities of India and USA had entered into a Memorandum of
Understanding (MoU) regarding suspension of collection during the pendency of MAP.
2. This MoU was brought to the notice of field formation vide Instruction No. 2/2003, dated
28-4-2003 (F. No. 500/56/99-FTD) wherein it was stated that the collection of outstanding
taxes in the case of a taxpayer, who is a resident of USA and whose request under MAP is
under consideration of the Competent Authorities, shall be kept in abeyance subject to
furnishing of a bank guarantee of an amount equal to the amount of tax under dispute and
interest accruing thereon as per the provisions of the Income-tax Act.
3. Now references have been received for extending the applicability of MoU to Indian
resident entities in cases where Mutual Agreement Procedure has been invoked by the US
resident. In order to avoid hardship to Indian resident taxpayers especially in cases involving
transfer pricing, where the Indian resident entity is liable to pay taxes on such income which
may have been charged to tax in the hands of the associated entity in USA, it has been
decided to extend the applicability of the MoU to such Indian resident entities during the
course of the pendency of the MAP invoked by a resident of USA.
4. On receipt of a formal request for suspension of collection of outstanding tax in terms of the MoU from a taxpayer being, a resident of USA or an Indian resident entity, in a case where MAP has been invoked through US Competent Authority and the same has been admitted by the Indian Competent Authority, the Assessing Officers are required to keep the enforcement of collection of outstanding taxes in abeyance in respect of such taxpayers—
(i) after obtaining a confirmation regarding pendency of MAP from the Foreign Tax and
Tax Research Division of the Central Board of Direct Taxes and
(ii) on receipt of a bank guarantee in the model draft format annexed to the MoU for an
amount calculated in accordance with the manner indicated therein.
5. All the other conditions of MoU as enumerated in Instruction No. 2 of 2003, dated 28-4-
2003 shall remain the same.
6. These instructions are issued under section 119 of the Income-tax Act and the same may be brought to the notice of all the officers in your charge.
Instruction: No. 10/2007, dated 23-10-2007.


 

Assistant Director of Income Tax-I, New Delhi Vs. M/s. E-Funds IT Solution Inc[ SC 2017]

KEYWORDS:–  The Organisation for Economic Co-operation and Development (OECD)-Mutual Agreement Procedures (MAP)

Supreme Court-min

Assistant Director of Income Tax-I, New Delhi Vs. M/s. E-Funds IT Solution Inc.

[Civil Appeal No. 6082 of 2015] [Civil Appeal No. 2962 of 2016] [Civil Appeal No. 6087 of 2015] [Civil Appeal No.6102 of 2015] [Civil Appeal No. 6084 of 2015] [Civil Appeal No. 6100 of 2015] [Civil Appeal No. 6094 of 2015] [Civil Appeal No. 6083 of 2015] [Civil Appeal No. 6096 of 2015] [Civil Appeal No. 6089 of 2015] [Civil Appeal No. 6104 of 2015] [Civil Appeal No. 6088 of 2015] [Civil Appeal No. 6091 of 2015] [Civil Appeal No. 6103 of 2015] [Civil Appeal No. 6093 of 2015] [Civil Appeal No. 6085 of 2015] [Civil Appeal No. 6090 of 2015] [Civil Appeal No. 6095 of 2015] [Civil Appeal No. 6099 of 2015] [Civil Appeal No. 6092 of 2015] [Civil Appeal No. 6101 of 2015] [Civil Appeal No. 6097 of 2015] [Civil Appeal No. 16958 of 2017 @S.L.P.(C) No.27494 of 2017 Cc No.19128 of 2014]

ACT : India U.S. Double Taxation Avoidance Agreement of 1990

BENCH :

 HISTORY : Appeals from the Income Tax Appellate Tribunal (ITAT)

R.F. Nariman, J.

Leave granted.

1. These appeals are from a judgment of the Delhi High Court disposing off several appeals and cross appeals. They relate to two American Companies which are the assessees in the present case, namely, e-Funds Corporation, USA (relating to assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08) and e-Funds IT Solutions Group Inc., USA (relating to assessment years 2000-01 to 2002-03 and 2005-06 to 2007- 08). The appeals from the Income Tax Appellate Tribunal (ITAT) by the assessees were allowed by the High Court, whereas cross-appeals by the department were rejected. After framing several substantial questions of law, the High Court narrated the undisputed facts as follows:

“6. Undisputed facts in brief may be first noticed. The assessees are companies incorporated in United States of America (USA, for short) and were residents of the said country. They were assessed and have paid taxes on their global income in USA. e-Fund Corp. was the holding company having almost 100% shares in IDLX Corporation, another company incorporated in USA. IDLX Corporation held almost 100% shares in IDLX International BV, incorporated in Netherlands and later in turn held almost 100% shares in IDLX Holding BV, which was a subsidiary again incorporated in Netherlands.

IDLX Holding BV was almost a 100% shareholder of e-Funds International India Private Limited, a company incorporated and resident of India (e-Fund International India Private Limited has been described as ‘e-Fund India’). IDLX International BV was also the parent/holding company having almost 100% shares in e-Fund Inc., which as noticed above, was a company incorporated in USA.

7. Both e-Fund Inc. and e-Fund Corp. have entered into international transactions with e-Fund India. The details of these transactions have to be examined in depth and have to be referred below. e-Fund India being a domestic company and resident in India was taxed on the income earned in India as well as its global income in accordance with the provisions of the Act. The international transactions between the assessees and e-Fund India and the income of e-Fund India, it is accepted, were made subject matter of arms length pricing adjudication by the Transfer Pricing Officer (TPO, for short) and the Assessing Officer (AO, for short) in the returns of income filed by e-Fund India.

We are not primarily concerned with the merits of the computation of income declared and assessed in the hands of e-Fund India in the present appeals, though the factum that e-Fund India was assessed to tax on its global income as per law or on arms length pricing in relation to associated transactions and the basis of the said computation of income earned by e-Fund India, as noticed below, is a relevant and an important fact. Revenue has not disputed the said legal position.

It is the contention of the Revenue that income of the two assessees were attributable to India because the two assessees had PE in India and should be taxed in India, irrespective of whether the said assessees had paid taxes in USA. Income earned and taxed in the hands of e-Fund India was different from the income attributable to the two assessees. Thus the balance or differential amount, i.e., income attributable to the two assessees, which was not included in income earned and taxed in the hands of e-Fund India, should be taxed in India.

8. As a principle what is stated and submitted by the Revenue cannot be contested and in fact not contested by the assessees as it is a principle applicable to international taxation. A foreign or a non-resident company can be taxed in the country where it has a subsidiary, which is also a PE on the income attributable to the said PE, even if the subsidiary (in the present case of e-Fund India) is being taxed in the said country.

The principle being that subsidiary being an independent and a distinct entity is taxed for its income, whereas the foreign entity, i.e., holding company is taxed for the income earned by the said independent entity attributable to the PE in the country where subsidiary is situated. The income of the subsidiary is not taxed in the hands of the non-resident principal and vice-versa. Thus, there is no double taxation in the hands of the holding company as income of the subsidiary is not taxed as income of foreign holding assessee. The principle is that a subsidiary constitutes an independent legal entity for the purpose of taxation.

2. The assessing authority decided that the assessees had a permanent establishment (hereinafter referred to as PE) as they had a fixed place where they carried on their own business in Delhi, and that, consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement of 1990 (hereinafter referred to as DTAA) was attracted. Consequently, the assessees were liable to pay tax in respect of what they earned from the aforesaid fixed place PE in India. The CIT (Appeals) dismissed the appeals of the assessees holding that Article 5 was attracted, not only because there was a fixed place where the assessees carried on their business, but also because they were “service PEs” and “agency PEs” under Article 5. In an appeal to the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a “fixed place PE” and “service PE” had been made out under Article 5, but said nothing about the “agency PE” as that was not argued by the Revenue before the ITAT.

However, the ITAT, on a calculation formula different from that of the CIT (Appeals), arrived at a nil figure of income for all the relevant assessment years. The appeal of the assessees to the High Court proved successful and the High Court, by an elaborate judgment, has set aside the findings of all the authorities referred to above, and further dismissed the cross-appeals of the Revenue. Consequently, the Revenue is before us in these appeals. 3. The learned Attorney General, Shri K.K. Venugopal, has argued before us that, under Article 5(1) of the DTAA, a fixed place PE has been made out on the facts of these cases, and  relied heavily upon the United States Securities and Exchange Commission Form 10K of e-Funds Corp. dated 31st March, 2003. According to the learned Attorney General:

    • Most of the employees are in India (In fact, the High Court records that 40% of the employees of the entire group are in India).
    • eFunds Corp has call centers and software development centers only in India.
    • eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India.
    • The master services agreement between the American and the Indian entity gives complete control to the American entity in regard to personnel employed by the Indian entity.
    • It is only through the proprietary database and software of eFunds Corp, that eFunds India carries out its functions for eFunds Corp (The High Court records that the software, intangible data etc is provided free of cost and then states that this is irrelevant).
    • The Corporate office of eFunds India houses an ‘International Division’ comprising the President’s office and a sales team servicing EFI and eFunds group entities in the United Kingdom, South East Asia, Australia and Venezuela. The President’s office primarily oversees operations of eFunds India and eFunds group entities overseas. The sales team undertakes marketing efforts for affiliate entities also.
    • The CIT(A) has referred to the Transfer Pricing Report which says that eFunds India provides management support and marketing support services to eFunds Corp group companies outside India. Regarding supervision of personnel rendering the services, the TP Report states as follows:
    • “The President’s office manages the operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to the President. The President’s overall reporting is to EFC. Though the personnel rendering marketing services are employees of EFI, they report to overseas group 9 entities to the extent that they are engaged in rendering services to such entities.” Applying the above facts, it is submitted that the assessees satisfy the requirements of a fixed place PE.
      The Supreme Court in the recent judgment in Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation-3, Delhi and others, (2017) SCC Online SC 474 has held that “it universally accepted that for ascertaining whether there is a fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on.”
    • It was further held that “the physically located premises have to be ‘at the disposal’ of the enterprise” and that “the place will be treated as ‘at the disposal’ of the enterprise when the enterprise has right to use the said place and has control thereupon. Consequently, he argued that physically located premises are “at the disposal” of the assessees with the degree of permanence required, namely, the entire year. In addition, he argued that the High Court was in error in holding that the place of management PE under Article 5(2)(a) was prima facie made out, but since the said provision had not been invoked and requires factual determination, Revenue’s argument was dismissed on this score.
    • Further, under Article 5(2)(l) of the DTAA, he argued that a service PE is clearly made out on facts because:
    • As per the consolidated Annual Report of eFunds Corp, most of the employees are in India. eFunds Corp has call centers and software development centers only in India.
    • eFunds Corp is essentially doing marketing work only and its contracts with clients are assigned, or sub-contracted to eFunds India.
    • Regarding supervision of personnel rendering the services, the TP Report states as follows:
    • “The President’s office manages the operations of eFunds India and eFunds group entities in UK and Australia and accordingly, employees of these entities report to the President. The President’s overall reporting is to EFC. Though the personnel rendering marketing services are employees of EFI, they report to overseas group entities to the extent that they are engaged in rendering services to such entities.”

 

    • The Master sub-contractor agreement between eFunds Corp and eFunds India discussed in the CIT(A)’s order provides in clause 1.1(a) as follows:
    • “Subcontractors personnel assigned to work with eFunds IT or Customers located in the United States shall be directed by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds IT. In the event Subcontractors personnel are assigned to perform such services in India, the Subcontractor shall supervise such work, acting at the direction of eFunds IT. eFunds IT shall be the sole judge of performance and capability of each of subcontractors personnel and may request the removal of one or more of Subcontractors personnel from a project covered by any statement of work as follows.”
      • It is submitted that the personnel engaged in providing these services were ostensibly the employees of eFunds India but were de facto working under the control and supervision of eFunds Corp. In this regard, reference was made to Para 17 of the judgment inDIT v. Morgan Stanley (2007) 7 SCC 1, where the Court held:

    “17……It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge.”

    • Furthermore, the AO in the Assessment Order has observed that eFunds Corp has seconded two employees to eFunds India and these employees worked as Sr. Director- Technical Services and Country Head-Business Development. The activities of the seconded employees go beyond mere ‘stewardship activities’ in terms of Morgan Stanley.
  • The term ‘Other Personnel’ has to be seen in the context of the facts of this case which show that eFunds India was not an independent subsidiary. Further, he also argued that a dependent agent PE was made out under Articles 5(4) and 5(5), there being a concurrent finding of facts of the CIT (Appeals) and ITAT in this regard. Also, according to the learned Attorney General, since the assessees failed to furnish information when sought for, an adverse inference was sought to be drawn against them and that, therefore, it is clear that once this inference is drawn, the burden shifts on to the assessees, which they will then have failed to discharge.

4. The learned Attorney General also relied heavily upon an admission made under the mutual agreement procedure (MAP) under Article 27 of the DTAA, in which, for the assessment year 2003-04 qua e-Funds Corp., and assessment years 2003-04 and 2004-05 qua e-Funds IT Solution Inc., the assessees have admitted that income tax will be attributable “to the Indian PEs” 14 based on a certain ratio and that, therefore, it is clear that this admission would continue to bind the assessees in all subsequent years as there was no change in the factual position.


5. As against this, Shri S. Ganesh, learned senior counsel for the respondents, has argued that the tests for whether there is a fixed place PE have now been settled by the judgment of this Court in Formula One (supra), and that it is clear that for a fixed place PE, it must be necessary that the said fixed place must be “at the disposal” of the assessees, which means that the assessees must have a right to use the premises for the purpose of their own business, which has not been made out in the facts of this case. He further argued that, on the facts of this case, both the US companies as well as the Indian company pay income tax, and the Transfer Pricing Officer by his order dated 22nd February, 2006, has specifically held that whatever is paid under various agreements between the US companies and the Indian company are on arm’s length pricing and that, this being the case, even if a fixed place PE is found, once arm’s length price is paid, the US companies go out of the dragnet of Indian taxation.

He also adverted to Article 5(6) to state that the mere fact that a 100% subsidiary may be carrying on business in India does not by itself means that the holding company would have a PE in India. Further, according to learned counsel, so far as the service PE is concerned, even the assessing officer did not find that such a PE existed. According to him, under Article 5(2)(l), it is necessary that the foreign enterprises must provide services to customers who are in India, which is not Revenue’s case as all their customers exist only outside India.

Further, according to the learned counsel, the entire personnel engaged in the Indian operations are employed only by the Indian company and the fact that the US companies may indirectly control such employees is only for purposes of protecting their own interest. Ultimately, there are four businesses that the assessees are engaged in, namely, ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services.

Since all these businesses are carried on outside India and the property through which these businesses are carried out, namely ATM networks, software solutions and other hardware networks and information technology infrastructure were all located outside India, the activities of e-Funds India are independent business activities on which, as has been noticed by the High Court, independent profits are made and income assessed to tax under the Income Tax Act.

According to the learned counsel, “agency PE” was never argued before the assessing officer and even before the ITAT. Therefore, no factual foundation for the same has been laid. Equally, according to the learned counsel, the settlement procedure availed for the assessment years in question cannot be said to be binding for subsequent years as they were without prejudice to the assessees’ contention that they have no PE in India. He also relied upon the OECD Commentary, paragraph 3.6 in particular, to demonstrate that the so-called admissions made and relied upon by the three authorities below were correctly overturned by the High Court.

Learned counsel also stated that the ground of adverse inference was never argued or put before any of the authorities below, and the only place that it could be found is in the assessment order for the year 2003-04, which order became non est as it was substituted by the agreement entered into between the parties ending in withdrawal of appeals before the CIT (Appeals).

Thus, according to the learned counsel, the view of the High Court is absolutely correct and should not be interfered with. Learned counsel also argued that the crossappeals of the Revenue were correctly dismissed in that, even though the ITAT decided the case in law against the assessees, yet it found on facts, differing from the calculation formula by the authorities below, that nil tax was payable. This is the only part of the ITAT judgment upheld by the High Court, and should not, therefore, be disturbed in any case.


6. Before we deal with the submissions made on both sides, it is necessary to first set out the statutory background. This is contained in Section 90 of the Income Tax Act, before it was amended in 2009. Section 90(1) and 90(2) of the Income Tax Act, as it then stood, read as under:

Section 90. Agreement with foreign countries.-

1) The Central Government may enter into an agreement with the Government of any country outside India-

(a) for the granting of relief in respect of-

(i) income on which have been paid both income-tax under this Act and income-tax in that country; or

(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) 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 to the extent they are more beneficial to that assessee.”

7. Under this provision, the India US Double Taxation Avoidance Agreement of 1990 was made. We are directly concerned with Article 5 of the DTAA, which reads as under:

ARTICLE 5 – Permanent establishment –

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources;

(g) a warehouse, in relation to a person providing storage facilities for others;

(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on;

(i) a store or premises used as a sales outlet;

(j) an installation or structure used for the exploration or exploitation of natural resources, but only if so used for a period of more than 120 days in any twelve-month period;

(k) a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period;

(l) the furnishing of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), within a Contracting State by an enterprise through employees or other personnel, but only if:

(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or

(ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)].

3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include any one or more of the following:

(a) the use of facilities solely for the purpose of storage, display, or occasional delivery of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or occasional delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise.

4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies – 21 is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if:

(a) he has and habitually exercises in the firstmentioned State an authority to conclude on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;

(b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or

(c) he habitually secures orders in the firstmentioned State, wholly or almost wholly for the enterprise.

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm’s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.

6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.”

8. Article 7 has also been referred to, by which the profits of an enterprise of a contracting State may be taxed in the other State only to the extent of so much of the business as is attributable to a permanent establishment in the other State.

Article 25 was referred to by the learned Attorney General to counter an argument made by Shri Ganesh based upon affidavits filed before this Court stating that if the assessees were made to pay tax in India, there would be double taxation. Article 25 provides for relief from such double taxation, by which the United States shall allow to a resident or citizen of the United States as a credit against US tax on income tax that is paid to India by or on behalf of such citizen in India. Article 27 is also important and reads as under:

ARTICLE 27 – Mutual agreement procedure –

1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case to the competent authority of the Contracting State of which he is a resident or national. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits or other procedural limitations in the domestic law of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. The competent authorities, through consultations, shall develop appropriate bilateral procedures, conditions, methods and techniques for the implementation of the mutual agreement procedure provided for in this Article. In addition, a competent authority may 24 devise appropriate unilateral procedures, conditions, methods and techniques to facilitate the above-mentioned bilateral actions and the implementation of the mutual agreement procedure.”

9. This Article must be read with Rule 44H of the Income Tax Rules, 1962, which reads as under:

Action by the Competent Authority of India and procedure for giving effect to the decision under the agreement. 44H.

(1) Where a reference has been received from the competent authority of a country outside India under any agreement with that country with regard to any action taken by any income-tax authority in India, the Competent Authority in India shall call for and examine the relevant records with a view to give his response to the competent authority of the country outside India.

(2) The Competent Authority in India shall endeavour to arrive at a resolution of the case in accordance with such agreement.

(3) The resolution arrived at under mutual agreement procedure, in consultation with the competent authority of the country outside India, shall be communicated, wherever necessary, to the Chief Commissioner or the Director-General of Income-tax, as the case may be, in writing.

(4) The effect to the resolution arrived at under mutual agreement procedure shall be given by the Assessing Officer within ninety days of receipt of the same by the Chief Commissioner or the Director- General of Income-tax, if the assessee,-

(i) gives his acceptance to the resolution taken under mutual agreement procedure; and

(ii) withdraws his appeal, if any, pending on the issue which was the subject matter for adjudication under mutual agreement procedure.

(5) The amount of tax, interest or penalty already determined shall be adjusted after incorporating the decision taken under mutual agreement procedure in the manner provided under the Income-tax Act, 1961 (43 of 1961), or the rules made thereunder to the extent that they are not contrary to the resolution arrived at.

Explanation.-For the purposes of rules 44G and 44H, “Competent Authority of India” shall mean an officer authorised by the Central Government for the purposes of discharging the functions as such.”

10. The Income Tax Act, in particular Section 90 thereof, does not speak of the concept of a PE. This is a creation only of the DTAA. By virtue of Article 7(1) of the DTAA, the business income of companies which are incorporated in the US will be taxable only in the US, unless it is found that they were PEs in India, in which event their business income, to the extent to which it is attributable to such PEs, would be taxable in India. Article 5 of the DTAA set out hereinabove provides for 26 three distinct types of PEs with which we are concerned in the present case: fixed place of business PE under Articles 5(1) and 5(2)(a) to 5(2)(k); service PE under Article 5(2)(l) and agency PE under Article 5(4).

Specific and detailed criteria are set out in the aforesaid provisions in order to fulfill the conditions of these PEs existing in India. The burden of proving the fact that a foreign assessee has a PE in India and must, therefore, suffer tax from the business generated from such PE is initially on the Revenue. With these prefatory remarks, let us analyse whether the respondents can be brought within any of the sub-clauses of Article 5.

11. Since the Revenue originally relied on fixed place of business PE, this will be tackled first. Under Article 5(1), a PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on. What is a “fixed place of business” is no longer res integra. In Formula One(supra), this Court, after setting out Article 5 of the DTAA, held as follows:

“32. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be ‘at the disposal’ of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as ‘at the disposal’ of the enterprise when the enterprise has right to use the said place and has control thereupon.

xxx xxx xxx

34. According to Philip Baker, the aforesaid illustrations confirm that the fixed place of business need not be owned or leased by the foreign enterprise, provided that is at the disposal of the enterprise in the sense of having some right to use the premises for the purposes of its business and not solely for the purposes of the project undertaken on behalf of the owner of the premises.

35. Interpreting the OECD Article 5 pertaining to PE, Klaus Vogel has remarked that insofar as the term ‘business’ is concerned, it is broad, vague and of little relevance for the PE definition. According to him, the crucial element is the term ‘place’. Importance of the term ‘place’ is explained by him in the following manner:

“In conjunction with the attribute ‘fixed’, the requirement of a place reflects the strong link between the land and the taxing powers of the State. This territorial link serves as the basis not 28 only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either Contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC).”

36. We would also like to extract below the definition to the expression ‘place’ by Vogel, which is as under: “A place is a certain amount of space within the soil or on the soil. This understanding of place as a threedimensional zone rather than a single point on the earth can be derived from the French Version (‘installation fixe’) as well as the term ‘establishment’. As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil.

This requirement, however, stems from the term ‘fixed’ rather than the term ‘place’, given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term ‘establishment’ makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term ‘installation’ instead of ‘place’.

The term ‘place’ is used to define the term ‘establishment’. Therefore, ‘place’ includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property (in civil law countries) is not authoritative.

It is rather the context (including, above all, the terms ‘fixed’/’fixe’), as well as the object and purpose of Article 5 OECD and UN MC itself, in the light of which the term ‘place’ needs to be interpreted. This approach, which follows from the general rules on treaty interpretation, gives a certain leeway for including movable property in the understanding of ‘place’ and, therefore, we assume a PE once such property has been ‘fixed’ to the soil.

For example, a work bench in a caravan, restaurants on permanently anchored river boats, steady oil rigs, or a transformator or generator on board a former railway wagon qualify as places (and may also be ‘fixed’). In contrast, purely intangible property cannot qualify in any case. In particular, rights such as participations in a corporation, claims, bundles of claims (like bank accounts), any other type of intangible property (patents, software, trademarks etc.) or intangible economic assets (a regular clientele or the goodwill of an enterprise) do not in themselves constitute a PE.

They can only form part of PE constituted 30 otherwise. Likewise, an internet website (being a combination of software and other electronic data) does not constitute tangible property and, therefore, does not constitute a PE. Neither does the mere incorporation of a company in a Contracting State in itself constitute a PE of the company in that State. Where a company has its seat, according to its by-laws and/or registration, in State A while the POEM is situated in State B, this company will usually be liable to tax on the basis of its worldwide income in both Contracting States under their respective domestic tax law. Under the A-B treaty, however, the company will be regarded as a resident of State B only (Article 4(3) OECD and UN MC).

In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the piece of land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent PEs were superfluous).

This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, and conducts meetings in the purchasing director’s 31 office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working.”

37. Taking cue from the word ‘through’ in the Article, Vogel has also emphasised that the place of business qualifies only if the place is ‘at the disposal’ of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue.

According to him, ‘disposal’ is the power (or a certain fraction thereof) to use the place of business directly. Some of the instances given by Vogel in this behalf, of relative standards of control, are as under: “The degree of control depends on the type of business activity that the taxpayer carries on. It is therefore not necessary that the taxpayer is able to exclude others from entering or using the POB. The painter example in the OECD MC Comm. (no. 4.5 OECD MC Comm. on Article 5) (however questionable it might be with regard to the functional integration test) suggests that the type and extent of control need not exceed the level of what is required for the 32 specific type of activity which is determined by the concrete business.

By contrast, in the case of a selfemployed engineer who had free access to his customer’s premises to perform the services required by his contract, the Canadian Federal Court of Appeal ruled that the engineer had no control because he had access only during the customer’s regular office hours and was not entitled to carry on businesses of his own on the premises. Similarly, a Special Bench of Delhi’s Income Tax Appellate Tribunal denied the existence of a PE in the case of Ericsson. The Tribunal held that it was not sufficient that Ericsson’s employees had access to the premises of Indian mobile phone providers to deliver the hardware, software and know-how required for operating a network. By contrast, in the case of a competing enterprise, the Bench did assume an Indian PE because the employees of that enterprise (unlike Ericsson’s) had exercised other businesses of their employer.

The OECD view can hardly be reconciled with the two court cases. All three examples do indeed shed some light onto the method how the relative standards for the control threshold should be designed. While the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source 33 State, the Canadian and Indian decisions advocate for stricter standards for the control threshold.

The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries (cf. Article 24(3) OECD and UN MC), and that facilities of a subsidiary would rarely been unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually exist only where the taxpayer is free to use the POB: – at any time of his own choice; – for work relating to more than one customer; and – for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion.

This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop (cf. Article 5(2)(e) OECD and UN MC) of 10 or 12 square 34 meters can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine.”

38. OECD commentary on Model Tax Convention mentions that a general definition of the term ‘PE’ brings out its essential characteristics, i.e. a distinct “situs”, a “fixed place of business”.

This definition, therefore, contains the following conditions: – the existence of a “place of business”, i.e. a facility such as premises or, in certain instances, machinery or equipment; – this place of business must be “fixed”, i.e. it must be established at a distinct place with a certain degree of permanence; – the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.”

12. Thus, it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals) and the ITAT have essentially adopted a fundamentally erroneous approach in saying that they were contracting with a 100% subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. The High Court has dealt with this aspect in some detail in which it held:

“49. The Assessing Officer, Commissioner (Appeals) and the tribunal have primarily relied upon the close association between e-Fund India and the two assessees and applied functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business. This is not a proper and appropriate test to determine location PE. The fixed place of business PE test is different. Therefore, the fact that e-Fund India provides various services to the assessee and was dependent for its earning upon the two assessees is not the relevant test to determine and decide location PE. The allegation that e-Fund India did not bear sufficient risk is irrelevant when deciding whether location PE exists.

The fact that e-Fund India was reimbursed the cost of the call centre operations plus 16% basis or the basis of margin fixation was not known, is not relevant for determining location or fixed place PE. Similarly what were the direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE. Assignment or sub-contract to e-Fund India is not a factor or rule which is to be applied to determine applicability of Article 5(1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not the relevant criteria/test. e-Fund India was/is a 36 separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayers.

Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between the Indian subsidiary and the foreign Principal under Article 5(1). Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place PE exists.”

13. It further went on to hold that the ITAT’s finding that the assessees were a joint venture or sort of partnership with the Indian subsidiary was wholly incorrect. Also, none of these arguments have been invoked by the Revenue and such a finding would, therefore, be perverse. After citing Klaus Vogel on Double Taxation Conventions, Arvid A. Skaar in Permanent Establishment: Erosion of a Tax Treaty Principle and Bollinger vs. Commissioner, 108 S.Ct. 1173, the High Court found against the Revenue, holding that there is no fixed place PE on the facts of the present case. We agree with the findings of the High Court in this regard.

14. Reliance placed by the Revenue on the United States Securities and Exchange Commission Form 10K Report, as has been correctly pointed out by the High Court, is also misplaced. It is clear that the report speaks of the e-Funds group of companies worldwide as a whole, which is evident not only from going through the said report, but also from the consolidated financial statements appended to the report, which show the assets of the group worldwide.

15. Also, Shri Ganesh has pointed out that the two American companies have four main business activities which are: ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. He was at great pains to point out the report of Deloitte Haskins and Sells dated 13th March, 2009, produced before the CIT (Appeals), in which, on behalf of their American clients, the said firm of Chartered Accountants stated:

“2. The nature of business under each of the above verticals is detailed below:

a) ATM Management Services

eFunds US’s ATM Management Services (“ATM Services”) segment covers the business of ATM deployment, management and branding services. eFunds US is an independent provider of ATMs and it places ATMs in convenience, grocery, general merchandise, and drug stores as well as gas stations located throughout the United States and Canada. The ATMs run on an operating software which is generally owned by the original ATM manufacturer whereas the datacentre, to which such ATMs are connected, operate on the software platforms such as ‘Connex’ which have been developed and maintained by eFunds US.

Services provided by eFunds US:

eFunds US provided the processing for over 11,000 of the ATM machines in its network. Most of the ATMs were owned by the Appellant and its associate companies. All these ATMs were installed outside India and mainly in United States.

Services provided by eFunds India:

The only involvement of eFunds India was responding to queries raised by the customers, if they faced any difficulty in operation of their transaction which was part of activity (d) referred above.

b) Electronic Payment Management

eFunds US’s Electronic Payment Management segment provides products and services in two broad categories: Payment Processing Software and Electronic Payment Processing Services. The business involves processing transactions for regional automated teller machine or ATM networks in the United States and also transaction processing for retail point-of-sale terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions.

Processing Services:

eFunds US processes transactions for regional ATM networks in the United States. They also provide transaction processing for retail point of sale (“POS”) terminals that accept payments from debit cards and paper cheques that have been converted into electronic transactions. Transaction processing involves electronically transferring money from a person’s checking or savings account according to his or her instructions. To carry out the tasks required, each ATM or POS device is typically connected to several computer networks. None of these networks is installed in India.

These networks include private networks that connect the devices of a single owner, shared networks that serve several device owners in a region, and national shared networks that provide access to devices across regions. Each shared network has numerous financial institution members. eFunds US provides its Customers with access across multiple networks. eFunds US’s Government services EBT (Electronic Benefits Transfer) business was started in response to federal mandates that require state and local Governmental agencies to convert to electronic payment methods for the distribution of benefits under entitlement programs, primarily food stamps and Transitional Aid to Needy Families. The EBT processing system manages, supports, and controls the electronic payment and distribution of cash benefits to program participants through ATMs and POS networks. As mentioned earlier, these are mostly located in USA. In any case, none was located in India.

Software Products:

eFunds US develops and sells electronic funds transfer software, Connex and Architect, used in electronic payment services to in 40 house processors and regional networks in 23 foreign countries and in the United States. None of the software products of eFunds US was licensed or installed in India. This software runs on IBM and Tandem computing platforms. eFunds US also provides software maintenance and support services as part of its Global Outsourcing business. eFunds US has developed various other software/solutions.

Services provided by eFunds US:

eFunds US was responsible for Customer Interface and customization of products and services as per the dictates of the Customer. Agreement/contracts with the Customer were entered into by eFunds US. All risks and responsibilities for performance of the Contract at all times were of eFunds US only. All Software’s/solutions are developed by eFunds US. Software writing and conceptualization of ideas were done by eFunds US. All Networks and Infrastructure for this category of services is owned by eFunds US only. Connex was developed by a company acquired by eFunds US.

eFunds US’s associate company in United Kingdom has developed and owns the Architect software which is middleware used primarily by financial institutions in Europe (there is one customer in Chicago). This software runs on IBM and Tandem computing platforms. All of them were located outside India. In accordance with the terms of the contract with Government Agencies, eFunds US is responsible for management, support and control of the electronic payment band distribution of cash benefits to program participants through its ATM and point of sale network.

Services provided by eFunds India:

eFunds India provided testing, bug fixing and other related 41 software development support services to eFunds US for various software/software based solutions developed by eFunds US. Such services are required by eFunds US in the course of development of software/software based solutions and their use in providing services to customers. The process of development of software/solutions involves testing the same with sample data to determine the workability of the software. Further, certain errors or bugs may be found in the software/solutions at such eFunds US avails the services of eFunds India for bug fixing. The work performed by eFunds India for eFunds Government Services Business (EBT Processing) was limited to responding to the inbound calls made to its call centre for enquiry on non-acceptance of cheques and opening of accounts.

c) Decision Support & Risk Management

eFunds’ US Decision Support & Risk Management (“Risk Management”) segment provides risk management-based data and other products to financial institutions, retailers and other businesses that assist in detecting fraud and assessing the risk of opening a new account or accepting a cheque. This segment offers products and services that help determine the likelihood of account fraud and identity manipulation and assess the overall risks involved in opening new accounts or accepting payment transactions.

SCAN:

SCAN or Shared Cheque Authorization Network, helps retailers reduce the risk of write-offs for dishonoured cheques due to insufficient funds and other forms of account fraud or identity manipulation. When a cheque is presented as payment at the point-of-sale, SCAN members run 42 the cheque through a scanner. The information on the cheque is then compared to the SCAN database to determine whether there have been payment problems with the cheque writer or his or her account. SCAN then reports any issues to the retailer and the merchant decides whether or not to accept the cheque.

ChexSystems:

The ChexSystems business is a provider of new account applicant verification services for financial institutions. ChexSystems provides access to more than 17 million closed-forcause account histories and has recorded 124 million new account enquiries. An account is considered closed-for-cause when, for example, a consumer refuses to pay the account fee and the bank closes the account. ChexSystems helps financial institutions immediately assess the risks involved in opening an account for a new customer by supporting real-time enquiries to its database of consumer debit account performance. ChexSystems’ database includes account history data provided by or purchased from financial institutions and other data purchased from third parties including driver’s license data, deceased person’s records and suspect address lists. All such data base relates to the persons located in the US and the customers of this data base were banks and retailers located in the US.

Services provided by eFunds US:

eFunds US was responsible for Customer interface and agreement/contracts with the customers were entered into by eFunds US. All risks and responsibilities for performance of contracts at all times were of eFunds US only. All eFunds risk management services are based on, or enhanced by eFunds’ proprietary DebitBureau database, which is located in data centres of the group 43 situated in USA. DebitBureau contains over three billion records and includes data form eFunds ChexSystemsSM and SCANSM databases and other sources.

The data in DebitBureau is used to screen for potentially incorrect, inconsistent, or fraudulent social security numbers, home addresses, telephone numbers, driver license information, and other indicators of possible identity manipulation. Using this data, eFunds US can perform various tests to validate a consumer’s identity and assess and rank the risk of fraud associated with opening an account for or accepting a payment from that consumer. eFunds US software development centers in the United States, as well as in the U.S. data centers and remotely at the customers’ sites develop and maintain software for these service offerings.

Services provided by eFunds India:

The work performed by eFunds India involved responding to the inbound calls made by the customers located outside India to customer support center of eFunds US. These calls were routed to eFunds India for enquiry on non-acceptance of cheques and opening of accounts. eFunds India also provided software support services for SCAN and Chex process. eFunds India was only involved in bug fixing and software maintenance.

d) Global Outsourcing Services & Professional Services

eFunds US provide its clients with information technology and business process outsourcing services to complement and support its electronic payments business. Its business process management and outsourcing services focus on both back-office and customer support business processes, such as accounting operations, help desk, account management, transaction processing and call center operations. It consists of providing information technology services including maintenance of hardware and networks, installation of eFunds US electronic payment products and the integration of these products within the customer’s existing information technology infrastructure.

All of these hardwares, networks and information technology infrastructure were located outside India. Professional services include customizing standard eFunds US products and developing new applications for clients who want additional features and functionality and help clients test and refine eFunds US products in their information technology environments. In addition, it also covers providing on-site user training on eFunds US products and solutions for the information technology, operations and management staff of clients.

Services provided by eFunds US:

eFunds US was responsible for Customer Interface and customization of products and services as per the dictates of the Customer. Agreement/ contracts with the customers were entered into by eFunds US. All risks and responsibilities for performance of the contracts at all times were of eFunds US only. Services provided by eFunds India: eFunds US subcontracted part of its responsibilities under professional services contract with some of its customers to eFunds India which involve the following:

  • Data Processing Services including making outbound calls to collate data;
  • Making soft outbound calls to customers of eFunds US clients to follow up payment; and
  • Responding to inbound calls from customers from dealers/customers of telecom services providers (who are customers of eFunds US), to check on the status of applications made for new connections, change in billing plans etc.

Note: Logica Global, an independent company, had received an order from the Reserve Bank of India for development and implementation of certain software. A part of this work was subcontracted to eFunds India directly by Logica Global. The Appellant had nothing to do with this contract.”

16. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad. This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore, correct on this score.

17. Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of the DTAA is that an enterprise must furnish services “within India” through employees or other personnel. In this regard, this Court has held, in Morgan Stanley (supra), as follows: “16. Article 5(2)(l) of DTAA applies in cases where MNE furnishes services within India and those services are furnished through its employees. In the present case we are concerned with two activities, namely, stewardship activities and the work to be performed by deputationists in India as employees of MSAS. A customer like MSCo who has worldwide operations is entitled to insist on quality control and confidentiality from the service provider. For example in the case of software PE a server stores the data which may require confidentiality.

A service provider may also be required to act according to the quality control specifications imposed by its customer. It may be required to maintain confidentiality. Stewardship activities involve briefing of the MSAS staff to ensure that the output meets the requirements of MSCo. These activities include monitoring of the outsourcing operations at MSAS. The object is to protect the interest of MSCo. These stewards are not involved in day-today management or in any specific services to be undertaken by MSAS. The stewardship activity is basically to protect the interest of the customer. In the present case as held hereinabove MSAS is a service PE. It is in a sense a service provider.

A customer is entitled to protect its interest both in terms of confidentiality and in terms of quality control. In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services. We do not agree with the ruling of AAR that the stewardship activity would fall under Article 5(2)(l). To this extent we find 47 merit in the civil appeal filed by the appellant (MSCo) and accordingly its appeal to that extent stands partly allowed.

17. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS.

It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge.

18. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to 48 India.

He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(l). We find no infirmity in the ruling of ARR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed.” (at pages 15-16)

18. It has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) is not satisfied. However, the learned Attorney General, relying upon paragraph 42.31 of the OECD Commentary, has argued that services have to be furnished within India, which does not mean that they have to be furnished to customers in India. Para 42.31 of the OECD Commentary reads as under:

“Whether or not the relevant services are furnished to a resident of a state does not matter: what matters is that the services are performed in the State through an individual present in that State.”

19. Based upon the said paragraph, Shri Venugopal has argued that in assessment year 2005-06, two employees of the American firm were seconded in India and that, therefore, it is clear that management of the American company through these employees has obviously taken place. The High Court, in dealing with this contention, has found as follows:

“62. The appellants had pleaded before the authorities and the tribunal that prior to assessment year 2005-06 not even a single employee of the assessee ever visited India even for a short period and in 2005-06, two employees of e-Fund were transferred to e-Fund India and that the entire expenditure for these two employees were borne by e-Fund India. No employees were present in India after 2005-06. Presence of employees in India is relevant under Article 5(2)(l) but the said employees should furnish services within the contracting State.

These services should not be mere stewardship services. The Assessing Officer has recorded that employees were seconded to e-Fund India but the functions they performed and whether they performed functions and reported to e-Fund Corp/associated enterprise was not known or ascertained. This was not the correct way of determining and deciding whether service PE existed. Whether the seconded employees were performing stewardship services or were directly involved with the working operations was relevant. It is also not known whether the services were performed related to services provided to an associated enterprise in which case clause 5(2)(l)(ii) would be applicable. In the said situation, the question of attribution of income etc. would also arise.

63. Two employees of e-Fund Corp were deputed to e-Fund India in the assessment years 2005-06. The case of the assessee and e-Fund India is that they were deputed to look towards development of domestic work in India. Payment of these employees as per the Revenue to the extent of 25% was borne by e-Fund India and balance 75% was borne by e-Fund Corp. The Assessing Officer on this basis has observed that this reduced cost base of e-Fund India as remuneration was paid by e- Fund Corp and the said employees were at liberty to perform functions of e-Fund Corp even while working for e-Fund India. The response of the assessee as quoted in the assessment order was that e-Fund India, apart from export activities had also domestic business in India.

This was evident from the return of income filed by e-Fund India where domestic income was computed separately as it was not eligible for deduction under Section 10A of the Act. Copy of the return was furnished. It was further stated that cost of personnel seconded in India was fully borne by e-Fund India i.e. 100% of the salary paid to the said employees seconded to India were debited to profit and loss accounts. 75% of the salary component was paid abroad by e-Fund Corp but the same was reimbursed by e-Fund India. This was in accordance with and permitted under the Indian Exchange Control Regulations.

It was further stated that the Assessing Officer was wrong in assuming that the two seconded employees were at liberty to function for e-Fund Corp while they were working for e-Fund India. The seconded employees were working under the control and supervision of e-Fund India. The Assessing Officer thereupon has not commented on the reply of the assessee, though he has recorded comments in 51 respect of replies to other issues raised by him (see paragraph 7 of the assessment order). The aforesaid factual assertion made by the assessee, therefore, was not negated or questioned by the Assessing Officer.”


20. We entirely agree with the approach of the High Court in this regard. Article 42.31 of the OECD Commentary does not mean that services need not be rendered by the foreign assessees in India. If any customer is rendered a service in India, whether resident in India or outside India, a “service PE” would be established in India. As has been noticed by us hereinabove, no customer, resident or otherwise, receives any service in India from the assessees. All its customers receive services only in locations outside India.

Only auxiliary operations that facilitate such services are carried out in India. This being so, it is not necessary to advert to the other ground namely, that “other personnel” would cover personnel employed by the Indian company as well, and that the US companies through such personnel are furnishing services in India. This being the case, it is clear that as the very first part of Article 5(2)(l) is not attracted, the question of going to any other part of 52 the said Article does not arise. It is perhaps for this reason that the assessing officer did not give any finding on this score.

21. Shri Ganesh has argued before us that the “agency PE” aspect of the case need not be gone into as it was given up before the ITAT. He is right in this submission as no argument on this score is found before the ITAT. However, for the sake of completeness, it is only necessary to agree with the High Court, that it has never been the case of Revenue that e-Funds India was authorized to or exercised any authority to conclude contracts on behalf of the US company, nor was any factual foundation laid to attract any of the said clauses contained in Article 5(4) of the DTAA. This aspect of the case, therefore, need not detain us any further.

22. Shri Ganesh has referred to and relied upon an order of the Additional Taxation Commissioner, who is the Transfer Pricing Officer. The said order is dated 22nd February, 2006 and states as under: “The taxpayer company filed its return of income with ACIT Circle 11(1), New Delhi. A reference was received from the Assessing Officer to determine the ‘arm’s length price’ u/s 92CA(3) in respect of ‘international transactions’ entered into by the assessee during the F.Y. 2002-03.

In response to notice u/s 92CA, Shri Vijay Iyer, CA of S.R. Batliboi & Co. Chartered Accountants, authorized representative of the assessee appeared form time to time. The documentation prescribed under Rule 10D of the Income Tax Rules was submitted and placed on record. The taxpayer company is engaged in providing IT enabled services which include Back office services and Call centre services. It also has a software design center for development of software for call centres. eFunds International (India) Pvt. Ltd. is a wholly owned subsidiary of IDLX Holdings BV, Netherlands. IDLX is a wholly owned subsidiary of eFunds Corp. The major international transactions undertaken by the assessee during the year is given below:

S. No.

Description of transaction

Method

Value (In Rs.)

1.

Financial Shared Services (Back Office)

TNMM

33.9 Cr.

2.

Call Center Services (Shared Service Centre)

TNMM

88.03 Cr.

3.

Software Development (Off-shore for call centres)

TNMM

57.58 Cr.

54 In addition to the above the assessee has also provided software development services to overseas eFunds group entities. The international transactions undertaken by the assessee were examined vis-a-vis the method applied by the assessee for arriving at the arm’s length price. The assessee has relied on the Transactional Net Margin Method (TNMM) in respect of all the major international transactions.

After examination of the documentation and discussion with the authorized representative of the assessee, no adverse inference is drawn in respect of the Arm’s Length Price (ALP) of the international transactions, as declared by the assessee in Form 3CEB, annexed to the return of the Income.” Shri Ganesh is correct in stating that as the arm’s length principle has been satisfied in the present case, no further profits would be attributable even if there exists a PE in India. This was specifically held in Morgan Stanley(supra) as follows:

“32. As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm’s length principle we have quoted Article 7(2) of DTAA. According to AAR where there is an international transaction under which a non-resident compensates a PE at arm’s length price, no further profits would be attributable in India. In this connection, AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 55 2004 also issued by CBDT. This is the key question which arises for determination in these civil appeals. (at page 25)

xxx xxx xxx

35. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of the IT Act.

All provisions of the IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carryforward and set-off losses, etc. However, deviations are made by DTAA in cases of royalty, interest, etc. Such deviations are also made under the IT Act (for example Sections 44-BB, 44-BBA, etc.).

36. Under the impugned ruling delivered by AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm’s length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken, there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm’s length basis taking into account all the risk-taking functions 56 of the enterprise. In such cases nothing further would be left to be attributed to PE.

The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to PE).” (at pages 27-28)

23. As a large portion of Shri Venugopal’s argument was in relation to the MAP settlement in the present case, it would be necessary to refer, in some detail, to the documents produced on this account.

24. Resolution dated 23rd April, 2007 passed by the competent authority of India, which was strongly relied upon by Shri Venugopal, is set out hereinbelow:

Resolution under Section 90 of Income Tax Act, 1961 read with Article 27 of Indo-USA Double Taxation Avoidance Agreement

1. The Acting Director (International), Competent Authority of USA initiated Mutual Agreement Procedure in the case of M/s eFunds Corporation and eFunds I.T. Solutions Inc. for the previous year ending 31.03.2003 with the Competent Authority of India under the Double Taxation Avoidance Agreement vide their letter No.SE:LM:IN:T:2:JN dated 8.05.2006.

Subsequently, vide letter dated 16.02.2007 Competent Authority of USA initiated Mutual Agreement Procedure for the previous year ending 31.03.2004 in the eFunds I.T. Solution Group Inc. The Competent Authorities of both the countries after having examined the facts of the case and issues involved have arrived at a resolution in terms of Section 90 of Income Tax Act, 1961 read with Article 27 of Indo-USA Double Taxation Avoidance Agreement and Rule 44H of Income Tax Rules, 1962.

2. The Competent Authorities of USA and India have reached an agreement as follows with respect to the tax assessment on M/s eFunds Corporation and eFunds IT Solutions Group Inc.:- Income will be attributed to the Indian PEs based on the ratio of certain developed and acquired tangible and intangible assets in India and outside India. Out of the total assets for the AY 2003-04, 10.48% of the assets were located in India and accordingly 10.48% of the income would be attributable to India. The percentage attributable to India for the AY ending 2005 was arrived at 11.11%.

These percentages will be applied to the base of consolidated gross income as reduced by the income of subsidiary eFunds India Pvt. Ltd. Already reported in India. Thereafter, the total income so attributed will be apportioned between eFunds and IT solutions in the ratio of 85% (to eFunds) and 15% (to IT Solutions) for the AY 2003-04 and 87% (to eFunds and 13% (to IT Solutions) for the AY 2004-05. In view of the above, the income attributor, as agreed upon is given below:-

 

A.Y. 2003-04

A.Y. 2004-05

 

Figures in US $ million

Figures in US $ million

Apportionable base income

25.12

30.71

Percentage attributed to India

10.48%

11.11%

Income attributed to India

2.63

3.41

Allocation between IT Solutions and eFunds IT Solutions eFunds

0.39 (15%) 2.24 (85%)

0.45(13%) 2.96(87%)

Interest will be chargeable as per provisions of the Income -Tax Act, 1961.

3. The Assessing Officer will give effect to this resolution in terms of clause 4 of Rule 44H of the Income Tax Rules, 1962.

4. Appeals, if any, filed by both the parties will be withdrawn.”

25. However, Shri Ganesh stated that this was not the end of the matter as the Department of Treasury in Washington, by a letter dated 7th May, 2007, specifically stated, “although we do not agree on the technical merits that e-Funds and IT Solutions had a PE in India, we reached a mutual agreement with a view to avoid double taxation”. Equally the same document states: “Effect on Future Years: The competent authority determination made herein is not binding on subsequent years.”

26. To the same effect are the letters dated May 14, 2007 written by e-Funds Corp. to the Deputy Director of International Tax Circle in India. Shri Ganesh has also referred to and relied upon paragraph 3.6 of the OECD Manual on MAP Procedure, which reads as follows:

3.6. Competent Authority Agreements

Competent authority agreements or resolutions are often case and time specific. They are not considered precedents for either the taxpayer or the tax administrations in regard to adjustments or issues relating to subsequent years or for 60 competent authority discussions on the same issues for other taxpayers. In fact, the letters exchanged between competent authorities to resolve a case often state as much. This is because the competent authorities have reached an agreement that often takes into account the facts of the particular taxpayer, the differences in the provisions of the tax law in each country, as well as the effects of the economic indicators on the particular transactions at the relevant time. Any review or adjustments of subsequent years by a taxpayer or tax administration is best based upon the particular circumstances, facts and documentary evidence existing for those years.”

27. However, the learned Attorney General relied upon paragraph 1.3.1 of the OECD Manual and Best Practice No.3, in particular, which reads as under:

Best Practice No. 3: Principled approach to resolution of cases

In the resolution of MAP cases, a competent authority should engage in discussions with other competent authorities in a principled, fair, and objective manner, with each case being decided on its own merits and not by reference to any balance of results in other cases. To the extent applicable, the Commentary to the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines are an appropriate basis for the development of a principled approach.

As part of a principled approach to MAP cases, competent authorities should be consistent and reciprocal in the positions they take and not change position on 61 an issue from case to case, depending on which side of the issue produces the most revenue. Although a principled approach is paramount, where an agreement is not otherwise achievable, both competent authorities should look for appropriate opportunities for compromise in order to eliminate double taxation. To the extent possible, competent authorities who face significant recurring issues in their bilateral relationship may wish to reach agreement on the consistent treatment of such issues.”

A perusal of the above would show that a competent authority should engage in discussion with the other competent authority in a principled, fair and objective manner, with each case being decided on its own merits. It is also specifically observed that where an agreement is not otherwise achievable, then both parties should look for appropriate opportunities for compromise in order to eliminate double taxation on the facts of the case, even though a principled approach is important.

The learned Attorney General also relied upon Best Practice No.1 of the said OECD Manual, which requires the publication of mutual agreements reached that may apply to a general category of taxpayers which would then improve guidance for the future. Best Practice No.1 has no application on the facts 62 of the present case, as the agreement reached applies only to the respondent companies, and not to any general category of taxpayers. It is clear, therefore, that Shri Ganesh is right in relying upon Article 3.6 of the OECD Manual. It is very clear, therefore, that such agreement cannot be considered as a precedent for subsequent years, and the High Court’s conclusion on this aspect is also correct.

28. The learned Attorney General has also laid great emphasis on non-disclosure of documents and has relied upon a long list of documents that the assessees were asked to disclose and which they did not. From this, according to the learned Attorney General, an adverse inference should be drawn, and from this alone it should be inferred that a PE of the assessees, therefore, exists in India. We are afraid that this argument cannot be countenanced at this stage as it has never been raised before any of the authorities below and has not been raised before the High Court also. This being the case, we do not think it necessary to get into this aspect of the matter.

29. Having held in favour of the assessees that no permanent establishment in India can possibly be said to exist on the facts of the present case, we do not deem it necessary to go into the cross-appeals that were filed before the High Court, which were dismissed by the High Court agreeing with the ITAT that the calculation of the ITAT would lead to nil taxation. This point would not arise in view of our decision on the facts of the present case. It is, therefore, unnecessary to go into this aspect of the matter.

30. The appeals are accordingly dismissed with no order as to costs.

………………………………J. (R.F. Nariman)

……………………………….J. (Sanjay Kishan Kaul)

New Delhi;

October 24, 2017

The Commr. of Income-tax, U. P Versus Messrs Gappumal Kanhaiya Lal

Supreme Court-min


AIR 1951 SC 5 : (1950) SCR 563 : (1950) 18 ITR SC 584 : (1950) SCJ 443

(SUPREME COURT OF INDIA)

The Commr. of Income-tax, U. P Appellant
Versus
Messrs Gappumal Kanhaiya Lal Respondent

(Before : Saiyid Fazl Ali, M. Patanjali Sastri, Mehr Chand Mahajan And B. K. Mukherjea, JJ.)

Appeal No. 6 of 1949 Decided on : 26-05-1950.

Income Tax Act, 1922—Section 9—Annual Computation of Income from Property—U.P. Municipalities Act, 1916—Section 128 and 149.

Counsel for the Parties:

Shri M. C. Setalvad, Attorney-General for India (Shri H. J. Umrigar, Advocate, Supreme Court, with him) instructed by Shri P. A. Mehta, Advocate for Appellant

Shri Gopi Nath Kanzru, Senior Advocate, Supreme Court, (Shri K. B. Asthana, Advocate, Supreme Court with him) instructed by Shri S. P. Varma, Advocate for Respondents.

ORDER

1. This appeal from a judgment of the High Court of Judicature at Allahabad dated 31-8-1944 raises the same points as have been discussed in Civil Appeal No. 66 of 1949. The Income-tax Appellate Tribunal referred four questions to the High Court of Judicature at Allahabad under S. 66 (1), Income-tax Act. These questions related to the year of assessment 1939-40. The High Court answered two of the questions in the affirmative and two in the negative. The two questions relating to the appeal are those that were answered in the affirmative and are as follows:

“Whether (l) the amount of house tax and (2) the amount of water tax, imposed by the Municipal Board of Allahabad under S. 128, sub-s- (1) cls (i) and (x), respectively of the United Provinces Municipalities Act, 1916, and paid by the owner as a lessor under S. 149 of that Act should be deducted as an allowance from thebona fideannual value of the properly determined under Sub-section. (1) read with Sub-section. (2) of S. 9 of, the Act, on the ground that such amount is an annual charge, which is not a capital charge to which the property is subject within the meaning of cl. (iv) of Sub-section. (1) of S. 9 of the Act.”

2. Under S.128, United Provinces Muncipalities Act, 1916, the municipality can impose a tax in the whole or any part of the municipality on the annual value of buildings or land or of both, and a water tax on the annual value of buildings or land or both. Every such tax on the annual value of buildings or land or both is leviable on the actual occupier of the property upon which the said taxes are assessed, if he is the owner of the buildings or lands or holds them on a building or other lease from the Crown or from the Board, or on a building lease from any person. In any other case the tax is leviable from the lessor, if the property is let (vide S. 149). Section 177 enacts that all sums due on account of a tax imposed on the annual value of buildings or lands or both shall, subject to the prior payment of the land revenue, if any, due to His Majesty thereupon, be a first charge upon such buildings or lands.

3. It is apparent, therefore, that the provisions of the United Provinces Act in respect of the levy of the taxes are substantially similar to the provisions of the Bombay Act discussed in Civil Appeal No. 66 of 1949. For the reasons given in that appeal and as a result of that decision this appeal stands dismissed with costs and we consider that the High Court of Allahabad has answered the questions above mentioned correctly.

 

Commissioner of Agricultural Income-tax, West Bengal Versus Keshab Chandra Mandal[SC 1950]

Supreme Court-min


AIR 1950 SC 265 : (1950) SCR 435 : (1950) 18 ITR SC 569

(SUPREME COURT OF INDIA)

Commissioner of Agricultural Income-tax, West Bengal Appellant
Versus
Keshab Chandra Mandal Respondent

(Before : Saiyid Fazl Ali, M. Patanjali Sastri, Mehr Chand Mahajan, B. K. Mukherjea And S. R. Das, JJ.)

Appeal No. 88 of 1949, Decided on : 09-05-1950.

Counsel for the Parties:

Shri K.P. Khaitan, Senior Advocate, Supreme Court, (Shri B. Sen, Advocate, Supreme Court, with him) instructed by P.K. Bose, Agent –

Judgment

S.R Das, JThere is no serious dispute as to the facts leading up to this appeal. They are shortly as follows.:

2. In response to a notice issued under S.24(2), Bengal Agricultural Income-tax Act, 1944, the assessee, who is the respondent before us, submitted a return showing his total agricultural income for the assessment year 1944-45 to be ` 835. This return is dated 3rd April 1945 and just below the declaration appears the following writing in vernacular:”Sri Keshab Chandra Mandal.” On 18th April 1945, the Agricultural Income-tax Officer noted on the order sheet that the case would be taken up at Bankura Dak Bungalow on 6th May 1945 and directed the office to inform the party to appear with all settlement records, vouchers etc. On 6th May 1945, the assessee filed a petition before the Agricultural Income-tax Officer who had gone to Bankura stating inter alia that he had been advised that the return which he had submitted before under the advice of a Headmaster of a school was not a proper return that there were many mistakes in the return and many things had been omitted and that, therefore, it was absolutely necessary for him to submit a fresh return and praying for 15 days’ time for doing so and also for a form of return. This petition was signed in vernacular as follows:”Sri Keshab Chandra Mandal x Ba:Sri Jugal Chandra Mandal,” Below that was the signature of his pleader H. Nandi. With this petition was attached a Vakalatnama signed in vernacular in the manner following:‘‘Sri Keshab Chandra Mandal x Ba:Sri Jugal Chandra Mandal of Balya.” It will be noticed that in both the signatures, against the name of Sri Keshab Chandra Mandal there was a cross mark. The Vakalatnama contained the following entry:

“I hereby appoint on my behalf Srijukta Babu Hangsa Gopal Nandi, Pleader, to do all works in connection with this case and as I do not know to read and write I put in x mark in the presence of the under mentioned person, as a token thereof.”

3. His son Sri Jugal Chandra Mandal attested the cross mark in the Vakalatnama

4. On receipt of this petition the Agricultural Income-tax Officer allowed time for one day and fixed the case for 7th May 1945 at 10 A.M. The assessee was directed to submit a fresh return and to produce account books and other necessary papers. It was also stated in the order sheet that if the assessee failed to comply with the order, assessment would be made under S. 25 (5) of the Act.

5. On 7th May 1945 the assessee did not appear personally. His son Jugal Chandra Mandal appeared with pleader Babu Hangsa Gopal Nandi. The son, Jugal Chandra Mandal, had not brought any letter of authority from the assessee. A return was submitted which was signed in vernacular as follows:”Sri Keshab Chandra Mandal Ba:Sri Jugal Chandra Mandal.” It will be noticed that in this last signature there was no cross mark.

5a. The Agricultural Income-tax Officer stated in his assessment order as follows ;

“A fresh return is submitted today. A remarkable difference is noticeable between the two returns. First return shows total agricultural income ` 835 whereas the revised or the fresh one shows an income of ` 1,077-12-6. This is really strange. The first one appears to have been signed by the assessee himself but the second one has been signed by Jugal his son for the assessee. Under the circumstances, I can put no reliance on any of these returns. I do not make any assessment based on these returns.”

6. The Agricultural Income-tax Officer there after immediately proceeded with the assessment and assessed ` 4,968-12 -1 as the assessable income.

7. The assessee preferred an appeal from this order to the Assistant Commissioner, Agricultural Income-tax, Bengal. The Assistant Commissioner by his order dated 14th August 1945 dismissed the appeal and confirmed the assessment under S. 35 (4) (a) (i).

8. The assessee thereupon preferred a further appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal on 9th December 1947 accepted the appeal on the ground, amongst others, that the return filed on 7th May 1945 was a proper return and should have been treated as such.

9. The Commissioner of Income-tax thereupon applied under S.63 of (1) of the Act for a reference of certain question, of law to the High Court. The Appellate Tribunal by its order dated 22nd April 1948 referred the following question of law to the High Court:

“Whether in the circumstances of this case, the declaration in the form of return signed by the illterate assessee by the pen of his son should be treated as properly signed and a valid return.”

10. The reference came up before a Bench of the Calcutta High Court (G.N. Das and B. P. Mookherjee JJ.) who, for reasons stated in their judgment dated 16th September 1948, answered the question in the affirmative. The Commissioner thereupon applied to the High Court for a certificate under S. 64(2) of the Act which having been granted the appeal has now come up before us for final disposal. In this appeal we are only called upon to judge whether the answer given by the High Court to the question of law formulated by the Appellate Tribunal is well-founded. It is abundantly clear on the records that there was no physical contact between the assessee and the signature appearing on the return as filed on 7th May 1945 and the fact is referred to by the words “in the circumstances of this case” at the beginning of the question. Indeed the whole of the proceedings have proceeded on this footing. I desire to make it clear that in this appeal we are not concerned with the propriety of the Income-tax Officer in proceeding to assessment without giving the assessee a further opportunity to put his mark on the return.

11. The High Court quoted the following observation of Blackburn J. in The Queen vs. The Justices of Kent, (1873)8 Q.B. 305 at p. 307.

“ No doubt at Common Law, where a person authorises another to sign for him, the signature of the person so signing is the signature of the person authorising it; nevertheless, there may be cases in which a situate may require personal signature.”

12. Then after stating that the Courts ought not to restrict the common law rule qui facit per alium facit per se, unless the statute makes a personal signature indispensable, and referring to certain Decided case, enunciated the proposition that when the word “sign” or “signature” is used by itself and unless there be a clear indication requiring the personal signature by the hand of the person concerned, the provision would be satisfied by a person signing by the hand of an agent. Applying this test the High Court came to the conclusion that there was not only not anything in the Act or the rules requiring the personal signature of the individual assessee but that insistence on such a requirement would create an anomaly, in that while an assessee who is an individual will have to sign personally, the persons authorised to sign for the other categories of assessee, namely, a Hindu undivided family, a company, the Ruler of an Indian State, a firm or any other association will not be compellable to sign personally. The High Court took the view that to avoid such a patent anomaly which would inevitably result if the interpretation proposed by the department were to be accepted, the Court would follow the common law rule mentioned above. In the result, the High Court answered the point of law referred to them in the affirmative.

13. The learned Standing Counsel to the Government of Bengal (Mr. K. P. Khaitan) in the course of a fair and lucid argument contended before us that the Court should give effect to the plain meaning of the words of the statute and the rules which have statutory force whatever might be the consequences and that on a plain reading of the Act and the rules there could be no doubt that the Legislature intended the return of an individual assessee to be signed by himself, i. e., personally. Learned counsel referred us to a number of decisions, both Indian and English, where personal signature had been held indispensable.

14. There is no doubt that the true rule as laid down in judicial decision and indeed as recognised by the High Court in the case before us is that unless a particular statute expressly or by necessary implication or intendment excludes the common law rule, the latter must prevail. It is, therefore, necessary in this case to examine the Act and the rules to ascertain whether there is any indication therein that the intention of the Legislature is to exclude the common law rule.

15. Turning first to the Act, it will be found that by S. 2 (14) the word “received” used with reference to the receipt of the agricultural income by a person has been defined to include receipt by an agent or servant on behalf of a principal or master respectively. If the Legislature intended that a signature by an agent would be permissible it could easily have defined the word “sign” so as to include the signature by an agent. Section 25 (2) of the Act requires that it the Agricultural income -tax officer is not satisfied without requiring the presence of the person who made the return or the production of evidence that a return made under S. 24 is correct and complete, he shall serve on such person a notice incurring him, on a date to be therein specified, either to attend at the Agricultural income-tax Officer’s office or to produce or to cause to be there produced any evidence on which such person may rely in support of the return. This section expressly permits production of evidence by an agent. Section 41 gives to the Agricultural Income tax Officer, the Assistant Commissioner and the Appellate Tribunal for the purposes of Chap. V and to the Commissioner for the purposes of S.37 the same powers as are vested in a Court under the Code of Civil Procedure, 1908, when trying a suit in respect of certain specified matters only, namely enforcing attendance of any person and examining him on oath or affirmation, compelling production of documents and issuing commissions for the examination of witnesses, and the proceedings before those officers are to be deemed to be “judicial proceedings” within the meaning of Ss.193 and 278 and for the purposes of S.196, Penal Code. Again, S. 60 of the Act permits a notice or requisition under the Act to be served as if it were a summons issued by a Court under the Code of Civil Procedure, 1908, and specifies the person on whom such service may be effected. There is nothing in the Act making the provisions of the Code relating to the signing or verification of pleading applicable to the return to be filed by any assesses. If the Legislature intended that the a return might be signed by the assessee or by his authorised agent there could have been no difficulty in inserting a section in the Act adopting the provisions of the Code relating to the signing and verification of pleadings as if the return was a pleading in a suit, Sections 35 and 58 expressly permit an assessee to attend before the Assistant Commissioner and the Appellate Tribunal or any agricultural income-tax authority in connection with any proceeding under the Act, otherwise than when required under S.41 to attend personally for examination, to attend by a person authorised by him in writing in this behalf, being a relative of, or a person regularly employed by, the assessee or a lawyer or accountant or agricultural income-tax practitioner. It should be noted that even under this section any and every agent cannot represent the assessee but only certain specified kinds of agents can do so. To summarise, the omission of a definition of the word “sign:as including a signature by an agent, the permission under S. 25 for production of evidence by an agent and under Ss. 35 and 58 for attendance by an agent and the omission of any provision in the Act applying the provisions of the Code of Civil Procedure relating to the signing and verification of pleading to the signing and verification of the return while expressly adopting the provisions of the Code relating to the attendance and examination of witnesses production of documents and issuing of commission for examination and for service of notices under Ss. 41 and 60 respectively cannot be regarded as wholly without significance. The matter, however, does not rest there.

16. Section 24 of the Act required the Agricultural Income-tax Officer to call for a return in the prescribed form and varied in the prescribed manner. Rule 11. Bengal Agricultural Income-tax Rules. 1944, framed under S.57 of the Act prescribes that the return required under S. 24 must be in Form 5 and shall be verified in the manner indicated therein. These is a footnote in Form 5 to the following effect:

“ The declaration shall be signed:

(a) In the case of an individual by the individual himself;

(b) in the case of a Hindu undivided family by the Manager or Karta;

(c) in the case if a Company or the Ruler of an Indian State by the principal officer;

(d) in the case of a firm by a partner;

(e) in the case of any other association by a member of the association.

17. There is also a note that the signatory should satisfy himself that the return is correct and complete in every respect before signing the verification, and the alternatives which are not required should be record out. It will be interesting to compare the requirements of R.11 and Form 5 with those of other rules dealing with appeals and other proceedings. Section 34 allows an appeal from the Agricultural Income-tax Officer to the Assistant Commissioner. Subsection (3) of that section requires that the appeal shall be in the prescribed form and shall be verified in the prescribed manner. Likewise S.36 provides for a further appeal must be in the Tribunal and sub-s. (4) of that section also required that such an appeal must be in the prescribed form and be verified in the prescribed manner. Rule 13 prescribes the forms of appeals under S. 34 and R. 14 prescribes the forms of appeals under S.63 of the Act. Rule 15 is as follows: “The forms of appeal prescribed by Rr. 13 and 14 and the forms of verification appended thereto shall be signed

(a) in the case of an individual, by the individual himself;

(b) in the case of a Hindu undivided family, by the Manager or Karta thereof;

(c) in the case of a company, by the principal officer of the company;

(d) in the case of a firm, by a partner of the firm;

(e) in the case of a Ruler of an Indian State, by the principal officer of the State; and

(f) in the case of any other association of individual by a member of the association; and such forms of appeal shall be also signed by the authorised representative, if any, of the appellant.”

18. Rule 17 deals with applications for refund of tax. Sub-rules requires every such application to be signed by, the claimant and his authorised representative, if any, and allows such application to be presented by the applicant either in person or through such authorised representative. Rule 22 require that where an application or memorandum of appeal is signed by an authorised representative the latter must annex to it the writing constituting his authority and his acceptance of it. Under R. 25 an appeal to the Tribunal has to be presented in person or by an authorised representative and under R.28 every such appeal has to be preferred in the form of a memorandum signed by the appellant and his authorised representative, if any, and verified by the appellant. Each of the Forms, from Form I to Form 20, contains separate spaces for the signatures of the appellant or the applicant or the claimant as the case may be and the authorised representative, if any. Form 23 which is notice of hearing of appeal under. S.36 requires the attendance of the appellant or respondent either in person or by an authorised representative. Rules 47 provides that, subject to certain special provisions, the provisions contained in Part II of the rules relating to the presentation, notices and hearing of an appeal before the Appellate Tribunal shall apply to the presentation, notices and hearing of a S. 63 reference application as if it were an appeal. Rule 53 empowers the Tribunal, if it considers it necessary, to hear the applicant or his authorised representative. A perusal of the several rules referred to above will show that while Rr. 15, 17 (2), 28 and the forms thereunder require the appeal or application to be signed by the appellant or applicant or claimant as well as by his authorised representative, if any. R. 11 and Form 5 require only the signature of the assessee the manner therein prescribed for different categories of assessees. Again Rr. 17(2), 25 and 47 permit presentation of applications and appeals by the authorised representative of the assessee whereas there is no such provision for the presentation by an authorised agent of a return under R. 11 which could easily be inserted in the rules if the Legislature so intended. That wherever the assessee or the appellant or the applicant is required to sign he must sign personally, is also borne out by note (1) at the foot of Form 20 which is for refund of tax under S. 43(2). It runs as follows:

“In the case of a person not resident in British India, the above declaration shall be sworn (a)before a Justice of the Peace, a Notary Public, a Commissioner of Oaths, if the applicant resides in any part of His Majesty’s Dominion. outside British India, (b) before a Magistrate or other official of the State or a Political officer, if he resides in a State in India, and (c) before a British Council, if he resides elsewhere.”

19. This does not mean that only the claimant for refund under S. 48(2) who resides outside India must sign his application personally and other assessees or appellants or applicants or claimants need not sign their return or appeal or application personally. All that it means is that such a claimant for refund under S.48 (2) must have his signature authenticated by certain public officers by swearing the declaration in their presence. This clearly indicates that personal signature of the assessee, the appellant or applicant is necessary in all cases wherever his signature is required and authentication of such signature is required only in the case of a claimant for refund of tax under S. 48 (2). There are yet other reasons why personal signature of an assessee, appellant applicant or claimant is necessary. It has been seen that under the Act and for the rules several acts can be done by or through the authorised representative, namely, production of documents, presentation of appeal or application and attendance in proceedings before the authorities. The expression “authorised representative” is defined in R. 2 (a). It will be noticed that in each case the authorised representative has to be duly authorised in writing. Under R. 22 the authorised representative has to file the writing constituting his authority and his acceptance of it. If it were intended that the signature by an agent on a return or a memorandum of appeal or other application will suffice as the signature of the assessee or the appellant or the applicant or the claimant, there would certainly have been some rule for constitution of such agency in writing and for the filing of the writing constituting such agency and the agent’s acceptance of it. If an, agent for mere presentation of an appeal is expressly required by the rules to be duly authorised in writing and such writing has to be filed on record I cannot think that the Act or the rules contemplate or permit the employment of an agent to sign an important document, namely, a return or an appeal or application without any written authority and that such agent may sign without producing any such written authority. And yet that would be the result, for, there is no provision in that behalf in the Act or in the rules. On a consideration of the provisions of the Act and of the rules and the forms and for reasons stated above there appears to be many clear indicating of all intention on the part of the Legislature to insist on the personal signature of the assessee, appellant or applicant whenever his signature is required by this Act or the rules and the common law rule qui tacit per alium facit per se is excluded by necessary implication or intendment of the Act and the rules.

20. The appellate Tribunal and the High Court have referred to certain difficulties in arriving at this conclusion which may now be considered. It is pointed out that to insist on the persons signature of an individual assessee will result in the anomaly that persons authorised to sign for the assessees of other categories will be free to get the returns signed by their own agents. This argument really begs the question. For reasons stated above, none of the person designated in the footnote to Form 5 are authorised to employ an agent to sign for him and, therefore, no anomaly can arise. If anything, the use of the word “himself” with reference to an individual makes the position clearer so far as such individual is concerned. There is an argument based on hardship or inconvenience. Hardship or inconvenience cannot after the meaning of the language employed by the Legislature if such meaning is clear on the face of the statute or the rules. Further, there is no hardship or inconvenience. In the cases of all illiterate person, he can put his mark which, by the Bengal General Clause Act, is included in the definition of ‘sign”. If claim Form 20 for refund of tax under S. 48 (2) can be sent to a claimant abroad for his signature before certain public officer for authentication, there can be no hardship or inconvenience in sending to him abroad the return in Form 5 for his signature without the necessity of any authentication thereof. It is said that such a construction will prevent a leper who, by reason of the loss of his fingers, cannot even put his mark. Such cases will indeed be rare and in any event it will be for the Legislatures to rectify this defect. Not to insist on personal signature on return or appeals or applications will let in signature by agent not duly authorised in writing and without production of such writing. In that case the provisions for penalty for filng false returns may quite conceivably be difficult of application. The omission of a definition of the expression “sign” so as to include the signature of an agent, the presence of the provisions permitting only certain specified acts, other than signing, to be done by or through an authorised agent are significant and indicate that the intention of the Legislature is not to permit signature by an agent so as to exclude the common law rule referred to above.

21. Turning now to the judicial decisions cited before us it will be found that Courts have insisted on personal signature even when there were not so many clear indications in the statutes under consideration in those cases as there are in the statute and the rules before us. Thus in Monks vs. Jackson (1876) 1 C.P. D. 683 which was a case under S. 1(8), Municipal Elections Act (38 and 39 vic c.40) which required delivery of the nomination paper “by the candidate himself or his proposer or seconder to the Town Clerk” it was held that this requirement was not satisfied by the delivery of it by an agent. In The Queen v Mansel Jones, (1889) 23 Q. B. D. 29 it was held that a person charged with any corrupt or illegal practice at a municipal election who was entitled, under S. 38, Corrupt and Illegal Practices Prevention Act, 1883, to be “heard by himself’’ was not entitled to be heard by his counsel or solicitor. In In re Prince Blucher, (1931)2 Ch. 70 the English Court of Appeal held that proposal of composition signed by the solicitor of a debtor, who was, by reason of his serious illness, unable to sign it, did not comply with the requirements of S. 16 (1), Bankruptcy Act. 1914, which required “a proposal in writing signed by him.” The Court of Appeal applied the principles of the decision in Hyde v Johnson, 1836) 2 Bing. (N.C.)776 and in In re Whitely Partners Ltd. (1886) 32 Ch. D. 337. In Luchmes Buksh Roy vs. Runjeet Ram, 20 W. B 375 a Full Bench of the Calcutta High Court held that an acknowledgment by a Mooktear was not sufficient for the purposes of S. 1 (5)Limitation Act (XIV [14] of 1859) which required an acknowledggment signed by the mortgagee Rankin, C. J., held in Japan Cotton Trading Co. Ltd. vs. Jajodia Cotton Mills Ltd. 54 Cal. 345 that a demand letter signed by the solicitors of the petitioning creditor was not a notice under S.163, Companies Act which as it then stood required a demand “under his hand .” A similar view was taken by the Rangoon High Court in Manjeebhai Khataw and Co. vs. Jamal Brothers and Co. Ltd., 5 Rang. 483 and M. A. Kureshi vs. Argus Footwear. Ltd., 9 Rang, 323. See also Wilson vs. Wallani, (1880) 5 RX. D.155. In Nachiappa Chettyar vs. Secy of State, 11 Rang. 380 it was held that the registration of a firm on an application signed by the agent of the partners was ultra vires inasmuch as the rules framed under S. 59. Income-tax Act, required an application signed by at least one of the partners. In Commr. of Income tax, Madras vs. Subba Rao, I. L. R. (1947) Mad. 167 it was held that by reason of the word ‘personally” occurring in R. 6, Income- tax Rules framed under S. 59, Incometax Act, 1922 a duly authorised agent of a partner was precluded from signing on behalf of the partner an application under S. 26A of the Act for registration of the firm. In all these cases the common law rule was not applied evidently because the particular statutes were held to indicate that the intention was to exclude that rule. This intention was gathered from the use of the word “himself’ or “by him” or “under his hand”‘ or “personally.” It is needless to say that such an intention may also be gathered from the nature of the particular statute or inferred from the different provisions of the statute and the rules framed thereunder. As already stated, there are many indications in the Bengal Agricultural Income-tax Act, 1944, and the rules made thereunder evidencing an intention to exclude the common law rule in the matter of the signature of the assessee, appellant or applicant on the return appeal or application.

22. The High Court referred to the case of In the matter of Commissioner of Income tax, C. P. and U. P., AIR 1935 Oudh 305 and sought to find support for its views from the circumstances that the Court in that case rejected the return not on the ground that it was bad because it was signed by an agent but on the ground that the power of attorney did not authorise the agent to sign it. It is quite clear that the Court in that case found it easier to decide the case on the latter ground than to enter upon a discussion of the first ground. It is impossible to read that case as an authority for the proposition that the signature of an agent was permissible at all. The Full Bench decision of the Allahabad High Court in Deo Narain Rai vs. Kukur Bind, 24 ALL. 319 referred to in the High Court Judgment before us does not appear to militate against the views expressed above. On a construction of S. 59, T. P. Act, it was held that there was nothing in the Act to exclude the application of the common law rule. The only provision of that Act on which reliance was placed in establishing such exclusion was S. 123. Stanley, C. J., pointed out that the language of the last mentioned section was elliptical and was not accurate draughtsmanship and therefore, it could not he relied upon in construing S. 59. The judgment of Banerjee J., also makes it clear that he found nothing in the Act to exclude signature by an agent and that the words “on behalf of “ in S. 123 were surplusage. It is quite true that when signature by an agent is permissible, the writing of the name of the principal by the agent is regarded as the signature of the principal himself. But this result only follows when it is permissible for the agent to sign the name of the principal. If on a construction of a statute signature by an agent is not found permissible then the writing of the name of the principal by the agent however clearly he may have been authorised by the principal cannot possibly be regarded as the signature of the principal for the purposes of that statute. If a statute requires personal signature of a person which includes a mark, the signature or the mark must be that of the man himself. There must be physical contact between that person and the signature or the mark put on the document.

23. The result. therefore is that this appeal must be accepted and the question referred to the High Court must be answered in the negative. There will be no order for costs against the assessee and the appellant Commissioner must bear his own costs throughout.

24. Fazl Ali J—I agree.

25. Patanjali Sastri J.—I agree.

26. Mukherjea J.—I agree.

27. Mahajan J.—The question of law referred to the High Court and answered by it in the affirmative is in these terms:

“Whether in the circumstances of this case, the declaration in the form of return signed by the illiterate assessee by the pen of his son should be treated as properly signed and a valid return.”

The High Court was not called upon to answer the question whether an income-tax return could be validly signed by an agent in the name of the principal; on the other hand, the question as framed assumes that the return was signed by the illiterate assessee but that the pen affixing the signature was that of his son. The physical act of putting the mark was made by the pen or possibly by the hand of the son who was not the agent appointed by the father and was not otherwise authorised by him to sign for him.

28. No evidence was led and there is nothing whatsoever on the record to establish that this illiterate assessee did not touch the pen or the hand of the son when the signature was affixed on the return. No precise definition of the word “signature” is given in the Indian Income-tax Act or in any other law. In the General Clauses Act there is no other exhaustive defined of the word, It merely says what the word “signature” shall include. It includes the affixing of mark. In India it is a well-known practice that when the executant of a document is illiterate be simply touches the pen wherewith someone else signs his name for him. Reference in this connection may be made to page 972, para. 1659 of Gour on The Law of Transfer. The signature made in these circumstances is personal signature of the executant. It is his autograph. No question of agency arises in such a situation This is what seems to have happened here as one can guess from the frame of the question. Be that as it may, without any enquiry into the circumstances in which the pen of the son affixed the signature of the assessee on the return it could not be assumed that the son acted as the agent of the father and signed his name in that capacity. In my opinion, the discussion of the question whether an agent can sign a return for an asseesses was outside the scope of the question which the High Court was called upon to answer. The answer given in my view was a correct one.

29. After considerable thought I am disinclined to reverse the decision of the High Court by placing an interpretation on the question which it does not bear. In an ex parte hearing we had not the advantage of hearing any arguments in support of the view taken by the High Court as the respondent did not appear. It is unnecessary to express any opinion on the question whether an agent can sign for the principal a form of return under the Indian Income-tax Act as that enquiry is outside the scope of the question referred to the High Court as already pointed out.

30. In the absence of any material to the contrary I am satisfied that the assessee signed the return personally. If the Income-tax Officer felt that the assessee had not touched the pen or the hand of the person who put the signature on the return he should have called upon the assessee to appear before him and ascertain from him the circumstances in which the son’s pen was used for the signature. In the matter of Commissioner of Income-tax, C. P. and U. P., AIR 1935 Oudh 305, it was observed that it is the duty of the Income-tax Officer before be accepts a return signed by an agent to satisfy himself about the authority of the agent to do so. In my opinion, it is equally the duty of an Income-tax Officer before he rejects a return of an illiterate assessee or a person such as a leper, to satisfy himself that there was no physical contact of the person with the mark or the signature put on the form. I agree with my brother Das that there should be physical contact between the person and the signature or the mark put on the document but I am afraid I cannot agree with him that in this case that has not happened. The question to a certain extent assumes the contact of the assessee with the pen of his son when it states that the illiterate assessee’s signature was put with the pen of the son. Be that as it may, that circumstance has not been eliminated in the case and that being so, the question cannot be answered in the manner proposed by my learned brother. I am further of the opinion that the Income-tax Officers should not while administering the law create unnecessary problems for the Courts. In the present case if there was any doubt in the mind of the Income-tax Officer, he should have called upon the illiterate assessee to put his mark in his presence on the return and be should not have acted hastily in assessing him under the penal provisions of the Act. Ignorant and illiterate people who are not well versed with the law of income-tax should be dealt with more sympathetically than was done here. They should not be penalised in the manner that the present assessee was penalised.

31. In the result I would dismiss this appeal.

 

Income Tax Rules Subjectwise

Law Library


For Income Tax  1961 Act Click Here


DEDUCTIONS

FOREIGN CURRENCY BONDS, INCOME FROM

  • deduction of tax at source u/s 196C

FOREIGN INSTITUTIONAL INVESTORS, INCOME OF

  • deduction of tax at source

PROFESSIONALS/TECHNICAL SERVICES

  • deduction of tax at source from, in case of fees paid to u/s 194J

SALARY

  • deduction of tax at source
  • determination of income

UNIT TRUST OF INDIA