Sheladia Associates Inc V. Assistant Director of Income Tax, Office of ADIT (INTTARN)-2 HYD and Union of India, Ministry of Finance, Department of Revenue

WP/18382/2023

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The case involves Sheladia Associates Inc., a U.S.-based consulting firm, which entered into a joint venture with Intercontinental Consultants & Technocrats Pvt. Ltd. for a project in Bangladesh. The project involved upgrading a road in Bangladesh under a Public-Private Partnership. The petitioner applied for a nil rate TDS deduction certificate under Section 197 of the Income Tax Act, 1961, asserting that no income was earned in India and thus no TDS should be deducted. The Income Tax Department rejected this application, leading to the filing of the writ petition. The court examined whether the income from the project was taxable in India and whether the petitioner was liable for TDS deduction.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 796195 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 25-01-2024
• Assessment Year: misc
• Other Referred Cases: Larsen & Toubro Limited Vs. Assistant Commissioner of Income-tax (TDS/2(1)), Areva T&D, SA Vs. Assistant Director of Income-tax, Ansaldo Energia SpA Vs. Income-tax Office
• Laws Referred To: Income Tax Act, 1961, Constitution of India
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K MAMATA; GADI PRAVEEN KUMAR
• Assessee Lawyers: I MYTRI
• Keywords: Income Tax; Joint Venture Agreement; Permanent establishment; Technical Services; Writ of Certiorarified Mandamus; NIL rate TDS deduction certificate
• Section: 264; 197; 226

Judgement Text

"[ 3386 ] HIGH COURT FOR THE STATE OF TELANGANA AT HYOERABAD (Special Original Jurisdiction) THURSDAY, THE TWENTY FIFTH DAY OF JANUARY TWO THOUSAND AND TWENTY FOUR PRESENT THE HON'BLE SRI JUSTICE P. SAM KOSHY AND THE HON'BLE SHRI JUSTICE LAXMI NARAYANA ALISHETTY Between: AND 1. 2. Sheladia Associates lnc, '15825 Shady Grove Road, Suite 100, Rockville, MD 20850, USA. Represented by its General Manager (Accounts and Administration), Mr.Shaiiu Sebastian ...pETtnoNER Assistant Director of lncome Tax, Office of ADIT (lNT TARN)-2 HYD, Aayakar Bhavan, Hyderabad - 500004 Union of lndia, Ministry of Finance, Department of Revenue, Rep., by its Secretary (Revenue), North Block - New Delhi - 1 10001 ...RE''.NDENTS Petition under Article 226 of the Constitution of lndia praying that in the circumstances stated in the affidavit filed therewith, the High Court may be pleased to issue a writ or direction or order more particularly in the nature of a Writ of Certiorarified Mandamus, calling for the records and quashing the lmpugned Order dated 22.06.2023, bearing DIN and Order No. SOi260420231467465 and Request Number. 467465, for the Financial Yeat 2023-24, passed by Respondent No. 1 under Section 197 of the lncome Tax Act, 1961 as being illegal, arbitrary, in excess of the 1st Respondents jurisdiction and in violation of established principles of natural justice and directing the 1st Respondent to grant the Petitioner a NIL rate TDS deduction certificate under Section 197 of ttle lncome Tax Act, '1961 for the Joint Venture Agreement dated 206.202 1 executed between the Petitioner and M/s lntercontinental Consultants 86 Technocrats Private Limited WRIT PETITION NO: 18382 OF 2023 lA NO: 1 OF 2023 Petition under Section. 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased to dispense with the filing of certified copies of lmpugned Order dated 221A612023, bearing DIN and Order No. 50/26042023/467465 and Request Number. 467465, for the Financial Year 2023-24, passed by the l st respondent under section 197 of the income tax Act. 1 96 1 lA NO: 2 OF 2023 Petition under Section '151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased to direct the 1st Respondent to permit the Petitioner to receive payments under the Joint Veriture Agreement daled 2810612021 between the Petitioner and M / s lntercontinental Consultants and Technocrats Private Limited without any Tax Deducted at Source in lndia under Section 195 or any other provisions of the lncome Tax Act, 1961 Counsel for the Petitioner: SMT. l. MYTRI Counsel for Respondernt No. 1: SMT. K. MAMATA, SC FOR INCOME TAX Counsel for Respondernt No.2: SRI GADI PRAVEEN KUMAR, DEPUTY SOLICITOR GENERAL The Court made the f('llowing: ORDER I I I WRIT PETITION No.18382 OF 2023 ORDER: (per Hon'ble Si Justice l,axmi Naragana Alishettg) This writ petition has been liled by the petitioner seeking the following relief: \"....to issue a writ or direction or order more particularly in the nature of a Writ of Certiorarified Mandamus, calling for the records and quashing the impugned order dated 22.06.2023, bearing DIN and Order No.SO 126042023 / 467465 and request number:467465, for the Financial Year 2023-24, passed by respondent No.l under Section 197 of the lncome Tax Act, 1961 as being illegal, arbitrary, in excess of the 1't respondent's jurisdiction and in violation of established principles of natural justice and directing respondent No. I to grant the petitioner a NIL rate TDS deduction certificate under Section 197 of the lncome Tax Act, 1961 for the Joint Venture Agreement dated 28.06.2021 executed between the Petitioner and M/s. Intercontinental Consultants and Technocrats Private Limited.\" 2. Heard Smt.l.Mytri, learned counsel for the petitioner, Smt.K.Mamata, learned Standing Counsel for respondent No. 1 and Sri Gadi Praveen Kumar, learned Deputy Solicitor General of India, for respondent No.2. 3. The brief facts leading to liling the present Writ Petition are that the petitioner is a Professional Consulting Firm with /, HONOURABLE SRI JUSTICE P.SAM KOSHY & HON'BLE SRI JUSTICE LAXMI NARAYANA ALISHETTY PSK,J & LNA, J W.P No. t 8382 of 2023 headquarter at Rockville, Maryland, USA, and registered under the laws of the United States of America [U.S.A]. The petitioner company is a tax resident of U.S.A, as per the petitioner's Tax Residence Certificate [TRCI from the department of Treasury, dated Ol.12.2022. The petitioner is engaged in comprehensive consultancy services including but not limited to Independent Consultancy Services, Independent Engineer Services, Pre- Tender Services and Traffic Engineering, Tendering Assistance, Environmental Engineering, Architectural and Rural Development and etc., 4 . The petitiorrer and M / s. Intercontinental Consultants & Technocrats Privzrte Limited (hereinafter referred to as 'lCT), a company incorporated in India, entered into a join t venture agreement dated 28.06.2021, for the purpose of engaging the petitioner compan1/'s Independent Engineering Services with respect to ICT's project in Bangladesh. The said project entailed upgrading a Joydev-Debogram-Bhulta-Mandanpur Road (N- 1O5, also known as Lhe Dhaka By-Pass Road) in Bangladesh into four lanes vide a Public-Private Partnership. The petitioner company has a Permanent Establishment [PE] in Hyderabad, from India, and the Indian PE is assessed to tax under the Income Tax Act, 196 I (for short 'the Act) vide PAN No. 2 PSK,J & LNA, J w P-No.Ia3a2 of 2023 AAFCS7792F. It is stated that the joint venture agreement was not entered into with the PE at all. Therefore, it does not create information rights and obligations on permanent establishment in India. 5. It is further contended that joint venture agreement was exclusively between the petitioner and ICT and PE is therefore, no way involved, which is also evident from the petitioner company's board resolution, dated 3O.O3.2O21 . It is further stated that petitioner company's President and CEO signed an undertaking that PE in India was not involved in the Dhaka By- Pass Road Project. Therefore, there can be no income that is received or deemed to be earned in India. As per the joint venture agreement, the development is taking place in Bangladesh and not in India, therefore, there is no income accruing/arising or deemed to accrue/arise in India and hence, there is no tax liability arising in India. 6. Further, ICT sought to deduct tax at source under the Act, 1961 for the Independent Engineering Services rendered by the petitioner Company. However, given the fact that no income is being earned or attributable to the PE in India, such a deduction of tax at source is not necessary. The petitioner made J PSK,J & LNA, J w.P.No.,a382 of 2023 an application to respondent No. 1 under Section 197 of the Act, for grant of nil rate TDS deduction certification on 26.04.2023 along with joint venture agreement, board resolution dated 3O.O3.O2O2 and the undertaking given by the petitioner company. Respondent No. I sought certain clarifications from the petitiorer company on O3.05.2O23 and a prompt reply was issued by the petitioner on the same day and once again uploaded the copies of the joint venture agreement, the TDS, board resolution and undertaking. However, there was no response from respondent No.1, therefore, the petitioner issued two remainders emails, requesting respondent No. I to pass an order under Section 197 of the Act, 1961. 7. It is fr:rther contended that on 22.06.2023, the petitioner company received an email from the Income Tax Department, intimating passing of the impugned order rejecting the petitioner acplication filed under Section 197 of the Act. The petitioner contended that said impugned order was passed without taking into consideration the submissions made by the petitioner company. Challenging the said impugned order, present writ petition is hled on various grounds. 4 9 . Alternatively, it is contended that the fees for the consultancy services rendered at Bangladesh by petitioner Company to ICT, is governed by the DTAA between the U.S.A. and India. Under Article 12 of the DTAA, only fees for 'included services' are taxable in the source State, and not the fees for ) ..-7 ,/, PSK.J & LNA, J W.P-No.B3A2 of 2023 8. It is contended that ICT, tax resident in India, seeks to deduct TDS and it is made with respect to the petitioner company, which is tax resident of the United States of America. The TDS sought to be deducted is for work that is carried out in Bangladesh and thus no income received/accrued/ arising in India to the petitioner Company, as per Sections 5 and 9 of the Act. It is also contended that ICT exclusively utilized consultancy services of the petitioner Company in Bangladesh for the purpose of earning income in the very same country and amount paid is for source with respect to the Dhaka By-pass Road project and therefore, it falls under exception carved out in Section 9(i)(vii)(b) of the Act. As per which, any fee for technical services paid by a resident for \"services utilized in a business or profession carried on by such person outside India' or \"for the purposes of making or earning any income from any source outside India\" shall be excluded from the ambit of \"income by way of fees technical services.\" ti' / / / PSK,J & LNA, J w.P.No.lA3a2 of 2023 technical services which is in question in the present proceedings. It is also contended that as per Article 7(1) of the DTAA, the business profits of an enterprise of a contracting State shall only be taxable in the State unless the enterprise carries out the business in the other contracting State through a PE. 10. In the present case, the petitioner Company's Indian PE is not involved in the Dhaka By-Pass project in any manner and therefore, no :ncome is attributable to the PE from the fees from the consultar.cy services earned by the petitioner company for the said project and is only taxabie in the USA. 11. It is contended that income from the Bangladesh project is not taxable under the Act, and therefore, the same is not liable to tax in India both under the Income Tax Act as well as under the DTAA. It is further contended that without taking into consideration the contentions raised from the petitioner company, its application dated 26.04.2023, clarification dated O3.O5.2O23, board resolution dated 3O.O3.2O21 and undertaking lrom the petitioner company, the impugned orders have been passed erroneously. 6 PSK,J E LNA, J w.P-No. ta382 of 2023 12. Respondent No.l has filed counter affidavit, intei alia contending that the petitioner has an effective alternative remedy by way of filing a revision before the Commissioner of Income Tax under Section 264 of th,e Act. Therefore, the present writ petitioner is not maintainable and liable to be rejected on the ground of availability of adequate and efficacious alternative statutory remedy. 13. It is contended that the impugned order was passed after duiy examining the material submitted by the petitioner and the assessing officer has rejected the request of the petitioner for issuance of a nil certificate for deduction of TDS by duly recording the reasons and also following the principles of natural justice. It is also contended that the petitioner is seeking to mischievously set up the lack of involvement of its Indian PE in its Bangladesh project to circumvent its liability and avoid deduction of tax on expenditure being booked and pa5rments being made by an Indian entiqr from India. If the expenditure is being incurred from India, then the corresponding income ought also be liable to tax in India. 14. It is also contended that Schedule - 1 of joint venture agreement makes it clear that the Indian entity ICT is the lead 7 /i 'i 1 / PSK,J 65 LNA, J lY.P.No- I$42 of 2023 partner in-charge of overall administration of the project and that the projec t is being managed from India. Thus, the petitioner is rendering services to the Indian lead P:rrtner and hence, the Assessing Ofhcer has come to the conclusion that the payments in foreign currency by the Indian entity i.e., ICT to the petitioner is the fees for technical services received in India as contemplated under Section 5(2) of the Act, 1961 and that such amounts would be deemed to be income accruing in India under Section 9(1) of ttre Act. 15. It is further contended that in the event of the payment/expenditure as well as the income accruing by/ to the Bangladesh Project PE, no reason whatsoever has been given as to why the payment is being routed through India. This leads to the inference th;rt such circumvention is designed to avoid tax/ withholding tax in multiple jurisdictions. Further, Section 197 of the Act is relevant only when the payee is eligible for any credit or at the time of payment of amount as contemplated under Section 197(ll of the Act. In the instant case, the expenditure regzrrding the consultancy services rendered by the petitioner in Bangladesh is attributable to the Project PE in Bangladesh and the expenditure is in no way related to ICT India. Therefore, the occasion for applying for a certificate under 8 PSK,J & LNA. J W-P.No- 18382 of 243 Section 197 of the Act does not arise as the payer would be an assessee under the tax.jurisdiction of Bangladesh 16. It is also contended that the petitioner has failed to come abreast as to why payments are being routed through India for work done and income accruing in Bangladesh. It is seeking to mislead that its Indian PE is not engaged in the work in Bangladesh. It is further contended that proceedings under Section 197 of the Act are ten tative or provisional or interim in character. The tax liability in respect of any payments made would have to be finally determined in assessment proceedings under the Act. As the scope of Section 197 of the Act is limited, a certificate under Section 797 only mitigates any action which may be initiated under Section 201 of the Act against the payer for the failure to deduct tax at source. L7 . It is finally contended that the assessment officer had rightly passed impugned order by duly taking into consideration all the aspects and that there are no merits in the present writ petition. 18. In support of his contentions, learned counsel for the respondents has relied upon the following judgments: 9 i / / PSK,J & LNA, J w P.No 18382 oJ2023 r0 I-arsen & Toubro Limited Vs. Assistant Commissioner of Income-td-x. (TDS/ 2(1)1 (ii) Areva T&D, SA Vs. Assistant Director of Income- tax2 (iii) Ansaldo Engergia SpA Vs. Income-tax OfJiceF. 19. In the case of Areva T&,D, SA (supra), the Delhi High Court has held that authorbation/ certifi.cate issued under Section 195/ 197 of the Act is prouisional in nature and cannot be equated uith regular assessment or other proceedings under the Act. The certificote has been isszed as an inteim measure on the request of the petitioner and it cannot be compared uith the final determination of tax liabilitg by making an assessment under Section 1a3p) of the AcL Further, at paragraph No.28, it has been held as follows: '28. Explanation 2(a) of the aforesaid section clearly takes care of thE situation where no return has been filed. Ort a conjoint read.irtg of sedions 195 and 197 of the Act, we are of the uiew that iJ ang opinion is expressed at the time of grant of certiJicate il is tentatiue or provisional or interim in nature and the so,me u,ould tlot debar the Assessing Olficer from initiating a proceeding under Section 147 of the Act on the ground that there has been a change of opinion. \" (i) ' 12010t lu0 Tarm n 373 (Bombay) '(201l) l0 taxnlann.com 319 (Dethi) '(zoo:) t:l i Ta{man 795 (Madras) PSK,J & LNA. J tY.P-No. B3a2 of 2023 ll 20. Further, in Ansaldo Engergia SpA (supra), the issue before the Madras High Court was a challenge to the cancellation of certihcate issued the Deputy Commissioner of Income-tax under Section 197 of the Act and wherein, it is further contended that such cancellation is illegal and contrary to the provisions contained in Section i97(1) and (2) rlw Section 44BBB of the Act and is vitiated by non-application of mind and violative of the principles of natural justice. The Madras High Court at paragraph-S held as under: '5. .. euen if the cerlificate for deduction ot source at a louer rate is utithdraun, the consequence of such uithdrawal uould be that deduction fas b be made at a higher rate, but ultimatelg the question of liability is to be dectded in assessmenl proceedings. The liability of the petitioner is not being finally determined at the time of the utthdraual of the certiftcate. If ultimqtelg it is found that the petitioner is liable to pdA tax at a rate louer than the deduction to be made, it is obuious that tte amount patd is to be refunded.\" 21. Further, it is relevant to refer clauses of joint venture agreement dated 28.O6.2021, which reads as under \"2.7. Once exeanted by alt of the Menbers, this Agreement shall be effectiue as of the date on ut6ch the perfoflnance of Senzces begins in accordance uith GCC Clause 17.1 and 18.1 of the Seruices Agreement. The Members had cotlstituted themselues as an Unincorporated Joint Venture and submitted a Proposal to the Client for rendering consultancA servrces as specifed in the Scope of Serutces hereinafier. Each Member had used all reasonable sktll and diligence in the preparation and , I I PSK.J & LNA, J tY.P No.18382 of 2023 t2 submission of the Proposal to the Client. The Prolnsal uas submitted once the tenns uere unanimouslg agreed bg the Members artd in line uith the terms of the JV Agreement signed betueen tfu? Parties on 15th January 2020 and Fee proposal sharing agr,zecl bg the Parties on the same date. 2.7.7. Ilport ouard of the Prokct to the Joint Venture on 6th April 2021, Lead Member ltas entered into a Senaces Agreement uith tle Client ('kruices Agreement\") on 6 Apil 2021, utherebg the Members haue agreed to perfonn atl the Seruices to be undertaken for the Project bg the Joint Venture under lhe St?rutces Agreement. 2.7,2. The Joint Venture parties shall be jointly and seuerally liable to tfut Client to the extent of seruices prouided bg each partg for pelforming tle seruices and the obligations of ttrc Joint Venture as set forTh in the Contract, in accord.ance uith the tems and conditions thereof. The Joint Venture partg's share of the Contract amount and liabilities shall be proportionate to their inputs in carrying out their seruices for the Project. 74.7. AU pagments to the Members pursuant to the Seruices Agreement or ottenuise shall be made in accordance with Schedule 3 and the financtal policg of th.e Joint Venture (including pagrnent of interest on ang amounts ushich a Me-mber may become liable to pag the other Member pursuarlt to this Agreement) is rrs set oul in that Schedule. 74.4. As baueen the Members, each Member shall haue full and sole responsibilitA for the payment oJ anA taxes, duties, /ees or assr:ssments of a similar nafire uhatsoeuer leuied in connection Dith its seruices under this Agreement, tncluding subcontract:; end including but not limited to, ang personal income taxe'd, leuied or imposed. on ang of its emplogees or persorutel or ang of its submntractor's emploAees or personnel. The respon::ibilitlJ on paVments bg a Member to non-residents PSK.J & LNA, J W.P No.lA382 of 2023 li lies with the said Member, espectallg with regard to anA specific local tax. 77.7. This agreement has been entered qnd shall in all respects be constnted and interpreted in accord.ance with laus of 'lndia'. Schedule 7, clduse 7,2:- The Project is: Independent Engineeing (lE) Seruices for Upgrading of Jogdeupur - Debogram - Btulta Madanpur (Dhaka Bg-Pass) Road. (N-105) into 4 lanes through Public Priu ate Partner s hip, B ang ladesh- Schedule 2, Scope of Seruices (Clause 5.2) :- The bief responsibilities of ICT and Sheladia haue been mentioned belou.t: (i) Sheladia shalt provide tlE. keg Senior Structural Dngineer qnd undertake th.e scope of seruices under this positton as outlined in the Job Desciption in the Seruices Agreement, uith due attention to d-eadlines and aordination uith the team. (ii) ICT shall lead the project uith support of Sheladia and shall discharge its duties in a fair, impartial and efftcient manner, consistent uith tfe highest standards of professional tntegitg and Good Industry Practice. (iiil I:he Client will provid.e tn-country jacitities, including fumished and equipped office space, transport and logistic supporT. (iu) ICT and Sheladia sLnll carry out their utork as laid down in the Seruice Agreement.\" 22. As per Schedule 3 Annexure A of joint venture agreement, ICT agrees to pay to Sheladia for the services of Md.Nazrul Islam for the position of Senior Structural Engineer. The petitioner also agreed to pay a mark-up fee of USD 3,000 (US Dollars l PSR.J & LNA, J W.P No.18342 of 2023 14 Three Thousand Only) per month per position for service of 'Senior Geotecheical Engineer', 'Financial Expert' and 'O & M' Specialists on this project. 23. Perusal oi pieadings and material on record show that subject project is being undertaken in Bangladesh and no part of the said proje:ct is situated in India. The amounts payable to ICT in respect of above project are being paid in Bangladesh by the Government of Bangladesh. The services for the said project are being rendered by the petitioner herein to ICT ancl the same is governed by DTAA. As per Article 12 of the DTAA, only fees for 'included servicr:s' are taxable in the source State and not the fees for the ter:hnical services, which is in question in the present proceedings. Further, as per Article 7(1) of the DTAA, the business prr:fits of an enterprise of a contracting State shall only be taxable in the State unless the enterprise carries out the business in other contracting State through a PE. In the present case, no material is placed on record to show that PE of the petitioner company, having office at Hyderabad, is involved in any manner in the above project. 24. In the above lactual background, and in the absence of any material plrtced before this Court, it can be inferred that no PSK,J & LNA, J W.P.No.18382 of 2023 15 taxable event has taken place in India and thus, petitioner company cannot be subjected to TDS for payments made by ICT to the petitioner company. Though, petitioner has got an alternative remedy of revision before the appellate authority under Section 264 of the Income Tax Act against the impugned order, this Bench is not inclined to reiegate the petitioner to appellate authority in the absence of any strong material warranting to hold the petitioner liable to pay TDS. 25. In the light of above facts, discussion, the Writ Petition is allowed and the respondents are directed to consider granting nil rate TDS deduction certificate to the petitioner under Section 197 of the Income Tax Act, 1961, within a period of eight weeks from the date of receipt of copy of this order. There shall be no order as to costs. 26. Pending miscellaneous applications if any shall stand closed. //TRUE COPY// SD/.A.V.S. PRASAD ASSrsrANr sPt*o* To, SECTION OFFICER H*\"tTsf,*nt},.;,fr$il;::::\"\":\" : 1 2 4. ( b. MBC BS iwo CD CoPies . ->z- I I I HIGH COURT DATED: 2510112024 ORDER WP.No.18382 of 2023 DISPOSING OF THE WRIT PETITION WITHOUT COSTS ?s li I ro 0 2 tlB 2024 * r-re0 * "