Rio Tinto Tecnical Services, V. DDIT, Circle-2(1),

ITA 3399/DEL/2002

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5496 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 25-11-2009
• Assessment Year: 1999-2000
• Appeal Filed On: 22-08-2002
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M K GAUTAM; Y S KAKKAR
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 28; 90

Judgement Text

I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 1/17 IN THE INCOME TAX APPELLATE TRIBUNAL, NEW DELHI, BENCH E BEFORE SHRI G. E. VEERABHADRAPPA, HONBLE VICE PRESIDENT AND SHRI A. D. JAIN, JUDICIAL MEMBER ITA NOS.3399 /DEL/2002, 5372/DEL/2003 & 4742/DEL/2 004 (ASSESSMENT YEAR 1999-2000, 2000-01 & 2001-02 RESPECTIVELY) RIO TINTO TECHNICAL SERVICES VS. DCIT, CIRCLE 2(1), (A DIVISION OF TECHNOLOGICAL NEW DELHI RESOURCES PTY. LTD.) PROJECT OFFICE, 11 TH FLOOR, GOPAL DAS BHAWAN, 28, BARAKHAMBA ROAD, NEW DELHI. (APPELLANTS) (RESPONDENTS) PAN / GIR NO. FOREIGN COMPANY APPELLANT BY: SHRI SALIL KAPOOR, SANET KAPOOR, ADV . ABHISHEK CHAWLA, NITHIL JAISWAL, CA RESPONDENT BY: MS. Y S KAKKAR, DR & SHRI M K GAUTAM, CIT DR ORDER PER A. D. JAIN, JM: 1. I.T.A. NO. 3399/DEL/2002 IS AN APPEAL FILED BY T HE ASSESSEE AGAINST THE ORDER OF LD. CIT(A) XXIX, NEW DELHI IN APPEAL NO.240/2001-02 DATED 14.06.2002 FOR THE ASSESSMENT YEAR 1999-2000, I.T.A. NO. 5372/DEL/2003 IS AN APPEAL PREFERRED BY THE ASSESSE E AGAINST THE ORDER OF CIT(A) XXIX, NEW DELHI IN APPE AL I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 2/17 NO.20/2003-04 DATED 6.10.2004 FOR THE ASSESSMENT YEAR 2000-01 AND I.T.A. NO. 4742/DEL/2004 IS AN APPEAL PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A) XXIX, NEW DELHI IN APPEAL NO.183/2003-04 DATED 12.08.2004 FOR THE ASSESSMENT YEAR 2001-02. AS ALL THESE APPEALS RELATE TO THE SAME ASSESSEE AND A RE IN REGARD TO ONLY ONE ISSUE, THE SAME ARE BEING DISPOS ED OF BY THIS COMMON ORDER. 2. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A DIVISION OF TECHNICAL RESOURCES PRT. LTD. AUSTRALIA, WHICH HAD ENTERED INTO A CONTRACT WITH R IO TINTO INDIA PVT. LTD. (FOR SHORT, RTIPL) ON 04.03.1998 FOR EVALUATION OF COAL DEPOSITS IN MAHARASHTRA AND CORRESPONDING FEASIBILITY STUDIES FOR TRANSPORTING THE SAME TO BHADRAWATI POWER STATION; THAT THE ASSESSE E HAD ESTABLISHED A PROJECT OFFICE IN INDIA ON 22.09. 1998 PURSUANT AN APPROVAL GRANTED BY RBI TO RENDER THE SERVICES UNDER THE AGREEMENT; THAT THE PROJECT WITH RTIPL WAS COMPLETED ON 18.06.1999; THAT THE ASSESSE E FURTHER ENTERED INTO A CONTRACT WITH RESOURCES OF O RISSA MINING LTD. ON 22.07.1999 FOR EVALUATION OF IRON OR E DEPOSITS AT GADHANARDHAN & MALANGTOLY IN ORISSA AND THE CORRESPONDING FEASIBILITY STUDIES FOR TRANSPORT ATION OF IRON ORE BY RAIL TO PARADEEP PORT, ORISSA; FOR T HIS PURPOSE, THE RBI HAD GRANTED THE ASSESSEE AN APPROV AL I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 3/17 DATED 02.09.1999 FOR THE RELEVANT ASSESSMENT YEARS 1999-2000, 2000-01 & 2001-02 THAT THE ASSESSEE HAD FIELD ITS RETURN OF INCOME, WHICH WAS PROCESSED; TH AT THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE A.O. HAD HELD THAT THE AMOUNTS RECEIVED BY THE ASSESSEE FROM RTIP L AND RIO TINTO ORISSA MINING LIMITED (FOR SHORT, RTOM) WERE FEE FOR TECHNICAL SERVICES AND IN ACCORDANCE WITH THE PROVISIONS OF SECTION 9(1)(VII) READ WITH SECTION 115A OF THE I. T. ACT, HE TAXED THE SA ME @ 20%; THAT THE GROSS RECEIPT OF THE ASSESSEE HAD BEE N TREATED AS FEE FOR TECHNICAL SERVICES AND TAXED @ 2 0% ON GROSS BASIS BY INVOKING THE PROVISIONS OF SECTIO NS 115A AND 44D OF THE ACT; THAT THE A.O. HAD ACCEPTED THAT THE ASSESSEE WAS COVERED BY ARTICLE 7 OF THE D TAA BETWEEN INDIA AND AUSTRALIA; THAT, HOWEVER, THE A.O . HAD HELD THAT THE SAID ARTICLE 7 OF THE DTAA DID NO T PRESCRIBE ANY RATE OF TAX AND, THEREFORE, REFERENCE WAS TO BE MADE TO THE ACT AND CONSIDERING THAT THE NATURE OF RECEIPT OF THE ASSESSEE WAS FEE FOR TECHNICAL SERVI CES AND ITS BUSINESS INCOME, APPLIED THE PROVISIONS OF SECT IONS 115A AND 44D OF THE ACT; THAT THE LD. CIT(A), IN TH E COURSE OF APPELLATE PROCEEDINGS, DISMISSED THE ASSESSEES APPEAL WITHOUT APPRECIATING THE CONTENTI ON OF THE ASSESSEE; THAT AS PER THE PROVISIONS OF SECTION 90 OF THE ACT THE ASSESSEE WAS TO BE TAXED AS PER THE I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 4/17 PROVISIONS OF THE ACT AND THE RELEVANT DTAA, WHICH EVER WAS BENEFICIAL TO THE ASSESSEE; THAT THE ASSES SEE HAD OPTED TO BE TAXED UNDER THE PROVISIONS OF DTAA BETWEEN INDIA AND AUSTRALIA. IT WAS THE FURTHER ADMITTED THAT THE ASSESSEE HAD A PROJECT OFFICE IN INDIA AND IT CONSTITUTED A PERMANENT ESTABLISHMENT (PE) IN INDIA AS PER ARTICLE 5 OF THE INDIA - AUSTRALIA TRE ATY; THAT AS PER ARTICLE 12(4) OF THE TREATY AS THE ASSESSEE WAS DERIVING INCOME FROM A FIXED BASE SITUATED IN INDIA , THE PROVISIONS OF ARTICLE 7 OF DTAA APPLY; THAT SINCE T HE ASSESSEE HAD PE IN THE FORM OF A PROJECT OFFICE IN INDIA THROUGH WHICH THE SERVICES UNDER THE CONTROL OF RTI PL & RTOM HAD BEEN RENDERED, ARTICLE 6 OF INDIA - AUSTRALIA TREATY WAS APPLICABLE IN DETERMINING THE INCOME CHARGEABLE TO TAX; THAT AS PER ARTICLE 7(1), WHICH WAS A CHARGING PROVISION FOR COMPUTATION OF BUSINES S PROFITS OF THE ASSESSEE, A NON RESIDENT CARRYING ON ITS BUSINESS IN INDIA THROUGH ITS PERMANENT ESTABLISHME NT THE INCOME THAT WOULD BE CHARGEABLE TO TAX IN INDIA WOULD BE THE PROFITS THAT ARE ATTRIBUTABLE TO THE ASSESSEES SAID PERMANENT ESTABLISHMENT; THAT THE A .O. HAD REJECTED THE ASSESSEES SUBMISSION AND HAD HELD THAT SINCE THE ASSESSEE WAS RENDERING SERVICES WHICH WER E IN THE NATURE OF A FEE FOR TECHNICAL SERVICES, THE PRO VISIONS OF SECTION 44D OF THE ACT APPLICABLE AND THE ASSESS EE I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 5/17 WOULD BE SUBJECT TO TAX ON GROSS BASIS, AS PER THE PROVISIONS OF SECTIONS 115A AND 44D OF THE ACT; THA T THE PAYMENT FOR THE SERVICES RENDERED WAS NOT FEE F OR TECHNICAL SERVICES, EITHER UNDER ARTICLE 12(3)(G) O F THE INDIA-AUSTRALIA TREATY, OR U/S 9(1)(VII) OF THE ACT , IN SO FAR AS THE ASSESSEE HAD NOT RENDERED ANY SERVICES W HICH MADE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL, KNOW HOW OR PROCESS OR INVOLVE DEVELOPMENT AND TRANSFER OF ANY TECHNICAL PLAN OR DESIGN; THAT THE ASSESSEE WAS ENGAGED IN THE EVALUATION OF IRON ORE DEPOSITS AT GANDHAMARDAN AND MALANGTOLI IN ORISSA A ND THE CORRESPONDING FEASIBILITY STUDY FOR TRANSPORTAT ION OF ORE BY RAIL TO PARADEEP PORT, ORISSA; THAT AS PER T HE CONTRACT, THE SERVICES OF THE ASSESSEE DID NOT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKIL L OR KNOW HOW OR PROCESS AND ALSO DID NOT INVOLVE ANY DEVELOPMENT OR TRANSFER OF A TECHNICAL PLAN OR DESI GN; THAT THE PROVISIONS OF SECTION 55A WERE NOT APPLICA BLE. IT WAS THE FURTHER SUBMISSION THAT THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE WERE AN INTEGRAL PART OF A MINING PROJECT AND WERE COVERED BY THE SPECIFIC EXCLUSION PROVIDED IN THE DEFINITION OF FEE FOR TE CHNICAL SERVICES U/S 9(1)(VII) OF THE ACT; THAT THE ACTIV ITIES CARRIED OUT BY THE ASSESSEE WERE A STEP IN AID AND AN INTEGRAL PART OF A MINING PROJECT AND THUS FELL WIT HIN THE I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 6/17 DEFINITION OF MINING FOR THE PURPOSE OF EXPLANATI ON (2) TO SECTION 9(1)(VII) OF THE ACT. THE LD. COUNS EL THEN DREW OUR ATTENTION TO CBDT CIRCULAR NO. 202 DATED 5.7.1976 EXPLAINING THE PROVISIONS OF THE FINANCE A CT 1976 IN RELATION TO THE DEFINITION OF FEE FOR TECH NICAL SERVICES WHEREIN IT HAS BEEN SPECIFIED AS UNDER: ANY CONSIDERATION RECEIVED FOR ANY CONSTRUCTION, ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT. SUCH CONSIDERATION HAS BEEN EXCLUDED FROM THE DEFINITION ON THE GROUND THAT SUCH ACTIVIT IES VIRTUALLY AMOUNT TO CARRYING ON BUSINESS IN INDIA F OR WHICH CONSIDERABLE EXPENDITURE WILL HAVE TO BE INCURRED BY A NON-RESIDENT AND ACCORDINGLY, IT WILL NOT BE FAIR TO TAX SUCH CONSIDERATION IN THE HANDS OF A FOREIGN COMPANY ON GROSS BASIS OR TO RESTRICT THE EXPENDITURE INCURRED FOR EARNING THE SAME TO 20 PER CENT OF THE GROSS AMOUNT AS PROVIDED IN NEW SECTION 44D. CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY MINING OR LIKE PROJECT WILL, THEREFORE, BE CHARGEABLE TO T AX ON NET BASIS, I.E. AFTER ALLOWING DEDUCTION IN RESP ECT OF COSTS AND EXPENDITURE INCURRED FOR EARNING THE SAME AND CHARGED TO TAX AT THE RATES APPLICABLE TO THE ORDINARY INCOME OF NON-RESIDENT AS SPECIFIED IN THE RELEVANT FINANCE ACT. 2.1 THE LD COUNSEL THUS SUBMITTED THAT THE PROVISIO NS OF SECTION 44D OF THE ACT AND SECTION 115A DID NOT APP LY TO THE ASSESSEES CASE AND THE INCOME OF THE ASSESS EE WAS ENTITLED TO BE ASSESSED AS BUSINESS INCOME AS P ER ARTICLE 7 OF THE DTAA AND THE EXPENSE WERE ENTITLED TO BE ALLOWED IN COMPUTATION OF INCOME OF THE ASSESSEE . I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 7/17 2.2 IT WAS THE ALTERNATE SUBMISSION BY THE LD. COUN SEL THAT IF SECTION 9(1)(VII) OF THE ACT IS DEEMED TO BE APPLIE D IN THE ASSESSEES CASE THEN THE ASSESSEES CASE FALLS WITHIN THE EXCLUSION PROVIDED IN EXPLANATION (2) OF THE SA ID SECTION AND A PURPOSIVE INTERPRETATION OF THE LEGIS LATION IS REQUIRED TO BE MADE. HE STATED THAT THE RATIONA LE OF INTRODUCING A GROSS BASIS OF TAXATION WAS TO REMOVE THE DIFFICULTY OF ASCERTAINING A NON-RESIDENTS TAXABLE INCOME CONVENIENTLY, IN THE ABSENCE OF SUPPORTING RECORD AND DATA. HE CONTENDED THAT IF THE PROVISI ONS OF SECTION 9(1)(VII) ARE BLINDLY APPLIED, IT WOULD RES ULT IN TAXING A NON RESIDENT, WHO AN OPENS OFFICE IN INDIA AND CARRIES ON BUSINESS OPERATION IN INDIA TO BE TAXED IN THE SAME LINE AS A NON RESIDENT WHO IS PROVIDING TECHNI CAL SERVICES SITTING ABROAD. HE AVERRED THAT IF SECTIO NS 44D AND 115A OF THE ACT ARE APPLIED, PAYMENT BY AN INDI AN CONCERN TO A NON-RESIDENT WOULD BE DENIED THE BENEF IT ON A NET BASIS WHEREAS PAYMENT BY A NON-RESIDENT TO A NON-RESIDENT WOULD BE ALLOWED ON A NET BASIS; THAT IF THE INTERPRETATION TAKEN BY THE A.O. IS APPLIED TO THE TREATY PROVISIONS, IT WOULD MEAN THAT A NON RESIDENT RENDE RING TECHNICAL SERVICES WITHOUT COMING TO INDIA WOULD GE T A BENEFICIAL RATE OF TAX @ 10% TO 15%, WHEREAS A NON RESIDENT COMING TO INDIA AND DOING BUSINESS IN INDI A WOULD PAY TAX @ 20% TO 30% ON GROSS RECEIPT; THAT THE I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 8/17 INCOME OF THE ASSESSEE DID ARISE IN INDIA AND CONSEQUENTLY, THE DEEMING PROVISIONS OF SECTION 9 O F THE ACT ITSELF DID NOT APPLY; THAT THE ASSESSEES C ASE WAS NOT OF A NON-RESIDENT WHO RENDERED SERVICES FROM OUTSIDE INDIA; THAT THE ASSESSEE HAD TAKEN THE REQU ISITE PERMISSION TO DO BUSINESS IN INDIA AND AS PER THE SANCTION GRANTED, IT HAD SET UP AN OFFICE IN INDIA, WHICH WAS ACCEPTED AS THE PE OF THE ASSESSEE IN INDIA AS PER THE PROVISIONS OF ARTICLE 7 OF THE DTAA BETWEEN IND IA AND AUSTRALIA; THAT IT WAS THE BUSINESS INCOME OF T HE ASSESSEE WHICH WAS LIABLE TO BE TAXED IN INDIA AS P ER THE REGULAR PROVISIONS OF THE INDIAN TAX LAWS AND IT WA S NOT THE INCOME OF THE ASSESSEE AS A NON RESIDENT WH ICH WAS LIABLE TO BE TAXED; THAT CONSEQUENTLY, SECTIONS 9, 44D AND 115A DID NOT APPLY TO THE ASSESSEE; THAT TH E ASSESSEE HAD BEEN DOING ITS BUSINESS IN INDIA; AND THAT IT WAS THE INCOME OF THE PE OF THE ASSESSEE IN INDIA W HICH WAS TAXABLE IN INDIA AND THE COMPLETE AUDITED ACCOU NTS OF THE ASSESSEE WERE AVAILABLE AND SO, THERE CAN BE NO DIFFICULTY IN CALCULATING THE ACTUAL PROFITS OF THE ASSESSEE. 3. ON THE OTHER HAND, THE LD. D.R. SUBMITTED THAT T HE EXISTENCE OF PE OF THE ASSESSEE IN INDIA HAD NOT BE EN DISPUTED; THAT THEREFORE, THE TAXABILITY OF THE ASS ESSEE IN INDIA REMAINS UNDISPUTED; THAT THE EXPLANATION TO I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 9/17 SECTION 9(1)(VII) OF THE ACT, WHERE AN EXCLUSION IS PROVIDED, ALSO DOES NOT APPLY TO THE ASSESSEES CAS E, AS THE ASSESSEE WAS NOT DOING THE BUSINESS OF MINING A ND LIKE ACTIVITIES; THAT THE ASSESSEE, AS PER THE CONT RACT, WAS PROVIDING TECHNICAL SERVICES OF EVALUATION OF IRON ORE RESOURCES AND GAVE THE FEASIBILITY STUDY FOR TRANSPORTATION OF THE ORE, AS ALSO THE DEVELOPMENT OF IRON ORE HANDLING ON SHIP LOADING COMPLEX; THAT TH E CONTRACT ITSELF TALKED OF TECHNICAL WORK AND THE PA YMENT WAS THUS FEE FOR TECHNICAL SERVICES PROVIDED BY THE ASSESSEE THAT THE PROVISIONS OF SECTION 9(1)(VII) D ID APPLY AND THE INCOME OF THE ASSESSEE, WHICH WAS LIA BLE TO BE ASSESSED ONLY UNDER THE PROVISIONS OF SECTION 44D AND 115A OF THE ACT; THAT THAT ARTICLE 7 OF THE DTA A BETWEEN INDIA AND AUSTRALIA DID NOT APPLY IN SO FAR AS THE SERVICES PROVIDED WERE FEE FOR TECHNICAL SERVIC ES; THAT EVEN ASSUMING THAT ARTICLE 7 APPLIES, THE SAID ARTICLE DID NOT PROVIDE FOR ANY RATE FOR CALCULATIN G THE TAX AND CONSEQUENTLY, ONE HAS TO RELY ON THE DOMEST IC LAW FOR LEVYING THE TAX FOR WHICH PURPOSE ONE WOULD HAVE TO GO TO SECTION 115A OF THE ACT; AND THAT AS PER SECTION 115A, AS THE SERVICES RENDERED WERE FEE FOR TECHNICAL SERVICES, THE GROSS RECEIPTS HAVE TO BE T AXED AT THE FLAT RATE OF 20%, WITHOUT GIVING ANY DEDUCTION OF ANY EXPENSES; THAT SECTION 44D SPECIFICALLY PROVIDE FOR I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 10/17 THE TAXATION OF FEE FOR TECHNICAL SERVICES AND AS P ER THE PROVISION OF SECTION 44D(6), NO DEDUCTION IS TO BE ALLOWED IN RESPECT OF ANY EXPENDITURE OR ALLOWANCE UNDER THE PROVISIONS OF SECTIONS 28 TO 44C OF THE A CT; THAT EVEN ARTICLE 7(3) ONLY PREVENTS DEDUCTION AGAI NST THE RECEIPT SOUGHT TO BE ASSESSED UNDER ARTICLE 7 T O THE SAME EXTENT AS WOULD BE PERMISSIBLE IF AN ASSESSMEN T WAS MADE UNDER THE ACT AND IN THE CASE OF A FOREIGN COMPANY ALLOWANCE OF DEDUCTION IS GIVEN BY SECTION 44D. THE LD. D.R. VEHEMENTLY SUPPORTED THE IMPUGNED ORDER. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERUSED THE MATERIAL ON RECORD. EVEN THOUGH THE A. O. HAS EXTRACTED A PART OF THE AGREEMENT BETWEEN RIPL & RITS IN PAGE 2 OF THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 1999-2000, IT IS NOTICED THAT ONE PORTION OF THE AGREEMENT HAS REMAINED MISSED OUT. IT IS NOTICED THAT THE A.O. HAS EXTRACTED SCHEDULE 1 OF T HE AGREEMENT, WHEREIN, HE HAS EXTRACTED ONLY PARA 1 OF THE OBJECTIVES AND THEN, HAS PROCEEDED TO EXTRACT THE S COPE OF THE SERVICES. THE PORTION WHICH HAS REMAINED SO EXCLUDED IS EXTRACTED HERE FOR BETTER APPRECIATION. THE EVALUATION OF THE RESOURCES WILL BEGIN WITH A GEOLOGICAL MAPPING, DRILLING AND EDITING PROGRAMME AND BE FOLLOWED BY IRON ORE QUALITY TESTING AND RESOURCE MODELING. I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 11/17 SPECIFICALLY, THE OBJECTIVES OF THE PRE-FEASIBILITY PHASE 2 PROGRAMME ARE TO: IMPROVE THE KNOWLEDGE OF THE OREBODY AND ORE CHARACTERISTICS BY A BULK SAMPLING AND DRILLING PROGRAMME; INVESTIGATE PRELIMINARY METALLURGICAL AND TREATMENT CHARACTERISTICS, DEFINE OPTIONS AND ESTIMATE COSTS; INVESTIGATE INFRASTRUCTURE REQUIREMENTS AND EXISTING CAPACITIES, DEFINE OPTION AND ESTIMATE COSTS; CARRY OUT A PRELIMINARY ENVIRONMENTAL ASSESSMENT; IDENTIFY MAJOR ISSUES WHICH MIGHT PREVENT THE PROJECT PROCEEDING; IDENTIFY MAJOR OPTIONS FOR FURTHER STUDY; PREPARE THE PHASE 2 PRE-FEASIBILITY STUDY REPORT ENCAPSULATING ALL OF THE ABOVE LISTED ELEMENTS, INCLUDING PRELIMINARY MINING PLAN, FLOW SHEETS, AND COSTS, AND INDICATIVE FINANCIAL ANALYSIS. 4.1 A READING OF PORTION EXTRACTED ABOVE SHOWS THAT THE PRIMARY OBJECTIVE IS TECHNICAL WORK FOR THE EVALUAT ION OF IRON ORE RESOURCES AND THE CORRESPONDING FEASIBILIT Y STUDY FOR TRANSPORTATION OF ORE BY RAIL AND THE DEVELOPME NT AND HANDLING OF SHIP LOADING CAPACITIES AS THE SPECIFIE D PROCESS. THE EVALUATION OF THE RESOURCES WAS TO BE GIN WITH GEOLOGICAL MAPPING, DRILLING AND EDITING PROGRAMME, TO BE FOLLOWED BY IRON ORE QUALITY TESTING OF THE RESOURC ES MODELING. THUS, THIS IS NOT A CASE WHERE A SIMPLE TECHNICAL OR CONSULTANCY SERVICE IS PROVIDED, BUT I T INCLUDES I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 12/17 SPECIFIC ACTIVITIES WHICH ARE REQUIRED TO BE DONE O N SITE, I.E., BY VARIOUS ACTIVITIES SUCH AS THE GEOLOGICAL MAPPING, DRILLING, TESTING OF QUALITY, QUANTIFYING THE POSSI BLE QUANTITY AND RESOURCES, EXAMINING THE ENVIRONMENTAL HAZARDS. FOR THE PERFORMANCE OF THE CONTRACT, IT I S NOTICED, THE ASSESSEE HAS OBTAINED NECESSARY PERMISSION FROM THE RBI, WHICH IS THE SANCTIONING AUTHORITY FOR OPENING A PROJECT OFFICE IN INDIA. IT IS AN ACCEPTED FACT TH AT THE ASSESSEE HAS OPENED ITS PROJECT OFFICE IN INDIA AND HAS ENTERED INTO A CONTRACT TO DO BUSINESS IN LINE WITH THE PERMISSION GRANTED BY RBI. IT IS ALSO AN ACCEPTED FACT THAT HE ASSESSEE DOES HAVE A PERMANENT ESTABLISHMENT (PE ) IN INDIA. THUS, WHAT WE HAVE IS THAT THE ASSESSEE IS A NON RESIDENT WHICH HAS PE IN INDIA AND IS DOING ITS BUS INESS FROM ITS PE IN INDIA. IN SUCH A SITUATION, THE ASS ESSEE OUGHT TO HAVE A LIBERTY TO CHOOSE WHETHER IT WISHES TO BE TAXED UNDER THE PROVISIONS OF THE ACT OR UNDER THE DTAA AS PER THE PROVISIONS OF SECTION 90 OF THE ACT. AS PER THIS PROVISION, THE ASSESSEE HAS CHOSEN TO BE TAXED UNDE R THE DTAA BETWEEN INDIA AND AUSTRALIA, THE LATTER BEING THE COUNTRY OF REGISTRATION/INCORPORATION OF THE ASSESS EE COMPANY. HERE, IT WOULD BE WORTHWHILE TO MENTION T HAT WHEN TAXING A NON-RESIDENT, IT WOULD FIRST HAVE TO BE SEEN WHETHER THE INCOME OF THE NON-RESIDENT ARISING IN I NDIA FALLS WITHIN THE PROVISIONS OF SECTION 9 OR SECTION 5 OF THE I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 13/17 INCOME TAX ACT. IF IT DOES NOT FALL WITHIN SECTION S 5 & SECTION 9 OF THE ACT, THE INCOME ITSELF WOULD BE SPECIFICALLY EXEMPTED. IF IT DOES FALL WITHIN SECT ION 5 AND SECTION 9 OF THE ACT, IT IS THEN THAT SECTION 90 OF THE ACT COMES INTO OPERATION AND THE LIBERTY IS GIVEN TO TH E ASSESSEE TO OPT FOR BEING TAXED EITHER UNDER THE IN DIAN TAX LAW OR UNDER DTAA BETWEEN INDIA AND THE COUNTRY OF INCORPORATION. 4.2 IN THE PRESENT CASE, THE ASSESSEE, AS MENTIONED EARLIER, IS INCORPORATED IN AUSTRALIA AND IT HAS, ADMITTEDLY, A PE IN INDIA. CONSEQUENTLY, THE DTAA BETWEEN INDIA & AUSTRALIA IS TO APPLY. THE INCOME OF THE ASSESSEE IS TAXABLE IN INDIA AS PER THE PROVISIONS OF SECTION 5 (2) OF THE ACT. THE INCOME OF THE ASSESSEE BEING TAXABLE IN I NDIA, THE ASSESSEE HAS OPTED TO BE TAXED UNDER THE PROVIS IONS OF THE DTAA BETWEEN INDIA & AUSTRALIA. WE HAVE NOT GON E INTO THE PROVISIONS OF ARTICLE 5 OF THE DTAA, WHICH DEALS WITH THE EXISTENCE OF PE, IN SO FAR AS IT HAS BEEN ADMITTED THAT THE ASSESSEE HAS A PE IN INDIA. WE ARE CONCERN ED NOW WITH ARTICLE 7, ARTICLE 12 AND ARTICLE 19 OF THE DT AA BETWEEN INDIA & AUSTRALIA. AS PER ARTICLE 7, IT IS THE BUSINESS PROFIT, WHICH IS CONSIDERED THEREIN. ARTI CLE 12 DEALS WITH ROYALTY AND ARTICLE 14 WITH INDEPENDENT PERSONAL SERVICES. ARTICLE 14 OF THE DTAA WOULD NO T APPLY, AS IT RELATES TO AN INDIVIDUAL OR A FIRM OTH ER THAN A I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 14/17 COMPANY. HERE, THE ASSESSEE IS A COMPANY. ARTICLE 12 RELATES TO ROYALTIES AND SUB-CLAUSE 3(G) OF ARTICLE 12 INCLUDES THE RENDERING OF SERVICES INCLUDING THOSE OF TECHNICAL AND OTHER PERSONAL NATURE, WHICH MAKES AV AILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW HOW AN D PROCESS AND CONSISTS OF DEVELOPMENT AND TRANSFER OF THE TECHNICAL PLANS & DESIGNS. THIS IS SIMILAR TO THE PROVISIONS OF EXPLANATION (2) TO SECTION 9(1)(VII) OF THE ACT, WHICH TAKES WITHIN ITS AMBIT FEE FOR TECHNICAL SERVICES. AS PER ARTICLE 12 OF DTAA, THE TERM ROYALTY INCLUDES SUC H ITEMS AS ARE TREATED AS FEE FOR TECHNICAL SERVICES UNDER THE INDIAN TAX LAWS AND THE SAME THE SAME IS TO BE TAXE D IN INDIA, AS THE SAME HAS ARISEN IN INDIA. AS PER ART ICLE 7, THE BUSINESS PROFITS OF AN ENTERPRISE OF AUSTRALIA IS L IABLE TO BE TAXED ONLY IN AUSTRALIA, UNLESS THE ENTERPRISE CARR IES ON THE BUSINESS IN INDIA THROUGH ITS PE SITUATED IN INDIA. IF THE ENTERPRISE CARRIES ON ITS BUSINESS THROUGH A PE SIT UATED IN INDIA, THE PROFITS OF THE ENTERPRISE CAN BE TAXED I N INDIA ONLY TO THE EXTENT AS IS ATTRIBUTABLE TO THE PE. A S PER ARTICLE 7(2), IF AN ENTERPRISE CARRIES ON ITS BUSIN ESS THROUGH A PE SITUATED IN INDIA, THEN THE PROFITS ATTRIBUTAB LE TO THAT PE SHALL BE TAXED AS IF THE PE IS A WHOLLY INDEPEND ENT ENTERPRISE. AS PER ARTICLE 7(3), IN DETERMINING TH E PROFITS OF THE PE THAT SHALL BE ALLOWED AS DEDUCTION AND IN ACCORDANCE WITH AND SUBJECT TO THE LAW OF LIMITATIO N I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 15/17 RELATING TO TAX IN INDIA, INDIA BEING THE CONTRACTI NG STATE IN WHICH THE PE IS SITUATED. AS PER ARTICLE 7(7), WHE RE THE PROFITS INCLUDE ITEMS OF INCOME, WHICH ARE DEALT WI TH SEPARATELY IN OTHER ARTICLES OF THE DTAA THEN THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISIONS OF ARTICLE 7 OF THE DTAA. 4.3 THUS, APPLYING THESE PROVISIONS TO THE FACTS TO THE PRESENT CASE, IT IS NOTICED THAT THE ASSESSEE HAVING ADMITT ED THAT IT HAS PE IN INDIA AND THE INCOME OF THE ASSESSEE IS T AXABLE IN INDIA AND THE ASSESSEE HAVING OPTED TO BE TAXED AS PER THE PROVISIONS OF THE DTAA IT IS ARTICLE 7 OF THE DTAA WHICH APPLIES TO THE ASSESSEES CASE IN SO FAR AS THE ASS ESSEE HAS A PE IN INDIA. THUS, AS PER ARTICLE 7(2) OF THE DTAA , THE PE OF THE ASSESSEE WOULD HAVE TO BE TREATED AS A WH OLLY INDEPENDENT ENTERPRISE, WHICH IS LIABLE TO BE TAXED IN INDIA. ONCE IT IS HELD THAT THE ASSESSEE IS LIABLE TO BE T AXED AS PER ARTICLE 7 OF THE DTAA, SUB-CLAUSE (3) OF ARTICLE 7 OF THE DTAA WOULD COME INTO PLAY AND DEDUCTION IN ACCORDAN CE WITH THE SUBJECT TO THE LAW RELATING TO THE TAX IN INDIA WOULD APPLY. SINCE IT IS HELD THAT ARTICLE 7 OF TH E DTAA COMES INTO PLAY, SECTION 9(1)(VII) OF THE ACT WOULD NO MORE BE APPLICABLE AS ARTICLE 7(2) OF THE DTAA SPEC IFIES THAT THE PE OF THE ASSESSEE IS TO BE TREATED AS A W HOLLY INDEPENDENT ENTERPRISE AND IT IS THE PROFITS OF SUC H PE IN INDIA WHICH ARE TO BE TAXED. SINCE ARTICLE 7 OF T HE DTAA I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 16/17 IS APPLIED, SECTION 44D AND SECTION 115A OF THE ACT ALSO WILL NOT APPLY IN SO FAR AS THEY RELATE TO FOREIGN COMPANIES, WHEREAS CLAUSE (2) OF ARTICLE 7 OF THE DTAA SPECIFI ES THAT THE PE IN INDIA IS TO BE TREATED AS A WHOLLY INDEPE NDENT ENTERPRISE IN INDIA. IN SUCH A SITUATION, SUB-CLAU SE (3) OF ARTICLE 7 OF DTAA WOULD COME INTO PLAY AND THE INCO ME OF THE ASSESSEE WOULD HAVE TO BE ASSESSED BY APPLYI NG THE REGULAR PROVISIONS OF THE INDIAN TAX LAWS. IN SHOR T, THE ASSESSEE HEREIN WOULD BE LIABLE TO BE ASSESSED AS A N ENTITY SEPARATELY ASSESSABLE IN ITS OWN INDEPENDENT CAPACI TY IN INDIA AND THE PROVISIONS OF SECTIONS 28 TO 43C OF T HE ACT WOULD BE AVAILABLE TO THE ASSESSEE. WHAT IS TO BE UNDERSTOOD HERE IS THAT IT IS THE BUSINESS PROFITS WHICH ARE CHARGEABLE UNDER ARTICLE 7 OF THE DTAA. SO AS TO W HAT THE BUSINESS OF THE ASSESSEE IS, IS ALSO TO BE CONS IDERED. THE BUSINESS OF THE ASSESSEE IS AS PER THE CONTRACT S ENTERED INTO BY THE ASSESSEE WITH THE VARIOUS PERSONS. THE CONTRACTS ARE INCLUSIVE CONTRACTS OF TECHNICAL NATU RE, AS ALSO DRILLING, ETC., AS EXTRACTED EARLIER. THUS, IT CAN NOT BE SAID THAT HE ACTIVITIES OF THE ASSESSEE IS PURELY TECHNI CAL SERVICE. THE DRILLING AND EXCAVATION AND TESTING CANNOT BE D E- LINKED FROM THE EVALUATION AND THE FEASIBILITY STUD IES. IT IS A CONSOLIDATED ACTIVITY. THUS, THE ACTIVITIES OF T HE ASSESSEE CANNOT BE HELD TO FALL WITHIN ARTICLE 12 OF THE DTA A ALSO. IN THESE CIRCUMSTANCES, THE ASSESSEE HAVING OPTED T O BE I.T.A. NO.3399/DEL/2002 5372/DEL/2003 & 4742/DEL/2004 17/17 TAXED UNDER THE DTAA, THIS OPTION CANNOT BE DENIED TO THE ASSESSEE AND AS PER SUB-CLAUSES (2) AND (3) OF ARTI CLE 7. THE ASSESSEE IS TO BE TAXED AS AN INDEPENDENT ENTER PRISE IN INDIA AND THE REGULAR PROVISIONS OF THE INDIAN TAX LAWS WOULD APPLY TO THE EXCLUSION OF SECTION 9(1)(VII), SECTION 44D AND 115A OF THE ACT. IN THESE CIRCUMSTANCES, T HE ORDERS OF THE LOWER AUTHORITIES ARE REVERSED AND TH E APPEALS OF THE ASSESSEE ARE ALLOWED. 5. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE A LLOWED. 6. THIS DECISION WAS PRONOUNCED IN THE OPEN COURT O N 19 TH MAR., 2010. SD./- SD./- (G.E.VEERABHADRAPPA) (A.D. JAIN) VICE PRESIDENT JUDICIAL MEMBER DATED:19 TH MAR., 2009 SP. COPY FORWARDED TO 1. APPELLANT 2. RESPONDENT 3. CIT TRUE COPY: BY ORDER 4. CIT(A) 5. DR DY. REGISTRAR, ITAT, NEW DELHI